Markets: Sometimes you just have to love them (Part 3)
While few of us give them much thought, market mechanisms are amazing. They generally take the collective desires of both producers and consumers and allow these two incredibly diverse groups to find a reasonable outcome. Of course in this outcome, which is significantly influenced by the pricing mechanism, consumers would be ecstatic with lower prices while businesses would happily charge higher prices. But somehow, unanimity is reached and market activity proceeds in a way that will help meet consumer, business and societal needs.
Does this suggest a “laissez faire” system of complete government non-interference is the most desirable economic organization? No. While markets are, indeed, wonderful things, they are not perfect (as in “perfectly competitive”) and may have significant imbalances of power contained within them.
In economic theory, a “perfectly competitive” market structure is one in which all market participants — buyers and sellers alike — are insignificant and thus market mechanisms can’t be manipulated by anyone. A fine theoretical notion, but one which simply does not represent reality. In a world composed of “imperfectly competitive” market structures (including monopolies, oligopolies and monopolistic competition), buyers remain insignificant while producers may have significant market power and thus unfair manipulative capabilities. Government thus arises as a potential counterbalance to such manipulators so as to allow markets to work well for consumers and non-manipulative producers.
In terms of understanding what this may suggest about the proper role of government in a market-driven economy, a recent statement by Republican presidential hopeful Mitt Romney — for which he has unfairly been chastised — needs to be examined. Mr. Romney indicated that corporations (which should be more generically described as “businesses”) are people. Gasp! Did he really say something so ridiculous and abhorrent? Yes he did, and he was absolutely correct.
In the marketplace, the desires of two market “constituencies” — consumers and producers — are being addressed, with a related societal desire to see the nation’s productive resources being put to their best possible use to satisfy unlimited wants and needs. Each of these constituencies is completely and thoroughly composed of people. People who are, by and large, honest, trustworthy and ethical in the conduct of their affairs.
Sadly, some market participants cast aside their proper conduct and engage in illegal activities. Consumers might do this through theft — producing the problem of “shrinkage” for retailers that we all end up paying for — while businesses might engage in anticompetitive activities so as to disadvantage others for their personal gain. Thus arises the need for government as an agent to insure that all parties involved in the marketplace are playing “fairly” so that market mechanisms can perform their essential functions.
In most instances, keeping consumers honest and ethical in their conduct is relatively straightforward, since they truly are insignificant and have no manipulative capabilities. As such, local law-enforcement efforts by police are sufficient and consumers pose no real threat to the proper functioning of markets.
While it would be lovely to think otherwise, market insignificance is not necessarily present in portions of the business world. Manipulative capabilities do potentially exist within the business community, although I would like to emphasize strongly that this is rare among the millions of business operations in the U.S. and the people who work for companies honestly and ethically each and every day. Yet with this unfortunate ability of some businesspeople to manipulate market activity, there is the possibility that the honest/ethical consumers and producers are put at risk. Government stands as that entity which has the ability to insure that anticompetitive/manipulative capabilities are kept in check for the benefit of consumers, producers and society.
Over some hundred-plus years, this has given rise to various U.S. antitrust laws and the government agencies that are assigned the task of insuring the proper functioning of markets in allocating societal resources.
But an important cautionary note comes with the role of government as a protector of marketplace integrity: like consumers and businesses, government is composed of people. As with the other two market constituencies, the vast majority of people associated with government are honest, trustworthy and ethical. But as with the other two groups, there is no guarantee that a government composed of politicians/bureaucrats will not abuse its power and potentially manipulate government efforts for personal gain. This implies the need to secure a proper and reasonable conduct by government within a well-functioning marketplace; the concluding topic in this series to be examined next week.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.