Maximum labor efficiency without unemployment

[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.