I’m currently reading Kurt Eichenwald’s The Informant (the one that was made into that Matt Damon movie). It is about the Archer Daniels Midland price fixing scandal from the 1990s.
While the first 3rd of the book has been really enjoyable, Eichenwald’s infrequent, timid forays into economic reasoning are mediocre at best, supplying the reader with only the most conventional of wisdom (he used the term “unfettered capitalism”; need I say more?). The book is mostly focused on the interplay between the informant, Mark Whitacre, and the FBI agents involved in the investigation to catch the agricultural giant ADM in its consipiracy with its competitors to “rob” the customers of the world, but it obviously has as its ideological underpinning the idea (completely taken for granted by the author) that price fixing is a crime.
I believe that, absent fraud or force, companies, even competing ones, should be able to set prices however they choose, and that “price fixing” is as ambiguous a charge as any other that falls under the Sherman Antitrust Act. However, I feel a little shaky arguing this subject.
What is the argument that you’re having trouble debunking? As in, what specifically is the reasoning that you think people should not be able to sell for whatever price they want?
If I decide to raise the price of my $.99 piece of gum to $5. What property is being damaged?
What if I meet with the owners of every store in a given area and raise this gum to $5? What property is damaged?
When there is collusion between businesses (or a cartel) to try to raise prices, the more incentive there is for an outside competitor to enter the market and undercut you, or for someone to break out of the cartel and undercut their competitors. The only way this can be somewhat successful is if they have the backing of the state in order to crush any outside competitors from entering the market.
Edit: There is a lot on this topic on Mises, just look up “Collusion”, “Monopoly”, “Cartel”, “Price Fixing”. My favorite find is this gem:
The reasoning given by the author (a journalist), seems to be pretty much what I expect from the man on the street:
The way capitalism is supposed to work is that competing firms drive down price, benefiting consumers. However, if these firms wise up and decide to raise their prices and reduce output, then the consumers are robbed of the price they would be able to obtain in a free market. Thus, we have an FBI division devoted to this and other acts of “economic conspiracy.”
The whole “defending the free market” thing is all the more laughable because the author had just (within the previous 50 pages or so) finished outlining all the various subsidies, sweetheart deals, tax breaks, and favorable treatment due to campaign financing ADM enjoyed as a corn processing company.
I guess I wouldn’t necessarily say I have trouble debunking it. In my mind it seems pretty clear. I was just eager to hear some of you guys’ input, especially since the subject is fresh in my mind
But it is impossible to know what “price you would have obtained on the free market.” As mentioned in my previous post, the more and more profits gained from this “collusion,” the more and more incentive there is to break undercut the cartel. It is unsustainable.
Collusion can be debunked by just learning some basic economics (prices tending towards equilibrium) and doing some thought experiments (as my gum example). Then you just have to see that the only possible way it is possible is with government involment. Thus the problem with collusion is not with the “free market”, but a problem with the state meddling in the market process.
Also, it’s funny - I think the textbook answer as regards the market mechanism to break up these potential cartels (to the extent that they might “need” to be broken up) is the inevitable temptation on the part of each conspiring firm to undercut the other(s) and gain a larger share of the market. I’m sure Eichenwald wasn’t trying to undercut his own position, but large portions of the book describe competing firms’ (especially from Asian countries) unwillingness to “play by the rules”. Yet of course this point is glossed over.
One of the FBI agents on the case to this day regards the mole from the company as a national hero for his efforts in putting an end to this heinous crime.
If the goal is to have a market with many more, smaller companies ‘honestly’ competing, the solution is to roll back government, not create more laws to address problems created by previous laws.
That’s like saying that, if I bought a house for $100,000, but later can only sell it for $75,000, I was somehow robbed of $25,000. How does that follow?
To be honest, I’ve lately been shying away from using the word “market” because it implies these nice, tidy, independent “silos” of economic activity. In reality, however, it’s all interconnected. Substitutes and complements abound. Any price-fixing or other collusion will have economic effects outside of their specific “market”. This makes it all the more difficult to sustain a collusive agreement.
Other posts answered the OP nicely. I just wanted to add one more angle. Like most other socialist fallacies, the common perception about “price fixing” also stems from objectivity of values. There is presumably an objective value (price) of X (mostly related to labor theory of value) which greedy capitalists (through marketing, lying, cheating, blackmail, or collusion) sell for Y(>X) which is how profit gets created. Therefore, we need the good government to somehow control this “unfettered” profit creation and protect the gullible customers and exploited workers from the unsatiable capitalists’ greed.
Once a socialist is taught about the subjectivity of values and the inherent wealth creation power of each and every voluntary exchange (both sides are better off), there is no looking back.
I am reading Man, Economy, and State. I just read the chapter on cartels and monopoly. I fully agree with the line of reasoning that producers, even if in cooperation with other producers can withold goods or decrease production in order to maximize income where the demand curve is inelastic. Makes perfect sense. Nothing immoral. No more immoral than trying to maximize the wages for your labor.
But what about the situation where, for example, a pharmaceutical company is the only source for a life saving drug during an epidemic, or even just during the regular modest incidence of a fatal illness. The families/patients are likely to have getting the drug pretty high on their priority list, preferring to pay a lot to avoid the “disutility” of death. Is it moral for the producers to just use the inelasticity and jack up the price maximizing total income until the price becomes so high that the curve becomes elastic in that price range, and people are willing to die, or let grandma die, rather than pay the price?
I would not suggest coersion upon the company, but might offer labor and land to them as a gift in order for them to readjust the corporate priorities, so to speak.
What does the cognoscenti say about this?
Forgive me, I am a libertarian newbie, and never took any economics before. But I am studying hard, need a little help. Thanks in advance.
I don’t think I qualify to answer for the cognoscenti, but I would say, briefly, that yes it is moral for them to do that.
It may strike some people as a callous point of view, but one could ask those people on what alternative grounds they would prefer allocating the drug. If they say “to those who really need it, as opposed to those who can pay the most for it,” obviously there is no way for an outsider to be able to tell who “really” needs or deserves something; value scales are not subject to measurement, and anyway, ability to pay the most (or of finding others to help one pay) is the only non-arbitrary way of coming close to that standard.
Pharmaceutical companies can’t make demand curves inelastic; an inelastic demand curve is a reflection of the relative scarcity of the commodity. The higher price is, of course, a boon to the owner of the commodity, but the point is that it also economizes that commodity toward those who most urgently desire it, as well as attracting further production of that commodity.
In short, yes it’s moral, and the alternative would be a political process in which somebody in power arbitrarily chooses who lives and who dies.
What’s “morality” to you, David? (+1 internet if you correctly guess which film I’m paraphrasing.)
Here’s my take on it: the existence of a life-saving drug does not prima facie entitle anyone to the use of it, for free or at any particular price, in order for his life to be saved. Given that, it cannot follow that anything was prima facietaken away from him (including his very life) if he can’t afford to use said drug. Although, on the other hand, no one has to approve of what someone charges for using a life-saving drug or any other good or service, I don’t think anyone has the moral right to then force that person to change it. To do so would constitute aggression, in my book.
Your suggestion of offering labor and land is an interesting one, and I have no problem with it on a moral level. However, instead of gifting such to the company, I’d recommend loaning it to them. That way, the company would have more of an incentive to follow through on its promise to readjust its corporate priorities - if they fail to do so, they forefeit the use of the land and/or labor.
Actually I think it is fair to try to raise donations to pay for the drug, on a voluntary basis of course. One could try to convince the corporate board of the wisdom of being more humanistic as a way of raising the public profile of the company, which might be beneficial to them. I believe many pharmas have actually reined in the price for certain drugs for AIDS, but I don’t have the facts in front of me now.
I suppose I have been brought up to value human life, perhaps too much. I agree the government has no right to force a company to lower its prices, “in the public interest”. By giving land and labor to the pharma, perhaps it would produce more of the drug if its marginal costs were in part defrayed, like run an extra shift at the factory etcetera. But I guess thats the same as raising cash to pay for the drug.
No one has the right to be given the things they need to live, like food, shelter, etc. They or their loved ones need to work or pay for them. My dad used to say “The world doesn’t owe anyone a living”. So you are not owed the miracle drug either.
