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Fixing capitalism: reactions and replies

Posted by Graeme in Economics,Politics at 11:33 am on Sunday, 22 November 2009

The reactions to my post on fixing capitalism have surprised me: almost everyone who has blogged or tweeted on it agrees with the broad thrust of what I advocate. For proposals so far from the political mainstream, what does that mean? Perhaps is shows how for the politicians are from a popular demand for change. There also a few points that need replies.

The most important thing I have to say is the need to fight neo-mercantilism. Many people have hardly noticed the drift from pro-free markets and competition to pro-business and hang competition, so merely talking about it wins the first round.

The proposals on copyright and patents have attracted little criticism, probably because the readers I have got so far are familiar with the audience. To those who disagree, I have one question: where is your evidence? My proposals reflect the evidence I have been able to find: some of it is linked to (not always directly). If there is good evidence to contradict it, please tell me about it.

Some people have practical objections to breaking up of companies with too much market share. I accept that it cannot necessarily be applied to all industries. It is very hard to imagine breaking up Google into ten bits would be productive, for example. I do think that this approach would work in most industries: old media, retail, most manufacturing, banking and financial services, etc.

The point is that the burden of proof would be reversed, and much less would need to be proved. At the moment an existing monopoly may only be dismantled if the monopolist can be proved to have behaved in certain ways that are considered abuses of monopoly. What I am proposing is that the monopolist should be required to prove that the public interest is best served by allowing the monopoly to continue.

Where are monopoly is allowed to continue, they should also be required to show why one of the following solutions (in order or preference) should not be applied to them:

  1. Mutualisation: they should be owned by their customers.
  2. Tight regulation: in the way that telecoms is regulated in the EU.
  3. Nationalisation: only if the other two are not possible and the business is one that a government is likely to run well.

Even where the monopoly is allowed to continue, we could improve it by forcing the spin-off of businesses that do not need to be owned by the monopolist. This would prevent bundling and other ways of extending the monopoly.

Although I did not think in quite those terms at the time, what I wrote is, as Alan Patrick pointed out a draft manifesto. Please point out the flaws and omissions (comment here, blog about it, tweet about it) and I will do my best to improve it.

Please note that all my blog posts are Creative Commons licensed, so they can be freely reproduced by most blogs and websites as long as they link back.

Comments (18)

Comments(18)

Comment by Dave at 3:27 pm on 22 November 2009 at

Removing patents would destroy my industry (pharmceuticals), and several others, I’m sure.

The cost of discovering and developing a drug is estimated at being around 1.2 billion dollars.
Someone could set up a company and manufacture copies of the drugs that have been discovered for a few million.

Companies need to be rewarded for their discoveries, otherwise there’s no incentive to discover them in the first place.

Comment by Graeme at 4:20 pm on 22 November 2009 at

David, firstly it would not destroy the industry. Drugs that have already been developed would just get cheaper.

As for funding drug discovery, it patents are a very inefficient method of doing so: I have already covered this in a previous post.

That is without taking into account the inefficiencies that litigations costs, re-inventing the wheel to work around patents, research that is blocked by patents, research that does not take place because no one wants improvements to an in-patent drug, etc.

It is also often necessary to provide other incentives on top of patents such subsidies, tax breaks, and orphan drug status.

Even straight government funding would be more efficient.

The incentives that patents provide are also not always the right incentives. I have discussed that before as well.

Comment by Tom Standage at 5:30 pm on 22 November 2009 at

Two quick points. First, defining monopolies is all about market definition. Do we break up Apple because it controls 100% of the iPhone app market? Almost anything’s a monopoly if you define it narrowly enough; conversely, nothing is if you define things broadly enough. Agree that action against monopolies is sometimes necessary, but the devil’s always in the details.
Second, breaking up firms with market share about x% runs into the same problem: defining the market. A further problem: it would raise prices for customers by reducing economies of scale. Lots of carmakers have double-digit market share, but it’s a competitive market. Breaking them up would do little except raise prices for products from sub-scale producers.

Comment by Tom Standage at 5:31 pm on 22 November 2009 at

I mean “above x%” — duh

Comment by Graeme at 5:51 pm on 22 November 2009 at

The problem of defining monopolies exists with current competition laws as well. App store is an interesting example. I think the real problem there is selling locked down devices (which I would not allow either!), but if Apple does not have too high a share of the smart phone market (they probably do), I would say let it be.

I am not convinced that having 10% of less market share would affect economies of scale in cars to noticeably affect prices: manufactures with share in that range are price competitive.

There probably are industries that justify exceptions. Give them a chance to prove it, but split them up if they cannot. That’s what I mean by reverse the burden of proof.

Comment by drew Roberts at 6:37 pm on 22 November 2009 at

A couple of my thoughts. (Not particularly tied to each other.)

1. Only human beings can own shares in corporations.

2. If a company is “too big to be allowed to fail” they are too big, break them up. (Or conversely, let them fail when the time comes.)

3. No government granted monopolies. Sorry, let the market solve the problem.

4. No corporations allowed to hold monopoly positions in a market. Humans perhaps, but no corporations.

all the best,

drew

Join the Free Music Push
http://freemusicpush.blogspot.com

Comment by Dave at 7:12 pm on 22 November 2009 at

Hi Graeme,

Interesting stuff. I hope my comment didn’t come across as too flipant.

I guess it’s fair to say that the pharma industry couldn’t exist in its current form without patents.

I agree whole heartedly with the stuff you wrote on pharmaceutical sales. Drugs should be prescribed purely on their merits, and there shouldn’t really be any reason for a sales force, beyond providing GPs with the information they need to make an informed choice.

I pretty much agree with everything you say on the patent incentives blog page too, e.g. on me-too’s, orphan drugs, treatments rather than cures, decisions based on profits rather than the impact of the drugs, and the general inefficiency of the system. I think you underestimate the value that the companies place on coming up with a first-in-class drug for a new disease. Those opportunities don’t come up too often.

I wonder whether the alternatives to a capitalist-driven approach would be better, given it’s such a high-risk business. So much money has to be invested to bring a drug to market, and there’s still a chance that some unwanted side effects could emerge and the whole thing has to be pulled. I’ve always thought that a system consisting of a small number of large companies competing to deliver the best drugs would be best.

I think the current system really comes into its own when new diseases emerge, e.g. HIV, or when scientific advances initiate a race to develop drugs for common diseases, e.g. Altzeimers.

For a government-funded approach to work, the governments would have to approach it like a business anyway, generating income to cover the research expenditures by sales in other countries. I wonder how different it would end up being.

Anyhow, you’ve written some really interesting stuff on this.

Comment by Graeme at 8:03 pm on 22 November 2009 at

No problem with your comment at all, and thanks for making such a detailed second comment.

The best ideas I have heard are straight state funding or a bounty system (as has been discussed in the US).

Another alternative is to use the approval system to give incentives: like the exclusivity periods that already exist. It might work well, but I am not comfortable with giving the regulators even more power and discretion.

I disagree that a government system need rely on sales to other countries. If each country spent roughly what it saved by abolishing patents, there is your funding. You would probably need a treaty of other agreement that it is hard to back out of for that approach to work – but we need treaties and agreement for patents to work as well.

Comment by How to fix capitalism at 8:14 am on 23 November 2009 at

[...] 23 Nov 2009: I have fixed some typos and written a follow-up that addresses some of the points that have come up in [...]

Comment by Christopher Lord at 1:50 pm on 23 November 2009 at

I posted this in the other thread, but I figure having it here too might help some readers who have already read the previous post.

We should bring back time-limited charters. Having a date of death would create incentives to limit waste and would give society a big hammer (dissolution of assets back to investors) with which to punish poorly behaving corporate entities.

http://www.reclaimdemocracy.org/corporate_accountability/history_corporations_us.html

Comment by Beck at 8:36 am on 4 December 2009 at

I have to disagree with a couple of things:

First, government involvement with large (potential monopolistic) corporations should be discourage. Tight commercial and gov’t integration breeds conflicts of interest and corruption: think separation of church and state. Big companies also do things that small companies can’t do. Increasing competition just for the sake of competition isn’t going to solve the science and engineering challenges of the next millennium.

Secondly, greed is good. Greed is often misrepresented as evil due to the absence of morality. I exchange value for value: I do not give a bum $5 because I value the $5 more than him, but I do give my friend $5 because I value his friendship more than $5. Evil is someone usurping your values for their own, voiding your morality: I force you to give the bum $5. I disagree that greed does not breed integrity: it forces people to the exchange of equal value. The exchange in absence of integrity is fraud; however the absence of greed is the absence of value.

Comment by Graeme at 8:58 am on 4 December 2009 at

YOur first point can be split in three parts. We are in agreement on the first, that government and corporations should not be integrated. That is the point of my proposals.

The second part is that you sometimes need big companies. I do not disagree with that, but in almost every industry companies are much much bigger than they need to be.

Increasing competition does solve engineering challenges, because it increases the motivation to solve them.

Your second point is different. Partly it is because I distinguish between greed and moderate self interest (as Adam Smith did). It is also because we subscribe to fundamentally different ethical systems. I think it a good thing to, for example, “give all you have to the poor” (I have not, but I do not claim to be a saint either). You, I take it, would not.

Comment by Beck at 9:27 am on 4 December 2009 at

I think identifying companies that are “much bigger than they need to be” is a very gray area.

I suppose it depends on how you define greed. People tend to knee-jerk that any form of self interest is greedy without realizing we do things out of self interest all the time. Perhaps an adequate definition of greed would be “self destructing self interest.” (In which case I do not support greed at all, as it is a self defeating system).

Perhaps, but if you see *value* in giving your money to the poor I do not begrudge you your right to do that. I would argue we have fundamentally similar ethical systems but with different values. If you demanded that I follow suit through the use of force – undermining my free will, my right to property, as well as my values – then we would have fundamentally different ethical systems.

Comment by Beck at 9:34 am on 4 December 2009 at

Oh, in regards to your comment “Increasing competition does solve engineering challenges, because it increases the motivation to solve them.”:

It only solves sufficiently simple engineering challenges that whatever unit of competition (a single engineer, a hundred engineers, a thousand engineers, whatever) is capable of solving. It does not take dozens of engineers to build a nanoscale processor or explore space: it takes hundreds or thousands. There’s simply problems which are solved cheaper and faster by larger groups.

Comment by Graeme at 10:04 am on 4 December 2009 at

I do support the use of force to redistribute money: for example through taxation and welfare.

There are grey areas, but any type of competition law has grey areas, and we have to have some type of competition law anyway or the economy would be run entirely by cartels.

The advantages of competition are greater than the advantages of scale: otherwise Soviet engineering would have been the best. OK, that is an extreme example, but given the lack of real world tests it is about all we have.

How big do you need to be to build a processor. As big as AMD? As big as IBM’s processor division? As big as Sun? As big as ARM to design one, and as big as the biggest of the smallest fab building ARM designs to make one?

Whatever the answer, I am sure it is going to be much much smaller than Intel.

Then there are lots of engineering problems that have been solved by government funding (space launch, the internet, basic infrastructure) or with heavy government subsidies (pharmaceuticals, telecoms).

Also note that by breaking up big companies you can often avoid the need for heavy government intervention. I also suggest mutual/co-operative ownership as a substitute for state ownership. If my proposals were adopted in toto there would be a lot less government intervention overall, and more of it follow rules or be delegated to independent agencies, the judiciary and immediate stakeholders rather than being at politicians discretion.

Comment by Graeme at 10:12 am on 4 December 2009 at

Also note that many big problems can be solved by multiple small firms each tackling a bit of the problem. This is how Red hat, Ubuntu, Mandriva, etc. can deliver an OS competitive with Windows (although I admit marketing and distribution does not seem to scale that way).

Going back to processors, even if Intel’s size is needed to build processors (I do not think so, for the reasons above), why does Intel have to be big enough to make CPUs and GPUs and chipsets and flash memory etc.

Comment by Beck at 11:03 am on 4 December 2009 at

Taxation is a special case. Welfare (in its most common, self perpetuating form) is another story: it is decidedly anti-capitalistic. It subsidizes an ultra poor class by the labor of a slave class and it breeds a conflict of interest on an unparalleled scale (want to stay in power? just promise to give away other people’s money in exchange for votes). This is *the* loop hole in democracy, exactly what Alexander Hamilton was fearful of, and one major reason why welfare should be left up to individuals whom are best able to determine where their money is most needed. (As opposed to soulless, power-hungry governing bodies). Contrary to your prejudice, my problem isn’t giving money to charities but *forcing* people to give money to them. I know all too well what the value *my* dollar has to charity because I know what I had to do to earn it. Compassion, like wealth, doesn’t come from governments, it comes from individuals. I doubt your compassion if you think that end justify these means.

Building a processor depends on the processor. One man can design and build an adding machine, but I doubt any one man can design and build a multi-core x86 processor with 32 nm feature sizes.

I don’t have a problem breaking up sufficiently large companies – you made good points for this in your first article and I do not mean to disagree, at least not completely – I’m pointing out that if you treat this as an optimization problem, and your /only/ optimization is competition, then your solution is to have all individuals competing against each other. If you want to optimize competition, productivity, and the rate of change of technology, then corporations (and technology) of increasingly large size will be necessary to accomplish increasingly large tasks. This is the gray area and I would be interested in reading your thoughts on how to address it.

Comment by Graeme at 8:42 am on 7 December 2009 at

I am planning complete post on the question of how to break up large companies, as it has stimulated more discussion here than anything else I said.