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Feedback from Jan Narveson (5-15-02):

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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.

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.

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 economy.

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.

Period.

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....


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.

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 living.


Wenger virtually accepts my point above when he goes on to say:

...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. ...

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...

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:

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 lost.

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.

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.

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!)


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 countries.

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 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.

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?


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 larger community.

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 the situation.


Have a look at Wenger's proposals about pollution:

  1. 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,

  2. 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.

  3. 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.

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.

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 they benefit.

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

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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