The Myth of the Invisible Hand

[Heyo]

(Posting this under politics since there is no economics section. If this is wrong here please move. Tia)

The "Invisible Hand" of the free market is a concept in economics. Basically it says, if someone is running a business that is exceptionally successful, there will be someone who is going to compete. The competition will drive prices down to a point (Nash equilibrium) where both competitors can live and the customers get the best product for their money. Yeh, capitalism!

This only works for a lemonade stand and only if the vendors don't talk to each other.
The goal of both competitors is (must be) to make as much money as possible. When they compete they can only achieve prices that are around the mentioned Nash equilibrium. But there is a second monopoly equilibrium that is much higher and can usually only be demanded by a monopolist. Knowing that, and having the ability to talk to each other, both companies are better of when they cooperate by fixing prices, dividing up territory or specialising. That's called Free Market Economy.
Now people are angry about high prices and the government jumps in with Trust Laws (bad big government, ruining free market).
Now, what to do? Lobbying against trust law, of course. Nope. Let the plebs have the illusion they have a competitiv market. Lobby for regulations.
Why? Regulations are bad for businesses
Let the plebs think that and always whine about it. But keep in mind that regulations are in favour of established companies. This is especially important when entering a market is already risky and expensive. It keeps new competitors out and with the few existing there can be a system set up that doesn't too obviously break trust laws.

Now you know why you in the freest economy, the US, pay more for telecommunication, energy, medicine, etc. than in more regulated economies like most of Europe.

Any economists here to correct me on this?

 

[Revoltingest]

(Posting this under politics since there is no economics section. If this is wrong here please move. Tia)

The "Invisible Hand" of the free market is a concept in economics. Basically it says, if someone is running a business that is exceptionally successful, there will be someone who is going to compete. The competition will drive prices down to a point (Nash equilibrium) where both competitors can live and the customers get the best product for their money. Yeh, capitalism!

This only works for a lemonade stand and only if the vendors don't talk to each other.
The goal of both competitors is (must be) to make as much money as possible. When they compete they can only achieve prices that are around the mentioned Nash equilibrium. But there is a second monopoly equilibrium that is much higher and can usually only be demanded by a monopolist. Knowing that, and having the ability to talk to each other, both companies are better of when they cooperate by fixing prices, dividing up territory or specialising. That's called Free Market Economy.
Now people are angry about high prices and the government jumps in with Trust Laws (bad big government, ruining free market).
Now, what to do? Lobbying against trust law, of course. Nope. Let the plebs have the illusion they have a competitiv market. Lobby for regulations.
Why? Regulations are bad for businesses
Let the plebs think that and always whine about it. But keep in mind that regulations are in favour of established companies. This is especially important when entering a market is already risky and expensive. It keeps new competitors out and with the few existing there can be a system set up that doesn't too obviously break trust laws.

Now you know why you in the freest economy, the US, pay more for telecommunication, energy, medicine, etc. than in more regulated economies like most of Europe.

Any economists here to correct me on this?

Some thoughts....
- Think of the "invisible hand" as a tendency....not something
absolutely deterministic.
- We are far from the most free economy relative to other countries.
And we've been becoming less so over recent years.
Country Rankings: World & Global Economy Rankings on Economic Freedom
We were once in the top 10.
Now we're in 17th place.

 

[metis]

Unregulated capitalism is essentially "social Darwinism", and no country today uses that because of the consequences as was seen back over the the last couple of centuries. All countries today are referred to as having "mixed economies", namely a mixture of capitalism and socialism to varying degrees.

 

[PureX]

It's worse than that.

Let's say there are two gas stations serving a town. One on the east side, and the other on the west side. And they both charge the same price for gas because the owners assume that if they were to raise their price, their customers would go to the other station, and they'd end up losing money rather than gaining.

But then one day one of the owners thinks to himself that if he only raises his price by a penny, most people will just pay it rather than drive across town. So he raises his price by a penny, and sure enough, he loses no customers, and increases his profits. Te cost is minimal to his customers, but the profit is substantial to the station owner.

So, of course, the other station owner sees this, and realizes that he, now, should be able to raise his gas price by 2 pennies per gallon because a one cent raise only makes him even with the other station, so one more penny per gallon should not cost him any customers, as it didn't cost the other station owner any. So he raises his gas price by 2 cents per gallon. And although the 2 cent raise annoys people, they still aren't going to waste the extra gas and time driving across town to save one penny per gallon of gas at the station further away. So the second station owner gets an even bigger increase in profit

Now, the first station owner sees his chance to do the same thing: to raise his price by 2 cents per gallon, because that's only one cent above the other station's price, and people have shown that they will bot bother driving across town to save one penny per galling. And so the prices go; up and up and up, two pennies at a time.

The point here is that neither station owner had to meet and agree to escalate their prices because they both already had the same goal: to get the maximum price per gallon of gas without losing too many customers. And since all their customers HAD TO HAVE GASOLINE TO LIVE in that area, There was no limit to the price-gouging that these gas station owners could engage in. And of course, once the gasoline whole-sellers get wind of this 'successful profiteering', they will raise their gas price to the station owners, to get their cut of the new "windfall" profits. Eventually their prices would get so high that they would begin to lose some customers who simply could not afford to drive, anymore. But as long as the loss of sales was minimal compared to the increase in profit per sale, the station owners were happy. After all, they would much rather sell one gallon of gas for ten dollars a gallon than sell ten gallons of gas for one dollar each. They aren't in business to sell gasoline, after all, they are in business to make as much monetary profit as possible.

The big lie behind all this "self-regulating" free-market capitalist bullsh*t is that we are engaging in free market commerce. WE ARE NOT ENGAGING IN FREE MARKET COMMERCE. WE ARE ENGAGING IN CAPTIVE MARKET COMMERCE. When the buyer HAS TO BUY from someone, the market is not a "free" market. And nearly ALL modern markets are now captive markets, with the exception of luxury markets. Anything we have to buy to live in a modern inter-dependent society is NOT free market commerce. Food, clothing, shelter, energy, transportation, communication, education, health care, insurance ... NONE OF THESE ARE FREE MARKETS. And that is why we are being price-gouged for all of these products, and by all of the purveyors of these products. And none of them had to meet in secret in back rooms to agree to do it. Their singular goal of maximizing profit to themselves had them all in agreement, automatically. And our having to buy what they sell means they can price-gouge us until we have no more money to pay them.

 

[metis]

Trump doesn't like regulations, but then look at his past record: Explainer: Why Trump's legal woes go beyond the Mueller report

https://www.vox.com/policy-and-politics/2016/9/28/12904136/donald-trump-corrupt

 

[Heyo]

It's worse than that.

It's one of the scenarios I described. In this case the division of territory (although not planned). The two have their oligopoly. It will last as long as 1. no third party wants to get in into the action and 2. both of them stay in their corner.
When west-side-guy sees an opportunity to open a subsidiary on the east side prices would go down there very quickly. So he probably doesn't. Capitalism stifling competition.

 

[Sunstone]

I might be wrong about this (it's been a while), but Adam Smith in Wealth of Nations did not quite argue that unfettered capitalism would end up with a perfectly happy world of low prices and lean, but thriving competitors. Instead, he correctly foresaw that business owners (capitalists) would squeeze wages until their workers could only barely feed themselves and their families well enough to stay alive.

Later on, Marx elaborated on that by predicting (again, correctly) the "exportation of the proletariat", which was his language for capitalists shipping production to other countries where they could (with fewer restrictions of any sort) put the screws to the local workers.

e.g. Apple shipping production of its electronics from the US to China. In essence, from moderately well-paid American jobs with benefits to 25 cents an hour Chinese jobs with greatly fewer benefits (I believe your 'benefit package' is you get to live in a company dormitory where you are subject to being roused out of bed at two in the morning if your factory happens to suddenly need for any reason to ramp up production).



Those two points should not be taken as criticisms of your OP, @Heyo, so much as they should be understood as refinements. I believe your OP is essentially sound. In fact, it is well known that large American corporations routinely lobby the US Government (at both the legislative and bureaucratic levels) to impose "benevolent" regulations on them. Them and their up and coming mid-size competitors, that is.

You see, they themselves are much better able to handle and/or survive those regulations than are the pesky mid-size corporations that are nipping at their heels, trying hard to overtake them. In short, they are using the Government to beat down and even crush the competition that would otherwise force them to lower prices.

When you see increasing government regulations in the US, you are not so often seeing socialism at work as you are seeing good old capitalism at work (in one of its stealth modes).



Is the solution then fewer government regulations in order keep big corps from crushing mid-size corps? Well if you think that, you are not taking into account Adam Smith's point -- without any regulation at all, the workers are going to be pushed into lives of permanent near-starvation.

About the only way out -- in my opinion -- is to have the government regulate capitalism, but with much, much greater transparency and public oversight of what's really going on.

In the end there is no escaping a democracy's need for well-informed, alert citizens who are absolutely zealous in their pursuit of good government.

 

[PureX]

It's one of the scenarios I described. In this case the division of territory (although not planned). The two have their oligopoly. It will last as long as 1. no third party wants to get in into the action and 2. both of them stay in their corner.
When west-side-guy sees an opportunity to open a subsidiary on the east side prices would go down there very quickly. So he probably doesn't. Capitalism stifling competition.

There is no logical reason for anyone to add another station to this market, since the result will be that everyone loses money. There are only so many customers in that area, AND the prices are already set at the maximum sustainable amount. "Competition" is a myth in these captive markets. The goal is not to compete, but to sell as LITTLE gas for as a MUCH as possible, because buying and then re-selling the gas is all an expense that cuts into the profit.

 

[Heyo]

There is no logical reason for anyone to add another station to this market, since the result will be that everyone loses money. There are only so many customers in that area, AND the prices are already set at the maximum sustainable amount.

There is a strong incentive to compete against a monopoly. The monopolist can demand monopoly equilibrium prices. I.e. he has a big profit margin. Thus a competitor can make a profit even at a lower price.
(At least that is the basic idea. There are other things to regard as supply and demand, future evolution of prices, etc.)

 

[PureX]

There is a strong incentive to compete against a monopoly. The monopolist can demand monopoly equilibrium prices. I.e. he has a big profit margin. Thus a competitor can make a profit even at a lower price.
(At least that is the basic idea. There are other things to regard as supply and demand, future evolution of prices, etc.)

To compete would cost a lot of initial money, and result in a lower profit. There is a reason that monopolies become monopolies. And that reason is that they are impossible to compete against, successfully. They wouldn't exist in the first place, if they were.

 

[Heyo]

To compete would cost a lot of initial money, and result in a lower profit. There is a reason that monopolies become monopolies. And that reason is that they are impossible to compete against, successfully. They wouldn't exist in the first place, if they were.

Ever seen a place where two gas stations are just opposite each other on the same street? It happens.
Monopolies also happen but they usually have to use illegal methods to stay there or they must be protected by the law.

 

[PureX]

Ever seen a place where two gas stations are just opposite each other on the same street? It happens.
Monopolies also happen but they usually have to use illegal methods to stay there or they must be protected by the law.

Those "outlets" are not the monopoly. They are just franchise businesses controlled by and profiting the same monopoly. The real monopolies are now so big, and so pervasive that they control whole segments of commerce.

We go to the retail store and see many different brands of the same basic items and we think they are all competing with each other, ad that we benefit from all that choice. When in fact they are all owned and/or controlled by the same huge business conglomerate, and they are not competing really with each other at all. They compete only in the sense that 'regular gasoline' competes with 'higher octane gasoline' at the pump. It's choice, but not a really "free market" choice. Not the kind of choice that would result in lower prices for better quality.

 

[Heyo]

Those "outlets" are not the monopoly. They are just franchise businesses controlled by and profiting the same monopoly. The real monopolies are now so big, and so pervasive that they control whole segments of commerce.

With gas stations it really often is competition. There are still multiple petroleum companies with their outlets and there are free stations.
But ...

We go to the retail store and see many different brands of the same basic items and we think they are all competing with each other, ad that we benefit from all that choice. When in fact they are all owned and/or controlled by the same huge business conglomerate, and they are not competing really with each other at all. They compete only in the sense that 'regular gasoline' competes with 'higher octane gasoline' at the pump. It's choice, but not a really "free market" choice. Not the kind of choice that would result in lower prices for better quality.

That is true as a general tendency of a capitalist market. We see buy-outs and mergers on a monthly basis. Bayer swallowed Monsanto, Disney now owns Fox, Lucasfilm, Marvel and Pixar. They call it "market consolidation". Many of these mergers are not in the public interest and sometimes the anti-trust offices have to jump in.
Capitalism on its own doesn't work for the benefit of society and the "invisible hand" is a myth. I think we agree on that?
And I wanted to de-mystify that basis of the capitalist fairy tale.