Copyright Reform: A Proposal

My proposal for copyright reform:  5 years, 5 million copies, or 30 years, which ever comes second.

You have rights to your work for at least 5 years, no matter how many of your work you sell. Suppose you sell 7 million, or 70 million, in 5 years. Then at 5 years, that's the end of it.  Your work enters the public domain.

Suppose you only sell 3 million by the end of 5 years.  Your rights are extended until you sell another 2 million.  Unless that takes more than 30 years.

Suppose your work is something off beat, or scholarly, and is never going to sell 5 million copies.  Then you have the rights for 30 years. 

Good for books.  For movies?  If a movie hasn't made its money back in 5 years, it isn't going to. 



Comments?  Problems?

(Cross posted to:  http://economistsview.typepad.com/economistsview/2012/12/gop-fires-author-of-copyright-reform-paper.html#comments)
 

Winners and Losers in Free Trade.

It is often said, in the justifications of free trade, that there are more winners than losers.  But this is not quite what is actually the consequence of free trade.  It is more correct to say that there is more winning than losing, but this is not at all the same thing.  The winning may be concentrated among a few, while the losing could be distributed among many, in which case there would be more losers than winners.  Further, the losers could be among the less wealthy, and thus less able to afford their losses.  Is this what we are seeing in the new global economy?  The rich winning, and getting very rich, while many others are losing, and hurting? 

Inter-Generational Borrowing

Nick Rowe addresses the problem of inter-generational borrowing at:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/12/debt-is-too-a-burden-on-our-children-unless-you-believe-in-ricardian-equivalence.html

The issue is brought up again by Dean Baker: http://www.cepr.net/index.php/blogs/beat-the-press/children-and-grandchilden-do-not-pay-for-budget-deficits-they-get-interest-on-the-bonds

If I read Nick Rowe right, he assumes (using a toy economy based on apples,) that A: Apples don’t last.  And concludes:  B:  Each generation, in borrowing apples from their children,  consumes an increasing share of the apples produced by their children.  That is, each generation consumes more than they themselves produced, taking from the production of their children. (The second generation gives to the first, but borrows even more from the third, etc.) I think this is correct, and is Nick’s point: Inter-generational borrowing is not neutral. Succeeding generations end up short. And Dean Baker, who claims that there is no transfer of wealth with inter-generational borrowing, is wrong.

If I read this right, then the only moral position is to grow the economy at a rate greater than the increase in (real) inter-generational borrowing. ( Of course, this eventually comes up against physical limitations.) That is, plant apple trees at an increasing rate, greater than the increase in inter-generational borrowing. But this requires (it seems to me) that the present generation consumes less than they would if they hadn’t borrowed in the first place.  That is, the present generation must invest more than they borrow.   

But in terms of the present, real value, this just means the present generation should consume less than they produce, and invest the rest. The borrowing of money is irrelevant, except where it affects this. 

In fact, the borrowing of money is rather inverted, because the younger generation is forced to borrow money from the older, established, wealthier generation, pay that older generation back with interest, and thus end up with a diminished share of the  real pie. 

So this is what the government is doing.  It is the younger generation borrowing from the older, who refuse to pay their taxes, and instead consume more than they produce.   Social Security and Medicare notwithstanding,  (Who, after all, will be cheated, if Social Security and Medicare are not adequately funded in the future?) the government, in principle, represents the interests of the young. Its proper purpose is to invest in the future, which is more the younger generation's than the older.

But the government has been co-opted by the older generation, who, instead of holding it in trust, exploit it to their own profit. 

The Republicans’ stated goal, then, and that of Austerians in general, the shrinking of government, (especially those parts of government that pertain to investment,) is to cheat the young out of their interests.   This is what we are seeing in youth unemployment across the globe, so much being taken away that the younger generation is even being decapitalized.  Here in the US, it is seen as higher costs of college, and lower investment in primary education, the neglect of infrastructure, etc.  (Infrastructure is of greater benefit to  the young, since they can expect to use it longer.)

So not only is it the 1% vs the 99%, but it is the old vs the young.  

The problem for the old, of course, is that by decapitalizing the young, they are decapitalizing themselves.  Because it is on the backs of the young the old hope to take their ease.  

 Running a trade deficit is also borrowing from future generations, and is thus also immoral, unless it is done for investment.

The Poor Help Prop up the Middle Class

Push up economics:  Many conservative middle class voters are resentful of the poor, thinking them shiftless and lazy, paying no taxes and often instead collecting unjustified income from the government.  71 percent of Republicans, for instance, in a recent poll, said “they believed the poor should not be exempt from income taxes.”   Well, the poor are not ‘exempt.’   They just don’t make enough income to make it to the positive tax rate.  Do any of the middle class want to trade places with the poor?

The middle class should be grateful to the poor, and the labor they provide.  The poor often work hard, for mean wages, making a significant contribution to middle class welfare.   Also, as consumers, the poor purchase an important portion of the production of the middle class, and help keep the members of the middle class in business and employed.  Many middle class businesses, and their employees, owe their profit margins, and continuing business, to the purchases of the poor. The poor represent at least 15% of the population, and even if their purchasing power is much less, it is enough to make a difference.  And they provide other opportunities for middle class income and activity.  By cutting off supports to the poor, or by raising taxes on the poor, the middle class will do themselves no favor.  Indeed, instead, by providing more opportunity to the poor, by improving their welfare, the middle class will improve their own situation.

More money comes up to the middle class from the poor, than comes down to them from the wealthy.  Indeed, the wealthy take their profit from the middle class.

For a nice summary of some of the functions poverty and the poor serve for the rest of society,  and in particular the middle class, see Herbert J Gans:  “The Uses of Poverty: The Poor Pay All.”: http://www.sociology.org.uk/as4p3.pdf

Private Wealth, Public Debt, and Taxes

Well, well. Over at VoxEU somebody just connected a couple of the dots:

http://www.voxeu.org/article/eurozone-crisis-time-tax-rich

“Increased levels of public debt are accompanied by mounting private wealth, which is increasingly concentrated on the wealthy elite.”

Could there be a connection?  Could the public debt increasingly be held by a wealthy elite?  Could that wealthy elite be charging their sovereigns rent for the use of the sovereigns own money, money only owed that elite in the first place because that elite have used their power over their governments to lower their own taxes?  And the governments have had to borrow to maintain their services, and now they owe that elite too much to ever repay? 

But note the key step:  The elites used their power over governments to reduce their own taxes, and forced those governments to borrow from them instead.  And now those governments owe too much, threatening the very stability of the system which supports their own wealth.  Greed, greed, greed. 

At Vox they propose a one-off tax of 10%  on the assets of the top 8% of wealth.  (The top 10%, in Germany, for instance, own 2/3 of the wealth.)  They figure it will raise 9% GDP. 

Good, but not good enough.  The entire increase in the concentration of wealth since the 1970’s has been engineered by the elites.  They should give it all back.  The top 1% share of the pie more than doubled, for instance, so they should be taxed, on average, 50% of their assets.

It’s quite remarkable.  They demand disproportionate compensation, because they are so important, and they run things.  But when you ask, who’s responsible for the increased inequality, they deny responsibility, and point the finger somewhere else:  Education, for instance.  Globalization.  

They manage the system, and the system is tottering.   They take too much out of the system for a modern economy to support.  But is it due to their mis-management and short-sighted greed? Or can we, they blame circumstances beyond their control?  Well, if they do not run things, perhaps they are paid too much.   

But we know very well who’s responsible for the financial predicament.  Our elites, and their greed.  So taxing their ill gotten gains is good for us.  And good for them.  Stave off collapse of the system, on which they, and the rest of us, depend.  Will they? Or will our elites, who purport to run things, be shortsighted to the end?  If the US elections are any indication…

Super-Majority Requirement makes for Ineffectual Government

It may be that a country with a legislature requiring a super-majority in one of its houses, (here in the US the Senate) is ungovernable.

As the minority, it is in the interests of the Republicans to oppose everything. This will cause the Democrats to be ineffectual in governing, thus increasing the likelihood of the Republicans being elected to the majority in the next election. However, should the Republicans be elected to that majority after the election, it will be in the interests of the Democrats to oppose everything the Republicans try to do.  Thus the Democrats will demonstrate the Republican's  ineffectualness at governing, and so increase the likelihood of their own eventual return to power. Irrespective of which party is in the majority, the government is ineffectual, and in a permanent state of paralysis.

Now the Democrats may see it in their interests to allow the Republicans full play of their pernicious behavior, hoping that the electorate will become aroused by the offenses visited on them, and return to the Democratic fold.   Thus bad laws would not be opposed, but good ones would be. So the country is either ungoverned, or badly governed.

We owe Mitch McConnell a note of gratitude for this lesson in political principles.

(Mostly) posted as a comment at:  http://economistsview.typepad.com/economistsview/2012/08/if-obama-was-for-it-we-had-to-be-against-it.html#comment-6a00d83451b33869e201676932b53b970b

The Party of the Rich has Triumphed in its Spead of Disinformation

The party of the rich has triumphed in its spread of disinformation. Check out this poll by Bob Livingston,  “Poll Results: Higher Taxes for the Rich or More Drastic Spending Cuts,” at personalliberty.com:

http://personalliberty.com/poll-results-higher-taxes-for-the-rich-or-more-drastic-spending-cuts/?eiid=

Of course, Bob is somewhat to the Right of Center, as are his readers and the responders to his poll. See Q5.  But, among his responders: 60% think that higher taxes on the rich will hurt the economy, and only 23% voted to increase taxes on the  richest Americans.  76% voted the government should make significant spending cuts to try to reduce the deficit. 

As for where those budget cuts should come from, 0% voted for cuts in Social Security, Medicare or Medicaid, (except for the 18% who voted ‘All of the above.’)  22% voted for cuts to Foreign aid, which is an insignificant portion of the budget.  A bit of disinformation there.  27%, (the largest,) voted  for the elimination of Federal Agencies (the EPA, Dept of Education, etc.  You know, things to do with our future, and Justice, the Treasury, including the IRS, etc., things to do with running the day to day stuff.)  Only 7% voted for cuts in the Dept of  Defense, despite its legendary wastefulness. 

For a more realistic perspective on what can and cannot be done, check out the NY Times ‘Budget Puzzle’, from Nov 13, 2010: http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html

But the real bottom line, of course, is the coddling of the rich. Getting 60% thinking that increasing taxes on the rich will hurt the economy, against all historical evidence, including the evidence of their own experience.   Taxes on the rich haven’t been lower in most of these readers’ lifetimes, and when during those lifetimes has the economy ever been in such sorry shape? This is surely one of history’s great triumphs of propaganda.  Getting a sizeable percentage of the population to think against their own interests, to identify with those who exploit them, and to imagine their interests align with those who, over the past 30 years or so, have taken over 15% of their income, (http://anamecon.blogspot.com/2010/10/what-income-of-top-1-means-to-rest-of.html ) and a greater percent of their wealth, is astounding.

It is also a triumph over logic:  What the rich do not pay in taxes, the rest of the people will have to. What the rich do not pay for defense, or for the common wealth of the people that is the government, the rest of the people will have to. Further, who does the government borrow from?   The rich.  So the rich are giving their money to the government anyhow, but when it is borrowed, they expect it paid back, eventually.  With interest.  And where does that money come from?  The people. 

And who’s services will get cut?  Not the rich’s.  The people’s.  When Education, Health and Human Services, Energy, all get cut, who will be the poorer?  Not the rich.  You can bet the rich will have the money to grease the palms of Congressmen to keep their places at the public trough warm and well stocked. 

And who will be at the front lines when the payrolls of government are slashed?  The Wall Street banker?  Or the Main Street small businessman, who depends on government wage earners, and other government expenditures, directly or indirectly, for a part of his business. 

One of the Main Functions of Government is to Consume Excess Production

One of the main functions of government is to consume excess production, hopefully in a socially constructive manner, and so maintain the price level. Keynes suggested this, as a solution to inadequacies of demand, but it must be done even in 'good' times, and adjusted, for bad. That is, government consumption must be increased during recession or depression.  Further, the government must redistribute even more as industries become more capital intensive.  To do this in perpetuity, government’s debt cannot get out of hand, but must be constrained as a percentage of GDP.  This means collect more taxes, and these must necessarily be collected from the rich.

First, the wealthy consume less as a percentage of their income than the rest of the population. They save more. On the other hand, since the government will spend all it collects in taxes, collecting more in taxes from the rich will be economically stimulatory.   That is, the economic multiplier on taxes on the wealthy is greater than one.    This implies a strongly progressive tax to stimulate the economy. 

Indeed, from the point of view of economic stimulus, there is no point in taking taxes from the poor, or even much of the working class, when their savings is very low.  Any money taken as taxes from the poor would have been spent anyway, and so would not provide net stimulus to the economy.  What is more, a certain rate of savings in the middle and lower classes should generally be seen as desirable, since it would act as an automatic stabilizer.  Money would be saved during good times, helping to slow down the economy, and dis-saved, or spent, during recession or depression, helping to stimulate the economy, thus helping to smooth economic fluctuations.      

Further, as the owners of capital, an increased share of market income will go to the wealthy as industries become more capital intensive.  More demand, that is money, will have to be redistributed to maintain the market, which otherwise would slowly contract as labor is increasingly forced out of the productive process. (The same thing happens in a country as production is off-shored. No country can afford to have a significant proportion of the goods it consumes to be imported, unless it has compensating exports.  Thus the need for balanced trade.  See:  http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html)  Indeed, given the observation that one of the government’s functions is to consume excess production, and running a trade deficit effectively increases that excess,  much of a government’s deficit can be laid at the feet of that trade deficit.)

Now there is no market for labor forced out of the productive process. This is because, as unemployed, they do not represent a market for production.  Supply increases, due to increased capital expenditures, but ultimate demand does not, because there is no increase in the number of consumers, that is, labor. Demand increasingly becomes concentrated at the top. (Of course, the wealthy could spend this money on providing public goods and services to the rest of their community. They instead rail against government, and do not themselves provide the things the community needs.)   

On the contrary, the absence of a progressive tax is/will be depressive, and destabilizing, as wealth becomes more concentrated and inequality increases. One of the causes of this destabilization is that as wealth becomes more concentrated, the market for commodities and financial instruments becomes thinner, and subject to greater fluctuations, as fewer people have the greater concentrations of wealth to invest in the various markets. Meanwhile, the market for production, represented by the middle and working classes, gradually contracts in the absence of a progressive tax.  The government, for a time, may maintain this by running up debt.  But this is regarded by many as unsustainable.

Privatizing government functions is counterproductive, since profits in privatized industries cause an increase in the upward redistribution of income, which must be counteracted with an even greater progressivity of taxes to compensate.  Indeed, a certain amount of inefficiency in government spending is a virtue, as it allows wider dispersion of government expenditures. 

What is important is the efficiency with which government collects taxes from the wealthy, since the primary goal is the constant redistribution of demand throughout the economy.  If it is inefficient in collecting taxes from the wealthy, too much money will remain at the top, and it will be inefficient at redistributing this money to the base of the economic pyramid, where it is needed to stimulate demand.  In particular, the taxes on the wealthy should be increased during recessions and depressions, that is periods of inadequate demand and excess supply.  Of course, that suggests taxes on the wealthy be decreased during periods of inflation, when they are large, but they are now already inadequate.  We are talking about a tax rate centered about 65% or so, and adjusted from there, depending on circumstance:  Higher during bad economic times; lower during good economic times. 

Regulating Oligopoly and Oligopsony

Regulating Oligopoly and Oligopsony

Having concluded there was a need to regulate oligopoly and oligopsony, ( http://anamecon.blogspot.com/2012/03/on-need-for-regulation-of-oligopoly-and.html ) we discuss some ways how it might be done. Other suggestions are welcome.

The problem is the oligopolist produces less than the competitive equilibrium, and at a higher price, while the oligopsonist buys less than the competitive equilibrium, and at a lower price.

 

In dealing with oligopy we wish to decide which oligopies are most damaging.  Those in elastic markets, for instance, would be naturally limited in their ability to extract rents, while those in inelastic markets would have greater opportunity, and given the situation, inclination, to do so.  Similarly, the costs of entry to a market would also set limits on how much extra normal profit could be collected. Low entry costs would limit the extra normal profits to low levels, since higher profits would encourage the entry of other firms into the market.

With damaging oligopy, one way is simply to tax the results. A problem here is getting the receipts back to the damaged parties.  Another problem with this solution is that it would not affect the oligopist’s equilibrium, to produce at higher prices and lower quantity produced than at competitive equilibrium for oligopoly, and to buy at lower prices paid for and a lower quantity than at competitive equilibrium for oligopsony. That is, it would not eliminate bottlenecks in an economy. As may be, this approach would be to tax extra normal profits at a punitive rate, say, 90% of profits over 6% (allowing for a 3% inflation rate.)  The point is, by the time oligopy is manifest, the market is relatively fixed in proportion to the economy as a whole. Yet because of the price scheme of the oligopy, the market is defective in size to the economy, and the rent collected goes into the bank, ie taken out of the economy at large, or goes into buying up assets in the economy at large, increasing the proportion of ownership of the oligop, at the expense of the other members of the economy.  So one would wish to force the oligopy to grow to proportion of and at the growth rate of the economy as a whole.  (This is a mature market problem, not a growing market one.  It is not a problem of a company expanding into an open market, such as Apple, with its product innovations.  Extra normal profits here can still be a problem to an economy, and lead to alterations in the distribution of wealth and power.  But the reinvestment of extra normal profits in plant is also necessary to expand production to meet the demand a smaller company cannot reasonably fulfill.) 

What is desired is that normal profits are allowed to be reinvested in the oligopy, while extra normal profits are returned to the economy at large.  In oligopoly, one might gear the tax to be scaled at 6% on profit per unit produced, (with a 3% nominal rate of inflation, and a 3% rate of growth.). This would be effectively a progressive VAT, or value added tax, on the ologopoly.  This would incentivize the oligopolist to produce to competitive equilibrium, since the maximum profit would then be proportional to quantity produced. (Actually this by itself wouldn’t quite work, as the oligopolist would just be encouraged to internalize costs, so as to reduce his ‘profit’ to the 6%.)   

Another is to institute price floors in the case of oligopsony, or price ceilings in the case of oligopoly, at what one would hope to be nearer the equilibrium price for a perfectly competitive market. One example of price floors, with oligopsonies, is with minimum wage laws.

A problem here seems to be that one loses the use of price signals, although this is actually not a problem with oligopy, since the quantity traded is no longer responsive to prices anyhow.  Or more correctly, the price becomes fixed, and unresponsive over a large variation of economic conditions. In any case, over a large variation, price and quantity do not respond to the demands of the economy. While these price levels could just be legislated, probably a more efficient method would be a competitive buyer, in the case of oligopsony, or a competitive producer, in the case of oligopoly.  In the case of oligopoly, another option might be to subsidize production.  This option, subsidizing production, would fail, however, in all cases but the mildest kinks, that is, where there were numerous competitors in the oligopoly, (or hardly like an oligopoly at all.)  This is because, with a severe kink, the vertical part of the Marginal Cost MC curve extends through the price axis, or at least very close, and thus all or most of the cost of production would have to be subsidized in order to encourage an increase in quantity produced.  Otherwise, the quantity for profit maximization would not change. This would still be useful, in cases like health care, where the goal was universal coverage.  See: http://anamecon.blogspot.com/2010/03/real-problem-with-health-care-in-us.html

Similarly, just buying up large quantities from the oligopoly would be very expensive, since you would be buying at the oligopolist’s price, and providing him his extra normal profit, as is in fact the current US government policy with respect to the health care industry.  Policy should be to force the oligopolist to sell at a price nearer the equilibrium price.  Again, the situation with health care is different, since if you want universal coverage, you want to drive the oligopolist’s price to near zero, and to do so must effectively subsidize the entire production.  That is, make health care a public good. 

In the case of oligopsony, by competitive, we mean a buyer who buys sufficient goods to drive the price up to what it would be under competitive equilibrium.  This buyer would constitute a regulator.  And what would the signals be, that this regulator would look for?  He would seek a normal profit for suppliers. (This assumes that for firms facing the oligopsony, there is no barrier to entry.  If there were such a barrier, we would expect the situation to evolve into one of oligopoly facing oligopsony. Does such a market exist at a competitive equilibrium?  It would seem to depend on the relative elasticities of the supply and demand.)

One way this might be shown would be an equilibrium in firms entering and leaving the market.  This shows how the quantity of suppliers might also be regulated. By increasing the price and quantity bought, firms would be encouraged to enter the market.  By reducing the price and quantity bought, firms would be encouraged to exit the market.

The idea of government being a last resort buyer of labor suggests an alternative to minimum wage laws.  The government would enter the labor market and act as a monopsonist, and bid up wages until the unemployment rate was down to desired levels.  Private industries would have to pay this rate also, or lose employees to the government.

The situation would seem to be more difficult with oligopoly.  The problem with the government producing to competitive equilibrium is that governments are notorious for producing inferior products.  Another problem, as in agriculture and education, is what the government actually does.  That is the government subsidizes production into the face of oligopsonies.   This results in producing a surplus of goods into a buyers market, driving down the prices.  (Indeed, the prices have been driven down so low, in the case of education, that buyers, the institutions of higher education, must be paid to accept most of the production of public education. The prices are negative.  This is an alternative way of looking at the distribution of pricings and cost burdens in education.  On the other end, businesses refuse to pay the universities for the production of the universities, their graduates.  They do not send clear signals as to what they want, except in a few career specific employment and unemployment rates. 

One way to rein in oligopoly is to promote the production of substitute goods.  The development and subsidy of alternative energy sources, for instance, would moderate the action of oil and coal oligopolists, which is one of the reasons they oppose alternative energy sources so fiercely.

   

As another alternative, the government could employ the aggressive use of anti-trust legislation, to prevent the formation of oligopoly. Probably a figure of providing 20% of the market would constitute a member of an oligopoly.  Thus, keeping firms below that size would prevent the kink from becoming too pronounced.  A problem arises, when the oligopoly faces oligopsony, or monopsony, as in retail supermarket chains, with their limited shelf space.   By hindering one, one encourages the other, and oligopsony can be as socially destructive as oligopoly.   

Another possible solution is to separate the functions of the oligopy, making one part into a quasi-utility, and eliminating costs of entry to the other function.  Thus, for instance, (as was done with British rail) providers of cable TVcould be separated into parts, one which merely operated and maintained the cable, and the other which provided the content, paying the operators of the cable a fee.  The operator would be a regulated monopoly, and the content providers would be competitive, the costs of entry, one of the prerequisites for oligopoly, minimized.  The same could be done with cell phones, the towers being regulated, and selling their bandwidth, which they would seek to maximize, for a fee.

Health care in the US is an instance of oligopoly. Actually it is an instance of several different oligopolies.  One is medical equipment supply.  Another is pharmaceutical supply.  Locally hospitals form oligopolies.  (Hospitals are an obvious choice for regulated utility.)  Finally, a limited supply of doctors and other medical personnel creates an effective oligopoly to health care consumers.   Production of health care is restricted, driving up prices. Buying from the oligopoly will not change this, and indeed can be expected to further drive up prices. 

For industries requiring a high level of maintenance of resources, such as farming, further regulation might be required of producers, to prevent depletion of assets in efforts to temporarily acquire extra normal profits.  Progressive taxation would be helpful here, since it increases the present value of future returns, rather than exploitation of the resource for immediate returns.

Milton Friedman: "The Social Responsibility of Business is to Increase its Profits," is Wrong

Milton Friedman, "The Social Responsibility of Business is to Increase its Profits," is wrong.

In his famous article, “The Social Responsibility of Business is to Increase its Profits,” (originally published in the New York Times Magazine September 13, 1970, see eg:http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html) Milton Friedman quotes himself from his book Capitalism and Freedom:

"there is one and only one social responsibility of business–to use it(s) resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

This is his concluding line in an article dedicated to denigrating the idea of “social responsibility” in businesses, and in particular by corporate executives. For a corporate executive to act in a “socially responsible” manner, Dr. Friedman posits that “it must mean that he (the corporate executive) is to act in some way that is not in the interest of his employers.”  That is, any act, (not geared to maximizing profits,) in excess of the minimum required by law and custom is not in the interests of his employers. 

His conclusion is at least naïve.  Clearly, a business can increase its profits if  “it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."  How much easier, though, to maximize its profit by externalizing all costs, by capturing and corrupting government, and altering the rules of the game to its convenience?  How much easier to profit by eliminating free and open competition, and legalizing deception and fraud? 

Dr. Friedman criticizes the 'socially responsible' postures taken by executives in and prior to 1970.  He further condemns socially responsible behavior by smearing it with the ‘socialist’ paint brush:   ”This is the basic reason why the doctrine of "social responsibility" involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce re­sources to alternative uses.”  Here Dr. Friedman makes no compromise. He essentially claims that market mechanisms are the only way to determine the allocation of scarce resources, denying any limitation to or failure of markets, or any use for political mechanisms of allocation.  But pollution control, and work place safety, are political allocations of resources, and ones which would be opposed by market mechanisms.  The failure of the market in the US to provide universal health care is another case in point, assuming universal healthcare is desired by a majority of the people.  

Milton Friedman's claim that the sole social responsibility of business is to increase its profits, places businesses into an adversarial relation to society.  That is, businesses become the enemies, the exploiters, of the society of which they are a part.  The logical conclusion of Dr. Friedman’s statement is that it is not a part of the social responsibility of business to behave in a socially responsible manner.  His implication, although I don’t think he realized this, is indeed quite the opposite, that a business should behave in a socially irresponsible, and even socially destructive, manner, if this increases its profit. This position is schizophrenic.  It is as if the hand was encouraged to act against the interests of the body of which it was a part.

There are ways of increasing a business’ profits which are damaging to the society of which it is a part. Indeed, it is a tendency of business to seek to externalize all costs. Thus, to pollute, to ignore worker safety regulations, to engage in mis-representation if not fraud, etc. If the business is in competition, and these things are permitted, it must do them, since its competitors, similarly situated, will also do these things.  Its competitors, if allowed to externalize costs by polluting, will do so, and so it must also.  Its competitors, if allowed to externalize costs by skimping on worker safety, will do so, and so it must do so also.  Further, business will seek subsidies by the government, and taxes by the government on its competition.

The conclusion of Dr. Friedman’s position implies the necessity that the corporate executive act without conscience.  This is necessary, since any operation of conscience within the confines of the executive’s office would be contrary to the profit maximization principle under which the executive, as an employee of the owners, is obliged to operate.  Indeed, profit maximization obligates the corporate executive to pollute and otherwise externalize all costs, so far as practically permitted, and to undertake the corruption of the regulating bodies, that is the corruption of government. 

But where is the root of his error?  Consider this quote from the article: “Society is a collection of individuals and of the various groups they voluntarily form.”  Society is hardly a mere collection.  It is dynamic, and its dynamic is non-linear. Society is not merely the collection of individuals, or even the mere collection of their actions.   The effect of everybody doing a thing, is quite different from the effect of just one or a few persons doing that thing.  Society is more than the sum of its parts. A business is more than the sum of its parts.  And the actions of businesses, and the other parts of society, combine in non-linear, and synergistic ways. There are returns of scale, and greater returns on the scale of integration of an entire society.  A business unconcerned with these interactions does society, and itself, disservice.  Dr. Friedman’s conception serves to atomize and divide, and reduce those social returns to scale, impoverishing society.  This is what we have seen, in the triumph of his error, and the rise of those who subscribe to it.

Consider instead a purely operational, and self-interested, definition of conscience: seeking to do that which is ultimately best for one’s self:  Seeking the larger good, with the expectation that one’s own welfare will be improved if that larger good is enhanced.  We do assume that the executive is interested indeed in maximizing the profits of his company. Then a goal of the business executive is the optimization of his society, (and by optimizing we can here mean purely maximizing the economy's growth rate,) since in an optimum society, his corporation itself is optimized, and in the long run, its profits maximized.  Thus, the executive with conscience will seek to participate in, and encourage the development of, a well regulated market, one which will enhance the value of his business to society, since in such a market growth is optimized for all businesses.  Therefore, rather than corrupting the regulators, he will seek regulation which maximizes the efficiency of resource allocation. Rather than competing in a race to the bottom, he will seek effective regulation that will encourage all businesses to good behavior. The business man of conscience, therefore, will speak out against corruption, and the capture of government by other businesses. As this will be in his own long term best interest.

The corporate executive’s duty to his employers is not uncritical obedience to the principle of short term profit maximization. Long term maximization requires the long term survivability of the society of which it is a part. 

Neither do the owners enjoy all incidents of property.  Ownership of property in any society is not an absolute.  It entails duties.  Society, and its government, retain the most important incidents of property, and this implies the obligation of the owners to ”socially responsible” behavior.   All individuals in society, by voluntary agreement, undertake this. 

While it is beneficial for each business to pursue its narrow interests, even to act in an unethical manner, (which Dr. Friedman in the larger sense implies is OK as long as it is within ‘the ‘rules of the game,’) it is bad for each business if all businesses act so.  Where all businesses sacrifice the larger good, sacrifice their ‘responsibility to society,’ for their narrower interests, all are poorer, and all lose. Where all businesses sacrifice the larger good, the larger good contracts.   

Even the winners lose. Therefore, it is in the interests of each business, to see that other businesses act in an ethical manner.  Thus, that the business exists in a well regulated market, and not a corrupt, environment.

We take Dr. Friedman to his logical conclusion, and that business indeed exists in an adversarial relationship to society, that its ultimate interests are contrary to the interests of society.  Then there is no intrinsic restriction to its activities in that society:  There is no limit on the things it can, or should, do, to gain profit. So business should seek to capture government,  and seek to ‘free’ itself from the constraints of regulation, and mitigate or corrupt that regulation.  Then when business captures government, and corrupts regulation, it must be that the government also acts contrary to the interests of society.  Therefore, it is in the interests of society, that the separation of business and state remain inviolate.  The Supreme Court’s decision Citizens United, therefore, must be considered inimical to society, at the least a terrible mistake, and those who support it, and profit by it, society’s enemies.

Clearly, it is in the interests of failing executives, and failing businesses, to corrupt government, and to legitimize deception and fraud.  Failing at production, they seek success through corruption.  Instead it is in the interests of successful executives and businesses to seek a well-regulated environment, and good government.

Society is captured by men who do not believe that the larger good is to their benefit, and therefore seek their own narrower self-interests, to the destruction of the larger good, and ultimately their own.

That our government is captured by executives and businesses, many of which would otherwise fail, that is to say, are not producers in any real economic sense, and so could not compete in a free and open market, bodes ill.   

Executives and corporations have taken Dr. Friedman's statement to heart.  His prescriptions have, so far as they have been carried out, done untold damage to the economy.

Progressive Taxation Encourages Investment

Progressive taxation can be an important tool in conserving natural resources, since it increases the relative present value of future returns, by reducing the returns to immediate exploitation of the resource.  Consider an example:  A capital good, a wood lot, say, provides an income stream of $100,000 in perpetuity.  Now, if the tax is flat, and the resource can be cashed out, for $2,000,000, and invested at interest for 5%, then the owner would be indifferent to exploiting or conserving the resource.  On the other hand suppose, with a progressive tax, the $100,000 was taxed at a miniscule rate, and the $2,000,000 at 50%.  Then the owner would have to be able to invest the $1,000,000 that remained after taxes at a 10% rate in order to be indifferent to preserving or exploiting the resource.  If this rate were unavailable, he would be more interested in conserving, rather than exploiting, this resource.

Indeed, progressive taxation increases the relative present value of any future income stream, and so encourages investment in the future.

The Extraction of Money from Communities in the New Economy

     The sound you don’t hear is the sound of money being sucked out of your community.  But you can see it.   Walmart is merely the biggest.  Target, Home Depot and Lowes.  Best Buy.  Staples.  McDonald’s and Wendy’s, Burger King.  The old standards like  Penny’s and  Sears. Even  PetCo,  Starbucks and ToysRUs. CVS and Walgreen’s.  The grocery chains.  Shell and Mobil and Sunoco.  And then of course  the big banks, Bank of America ,Wells Fargo, the rest.  They are pervasive.    Everywhere. 

      And what are they?  They are all extractive industries. 

      And that is what they extract?  Money.  Money from your community.

      And this is a new thing, this reorganization of the American economy.  It used to be, in the days of mom and pop stores, of locally owned factories and family farming, of small banking, that more of the money remained in the community, helping to maintain the flow of resources within and through the local economy. Factories and farms brought in the money.  Returns of production costs of the product went to the community.  Merely the cost of the materials which it used in manufacturing went outside the community, and this it recouped through the price of selling. The community also retained the profit, when the owner of the factory was local. See Diag 1, the factory in the Old Economy. (The sizes of the arrows within each diagram are merely indicative.  The important thing is the difference in sizes of the arrows between the diagrams.  Remember also the flow of money is opposite to the flow of goods and services.  When goods go out of the factory, and are sold in the Rest of the World, money flows in.)  The factory is a part of the community.  The factory brings money into the community by selling its product to the Rest of the World outside the community.  The only money it exports is for the material and energy which goes into making that product.  The rest of the money goes either to the workers, or to the owner.

      The workers, and the owner, who was a part of the community, spend some of their money in the Rest of the World, but spend most of their money in the community.  It is thus more likely that the amount of money retained by the community is greater than the money which leaves the community.  So the community prospers and grows.   

(Note, however, it grows by extracting money from other communities.  With a constant money supply, this is a zero sum game.   One community’s gain is another community’s loss.  Indeed, for a community to grow without deflation, it must have an influx of money.   And it is difficult for a community to grow with deflation, because under deflation, on average, businesses are nominally losing money.)

      The ‘Old Economy’ is no longer.  Now the profit goes to the headquarters of the giant corporations.  And to their owners, who take the money extracted from your community and spend it in theirs.   This makes their communities prosperous, while yours declines. See Diag 2, the factory in the New Economy.  The diagram is really no more complicated. All the flows of money are in the same directions. The extra solid arrows indicate increases in money being spent.  The clear arrows indicate money which is no longer being spent.  Thus in Diag 2.  the extra arrow going from the factory to the Rest of the World is the increase in costs due to the fact that the factory must buy its factors from oligopolies, while the clear arrow indicates money lost due to increased competition and the fact that it must sell to oligopsonies in the Rest of the World.  The money going to the owner does not necessarily change, but now, since the corporate owner is no longer in the community, the profits from the factory also leave the community.  Facing oligopsony, the Factory’s return is minimized, reducing profits and forcing the reduction of overhead.  This means replacing workers with machines.  So the capital costs leave the community, and the lost jobs reduce income to the community.  The clear arrow from the Factory to the workers in the community represents the reduction in income to the community due to decreased payrolls, a result of increases in productivity and mechanization.  Since the workers, as well as the factory, are now buying from oligopolies, more money leaves the community through them, and the clear arrow to the community indicates that less is retained by the community.  Thus the direction of the flows are the same, but the quantities are different, with more of the money from the operation of the factory leaving the community, and less staying in the community.  

      

      While it is possible for this community to also be prosperous, it is more likely, than in the old economy, that it is not, but rather that more money is being taken out of the community than is coming in.  It is still possible for the factory to be operating at a profit, that is the money coming into the factory is greater than the money going into the rest of the world and the workers. The owner is then making a profit.  However, it is more likely, than in the old economy, that the money going to the workers is also less than that leaving the community.  Thus, the community would be in decline.

      We can make a similar comparison of diagrams between old and new economies by studying the flow of money through their respective stores.  In the old economy, the store is locally owned, in the new, corporately owned. 

      Consider Diag 3, the store in the Old Economy.  The store is locally owned.    Money comes into the community from outside, say through a factory.  It could be farm production, or just the returns from the labor of members of the community in other communities.  Some is spent at the store, some circulates through the community, some leaves the community through other channels.  Of the money spent in the store, some goes to the Rest of the World, that money the store spends on products there.  But much, even most, is retained by the community, as wages, as profit to the local owner, as money paid to local producers.  Of the profits paid to the owner, some are spent in the Rest of the World, some spent in the community.  In any case, a relatively high percentage of the money spent in the store remains in the community. 

      Compare this to Diag 4, the store in the New Economy, in a ‘typical’ modern community.   This is the chain store, owned by a distant corporate owner. (Some of these are franchises, locally owned, but all sending a cut to the distant corporation.)  Again, the diagram is really no more complicated than the first one, the store in the old economy.     The flows of money are all in the same direction.   The added solid arrows indicate an increase in the flow of money, the clear arrows a decrease.  Money comes into the community from outside, through what the community produces.   This may be farm production, the production of a factory, or the labor of members of the community in other communities.  This is reduced from before (clear arrow from Rest of World to Community,) because the Community faces oligopsonies.  With a chain store, there is an increase in flow into the Rest of the World.  First, of course, the profits of the store go to the corporate owner, and leave the community.   This is also indicated by the clear arrow from the Corporation to the Community.   Second, there is little or nothing bought from local producers, so that arrow now points into the Rest of the World. Finally, there is the increase in money due to the fact that the goods the store buys are now bought from oligopolies, and thus at a higher cost. 

      

       This last needs to be discussed, because it is not so clear cut. While the chain store faces oligopolies, it is often an element of an oligopsony, and thus can command lower prices for the goods it buys.  Further, there is the natural savings due to trade.  (But this tends to drive out the local producers.) What is certain that it can, with its volume purchases, command prices from its suppliers lower than a locally owned store, and thus put the locally owned store at a competitive disadvantage.  This reduction is indicated by the clear arrow from the community to the store.  Indeed, because of this, the chain, so far as it presents substitutable goods, tends to drive the locally owned store out of business, and replace it.

      But to continue, the chain store, where it is larger than its competitors, can reduce labor costs two ways.  First, through more efficient labor practices, that is selling a greater volume of goods per unit of labor, and second through oligopsony in the labor market, driving down the costs of labor to a minimum.  It tends to drive wages down to the minimum, actually.    This is indicated by the clear arrow from the store to the workers.   Since the workers also face oligopoly in the rest of the world, the flow of money from the workers to the Rest of the World increases.  Together these factors reduce the amount of money the workers circulate in the community.  This needs to be discussed.

      The cost of labor to the store is really a zero sum for the community.  The greater the labor costs, the more the community must pay.  The less the labor costs, the less the community must pay. But in either case, the money comes back to the community as wages paid to the workers.   So it is really only a factor in the chain store competing against local businesses, lower labor costs allowing lower pricing and thus greater competition against the local business.  This forces down the price of labor in the local businesses, so long as they remain competitive.  It does change the distribution of money in the local community, reducing the share available to low wage earners, but this is another matter. 

      Aside from the differences due to oligopoly and oligopsony, the two major differences are the profits  leaving the community to the corporate owners,  and the money that leaves the community instead of going to local producers.  As in the new factory economy, the bottom line is the increase in money flowing out of the community, and the decrease in money flowing into the community, making it more likely, than in the old economy, that the community may be losing money rather than gaining it, and so be in decline.  If we realize that a prosperous community is only a few percentage points to the good, that is, the community typically makes only a small ‘profit,’ this is a significant difference, and may mean the difference between success and failure.

      And a successful community may be an extractive community, that is, one that relies on the extraction of resources from other communities.  We have indicated how successful factory communities extract money from other communities.  But we look now at Diag 5, the Store in Owner Communities.  

      The arrows have been simplified and reduced, but otherwise it is the same as Diag 4, except the corporate owner is a part of this community, and is responsible for a great influx of money into the community.  Indeed, the owner may be the major, or even the only source of money to the community. (By owner here, corporate owner, we don’t necessarily mean just the owner per se.  For instance, in a community with a corporate headquarters located in it, all the staff of the headquarters would be included under the term ‘owner.’  Even a corporate engineering office would qualify, (although that could also be analyzed as a factory, as could the headquarters itself.)  Not that they are necessarily actually owners, but rather that their employment is dependent on the flow of money from distant stores and factories.)   

      In any case, the inflow the sum of profits extracted from many communities, is more likely greater than the outflow.  For oligops living in communities distant from the ones they exploit, the fate of these other communities is secondary to their profits. 

      

      And what are the symptoms of excessive extraction? 

      Well, you can tell the poor communities, because few of the extractors mine there.  The money is gone. The ore has been played out.   Oh, perhaps the inferior extractors, like Dollar Tree, or Family Dollar, or the Payday Loan check stops, still plough the poor soil.  But the better ones, even many of the not so good ones, have left.   Those that require the rich ore, the high end extractors, the Bergdorf’s, the Saks, the fashion boutiques, the Abercrombie & Fitchs, the Aeropostales,  who require higher margins from their smaller volume;  the Apple stores, have long gone, if they ever came.        

   

      A community  may benefit from trade, where it is a net producer of goods, but this is increasingly difficult.    Free trade exposes a community to oligopsony and oligopoly.  Oligopsony minimizes the benefits the community receives from its own production, whether it be factory, or farming, or mining.   Oligopoly maximizes the extractions from the community, of goods sold in the community.   So a community may suffer from trade, even when it remains a producer.  It will likely benefit, where it is an extractor/owner community, but theses are comparatively few.  A community either benefits from the advantages of trade, or instead suffers extraction, of which a deficit in the public budget, is one aspect.  As money is sucked out of the community, unemployment rises, and locally owned businesses decline.    The tax base erodes. The schools decline, and maintenance of roads and infrastructure deteriorates.     The public commonweal is destroyed.

      Corporations are not interested in the typical communities of America, except as a source for the extraction of money.  Indeed, according to Milton Friedman, their only social responsibility is to increase their profits.  That is, their interest is in the destruction of the community.  Look at Apple.  They send their jobs to China and their profits to Lichtenstein.  They do not love America.  America to them  exists only to be exploited.   Their store is here.  They are interested in investing in stores here, but not so much in factories.  This is because in a community which is still a source of extraction, which still has money, everything costs more.  And this means the cost of labor, and thus the cost of production, is higher. 

      That is why corporations are not investing in America, except in extractive industries.  They are not investing in producing in America, because it means investing in the communities of America, and they have yet to be depleted by the extractive actions of these same corporations.  The costs are high, because of oligopoly, and the returns are low, because of oligopsony, oligopoly and oligopsony these corporations themselves inflict.  

      As for the extractors, they cannot spend their money fast enough.  And, because they cannot spend it fast enough, they put it in banks, often overseas.   From there, it makes its way back to the front banks in the US, where it is loaned to members of your community, and the interest is extracted.  Or they invest it in other extractive industries, other retail chains, or factories overseas.  The products of these factories are used to extract money from the communities in which they are sold. And the money from the production of these products, no longer made by factories in the community, is extracted by these overseas factories.   And the cost of shipping from overseas is also extracted.

      We come to an interesting conclusion.  As long as there is money to be extracted, extractors will come, with their stores, and seek to extract that money from the community.  (But worse is Amazon, which you do not see.   Amazon spends nothing in your community.  The entire monetary value of the imported product is extracted from the community.  Because those brick and mortar stores you do see spend most of their overhead in their respective communities, at least the community retains that, and the damage is less.  But Amazon and the rest of the mail order companies spend nothing, and are engaged in pure extraction.)

       And the members of the community become a party to the destruction of their community, and their own destruction.  Because the extractors do not bear the cost of supporting the community, they can sell at lower prices.  And the members of the community, in perceived self interest, benefit from these lower prices.   But their community does not, because the money saved is merely spent at other stores, and still exported from the community.  Not enough money is retained by the community to maintain the money supply in the community, and that supply declines, along with the community welfare. It could be said that the community consumes itself to death, as increasingly each act of consumption, in the New Economy, costs the community money.  

Links to NPR: Money in US Politics

Here's a link to an NPR episode on money in US politics.  You probably don't know how bad it really is:

http://www.thisamericanlife.org/radio-archives/episode/461/take-the-money-and-run-for-office

Here's the teaser.  Just 10 minutes:

http://www.npr.org/blogs/money/2012/03/30/149712857/the-friday-podcast-im-calling-to-ask-for-your-contribution

 Should make you want to listen to the main episode.

This American Life is doing a series, which we will try and keep you up on.

Links: Bank of America: Too Crooked to Fail

This should make you angry.  You're paying for it, and will pay perhaps thousands of dollars for it.
You.  Personally. And that may be if you're just lucky, since this sort of things screws up civilizations.

http://www.rollingstone.com/politics/news/bank-of-america-too-crooked-to-fail-20120314


Higher taxes. Higher prices.  Fewer services. Degraded quality of life.

The bank(s) is(are) half the problem.  The essential complicity of our government is the other half.

And more of the same with the so called JOBS bill  (Jump-start Our Business Startups) now going through Congress.   Investors will have another reason to beware, since it essentially reduces or does away with a lot of pesky disclosure formerly required of companies raising money from the public. Not that that will be a real problem, except to the suckers, er, investors, any company unwilling to disclose is looking for. 

Further, there is no reason to invest in an economy that is essentially frozen by excessive rent seeking, and as Matt Taibbi documents, is increasingly run as a Kleptocracy.

And this is the real reason for the decline in IPOs. (IPO is initial public offerings, the stock companies offer when they go public.) After all, disclosure wasn't a problem before  Certainly not in the 1990's, when there were hundreds each year, despite the disclosure laws they are now getting rid of.
 
As far as I can tell, the only difference between Democrats and Republicans is that the Democrats seem to use a little more grease. 

On the Need for Regulation of Oligopoly and Oligopsony

 A modern economy relies on a robust distribution of assets. This distribution of assets is necessary for its distribution of income.  It has a certain ‘shape,’ and the distributed income from these assets is necessary for it to maintain that shape.  Where ownership and control of these assets is narrow, the income from these assets goes to a small portion of the economy, depleting the rest of the economy of the income it needs to maintain itself  Even where there is redistribution, there is loss of efficiency.  While this is recognized with government redistribution, which is why large private interests often oppose it, it also happens with private redistribution, which tends to shortchange vital services which are not easy to extract profit from.   The privately powerful also have other interests in opposing or co-opting government authority, since government is, besides other private interests, the only counter-weight to their own unbridled power.  And this power will not always act in the public interest. Indeed, there is no reason, once it attains a certain magnitude, to imagine that it would act in the public interest, and instead that it would see the public as a source of rent extraction and exploitation.   

Our point is that while regulation may be a matter of justice, it is as importantly a matter of economic stability and efficiency.

There is clearly a need for regulation in monopoly. It is in the interests of the monopolist to produce less and charge more for what is produced, reaping an extra normal profit.  Extra normal profit translates into extra normal growth.  This results in an increase in the share of the economy going to the monopolist.  When the monopoly is small, this is incidental to the economy.  Where large, in proportion to the economy, however, it is insupportable in the long term.   

Just as in monopoly and monopsony, we see a need for regulation in oligopoly and oligopsony, and their combination oligonomy.  (When referring to all or any of them, we’ll use term oligopy, and similarly oligopist.)   The point is that rational behavior for the oligopist is not the best outcome for society. The oligopolist will produce less, and charge higher prices, than at competitive equilibrium.  The oligopsonist will pay less, and buy less, than at competitive equilibrium. Both will reap extra normal profits. The continuing transfer of wealth to the oligopist leads to accumulation and concentration of wealth and power, and a depletion of the wealth from the rest of society, while at the same time shorting the economy of goods and services it otherwise desires and even needs.

But this is not even in the long range interest of the oligopist.  For the oligopist, his market must grow at a rate equal to his own.  But by collecting extra normal profits from his market, his market cannot grow at that rate. His market grows, if at all, at a slower rate, and this rate limits the rate at which the oligopist himself can grow.

An oligopsony reduces the revenue available to producers facing that oligopsony.  Producers cannot sell as much, nor can they get the best prices for what they do sell.  They are thus discouraged from production.  Fewer enter the market.  Production is less reinvested in, becomes undercapitalized, and tends towards obsolete methods. 

When the oligopsony is in labor markets, (and the destruction of labor union power has essentially resulted in such an oligopsony,) it has these effects on the investment in human capital.  There is greater unemployment, greater underemployment, and less investment in education, as the labor force becomes undercapitalized, and tends towards obsolescence.

An oligopoly, where it is a supplier of factors for other producers, (and even finished goods may be regarded as factors for labor,) has the same effect. Because the producer forced to buy his factors from an oligopolist must pay more for those factors than he would if he could buy his goods in a more competitive market.  His product must either be more expensive, sell for more and at reduced quantity, or, if priced the same, sell at reduced profit.  His revenue is reduced.  His ability to capitalize his business is reduced.  Production is less reinvested in, becomes undercapitalized, and tends towards obsolete methods.   

The oligopist, because of his power, finds himself in a situation where he must sacrifice the long range good of society, and thus his own long term interests, for the short run interests of his oligopy.   Putting it the other way, if he were to seek to better serve his society, he must put his firm at disadvantage. The only other option is to cooperate with his fellow oligopists in producing, or buying. to competitive equilibrium,  in price and quantity. But this would entail sacrificing their extra normal profits, and worse, losing market share in the event any of the other oligopists defected, and ceased to cooperate.  (Of course, they could always cooperate to enhance their extra normal profits, to society’s detriment.) The preservation of his society is simply not seen in his best interests. This is a situation he would not be in with more perfect competition, when his interests would be more closely aligned with that of the economy at large.  

And it is a situation of composition.  Where oligopy is a relatively small portion of the economy, the economy can endure the distortions brought about by the abnormal profits of the oligopy.  The rent collected is not so exorbitant that it cannot be compensated for, at least to some degree, by the other operations of the economy.

 It is worse when oligopy is pervasive. Suppose the economy consists, somewhat evenly divided, of oligopy and its market. Then the oligopist is in a quandary.   What can he do with his extra normal profits?  It is pointless to invest in the oligopy’s market, which, limited in profit from facing the oligopy, is restricted in growth.   And it is pointless to invest further in the oligopy, which, because its market is restricted in growth, itself is restricted in growth.   Since there is no profitable investment in the real economy, he seeks to invest in the financial economy.  But the financial economy is also limited by the real economy.  Financial assets must eventually be redeemed for real assets, but since the growth in real assets is arrested by the extra normal profits of oligopy, there is no growth in the real assets for any growth in the financial assets to be redeemed for.  The result is a surplus of money for investment, with no real profitable opportunity.

This is the important point.  Unregulated oligopy, with its extra normal profits, when it becomes extensive, arrests the growth of the entire economy.  Indeed, the situation is actually worse, because by continuing to purge the rest of the economy of its normal income, it can cause the rest of the economy’s revenue to be less than its expenses.  Thus, the remainder of the economy, the oligopist’s market, may actually be forced into contraction.  But this is bad for the oligopist as well. For an oligopolist, it will shift the demand curve left and/or down, thus reducing the optimum quantity, or the price, or both, depending.  In any case, the revenue will be reduced.

With a straight demand curve, shifting it left, down, or left and down, are all equivalent.  With a kinked, or curved, demand curve, these each result in different diagrams, so we have to figure what factors will reduce the price, but not the quantity demanded, and which will reduce the quantity demanded, but not the price, and which both.  We must follow the kink, since that is where the price and quantity will become fixed at. 

If money were taken out of the market for food, say, a good with a relatively inelastic demand, the quantity demanded would probably not change, but the price would decline. The demand curve would shift downward, and p_a would decline.   In the food market it would be price deflationary.  In the more elastic market for luxury goods, the quantity demanded would probably change, but maybe not so much the price. q_a would shift to the left, but p_a would not change so much.  For goods or services in intermediate elasticity, the demand curve would probably shift down and to the left, and both p_a and q_a would change.   

(And similarly for increases in the demand curve.  The demand curve would shift up for inelastic, right for elastic, or both, depending on the price elasticity of the good or service demanded.)

In analyzing the situation, reducing the economy to just an oligopy and the rest of the economy, the situation then reduces to the producer-consumer problem, with the oligopist in the position of the producer. But of course, the oligopist attains his advantage, and his extra normal profits, not by doing more, but by doing less, and charging more, and paying less.  Rather than contributing his ‘fair share’ for the economy, of ‘pulling his weight,’ he slacks off, and uses oligopistic power to demand more money for what he does contribute, and to pay less for what others contribute.  That is, compared to the rest of the economy, he becomes a net consumer, the consumer of the purchases of his extra normal profits.   So really, it is more accurately described as the strong sector vs. weak sector economy, with the strong sector extracting its rents from the weak sector. See:  http://anamecon.blogspot.com/2011/11/morality-and-debt.html

We see here, with oligopy, Adam Smith's invisible hand, rather than acting to the benefit of society, acts to its detriment.

So now that we have established the need, the issue becomes what techniques can most efficiently counter the redistributionist tendencies of oligopy.

Link to Michael Hudson on How Banks Plan

Another gem from Michael Hudson:

 http://michael-hudson.com/2012/02/wall-streets-capital-gain-planning/

“…Everything over subsistence, they’ll want as a loan…”

“…Once the entire surplus is paid to the banks, there’s nothing  (left) over for rising living standards, there’s nothing over for new capital investment, there’s nothing over for long term research and development…”

Further, once growth is arrested, so is growth of the bank's investments.  It becomes a fixed income stream on a fixed asset.  Optimum is for the banks to aim for optimum real growth rate.  But banks can’t do this.

Oligopsonies in an Economy

Our study of oligopsonies will follow our study of oligopolies, which the reader will find helpful to refer to.  Oligopsonies are another example of the macroeconomic effects of microeconomic processes.  The derivation is based on the idea of the kinked supply curve, which may be out there but doesn’t seem easy to find. That oligopsonies create market distortion is well known. 

We discuss competitive oligopsonies, where collusion is not necessary.

For your convenience a little background. Oligopsonies are ubiquitous. It seems many markets evolve into them.  Although consumers do not directly experience them, (except in labor markets,) they may often occur as the back end of oligopolies. One oligopsony is the fast food industry, which forms an oligopsony to meat sellers.   It also forms an oligopoly to cheeseburger buyers.  (A suggested word is oligonomy. See: http://activism101.ning.com/profiles/blogs/oligonomy-defined) The factors, goods or services which go into the oligopolist’s product, which are unique to an oligopoly, face oligopsony. 

Other examples of (non-labor) oligopsony are 1:  Cocoa market, where three firms buy the vast majority of cocoa.  2:  American tobacco market, where three cigarette makers buy 90% of all tobacco grown in the US. 3: the culinary herb market.  

 The various drug cartels  may also constitute a oligopsony for drug producers, and an oligopoly for drug users.

The characteristics of an oligopsony are 1:  It consists of a relatively few, relatively large, buyers.  2:  Each firm is big enough to affect the others. That is, the prices each firm pays affect the prices paid by the other firms. 3:  The goods or services they buy are similar or identical.  4:  There are barriers to entry, such as initial capital costs. A firm needs to be capitalized to have a profitable use for what it buys.  

Those not interested in the derivation may jump ahead to the discussion at the conclusion.  Those interested might also find discussions on monopsony helpful.  Here’s one:

http://www.youtube.com/watch?v=gKUvnFOu02U

Since oligopsonies are buyers instead of sellers, instead of a kinked demand curve, the individual oligopsonist faces a kinked supply curve, S, which is also his average cost curve AC, This is the price he pays for his goods,.  Diagram 1 shows this supply curve for a particular oligopsonist.  The oligopsonist wants to buy at the kink, a which is at some price p_a, which is really determined by the market, and some quantity q_a, which is determined by other factors, which we will discuss in the conclusion. In any event, the kink at which he buys is at a lower price than the price at competitive equilibrium, (around e) and a smaller quantity.  His total cost is price times quantity bought, or p_a x q_a.

Why does he want to buy at price p_a?  If he lowers the prices he offers below p_a, to p_b, hoping to save money, none of his competitors will follow.  Since his prices are below theirs, and because they are all buying the same of similar goods, sellers will go to his competition, and he will lose market share. (Note the assumption that there is not so much to sell, that many buyers will have to come to him, anyway.) If the price he offers goes down a little, the quantity of goods he is able to buy will go way down, to q_b.  This is the characteristic of an elastic supply curve.  As you move down the curve, the quantity the oligopsoninst is able to buy goes down.  Since these goods are factors of production, the oligopsonist can no longer produce at the same scale as before, cutting into his profit margins. 

Suppose instead he raises the prices he offers, from p_a to p_c, hoping to gain market share.  Then his competitors will quickly follow suit, since they don’t want to lose their market share to him.  So he won’t gain market share, he’ll just be buying at a higher price.  He may, however, buy a few more, at q_c, just because his and everybody’s price is higher.   This is characteristic of an inelastic supply curve.  Since his costs per unit are higher, his profit margins are likely to be slimmer, since he won’t be producing appreciably more of his product.  

Now for a firm to maximize profits, its marginal costs, MC, must equal its marginal revenue product, MRP, which is also its demand curve, D.   This is always the case, but what does this mean?    The marginal revenue product, MRP, is the use the oligopsonist gets out of the next unit he buys.  This is (mostly) a decreasing function because of the law of diminishing returns.  This decreasing function is what we show in the diagram. (But we say mostly because consider our restauranteur buying labor. In his case the first worker is useless. He is simply not enough to run a restaurant.   So his MRP for labor starts at zero and  increases until it reaches some maximum, then decreases steadily, since further workers start getting in each other’s way and contribute an ever decreasing amount to his total profit.  Most analyses ignore this, and you can, too.  For goods, the MRP is  usually a simpler, a steadily decreasing function, although again economies of scale would make it first go up.)

Marginal cost is the increase in cost that results from buying one more unit.    For imperfect competition, as we have in the case of oligopsonies, MC is always more than the average cost, AC.  (AC is also the supply curve, S, remember.)  This is because when you buy more units, you have to buy them at a higher price, but you have to buy all your units at that higher price.   So if the firm buys 4 units for $60 and has to pay $90 for 5 units, then the marginal cost of the fifth unit is $30.   The average cost however, is $18, and lower than the marginal cost.

Profit is maximized when MRP = MC because when MC is greater than MRP, it costs more to buy the next unit than you get use out of it.  With the figures we used, you would buy 4 units for $60, get use out of them for $100, (manufacture some things you can sell for $100, say,) and make $40 profit.  If you were maximizing profit, you wouldn’t then buy 5 units for $90, having use of them for $125, and only make $35 profit. 

See Diagram 2.  The marginal revenue product MRP curve is the downward sloping line.

With the kinked supply or AC curve, the MC curve is very strange.  The AC_L and the MC_L curve, the curves below the kink, both start at the same point on the axis, (in the direction where the arrows come together,) but the MC_L curve ascends more steeply, twice as steep, it turns out. When they reach the kink, however, the MC_U and AC_U curves, the curves above the kink, also extend from a point on the axis, (much lower on the axis) in the direction of the dotted arrows, so the MC_U curve, being twice as steep as the AC_U curve, is much higher than the MC_L curve at the kink. (The upper and lower labels are for convenience.  They are just different parts of the same line.)

What is important is the green line, the marginal cost MC_V curve at the kink, which is vertical.  Now since, when we maximize profit, MRP = MC, when ever MRP crosses the green MC_V line, (at the star,) the profit maximizing quantity qa and price pa are going to stay the same.  See Diagram 3.  The firm, whether its marginal revenue product curve is MRP₁, or MRP₂ or MRP₃  is going to want to buy the same amount qa, and pay the same price pa.  This will maximize its profit.

Conclusion:  Since firms in oligopsonistic competition tend to be locked in to price, they must find other ways to compete, and maintain or gain market share.  The leader of a drug cartel, for instance, might resort to escalating levels of violence to secure market share.   (We make the casual observation that one need look no further than oligopsony, (and oligopoly,) pricing to deduce a cause for Keynesian ‘price stickiness.’  In an economy rife with oligopsony we would expect many points of price, and quantity, fixedness, making deflation a uneven and problematic process.) 

Consider MRP₃ in Diagram 3.  The oligopsonist would not want to lower marginal revenue product any more, through non-price competition, because then his profit maximization would occur at a price lower than p_a, and he would lose market share.

However, the opposite can also happen.  Since price is, with in a range, independent of costs, the oligopsonist may decide to increase  his MRP, use what he buys more efficiently, and so increase his profit that way. 

Oligopsonies do not consist of identical or identically sized firms, with identical shares of the market. The quantity a particular oligopsonist buys at is determined by historical factors, and his ability, or inclination, to compete in ways which do not affect the price he offers for the goods or services he buys. Working conditions, for instance, may be one way a labor oligopsonist may attract a better class of laborer, enhance his MRP, and so his profits. Historical factors, for instance, most notably their activities during the period their industry was more competitive and open, determined the relative sizes of Wendy’s, McDonald’s and Burger King before they filled the market and became an oligopsony.  Decisions since have changed their relative sizes and profitability.   

Another point is that, unlike perfect competition, firms of various efficiencies can co-exist in an oligopsony, operating at differing capacities and different economies of scale, each firm collecting its particular degree of profit.  And unlike perfect competition,  much of this profit is extra-normal.  Even an inefficient firm can make an extra-normal profit.

What other things might we expect?  Well, we would expect the transfer of some producer surplus to the buyer, in the form of his extra-normal profits. (The oligopsonistic buyer is seldom the ultimate consumer.) Consider that oligopsonies are becoming economically pervasive.  Each of these oligopsonies extracts its rent, transferring resources from producers, to the oligopsonists.  Indeed, to simplify considerations, let us just model the entire economy as two tiers, consisting of an oligopsony and those who sell to it.  Consider first perfect competition, where the economy was efficient and in balance, Diagram 4. 

 Supply equals demand and the equilibrium point e, and surplus is divided between seller and buyer. With oligopsony, Diagram 5, there is a net transfer of surplus from the seller to the oligopsonists. (the greenish-yellow box)  In the real economy, this would be manifest as lower producer profits.  We would thus expect a gradual decapitalization of  producers.  In a labor oligopsony, we would expect decrease in the welfare of labor, as the increase in the income of the oligopsonist has to come from somewhere. 

 

Efficiency has also declined because an oligopsony buys less than the competitive equilibrium production, at a lower price creating what is called deadweight loss:  The blue triangle in Diagram 5.  (I’m not sure if the blue triangle is exactly the right one, as I am not sure the exact location of the point of competitive equilibrium in the absence of oligopsony.) That is, the economy is producing less than it would otherwise, perhaps less than it needs to.  In a labor market, this would imply increased levels of unemployment.  For instance, since the public sector also supplies the private sector, as the private sector becomes increasingly organized as oligopsony, we would expect public sector income, supported by taxes on labor costs, to decrease.  We would also expect, due to dead weight loss, an increasing shortage of public goods.