Dogma Premise # 8

Routine market distortions, such as market concentration, externalities, and public subsidy, do not seriously undermine capitalism’s effectiveness.

Dogma Premise #8 accepts as true the common market distortions identified in Dogma Premises #5-7, and declares them inconsequential.  The basic argument is that even though markets are not perfect, they are nonetheless good enough to deliver technological advance, generally increased living standards, and consumer goods that are safe and effective.

The quick response to Dogma Premise #8 is that if markets are systematically flawed, then, regardless of what Capitalism delivers in the end, how can we be certain that no other system, also with many flaws, can’t do as well or better?

But it is also possible to defeat Dogma Premise #8 on its own terms.  How big a deal is it that the promised rewards of market competition are systematically destroyed by the competing producers themselves, who routinely reduce competition and make comparisons difficult for buyers?

If it is a buyers’ market -- that is, if markets are regulated to maintain competitiveness -- so that pricing is transparent, standards are imposed to prevent consumer lock-in, and exclusive arrangements are precluded -- profitability should be relatively low, and a wealth of industrial activity should be available to consumers at surprisingly low prices.

But if it is a seller’s market -- that, if the markets are managed to maximize profitability -- then efficiency will be sacrificed for profitability, artificial scarcities will be created to drive up prices, and marketing will be used to conform demand to supply, instead of the other way round.

There is no uncertainty as to which scenario dominates today; the empirical evidence is overwhelming.  List the once competitive industries that have consolidated into just a few producers: everywhere we look, from cars, aircraft, airlines and gasoline, to soft drinks, fast food, baby food, and bleach, markets for both consumer and industrial goods are dominated by a few big companies.

In The Rule of Three, business professor Jagdish Sheth cites numerous examples to argue that competitive markets will inevitably concentrate to just three producers, because a greater number of competitors reduces profitability.  It is a premise of Sheth’s analysis that companies are willing and able to manage competition within an industry and keep prices high to maximize profits, even if a lower price would clear the market and provide a greater social benefit.

Sheth's book is one small star and a vast galaxy of business books teaching corporate managers, both in MBA school and after they graduate, how to avoid competition and manage markets, instead of how to win.

The moral black hole at the center of this gallery is Michael Porter's seminal book, Competitive Strategy, a bible of techniques for "analyzing industries and competitors," largely designed to avoid the kind of "industry instability," that could lead to "competitive warfare."

Porter's goal, candidly stated in an introduction included in the book's 60th printing, in 1998, was to break with the prior modes of analysis, which had been "concerned mainly with the societal and public policy consequences of alternative industry structures and patterns of competition. The aim was to push 'excess' profits down. Few economicsts had ever even considered...how to push profits up." Among the tools Porter explores for limiting competition to drive up profits are:

  • Colluding with current competitors,

  • Creating market entry barriers to prevent future competitors,

  • Reduce customer and supplier bargaining power

  • Helping competitors leave the industry

  • Limiting the availability of substitute products

What they really teach  in business schools is nothing like what undergraduates learn about supply and demand, andhe end result of market competition in the the global economy is nothing like what the textbooks promised in terms of efficiency, opportunity, quality, or prices.

Once insulated from free market forces, there is little to prevent managers of  in  from paying themselves huge salaries and bonuses; selecting new executives based on nepotism, cronyism, or country club connections; or throttling back innovation in order to milk the profitability of prior investment without the expense of ongoing new product development.

So it is impossible to say that the effects of common market distortions do not severely undermine the benefits that supposedly flow from a free market.  The evidence of actual producer behaviors and actual consumer results show that the United States, at least, is largely denied whatever benefits a free, competitive market might deliver.

Dogma Premise 9

All Dogma Premises