Tuesday, March 27, 2012

Perfect Competition-ism vs. Capitalism

Perfect competition is the underlying assumption of Adam's Smith's treatise on capitalism.  The view that free markets (with freedom  for new producers to enter the market) are well suited to the allocation of labour and resources, because it ensures that people will adjust their behaviour to produce what is most in demand and least supplied.  Adam Smith was deeply aware and concerned with the corruption of markets, and because his entire advocacy of free markets was conditioned upon the freedom and information awareness to compete, let me substitute his use of the term capitalism for Perfect-Competitionism.

The one sentence distinction between Perfect Competionism and modern use of the word Capitalism, is that Capitalism includes the freedom to corrupt markets.  Most people who publicly tout capitalism as an ideology today do so with an Ayn Rand propagandist favouritism for the rich and industrial incumbents.  Free markets require rules, regulations, and/or mechanisms that protect the markets from corruption.  A complete absence of laws would allow murder, arson, theft and extortion as competitive measures and business models,  while too many regulations can create and protect monopolists and cartels.

(more) Perfect markets defined
Ultimate strict perfect competition does not exist because it requires perfect information shared instantaneously and infinite participants.  But for a practical view, perfect markets are those with as much participation (freedom of buyers and sellers) as possible and as little oppression as possible.   This definition, being a dual mandate, makes it unfortunately imprecise, but it does allow us to compare markets or market policies to alternative market structures, where one is clearly more perfect.  Maximum choice without coercion is a suitable definition inclusive of non-financial transactions.  Distilling the main benefit of this and the economics definition of perfect competition into a single rule of thumb, perfect markets lead to more unit sales at a lower price than imperfect markets, because perfect competition means more competition and/or more alternatives to choose from.  From a policy perspective, even if we understand that Strict perfect competition is unachievable, getting closer to perfect markets is worthwhile.

There are 5 categories of markets, which each have their own subtleties regarding perfect competition status, and the impact of oppressive forces.  These are: labour, capital, products, politicians, and the interests of the unrepresented.
  1. The labour market has an oppressive balance tilted in favour of buyers (employers).  Employers can dictate terms of contract, and generally have the power to pay what the market will bear.  To balance that oppressive power, unions, minimum wage, workplace health and safety regulations are argued for.  While a war of freedom (to pay what the market will bear) vs freedom (organize into a labour cartel to demand what the market will bear) is the historical organization/corruption of labour markets, war is expensive and wasteful, it's a fight labour tends to lose, and when labour wins it (creating fewer but higher paying jobs), it creates oppression for the unemployed and consumers.
  2. Capital markets has a power balance tilted in favour of capital providers for smaller and startup organizations, and tilted in favour of capital acquirers for established public companies.  There are many more people looking to invest in large companies with competitive advantages (or market corrupting power) than the limited capital needs of these companies.  Stock markets distort competitiveness also through better information available to insiders, and management/insiders being able to appoint directors and evade repaying investors by evading to pay sufficient dividends.
  3. Product markets are those traditionally exemplified within competitive markets.
  4. The market for politicians is cynically very free.  Despite heavy regulations against bribery, obtaining the friendship and loyalty of politicians is straightforward if you have the resources.  While politicians have a duty to the social interest (constituents), they will educate constituents on why their friend's interests should be accepted, and they can escape any clear binding mandates during campaigning.  While there is a clear unofficial market in political influence, votes themselves are property, and though it is not a financial transaction, constituents use of their voting power is a market transaction.  A perfect voting market, most would agree, would hold votes powerful and relevant.
  5. Unrepresented interests are by definition not a market since they are excluded from a/the contractual transaction.  These interests are also necessarily oppressed in contracts by being locked out of the negotiation.  This category is included only because markets made more perfect for their participants should ideally not place a burden on external society.  The labour and political markets (discussed above) have the strongest potential effects/burdens on society.

Arguments against Perfect Competion

While Perfect competition attempts to distill from capitalism its inherent utopian idealism, there are still forces and arguments against it, beyond individual selfish interest.

Prevention of failure
In almost every major city, taxi licenses are limited and fairly expensive.  The social advantage for doing so, is that the city earns revenue, and taxi drivers have something marketable that a bank can confidently lend against.  This results in much higher consumer fares than what would result under perfect competition (unrestricted taxi service providers).  There are laws in many places that make it illegal for private car owners to engage in commercial transportation, and there would be obvious consumer appeal to smart phone applications that coordinates between people traveling to a location and riders who'd want to go near the same location.

Ignoring the opportunities for transportation matching through technology, the one argument that can justify the apparent net negative to society of limiting the supply of taxis is that if too many taxis operated, then many of them would fail.  If a city currently has a regulated cartel of 1000 taxis that allow a full time driver to make $50k/year (before paying license amortization), if it were to be unregulated, there might be 9000 new taxis in service, each earning less profit per ride, and might result in $3k-$5k profits/year, and likely cause 9500+ of taxis to go out of service.

A price fixing cartel of taxi licenses provides a consumer benefit of consistency of service/availability.  A taxi service is dependable if there is an appropriate supply of taxis each year, rather than 10000 one year then 500 the next.  There is also an argument that failure creates hardship.  Failure is the main invisible hand mechanism to ensure well functioning markets.

A more important market than taxi service is agriculture.  Food security has much more sound basis for failure prevention because the hardship of farmer failure can lead to starvation.  It is a much clearer social benefit to target an oversupply of food production and maintain continuity of farming operations, because the risk of starvation is worth mitigating.

The prevention of failure argument against perfect competition is roughly a left wing argument.  Subsidies and market corruption can be justifiable for the purpose of business sustainability, even if it is perfectly fair to angrily denounce corrupt crony political intervention that goes far beyond creating business sustainability.

Investment returns
The core of all modern equity investment theory is to find companies with a sustainable competitive advantage, because competitive advantage means they have pricing and profit power.  Sustainable competitive advantage is typically a euphemism for market corrupting power.  Airline stocks are one example of panned poorly performing investments primarily because it is very competitive.  Any profitable route can be fairly easily matched by competing airlines.

Since the investor class is politically active and both desires to have opportunities available where markets can be corrupted, and maintain any market corruption of existing investments, they support political intervention in favour of monopolies, and the monopolists themselves have much more power to affect speech than the startups that might challenge them.

This is roughly a republican/Mitt Romney argument against perfect competition.  Its amoral.  Might makes right.  Nakedly, it is claiming that incumbent hegemonies deserve their riches because poor people had the theoretical opportunity to create that hegemony.

Still, some monopolies make sense.  Even if it is possible to lay competing railroad tracks between destinations, it would be socially wasteful, and likely result in one of the operators failing.

Insider Information
While stock markets are considered highly efficient (near perfect competition) markets, the disparity of information among insiders and the general public make them unfair.  This is especially apparent in the event of imminent collapse of a company (financial company, extra especially) , where management and public analysts continue to assert that everything is fine, and that there is substantial value in the company at current prices, meanwhile people with certainty aggressively sell to unsuspecting buyers.

The forces that advocate for this system are those who oppose sufficient regulation or enforcement of insider trading rules, the corruption of shareholder rights led by such states as Delaware, and even the existence of exchanges and salespeople designed to bring wolves and sheep together.  By contrast, Natural Finance Communal Equity trading is done through a consensus price setting mechanism by the insiders.

Rewarding innovation and  Intellectual Property/Achievements
Patents and copyrights provide protection and monopoly power to the innovator.  In the case of patents, it provides a licensing vehicle with which the innovator can license and share his innovation.  While there is a perfectly valid argument that protection of innovation creates innovation, the monopoly power clearly corrupts markets.  If we consider the protection of innovation as a gift from society to the innovator, society should be treated better than AIDS medication price gouging, and aggressive litigation against genetic modified seeds that infect surrounding farms, or criminal penalties for downloading a Michael Jackson song that are harsher than those for killing Michael Jackson.

The arguments for monopolies are the essence of capitalist corruption of free markets.  Open Partnerships is one alternative I've proposed to replace the existing Patent social contract where society currently grants the Patent holder unlimited profits and receives nothing (other than benefits of paying monopolist's asking price for use of invention) in return.  Open Partnerships create an upper limit on financial return to the innovator by providing an open buy-in price to anyone interested in benefiting from the innovation.  This necessarily returns to society a limit on profit extraction from the monopoly, because it broadens profit and control participation, including the potential to direct use of the innovation towards non-profit-maximization directions.

First Mover and Branding/Reputation competitive advantage
A company's reputation and brand can be a deserved competitive advantage, because competing on price, quality, and service are core foundations of a free and perfect market.  Being first to a market can be a fair advantage that doesn't enshrine a monopoly, or it can be unfair but still socially practical.  The railroad example, and installing pipes and wires to homes are most economically practical if one provider supplies the entire market capacity for the services.  While simple monopoly abuse is enabled by privatized capitalist ownership and corruption of markets, the abuse is extended when the wiring owners diversify into the content travelling on the wires.

The innexcusable offense to perfect competition is not in allowing necessary monopolies, but supporting and tolerating the diversification of empire of a necessary monopoly into a stronger unnecessary monopolist.

Natural finance and other policy solutions enhancing perfect competition
The etymology of Natural Finance stems from financial algebra used to transform the raw natural forces of power and greed into win-win structures that balance risk, reward and fairness among participants and society.  The use of the word natural refers to obviousness and truth.... naturally better.

Perfect competition for capital is achieved through Natural finance's open queued loan system as it provides infinite demand for loans while always adjusting to the best bids from lenders for the fixed quantity of capital that is needed.  Any information deficit as to company awareness or business clarity will only temporarily prevent financing costs to the company from gravitating to the lowest return investors will accept.  Information advantages that cause an investor to obtain yields temporarily greater than the natural rate it should gravitate to, are temporary until the rest of the market understands the same information. The other powerful limit on information advantages and insider trading is the recommendation for how partners either allow new partners to buy in or existing partners to sell out.  The sales price for an equity share is the consensus median price determined by existing insider partners.  If one insider has better information than the other partners, he is motivated to share that information so that pricing can reflect his view of reality.

Natural Financed corporations also transform the failure of an organization into a voluntary process.  Deserved market failures likely continue to happen, but failures due to onerous credit terms do not.  Owner-Director abandonment of a market innefficient enterprise is the core mode of failure, but does not necessarily result in the end of the enterprise, since creditors can take up the operations in the event of abandonment.  Natural Financed businesses are more sustainable than traditionally financed business, because they have lower fixed cost overhead.  Natural Finance (unlike traditional) debt is not a fixed cost obligation, and the loan queue system creates flexibility for suppliers and employees to accept deferred payments for services.

Natural governance ideas can bring market perfection in the labour and political (social governance) markets. Basic income, by entitling all citizens to payments necessary for survival, allows for perfect labour markets.  Giving everyone the freedom to do something, even if they have the option to do nothing, eliminates every major oppression in a labour market.  Basic income allows free labour markets to be perfect labour markets. There is no longer a need for minimum wage, favouring education, employee or new business programs.  People gain the freedom and independence to pursue what they want, and may choose to do something not particularly profitable if they feel it is still important.

Natural governance also significantly improves the political market.  Social dividends and independently accountable executive mandates means that there is always a voter controlled option of eliminating a program.  An option to the cost of every socially funded program is an equal social cash dividend paid to each social member.  Basic income and social dividends also lessen the need for group advocacy, and so lessen the prize of governance power.  Most importantly, direct electoral accountability of every executive position pressures effective and efficient execution of duties.

Summary of perfect market enhancement measures
The availability of a negative option is key to making a market less oppressive.  The freedom to not join the labour force, or not elect a bureaucrat or fund a program more fairly balances power within those markets.  Through Soft loan queues, the infinitely replaceable lenders eventually achieves perfect market price equilibrium for financing, and the investors right to dividends empowers investors with the choice on whether to entrust management with reinvesting a venture's profits back into the company.

The most powerful logical illusions in our world are created by attaching a word to an idealist concept, as a defense for an expanded ideology that goes beyond (corrupts) that idealist concept, even contradicting it.  The etymology of capitalism and feminism clearly promote capital and women's interests.  Since most people are only capable of forming simplistic understanding of an ideology, it is easy for the greedy or liars to hide behind simple public ideology and  hypocritically denounce opposition to their corrupting power as being anti-idealist.  Frequently, debate with capitalists and feminists devolves into the hypocrite distancing himself with "the real ideology only supports efficient markets or gender equality".  The other tactic enabled by the linguistic hijacking of an idealist concept is to denounce the anti-hypocrits as being hateful of the successful or women.

The linguistic proposition of perfect competitionism is made because it is critically important to truth discovery to linguistically separate any idealist core of an ideology from the overall values of its ideological proponents.  Perfect Competition was initially described by classical economists as an artificial/academic description of an imaginary ideal.  The ideal is worthwhile.  A historical point I'm unable to answer is whether this ideal was deliberately proposed to advance market liberalization policies (and the freedom to corrupt markets), but that ideal has been corrupted in order to advocate for corrupt markets under an ideological flag of capitalism.

Its probably unfair of me to separate capitalism into a non-pejorative, perfect-competitionism, in order to use the Holistic ideological view/proponentship pejoratively.  A clearer and fairer distinction can be separating the concept of Capitalist ideology into Perfect Competitionism, and Piggy-Capitalism.

Perfect competitionism as an ideology
While perfect competition may seem like a subtle variation of free markets and capitalism, as an ideology, it is a drastic distancing from corporatism, public company share marketing, and labour and political oppression.  It is about "fixing" free markets so that they are not oppressive, while also exposing those who advocate corrupting markets in the name of capitalism to be anti-idealists.

More broadly it is a social framework that maximizes happiness/choice without resorting to class warfare or advocacy for one class.  Policies can be evaluated holistically in what is centrist-ly viewed an improvement to status quo.