Assumptions of Perfect Competition: Lesson 3

Given the savagery with which corporations defend their right to control the markets they operate in, the third assumption of a perfectly competitive market seems fairly extraordinary.

Assumption 2: There is complete freedom of entry into the industry for new firms

This assumption follows directly from the first and is necessary to ensure that there continues to be a large number of buyers and sellers so that competition between them occurs. In order for entry and exit to the marketplace to be free there must be no ‘barriers to entry’. As just explored, it is obvious that in the market for complex products, the need to invest in R&D, to prepare a product for the market, and then to advertise it all create barriers too huge for all but the largest corporate investor. James Dyson has described in detail his experience of trying to break into the market for vacuum cleaners, with a new product which he wanted to sell himself rather than selling the idea to one of the corporations controlling that market.

The whole concept of ‘intellectual property’, enshrined as TRIPS (Trade-Related Intellectual Property) in the WTO agreement makes a mockery of free entry into the market, since patent or licensing laws will operate to restrict this assumption. So one of the central assumptions used to argue that markets are the ideal way to distribute goods relies on the fact that producers can have free access to information about products they might wish to produce, that the inventor of the process cannot use the law to protect his right to extract profits from that invention while preventing others from producing it more cheaply. That, in fact, that 564 pages of Blackstone’s Statutes on Intellectual Property do not exist. In reality, of course, this is the kind of law corporations use to protect their profits. How surprising that an organisation like the WTO, which claims to be the foremost global promoter of ‘free’ markets, in fact defends the right of corporations to extract profits in this way that wholly invalidates the free operation of markets.

We may take the example of the pharmaceutical industry, since it is a clear case where every moral pressure, never mind the strictures of a genuinely free market, suggests that knowledge about how to cure disease should not be restricted. Patents have long been used in the pharmaceutical industry to protect the fruits of research. The justification used is that, if companies could not be guaranteed the right to be the sole profiteer from their discoveries, they would not invest the money in the initial research. However, when faced with dire humanitarian need few think that the global protection of what is referred to as ‘intellectual property’ under the TRIPs agreement, can be maintained. This is why, with 25 per cent of its people of working age being HIV-positive, the South African government decided to ignore international law and import generic AIDS drugs from India. The price difference is staggering—$350 for a year’s supply compared with $10,000 for the branded medicines—so a poor country like South Africa had little choice. Under the TRIPs agreement South Africa was clearly able to justify its actions under clauses exempting countries facing public-health disasters, but its actions were legally challenged by the US trade representative and action was taken against the government of South Africa by the Pharmaceutical Manufacturers’ Association. The courage of the government was rewarded and the PMA eventually withdrew its case in 2001, coming to a deal with the government over reasonable pricing and availability of AIDS drugs.

The reality in the pharmaceutical market, as in many markets, is that businesses will produce what they can make a profit from, not what is in the public interest. This is why there are no high-tech cures for sleeping sickness and malaria, which poor people die from, while there are a superfluity of treatments for the concerns of the affluent, from skin products to slimming pills. It is a recognition of the fact that research for profit is not directed in the public interest that leads to the awarding of research grants for the development of a range of important recent drug successes.

A report from the US Congressional Joint Economic Committee in May 2000 established that 7 of the 21 most important drugs introduced in the US between 1965 and 1992 (including tamoxifen, AZT/zidovudine, Taxol, Prozac and Capoten) were developed with the help of federal funds. AZT, the leading anti-AIDS drug, was originally synthesized in 1964 as a result of a National Cancer Institute grant. However, GlaxoSmithKline determined the drug’s anti-AIDS properties and were granted a patent for this use, and hence profited from its worldwide sale. Many of these drugs that are so jealously guarded have been developed partially, often to the extent of half the funding, by public money. And yet the ‘intellectual property’ reverts to the corporations and we, the public who funded the research, have to pay them for the benefits of the knowledge they developed at our expense.

The other side of the free-entry-and-exit coin is the need for ‘factors of production’, i.e. labour and capital, to be perfectly mobile. Just in personal terms it is clear that labour is far from mobile: rrestrictions range from family or neighbourhood ties to the loss of pension rights’. But the most glaring ‘restriction’ is found in the strict immigration rules that govern freedom of movement of labour. What is the value of basing a claim to the superiority of the market on the fact that workers can move freely to better paid jobs in a world where they are not actually allowed to enter Britain, are condemned as economic migrants and, if they succeed in entering, put in gaol as illegal immigrants or deported? Even in a labour-market with apparent free movement of labour, as the EU has been since 1992, there is actually very little movement of workers from one country to another, since they are dissuaded by language and cultural barriers.

The devastating consequences of genuine free movement of labour can be assessed by comparing the minimum wage in the UK with the sorts of wages paid to workers in the Chinese SEZs (special economic zone, or specially exploitative zone) in Guangdong exposed by Corporate Watch. A shoemaker there earns only £40 per month of 14-hour, 7-week days, out of which s/he has to pay for food and bedding. It is the working conditions faced by people like this that turn them into economic migrants, and their desperation and willingness to be exploited that frightens European governments into undermining the free market they officially support by preventing their freedom of movement into our labour market. Tweet