Prices, Monopoly and the Law

This is going to be a long one.  I want to take two ideas I have been meaning to write about and weave them together because the connection between them is very important and not very obvious.  So if you’re looking for a quick read, skip this one.  If you’re ready to understand the real problems we face and where we went off the rails, then pour yourself a cup of coffee and settle in.  We begin with this story (and here is part 2).  Everything is illegal.  Everyone is a criminal.  The first terrifying revelation that comes from this is that if someone wanted to put you in prison, the chances are that they would be able to find a way, even if it’s a way you don’t even know exists.  That’s not what I want to talk about though, there are more subtle economic implications of this paradigm.

Lately I have been talking about a stereotype of the left which I will, from now on, refer to as the “lunatic left.”  If you missed it here is the video I have chosen to represent their views.  The lunatic left believes that employment is slavery, and that the need to have a job is a construct of an oppressive capitalist system.  Again, while this is about 90% nonsense, there is a kernel of truth here.  To find it, first consider how a man would live in a society with no trade.  He would have to produce everything he owned/consumed himself.  This would certainly not be a socialist paradise where you didn’t have to work and you just laid around looking at art all day.  However, it would also be a situation where you wouldn’t be at the mercy of an employer for your survival. 

In a free market, the reason people take jobs is because someone offers to pay them more than they could produce on their own.  In other words the job makes them better off.  This is possible because it is more efficient for labor to be specialized and coordinated.  This is not slavery.  Anyone who wanted to could choose not to take a job and try to survive on their own.  Indeed many people would be able to produce a great deal on their own without working for anyone else.  These are the people we now call entrepreneurs.

But now we live in a society where large numbers of people are unemployed for years at a time and are seemingly unable to support themselves and therefore must petition the government for their sustenance.  I suspect that most of them wouldn’t be unemployed that long if we weren’t paying them for it but many apparently don’t agree with me so let’s imagine they are correct.  We have to ask ourselves how that could be the case.  How have we found ourselves in a situation where we can’t support ourselves without someone “giving” us a job?   All you have to do is get up in the morning and do something of value to someone.  Are we to believe that these people haven’t been able to create anything of value for two years? 

To see the problem, we have to consider what would happen if you got up one morning with no job and tried to create something valuable.  Let’s say you know a little bit about carpentry (how much could you learn about carpentry in two years?) and you start making furniture — nobody hires you to make furniture, you just start doing it one day because it’s something of value you are capable of creating.  First, you will probably have to get a business license if you intend to sell any of it.  Ok, that’s not that big a deal.  You might not be able to sell it out of your house because it’s probably not zoned correctly.  You could sell it on the street somewhere but then you would need a permit for that.  To get the business license you would probably have to get insurance incase a chair you made spontaneously combusted and caught someone’s house on fire.  If there is a carpenters’ guild, you will have to pay them a hefty fee and possibly wait on a list before you are allowed to sell anything.  Your garage will have to be OSHO compliant.  And if you’re neighbor is also unemployed and you think you could make your operation run more efficiently by bringing him in to do some of the work, you will have a whole new set of fees and regulations you will have to follow.  And if there are price controls on your product then you may as well just forget it.

I used to be a business major and I changed to economics because I rarely learned anything useful in a business class but one thing I do remember learning is that the moment you start a business you have to hire two people, a lawyer, and an accountant (he also said you need a banker but that’s a different story…).  The reason for this is obvious.  It takes at least two people with probably 11 combined years of college education just to be compliant with all the laws and regulations which govern even the most simple activities.  If you aren’t careful you could easily end up bankrupt and in prison because you thought you could produce on your own by selling orchids or inventing a new motor.  If you can’t produce enough value to sustain yourself and a lawyer and an accountant, and pay all the taxes and fees to government, then you aren’t allowed to produce. 

All of this makes it very difficult for a typical person to get up in the morning and take care of himself.  By taking away their outside option, we create a population of people who know no other way to live but to beg for a job or beg for a government handout.  Where the lunatic left goes wrong is in thinking that work is slavery.  Every creature has to work to survive.  But it is true that our government has gone to great lengths to create an economy in which you need a job in order to work.  So let’s talk about how that happened.

Most people are scared of freedom.  We have been told our entire lives that if people (often “capitalists”) are left to their own devices, even when confined by a proper system of laws which protect property rights, that they will find ways to screw us over somehow.  When trying to convince people that “laissez-fair” capitalism is a good idea, it is usually necessary to meticulously break down a litany of arguments, poor though they may be, to this effect.  And the last stand of the frightened interventionist is almost always the monopoly argument.

The monopoly argument goes like this.  If firms are allowed to get a monopoly on some market, they will be able to increase profit by restricting output and raising prices.  This is essentially an economic fact.  However, the real issue is how do you get a monopoly?  If you had a monopoly and you were making monopoly profits, other firms would be able to gain by entering the market and competing with you at a lower price.  If you could get all of your competitors to cooperate, then you could all gain from higher prices but each member would have an incentive to cheat, and even if they didn’t others could enter and undercut the cartel.  These issues have proven to be very steep obstacles to the capitalist in his endless quest to fleece the public.  But he has found a way.

Now read this excellent short (short by history book standards, long by blog standards) history of the robber barons. (I’m serious you have to read this one)

The only reliable way to get monopoly power is to have it enforced by the government.  The problem with a cartel is that if people cheat, you have no power to punish them.  But if you can get control of the government, then you can punish them for doing things like lowering the price or producing too much.  This is where we went wrong.  It was not greedy fat-cat capitalists running wild with no government oversight screwing the common man.  It was greedy fat-cat “capitalists” discovering that they could use the government to screw the common man and in doing this they screwed the real capitalists. 

The folly of this is most readily highlighted by noticing that the whole justification for all these policies was based on the fear that companies who had been continuously providing more and more goods at lower and lower prices would somehow, someday end up screwing the consumer by restricting output and raising prices even though this had never happened. 

To really solidify their hold on the economy, it was necessary to convince the public that high prices are actually good and low prices are bad.  This sounds ridiculous until you notice that that is exactly what Keynesian economics does.  Every problem is caused by prices falling.  Every solution is some attempt to prop them up.  It is now so pervasive that we constantly see things like this.   In this clip the host of a show on Fox Business asks if what we need to bring a market that is characterized by a surplus into equilibrium is for prices to rise.  Now this might be an indication that she has no idea how even the basics of economics work or it might be a slip of the tongue, but even if we give her the benefit of the doubt, the housing market analyst from Moody’s answers the question with a slightly less incompetent but still profoundly confused response saying that the reason prices are falling is that there is too much supply compared to demand.  This is correct (assuming that what she meant by supply is quantity supplied at the current price and by demand she meant quantity demanded at the current price) but then she says that what we need is for demand to increase.  What we really need is for prices to fall!  The thing that we need is the thing that the market is desperately trying to accomplish but we have it so engrained in us that falling prices is a catastrophe that we want to do anything we can to fight it. 

[As a side note, let me point out that people who’s wealth was “tied up in their house” would be largely unaffected by falling housing prices, the people who are hurt are the people who don’t have their wealth tied up in their house but are instead have their house highly leveraged.]

During the great depressing the fear of falling prices was used to increase wages while people were unemployed, throw dry cleaners in jail for charging too low a price and destroy crops while people were going hungry.  This is the reason that the depression lasted for a decade and a half.  The beneficiaries of these policies were not “the public” they were the powerful businesses and unions who had the ability to manipulate the government.  These policies are designed to keep the little guy from competing with them.  The same thing is true of recent legislation such as healthcare and financial regulation.

Where we went wrong was in allowing the government to meddle in the economy.  Out of the fear of a monopoly which had never existed we empowered the government to create and enforce monopolies.  Once we allowed the government to be a giant grab bag of subsidies and a thug for hire to attack competing companies, we created a system where success is determined largely by one’s ability to control the government and lobbying the government is an activity characterized by significant economies of scale.  Is it any wonder that in this environment small business is finding it difficult to compete?