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would you mind expanding on why you think this result means capitalism is flawed?

by joshAg 15y ago

Daishiman 15y ago
Why wouldn't it? It's an unrealistic expectation that the fact that we have ideas for certain econopolitical models and that they're superficially consistent in normal discourse should mean that, in practice, they exhibit multiple negative behaviors. All systems are flawed and unfair to some level, and there are tons of examples for capitalism in particular. The question is to what extent we can mitigate some of the negative effects and which ones we're willing to accept.
- joshAg 15y ago
  don't get me wrong, i agree that there's tons of flaws with capitalism, but i was curious as to why the natural emergence of cartels is considered a flaw.
  - dingfeng_quek 15y ago
    Cartel-like (monopoly/oligopoly) pricing leads to a non-optimal outcome (the loss is usually called the deadweight loss). The price is set higher than the socially optimal price - some consumers who would have benefited overall from the good (benefit from good > production cost of good) would not buy and consume the good because the price is higher than the production cost (price of good > benefit from good). If your curiosity is strong enough, you can find a more detailed outline of the concept in an introductory economic text.
_delirium 15y ago
A more limited way of putting it would be that (neo-)classical economic theory has some flaws, in that it assumes prices will track supply/demand balance and maximize market participants' utility (as expressed via price preferences), in the absence of state distortion of markets, which appears not to always be true, since markets can be self-distorting. Not surprising given that most complex systems have strange pathologies in the form of feedback loops, local attractors, etc., but interesting to see this study nonetheless. Whether that means capitalism is flawed depends on the extent to which you consider the neoclassical utility-maximization explanation of how markets work to be an important part of the justification for capitalism. It probably undermines the utopian libertarian vision of a laissez-faire, unregulated economy in which everything is free and everything is perfectly allocated, more than it undermines the U.S./European brand of pragmatic market economies.
- chernevik 15y ago
  I'm not sure how we're defining "flaw" here. Nor am I sure that free market theory promises "perfect allocation". Isn't the claim that a free market will provide a _better_ (e.g. more productive, more generally satisfying) allocation of goods than any other arrangement? I don't see anything in the OP that suggests this. Consumers may complain that this behavior results in higher prices than they would otherwise pay. But I suspect those prices are likely only raised at the margin, to some degree that shifts consumer surplus from consumers to sellers. They aren't being priced out of the gasoline market entirely -- were they so, total sales would fall off signalling reduced demand, and we'd expect prices to fall accordingly. Copying here is sellers following those prices that best capture that surplus. I'd be more worried about collective behavior that restrained market entry by other sellers. Also: this discussion is focused on the short- to mid-term. The overall price level, even if shifted among possible equilibria by collective behaviors, signals demand to producers. A high gasoline price raises oil prices which increase incentives to find and produce more oil. As that oil comes to market, supply increases and price falls. tl;dr Free markets promise "best", not "perfect", allocation. Not clear that these tacit cooperations do more than move prices within possible local equilibria so as to capture more consumer surplus for producers. In any case, prices still serve, over the long term, to signal returns to investment in production.
  - dingfeng_quek 15y ago
    If this is an argument that, when there are economic profits to be made in a market: 1. The "size" of the firms will increase to compensate : Do take note of diseconomies of scale beyond a certain size. 2. New firms will enter to compete in the market : Depends on the barriers to entry.
- yummyfajitas 15y ago
  ...(neo-)classical economic theory has some flaws, in that it assumes prices will track supply/demand balance and maximize market participants' utility... No, classical economic theory doesn't assume this. It derives this as a conclusion under some specific assumptions: demand and supply are elastic, many non-colluding buyers and sellers, good information and low transaction costs. The conclusion of classical economic theory is that under the circumstances I described above, prices will stabilize near a price P satisfying supply(P)=demand(P), where "near" is bounded by the size of transaction costs. The paper under discussion is also classical economic theory, it just makes different assumptions: it assumes perfectly inelastic demand (i.e., users have no choice but to buy) and poor information/high transaction costs (buyers can only switch sellers infrequently and can't switch arbitrarily). It also assumes that sellers only copy the pricing strategies of others, and never come up with their own (e.g., no aggressive price competition). It's not a "flaw" in classical economic theory, it's just applying classical economic theory to a new circumstance. It seems like it might be a good model for certain markets - mandatory insurance for example (auto collision insurance or health insurance in MA), display both demand inelasticity (you are legally obligated to buy) and comparison is difficult.

would you mind expanding on why you think this result means capitalism is flawed?

by joshAg 15y ago

would you mind expanding on why you think this result means capitalism is flawed?

Why wouldn't it? It's an unrealistic expectation that the fact that we have ideas for certain econopolitical models and that they're superficially consistent in normal discourse should mean that, in practice, they exhibit multiple negative behaviors. All systems are flawed and unfair to some level, and there are tons of examples for capitalism in particular. The question is to what extent we can mitigate some of the negative effects and which ones we're willing to accept.

joshAg 15y ago
don't get me wrong, i agree that there's tons of flaws with capitalism, but i was curious as to why the natural emergence of cartels is considered a flaw.
- dingfeng_quek 15y ago
  Cartel-like (monopoly/oligopoly) pricing leads to a non-optimal outcome (the loss is usually called the deadweight loss). The price is set higher than the socially optimal price - some consumers who would have benefited overall from the good (benefit from good > production cost of good) would not buy and consume the good because the price is higher than the production cost (price of good > benefit from good). If your curiosity is strong enough, you can find a more detailed outline of the concept in an introductory economic text.

_delirium 15y ago

A more limited way of putting it would be that (neo-)classical economic theory has some flaws, in that it assumes prices will track supply/demand balance and maximize market participants' utility (as expressed via price preferences), in the absence of state distortion of markets, which appears not to always be true, since markets can be self-distorting. Not surprising given that most complex systems have strange pathologies in the form of feedback loops, local attractors, etc., but interesting to see this study nonetheless. Whether that means capitalism is flawed depends on the extent to which you consider the neoclassical utility-maximization explanation of how markets work to be an important part of the justification for capitalism. It probably undermines the utopian libertarian vision of a laissez-faire, unregulated economy in which everything is free and everything is perfectly allocated, more than it undermines the U.S./European brand of pragmatic market economies.

chernevik 15y ago
I'm not sure how we're defining "flaw" here. Nor am I sure that free market theory promises "perfect allocation". Isn't the claim that a free market will provide a _better_ (e.g. more productive, more generally satisfying) allocation of goods than any other arrangement? I don't see anything in the OP that suggests this. Consumers may complain that this behavior results in higher prices than they would otherwise pay. But I suspect those prices are likely only raised at the margin, to some degree that shifts consumer surplus from consumers to sellers. They aren't being priced out of the gasoline market entirely -- were they so, total sales would fall off signalling reduced demand, and we'd expect prices to fall accordingly. Copying here is sellers following those prices that best capture that surplus. I'd be more worried about collective behavior that restrained market entry by other sellers. Also: this discussion is focused on the short- to mid-term. The overall price level, even if shifted among possible equilibria by collective behaviors, signals demand to producers. A high gasoline price raises oil prices which increase incentives to find and produce more oil. As that oil comes to market, supply increases and price falls. tl;dr Free markets promise "best", not "perfect", allocation. Not clear that these tacit cooperations do more than move prices within possible local equilibria so as to capture more consumer surplus for producers. In any case, prices still serve, over the long term, to signal returns to investment in production.
- dingfeng_quek 15y ago
  If this is an argument that, when there are economic profits to be made in a market: 1. The "size" of the firms will increase to compensate : Do take note of diseconomies of scale beyond a certain size. 2. New firms will enter to compete in the market : Depends on the barriers to entry.
yummyfajitas 15y ago
...(neo-)classical economic theory has some flaws, in that it assumes prices will track supply/demand balance and maximize market participants' utility... No, classical economic theory doesn't assume this. It derives this as a conclusion under some specific assumptions: demand and supply are elastic, many non-colluding buyers and sellers, good information and low transaction costs. The conclusion of classical economic theory is that under the circumstances I described above, prices will stabilize near a price P satisfying supply(P)=demand(P), where "near" is bounded by the size of transaction costs. The paper under discussion is also classical economic theory, it just makes different assumptions: it assumes perfectly inelastic demand (i.e., users have no choice but to buy) and poor information/high transaction costs (buyers can only switch sellers infrequently and can't switch arbitrarily). It also assumes that sellers only copy the pricing strategies of others, and never come up with their own (e.g., no aggressive price competition). It's not a "flaw" in classical economic theory, it's just applying classical economic theory to a new circumstance. It seems like it might be a good model for certain markets - mandatory insurance for example (auto collision insurance or health insurance in MA), display both demand inelasticity (you are legally obligated to buy) and comparison is difficult.