As I understand it, Austrian economists generally believe that markets should be allowed to operate without government intervention (please correct me if I’m wrong). In that case, I would like to get opinions on an essay I have written on the non-optimality of free markets here.
Austrian economists is defined by praxeology. But yes, people who use correct methodology do tend to correctly favor markets over violence.
Using these tactics a dominate company could succeed in keeping an inferior or equal firm from arising. But a superior firm, the only kind of firm that needs to arise, would not be effected.
You should notice that these supposedly illicit activities are examples of competition(charging low prices, using cheap suppliers, forming mutually beneficial alliances), the very thing you claim to want to promote through regulation. You would then notice that government anti-monopoly regulations actually reduce the competition in a market. The competitiveness of a market being determined not simply by the number of firms, but by how those firms engage in business.
Business regulation’s function is to turn a decentralized industry into a single cartel, ie a monopoly.
There are many mildly irritating misunderstandings of economic theory in your article, but the one which I think leads most directly to your incorrect conclusion is this:
"Obviously when a company goes bust, it can never be “tried” again, it doesn’t get a second chance. The succeeding company (or very small number of companies) tends to grow and dominate the market. Once a company dominates a market then it can start to raise its prices and employ a plethora of strategies to suppress rivals, that have nothing to do with producing the best goods for the consumer. For example:
• Predatory pricing (temporarily and unsustainably lowering your prices until your rivals go bust)
• Tying up exclusive distribution channels
• Using your size to get raw materials for less than any new rivals can
• Using your size to negotiate higher prices from retailers than any new rivals could."
When a company goes bust because a competitor was more efficient, the competitor has not “won the war.” A company in the free market is always in danger of facing new competition.
The “plethora of strategies” that a company can use to suppress rivals have no effect in a free market other than hastening the rise of rivals and the bankruptcy of the company employing the strategies.
The second that a firm becomes so ineffecient that it could not bear competition in its market, it will have competition. In a free market, only through continuous innovation and cost reduction can any firm, no matter how initially dominant, maintain its position.
Your conclusion, that the free market is sub-optimal, fails.
Your essay is one giant Nirvana Fallacy
You should read some books and articles on Austrian economics.
First of all, thank you for your civilized reply…
Not quite true. I claim that there are some inherent advantages in being an already established large company over being a new small hoping-to-be-large-eventually company. You too seem to acknowledge that there must be some advantage since you concede that a dominant company could succeed in suppressing an equal company. Let us crudely say that the advantage of already being established over being a newcomer is X%. Then your first sentence should be adjusted to “Using these tactics a dominant company could succeed in keeping any firm whose performance is less than (the established firms performance + X%) from arising.”. This then makes the second sentence false.
Lets take each in turn:
*charging low prices… sure, charging low prices is generally good, but charging low prices for a short period whilst killing future choices, then ramping up your prices as soon as the competition has died is not so obviously good. I remember there was a battle between two London newspapers many years ago - one of them owned by a large company, one of them owned by a small one. The large company then started a price war and for a few months both of them were given away free… but the small newspaper could not keep this up and went bust. The big paper promptly put its price back up to what it was before and the price remained high for many years after.
*using cheap suppliers… this is erroneous because it is often the case that the large established company can get lower prices from the same supplier as the small startup uses simply because they have the power to make larger orders.
*forming mutually beneficial alliances… mutually beneficial to the two parties (note that neither party is “the public”)- but creating an additional hurdle for new startups, thereby reducing the potential for competition.
That is perfectly true. But in general (and this does depend on which market sector we are talking about) the threat from new startups is very non-uniform. If there were an army of potential rivals continually ready to pounce on the established market leader then I would agree with you more. But in so many sectors the route to market is long, cumbersome and expensive. So the situation is more like this: nearly all the time there is no significant threat and this is interspersed with short bursts of threat. This allows the larger company to behave less than competitively for most of the time and then intermittently employ tactics like predatory pricing.
I fail to see how you come to that conclusion.
That’s a not-quite accurate statement… please consider the point about “X%” I mentioned in my previous post replying to “JonBostwick”. Your statement needs to be modified to include the X% factor.
Doctor Nir prescribes chapter 10 from Reismans Capitalism,
take subsection 7 twice a day and come back when you start to feel the effects.
more generally i would critique your concept of ‘optimality’, what is your criteria?. lets assume you have very demanding criteria, so that no schema of production is optimal, would you concede to laissez faire if there were sound arguments that it approximated optimality more closely and reliably than any other schema ?
Do you think regulation speeds this up or slows it down?
Proof of this?
The larger the company, the more that is lost from ‘predatory pricing.’ Let us try a thought exercise to show this. Cain-Depot is a new chain store that I have just invented and we want to clear the local market in order to monopolize it. I sell drills that are normally priced at 100 dollars for only 50 dollars thus losing 50 dollars for every drill I sell. Now I am suppose to carry this on for months in order to run out other businesses possbily even years, and my aim is to clear a market so I can sell the drills for $150. So I incur massive loses in order to supposedly receive massive profits while hoping that no new businesses arise or that any existing business enter into my market to engage themselves in ‘predatory pricing.’
read pps. 399-405 or so of Reisman’s Capitalism, as the above poster mentioned.
http://capitalism.net/Capitalism/CAPITALISM_Internet.pdf
it’s available online.
If you continue to insist that the predatory pricing doctrine is a reality without reading the best refutation of it available, I’ll have to assume that you’re irrational, and have no interest in a real debate.
If you wish to continue holding your opinions with no basis in anything other than your own thoughts, as a contrarian, then there is no point in attempting to hold rational discourse with you.
If instead, you read Reisman and then refute it, I’ll be very much interested in continuing this discussion.
Ermm, since when is praxeology a method?
Thank you for the precise reference - I will indeed read that section… but on reflection I’ve decided that the four bullet points I put in my essay are perhaps in the wrong order. I suspect that predatory pricing is perhaps the least important/likely-to-occur of the four mechanisms, so it could be a bit of diversion for us to argue about it. I would here by like to omit that bullet point… indeed I have just removed it from my original blog essay.
Would I be right in assuming that the capitalism book refutes my other three bullet points? If so where? I will read any relevant sections with interest if anyone would like to tell me the pages/sections.
I think you would do well to read the entirety of Chapter 10 of the book linked above, the chapter entitled “Monopoly vs. Freedom of Competition”
He covers everything you’ve mentioned, including the 3 points besides predatory pricing, and many other points you’ve left off your short list (like Japanese ‘dumping’ and the case of Standard Oil.)
He continues on to examine the monopoly v. pure and perfect competition as presented by modern mainstream economics, and then to use a concrete example to illustrate the absurdity of ‘pure and perfect’ competition, or Platonic competition, as he calls it.
Anyway, I hope that the insights in Reisman’s book do as much to illuminate your understanding of economics as they did for me.
Also, thank you for your polite and reasonable response. It’s not often that a person on a forum shows the ability to step back from a point they previously asserted when confronted with conflicting evidence. I’m glad you have an open mind, and seem to be truly searching out reasonable conclusions about the market. You’re behaving as a scientist and not as a zealot. That’s a good thing.
Read some of Dom Armentano’s anti-trust work if you want to see the anti-trust dogma shredded to pieces as it so richly deserves.
You gave no reason why these forms of competition are less respectable than any other form of competition. Stating that they seek to advance the interest of the company at the expense of its competitors is not enough, as that is true of all forms of competition. You have landed yourself in contradiction. Either competition is good and should be allowed unhampered, or it is bad and the government should not regulate in favor of it.
Anti-trust laws seek to punish those companies that compete successfully. In that sense it discourages competitiveness, and by doing so it amounts to a reward to the uncompetitive.
You can never increase competitiveness by punishing success.
ha ha ! for everything else, theres mastercard!
Give me a while to chew over chapter 10 as suggested.
I’ll be back.
Mick.
Yes, and Rothbard was wrong here. Praxeology is a subject area, namely the science of human action. It is not a method and Mises didn’t think so either.