I can’t tell you how many people start chewing their nails in fear when I advocate the free market.  These days, I seem to have a lone voice (not in the blogosphere though) raging against the dying of the night when it comes to defending a free market.

“Teh economic disaster was a result of de-regulation!  We need to nationalize teh banks!”  As FSK said, “It’s over 100+ years too late to start talking about that.

The biggest fear people handicapped by public education and a complicit media cartel (I’ll call them “voters”) is this idea of monopoly.  The conversation goes something like this:

  • Me: “Why do you fear monopolies?”
  • Voter (pausing because (a) no one has asked them this before and/or (b) they have never taken the time to perform some self-analysis before.  S/he stutters, stammers, hems and haws and then kneejerks out with, “Its because monopolies have lots o’ money to corrupt government!”
  • Me: “How’s that all working out currently with special interest groups, lobby groups, and corruption today with (cites long list of current specific events)?”
  • Voter (cognitive dissonance rising): “Umm…well…er…I am afraid of high prices!”
  • Me: “And lower quality?”
  • Voter: “Hell yeah!”
  • Me: “And reduced selection?”
  • Voter: “You bet!”

I thought I would take the time to dispel some of that line of thought.  Now, this analysis only works given a free market, so you have to remind people of this when you present it.  Always use the phrase, “Given a free market…” or a variant like this, “Given a free market, which we do NOT have today…”.  Let’s continue:

Given a free market, I can think of 4 types or areas of competition off the top of my head:

  • Direct Competition
  • Indirect or Parallel Competition
  • Dollar Competition
  • Market Competition.

Direct Competition is what we are most familiar with.  Even voters recognize this.  Airline X directly competes with Airline Y servicing the same airport going from point A to B.  X battles Y for Customers.  Television networks compete for viewers so they can impress potential advertisers with ratings and so forth

Indirect or Parallel Competition is not readily seen by voters, but oh my, is it real.  Airline X not only competes with Airline Y, but they ALSO compete with Train Company Z, Bus Company M, and even Autocar Maker N, all taking customers to points A and B.  Television stations compete for the attention of voters with newspaper companies, radio, magazines, and the Internet.  Living in Canada, we are well aware that Rogers (arguably the largest communications provider up here) has recently expressed deep concerns of losing advertising revenue in its conventional old media to viewers “switching off” and going to the Internet for information.

Dollar Competition is again not readily seen by voters.  What’s this?  It is an area of competition where every product or service competes against EVERY OTHER product or service for the limited dollars in your pocket/wallet/purse.  Explain?  Well, if I go buy product A, but I don’t have enough dollars to buy product B.  I wanted both, but I had to forego B.  The manufacturer of product B loses out.  In this case.

Suppose I want to buy a car.  I decide this is the year to do it, but as a result, I DON”T take that big vacation.  All the people who would have been the recipient of my vacation money (the airlines, hotel, car rental company, restaurants, attractions, people I would have tipped, etc etc) all effectively lose out to the company I bought the car from (although these days, thanks to bailouts, it seems I have to pay for the car I didn’t want as well as the car I DID BUY!).

Finally, we come to Market Competition.  What’s that?  It is this notion that at any time, anywhere, any individual is free to enter or exit a particular area of business or industry to compete with the incumbents or leave the industry altogether and let the incumbents take up whatever Customers you may or may not have had.  Another way of describing it is “equal barrier to entry” or a “level playing field” for all participants.   For example, if government regulatory enforcements can be borne by a large corporation but cripple a smaller company, we don’t have Market Competition.

If a shoe store is operating in your area, treats their Customers well, has reasonable prices, a wide selection, has courteous clerks, is well lit and clean, would you set up a new shoe store business next to them?  You might, but you would probably go broke.  You might try across town.  However, if you identified a crappy shoe store who had high prices, low quality and selection, rude clerks, and was a dump, you WOULD set up a business right beside them.  Customers would only be too glad to frequent your store.

Now.  That all said.  Given a free market, does it sound like it trends toward monopolies?  I will immediately concede the point that EVERY businessman would like to obtain a monopoly in their respective industry, but, given a free market and the at least 4 areas of competition I described above, they just can’t do it.

Monopolies can only be obtained and protected BY THE STATE.  In the past, a Merchant would approach the King and say, “I would like to set up a business in this part of the Kingdom, and I would like you grant me a monopoly in that area or the entire Kingdom that only allows me to operate in the  production and distribution of product X or service Y.”  The King would think it over and discuss the sum of money that would be paid to the King by the Merchant in return for such a privilege – the King would violently crack down on any competitor that would attempt to compete with the Merchant.  In essence, the Merchant had the concentrated benefit of operating a monopoly AND outsourced or distributed the costs of protecting his monopoly to the Serfs/Taxpayers as they paid taxes to the King to operate his army/police.   Now we had the case of high prices and low quality would result, the People would not benefit from it and they paid for it, to boot.

However, even a monopoly can’t overcome some of the areas of competition described above.  Bell Canada, once a monopolistic telco, was notorious for poor service, poor quality, and outrageous prices.  They gouged the public for years.  Yet, they could not overcome Parallel Competition.  People could write letters to each other instead of using long distance calls.

Given a free market and competition, prices tend to trend downwards and quality upwards.  Are we clear?  I have to run..