30 May 2007
Examples of public goods would be public services such as the police and flood defences, i.e. services which can be considered ‘non-rival’ (nobody else is providing them) and ‘non-excludable’ (if somebody pays for them we all benefit). Education and health are frequently excluded from this view of services and defined as ‘merit goods’, although my own view is that these are also public goods and have been redefined elsewhere for ideological reasons, i.e. to make them available for the rapacious market. Examples of natural monopoly goods would be the water supply or telecommunications, since the nature of the good makes it senseless to have more than one supplier because of the large-scale and inevitable nature of the economies of scale involved in establishing the provision of the good or service.
So we have arrived at a situation where, in spite of this the theoretical necessity assumption that markets can only be justified as offering economic superiority in the case of pure private goods, the global ‘free market’ is at this very moment seeking to extend its tentacles into every public good and service imaginable. If the supremacy of the market can only be demonstrated in the case of pure private goods, why were we forced to suffer the disaster of Railtrack and the chaos of GATS (the General Agreement on Trade in Services). Why is it that markets are being forced into areas, such as health care and education, where they are neither appropriate nor efficient, and on the basis of a market justification that they cannot even theoretically live up to? Of course in terms of economic theory we know this is a rhetorical question, because the answer lies in the realm of politics.
It is because of political pressure that the World Bank, which is a leading ideologue in the cause of markets when it comes to Structural Adjustment Programmes, is a leading player in the drive for the privatisation of the supply of water in the developing world, water being almost the classic case of a purely public goodnatural monopoly. This is why water dominated the agenda at the Johannesburg Summit in 2002 and why 2003 was declared by the UN as the International Year of Fresh Water. Once the market was opened to profiteering suddenly there were plenty of companies prepared to provide water to the world’s poor. When the ideology has achieved its purpose it is the citizens of the world who have to live with the consequences.
It was inevitable that market economics would not be in the interests of consumers of water: even the theory said so. So did a report from the World Bank’s own research unit which questioned the efficiency of markets in the distribution of water and underlined the importance of firm state intervention. In the UK consumers have suffered from the monopolization of the natural monopoly of the water supply. The reality of privatised water in the UK is that none of the companies has really had to compete for their regional monopolies; rather they were given 25-year concessions when they were established in 1989.
Adam Smith, who is often touted as the originator of the theory of market competition, wrote about the invisible hand of the market. According to Smith, each participant in a competitive market is ‘led by an invisible hand to promote an end which was no part of his intention’. However true this may have been in Smith’s day, it has never been demonstrated in the complex, global economy of the 21st century, when the invisible hand has made itself visible, and for many it is making a gesture that Smith would never have expected. Tweet
26 May 2007
Perhaps we still long for the certainty of those days, when we sang confidently that our nation had arisen at heaven's command from out the azure main, as hundreds still do every year at the last night of the proms. The role the sailing ships played in the Slave Trade and in the stealing of resources are less prominent.
On the same day that the Cutty Sark burned the government announced the centralisation of planning and the removal of the right of local people to have a democratic say over what is constructed in their neighbourhood. The Empire spirit lives on, at least in the sense that nothing shall be allowed to stand in the way of economic growth. Although these changes are of general application it can be no coincidence that two days later we are told that nuclear energy is the response to climate change. Since nobody wants that in their backyard the link is clear.
So how we would we organise trade in our green economy of the future? The need for exchange is obvious once you move beyond the survivalist position of trying to make everything yourself. For goods that can be made with local materials the only problem is establishing a fair price. And for those that need to travel the world the Cutty Sark may have something to teach us. One local man in Stroud has a long-term plan to buy a sailing vessel and use it to trade with low carbon impact. Discussions are being had about the possibility of using sailing barges to bring goods along the canal to Stroud.Tweet
18 May 2007
The proposed Banco del Sur is being discussed by a group of Latin American countries including Argentina, Brazil, Bolivia, Ecuador and Paraguay as well as Venezuela, a pretty comprehensive list of the countries that lost out most spectacularly as a result of their debts to the IMF. Paying interest to rich bankers in the West swallowed up the huge income they were earning from exports, preventing it from benefiting their own citizens.
The leaders of these countries, the majority now broadly on the left and including the highly colourful characters of Evo Morales of Bolivia (who meets visiting dignatories dressed in an alpaca jumper) and former union leader Lula of Brazil, as well as Chavez himself, have learned the lessons of the 1980s and 1990s. The proposed new bank will hold reserves made up of the currencies of the countries of the region and could make development loans. It could also operate as a clearing-house for regional trade, avoiding the need to use dollars and hence support the US.
The high price of petroleum enables Venezuela to step outside the exploitative international institutions that have kept the South poor since the Bretton Woods agreement. The countries of Latin America can create an internal import-export market based on parity and fair representation, rather than the one-sided system of the WTO.
I wonder if this is the little joke that Chavez was sharing with his friend and inspiration Fidel Castro in those pictures from the Havana hospital! No wonder they laughed so much! Tweet
14 May 2007
Of all the assumptions of perfect competition the assumption about knowledge of opportunities to buy and sell this one relating to information has failed the test of time perhaps worst of all. In Adam Smith’s 18th-century market it was a reasonable suggestion that you might be able to have ‘perfect information’ about all the goods between which you were making your choice. There were, let’s say, three shoemakers and you could stroll from one stall to the next, and on to the third. In markets and fairs of this time, producers of similar goods helpfully located themselves alongside one another, which is why we are left with street names such as Butcher’s Row or Shoe Lane.
Pretty nearly perfect information was possible then, because there was such a limited range of goods. Proponents of market capitalism frequently list the expanded range of goods as one of the achievements of their favoured economic system, yet they have failed to consider how this impacts on the assumption about perfect knowledge. With millions of goods currently available how could we possibly know about all of them? Evidence that we do not comes in the form of advertising campaigns like the one by Superdrug claiming ‘If you find it cheaper elsewhere, we’ll refund twice the difference’. Clearly, if you had perfect information you would know it was cheaper somewhere else to start with and, if you wished to ‘maximise your utility’ buy it there. Such advertising campaigns manipulate us on the basis of our well-founded fear that our knowledge of the market and its goods is far from perfect.
This assumption comes in two parts, and far from reality though the side relating to consumers is, that relating to producers takes us once again into the realms of fantasy or farce. For the assumption to be true, sellers of goods have to have perfect information about all the opportunities to sell. As Sloman puts it: ‘Perfect knowledge means that potential entrants know immediately of a change in market circumstances which will yield them better rewards than can be earned elsewhere’‘Producers are fully aware of prices, costs and market opportunities. But in the global marketplace this would have to include selling opportunities right across the globe. In reality the only players who have this sort of reach are well-established, well-capitalised corporations. What chance do you or I have of finding out about market opportunities in Montevideo or Novosibirsk?
The focus of this point about the perfect knowledge of sellers is that they must have a knowledge of market opportunities. This will fulfil the necessary constant entry of new sellers which is the way that prices are kept low and racketeering is prevented, the basis of why the market system is a good system for distributing goods in the first place. Potential entrepreneurs are expected to scan the economy for market opportunities for them to exploit, which are those opportunities where existing suppliers are making the largest profits, ‘abnormal profits’, as economic theory calls them. But how are we to know the size of these profits, normal or abnormal, when such knowledge is constrained by commercial confidentiality. Modern corporations pay accountants to distort the financial figures they are required to declare, while most others are kept secret to protect their commercial position.
6 May 2007
This assumption is necessary to achieve the required situation where we make our purchases solely on the basis of price; it is often referred to as the homogeneity of the product, while consumers are defined as being indifferent between the different products on offer. We are indifferent between the products of different suppliers, since we ‘regard all units of the industry’s product as identical’. For this to be true, we would have to be sure that our teenage children would be equally happy with a Primark tracksuit for Christmas as one emblazoned with the latest trendy sports brand. Or that a pair of trainers with Wayne Rooney’s face appliquéd to the side would offer no more delight than another pair without this childish respository of England’s hopes.
One textbook deals with this point about consumers’ lack of indifference by explaining that this assumption is unlikely to be met in practice, citing the example of the car industry where, even if there were many firms, perfect competition would not be possible because the Ford Mondeo and the Vauxhall Vectra cannot be considered homogeneous goods; consumers have individual preferences for one or the other. The assumption can then slightly qualified so that, if a producer decides to produce a slightly different product then this does not invalidate the assumption, but rather a new market is created. This may hold water if we think of the market for shoes being divided into the market for shoes and the market for trainers. But we can hardly make sense of a theory that would require a different market for trainers with each different sportstar’s face, or for each different team’s football shirt. Yet it is clear that young people are far from indifferent between these goods.
Again the proof of the irrelevance of this assumption is found in the actions of the market actors themselves. If indifference between similar items were part of their understanding of the market, why would the expend so much energy shoring up the uniqueness of their brand, which is the main focus of energy of the global corporations, as shown by Naomi Klein. The purpose of the brand is directly to undermine the homogeneity of products, to achieve a situation where indistinguishable brown liquids become of hugely different value because they are marked with the label ‘Somerfield Cola’ or ‘Virgin Cola’. The advertising industry is explicitly dedicated to undermining this assumption by establishing consumer preference for one brand or another.
The brand is now the key means for corporations to establish value. It is a means of inflating the value of a product to the customer compared with the actual value of the item in terms of what it can do. In Marxist terminology, the exchange value is extended way beyond the use value of the product. This means a bonanza for the corporation, which has to only pay the poverty wages to make the items but can extract a profit equal to almost all the value on the market. But if you are stupid enough to buy a worthless brand rather than a useful product I suppose you have only yourself to blame!
1 May 2007
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