Capitalism & Monopolies

Inevitable

Chetan Phalke

Capitalism Today's Capitalism Pseudo Capitalism : • incomprehensible rules regarding mergers,

acquisitions, and stock sales• wage controls, price controls,

protectionism, corporate subsidies, international management of trade

• foreign policy controlled by corporate interests and overseas investments

• centralized federal mismanagement of farming, education, medicine, insurance, banking and welfare

Capitalism should not be condemned, since we haven't had capitalism !

The Ideal Capitalism - Free market economy : Deregulate business and trade, restrict state intervention, and let the energies of entrepreneurship and free-flowing capital generate wealth for all of those who participate in the economy.

How it functions……Structured monopolization of so many systems has resulted in a set of political arrangements. Economy is run by compact elite that is able to fuse the power of governments. That enables them to offload their risks on to us, also to determine with complete freedom of who wins, who loses & who pays.

capitalism needs imperialism in order to survive. The unplanned nature of capitalism, inevitably overproduces commodities and overuses resources, which leads it to expand its markets and drain the resources out of other, less-developed nations. The wealthy nations, must maintain cheap access to third world natural resources and unfree labour (by force if necessary).

Paradox… • Capitalism succeeds precisely because free exchange is mutually advantageous.

• It is “the source” of civilizations and human progress. Capitalism has brought to the masses products and services that were once considered luxuries available only to the rich. Capitalism is not only the best-known source of upward economic mobility, it "actually reduces income inequalities within a nation.“

• In short, capitalism alleviates poverty, raises living standards, expands economic opportunity, and enables scores of millions to live longer, healthier, and more peaceful lives.

"If the government is to tell big businessmen how to run their business, then don't you see that big business men have to get closer to the government even than they are now? Don't you see that they must capture the government, in order not to be restrained too much by it? Must capture the government? They have already captured it." - Woodrow Wilson

Regulation / Capture Effect

•Interest groups and other political participants will use the regulatory and coercive powers of government to shape laws and regulations in a way that is beneficial to them.

•when regulators form expert bodies to examine policy, this will invariably feature current or former industry members, or at the very least, individuals with contacts in the industry.

“Behind ‘The Invisible Hand’ of markets, there is the visible hand of politics, which establishes the rules & conditions in which the market mechanism operates.” - George Soros

Continued….• Vested interests in an industry have the greatest financial

stake in regulatory activity.

• They are motivated to influence the regulatory body than individual consumers.

• Not because they are large or because they are corporations but because "many corporations support dominant or anti capitalist policies like trade protectionism or corporate welfare because they hope to benefit from the policies at everyone else's expense.“

Most businesspeople are not even capitalists !

Monopoly….Why it occurs

•Profits would attract increased competition. In the long run profits would attract new firms to the industry. This results in a further increase in total output and a fall in price. ultimately to the point where all greater than normal returns are eliminated.

•In the long run, profits are likely to be "competed away" as new firms enter the market with similar products and prices will tend to fall.

Creative Destruction !

Criticism :Monopoly power permits managers and workers to function at lower levels of productivity than they would be required to achieve in a competitive environment.

Fact :If managers and employees of firms resorted to such inefficient methods, the profitability of such a firm would decline and the capital market would function in such a way as to make it difficult for a firm to attract new investment or even to retain what it had. Capital would tend to move from inefficient firms to those that were are efficiently operated.

There is unfortunately no good solution for technical monopoly. There is only a choice among three evils: private unregulated monopoly, private monopoly regulated by the state, and government operations. —Milton Friedman

Criticism:Monopolists controls the prices & misallocates the resources associated with monopoly power.

Fact:People running modern business are more concerned with other things. The last thing they are interested in doing is competing through price. The way a modern business succeeds or fails is not in cutting price, but coming up with a new product, or a new technology, or a new source of supply, or by reorganizing (possibly becoming big by grabbing more market share),

•As for government regulations designed to "preserve competition", both are unproductive and unnecessary. •In fact, he argued, the historical evidence shows that monopoly, when it does arise, seldom persists. Attempts to penalize big business amount to penalizing success, the very success which has enabled capitalism to raise living standards for workers and capitaliststo unprecedented levels.

Joseph Schumpeter

Some ‘TECHNICAL’ benefits of Monopoly…..

•Eliminates wasteful competition and duplication of production facilities.

•Firms can plan their activities, and ultimately might yield benefits to consumers in the forms of secure supplies.

•Monopoly promotes research, development &more effective methods of production.

•It is technically possible that the monopolization of a previously competitive industry could result in a lowering of costs. A large, well-financed organization might be able to introduce new, more efficient methods of production Whether the benefits of such cost reduction would be passed on to consumers or not is another question. The monopolist is motivated (as is the competitive firm) to maximize profits, not minimize price.

Perfect competition is an exception rather than the rule !

Natural Monopolies

•There may be no feasible alternative to a monopolistic structure of industry. Where economies of scale are very large and the size of the market limited, it may not be feasible to have more than a single producer.

•Electric power generating systems and other public utilities such as rapid transit systems provide examples of situations where competition is simply not practical.

•In these circumstances various methods may be used to limit the negative social impacts of monopoly power.

•Public ownership and rate regulation by some publicly appointed agency are familiar examples in most countries.

Price Discriminating Monopoly

•Separate customers into different groups having different elasticities of demand for the monopolist’s product.

•This type of discriminatory pricing is familiar to airline passengers.

Product Differentiation

•There may be quite a number of firms (as in perfect competition), but they produce products which are somewhat different from one another. Such "product differentiation" is familiar from everyday experience.

•Many people have a favourite brand of tooth paste or believe that their cars run better on one brand of petrol than another.

•What is important in such cases is not whether there is any real difference among brands, but whether consumers believe there is. This is an area where advertising, as well as other considerations such as a seller’s location and the quality of service provided, enter into the picture.

•A firm practicing product differentiation is trying to establish a "monopoly" of that particular version of the product, and to the extent it succeeds, it will operate much like a monopoly in making its output and pricing decisions.

Monopoly profits, are more like prizes. less important for what they confer on a few lucky winners. But an incentive to encourage many to seek success and in the

process of increasing productivity and the well-being of all.