Week in Review
So many people fear the low prices of corporations. They say they will put higher priced Mom and Pop shops out of business. Then when they have a monopoly they will raise their prices and gouge their customers. Which is silly. Because corporations can’t create a monopoly. Only government can grant them one. Allowing them to charge the high prices once the government eliminates all competition. But even when the government does if there is a market for lower prices some competition will find a way (see 3 epic fails that prove Uncle Sam is a terrible venture capitalist by Burton W. Folsom Jr. and Anita Folsom posted 4/19/2014 on the New York Post).
After 20 years in Europe perfecting his steamboat, an inventor named Robert Fulton returned to the US in December 1806.
He knew that a legislator, Robert Livingston of New York, would back him to the hilt. Livingston was a Founding Father who believed that steamboats would work well on the wide rivers of North America. Livingston and Fulton obtained a monopoly from the New York legislature for the privilege of carrying all steamboat traffic in New York for 30 years, if they could produce a working steamboat within two years…
One problem with Fulton’s monopoly, however, was that it affected shippers in neighboring states. As steamboats became more common, the Fulton monopoly meant that other companies couldn’t sail in New York waters without fear of fines. The monopoly also kept ticket prices high.
Finally, in 1817, Thomas Gibbons, a New Jersey steamboat man, tried to crack Fulton’s monopoly when he hired young Cornelius Vanderbilt. Gibbons asked Vanderbilt to run steamboats in New York and charge less than the monopoly rates…
For 60 days in 1817, Vanderbilt defied capture as he raced passengers cheaply from Elizabeth, NJ, to New York City. He became a popular figure on the Atlantic as he lowered the fares and eluded the law.
Finally, in 1824, in the landmark case of Gibbons v. Ogden, the US Supreme Court struck down the Fulton monopoly. Chief Justice John Marshall ruled that only the federal government, not the states, could regulate interstate commerce.
This extremely popular decision opened the waters of America to competition. A jubilant Vanderbilt was greeted in New Brunswick, NJ, by cannon salutes fired by “citizens desirous of testifying in a public manner their good will.”
On the Ohio River, steamboat traffic doubled in the first year after Gibbons v. Ogden and quadrupled after the second year. The real value of removing the Fulton monopoly was that the costs of traveling upriver dropped. Passenger traffic, for example, from New York City to Albany immediately dipped from $7 to $3 dollars after the court decision.
Only governments can maintain and enforce a monopoly. And only a business with a government enforced monopoly can gouge their customers. For with the government eliminating all competition what else is a consumer to do? He or she has no choice but to buy from the business with the government enforced monopoly. The same is true today.
Free market capitalism is always finding a better way to do something that costs less. But people who enjoy government monopolies try to fight back. To keep their government privileges. Just look at the UAW and the automotive industry. Which used the power of their government privilege to restrict competition. Such as with tariffs and import quotas. Which only let the UAW to continue to burden the American automotive industry with ever more costly union contracts that ultimately led to their bankruptcy/government bailout. All the while keeping cars more expensive than they had to be. As the UAW used their government privilege to gouge American automotive customers.
Tags: capitalism, competition, corporations, Fulton, government enforced monopoly, government monopolies, government privilege, lower prices, monopoly, steamboat, UAW, Vanderbilt
Week in Review
A lot of people fear big corporations. And fight hard against them. Especially the big ones that provide a wide variety of goods and/or services at lower prices than the competition. The kind that put Mom and Pop stores out of business. Opponents of these big corporations say those low prices are only a dirty trick to put the competition out of business. To make themselves a monopoly. And once they get rid of all competition with their unfair low prices there will be nothing to stop them from raising their prices. Higher than even the Mom and Pop stores they put out of business. Of course, if that were true then you wouldn’t read stories like this (see Chick-fil-A Stole KFC’s Chicken Crown With a Fraction of the Stores by Venessa Wong posted 3/28/2014 on BloombergBusinessweek).
The days when fried chicken was synonymous with a certain white-haired southern gentleman are over, at least in the U.S. A new champion has claimed KFC’s long-held chicken crown: Chick-fil-A…
Anyone in the northern half of the U.S. is likely scratching her head and wondering why she hasn’t seen Chick-fil-A outlets opening in the neighborhood. Last year Chick-fil-A only had about 1,775 U.S. stores to KFC’s 4,491, and most are in the South. Yet in dollar terms the Colonel is coming up short even with that much larger footprint: Chick-fil-A’s 2013 sales passed $5 billion, while all of KFC’s U.S. restaurants rang up about $4.22 billion, according to Technomic. And that’s with zero dollars coming in to Chick-fil-A on Sundays, when every restaurant is closed.
Chick-fil-A has fewer outlets than KFC. Yet they have a greater sales volume. Why? Because they sell at higher prices than KFC. According to those who fear big corporations this is not supposed to happen. KFC should be able to sell at lower prices than the smaller Chick-fil-A. So low that Chick-fil-A should go bankrupt trying to match the unfair lower prices of KFC. But that isn’t happening. Because there is no way any corporation can monopolize any industry without the government first creating a monopoly for them. As Chick-fil-A has proven. They thought they could offer food people would prefer over KFC. And did. Despite KFC dominating the industry. And the people liked the food so much that they were willing to pay more to eat Chick-fil-A over the less expensive KFC.
The only way you can shut someone out of an industry is by raising the barriers to enter that industry. Such as with costly licensing, permitting, fees, restrictive regulatory policies, etc. Things only the government can force on the competition wishing to enter a market. Thus limiting competition in that market to protect their crony friends. But if there is no government protection of established businesses that are monopolies or quasi monopolies anyone can enter the market and compete against them. As Chick-fil-A proves.
People shouldn’t fear big corporations. They should fear government. The only entity that can create and enforce a monopoly. For it is only with the government’s help that a monopoly can gouge customers with their high prices. Because in a free market with low barriers to enter it will be impossible to gouge customers as the competition will keep all pricing competitive. Because if some try to gouge their customers those customers will just go to the lower-priced competition.
Tags: barriers to enter, Chick-fil-A, competition, corporations, free market, higher prices, KFC, lower prices, market, mom and pop stores, monopoly, prices
Competition makes Everything Better for Consumers
Let’s go back a hundred years or so. When the railroads were making their way west. Through barren and unforgiving country. Where a depot is built in the middle of nowhere. One day it will become a city but now is just a shack or two. And a water tower along the tracks to replenish the steam locomotives. This is the closest thing to civilization for hundreds of miles. Railroad building supplies head west on the new track to continue the track further west. And the trains stop to fill their locomotives with water. You look at all that traffic passing that depot and decide to open up a diner/saloon to replenish all those people. Who are earning wages. But have nothing to spend them on for hundreds of miles around.
There’s no electricity yet. Or ice. So the meat shipped to the diner may not be the freshest. But you can cook it with a lot of spices to hide any bad taste in case the meat is rancid. Liquor comes out without any spoilage. It’ll last so long that you can keep watering it down to make more money per bottle. Your diner/saloon can be dirty and overrun with bugs. You can just throw the bugs into the pot to make the meat go further. It doesn’t matter. Because for most of your customers this is the only place to come to eat and drink. Even if they get ill from eating bad meat they’ll keep coming back. Because where else are they going to go?
Your costs are low. And your prices are high. You’re doing very well. It’s nice being the only diner/saloon at this depot. But then a town starts growing around the depot. And another diner/saloon opens. It’s cleaner. They serve fewer bugs in their food. Their meat is less rancid. Their liquor is less watered down. And their prices are lower. Everyone who eats and drinks at this depot-town eats and drinks there. Not at your filthy shack. You quickly go from making a lot of money to making nothing at all. Because this new competition in town took away all of your business. For competition makes everything better for consumers.
When the Government Interferes with the Free Market there is no Incentive to Please their Customers
Competition is key to the free market economy. And it’s the most important thing. Even more important than government regulation. Because with competition you don’t need regulations. You don’t need inspectors. You don’t have to file complaints. You don’t have to wait for corrective action. Because if you have competition you have something that works better. And faster. Pleasing customers. If you don’t please them more than your competition then you will lose your customers to your competition. This is a powerful incentive to lower your prices. Improve the cleanliness of your establishment. And to improve your quality. Competition makes businesses try harder to please their customers. On their own. Without compulsion.
In the above example the first diner/saloon owner could have appealed to the government. Asked the government to prohibit the second establishment from opening. Saying that it was destructive competition. That they were dumping lower-priced food and drink onto the market to put the first establishment out of business. So they could raise their prices higher and lower their quality when they do. That the market wasn’t large enough to support two businesses. That their lower prices mean they will pay their employees less. And a whole host of other bad things that will follow if this second business opens. Of course the second business has none of these complaints. Because they offer better quality at lower prices. They don’t need the help of government. Just a competitive free market.
If the first business should prevail in their request for government help the government will take action. Force the second business to shut down. Make them sell their food and drinks at higher prices. Charge them a special excise tax on all their sales to raise money to transfer to and help the first business. Or some other action to make the market ‘fair’ again. Which means allowing the first establishment to continue to sell lower quality at higher prices. Which they would. For with the power of government helping them they have no incentive to please their customers. So they don’t. So people with no choice have to pay more for lower quality. And this is what happens when the government interferes with the free market.
Free Market Competition delivers High Quality at Low Prices with the Most Efficient Allocation of Resources
Competitive free markets also guarantee that businesses use resources in the most efficient manner. As they try to sell the highest quality at the lowest price they will buy very carefully. They will buy only the things they can sell. And only enough of them to meet their demand. For if they buy more than they can sell it will only raise their prices. As those prices have to pay for the things they sell. And the things they can’t sell. So there is a very strong incentive to buy only what they absolutely need. Leaving things for others to buy. Which is much better than having some government bureaucrat allocate resources.
Suppose the government owned the railroad and all the depot-towns along the line. And each depot has a diner/saloon. Each depot-town is about the same size. So the government bureaucrat ships the same supplies to each depot. One barrel of flour. One barrel of cornmeal. One barrel of salted pork. Two sacks of beans. Four sacks of coffee. Five cases of whisky. And so on. But the people don’t eat and drink the same in each of these depot-towns. Some drink more liquor than others. Some drink more coffee than others. Some eat more meat than others. Some eat more beans than others. Depending on the season. The cattle drives. Whether the farmers are sowing or reaping. The religious pilgrimages. The weather. Etc. The local diner/saloon owners are in tune with the rise and fall of demand. But the government bureaucrat 2,000 miles away isn’t. So some receive more than they can use. Others run out before the next shipment. Making the allocation of resources inefficient. Leading to waste. And higher prices to pay for all of that waste.
Free market competition always works best. And the more problems that we solve by creating more competition the better the solutions are for the people ultimately paying the prices. The consumers. As free market competition delivers high quality at low prices with the most efficient allocation of resources. Giving us things like the high-definition television. The smartphone. The tablet computer. And our morning coffee. Where quality just keeps getting better while prices keep falling. When we don’t use free market competition we get high prices, poor quality and inefficient resource allocation. From cable television that increases rates while lowering quality (we’ll be at your house either sometime in the morning or sometime in the afternoon tomorrow or the day after. Please have someone available at your home to meet our technician). To waiting in line to renew your driver’s license. Which is about as enjoyable as a root canal.
Tags: allocation of resources, better quality at lower prices, competition, competition makes everything, competitive free market, Consumers, costs, customers, demand, efficient, free market, free market competition, free market economy, government bureaucrat, high quality, higher prices, highest quality, incentive, low prices, lower prices, lower quality, pleasing customers, prices, quality, resources
Mercantilism benefited only Protected Industries which Profited Handsomely from Higher Consumer Prices
The Age of Discovery ushered in the era of mercantilism. An era of trade. But protected trade. Tariffs, quotas, protectionism, restrictions, subsidies, etc. You name it they used it. To favor their trade position and their domestic industries. And to restrict that of everyone else. For mercantilism was a zero-sum game. You only did well if others did not. A thought that still has traction today. Especially in older, inefficient industries. That cannot compete with international competition that provides better quality at lower prices. Such as textiles. Steel. Automobiles. The Americans protected these industries in the face of better foreign competition. Which only hastened their decline.
A protected industry has no incentive to improve. When protective tariffs raise prices of lower-priced and higher-quality imports consumers buy the inferior domestic goods. Because the tariffs make the better goods more costly. So when a business has a captive audience their only focus is in maintaining that protectionism giving them that advantage. Not improving their quality. Or improving their productivity to lower their prices. Why? Because they don’t have to. So prices continue to rise to pay for inefficient labor and management. And quality continues to decline due to the lack of real competition forcing them to continually provide a better product. By improving designs. Production methods. And making capital investments in new machinery and equipment.
This is the cost of protectionism. Poorer quality and higher prices. Because of the misguided belief in the zero-sum game of mercantilism. There was a reason why mercantilism was abandoned for free trade. Because free trade was better. For consumers. Giving them lower prices and higher quality. Whereas mercantilism benefited only those protected industries which profited handsomely from those higher consumer prices. And the government officials who granted those favorable protectionist policies.
The Consumer gets Lower Prices AND Higher Quality thanks to the Division of Labor, Specialization and Comparative Advantage
As civilization advanced so did the division of labor. People began to specialize. Instead of growing our own food, making our own tools, spinning our own pottery, etc., we did only one thing. And did it well. Then we traded the things we made for the things we didn’t make. This division of labor created a middle class. And this middle class would take their goods to market to trade with other middle class artisans. At first bartering with each other. Trading good for good. Then they introduced a temporary storage of value into the economy. Money. Making those trades easier by reducing search times. Trading your goods for money. And your money for goods. Making life a lot simpler at the market.
Let’s take a closer look at the division of labor. Let’s consider two artisans. A toolmaker. And a potter. Both are skilled craftspeople. And can make an assortment of goods. But each excels at one particular skill. The toolmaker can make 10 plows a day. But if he makes 2 pottery bowls he can only make 4 plows in that same day. The potter can make 12 pottery bowls in a day. But if he makes 3 plows he can only make 5 pottery bowls in that same day. Each can make more of their specialty. But when they try to make other things in addition to their specialty they can’t make as much of their specialty as before. So there is a cost to the toolmaker to make pottery. To make 2 bowls cost the toolmaker 6 plows. And there is a cost to the potter to make tools. To make 3 plows cost the potter 7 bowls. So the economy as a whole is better off when the toolmaker and the potter focus all of their energies in their own specialty. When they do we get 10 plows and 12 bowls in one day. When they don’t we only get 7 plows and 7 bowls.
We call this economic principle comparative advantage. Where we look at economic output. Which is what matters. The more we bring to market the better it is for consumers. Because greater quantities mean lower prices. And when these skilled craftspeople focus on their specialty they improve the overall quality of the goods they bring to market. So the consumer gets lower prices AND higher quality. Thanks to the division of labor. Specialization. And comparative advantage.
We will always Have Jobs regardless the Size of our Imports for Having a Job is the Only Way to Buy those Imported Goods
If you multiply this over and over again to represent all the individual economic exchanges throughout the world you see why free trade is better than the protectionist policies of mercantilism. Because it provides consumers with greater economic output at lower prices and higher quality. This is why nations practicing free trade have the highest standards of living. Because their people can walk into large department stores and fill their carts with inexpensive, high quality goods on a moderate paycheck. Which could never happen if the mercantilists had their way.
The old inefficient industries want tariffs to increase the costs of those goods we fill our shopping carts with. Including the food we eat. And the cars we drive. They use lofty arguments about protecting American jobs. But those protectionist policies destroy jobs by increasing costs for businesses throughout the supply chain. Raising consumer prices everywhere. Reducing the amount of things we can buy. Meaning businesses can’t grow and create new jobs. Or they have to cut back production and eliminate existing jobs.
There’s also a lot of talk about the balance of payments. Which actually meant something during the days of the gold standard. For any trade deficits had to be paid for with gold. But we don’t have the gold standard anymore. Governments everywhere abandoned it in favor of irresponsible government spending. So we don’t have to pay for trade deficits with gold. Most money today is just electronic entries in a computer. International capital flows have never been greater. There are currency markets where people actively trade the world’s currencies. So trade deficits don’t mean the same thing they once did in the mercantile world. Then there’s the argument that if all our manufacturing jobs go overseas there will be no jobs for Americans. If we import everything and export nothing there will be jobs everywhere but here. Sounds like a problem. But can that happen? Not unless we get those imports for free. So we will always have jobs regardless the size of our imports. For having a job is the only way to buy the imported goods in those department stores.
Tags: artisans, barter, bowls, comparative advantage, competition, consumer prices, Consumers, division of labor, economic, economic exchanges, economy, export, free trade, gold standard, higher prices, higher quality, import, incentive, international competition, jobs, lower prices, mercantilism, middle class, money, poorer quality, potter, pottery, prices, productivity, protected industry, protectionism, protectionist policies, quality, search times, specialization, specialize, specialty, tariffs, toolmaker, tools, trade, trade deficit, zero-sum
When you have a Captive Audience you can Charge whatever Prices you Want
Go to a football game lately? Hockey? Basketball? Baseball? It’s a pretty expensive day out. Especially if you eat while in the stadium. Those concession prices are pretty steep. In fact, people say that stadium food is some of the most expensive food anywhere. I don’t. I say it is some of the highest quality and some the most fairly priced food you’ll find anywhere…in the stadium.
Stadium food is convenient food. And that’s what you’re paying for. Convenience. Because it’s too great of an inconvenience to leave the stadium to buy a more reasonably priced hotdog someplace else. And despite what the critics say of concession pricing, those concessions have long lines. Because people may say the prices are too high. But deep down they know what a bargain they are. Delicious food cooked and sold only steps away from their seat. It’s better than at home. And there’s no cleanup.
When you have a captive audience you can pretty much charge what you want. Because the market is fixed. Stadiums charge a fortune for those concession spaces. Because running a big stadium is expensive. And it’s not really used all that often. I mean, there are only 8 home games in the regular season in football. Doesn’t give the stadiums much time to earn revenue to pay for these expensive things. So they charge high fees wherever they can. So the concessioners have to pass that cost on to the customer. As all businesses do. And when you have a captive audience it’s a whole lot easier to do this. Because, where else are the people going to go?
Competition Increases Quality and Lowers Prices for Consumers
Let’s look at this in another way. Say you have a friend who works for a catering company. He drives a ‘roach coach’. He stops at the factories and local construction site to sell food to hungry workers. He sees the money these trucks make. Considers his paycheck. And thinks he’s tired of making his boss rich. So he buys a truck for himself. And looks for his own territory.
Now let’s say you go on an evening bike ride on weekends. And you come across your friend. He’s found some prime real estate to park his roach coach on. In the median of a boulevard across from an automobile assembly plant gate. Where he has a captive audience. Hungry workers working the midnight shift with no place else to buy delicious food. Business is good. You stop by on your bike ride and buy a snack and chat. Then one night you noticed a beat up Ford Pinto pull up in the median not far from your friend’s truck. He pops the hatch. And you start smelling something. Something good. Fresh pizzas. And hot fresh subs. This guy owns a pizzeria. And just closed for the night. After filling his car with fresh pizzas, hot fresh subs and soda. And just like that business wasn’t so good for your friend anymore. For fresh pizza and hot fresh subs are more delicious than the sandwiches and cans of stew your friend was selling. But one thing the Pinto didn’t have that your friend did. Ice. He was selling warm soda. Or trying to. Your friend had cold soda. And that was just what the doctor ordered on a hot, humid, summer night. Your friend was now sharing his captive audience. Selling less than he was. And at lower prices because of this new competition. But he was still able to turn a profit and make his truck payment.
Then the Pinto guy took it up a notch. One night, as the workers headed out into the median on break, he pulled out a tub filled with ice. And soda. “Cold soda,” he barked. “Ice cold soda.” This squeezed your friend’s sales even more. He had nothing left to compete with but price. So he lowered his prices even further. Barely breaking even. Then one night someone else pulled up on the median. A beat up AMC Gremlin. Some kid just out of high school got out. Popped the hatch. And started barking, “Fresh McDonald Big Macs. French fries.” And, of course, ice cold soda. The kid didn’t have a lot. But what he had he was selling at a nice markup. Which was enough for him. Because he had no overhead. And made enough to by some beer later that night. A very modest sales goal. But it split that captive audience three ways. Soon your friend was losing money. Then the economy went into recession. And they discontinued the midnight shift. Your friend lost his truck. And went back to driving a truck for his former boss. The Pinto guy increased his pizzeria’s delivery radius to make up for the loss business. And hired the Gremlin kid to help with those deliveries.
The Business Cycle is a Natural and Necessary Part of the Economy and is the Only Way Supply adjusts to Demand
From the perspective of the workers increasing competition made things better. Competition gave them more variety. Higher quality. And lower prices. Over time that competition gave them more value for their money. This microcosm of the economy was booming for awhile. Others jumped in. Making investments. Increasing their inventories. But eventually they expanded too much. Supply exceeded demand. Some inventory went unsold. Prepared food not being something you can return these people had no choice but to cut their prices. To reduce those burgeoning inventories. The guy with the highest overhead, your friend with the catering truck, was the first to fail. Then the market collapsed completely with the elimination of the midnight shift. So the other two had to shutter their operations there.
We call this the business cycle. It’s the boom-bust cycle of the economy. From good economic times (boom) to recessions (bust). It’s the natural ebb and flow of economic exchange. When the market presents a demand to be met supply flows into it. At first prices and profits are high. Like at a stadium with a captive audience. Then competition moves in. Unlike at a stadium. That demand is now split between the competition. Each sells less. And profits less. To try and increase sales they try to offer better value for the money. Tastier food. Colder soda. Etc. When that doesn’t work any longer they start lowering prices. But because supply built up so much as eager competitors joined in get a piece of that action supply grew so much it exceeded demand. And no amount of price cutting can fix that. Only a recession. To reset prices and supply to meet market demand. Which means some businesses fail. Those who don’t lay off employees. To reset their prices and production to levels that meets demand.
Monetary and fiscal policy tries to massage this business cycle. By softening the recession part of it. By lowering interest rates. To encourage businesses to invest and expand production. And hire more employees. Or by increasing government spending. Creating jobs by building roads and bridges. Or by simply giving more money to consumers (via tax cuts or stimulus checks) to encourage them to buy more. Thus encouraging businesses to hire more workers. To meet this ‘higher’ demand. Of course, in our example, this wouldn’t have helped our three businesses. None of them would have borrowed cheap money to increase supply. Not when supply already exceeded demand. In fact no amount of monetary or fiscal policy action would have helped. It certainly wouldn’t have added back that midnight shift. Unless the government started buying cars for people. Which might have put people back to work on that midnight shift. But such an expansion of government spending would have increased taxes. So high that it would have reduced economic activity elsewhere. As it transferred this money out of the private sector and into the public sector. Saving a few jobs at the cost of consumers everywhere paying higher taxes.
The business cycle is a natural and necessary part of the economy. It’s how supply adjusts to demand. And the only way supply adjusts to demand. Thanks to prices. That automatic mechanism that tells businesses exactly where supply should be. And by interfering with this you make markets operate blindly. Unable to know when supply exceeds demand. So supply keeps increasing even after it already exceeds demand. Creating bubbles. And when the bubble bursts prices plummet. To unload those burgeoning inventories. Making recessions longer and more painful than they need be.
Tags: boom-bust cycle, bubble, Business, business cycle, businesses, captive audience, competition, concession prices, Consumers, demand, economy, fiscal policy, government spending, higher quality, higher taxes, interest rates, inventories, inventory, jobs, lower prices, market, monetary policy, overhead, prices, profit, quality, recession, roach coach, selling, stadium food, supply, taxes, value, workers