Growing up I listened to Rush Limbaugh with my parents. I remember driving in the summer, from noon to three, hearing him denounce Bill Clinton, and trumpet his view of economics. His view is rather simple and elegant: enable "free enterprise" and the rising of the water will float everyone's boat. This is "supply-side" economics (the "trickle-down" stuff is not really a economic position), i.e. if you bolster the producers and employers, you will bolster everyone. This does have prima facie plausibility, if you think about the reasons a business might expand. There are two basic reasons a business expands: the costs of production goes down, or there is an increase in demand. The main reasons for a decrease in the cost of production would be paying employees less, figuring out better techniques of production, or the lessing of other "exogenous" factors (exogenous just means those factors that do not have to do with the market per se). The worse exogenous factors, according to Limbaugh and most supply-siders, is government intervention - in the form of taxes and regulation. And so the argument goes, instead of decreasing production cost through paying employees less (although this too is argued - against the minimum wage, for example), one should get the government off the backs of the employers.
At the heart of this view is the basic neoclassical economic view that the market is the most efficient instrument for the allocation of scarce resources. The reason for this is because of the principle of marginal utility, or marginality. This principle basically states, all things being equal, that (from the demand side) as an individual consumes more and more of something, it becomes less desirable (or, as economists say, the "utility" is lessened). Thus, after the first can of caviar that I have, there will be decreasing returns on my enjoyment of additional cans. This principle makes sense: the more you have something, the more "normal" it becomes, the less of a treat it is, the less desirable for itself it becomes.
From the supply side, the principle of marginality is similar. The idea is that as a producer expands production to meet the increasing demand, each additional unit costs more to produce than the ones before. Consider the caviar. As I eat more and more caviar, and the caviar fishermen expand their operation, it will take them more and more resources and energy to get enough caviar to fill my demand. At the same time, the price will go down, since the supply goes up, and my desire goes down.
The outcome of these two movements is what economists call a "competitive equilibrium. It will mean that demand has equaled supply. Alfred Marshall was perhaps the most famous and one of the earliest economists to talk about this. Now, if one thinks about this, it's great. It means that left on its own, the market does everything we need. It allocates things based on what the individual wants, and that all the productivity in an economy is focused. It also means that there is no other way to increase one player's welfare at the expense of another (what economists call the "Pareto optimum"). It is a world where the market - not the government or some other thing - allocates all the resources out there in the most efficient manner possible.
There is only one slight problem, a small caveat that makes a big difference. This is the caveat "all things being equal" (ceteris paribus). What does this mean? This means that the very concept of a market is an abstraction, an utopia, a pie-in-the-sky world where no one really lives. The "market" correcting itself is a fiction - a pious fiction, perhaps, but a fiction nonetheless. Let me explain why.
The major reason is that this world is filled, not with pure competition, but with "oligopolies." This is a nice economic term for an asymmetrical allocation of productivity between producers. Monopolies and "duopolies" are examples of this, and of course most free-marketers would say that you need really strong anti-trust laws to make sure these don't occur (almost the only place they say the government should intervene). However, in our economy, and the international economy, it is clear that in fact oligopolies are the norm, not the exception. Even though we heap praise on small business as the back-bone of the economy, it is really not the case that there could ever be market equilibrium because of the very real problem that there is no perfect competition, and their never will be. The reasons are simple: history, geography, and politics.
Let's take an example: Microsoft. There is this concept economists now use called "path dependencies." This is a fancy way to say that you only have so many options. Microsoft is not considered a monopoly because it's not like they make all the software or hardware. They're just the main operating system people have to use. Imagine you're a small business owner who is dependent on computers. You can either go with Mac - which has much less software and compatibility - or with Microsoft, who has the basic system most people use. In perfect competition this would not be the case. You would have lots of choices, and you would pick the one that is the most efficient. Instead, because a contingent thing like the poor marketing of Apple in the 80's, you only have one choice, and not even the most efficient. This is a path dependency.
The second major thing about oligopolies is the fact that these are not merely asymmetries in production and allocation, but in real political power. Political power is one of those things that neoclassical economists don't like to talk about (it cannot be quantified), but in the real world (not the world of ceteris paribus) political power, and power asymmetries in general, really effect the outcome of the market. This of course is seen with the recent Wall-Street debacle, and with organizations such as the IMF and WTO, who continually reinforce the trade advantages of developed countries (by things like not demanding the dismantling of agricultural subsidies and other things). In fact, even with regional trade agreements that are supposed to be "free" like NAFTA, there is no free trade. Barriers are lessened to a degree (and disproportionately for less-developed countries), but the fact remains that for all the free-trade talk, there is very little free trade at all.
Which brings me to the title of this blog. I'm not a socialist. In theory, free markets are great. What I have issue with is the notion that any market really is free, or really can be. Supply siders might retort that 'it's because of government!' But it is a fundamental misrecognition of power to think that somehow those in power (such as the powerful in oligopolitic markets) will just give it up for an ideal that has never been seen in the history of the world (the ideal of market equilibrium).
Then again, maybe I'm wrong, and we should say with Nietzsche that "the lie is a condition of life." Or, maybe we should buck up and say that humans making decisions has more to do with allocation of resources that we acknowledge, and then we should figure out what good judgment entails. Just an idea.
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