Why Not Capitalism?

[Vlerchan]

I'm talking free-market capitalism here: no government regulation, no price ceilings or price floors floors or other such distortions, no barriers to the free movement of labour or capital, etc. With the exception of Korashk basically everyone on this board supports some sort of restriction in the free market so I'd presume there's going to be some strong reasoning - right?

---

It should be noted that I'm placing this question in the context of a world in which lobbying to national governments can't happen.

[Korashk]

Not a lot of economic discussions happen in this forum, which is too bad. I'm willing to defend my positions as best I can; especially since I'm in the minority.

Drugs?
Immigration?
Regulations?

Bring it, although I am wary of defending my positions against you Vlerchan. You know your stuff, most of the time better than I do.

[Vlerchan]

I'd decide I'd defend free-market capitalism here. Saying that, if we don find ourselves in the situation where we have no responders I'll jump onto the pro-regulationists side - because I do have my own criticisms of free-market capatalism to give. I also think it's a pity too that there's no discussion of economics here. Though I thought the question of 'defend literally anything in the current system' would inspire at least a few people.

[phuckphace]

I've never received a compelling answer to the question of how a free market would "self-regulate" in any practical sense.

let's say I'm a major player in the free market of Korashk's Gulch, and own a successful company that was able to capture a large portion of the market because I have skills that pay the bills (I innovated first and thus became an established household name). now along comes a competitor who has introduced a product/service similar to mine that consumers decide they love more for whatever reason, and then sales start to taper off, potentially putting my livelihood at risk. since there's no busybody government around to interfere, I have several options:

1.) buy out my competitor using my deep pockets
2.) poach their most talented people using my deep pockets
3.) engage in corporate espionage and other disruptive activities to drive the competitor out of business

if any of these are possible (and they would be in a free market) it leads paradoxically to an un-free market, from the perspective of the little guy trying to take on an established firm.

the response to these is usually something like "well obviously the established company would be forced to innovate even more and thus an innovative race will begin" but judging by what we know of how corporations operate, I don't think we'll be seeing very much if any honest market competition. buyouts are much easier and bring bigger gains sooner (besides, "innovation" these days is more of a marketing distinction than anything else. same shit, different logo).

corporate corruption is just like government corruption - a lot of it occurs behind closed doors and out of the public eye, and can go on for years before it is uncovered. Intel, for example, got caught paying programmers to slip in code that would cause software to deliberately run slower on PCs with AMD CPUs. this was a well-known phenomenon for a while among IT people, but Intel's attitude was just "Well, what are you going to do about it?" I have yet to see any evidence that they and everyone else with a lot of capital wouldn't be 100 times bolder in a free market.

[Vlerchan]

I've never received a compelling answer to the question of how a free market would "self-regulate" in any practical sense.
At its most basic:

"Firms must compete to please consumers and sell their produce. This is done in order to survive. As such, consumers are all the regulation a firm needs: because if a firms actions are not pleasing its consumers then it won't survive."

If you want me to get more specific you're going to need to get more specific with your questions.

let's say I'm a major player in the free market of Korashk's Gulch, and own a successful company that was able to capture a large portion of the market because I have skills that pay the bills (I innovated first and thus became an established household name).
Your early supernormal profits are going to attract competitors into the market a lot earlier than you can gain such monopoly power*. In this scenario you won't have a government to run to a legislate for 'patents' or regulations in regards to standards, the former eliminating and the latter damaging competition. Without your monopoly power to keep you safe this 'innovation race' will actually occur.

What is a problem is the oligopolies that have already formed.

now along comes a competitor who has introduced a product/service similar to mine that consumers decide they love more for whatever reason, and then sales start to taper off, potentially putting my livelihood at risk. since there's no busybody government around to interfere, I have several options:
If you have monopoly power then literally no firm is going to attempt this because you, due to your economies of scale, are going to be able to underprice them easily (see: mass production; predatory pricing if necessary).

1.) buy out my competitor using my deep pockets
I agree that this is a serious problem, but not in the same way you're approaching it.

What does happen is that firms decide to compete in the same sectors as big firms (say technology), attempting to attract a niche audience. Big firms due to them being inherently inefficient as a result of diseconomies of scale won't be able to compete on a small scale - or react quickly to sudden changes in taste - and so these niche markets will be where these small firms thrive. As these small firms grow from operating successfully in these niche markets a serious risks of competition with bigger firms arises and so there's a good chance that one of the big firms in the same industry buy them out. Being bought-out is actually the aim of a lot of entrepreneurs. (http://www.inc.com/scott-jones/when-is-a-good-time-for-your-startup-to-be-acquired.html)

This is obviously bad.

2) poach their most talented people using my deep pockets
In small firms the most talented people tend to be the people who started it up.

I would presume that the most talented of employees would be attracted to the bigger firms by the idea of bigger wages.

engage in corporate espionage and other disruptive activities to drive the competitor out of business
Lots of ways to limit this.

But I would agree that extra-legal 'competition' is a danger. See below for more commentary.

if any of these are possible (and they would be in a free market) it leads paradoxically to an un-free market
It's all happens in regulated capitalism, except with less competition to start.

But I suppose you're a state-socialist so that point isn't as applicable to you as most others.

I have yet to see any evidence that they and everyone else with a lot of capital wouldn't be 100 times bolder in a free market.
Firms have a reputation to upkeep.

Busting down doors and going syndicate-style (awful game) on another firm just isn't an option because operating a successful firm requires more than just some ideas and the means of production. I'm not saying that small, levels-like-we-have-now forms of corporate espionage and warfare aren't going to exist in a free-free market but I can't imagine rationally-acting companies acting beyond that. I disagree with any corporate espionage and warfare whatsoever but I do believe that all sorts of agreements, etc. can be reached in-firm to deal with the espionage, and law enforcement agencies would exist outside the firm in order to deal with the warfare.

---

* I'm defining monopoly power as a significant degree of control over output or prices in the market - i.e., your firm control >15% of a industry.

[Hyper]

Firms have a reputation to upkeep.

Busting down doors and going syndicate-style (awful game) on another firm just isn't an option because operating a successful firm requires more than just some ideas and the means of production. I'm not saying that small, levels-like-we-have-now forms of corporate espionage and warfare aren't going to exist in a free-free market but I can't imagine rationally-acting companies acting beyond that. I obviously disagree with this corporate espionage and warfare but I do believe that all sorts of agreements, etc. can be reached in-firm to deal with the espionage, and law enforcement agencies would exist outside the firm in order to deal with the warfare.

---

* I'm defining monopoly power as a significant degree of control over output or prices in the market - i.e., your firm control >15% of a industry.

Microsoft? Monsanto? How much do these companies honestly care about their reputation?

They can just use their massive budgets to silence the media, cover shit up and so on. Monsantos bullshits been repeatedly exposed but nothing really changes.

[Vlerchan]

Microsoft? Monsanto? How much do these companies honestly care about their reputation?
Enough to pay big money to silence the media? etc. Using your money to sway public opinion obviously isn't something sustainable in the long-term. In any even sort of competitive market, GMOs (http://grist.files.wordpress.com/2008/01/monsanto-share-gm_h328.gif) and operating systems (http://cdn.arstechnica.net/ars_OS_share_0710.png) are highly uncompetitive markets so this doesn't occur to the same extent, it wouldn't be a practice that any rational, forward-thinking firm would want to resort to.

I of course do believe that firms that are still vying for control over markets care about their reputation.

Although reputation is an intangible concept, research universally shows that a good reputation demonstrably increases corporate worth and provides sustained competitive advantage. A business can achieve its objectives more easily if it has a good reputation among its stakeholders, especially key stakeholders such as its largest customers, opinion leaders in the business community, suppliers and current and potential employees

[...]

One thing is certain, there is a high cost to pay for losing reputation, the good standing among stakeholders. Past experience has shown that a badly handled crisis can strip big chunks off a company’s share price, eg Exxon’s share price plunged 20% after the Exxon Valdez incident. A smaller organization could be devastated by loss of reputation. Conversely, the skilful handling of a major issue or crisis can maintain a good reputation and cushion the organization’s share price against a drop in market share.

http://www.cuttingedgepr.com/articles/corprep_important.asp

---

Appealing to the idea of a reputation economy obviously isn't as powerful when it would be an economy which exists straight from the current one - the one, we should all note, which was responsible for the creation of monsters like Monsanto, who built up their monopoly power through government collusion, etc. - but with the exception of the firms operating within a few notable industries that you might care to name it's an entirely feasible proposition. I think, before any transition to this would be made, a government would have to pass legislation which broke up such big firms - with the breaking up being done on the basis of the value it's felt that government collusion added.

Of course, that's pure fantasy if you ask me, because governments are never going to act against firms in such a way, but then this is all hypothetical.

Monsantos bullshits been repeatedly exposed but nothing really changes.
Monsanto exists within a very corrupt system.

I invite you though to offer me up one example of a wrong-doing my Monsanto and I'll demonstrate how we'd reach a solution under a system of libertarian law, a system where we care about private property rights.

[Hyper]

I'm just going to pose the hypothetical question.

How would truly fair competition, without government collusion and all the bullshido that comes with it such as laws, regulations bought via lobbying & government contracts, stop the same or an even worse level of corruption arising?

I mean a corrupt politicians pockets never ask where the money comes from so anyone was and is free to lobby and try to acquire favors for their company, you could say that the current system is already a free market in that regard, excluding the existance of established monopolies.

Also in a completely unregulated market what is to stop industries from fixing prices to the absolute ''what the market would bear''

People not buying something because the price is unfair might work for luxury goods but not for necessities like food, power, water, gas, fuel.

As for Monsantos wrong-doings many of them could be avoided by indeed having no government regulation and thus no government interference in the markets but at the same time most of Monsantos scandals are also related to health concerns.

Which brings me to another question without any health guidelines how would the consumer be protected? How would such a market avoid producers using the cheapest possible chemicals & materials to manufacture their goods for increased profits and competitive edge without any regard for health & safety.

It already happens through lobbying but not in a completely unrestricted form.

[Vlerchan]

How would truly fair competition, without government collusion and all the bullshido that comes with it such as laws, regulations bought via lobbying & government contracts, stop the same or an even worse level of corruption arising?
Firms want to maintain a good reputation, because as empirical evidence shows holding a good reputation is good for business. I wrote earlier that considering this, the consumer base is the only regulatory body that a firm needs. This of course becomes less effective as industries and markets become more concentrated (which I might add is naturally occurring, beyond just corporate-government collusion - collusion just speeds it up), as I said in my previous post, which is one major fault I hold with free-market capitalism.

If you take issue with the above I would appreciate if you made an attempt in your counter to separate what would happen under free-market capitalism in terms of this and what would happen under regulated capitalism in terms of this and then demonstrate the differences between the two. Because unless that can be accomplished them I don't see the point in the current line of criticism.

I mean a corrupt politicians pockets never ask where the money comes from so anyone was and is free to lobby and try to acquire favors for their company, you could say that the current system is already a free market in that regard, excluding the existance of established monopolies.
I don't understand this point. Would you mind rephrasing it?

Also in a completely unregulated market what is to stop industries from fixing prices to the absolute ''what the market would bear''
In a competitive market place competition by definition exists. It would not be possible for a firm to raise it's prices above the current level without incurring losses, because unless it's built up some ridiculous amount of brand loyalty, people are going to switch to a cheaper substitute. It works like this in the current system. Unlike with the above example, it's a mechanism that doesn't become any less effective as industries grow more concentrated - though, what might become a problem is cartelisation, in which firms group together to set prices or limit output: though, that leaves them open to being undercut by arising small traders.

Which brings me to another question without any health guidelines how would the consumer be protected?
Firms that produce bad quality goods will see their business drop. Like with the above(s) consumers are the regulators in this instance.

I would also presume that private regulatory agencies might become a thing: organisations who function to determine the standards of various produce (this already occurs with the likes of Free Trade etc.), in this instance honesty would be ensured through competition: dishonest regulatory agencies would become untrusted, and so useless as an investment by either firms or consumer groups looking to contract them.

---

Korashk might have better answers in regards to how oligopolies would operate.

[Korashk]

I'm going to start by explaining some things about my responses. First, almost everything I say is based on a scenario where a free market is functioning as if it had started from a clean slate. If you pose a hypothetical that doesn't involve existing circumstances this is the situation that I'm basing my answer on.

There is a significant difference in analyzing free market situations as if they are the status quo, and analyzing them like the free market started yesterday.

let's say I'm a major player in the free market of Korashk's Gulch, and own a successful company that was able to capture a large portion of the market because I have skills that pay the bills (I innovated first and thus became an established household name). now along comes a competitor who has introduced a product/service similar to mine that consumers decide they love more for whatever reason, and then sales start to taper off, potentially putting my livelihood at risk. since there's no busybody government around to interfere, I have several options:

1.) buy out my competitor using my deep pockets
2.) poach their most talented people using my deep pockets
3.) engage in corporate espionage and other disruptive activities to drive the competitor out of business
1.) You can't buy out every competitor if you're in a fledgling industry. It's simply not feasible.
2.) Non-compete contracts.
3.) This sounds like it could very well open you up to a lawsuit by the company you're trying to sabotage. No economic regulations doesn't mean that companies can literally do anything they want to and face no repercussions.

The only real way you can really gain a foothold like that in a free market is to do it on a very small economic scale. The same lack of regulations that would potentially allow you to do these things also allows your competitor to sell the exact same product as you, not a similar one of their own innovation. In essence it would be all but impossible for you to do what you're claiming which is in essence the core of the concept. If your product is popular, it won't take long for competitors to spring up in nearly every situations.

A free market makes many potentially bad things possible and allowable. This is why it's so easy to throw reductio ad absurdum in its face. The issue with this is that just because something is possible doesn't make it particularly likely.

if any of these are possible (and they would be in a free market) it leads paradoxically to an un-free market, from the perspective of the little guy trying to take on san established firm.
The existence of a possibilities doesn't completely shut down an entire economic system. You have to explain logically why the situations will or are likely to happen in order to do that.

the response to these is usually something like "well obviously the established company would be forced to innovate even more and thus an innovative race will begin" but judging by what we know of how corporations operate, I don't think we'll be seeing very much if any honest market competition. buyouts are much easier and bring bigger gains sooner (besides, "innovation" these days is more of a marketing distinction than anything else. same shit, different logo).
This is what I talked about at the beginning of my post. Corporations as they exist today are given power by regulations and are able to do the things that they do because of regulations. Companies like Microsoft, Dow, Monsanto, GM, etc. can't really exist in a free market setting because the only way a company can get that big is through the use of force. In their case it's through the use of governmental force against other potential market competitors.

What you bring up here is a problem when talking about the status quo suddenly becoming a free market because of the sheer advantage they have from being able to suck on the golden tit that is the US government. However, if a free market situation comes about and stays about I believe that eventually these bigger firms would be forced to follow the rules of a free market in order to remain in business.

corporate corruption is just like government corruption - a lot of it occurs behind closed doors and out of the public eye, and can go on for years before it is uncovered. Intel, for example, got caught paying programmers to slip in code that would cause software to deliberately run slower on PCs with AMD CPUs. this was a well-known phenomenon for a while among IT people, but Intel's attitude was just "Well, what are you going to do about it?"
Personally, I can see that kind of activity opening Intel up for a long and drawn out lawsuit in a free market setting. lawsuits are definitely one of the biggest regulating forces available in a free market.

I have yet to see any evidence that they and everyone else with a lot of capital wouldn't be 100 times bolder in a free market.
You haven't seen the evidence because it doesn't exist. You can't ask for evidence of something that hasn't really existed. Austrian economics is loosely based on the study of human behavior and attempting to infer how that behavior would play out in an unregulated market.

If something like that happened I would chalk it up to a failed transition from the status quo to a free market, not a failing of the free market itself.

[Vlerchan]

There is a significant difference in analyzing free market situations as if they are the status quo, and analyzing them like the free market started yesterday.

In my opinion, the latter is pointless.

The only real way you can really gain a foothold like that in a free market is to do it on a very small economic scale.

By 'free market' you really mean 'perfect competition' because a 'free market' doesn't guarantee this arising by any stretch of the imagination. It's quite simply infeasible for it to arise in a number of sectors: sectors were product differentiation occurs from start (most services) and sectors where barriers to entry are naturally occurring (i.e., high start-up costs exist or expensive technology requirements exist or access to a limited supply of natural resources is necessary etc.). These sectors are going to be the quickest to go oligopoly on you.

In the real world perfect competition-like conditions only exist in currency markets and stock markets and commodity markets. It's also arisen in some cases on hyperlocalised scales, i.e., farmers markets. It can hypothetically arise in a lot of sectors but even then it's not going to last forever. What happens is basically: firms compete in the short-term, inefficient firms who can't cover their variable costs will leave the market in this period and the surviving firms will make supernormal profits (re: capital accumulation), surviving firms re-invest supernormal profits in firm giving them advantage in next period of heavy competition, existence of supernormal profits attracts more firms into the market in the long-run eliminating supernormal profits - rinse and repeat as many times as necessary to produce results I know you're not going to like.

Corporations as they exist today are given power by regulations and are able to do the things that they do because of regulations.

Big firms are also being given power by their massive economies of scale. In terms of oligopolies, regulations don't have that much to do with their continued existence.

Companies like Microsoft, Dow, Monsanto, GM, etc. can't really exist in a free market setting because the only way a company can get that big is through the use of force.

It's not. It just makes it easier. And the major problem is that they would exist unless you forcefully confiscate their property. Which even if you could justify would be basically impossible, because you're never going to vote in a government that will do that - and, even then, where do you reinvest the now-confiscated property?

However, if a free market situation comes about and stays about I believe that eventually these bigger firms would be forced to follow the rules of a free market in order to remain in business.

No. Here's what sort of market you're talking about:

http://www.economicshelp.org/wp-content/uploads/blog-uploads/2008/01/perfect-competition1.jpg

In the long-run, firms produce (at the price) where AC touches the line D = AR = MR. Firms are price-takers and so accept price to sell at given by the market (industry) which is given where MC cuts D = AR = MR. The fact that AR is a tangent to the AC curve demonstrates that all costs are covered and normal profits are being earned: if AC was above AR then losses would be being incurred and if it was above AR then supernormal profits would be being earned. How this works is outlined above.

Here's where Microsoft et. al. compete (sorta - this is not* going to be as exact).

http://www.economicsonline.co.uk/Business%20economics%20graphs/Oligopoly-kinked-demand.png

It's called the kinked demand curve model. Nowadays people use more complicated mathematical theories for analysing oligopolies but I feel that this approach is satisfactory - if a bit more general.

In both the long-run and the short-run firms produce where MC cuts the MR curve. In all cases supernormal profits are earned between the point between where MC cuts the MR curve and point A. Prices will stay between the two points given on the MR curve: If a firm raises prices to where the curve is elastic it will see a massive drop in sales/profits as consumers switch to substitutes, and if a firm drops prices to the inelastic part of the curve it will also see losses as other firms follows suit and push prices down to match, ensuring their market share remains.

---

tl;dr: Firms operating in Perfect Competition and Oligopoly follow different rules. And these rules are naturally occurring, and have nothing to do with regulations: in the case of the graphs I produced both assume that no distortions in the market exist. There is no (natural) scope for oligopoly to return to perfect competition. Since barriers to entry are naturally occurring in oligopolistic settings (economies of scale etc.) there's very little scope for new firms to enter the market.

If something like that happened I would chalk it up to a failed transition from the status quo to a free market, not a failing of the free market itself.

I'm still not sure how you intend for this transition to occur.

---

It should also be noted that I'm still on the free market side. These aren't criticisms as much as me trying to frame the issue. Call it an internal dispute.