Capitalism – a meaningless concept in which we can believe

As one surfs the economic forums of Medium and other media one often sees the word “capitalism” in the headlines but mostly I ignore these items because the word’s definitions are generally so vague the word is meaningless.  Because capitalism is such a meaningless word it is something in which we can believe while ignoring a less pleasant reality.

When we study economics we can try for an honest understanding so we can solve problems and reduce human suffering or we can seek rationalizations for things which will make us rich in spite of exploiting others, destroying the environment and overusing scarce resources.  If I were the chief executive of a large corporation or a politician I would want the second approach to economics.  Guess who pays the salaries of most economists.  This blogger makes no money out of his study of economics, so he can take the first approach.

The main feature of the economic organization with which most of us are familiar is that a lot of it is based on legislation which restricts competition.  Patents, copyright, licensing and subsidies all work to restrict competition  and/or distort prices.  These are so pervasive that we cannot say we have competitive market economy.

The problem with a perfectly competitive economy is that it does not allow for profits.  Competition reduces profits until each firm makes wages and a return on investment but no profits.  If one wants profits one needs government to pass legislation to restrict competition and most current  governments are happy to oblige.  Once upon a time this blogger used to make pottery.  I suggested that in order to make a good living we should form the Canadian Potters Association and get the government to pass legislation that all the people in Canada should eat only from dishes make by members.  Other potters laughed but lots of other occupations have that legislation: teachers, doctors, lawyers, septic tank installers, most large corporations (patents and copyright), etc.

Like lots of other people I would like to see an economy with more equality and less exploitation.  I believe the best way to get it would be to have more competition.  To get there we should repeal or at least reduce copyright, patent and licensing legislation and drop all subsidies.

This would leave many people exposed to economic adjustments which often cause suffering. A guaranteed income scheme would be a better way of coping with these problems than restricting competition.

Capitalism, competition and profits

Capitalism is about profits but economic theory tells us price should equal the marginal cost which does not allow for any profit.  It could be there is a contradiction between what we say we believe and the way we actually behave.  Figuring this out may be a major step in understanding our economy.

Price should equal marginal cost, the cost of the last item produced, because profits will attract more producers into an industry until competition forces prices down to the marginal cost level.  For this theory to work there must be perfect competition.  Perfect competition requires easy entry into a business, a uniform product,  that no participant in the market be large enough to influence prices by limiting sales or purchases and that all participants in the market have full knowledge of the market.

In perfect competition there are no profits because competition will force prices down to breakeven point.

This would be great for customers but producers, believing they have a right to profits want to restrict competition.  As producers tend to have more power than consumers there are in our economy lots of restrictions on competition.  There  are many ways to restrict competition but probably the best is to get governments to pass legislation that interferes with the operation of a competitive market. Look at the four requirements for perfect competition in the second paragraph above for ideas how to restrict competition.  Some of the legislation which interferes is patent and copyright, tariffs, subsidies and licensing.

An advantage of legislation restricting competition is that the state and its legal system can be used to enforce it.

Sometimes definitions can be fuzzy and most definitions of capitalism fit this.  The definition of perfect competition (see second paragraph above) is more precise even if it appears unrealistic.  We have jokes about economists making assumptions.  It is not safe to assume that capitalism is perfect competition.

I think the perfect competition model is very useful in that it provides an ideal towards which we could be working.  It provides guidance for policy even though there are lots of forces working against that policy.

Whatever name we apply to our way of organizing our economy, it is important to understand that it is based on governments passing legislation to restrict competition.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Is minimum wage legislation the appropriate way to deal with poverty?

The problem with minimum wage legislation is that it is an inappropriate tool to solve a very difficult problem.  A universal basic income would be a more effective way of dealing with poverty.

People working for low wages are only a part of the problem of people struggling to survive on minimum incomes.  Legislated minimum wages may help some people at the bottom of the wage scale, but it will do nothing for the others and may even add to the number of unemployed.

The agricultural surplus is the excess food a farm worker produces beyond his/her own needs.  This is what allows the rest of us to do the things we do. With the huge agricultural surplus we currently have and with modern technology we do not need for everyone to “work” for the most part of their lives.

In our society we have traditionally distributed this surplus via jobs and wages.  It may be this system is breaking down and we should be looking for alternatives such as a basic income scheme.  Unfortunately many people have a religious quality belief that employment is essential and that anyone who does not work his/her entire life is a deadbeat.  The work ethic is great for those who want to build empires based the work of others.  Maybe the minimum wage is appealing because it is seen as a way of transferring profits to workers.

Another problem with minimum wage legislation is that it distorts the operation of the market and some low paying jobs may be lost as the minimum wage raises costs.    A universal income scheme would allow individuals to decide the minimum wage at which they would work.  Those people who want to eat fast foods would have to pay enough for the restaurant to attract workers as people would not be obligated to work in order to survive.

We probably should not take for granted the agricultural surplus will continue indefinitely as there are many things which could wreck our food factories.  There could also be problems with the non-agricultural part of our economy.  In either case minimum wage legislation will not be of much use whereas a universal income scheme might make adjustments easier.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Governments, competition and subsidies

Is it legitimate for city governments to get involved in the economy as The Economist reports a number of mayors are doing?  Governments have been involved in their economies for millenia.  For us this involvement helps a some people make profits and when the economy is tough it helps a few people get jobs.

There are two ways governments get involved in economics – by passing legislation that restricts competition and by giving subsidies either in cash or tax exemptions.

Most economic legislation at the national level works to restrict competition. Patents, copyright, licensing and tariffs all limit competition and allow the firms protected to charge higher prices and make profits they would not otherwise have had.  It may be the most  valuable business skill is government relations and lobbying.  During the recent golden age of prosperity with constant economic growth the higher prices have hardly been noticeable and for most people not relevant.  As we go into a period of economic decline already lot of people are hurting.

The other way governments influence the economy is with subsidies or tax exemptions.  

There are three concerns about government involvement in the economy.  

The first is that protection from competition and subsidies distort prices and encourage inefficiencies in the economy.  It might be cheaper and more efficient to make wing nuts in one place but subsidies alter that.  It may be that competition is now to determine  which, city or state/province has the deepest pockets for providing subsidies.  When firms can go where they get the largest subsidy, there is an element of blackmail and it is not clear this is a good way to start a relationship.

The second concern is that most of us most of the time make decisions for our own short-term interests rather than the long-term interests of the community.  For most of us a job today is more important than the future health of the planet or even survival of the human race.  Also one has to suspect that in this respect politicians are at the head of the line especially when they want to get reelected.

A third concern is that subsidies are good at providing jobs for a lucky few people but provide no benefit for the rest of the unemployed.  I believe subsides should be given to consumers rather than producers so that they don’t distort prices and can provide assistance to all who need it.

DI_404_SUCKZ_Stephen_HarperOne can make lots of arguments against government involvement in the economy, but one is fighting a lot of short-term interests.  The Canadian prime minister is the chief executive officer of corporate Canada.  This applies to the incumbent and probably to most past and holders of that post.

The assumptions economists make

The assumptions economists make is the title of a book published in March of this year and for which a review is located here.  It sounds a little interesting so I have suggested it for purchase by our local library.  I’m not sure it is interesting enough to spend $25 for my own copy.

However, the title reminds me of my own struggles with the assumptions of perfect competition.  So here is a post from almost two years ago about the assumptions of perfect competition and how one could interpret them.

 

Perfect competition utopia

When I started studying economics and learned about perfect competition and its assumptions I thought it was totally unrealistic. I really enjoyed the joke about the economist who wanted to assume he had a can opener.

However, through the years I have come to see perfect competition as an utopia which provides guidelines for policy. I like the perfect competition model because it provides high efficiency, equality in that there are no profits, it works without economic growth and decision making is by individual consumers rather than governments.

One of the features of perfect competition is that there are no profits because if profits are being made in an industry others will enter that industry increasing competition and driving prices down until there are no more profits.

To get around this no profit feature business people lobby governments to pass legislation which restricts competition. For example, subsidies, some taxes, licensing, copyright and patent legislation all interfere with perfect competition.

To make our economy more competitive we should:

– Give subsidies to consumers rather than producers. This way prices will reflect true costs and buyers can make decisions according to their own values.

– Require producers to provide consumers will all relevant information about their products.

– Abolish patent and copyright legislation.

– Unilaterally abolish import and export tariffs.

Following is a summary of the assumptions for perfect competition.

The link for the website from which they were taken is http://tutor2u.net/economics/content/topics/competition/competition.htm

Assumptions behind a Perfectly Competitive Market

1. Many suppliers each with an insignificant share of the market “ this means that each firm is too small relative to the overall market to affect price via a change in its own supply “ each individual firm is assumed to be a price taker

2. An identical output produced by each firm “ in other words, the market supplies homogeneous or standardized products that are perfect substitutes for each other. Consumers perceive the products to be identical

3. Consumers have perfect information about the prices all sellers in the market charge “ so if some firms decide to charge a price higher than the ruling market price, there will be a large substitution effect away from this firm

4. All firms (industry participants and new entrants) are assumed to have equal access to resources (technology, other factor inputs) and improvements in production technologies achieved by one firm can spill-over to all the other suppliers in the market

5. There are assumed to be no barriers to entry & exit of firms in long run “ which means that the market is open to competition from new suppliers “ this affects the long run profits made by each firm in the industry. The long run equilibrium for a perfectly competitive market occurs when the marginal firm makes normal profit only in the long-term

6. No externalities in production and consumption so that there is no divergence between private and social costs and benefits.

Regulations and The Economist

This item was posted on The Economist website as a comment on an article in regulations.

http://www.economist.com/node/21534767

I have a theory that generally government legislation and regulations work mostly to restrict competition so that some people can make profits (which are not available with greater competition).

I don’t see how regulations are going to stimulate the economy.

Therefore regulations should be evaluated according to how they will make life better for us and how equally they are applied.

Lobbying and profits

Here’s a news item that American companies spending lots of money on lobbying do rather well.

Of course.  As a general rule economic legislation works to interfere with the competitive features of a market economy.  If there were perfect competition there would be no long-term profits.  Therefore, if you want to make  a profit you lobby the government to ensure if passes legislation restricting competition in your field.

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