Study Guide to Man, Economy, and State with Power and Market

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Chapter Summary Consumer preferences ultimately drive a market economy; many have termed this outcome as “consumers’ sovereignty.” Yet this is an inappropriate political metaphor; on a free market, individuals have complete control over their bodies and other property. Cartels allegedly restrict output below the socially optimum level. But consider the “worst case” where a cartel destroys some of its product. Even here, the true “waste” is not the destroyed product, but rather the scarce resources that went into the production of the excess units; once the cartel produces the profit-maximizing amount in the future, these resources will be channeled elsewhere. Moreover, the formation of a cartel in the first place is quite similar to the founding of a corporation or a merger, yet many view only the cartel as inefficient. In a free market, firms will tend to be the optimum size. Lower unit costs of large-scale production will tend to increase firm size, but the overhead costs of bureaucracy eventually check this trend. The ultimate limit is the chaos that would ensue if a firm eliminated the market prices for its inputs and products. Voluntary cartels formed for the purpose of restricting output and raising prices are inherently unstable. There will always be an incentive to cheat on the cartel agreement and produce more than the assigned quota. Even if the members of the 121 CHAPTER 10 MONOPOLY AND COMPETITION
122 Study Guide to Man, Economy, and State with Power and Market cartel can reach an agreement and obey it, if they are truly earning “above normal” returns, outsiders will enter the industry. A monopoly may be defined as (1) a single seller of a good or service, (2) the recipient of a government privilege, or (3) a business unit that can achieve monopoly prices. The first definition is vacuous; everyone is a monopolist in this sense. The second definition is legitimate, and focuses on government intervention that hampers welfare. The third definition is empty once we realize there is no such thing as “monopoly price.” Simply put, there is no such thing as a “monopoly price” to which we can contrast a “competitive price”; there is no way we can even in principle define these concepts. All we can discuss is the unhampered price that would emerge on a free market. Although a union presents a coherent example of restriction of output and the achievement of higher prices, this is not an example of monopoly; the privileged workers gain at the expense of nonunion members. A typical argument for unions is that the marginal productivity determination of wage rates, in practice, leads not to a unique value but rather a zone of possible wage rates. The problem with such a justification is that such zones of indeterminacy shrink as more and more people enter the market. Moreover, in practice unions often rely on the actual use (or at least threat) of violence to achieve such “bargains” with management. The crucial characteristic of a “perfectly competitive” industry is that each firm perceives the demand for its product as a horizontal line. Yet this is clearly absurd; even in theory, all demand curves must be downward sloping. The claims of “excess capacity” in monopolistically competitive industries defy rationality and ultimately rely on geometrical tricks: Once we drop the assumption of smooth cost curves, the argument falls apart.
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CONTENTS INTRODUCTION . . . . . . .
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In June of 2004, I became convinced
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Introduction ix appropriate, I have
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Chapter Summary In a money economy,
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Chapter 4: Prices and Consumption 4
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Chapter Summary Economists often ta
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Chapter 1: Defense Services on the
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Chapter 1: Defense Services on the
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Chapter Outline 1. Types of Interve
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Chapter 2: Fundamentals of Interven
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Chapter Summary Society is composed
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Chapter 4: Binary Intervention: Tax
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Chapter Summary There has been litt
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Apriorism, 1, 9 Ability-to-pay prin
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Index 251 Equilibrium, 47, 104 macr
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Index 253 Medium of exchange, 27, 3
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Index 255 See also Economy, Evenly
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