Libertarian capitalism --- libertarianism, as it's generally known here in Eris's Own Country --- is a curious ideology in many ways. The one which concerns us today has to do with its advocacy of capitalism. On the one hand, the sanctity of private property and private contracts is held to be a matter of inalienable natural right, guaranteed by the fundamental facts of morality, if not a basic part of Objective Reality; capitalism is the Right Thing to Do. On the other hand, much effort is devoted to arguing that unfettered laissez-faire capitalism is also the economic system which will produce the greatest benefit for the greatest number, indeed for all, if only people would just see it. Natural right therefore coincides exactly with personal interest. A clearer example of wishful thinking could hardly be asked for. It's not hard to see what function this plays, rhetorically. Many people who are not persuaded by the natural right argument can be lead to go along with libertarian proposals by considerations of economic efficiency. (I imagine the number of people who are unpersuaded of the economics, but buy the sanctity of property, is much smaller.)
Now, I am the last person to deny that the invisible hand is a very powerful and valuable concept, and I'm certainly not going to deny the fundamental theorems of welfare economics; Debreu's Theory of Value is one of my favorite books. Under certain precisely specified mathematical conditions, perfectly competitive markets inhabited by perfectly rational agents will allocate scarce resources in ways which cannot be altered without making some people worse off. Whether those conditions are satisfied by any economic system in the real world is an empirical question, and the answer is of course No. Given that those theorems do not apply, the efficiency of markets is another empirical question, or rather a whole series of questions, with answers depending on the market and the tasks they are being asked to perform. There are many situations where markets are a very valuable and powerful social technology, a useful way of coordinating actions, allocating resources, and eliciting valuable efforts. (I have written elsewhere, e.g. here and here, about the importance of using these tools to achieve the aims of socialism.) There are other situations where they produce awful, even perverse results, and still others where they'd never begin to get off the ground, like funding basic research or national defense. (The best book I have read about the overall virtues and limits of markets is Charles Lindblom's The Market System, reviewed here by George Scialabba and here by Danny Yee.)
Now, if the empirical track-record of what are conventionally called free markets is decidedly mixed, there are three courses of action open to the libertarian. (1) Embrace the natural-liberty argument wholeheartedly, and say that we should adopt laissez-faire even when it hurts us, because it's the right thing to do. Unsurprisingly, moral austerity in defense of liberty finds few takers, though it has some. (2) Argue that the empirical track-record of alternative economic arrangements is actually no better than that of free markets (that, e.g., every instance of market failure is at least matched by an instance of "government failure"), so that's a wash, and accordingly we should go with the market solution, since that respects natural liberty. (3) Argue that, appearances to the contrary, free markets really are optimal. This option, unlike the other two, is incompatible with intellectual honesty; it is also by the far the most popular, perhaps because it can be well-paid.
All of which is a long-winded way of bringing up today's outrage against both reason and the good name of political economy, Bust the Antitrusters, by Stephen Moore at the National Review, which was brought to my attention by Julie Saltman. The point of this article is to argue for the repeal of the Sherman Anti-Trust Act, on the following grounds:
Antitrust actions may have made sense during the era of Theodore Roosevelt, when firms like Standard Oil could truly monopolize local markets. But in the 21st century, where markets are global, the idea that firms can gouge consumers on prices is as antiquated as the stage coach. Consumers are more fickle and cost-conscious than ever before. If prices get out of line in any market where there are no barriers to entry, competitors swoop in and lower costs so that monopoly rents disappear.
I want to pause for a moment to admire the deceptive idiocy of this statement. It is perfect, after its kind, which is to say it's so bad it's hard to know where to start. I am tempted to begin with the implication that a hundred years ago, when real incomes were something like an eighth of what they are today, ordinary people were less cost-conscious (isn't it just like a conservative magazine to deny the reality of economic progress?), but never mind. Let's look closely at just the very last sentence.
What Moore is saying is, taken strictly, literally true, and perfectly vacuous: if a market is perfectly competitive, then it is perfectly competitive. If you assume away barriers to entry, and imperfect knowledge, and all the other ways in which actual markets differ from the Arrow-Debreu model, then indeed you will see competitive equilibrium, and monopoly rents will be dissipated. The deception comes from the implication that this is somehow relevant to policy in the real world. In the real world, information is imperfect and barriers to entry are substantial. It's not like this is news; there are perfectly good ways of modeling both situations within the framework of neo-classical economics. George Akerlof and Joseph Stiglitz won a Nobel Prize for their work on imperfect information (perhaps Moore has heard of the Nobel Prize?), and the entire field of industrial organization is concerned with little more than the second. (John Sutton's Technology and Market Structure is particularly apropos here, both because it's brilliant, and because the hardcover is heavy enough to make a satisfying blunt instrument.) In the real world, "monopoly rents" and "abnormal rates of return" are known as "acceptable profits", and serious investors have a word for someone who proposes to start a company in a field without barriers to entry. That word is "idiot", usually followed by remarks on the order of "Why are you wasting my time with crap?" (Similarly, in the real world, as Mark Kleiman has remarked, the companies which bank-roll the people who tell us that planning and model-based forecasting is impossible wouldn't dream of doing without planning, modeling and forecasting, which is why there are expensive, widely-adopted textbooks on "engineering" demand, etc.)
Most importantly of all, as Julie says very well, in the real world price-fixing and cartels are alive and well and result in regular criminal convictions. (These are just the people who are so clumsy as to get caught violating the Sherman Act; there are whole best-selling business books about how to engage in monopoly pricing without breaking the law. Lesson one is to get the state to enforce your monopoly through intellectual property rights.) Whether you're talking about boring old-economy agro-industrial products like citric acid and high-fructose corn syrup (hello, Archer Daniels Midland, America's version of collective agriculture!), or about shiny new-economy techno-industrial products like DRAM chips, price-fixing is alive and well.
I eagerly await a new article by Moore, or one of his ilk, arguing that the persistence of price-fixing shows that the Sherman Act, like all government regulation, is ineffective and accordingly should be scrapped. I will award extra points if they are able to argue that it has the perverse consequence of encouraging price-fixing. What would astonish me is libertarians of this stripe learning some actual economics.
Update, 12 July 2011: The links to Julie's blog are dead, but archive.org preserved a copy. (Thanks to Steve Laniel for running this down.)
Posted at September 17, 2004 01:40 | permanent link