Maximum labor efficiency without unemployment

[brainstorm]

How few jobs would it take to run a perfectly efficient economy and how many people could that economy sustain? For argument's sake, let's choose an arbitrary number, say 1 million people, to run mass-production factories and other essential sectors. If this number of workers could supply a population 300 times (or more) its size, what would happen as a result of the unemployment?

Now, how would you deal with that unemployment? Would you design numerous jobs in management, middle-management, marketing, and other bureaucratic functions that were not directly connected to core productivity? What if you didn't? Could all these people get income from investing in the small fraction of people who were producing everything? What if the stock market crashed and/or other price meltdowns occurred?

Is there some other way for a large population to rationally manage exceptionally efficient industrial technologies without creating widespread unemployment and poverty as a result?

 

[cesiumfrog]

It is already the case that only about 4% of the economy (or of the population) produces what is necessary for everyone else to survive. Instead of everyone only working for half an hour per day, turns out people have endless aspirations for more beyond the bare necessities. See: service economy. In blunter terms, even if you provided me with everything I had previously thought to want, then next I'd start wondering if I could additionally procure a holiday expedition to another star.. So you needn't worry of long-term unemployment arising from efficiency, it doesn't work that way.

(There may be short-term unemployment, if the efficiency increase is disruptively sudden, for people heavily invested in the newly obsolete. And there may be wealth-distribution questions worth addressing. But there is certainly no call for pointless wasteful "make-work", not so long as one can can still conceive unfulfilled wants that others can fill.)

 

[brainstorm]

But there is certainly no call for pointless wasteful "make-work", not so long as one can can still conceive unfulfilled wants that others can fill.)

So if people want it than it's not pointless? So if people are just bored and looking for things to do, it is economically rational to expend resources to provide that for them?

 

[russ_watters]

So if people want it than it's not pointless? So if people are just bored and looking for things to do, it is economically rational to expend resources to provide that for them?

Yes, of course it is rational to sell something to someone who wants to buy it from you!

 

[talk2glenn]

If this number of workers could supply a population 300 times (or more) its size, what would happen as a result of the unemployment?

Supply them with what? Everything they want? Impossible by definition.

There is no production technology which creates something from nothing. Given scarcity of inputs, no matter how efficient your creation of outputs, you will never have sufficient supply to satisfy infinite demands.

Ergo, the question is fanciful, not theoretical.

Is there some other way for a large population to rationally manage exceptionally efficient industrial technologies without creating widespread unemployment and poverty as a result?

Technological efficiency does not create any long run unemployment. There is always short run frictional unemployment due to changes in labor market conditions as a result of, amongst other things, technological changes. This is one of the reasons full employment is necessarily greater than zero. The frictional population is transitory, however - nobody is permanently removed from the labor force, they're only moved. That is to say, take a picture of the frictionally unemployed today, and 12 months from now, and you will have photographed two different groups of people.

We manage frictional unemployment by providing services which match capable workers with willing employers, both publicly and privately. Schools are the most obvious example.

 

[brainstorm]

Yes, of course it is rational to sell something to someone who wants to buy it from you!

Maybe instrumentally, but economic trade has the strange ability to take things that would be irrational if done for no money and make them seem rational because they generate revenue. This culminates in an economic culture where productivity is subordinated to desire instead of both being subordinated to rationality and efficiency. The logic is that economic abundance and productivity should be used to increase the freedom to spend money irrationally for the people who get the money. I think the economy would look a lot different if everyone maximized rationality in their spending instead of taking the privilege of making irrational choices just because their money gives them that ability.

Supply them with what? Everything they want? Impossible by definition.

It is if they stop wanting gratuitous amounts of elaborate goods and services. If everyone only wanted basic necessities and free time to pursue activities that didn't involve spending/consumption, there would be enough to supply them with "everything they want." The question is why they keep wanting more. Is it human nature or consumerism?

Technological efficiency does not create any long run unemployment. There is always short run frictional unemployment due to changes in labor market conditions as a result of, amongst other things, technological changes. This is one of the reasons full employment is necessarily greater than zero. The frictional population is transitory, however - nobody is permanently removed from the labor force, they're only moved. That is to say, take a picture of the frictionally unemployed today, and 12 months from now, and you will have photographed two different groups of people.

Theorists of industrial labor used to think that automation would make human labor unnecessary and in the future people would have abundant free time as a result. They did not expect that the technologies and efficiency would be used to increase profits, which would then be invested and spent on new forms of consumption and leisure. Today it's even gotten to the point that efficiency is viewed as bad because generating more free time is viewed as "increasing unemployment." It's a bizarre perversion of the basic rationality that working more efficiently is good because you get more work done in less time and therefore you get more free time as a result.

We manage frictional unemployment by providing services which match capable workers with willing employers, both publicly and privately. Schools are the most obvious example.

Right, but what if you don't don't want to go to school? Why shouldn't people just be able to put in a few hours at a factory and then have free time to do whatever they want, not just school?

 

[talk2glenn]

It is if they stop wanting gratuitous amounts of elaborate goods and services. If everyone only wanted basic necessities and free time to pursue activities that didn't involve spending/consumption, there would be enough to supply them with "everything they want." The question is why they keep wanting more. Is it human nature or consumerism?

This isn't an economist question, it is a philosophical or political one, and should be asked in the appropriate forum.

Economists are not interested in why people want the things they do. It is the study of behavior given certain natural laws. Amongst those in the concept of opportunity cost, which says that your choices have costs, or, said another way, you can't have everything. The decision to consume more butter necessitates the consumption of fewer guns. This is true regardless of wealth or productive potential. Wherever there are opportunity costs, scarcity follows - no economy can produce enough to satisfy the needs and wants of everyone.

Theorists of industrial labor used to think that automation would make human labor unnecessary and in the future people would have abundant free time as a result.

This is quite false. Nobody imagines that automation will eliminate the need for labor. Industrial technologies increase the productive potential of an individual unit of labor. That is, one man working one hour might be able to produce a ton of cotton using a cotton gin, versus an ounce without. The laborer hasn't been replaced with the invention of the gin, but simply made more efficient.

Further, laborers are needed to invent the gin, operate and maintain it, market it, sell it, regulate it, turn the cotton into useful final goods, etcetera. Surely this is pretty obvious? Now, granted, as technology improves then the productivity of labor increases, wealth increases, and the demand for leisure time increases (leisure being a normal good), therefore we can expect laborers in wealthier economies to work less than laborers in poorer economies. This is a hypothesis born out in observation.

Given the laws of nature, any available technology (no matter how advanced) will only be able to produce a finite quantity of final goods given a finite quantity of inputs.

Right, but what if you don't don't want to go to school? Why shouldn't people just be able to put in a few hours at a factory and then have free time to do whatever they want, not just school?

Why not? Nobody says you have to go to school. If you have the skills to work at the factory, and there is a factory willing to hire you, more power to you. The cost of going to school is of course not working at the factory and having free time. The relative values of these choices determines what the consumer will ultimately do.

 

[brainstorm]

This isn't an economist question, it is a philosophical or political one, and should be asked in the appropriate forum.

Imo, it is a mistake when people approach the issue of issue-categorization by viewing disciplines as being defined by their practitioners' work instead of as general frameworks of inquiry. You may be right that aspects of the OP are philosophical/political but the point is the economic implications. If there are social patterns of interests that influence consumption patterns, labor expectations, and thereby production - that is economics.

Economists are not interested in why people want the things they do. It is the study of behavior given certain natural laws.

Maybe, but it would be misleading to assume that free market economics emerges from totally rational, natural individual pursuits. If there are cultural patterns that are shaping economic behavior, why wouldn't economics pay attention to that?

Amongst those in the concept of opportunity cost, which says that your choices have costs, or, said another way, you can't have everything. The decision to consume more butter necessitates the consumption of fewer guns. This is true regardless of wealth or productive potential. Wherever there are opportunity costs, scarcity follows - no economy can produce enough to satisfy the needs and wants of everyone.

Right, but there are specific causes of consumption incompatibilities, unless you are just referring to the fact that budget limitations engender foregoing purchases to avoid overspending. On another level, it doesn't really make sense for one to have to forego butter to make a gun payment, since butter is not an ingredient of guns. If butter-consumption goes up, produces that have butter in their ingredients would become more expensive to reflect growing demand for butter.

This is quite false. Nobody imagines that automation will eliminate the need for labor. Industrial technologies increase the productive potential of an individual unit of labor. That is, one man working one hour might be able to produce a ton of cotton using a cotton gin, versus an ounce without. The laborer hasn't been replaced with the invention of the gin, but simply made more efficient.

Don't think in terms of "laborers" but in terms of labor-hours. If you can replace a process that takes 1000 labor hours with one that takes 10, 10 workers can work 1-hour each instead of 100.

Further, laborers are needed to invent the gin, operate and maintain it, market it, sell it, regulate it, turn the cotton into useful final goods, etcetera. Surely this is pretty obvious? Now, granted, as technology improves then the productivity of labor increases, wealth increases, and the demand for leisure time increases (leisure being a normal good), therefore we can expect laborers in wealthier economies to work less than laborers in poorer economies. This is a hypothesis born out in observation.

Efficiency can streamline any labor activity, including operating and maintaining the gin, marketing it, selling it, making cotton-goods, etc. There's no reason laborers in wealthier economies should work less hours for higher pay than others "in poorer economies." The free market should move production to wherever it can do so with the greatest cost-efficiency and use the competition among workers to drive down wages in high-wage areas. That is simply rational economic behavior, however personal labor-lovers want to claim it is to do this. In a social(ist) paradigm, it is cruel to rationalize production by minimizing workers' wages. In capitalism, other routes would be taken to improving the prosperity of workers.

Why not? Nobody says you have to go to school. If you have the skills to work at the factory, and there is a factory willing to hire you, more power to you. The cost of going to school is of course not working at the factory and having free time. The relative values of these choices determines what the consumer will ultimately do.

The consumer doesn't have much control over corporatism and meritocracy. Yes, a company that can find a way to hire less-educated employees and save money by doing so can deliver products for a lower cost, but they don't always do this for various reasons. When consumer-preferences are manipulated through marketing to stimulate more spending per unit consumption, it becomes rational to exploit consumer irrationality. That doesn't mean that the irrationality isn't obstructing overal rationality in the economy.

 

[WhoWee]

Maybe, but it would be misleading to assume that free market economics emerges from totally rational, natural individual pursuits. If there are cultural patterns that are shaping economic behavior, why wouldn't economics pay attention to that?

In the OP, brainstorm didn't consider the functionality of marketing - just a way to employ the excess folks.

"Now, how would you deal with that unemployment? Would you design numerous jobs in management, middle-management, marketing, and other bureaucratic functions that were not directly connected to core productivity?"

However, an informative marketing program (this is a monoploy - an the absence of competition) would increase demand for the supply you choose to promote.

 

[brainstorm]

In the OP, brainstorm didn't consider the functionality of marketing - just a way to employ the excess folks.

"Now, how would you deal with that unemployment? Would you design numerous jobs in management, middle-management, marketing, and other bureaucratic functions that were not directly connected to core productivity?"

However, an informative marketing program (this is a monoploy - an the absence of competition) would increase demand for the supply you choose to promote.

Obviously many people like to think of all goods and services as relative necessities just because they sell. No one likes to think that their job/service/product is superfluous along with the other 90%. The point of this thread was not to debate the utility of economic enterprises that go beyond provision of basic necessities. That's why I framed the OP in terms of the base assumption that basic necessities COULD be produced to eliminate things like health and nutritional deficiencies with the majority of the population unemployed.

To assume that marketing is good because it increases demand for non-necessary goods and services doesn't make sense from the perspective that people can freely decide for themselves what they want to have and do with their extra time. What you're basically saying is that if people have extra time, they should spend it creating non-necessities and then convincing others that they should sacrifice their time and freedom to attain those non-necessities.

What's really bizarre about that logic is that given a market economy where prices fluctuate relative to each other, the non-necessities and marketing have the ability to drive up prices of true necessities to levels that require people to cater to non-necessary economic goals just to be able to afford the most basic necessities. That's odd, don't you think, that producing non-necessary goods and services can become a necessity for attaining the means of acquiring basic necessities?

 

[WhoWee]

Obviously many people like to think of all goods and services as relative necessities just because they sell. No one likes to think that their job/service/product is superfluous along with the other 90%. The point of this thread was not to debate the utility of economic enterprises that go beyond provision of basic necessities. That's why I framed the OP in terms of the base assumption that basic necessities COULD be produced to eliminate things like health and nutritional deficiencies with the majority of the population unemployed.

To assume that marketing is good because it increases demand for non-necessary goods and services doesn't make sense from the perspective that people can freely decide for themselves what they want to have and do with their extra time. What you're basically saying is that if people have extra time, they should spend it creating non-necessities and then convincing others that they should sacrifice their time and freedom to attain those non-necessities.

What's really bizarre about that logic is that given a market economy where prices fluctuate relative to each other, the non-necessities and marketing have the ability to drive up prices of true necessities to levels that require people to cater to non-necessary economic goals just to be able to afford the most basic necessities. That's odd, don't you think, that producing non-necessary goods and services can become a necessity for attaining the means of acquiring basic necessities?

Or couldn't the resulting consumption could be viewed as an unintended consequence of "employing" the extra people in marketing positions?

 

[brainstorm]

Or couldn't the resulting consumption could be viewed as an unintended consequence of "employing" the extra people in marketing positions?

Do you mean because employment produces disposable income, which results in spending? If that's what you mean, I would say no insofar as the spending is voluntary; i.e. they could save their money instead of spending it. Yet, if they know that their jobs/income are dependent on consumption, they might accept consumption-spending of their disposable incomes as the means of maintaining jobs like their own. Salespeople spending the money they make on sales to keep other salespeople employed. The question is whether it makes sense for a sales economy to drive up price levels and income-needs to levels where basic necessities become out of reach for unemployed people.

BTW, don't forget the last question in the OP: Is there some other way for a large population to rationally manage exceptionally efficient industrial technologies without creating widespread unemployment and poverty as a result?

 

[WhoWee]

Do you mean because employment produces disposable income, which results in spending? If that's what you mean, I would say no insofar as the spending is voluntary; i.e. they could save their money instead of spending it. Yet, if they know that their jobs/income are dependent on consumption, they might accept consumption-spending of their disposable incomes as the means of maintaining jobs like their own. Salespeople spending the money they make on sales to keep other salespeople employed. The question is whether it makes sense for a sales economy to drive up price levels and income-needs to levels where basic necessities become out of reach for unemployed people.

BTW, don't forget the last question in the OP: Is there some other way for a large population to rationally manage exceptionally efficient industrial technologies without creating widespread unemployment and poverty as a result?[/QUOTE]

my bold

Yes, market the products and create a need (modify products to fit need if necessary) - which expands the economy.

 

[phyzguy]

Why shouldn't people just be able to put in a few hours at a factory and then have free time to do whatever they want, not just school?

They have that freedom today, and there are people who take advantage of it. How much money does it take to supply your basic needs? Not much. I know several people who work for about 1 month/year and then have free time the rest of the year, or work a few hours/week at odd jobs and have free time the rest of the time, or work hard for a few years and then retire However, most people aren't happy doing this, either because they get bored or they want more money to spend.

 

[brainstorm]

BTW, don't forget the last question in the OP: Is there some other way for a large population to rationally manage exceptionally efficient industrial technologies without creating widespread unemployment and poverty as a result?[/QUOTE]

my bold

Yes, market the products and create a need (modify products to fit need if necessary) - which expands the economy.

But this is what currently happens and it does not create widespread prosperity but rather intensifies stratification. Businesses push the prices of products to the maximum and create tiered salary schemes. The resulting middle-class is large enough to inflate prices to a level that working-class and poor people can't afford to keep up with except by working long hours in undesirable service jobs.

What I'm asking is if there's a way to manage the small amount of labor needed to provide everyone with basic necessities without expanding the economy beyond these necessary industries, e.g. by designing labor systems that train and employ people for limited contracts that nevertheless provide them when the means of long-term consumption of the goods they produce.

They have that freedom today, and there are people who take advantage of it. How much money does it take to supply your basic needs? Not much. I know several people who work for about 1 month/year and then have free time the rest of the year, or work a few hours/week at odd jobs and have free time the rest of the time, or work hard for a few years and then retire However, most people aren't happy doing this, either because they get bored or they want more money to spend.

I have done some informal research on this and mostly managers/employers prefer reliable employees who consistently show up and only take the designated 1 or 2 weeks/year vacation. They also prefer full-time employees and tend to ask part-timers to work shifts that full-timers would rather not work, like evenings and weekends.

 

[WhoWee]

What I'm asking is if there's a way to manage the small amount of labor needed to provide everyone with basic necessities without expanding the economy beyond these necessary industries, e.g. by designing labor systems that train and employ people for limited contracts that nevertheless provide them when the means of long-term consumption of the goods they produce.

The Soviet model failed.

 

[brainstorm]

The Soviet model failed.

Is this supposed to imply a clear answer? It sounds like you're just putting up the usual red flag to say, "no, conform to consumerism because nothing else works."

 

[WhoWee]

Is this supposed to imply a clear answer? It sounds like you're just putting up the usual red flag to say, "no, conform to consumerism because nothing else works."

I'm suggesting you take a look at the Soviet model and figure out WHY it didn't work - it's the closest working model (to your specifications) I can think of to study.

 

[brainstorm]

I'm suggesting you take a look at the Soviet model and figure out WHY it didn't work - it's the closest working model (to your specifications) I can think of to study.

All I know about the Soviet model is that it is a black sheep in terms of economic models. I also have the impression that some people got stuck doing productive labor while others got to spend their time doing art and culture in Moscow, which to me equals class-differentiation even if the actual wages of urban elites didn't exceed agricultural or industrial workers by much.

I think the reason consumerism is failing is because of corporatism. Obviously, given a lot of free time, people are going to seek other means of being productive with their time/energy. The problem is that firms organize this surplus labor power into profit machines that tend to inflate prices overall, which produces an endless prosperity-gap for the lower classes. This gap keeps them working in undesirable jobs, which provides cheap services to the middle-class, but it also generates a lot of unhappiness and corruption, not to mention fear, and these negative effects tend to "trickle down/up" in various ways.

 

[WhoWee]

All I know about the Soviet model is that it is a black sheep in terms of economic models. I also have the impression that some people got stuck doing productive labor while others got to spend their time doing art and culture in Moscow, which to me equals class-differentiation even if the actual wages of urban elites didn't exceed agricultural or industrial workers by much.

I think the reason consumerism is failing is because of corporatism. Obviously, given a lot of free time, people are going to seek other means of being productive with their time/energy. The problem is that firms organize this surplus labor power into profit machines that tend to inflate prices overall, which produces an endless prosperity-gap for the lower classes. This gap keeps them working in undesirable jobs, which provides cheap services to the middle-class, but it also generates a lot of unhappiness and corruption, not to mention fear, and these negative effects tend to "trickle down/up" in various ways.

What is your opinion of NAFTA - and the consequences that followed?

For instance, assume a factory in Detroit manufactured a product with a finished cost of $20 per unit that sold for $150. The Detroit workers belonged to the union, were protected by all of the US regulations, and had company paid health care - the building even had a roof and heat.

Then, the union went on strike and shut down production and the company looked for alternative ways to make the product. They found a Chinese factory with a trained labor force and more than adequate production capacity.

The Chinese factory guaranteed a finished cost (delivered to Detroit) of $8 per unit. The company said that sounded good and sent executives to China to tour the facilities. They found very poor working conditions and very low wages. They requested the factory repair the roof and make some other changes (the Detroit company was concerned about PR), it raised the finished cost to about $10 per unit - and the deal was done.

The Detroit factory closed. The Chinese factory purchased all of the production equipment and moved it to China. The union workers went on unemployment and the Detroit company continued to sell the product (so did the new manufacturer under their own label in Asia - but that is another story). The price to the consumer did not change.

The Detroit union workers priced themselves out of the market.

 

[brainstorm]

What is your opinion of NAFTA - and the consequences that followed?

For instance, assume a factory in Detroit manufactured a product with a finished cost of $20 per unit that sold for $150. The Detroit workers belonged to the union, were protected by all of the US regulations, and had company paid health care - the building even had a roof and heat.

Then, the union went on strike and shut down production and the company looked for alternative ways to make the product. They found a Chinese factory with a trained labor force and more than adequate production capacity.

The Chinese factory guaranteed a finished cost (delivered to Detroit) of $8 per unit. The company said that sounded good and sent executives to China to tour the facilities. They found very poor working conditions and very low wages. They requested the factory repair the roof and make some other changes (the Detroit company was concerned about PR), it raised the finished cost to about $10 per unit - and the deal was done.

The Detroit factory closed. The Chinese factory purchased all of the production equipment and moved it to China. The union workers went on unemployment and the Detroit company continued to sell the product (so did the new manufacturer under their own label in Asia - but that is another story). The price to the consumer did not change.

The Detroit union workers priced themselves out of the market.

An interesting story, but I don't see how it is a response to my post. In one sense, this is just an example of price-harmonization mechanisms at work. The savings of $12/unit should have made it possible to lower the retail price, which would stimulate further competition. In a legitimately competitive market, competition is supposed to drive ALL costs down, including not only labor but also management, share-dividends, and various input costs. The logical result of all this competition would eventually be that US and Asian labor markets would become competitive in terms of costs, because all the various inputs and costs of living in the two markets would be harmonized. As you indicate, though, the problem is that US workers, managers, shareholders, and their various subsidiaries feel some kind of entitlement to maintain a standard of living above Asia. I've heard general claims of human rights violations that legitimate such entitlement, but then it's not clear to me why governments aren't putting pressure on China to improve human rights through embargos, etc.

 

[WhoWee]

An interesting story, but I don't see how it is a response to my post. In one sense, this is just an example of price-harmonization mechanisms at work. The savings of $12/unit should have made it possible to lower the retail price, which would stimulate further competition. In a legitimately competitive market, competition is supposed to drive ALL costs down, including not only labor but also management, share-dividends, and various input costs. The logical result of all this competition would eventually be that US and Asian labor markets would become competitive in terms of costs, because all the various inputs and costs of living in the two markets would be harmonized. As you indicate, though, the problem is that US workers, managers, shareholders, and their various subsidiaries feel some kind of entitlement to maintain a standard of living above Asia. I've heard general claims of human rights violations that legitimate such entitlement, but then it's not clear to me why governments aren't putting pressure on China to improve human rights through embargos, etc.

My bold

These were direct product costs - including the G&A for the division and all freight costs into the Detroit facility. A reduction of retail price would have guaranteed off shore production and would have eliminated customer support and warranty offerings (consumer protection).

In response to the bolded section - it's only a problem when the Government mandates control. At minimum wage - this production would have been lost to China.

 

[brainstorm]

My bold

These were direct product costs - including the G&A for the division and all freight costs into the Detroit facility. A reduction of retail price would have guaranteed off shore production and would have eliminated customer support and warranty offerings (consumer protection).

I don't understand your logic. If the total production costs were reduced by $12/unit, why couldn't this have been translated into some reduction in retail price of at least between $0 and $12? In a perfectly competitive market, the new supplier would have been available to all competitors and thus any price-advantage would have translated into increased market share. Competition is supposed to reward the seller who minimizes costs and rationalizes production to the point of providing the highest quality at the lowest cost, no?

In response to the bolded section - it's only a problem when the Government mandates control. At minimum wage - this production would have been lost to China.

Again, your logic is not clear. You make definitive claims/statements without explicating your reasoning for saying them.

 

[WhoWee]

Again, your logic is not clear. You make definitive claims/statements without explicating your reasoning for saying them.

The US minimum wage rate (not the actual union rate plus benefits) was more than double the Chinese labor rate. What is not clear?

 

[WhoWee]

I don't understand your logic. If the total production costs were reduced by $12/unit, why couldn't this have been translated into some reduction in retail price of at least between $0 and $12? In a perfectly competitive market, the new supplier would have been available to all competitors and thus any price-advantage would have translated into increased market share. Competition is supposed to reward the seller who minimizes costs and rationalizes production to the point of providing the highest quality at the lowest cost, no?

You responded to this post by me:
"These were direct product costs - including the G&A for the division and all freight costs into the Detroit facility. A reduction of retail price would have guaranteed off shore production and would have eliminated customer support and warranty offerings (consumer protection). "

This was a proprietary and specialized product that needed informational marketing, required an investment in a product display at retail locations, required installation at the time of sale, and had a significant product support and warranty included in the price. Why would the owner of the technology allow competitors to sell it at a lower cost?

 

[brainstorm]

The US minimum wage rate (not the actual union rate plus benefits) was more than double the Chinese labor rate. What is not clear?

You don't explicate your reason for responding to my post with this information. You seem to be leaving it implicit. It's like asking why a tree is tall and getting the response, "The sun shines bright on the leaves." Maybe to you the reasoning seems obvious, but I didn't see your logic.

This was a proprietary and specialized product that needed informational marketing, required an investment in a product display at retail locations, required installation at the time of sale, and had a significant product support and warranty included in the price. Why would the owner of the technology allow competitors to sell it at a lower cost?

If an owner has the power to control whether competitors sell at a lower cost or not, you're not really dealing with a free market. Laissez faire capitalism is supposed to occur when there is competition among many firms with free entry and exit of the market. These firms compete in productivity, quality, efficiency, etc. in an attempt to gain market share by making the best product for the lowest price. This results in constant budget-tightening and deflation, but it also causes net gains in overall productivity and efficiency across the board. Probably this is how Asian labor markets have become so competitive globally, i.e. by reducing costs through increasingly efficient living.

There are rumors of inhumane treatment but it is unclear which aspects are inhumane and which are just higher-efficiency without being a real detriment to people. If you cut the personal budgets of many westerners and told them they have to get around by walking/bike/transit and they have to shop and eat in open-air markets, they might claim this was inhumane but is it really inhumane or just slightly less luxurious than the consumption habits they're used to?

 

[WhoWee]

If an owner has the power to control whether competitors sell at a lower cost or not, you're not really dealing with a free market. Laissez faire capitalism is supposed to occur when there is competition among many firms with free entry and exit of the market. These firms compete in productivity, quality, efficiency, etc. in an attempt to gain market share by making the best product for the lowest price. This results in constant budget-tightening and deflation, but it also causes net gains in overall productivity and efficiency across the board.

Apparently research and development costs (as well as product support, warranty, and all testing) should be absorbed by the owner of the technology - with no compensation or protection?

 

[brainstorm]

Apparently research and development costs (as well as product support, warranty, and all testing) should be absorbed by the owner of the technology - with no compensation or protection?

Look, you're obfuscating the whole issue of the difference between a classical free market and markets where firms vye for relative control. When you keep talking about "the owner of the technology," you seem to be referring to a patent-owner, whose patent puts them in a position of temporary monopoly. If the patented technology does not have any viable substitutes, the product could gain its own niche and be priced as high as the market will bear.

That's not the situation that classical free market economic theory addresses, though. A classical free market consists of numerous producers that have more or less the same access to information and resources, who compete in terms of price and quality in order to gain market share. They way you talk, you assume that the owner of a technology has a monopoly position and an set of rights/duties that come with that power. That is more of a public-monopoly type model where monopoly is allowed with the stipulation that monopolists should not exploit their position of power. That's totally different than a free market situation.

 

[WhoWee]

Look, you're obfuscating the whole issue of the difference between a classical free market and markets where firms vye for relative control. When you keep talking about "the owner of the technology," you seem to be referring to a patent-owner, whose patent puts them in a position of temporary monopoly. If the patented technology does not have any viable substitutes, the product could gain its own niche and be priced as high as the market will bear.

That's not the situation that classical free market economic theory addresses, though. A classical free market consists of numerous producers that have more or less the same access to information and resources, who compete in terms of price and quality in order to gain market share. They way you talk, you assume that the owner of a technology has a monopoly position and an set of rights/duties that come with that power. That is more of a public-monopoly type model where monopoly is allowed with the stipulation that monopolists should not exploit their position of power. That's totally different than a free market situation.

Theory aside, can you name a single industry that is not governed by property rights, or manufacturing and distribution agreements?

 

[talk2glenn]

A classical free market consists of numerous producers that have more or less the same access to information and resources, who compete in terms of price and quality in order to gain market share.

What your describing is a not a "classical free market" (a term which does not exist to my knowledge), but a perfectly competitive market. In practice, perfectly competitive markets don't exist, but some exchanges, for example most commodities, get really close.

They way you talk, you assume that the owner of a technology has a monopoly position and an set of rights/duties that come with that power. That is more of a public-monopoly type model where monopoly is allowed with the stipulation that monopolists should not exploit their position of power. That's totally different than a free market situation.

Some markets are natural monopolies; high startup costs and/or insufficient demand make it impossible for 2 or more providers to compete and survive. Others are natural oligopolies, wherein only a handful of providers can survive and compete. Both of these are examples of market failure (the free market fails to provide an outcome that is most favorable to consumers and society). The government can intervene to promote more socially beneficial outcomes, at some cost.

It is possible that the owner of a technology could either be a sole producer (if the technology is necessary to produce some good and no one else has it) or have so large a technical advantage that he is able to slowly price-out competitors. In either a case a monopoly could arise naturally (in a "free market"), and governments will generally step into reduce the monopolists power. This is why the patents expire, for example, and why they are publicly available.

f an owner has the power to control whether competitors sell at a lower cost or not, you're not really dealing with a free market.

This is obviously false. There are innumerable, real world examples of the principle that free markets are not exclusively (or even typically) perfectly competitive and that producers have some pricing power. Free markets are typically understood to mean unregulated markets - this has nothing to do with market composition (which is a function of entry costs and production costs relative to potential revenues).

 

[brainstorm]

Theory aside, can you name a single industry that is not governed by property rights, or manufacturing and distribution agreements?

Essentially, all markets are radically free because humans are free to act and do as they will. However, when humans use their labor to create products designed to control market access and activities of others, market control begins. E.g. in a totally free market, people can create a government that protects property rights and patents to encourage economic activity. Still, as I understand it Adam Smith's romanticized free market did not take into account relative forms of monopoly and other market controls, because he stipulated that the invisible hand would only work under certain conditions, which included free entry and exit to markets, large number of competing sellers and buyers, etc.

What your describing is a not a "classical free market" (a term which does not exist to my knowledge), but a perfectly competitive market. In practice, perfectly competitive markets don't exist, but some exchanges, for example most commodities, get really close.

Terms don't "exist" or not. Words are used to describe concepts. The reason I say, "classical free market," is to refer to the criteria for the invisible hand to function, according to Adam Smith. I've been trying to find an online link but I haven't been able to yet. Still, you don't really need a citation because you can see how a demand or supply curve gets influenced by various control factors if you think about it.

Some markets are natural monopolies; high startup costs and/or insufficient demand make it impossible for 2 or more providers to compete and survive.

I.e. barriers to entry (and exit if there are high shut-down costs, for example).

Others are natural oligopolies, wherein only a handful of providers can survive and compete. Both of these are examples of market failure (the free market fails to provide an outcome that is most favorable to consumers and society). The government can intervene to promote more socially beneficial outcomes, at some cost.

Please note that a monopoly or oligopoly could be more or less "natural" depending on the factors that caused it to occur. If a hospital is a natural monopoly because various medical technologies used to be bulky and expensive and modern technology makes them less bulky and more affordable, numerous clinics could replace the hospital, even by housing them in the same general location, like a mall or city district.

It is possible that the owner of a technology could either be a sole producer (if the technology is necessary to produce some good and no one else has it) or have so large a technical advantage that he is able to slowly price-out competitors. In either a case a monopoly could arise naturally (in a "free market"), and governments will generally step into reduce the monopolists power. This is why the patents expire, for example, and why they are publicly available.

Yes, I think oligopoly is the most effective monopoly-type market control because slowly pricing out competitors, as you say, allows you to avoid regulatory interference. So, basically, instead of using your technology and/or production efficiency to undercut competitors and put them out of business, you follow them the way one race car can draft another. This way you can avoid being split up and having to compete against yourself, which would lower your price and therefore your revenues. i.e. It is profitable to keep inefficient competition in business.

This is obviously false. There are innumerable, real world examples of the principle that free markets are not exclusively (or even typically) perfectly competitive and that producers have some pricing power. Free markets are typically understood to mean unregulated markets - this has nothing to do with market composition (which is a function of entry costs and production costs relative to potential revenues).

The question then becomes whether they are truly free or controlled in some way. The only way to determine this is to look at the specific factors influencing producer and consumer behavior in a give situation.

 

[talk2glenn]

Terms don't "exist" or not.

In academic economics, they certainly do or don't. If you're inventing your own concepts, define them. But what you've described is a concept well understood and defined academically - we call it perfect competition.

The reason I say, "classical free market," is to refer to the criteria for the invisible hand to function, according to Adam Smith.

There is no "criteria" for functional invisible hands. Smith was describing a natural phenomena - producers will always produce where there is the greatest profit potential (maximize producer surplus), and consumers will always consume where there is the greatest savings potential (maximize consumer surplus).

This is true regardless of the composition of the market in which consumers and producers are participating. The monopolist is as subject to the principles of supply and demand as a competitive businessman. He faces a profit maximization problem, and will set his prices according to industry supply and demand functions, like any other business.

The only difference is that the monopolist has pricing power (or market power) - he does not take his price as given by the market. In perfect competition, no individual firm can raise its price (marginal revenue) above marginal cost without losing all of its customers to the competition. In perfect monopoly, an individual firm can raise its price above marginal cost without losing any of its customers to the competition (but it will lose customers to the substitution and income effects - customers will be willing and able to buy less of the more expensive good, aka the invisible hand). Most of the real world operates somewhere in between these two extremes.

Please note that a monopoly or oligopoly could be more or less "natural" depending on the factors that caused it to occur. If a hospital is a natural monopoly because various medical technologies used to be bulky and expensive and modern technology makes them less bulky and more affordable, numerous clinics could replace the hospital, even by housing them in the same general location, like a mall or city district.

Absolutely; the apparent dispute wasn't over whether or not man-made market failures exist (they do - licensing, zoning, and permitting are the obvious examples) but whether or not they arise naturally, in a "free market".

Yes, I think oligopoly is the most effective monopoly-type market control because slowly pricing out competitors, as you say, allows you to avoid regulatory interference.

It is not, discounting the value of avoiding regulatory interference. Absent collusion, an oligopolist will operate at a point where market price and supply are closer to competitive equilibrium than the monopolist, with greater aggregate social surplus but smaller producer surplus. The oligopolist will always prefer to be a monopolist, if possible.

The question then becomes whether they are truly free or controlled in some way. The only way to determine this is to look at the specific factors influencing producer and consumer behavior in a give situation.

No modern market is "absolutely" free, but a simple thought exercise can confirm the thesis. How do you imagine that the electrical generation and distribution industries would naturally come to be competitive? Would it ever be practical or economical for two competing firms to build redundant power plants servicing the same region, and to have every house and business in that region wired up to two or more redundant grids? Acme Power maintains the poles on the left side of the street, and Bravo Generation maintains the poles on the right?

The answer is, quite obviously, no. The market for electricity is naturally monopolistic, and there are no apparent competitive solutions. As a consequence, we treat them as publicly regulated legal monopolies.

 

[brainstorm]

In academic economics, they certainly do or don't. If you're inventing your own concepts, define them. But what you've described is a concept well understood and defined academically - we call it perfect competition.

Ok, but I still like to mention it as being a classical free market model because otherwise people will argue that oligopolistic, monopolistic behavior, or other means of exercising degrees of market control are "natural in a free market," when I believe that Adam Smith was pretty clear about juxtaposing free market behavior with structured/controlled markets. "Invisible hand" refers to emergent constraints of multiple firms interacting freely and not to constraints that are the result of vying for control by firms over their markets. E.g. there's a difference between an equilibrium price caused by equal access to a scarce resource and the same price when it's caused by limited access to a resource due to collusion between the supplier of the resource and certain favored firms. E.g. if anyone could make and sell coca cola because the recipe and brand name was open-source, the price would be lower than if the recipe and brand-name are controlled.

There is no "criteria" for functional invisible hands. Smith was describing a natural phenomena - producers will always produce where there is the greatest profit potential (maximize producer surplus), and consumers will always consume where there is the greatest savings potential (maximize consumer surplus).

If there are barriers to entry and exit to a market, firms think twice before jumping into a new business. There are other criteria, which I can't remember right now, but they basically involve forms of market control that either discourage competition and/or rationality among producers or consumers.

This is true regardless of the composition of the market in which consumers and producers are participating. The monopolist is as subject to the principles of supply and demand as a competitive businessman. He faces a profit maximization problem, and will set his prices according to industry supply and demand functions, like any other business.

Do you mean to say that monopolies are subject to the same demand curve that a competitive field of producers would be?

Most of the real world operates somewhere in between these two extremes.

Right, and unfortunately many of the proponents of free market capitalism don't favor the kinds of governance that pushes business in the direction of being more "perfectly competitive" to use your term.

Absolutely; the apparent dispute wasn't over whether or not man-made market failures exist (they do - licensing, zoning, and permitting are the obvious examples) but whether or not they arise naturally, in a "free market".

The whole point is that markets are only as free as they are. Yes, every market is ultimately free at the most radical level, but to say that vying for market control is a natural activity in a "free market" is like saying that authoritarian power is a natural exercise of freedom in a republican democracy.

It is not, discounting the value of avoiding regulatory interference. Absent collusion, an oligopolist will operate at a point where market price and supply are closer to competitive equilibrium than the monopolist, with greater aggregate social surplus but smaller producer surplus. The oligopolist will always prefer to be a monopolist, if possible.

Not when regulations favor oligopoly over monopoly. If you know that once you gain a monopoly, the government is going to step in and break you into multiple competitors, it is to your advantage to keep your competition sputtering along rather than competing with yourself, at least in terms of price-competition where profit-maximization is the object.

No modern market is "absolutely" free, but a simple thought exercise can confirm the thesis. How do you imagine that the electrical generation and distribution industries would naturally come to be competitive? Would it ever be practical or economical for two competing firms to build redundant power plants servicing the same region, and to have every house and business in that region wired up to two or more redundant grids? Acme Power maintains the poles on the left side of the street, and Bravo Generation maintains the poles on the right?

Well, every market is different of course, but interestingly it could be possible for numerous solar-panel firms to compete with each other to sell the most solar panels while increasing their profit-margin as high as possible by lowering costs. In that case, multiple solar array firms would compete for clients and people might have the choice of connecting their array with one neighbor or the other. No, it wouldn't really make sense to build multiple power cables but firms can compete in terms of pricing schemes, etc. so that consumers would choose a provider that offers them the best quality service for their needs at the lowest price.