Friday, January 26, 2007

Explaining the Difference Between Free and Perfect Competition

Copy/pasted from Pharyngula -

"A free-market, by economic definition, requires several conditions. Including:

1. No barriers to entry
2. Perfect information between buyer and seller
3. Indistinguishable products between sellers
4. A very large number of sellers
5. No control of prices"

Wrong. You're talking about the concept of "PERFECT COMPETITION". Perfect competition is an artificial concept, which is obvious after reading the strict set of "rules" that are required for perfect competition. Perfect competition is a theoretical concept. Perfect competition hasn't necessarily got ANYTHING to do with FREE competition.

Free competition exists when no one uses force or threat of force against persons or their property.

"This does not exist. There are no examples of completely free markets."

True but there are degrees of economic freedom and countries like the US, Hong Kong, Singapore, Ireland and Switzerland are usually ranked in top-5 but they are still far from being laissez-faire economies.

"The simpliest example is a company with a monopoly, which has eliminated the requirement for a large number of sellers."

Monopolies (I assume you're not talking about government monopolies - also known as legal monopolies) are not against Capitalism; they're only against the idea of perfect competition which is still only a theoretical concept.

(edit: one should also note that it's the government that has been the most efficient creator of monopolies)

"This is basic economics, as taught to me in my MBA program."

Yet you don't seem to be able to distinguish free competition from perfect competition.

And I don't think I need to remind you that perfect competition is still just an idea (edit: an economic model). In fact, attempts to create an environment for this so-called perfect competition only tend to make things worse and create a situation that's neither free nor perfect.

"Simple: regulate capitalism."

Doesn't work. Doesn't need to be regulated. People who hate property and individual liberties need to be regulated.

"Unbridled capitalism (unrestrained greed) gives us miners who are minors, sellers of stockshares in companies which didn't exist, sludge in our rivers and smog in our air."

Under real Capitalism you are prohibited by law from releasing poisonous material that harms other people or their property against their will. Capitalism is about individual liberties which include PROPERTY RIGHTS.

"Regulated capitalism can prohibit companies from hiring minors without review."

There is no need for minors to work under Capitalism thanks to the amount of wealth it creates. This is exactly what is happening in countries like India and China where free market reforms have made it possible for kids to do something else (although, these countries clearly haven't yet gone far enough; the Chinese countryside, for example, is still heavily Socialist and that's where the poor people are).

"Regulated capitalism can punish those who are caught commiting fraud (which is only possible due to a disparity of information)."

Punishing criminals doesn't require "regulated Capitalism" - just Capitalism.

"Regulated capitalism can have the power of a free market as a goal, even knowing it will never get there, by trying to eliminate the disparity of information between seller and buyer"

Information can be delivered better under free markets. See all sorts of magazines that review and rate without any government interference. Let markets (the consumer), instead of a bunch of government bureaucrats, be the judge.

"help to reduce the barrier to entry of new firms by providing start-up capital"

This only misallocates resources away from those who are able to use them more efficiently.
Under Capitalism there should be no LEGAL barriers for entry, no taxes that prevent you from starting up a firm, no minimum wages that prevent you from hiring, no subsidies that simply transfer money from one person to another etc.

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Anonymous Anonymous said...

A monopoly can be beneficial to people, since it might lead to lower costs and prices and better quality.

If the monopoly does not have to fear for indirect competition, then it might get lazy, do bad quality and raise its prices to a too high level.

When monopolies do not have to fear for indirect competition?

(Almost) only when the government regulates the business so that barriers of entrance are raised.

March 11, 2007 12:04 PM  

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