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How the economy should work
Fabian Tassano has responded to my post on the problems of the emergence of monopolies and oligopolies in more and more markets. He appears to think it is less damaging than I do, and he also wants to know what I think the best alternatives are.
Fabian claims that monopolies are less damaging than usually supposed. He refers to some studies he does not provide an details on, so I cannot respond to that. He also talks about contestable markets. The problem with that is that not all markets are contestable. In fact, the markets his original post talked about have high barriers to entry because of network effects.
Fabian himself recently experienced the effects the worst of the (near) monopolies, Microsoft’s. As a result of those sorts of problems, many people prefer to use Windows XP, rather than the new Windows Vista. Microsoft’s reaction has been to announce that sales of XP will stop at the end of the year, so customers will no longer have the choice. In effect, Microsoft gets to centrally plan what operating systems people will use of PCs.
In fact most consumers do not realise quite how badly they are treated by technology companies. Using an operating system other than Windows for a while makes one realise quite how bad it is. Virtually all the big technology companies (often in order to do deals with media companies) deliberately restrict what consumers can do with they own property after buying it. Against Monopoly covers some of the issues.
As for state regulation of markets being a problem. I agree it is not ideal, but it is exactly where we are headed. If we have markets that are not competitive, then the state has every reason to intervene.
There are other problems with relying on markets. Complex technology often means that buyers cannot make rational choices. This can apply to businesses as well as consumers, victims range from buyers of expensive IT to small farmers.
No one has devised a good market mechanism for funding R & D. Attempts to create such mechanisms have resulted in inefficient mechanisms and giving firms the wrong incentives.
More fundamentally, I am not aware of any reason to believe that market mechanisms will deliver an optimal result given a negligible marginal cost of production. This applies is the case with many important markets such software and music.
I do not have the perfect solution, but by current thinking is that we need a pragmatic mixture of different types of suppliers, which would vary from market to market:
- Breaking up large companies. At the moment competition regulators have to prove that a company is abusing its monopoly, or that a merger would harm competition. What we need is a presumption that companies large enough to influence prices or the evolution of a market should be broken up, unless they can prove a benefit.
- More cooperatives and mutuals. These can compete in the free market against capitalist firms, as building societies like Nationwide do. At the moment there is ideological opposition to encouraging these: for example British law allows a building society to convert to a shareholder owned bank (which is an unfair change of terms for those opposed to it anyway), but does little to help set up new building societies.
- More alternative ownership to profit driven capitalist investment. Existing examples include the John Lewis Partnership, The Cooperative Bank, and Glas Cymru.
- Heavy state funding of research, the arts and education, but through diverse channels and organisations so that real choice exists. This helps solves the problem of giving people the maximum benefit from things with near zero marginal costs of production. I will elaborate on how I think that should happen in a future post.
- Reduction of inequality of income as a definite policy aim. Again this deserves a post to itself in the future.
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