But Seriously...

It will be interesting to see how China handles this. My brother was in construction when we lived in Shanghai and when he talked about the huge bubble the country was creating in housing he said most Chinese people he knew answered "ehh the government will step in and correct things." A weird blind faith in the government to solve any problem.

 

This is absolute bullshit and undermines the entire point of discussing these topics.

Disingenuous, slippery slope arguments are what people resort to when they don't have a point or a coherent opinion. So instead of, "I feel <way> about <subject> because <reason>" it becomes "screw everything, if we're going to let the gays marry than WHY DON'T WE JUST LET PEOPLE FUCK GOATS??"

Come on, there's a lot of real discussion here - some good, some less good, but at least there are mostly reasoned opinions. Don't push in with crap like this.

 

What's happening in China was largely inevitable. It already happened in smaller markets in the Asian sphere, so it was just a matter of time. Now the government has suspended large majority shareholders from trading for 6 months.

http://finance.yahoo.com/news/china-bans-big-shareholders-cutting-003801709.html

What this means is the regulators are forcing considerable risk on them with little possibility to hedge against it. Chinese investments banks and FDIs are not going to touch that market for years now. This isn't even the problem though. The problem was 6 months ago when the market was skyrocketing and the price of the stocks was insanely overvalued. This their government attempting to adjust it, but it's going to have a severely adverse effect. Thank god American and British banks (aside from Forex traders) don't have a lot to do with that market.

 

Ok, I asked a question a few posts back that no one has answered, and is relevant to many of the 'points' made.

To reiterate: Is the successful result of Capitalism (or supercapitalism, if you will) Oligopoly?

Many of these 'free market' arguments are being made in situations where that theory is inapplicable. Of course, you've all read 'Wealth of Nations' - Volumes I-IV, and of course you're all familiar with background to the work itself and why it was created and at whose behest it was commissioned. Now, since you 'free marketers' are so familiar with the foregoing, as well as the requirements laid out by Smith for free markets and capitalism, you are in a position to answer the above question. The answer to that question is going to do away with quite a few of the arguments proffered because based on the answer, the economic landscape is very different and subject to different theoretical rules.

Hint: Someone touched on such a conundrum with the airlines.

 

I'm not 'advocating' anything. Yet. What I am asking is with all the bandying about of terms like 'capitalism' and 'free markets' and 'deregulation' and 'laissez faire' that people examine what the requirements are (theoretically) and see if those requirements are present in the US economy. The reason for this is the aforementioned terms are being used as 'end explanations' for why things are the way they are, but those terms are not end results. They are a means to an end result. There is a further question - one deeper than the one I posed and collaterally touched upon by toddamus, but I'll get to that specific question once folks have defined what kind of economy we actually are living in - and what rules (if any) theoretically apply, including if 'rules' from one form are applicable to the other (running both ways).

When I'm ready to advocate, I will (as usual) - make clear that something is my opinion. When I do, then I am advocating. I'm merely fact finding and defining right now.

 

Oligopolies are the natural result of free-market capitalism. Its the natural progression of the nature of the market, already seen in various sectors.

As for Adam Smith, the Wealth of Nations is one of the most misinterpreted works in economics. An enormous amount of emphasis is placed on the Invisible Hand, which is mentioned exactly once. A lot of his theories are sound, but largely incomplete.

 

Fascism isnt an economic system, its a political one.

 

Juice is closest. Ok, if you're an American, brace yourself for the following. You may want to sit down. Turn on some NASCAR, or Cops, or Real Housewives, or whatever insipid shit you watch to cleanse your mind.

The American economy is not a free market. It is an oligopoly. From the place you bought your alarm clock, the phone you check first thing in the morning, the food and coffee/tea you drink, the pills you take, the computer you jump on to check email, to the home you live in, the car you drive to work, the place you work, the place you get lunch, the food you cook for dinner, the clothes you dress in, the shoes you buy, the alcohol you drink, the cigarettes you smoke, the condoms or birth control methods you use, the tv you watch as you drift off at night:

They are largely dominated at some point in the supply chain by 3-5 companies. Why does this matter?

To sum up Smith, you essentially need three things for a free market to operate: infinite sellers (low barriers to entry); infinite buyers; and perfectly educated buyers. Now, the founding fathers were very aware of this theory, and not only capitalism but democracy has similar requirements theoretically (which I may get into later if anyone wants me to). Once those theoretical conditions are not present, you don't have a free market that operates the way it theoretically should. For instance, Nett noted that there are very few airlines, and their prices are all suspiciously similar. But here's the thing, in an Oligopoly, you don't even need collusion, because there are so few people operating in your industry - you know exactly what they're doing. What's even more distant is the fact that companies outside the Oligopoly have prices similar, maybe a little lower, but right in line whatever the cost of production may be. Oligopolies don't operate like a free market because they are powerful enough to alter the market - many times without violating any laws.

So that's why I asked the question. We live in an Oligopoly, and the rules are very different, so trying to apply free market rules will sometimes offer an explanation, but many times it won't because the preconditions for free market theory are not present in the macro sense. In a micro sense? Perhaps, depends on the industry/market.

 

Regulatory capitalism. Are you referring to the modern US or Nazi Germany since fascism was mentioned? Germany during that period was socialist. The US is not under laissez faire capitalism, at least not since the last 1800s.

Keep in mind "capitalism" and "socialism" are theories. No system is going to fit neatly under either category.

 

Its a bit of an oversimplification regarding how oligopolies work and the assumptions that need to be met for them to take place, but I understand your point (which is a good point). But economists that conclude that was usually rely on Bertrand model, which doesnt always result in a Nash Equilibrium. If using the Cournot model, the results are a little more ambiguous depending on the industry. Airlines, Telecom, parcel services, etc. are allowed to be oligopolies because it wouldnt make sense otherwise. If there were 100 cable companies instead of 5 or 6, what are they going to do? Lay their own millions of miles of fiber optic cable? Same with the postal service and power companies, these are government sponsored and in some cases, monopolies. But the reason we dont live in a full functioning one is the same reason why Smith's work was incomplete: it didnt take into account foreign competition into the market place.

The Sino-American economic dichotomy I mentioned a few pages back that (for some reason) I received a ton of shit for, is the answer to the oligopoly question. But I definitely get your conclusions on it.

 

Of course it's a bit of a simplification, but I don't want to get too deep in the background and not get to my point. As to Bertrand and Cournot, for those of you who were too busy having great sex, drinking, and smoking pot in college, their big theory AND I'M PARAPHRASING - is that Oligopolies can function in a free market because all things being equal, a duopoly will sell based on demand down to marginal cost. What this was a 'justification' for was the huge monopolies/oligopolies that sprung up during the industrial revolution (1860-1900, depending on where you were), in essence, these guys were saying 'it's ok that we have these huge corporations because mathematically speaking, they'll sell at the marginal cost and above.' However, like any social science (including my beloved political science) - it was a theory. We now have over 100 years of evidence to say that 'yes, mathematically, that should work out' - BUT one of the conditions that they both set forth for this theory is that the two firms involved in the industry can not cooperate in any way. Therein lies the rub. Cooperation takes many forms. Further, as noted in a prior post, you don't have to proactively cooperate to affect the market, you can just refrain from beating each other up. That is also economic cooperation.

It also discounts the human factor. In capitalism, you need 'a greater fool' for it to work, which essentially is the idiot that acts against their self interest (thus trying to institutionalize the human factor in free market theory). What Bertrand and Cournot did not account for (and 100 years of evidence to the contrary shows) - is that once you have two companies that are driven by greed alone, they won't sell at 'marginal cost' - they will ratchet the cost up to maximize profits and do so in lock step. They don't even have to cooperate.

Free market theory absolutely requires low barriers to entry - hence the examples Juice gave. Once you have very high barriers to entry, the Oligopoly can, and usually will, set prices far above marginal cost. That's history, not theory. Free market theory works very well in its limited way, meaning, it provides a nice check on firms getting too out of hand price wise because assuming barriers to entry are low, someone will come in and sell at a profit, but do so at a cost less than the firm charging too much.

My point with Oligopoly being the result of successful capitalism is that once you have high barriers to entry and only a couple of very large firms dictating prices, free market theory does a poor job of predicting demand and price.

So what is the check on an oligopoly? Historically it has been government intervention - sometimes that intervention is slow and very calculated (conservatism) or very reform and reactionary minded (liberalism).

I'll throw another curve at you, there is a bridge between economic systems and political systems - and what you are now seeing is what the US saw in the late 1800's, which is an oligopolistic system that paid for a plutocratic system overlaid with a veneer of democracy.