Feedback from Jan Narveson (5-15-02):
Operational note to all: Wenger's essay is fully downloadable; even though it's quite readable on the Web, it's a lot more readable in your favorite word-processor at your favorite size of type.
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But this is wrong. You cannot have hyperinflation merely from having a
bunch of monopolies around. What you also need is irresponsible government
control of the money supply. In Russia, resort to the printing press was
standard. That is what caused the hyperinflation, not monopoly.
We pressured Russia to cut the command strings in all its industries before getting competition set up in ANY one of them! Buyers had no
alternative to turn to, whose availability would have held down a price
surge. The result was one of history's worst episodes of hyperinflation and
the wrecking of what remained of Russia's economy.
What is needed to have a free economy is, well, freedom: that is to say,
you don't need to do any from-above prevention of monopoly, but you do need to have prevention of non-market means of maintaining monopolies (such as
the Mafia to take care of your potential competitors, a widely-practiced
method in Russia).
This is not to say that monopolies are desirable. It is rather to say that
if monopolies are undesirable, it is because there are better alternatives that someone would create if he were allowed to. In Russia, this latter condition is what did not prevail.
Here's a more general note on the so-called "perfectly competitive market" and
its dire effects on recent economics:
Economists are very, very fond of citing to the point of making it into
a mantra the definition of "perfect competition," in which there are no
transaction costs, no externalities, perfect consumer knowledge, and so
many producers that it is impossible for anybody to unilaterally influence
prices. This definition is what they employ in their "proofs" that a free market will maximize utility.
The definition is, of course, utterly inapplicable to any real-world
economy. So if you think that the only way to maximize utility in a free-market economy is to make it less free, viz., by having antitrust laws and god knows what else, then this "definition" will enable the otherwise free-market enthusiast to plump for considerable intervention in the
The definition is crazy, and also to use it for this purpose is, simply,
wrong. The correct one to employ is this: A "perfectly free market" is one
in which the particular externality which consists in the use of
interpersonal force initiated against persons and their property, or of
fraud (which in my view is a special case of interpersonal force, anyway), is
absent, either because the participants accept this as a moral restriction
on their activities or because people have somehow inaugurated effective
devices for penalizing those who do offend against that constraint.
It's the period that matters. Given the above, then whether there will be a
monopoly on anything depends on whether somebody is interested enough in
getting into a competitive productive enterprise to set it up. And he will
do that if it looks likely that he can make a profit in doing so.
Note that one of the areas in which there is scope for market activity is
the area of transaction costs. It is the fact that these can be
decreased in ways that can be bought and sold that is responsible, after
all, for the very existence of banks.
The major area in which people have supposed government intervention to be
necessary is regarding externalities, notably negative ones such as
pollution. Our major battle, I suppose, is with those people....
But which are "these conditions"? The most important by far is security of
life, especially from threats mounted by "competition" which happens to
feel free to promote its interests by murder. Russia fell way, way down on
this, in considerable part by not doing anything about its bloated and
useless armed forces, which took to putting their weapons (those who had
any) to more profitable uses, made more profitable by the fact that since
they were getting paid in monopoly money instead of real money, they had a
marked incentive as well as the means to turn to nasty ways of making a
What makes a market economy "good," far more efficient than government command could ever be at immediately making the detailed adjustments of a million-and-one changing conditions which keep most people and resources
usefully engaged at their best or near-best uses, is the Directory service
provided by freely changing prices and wages. When conditions are generally
fairly consistent, and when not too much at a time is out of whack, people
know pretty much what to expect and how to react, and the market is usually
a far better answer than is authoritarian command.
When those conditions no longer prevail, in emergency or with multiple
major difficulties under way, the pricing mechanism no longer is an
effective guide. The Directory goes off its tracks. People and resources go
unemployed, disruption spreads. Without intervention, the economy can
actually collapse, so abjectly that Humpty-Dumpty can't be put back
together again and no recovery is possible in the foreseeable future.
Wenger virtually accepts my point above when he goes on to say:
It's a little odd to think of wars as cases of unusual conditions needing
to be got over before normal pricing can return. And there is room for
debate about the widespread use of price and wage controls in the US during
WWII; the only thing there isn't room for debate about is that, however
they did it, the Americans won; and right after the war, they very rapidly
dismantled their military machine, with strikingly positive economic
results about as direct a contrast as you can imagine with the Russian
situation in 1989...
...even that most exemplary (relatively speaking!) of market economies, the United States economy, has ALWAYS had the good sense to lend its Directory a helping hand. Wars, depressions, other emergencies fairly quickly we've responded to them by setting up structures, either outside the market place or regulations within the market place, to contain the worst effects and
bring conditions back toward the point where normal pricing could once
again bear a rational relationship to the greater good. ...
Wenger talks about "other" conditions without being very specific about
them, but one guesses that he thinks that heavy antitrust laws, careful
federal regulation of banks, and so forth are part of the package.
Wenger sets forth the general thesis that the market tends to undersupply public goods:
It should be noted that a considerable part of the action here has to do
with accumulative, small-scale, negative externalities such as pollution,
which are incremental to infinitely fine degree, and where the transaction
costs of internalization are quite high. Of course, if the principle were that
the guy who is in the wrong has to PAY those transaction costs, maybe
things would be a bit different. And if the public court systems through
which you must go didn't add so hugely to those costs. And so on.
In cost externality situations, things tend to get done whose cost to society as a whole is greater than the benefits to society as a whole often far greater.
In benefit externality situations, things tend not to get done whose
benefits to society would be greater often far greater than their cost
would be, so that considerable well-being and positive opportunity are
In all three of these conditions (as well as the other conditions cited by
Adam Smith), the Directory is off the track. Normal pricing mechanisms for
prices and wages no longer direct people and resources toward their best
uses, but away from them. What makes the free market system "good" no
longer does so.
Wenger is aware that governments getting into these things can create costs
as well, and maybe make things worse than they were before. (Examples I
would give: the FDA, the EPA, and most other government organizations
though whether Wenger would accept those as examples, I don't know!)
Now, if you just delete the word "authoritarian" from the last sentence,
you get a more realistic view, I think. But apparently Wenger thinks that
"authoritarian" government, rather than, simply, "government," is the
problem, and he proposes:
Long-term situations and policy,
however, are carefully kept under civilian control because, otherwise,
outside the focus of a given emergency, for every situation such a command
structure makes right it goes wrong in ten other situations, as we saw was
the case with communism and as we see today in most surviving authoritarian
What we ought to know by now is that democracy guarantees that bad
solutions will stay in place for a long time, and worse ones will come into
view every week or so. How could he think that command government by
umpty-million incompetents is sure to be better than command government by
a small committee of incompetents?
Long-term policy should be democratic, with everyone having an opportunity to make an input into it, having a legitimate chance to affect the outcome
by virtue of the case they make.
This is, of course, correct, and essentially definitive of the problem. But
if you put the "solution" into the "hands" of the larger community as a
collectively (politically) acting body, you will certainly generate a large
bundle of further negative externalities at the hands of the elected
committee which the many voter-incompetents put in place to deal with
What leads the market mechanism astray in some types of
situation, such as cost or benefit externalities, is that, in those
instances, what's beneficial to the doer is less than beneficial to the
Have a look at Wenger's proposals about pollution:
Now, all of this assumes that we know what is pollution and what isn't
as if, either we have it or we don't. But pollution isn't like that. It's a
matter of degree, and generally speaking small amounts of it, which are
very expensive to avoid, are also essentially harmless: anybody would prefer that amount of pollution plus the low-priced goods or services which
introducing that much pollution, given that productive technology, would
enable, to paying huge sums of money for the services with zero production
of the pollution.
General tax on all classes of economic activities which result
in pollution, in proportion to the seriousness of the pollution. In
order for there to be more carrot than stick,
Those firms are exempted from that tax where they prove with
the burden of proof on the firm that in this particular instance
they in fact have prevented or stopped the pollution. With the burden of
proof on the firm, the firm will be bringing the evidence to the
government, rather than government having to go police the
polluters. Some policing in any case, but a very different situation and
much less cost to implement.
Special incentives in form of tax break to firms to invest in
the means to limit or end their pollution. "Sunset clause:" provide
these tax breaks on a sliding scale more if they do it now, somewhat less
if they do it soon, considerably less if they do it eventually. This
arrangement provides thereby the additional incentive to make that
investment sooner rather than later.
Examples: Primitive peoples build wood fires, often
inside of wigwams and such; the pollution in those enclosed areas is
fantastic. But even so, it's better than freezing your butt off.
Automobiles pollute, although modern ones pollute so little as to be
negligible; but we are better off with automobiles and pollution than with
no automobiles and no pollution (of that kind). [Historical note: Having horses shitting all over the place generates, probably, more pollution than
even quite dirty automobiles.]
It's only when the pollution gets considerable that we have problems, and then the trouble is that different people respond very differently. Some can take a lot more than others without ill effect. Examples: cigarette smoke, prolonged exposure to which promotes cancer in many people, but not in others: people like Winston Churchill, who died at 88 or so having smoked several cigars per day all his adult life; etc.
The Wengerian proposal will, we may be absolutely certain, result in
setting the thresholds way too low, making the tax way too high, and
keeping many, many officials in cushy jobs while making life more expensive
without providing any real benefits for most of us. And we may be sure that
they will, as such solutions always do, cost much more, in aggregate, than
Trying to individualize pollution solutions is very difficult, to be sure. But making polluters liable to the individuals their polluting activities adversely affect seems, in principle, the way to go; pollution taxes are fraught with potential for negative externalities which is fancy language for saying that they cost people who have no interest in paying.
Wenger's solution is not novel: it is put in practice all the time. Government incentives, let us remember, only work one way: first we impose a cost on everybody, or on some large class such as producers of stuff whose production might result in pollution; then we provide "positive" incentives by selectively relieving some people of the cost.
All such programs raise the question, "Why is government benefiting these
people and not others?" For example, why should space exploration get this
benefit (the benefit of tax freeness) and not all of the other harmless
activities in which we all (almost all?) engage daily?
I myself benefit appreciably from the government's preference for culture:
I get sizable tax deductions for my contributions to various classical
music-producing organizations; also for contributions to assorted charities;
and to my own university and some others, etc. But you can't have this kind
of "incentives" (which they are, to be sure) except against a background of
oppressive taxation of everything else. Much as I love music, I do not
think that governments are justified in taxing other people in order to
supply it to people like myself, even though, of course, I and my
music-loving friends are clearly the best people, right?...
Jan Narveson is a professor in the Department of Philosophy, University of Waterloo, Ontario, Canada. This commentary was originally posted to LibProfs.
See also comments by Kate Jones and Frederick Mann
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