I wrote this in chapter 6 of my book 'The Courageous State', which was published in 2011. I have edited it lightly for use here:
There are, without doubt, certain conditions that must exist before any market can operate, even imperfectly.
The first of these is that there have to be willing buyers for the products that are to be made available. Without such buyers there is no chance of selling products, let alone of doing so at a profit.
Second, if abuse is to be avoided as a result of monopoly profits being made there has to be competition in the marketplace. If there were, for example, to be only one commercial supplier of an essential service, such as healthcare, then the opportunity for price abuse would be enormous. This is especially true when purchases of healthcare frequently arise in situations of high stress when the opportunity for finding an alternative supplier is limited (or to put it another way, the purchaser is almost invariably at a disadvantage to the supplier at the point when they must buy because they are in pain and far from being able to make an objective decision). Only competition and informed decision making can, to some extent, limit that opportunity for abuse of the consumer and even then only if what is called oligopolistic behaviour can be avoided.
Oligopolistic behaviour happens when there are just a limited number of suppliers in the market and they can, whether explicitly or otherwise, cooperate to ensure that they can collectively earn monopoly profits that are exploitative. Precisely because informed decision-making on issues such as healthcare, and pensions (for example) is very hard to achieve the private supply of these services will always be open to considerable abuse, as the failings of pension privatization has already proved.
But even if competition could help when informed decision-making was possible it is also true that competition does also have a downside. This downside is that, by definition, competition requires that there is excess capacity in a market. There can be no such thing as effective competition if every single supplier in a market is operating at full capacity: in that case there is no opportunity for choice (whether informed or otherwise) on the part of the consumer. That consumer is left, if all suppliers are operating at full capacity, having to take whatever opportunity might be available to them at the supplier's convenience, and at the supplier's price. However, that means that to be effective competition is dependent upon all market participants always working at less than full capacity, which means that competitive markets must always (whatever the theoreticians may say) be inherently inefficient in practice because all participants in the market must be under-utilising the resources that are available to them if the consumer is to get the choice that they desire.
I have been musing on the extent to which the world can now afford the inefficiency of markets. Can we really afford excess capacity anymore?
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So interesting, thank you.
I am reminded of Michael Hudson’s (and others) point about how debt (across an economic system) can never be repaid because of compound intrest.
It depends what in.
Excess capacity = resilience in the face of uncertainty?
Excess capacity = waste of precious resources?
Can we afford markets? Again, it depends what in. In the fish business it is the market that allows price flexibility which means all fish will clear the market rather than rot on the quay. Healthcare (as you say) is a different story.
I think a pragmatic, case by case approach is needed rather than dogma. Dogma is what we get at the moment, you provide a welcome challenge to that. I think your piece recently about how the private sector is a good thing but that it depends crucially on state infrastructure (law, health education etc.) captured a lot of the arguments.
There is ultimately no solution that does not rely on a mixed economy
Good point.
Multiple mobile phone networks, focused on cities/towns with lousy rural coverage?
Much of the trading and speculation in the City?
Waste of resources.
Under-investment in water and electricity networks. Running down of manufacturing capacity of say pharmaceuticals (PPE anyone), steel, food?
Lack of resilience.
Ive been to a talk with this guy who is asking many of the questions and gave some insights into what Biden is doing with the IRA.
https://en.wikipedia.org/wiki/Barry_C._Lynn
He is challenging the ideology of totally free markets and unfettered globalisation.
In The Microeconomics Anti-Textbook (2nd ed, 2020) by Rod Hill and Tony Myatt, their introduction begins:
“The typical introductory economics textbook teaches that economics is a value-free science; that economists have an agreed-upon methodology; and they know which models are best to apply to any given problem. They give the impression that markets generally are sufficiently competitive that (for the most palt) they lead to efficient outcomes; that minimum wages and unions are harmful to workers themselves; and that government
regulation is either ineffective or harmful.
“The Microeconomics Anti-Textbook points out that all this is a myth. Value judgements pewacle economics and economic textbooks. These value judgements reflect a social and political philosophy and can be called an ideology or world-view. It is one that textbook writers are implicitly attempting to persuade the reader to accept. The Anti-Textbook makes this ideology, and the value-judgements behind it, explicit. The point is not so much to claim that this ideology is wrong, but simply to point out that it exists, and that there are always alternative views that one ought to consider.”
https://www.amazon.co.uk/Microeconomics-Anti-Textbook-Critical-Thinkers-Guide/dp/1783607297
Thanks
A very interesting post – one of my earliest interactions with you on this blog was I think musing over the wastefulness of competition.
Some thoughts:
1. The assumption/myth is that markets are the best knowledge processor of all. Yet, we know that this is only a quantitative aspect (speed, volume of info), not a qualitative one. In other words, a lack of knowledge or even ignorance/lies and emotion (panic!) and perceptions can still be processed by markets efficiently with disastrous results.
2. Market actors tend to offer less choice because it is more efficient to do so. Variety costs money in supply chains – I’m thinking about how Toyota and other mass car manufacturers now use the same basic parts in their cars and the ‘just in time systems’. Variety also causes problems in personal services – people are better processors of customer service needs than automated systems and even AI. Yet people are expensive to employ, so we see more automated systems but then we get more failure demand – people hanging on the phone or giving up on computers to talk to a real person of which there are too few in many organisations.
If you want the flip side of all that, ask yourself why a Rolls Royce of Ferrari costs more. Because they are mostly hand built and almost customised.
The truth is increasingly in popular car manufacturing that your car is made of industry standard parts that are found in all cars. So, in a way, choice in car buying is a bit of myth supported by expensive advertising.
That BMW you just paid over the odds for because of the BMW marque has the same floor pan as the cheaper Ford Focus you looked down upon! So much for ‘choice’ eh?
3. If markets are operating at excess capacity, then I’d argue that we can’t afford this because of the issue of market segmentation related to competition. The problem is in the choices that market actors then make in order to get competitive advantage over their competitors. This can be anything from poorer working conditions for their workers to lies being told about emission levels ( a well know criminal activity in car manufacturing), or being allowed to sell cars below certain standards of consumer safety and bending rules through political lobbying. All these sources of competitive advantage come at a cost to society – lower income, inequality, higher pollution levels, vehicles that can kill.
4. Another example is in utility provision where choice is also championed. OFWAT has been wanting to promote more provider-ship in water supply creating NAVS (New Appointments & Variations) away from the big suppliers like Severn Trent etc. But really, all we have is another billing entity that makes accessing their services and finding who is responsible for the water supply even harder for consumers and businesses. It is just ad hoc ideological dis-aggregation of what was a joined up, integrated system into smaller complex systems that don’t necessarily work in harmony (see below on CCT). It is done to extract value, not provide value or water for that matter because the easiest bit is the billing bit!! It’s the first thing the new NAVs set up!
It’s as though market health is measured only by how many providers there are and nothing else as an article of faith. And it is the regulator in this case giving itself more complexity to regulate, albeit badly!!
5. I remember starting in the public sector in the 1990’s and coming across Compulsory Competitive Tendering (CCT). So, you’d go into a council housing estate housing office the day after the repairs function was sold off to a private contractor and you’d find that the synergies and co-operation you previously had with the repairs section would go out of the window. This was because every penny was being accounted for, they only did what was in the contract and if it was out of contract, it cost extra. So, rather than focus on the service, focus is switched to the bottom line now, with an attendant break down in the previous seamlessness of the service felt by the tenants and arguments between repairs and reporting teams as to what should be done.
My view therefore is that markets are actually very inward looking rather than outward looking with an emphasis on generating income and income protection and nothing else probably because too many market actors are chasing the same thing in saturated markets. Saturated markets actually work against the market actors but more importantly work against this notion of choice which markets are actually promoted on. The whole thing becomes a lie because choice is actually just a convenient label for possible exploitation by markets.
It’s certainly an area that could do with a more critical analysis as you are, I think, suggesting. And each market will have its own dynamic as a result of the conditions it is working in.
Thanks PSR
This blog has improved in my view since it became FundingTheFuture
Is there an option to support it
I looked at the Kofi link but it clearly directs me to support something that has changed its name, and while I think a suitable transition period is fine for many things, this one’s been going on a bit don’t you think.
I should address it, I agree
It seems to me that the pursuit of 100% efficiency is undesirable. For example the NHS trying to have 100% bed occupancy, as it does, is self defeating.
Any endeavour needs some slack. It’s just a questions how much.
The pursuit of efficiency led to just in time supply chains. It was obvious 40 years ago that this led to fragile systems, though it was heresy to say so. This fragility has recently been demonstrated by the pandemic and Ukraine war.
A certain amount of slack is a good thing.
There’s a difference between spare capcity by design and random provision of it, I suggest.
I didn’t think the NHS had to have full bed occupancy. That has only happened under this government. If it has full bed occupancy there is no room for emergencies, like there used to be.
The pursuit of efficiency can become dangerous in its own way. In most activities and contexts, resilience is very much a desideratum and that depends on normally unused capacity being available in a crisis. A thoroughly efficient system or product will be broken by a peak load little above its design working load. It would depend on the particular case how much reserve capacity or strength is prudent or wasteful , but there must be very few where it is any close approximation to zero.
The perfect information aspect of this is very important.
For a market to work perfectly consumers need perfect information. For a market to work well consumers need good information.
It was illuminating last year when the gas prices shot up that all of us on “green” electricity tariffs had our bills increased. Turns out we had been getting gas all along as part of our mix and they were just lying to us. Plus the captured state has rigged the market to protect oil and gas from market shocks at our expense.
And what was the aftermath of that Great Reveal? Nothing, these bullshitters still all state on their websites that they offer 100% renewable electricity.
But what of the power (real or imagined) of financial markets Richard?
I’m currently reading Fritz Bartel’s fascinating “The Triumph of Broken Promises” about how the 1970s oil crises (and the financial markets response to it) caused both western and communist governments to impose austerity (and how western governments managed to do this AND survive). The financial markets caused the US dollar to lose value, and in response …
“The administration of Jimmy Carter thought about the challenge in precisely these terms. “How best to sell publicly a policy of long-term economic austerity” read the cover sheet of a memo sent from Treasury Secretary Michael Blumenthal to President Carter in the spring of 1979. Blumenthal considered the “continuation of tough and austere macroeconomic policies requiring sacrifices by many” to be “the only viable course” for the nation going forward. However, this path would create “political dissatisfaction among a broad array of interest groups.” There-fore, the administration would have to find a way to make austerity domestically palatable. “I freely concede,” Blumenthal wrote, “that this is no easy task.? To be successful, Blumenthal believed, a program of austerity needed “an overarching theme that engages the imagination and deep convictions of the people.” Carter would have to tell the nation that “as individuals, a national economy, and as a government, we have been borrowing and consuming – living off deficits in our personal, governmental and trade accounts.” The message had to be, “We can no longer afford this.” In order to return the United States to its former economic pre-eminence, Carter would have to tell the country, “We must now sacrifice and rebuild.””
Fritz Bartel, 2022, The Triumph of Broken Promises: The End of the Cold War and the Rise of Neoliberalism, p. 67.
The problem with Bartel is how he will explain how and why von Haykek’s ‘Road to Serfdom’ narrative got traction in the West.
Basically as I understand it, there were other drivers of economic chaos at the time.
Key was Western support for Israel. Roosevelt had negotiated cheap oil in the West from what were Muslim countries in the post WWII era. When Western support was given in the Israeli in its conflicts with Egypt and Syria, retribution was swift – oil prices were put up. It was as simple as that.
So, a geo-political choice was made by Western powers that had huge consequences for their economies. To hide the accountability for that choice, all of a sudden social programmes in the West were questioned and von Hayek’s rather quaint and questionable ‘theory’ became the new, convenient narrative.
Other factors causing trouble at this time were the dropping of the gold standard by Nixon for floating exchange rates (maybe not a bad thing in itself, but it is also about what else was happening at the time) and how the post war economies of those who were vanquished in WWII (Germany and Japan) were now out-performing better than those who had beaten them.
Basically the idea promulgated by von Hayek that social security systems were bleeding economies dry became the handy go-to excuse to destroy what had been built on the backs and sacrifices of millions of citizens around the world in two world wars.
The issue we have today is that von Hayek’s poisonous lies still rule our thinking. As we move off carbon (hopefully) and invest in more in home grown green, the power politics with the oil producing nations will change again.
Over-production is essential to productivity. Productivity in itself makes more productive use of resources. This is the basis of Schumpter’s concept of “Creative Destruction” but also the work of Janos Kornai:-
https://thenextrecession.wordpress.com/2021/11/11/kornai-on-capitalism-and-socialism/
It is also true the state has to lead the way by providing subsidies which is why a mixed economy is the best to provide greater balance to meet need especially saving the planet:-
https://www.theguardian.com/environment/2023/aug/05/uk-offshore-wind-at-tipping-point-as-funding-crisis-threatens-industry
It obviously doesn’t help to achieve balance in an economy when all the politicians and the mainstream media (like the Guardian) make a country live a lie that the state has no money of its own like the UK:-
https://www.forbes.com/sites/johntharvey/2023/08/02/should-we-downgrade-fitch-or-the-usa/?sh=b55255a9801d
The biggest waste is not over capacity , its carrying on doing inefficient things unquestioningly.
This is the justification for risk taking innovation.
Sometimes it works , sometimes it doesn’t .
When it eliminates waste it justifies its reward.
The profit motive can stimulate innovation or you can pay people.
It probably wont make much difference either way.
Having to pay yourself from future profits does however clarify the mind.
I think it is a valid question for necessity goods/services and is why some states often do control certain markets either by regulation, price or ownership. What really causes problems is when necessity markets are treated (managed) just like discretionary ones, because the consequences of poor supply in the latter are merely economic. No one dies because of a long lead time on a vacuum cleaner but water/food/power/health??
This is exemplified in the NHS as managers have pushed for ever higher ‘efficiencies’ (i.e. bed capacity rates in the 90s% range) because even a tiny uptick in the demand for a certain type of hospital bed will mean capacity is exceeded quickly and service is not available.