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.

Posted by Jim Newton on Jun 5 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.