Anyone who takes an economics course quickly discovers the folly of command market systems. In their attempt to equilibrate supply and demand, they always fall victim to the natural tendency of over- or underspeculation. Necessarily, these political economies fall (as in the case of the U.S.S.R.) or reinvent themselves (as in the case of modern China). And yet, despite the economic system, whether the intent is to create and regulate a monopoly (as socialist countries attempt to do) or to facilitate as much competition as possible (as is the intent of pure capitalism) never has a government been able to rid itself of monopolies.
Several economic scholars have proposed pure free market capitalism without government. These anarcho-capitalists come fairly close to a perfect system. However, most fall short because of the introduction of Murray Rothbard’s “Non-Coercion Doctrine”. Following the example of Adam Smith, such a doctrine facilitates the invisible hand to work unfettered. However, even with such market freedoms – so designed to allow for maximum competition – still the problems of monopoly power rear their ugly head through economies of scale, secluded markets, and undercuts.
While it may be true that no market system would be able to protect against such economic ills, there is still a way to keep monopolies in check without corruptible governments with their slow legislation and rapidly outdating laws. Enter, the visible hand.
The basic problem with previous anarcho-capitalist thinkers is that they focus only on the invisible hand. Thus, the only people controlling the market are those who are willing and able to buy whatever good is in question.
Thus when Factory X gains monopoly power in the graph, the only ones who can make an effect on the market are the ones who are satisfied in the first place (shaded in red). If such is the case, the monopolist firms which inevitably arise have no incentive to change, and the consumers who still are willing and able to buy from the monopolist firms have no incentive to change either. Thus, the externality is born by the exact people who have no ability to change anything in a non-coercive system (shaded in blue).
However, in our era in which information can travel at the speed of Google, the socioeconomic powers which the non-coercion doctrine attempts to eliminate are all the more likely to be the ones to fix the market rather than to break it. Now, when a plumbing company charges exorbitant prices to its customers, those without water will be able to see that not only those in their town, but those across entire continents may be suffering the same problem. And as discussion on blogs and forums become more and more heated and people more and more destitute, the likelihood that these businesses will see physical repercussions – the visible hand – become greater and greater. And, the businesses will find their stores and headquarters being vandalized/destroyed or their corporate officers being killed, and such behavior will continue until the business either corrects itself or folds altogether.
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What does the rest of the chart mean?
Also, thank you for the mini lesson in economics! It has been so long since I've taken it that I've forgotten everything except "supply and demand".
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You can't ignore me, for I'll not lie down quietly.
http://insanitek.net
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Which part of the chart?
The lefthand axis is the going price of a given good (the higher the price the higher on the axis you will be). The bottom axis is the quantity (the farther right you go on the axis, the more will be produced/be demanded).
The orange line is the demand curve. It demonstrates that as the price goes down, there will be greater demand (i.e., more people are likely to be willing and able to buy the good). The purple line (actually, it's plum...) is the supply curve. It demostrates that factory X will be able to produce more of a good at cost (i.e., without making a profit) if they raise the price.
In the left chart, the price and quantity are at equilibrium. Demand meets supply. This is the ideal market situation, acheivable when there is perfect competition.
In the right chart, there is little to no competition. Factory X is able to set their price high without producing much. This is because there are no other firms to undercut their price. We saw this happen with oil recently. OPEC decided that it wanted to make more of a profit than it was making, so it stopped supplying us with as much oil and sold it to us at a higher price. Thus, the price went up and fewer people bought it. The area of the graph shaded red between the prices where the quantity intersects the demand and supply curves would be factory X's profit.
The reason that this is bad is because it prevents all those people to the right of the shaded red area (shaded in blue) from having the good and it limits the supply. However, in a blind market situation, neither party in the red area (producers and consumers) have incentive to change their behavior since each is getting what it wants (sort of).
--Mike
Well, my answer to your question would have been "all if it?". I'm glad you did explain all of the graph. I was trying to figure out what all the colours, lines and axis meant. The extra explanation helped me a lot too! Thanks!
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You can't ignore me, for I'll not lie down quietly.
http://insanitek.net
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Very good writing, but your blog left my head spinning a little. Let me see if I correctly understand the so-called "visible hand": it would regulate market prices through the threat of physical violence against businesses who abuse the market and their customers?
I am familiar with Adam Smith's "invisible hand," and the argument that even in a monopoly, there is no incentive for the market to change, because both the monopolizing company and a sufficient number of customers are satisfied (that is, the former is making money and the latter is receiving a good or service). Is that an accurate summary?
Assuming that I've correctly grasped the main ideas of your blog, I'll venture a comment. Of course, I cringe at the mention of violence as a necessary mechanism in any type of market. The idea of a "visible hand," or unsatisfied consumers violently rising up against a monopoly, sounds eerily reminiscent of a Marxist-revolution-type situation. That, to me, is a very bad thing.
I suppose I would classify myself as an advocate of zero governmental intervention in the market, but even I recognize that in some cases, such as the fall of Fannie Mae and Freddie Mac, a government "bailout" is necessary to prevent a widespread economic crash. Those companies should have never been associated with the government in the first place, and should not have been allowed to guarantee 80% of the mortgages in the United States. We need more oversight, which isn't necessarily regulation.
Of course, I say this all with the advantage of hindsight.
The mortgage crisis is a result of something completely unrelated: banks being forced to give subprime loans to impoverished areas due to allegations of racism.
But back to my point. It's not necessarily violence that's necessary so much as leaving violence (as well as vandalism, slander/libel, etc.) open for use by the general public. A government would never do well to properly oversee a monopoly (or oligopoly) as such because they're usually the ones whose pockets are lined first (and they help the monopoly get to where they are).
--Mike
I didn't mean to get involved in the subprime mortgage crisis, but now I do see a possible connection between it and your blog. I did not know that banks were forced to give subprime loans, but assuming that this is true, wouldn't it be a negative example of the visible hand at work? These financial institutions were threatened not directly with violence, but with a potential backlash or repercussions. Therefore, they introduced subprime mortgages as a deterrent.
And unfortunately, I agree with your statement that the government is probably not very reliable when it comes to market regulation because of corporate influences in our government and corruption. Perhaps if someone was able to kick lobbyists out of Washington this problem would greatly diminish?
The visible hand is about disenfranchised consumers, not government might. The issue would be more likely about affordable housing than it would be affordable loans.
As for getting lobbyists out of Washington, it would never happen because that would make congressmen's bank accounts severely diminish.
--Mike
The visible hand of an outraged public is just the good old 'rule of force' we have always lived under, and always will. Is the difference here only that there is no overwhelming government force to come between the corporate monopoly and the outraged consumers? If so, then what would stop the corporation from responding to the first few violent acts in kind? Perhaps they could even use unregulated force against weaker competitors to gain monopoly status to begin with.
As an unaffiliated libertarian I am as close to an anarchist as I can stand to get, but the issue of rule of law vs. rule of force and the Possible (likely? inevitable?) consequences of the battle for dominance prevent me from going the rest of the way. Historically power vacuums are always filled, if not by a planned system of order and laws, then by the strongest one that wants control.
This is very interesting and I appreciate your effort. You mentioned as an example how the plumbing company charging exorbitant prices will experience physical repercussions. Now with the new wave of companies "going green" and expanding their efforts to be environmentally friendly, do you think in your opinion that this is a result of the socioeconomic powers which the non-coercion doctrine attempts to eliminate?
It is absolutely the case. However, something like that might also have been effected by the invisible hand. Thus, these changes might have been effected with a non-coercion doctrine in place.
I don't really understand how free market capitalists could support a 'non-coercion doctrine' since economics is based entirely on coercion.
--Mike