Only Government can Create and Enforce a Monopoly

Posted by PITHOCRATES - April 19th, 2014

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.

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Chick-fil-A outsells KFC and proves that there is no such thing as Monopolies in Free Markets

Posted by PITHOCRATES - March 30th, 2014

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.

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Byzantine Empire, Bosporus, Silk Road, Dutch East India Company, English East India Company, Tea Act and Opium Wars

Posted by PITHOCRATES - March 11th, 2014

History 101

(Originally published May 15th, 2012)

To encourage Risk Takers to Travel Halfway around the World Mercantile States granted Monopoly Charters

The modern world began because Europeans had a penchant for silk and spices.  Something they enjoyed during Roman times.  When the Romans ruled the world.  And the Mediterranean Sea was nothing more than a Roman lake.  But when the empire stopped conquering new lands and sending the spoils of war home they had to turn to other means to pay for the cost of empire.  Taxes.  To pay for the Roman government and their public spending.  And the Roman legions.  This excessive government spending led to the fall of the western half of the empire.  But the eastern half lived on for another 1,000 years or so.  Why?  Because the capital of the Byzantine Empire was Constantinople.  On the Bosporus.  Trade crossroads of the world.

This city was so rich everybody wanted to conquer it.  So they could have all those riches.  For everything that came along the Silk Road from China crossed into Europe at the Bosporus.  Soon Muslims fought Christians in the Holy lands.  Then more Christians came.  The Crusaders.  Those who didn’t die went back to Europe with some of those Chinese luxuries.  Spices.  Silk.  Porcelain.  Etc.  Sparking a renewed interest in these finer things in Europe.  Especially the spices.  For European cooking was horribly bland at the time.  The Ottoman Turks eventually took Constantinople.  Renamed it Istanbul.  And controlled that lucrative trade.  Making those much sought after Asian goods rather expensive in Europe.  Which they had no choice but to pay.  Because if you wanted those luxuries you had to go through Istanbul.  Until the Portuguese sailed around Africa and found a direct route to those cherished goods, that is.

It was the Commercial Revolution.  A new age of international trade.  A trade even more profitable than what the Ottoman Turks controlled.  Because big ocean-going vessels can carry more cargo than anything coming over land on the Silk Road.  And these new European maritime powers wanted that wealth.  And the power it would provide.  To encourage risk takers to get into those wooden ships and travel halfway around the world they granted monopoly charters.  The Dutch East India Company (VOC) was one of the largest.  And one of the wealthiest.  But this was not your typical company.  The VOC established overseas colonies.  It waged war.  Established treaties.  Even coined its own money.  Because of this thousands of VOC ships stuffed full of valuable cargoes sailed to Antwerp and Amsterdam, making the Dutch very wealthy.  And powerful.

The Tea Act allowed the Company to Ship their Tea Directly to America and exempted them from any Duties

Of course the Dutch weren’t the only ones doing this.  They had competition.  Portugal.  Spain.  France.  And England.  Who would bump into each other numerous times fighting for control of this trade.  And those colonies.  The English and the Dutch would fight 4 wars.  Which is how Dutch-founded Manhattan became part of the British Empire and, subsequently, one of America’s greatest cities.  The English East India Company gave the VOC a run for its money.  Parliament even passed legislation to give the English a monopoly on all trade with their American colonies.  The Navigation Acts.  Which stated that all trade to and from America had to be on English ships.  And all trade had to go through an English port.  Where the ships were unloaded and the cargoes inspected.  And taxed.  Then they could reload their cargoes and continue on their journey.  All tenets of mercantilism.  This kept the lower-priced Dutch goods out of America.  And prevented the Americans from selling to the Dutch directly for higher prices.  So it shut down the Dutch from all American trade (except for a prosperous black market). And brought in some lucrative tax revenue for England.  While extending shipping times and increasing prices for the Americans.  Which they were not happy about in the least.

The English East India Company (the Company) was similar in structure to the VOC.  And soon made the Indian subcontinent a wholly owned subsidiary of the Company.  But it wasn’t cheap.  Waging war was costly.  As was managing those conquered territories (something the Romans had also learned).  Then a famine in Bengal in 1770 claimed about one-third of the local population.  Making laborers more scarce.  And more expensive.  All at a time when the sales of their imported goods were falling in Europe.  There were warehouses full of unsold Chinese tea that they couldn’t sell.  Making for a bad time for the Company.

Higher costs and lower sales spelled trouble.  And that’s what the Company had a lot of.  Trouble.  So the Company turned to Parliament for help.  And Parliament helped.  By allowing the Company to ship their tea directly to America without having to unload it in a British port.  Or pay a duty on that tea.  Which would greatly reduce their costs.  And allow them to sell it in America cheaper than they did before.  So Parliament passed the Tea Act in 1773.  Making life better for all involved.  But the Tea Act left in place another tax in the previous Townshend Acts.  Which was a bigger problem than getting cheaper tea (which they could get on the black market from the Dutch).  These taxes on the British subjects in America were unconstitutional.  Because there were no Americans sitting in Parliament.  This was taxation without representation.  A much bigger issue than cheap tea.  So they threw that first ‘cheap’ tea into Boston Harbor.  The Boston Tea Party being a major step towards war with the mother country.  And American independence.

Britain became the Lone Superpower after Abandoning their Protectionist Mercantile Policies and Adopting Free Trade

The American Revolutionary War was not the only headache the British got from their mercantile policies.  Part of those policies required maintaining a positive balance of trade.  So there was always a net inflow of bullion into the mother country.  That’s why raw materials shipped into Britain from America.  And finished goods shipped out to America.  Finished goods are more valuable than raw materials.  So the Americans had to make up for this balance of trade in bullion.  Resulting in a net inflow of bullion into the mother country.  Very simple.  As long as you can manufacture higher valued goods that other people want to buy.

And this is the problem they ran into with the Chinese.  For though the British wanted those Chinese spices, silk and porcelain the Chinese didn’t want anything the British manufactured.  Which meant Britain had to pay for those luxuries with bullion.  Including all that Chinese tea they craved.  Which resulted in a net outflow of bullion to the Chinese.  The British fixed this problem by finding the one thing that the Chinese people wanted.  Indian opium.  Grown in Bengal.  Of course, this turned a lot of Chinese into opium addicts.  The addiction problem was so bad that the Chinese banned opium.  But the British were able to smuggle it in.  They sold so much of it that they used the proceeds to buy their tea.  Thus reversing the bullion flow.

Not the finest hour in the British Empire.  The Chinese and the British would go on to fight a couple of wars over this opium trade.  The Opium Wars.  Which the British did all right in.  Even gaining Hong Kong in the bargain.  They didn’t build any long-lasting love with the Chinese people.  But Hong Kong turned out pretty nice under the British.  Especially after they abandoned their protectionist mercantile policies and adopted free trade.  Which made the British the lone superpower for about a century as they modernized the world by leading the way in the Industrial Revolution.  And the Chinese in Hong Kong were very happy indeed to be there when the communists took over the mainland.  And caused a famine or two.  For they lived comfortably.  In a state founded on mercantilism.  That achieved its greatest prosperity during the free trade of capitalism that followed Britain’s mercantile ways.

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Abject Ignorance of things Economic is Destroying our Health Care System

Posted by PITHOCRATES - January 18th, 2014

Week in Review

The problem in America these days is the mass ignorance of the people.  Thanks to a public school system that does not educate but programs our children to be good Democrat voters.  Higher education taken over by the leftist radicals of the Sixties that forever changed the curriculum to teach our children to distrust capitalism and love government.  When controlled by Democrats, of course.  And people who are for some reason respected for their economic prowess who are absolutely clueless on things economic (see The Daily Show Nails Why Healthcare Will Never Work As A Free Market by Christina Sterbenz posted 1/18/2014 on Business Insider).

Steven Brill, author of Time’s in-depth healthcare analysis “Bitter Pill,” appeared on The Daily Show this week to discuss his opinion of Obamacare.

Brill’s work exploded his career into a love-hate relationship with Obamacare, now leading to a book. Speaking with Jon Stewart, Brill certainly made his criticisms known but we also feel like he pinpointed exactly why healthcare just can’t work as a free market.

Brill told the story of a cancer patient forced to pay $13,700 out-of-pocket, up-front for transfusion of a drug. And that cost only constituted part of a greater $83,000 payment. Brill claims, however, the drug only cost the pharmaceutical company $300.

Stewart came back at Brill with the typical, conservative argument — creating a free market for healthcare where patients pick-and-choose their coverage to create competition and therefore, better options.

“Everyone says, well it’s a marketplace. That guy [the cancer patient] has no choice in buying that drug. His doctor told him, ‘This will save your life. You don’t take it, you’re gonna die,'” Brill responded.

He further argued free markets must host two aspects — a balance between buyers and sellers and secondly, knowledge — neither of which the current U.S. system offers.

“That cancer drug has a patent. That is a monopoly that the government has given the drug company. There is no other drug. That’s the drug,” Brill said.

Jon Stewart is a comedian.  So one can almost forgive his ignorance.  But you’d think a person writing for a publication with the word ‘business’ in its name would actually understand business.  But the author hasn’t a clue.  It’s not her fault.  It’s because of the politicizing of our educational system.  As her dual degrees in journalism and public affairs would have taught her squat about the classical, Austrian or the Chicago school of economics.  Instead filling her head with Keynesian nonsense.  The one economic school embraced by power-hungry governments everywhere that has a proven track record of failure.  For it was Keynesian policies that gave us the Great Depression, the stagflation of the 1970s, the dot-com bubble and recession of the late 1990s/early 2000s and the Great Recession.  Where massive government spending did not pull the economy out of recession but only made things worse.

Why does this pharmaceutical company have a patent?  Or perhaps a better question would be why do we have this one cancer drug?  Why is it that this one pharmaceutical company developed a cancer drug that works that no other pharmaceutical company or government developed?  Because of that patent.  The only reason they poured hundreds of millions of dollars into research and development and paid massive liability insurance premiums for taking a huge risk to put a drug onto the market that may harm or kill people.  They do this on the CHANCE that they may develop at least one successful drug that will pay all of their past costs for this one drug, the costs for the countless drugs that failed AND a profit for their investors.  Who took a huge risk investing, giving this pharmaceutical company the money to pay all of their employees over the years it took to come up with at least one drug that wasn’t a loser.

Does the author of this article work for free?  No.  Of course not.  She has bills.  As we all do.  Even the people working at pharmaceutical companies.  Who don’t work there for free.  Even if the vast majority of their work produces nothing that their employer can sell their employer still pays them.  Thanks to their investors who give them the money to do so until they can actually sell something.  But their investors do this only because of the CHANCE that this pharmaceutical will develop that miracle drug that everyone wants.  A miracle drug that would never come into being if it weren’t for investors who were willing to risk losing huge amounts of money.  Something only rich investors can afford to do.

Health care worked as a free market before General Motors made it an employee benefit thanks to FDR’s ceiling on wages.  Once people stopped paying for what they received all free market forces left the health care system.  And costs began to rise.  This whole “healthcare just can’t work as a free market” is a product of the dumbing down of our educational system.  One that produces people who don’t know the difference between insurance and health care.  Insurance protects our assets against a catastrophic and UNEXPECTED loss.  Like when Lloyds of London started selling marine insurance at that coffee shop.  Every shipper paid a small premium to protect against a POTENTIAL sinking and loss of cargo.  A POTENTIAL financial loss.  Not every ship sank, though.  In fact, most ships did not.  Which is why that little bit from everyone was able to pay the financial loss of the few that did.  For the ships that didn’t sink the shippers paid every other cost they incurred to ship things across those perilous oceans.

This is how insurance works.  Which isn’t how our current health insurance works.  Where people don’t expect to pay for anything out-of-pocket.  Not the unexpected catastrophic costs.  Or the EXPECTED small costs that everyone can budget for in their personal lives.  Childhood vaccinations, annual checkups, flu shots, childbirth, etc.  Even the unexpected things that have a low cost.  Like the stitches required when a child falls off of a bike.  Things that would cost less than someone’s annual cellular costs.  Or things that people can plan and save for (like a house, a car or a child).  When we pay these things out-of-pocket there are market forces in play.  For a doctor is not going to charge someone they’ve been seeing for years as much as a faceless insurance company.  Even today some doctors will waive some fees to help some of their long-time patients during a time of financial hardship.  Because there is a relationship between doctor and patient.

When we pay out-of-pocket doctors can’t charge as much.  Because they need patients.  If they charge too much their patients may find another good doctor that charges a little less.  Perhaps a younger one trying to establish a practice.  These are market forces.  Just like there are everywhere else in the economy.  Even a cancer patient requiring an expensive wonder drug would contribute to market forces if there was true insurance in our health care system.  Cancer is an unexpected and catastrophic cost.  But not everyone gets cancer.  Everyone would pay a small fee to insure against a financial loss that can result from cancer.  Where that little bit from everyone was able to pay the financial loss of the unfortunate few that receive a cancer diagnosis.  Because only a few from a large pool would incur this financial loss insurers would compete against other insurers for this business.  Just like they do to insure houses.  And ships crossing perilous oceans.

Health care would work better in the free market.  It doesn’t today because government changed that.  Starting with FDR putting a ceiling on wages.  Which forced employers to offer generous benefits to get the best workers to work for them when they couldn’t offer them more pay.  This was the beginning.  Now the health insurance industry is so bastardized that it doesn’t even resemble insurance anymore.  It’s just a massive cost transfer from one group of people to another.  Instead of a pooling of money to insure against financial risk.  For the few unexpected and catastrophic costs we could not afford and budget for to pay out-of-pocket.

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China’s Fettered State-Capitalism puts Poisonous Gutter Oil on Store Shelves

Posted by PITHOCRATES - January 11th, 2014

Week in Review

There’s a myth in America that if we don’t have government food inspectors that evil corporations will sell poisonous food to unsuspecting Americans.  As if people will keep buying from a food manufacturer who has a reputation of poisoning their customers.  They won’t.  For every food brand has a competitor just waiting to take their business away.  Which they will do if the people believe they sell a higher quality product.  So there is a huge incentive to sell people nothing but the best and safest food they can.  For without government limiting a business’ competition it is only their good name that keeps customers coming back.  Unlike in China (see Ten jailed for producing, selling ‘gutter oil’ posted 1/7/2014 on China Daily USA).

A man was given a suspended death sentence and two others life in jail for producing and selling poisonous food, a court in east China ruled on Tuesday…

In 2006, they began to produce “gutter oil”, which refers to oil illegally made by reprocessing waste oil or even leftovers from restaurants. It was then marketed and re-used as cooking oil.

They then sold the “gutter oil” to 17 edible oil dealers in Shandong and Shanxi provinces, with a sales value of 52.4 million yuan…

China has been clamping down on “gutter oil” as part of its food safety efforts. The oil, which contains carcinogenic substances, is dangerous if consumed.

This is what happens when you fetter unfettered capitalism.  And transform it into state-capitalism.  Or a planned economy.  Where the government picks winners and losers.  Favoring their friends.  And hurting their competition.  Such as by limiting competition to protect their friend.  Giving them a state-enforced monopoly.  The only way a monopoly can exist.

Without competition you can sell crap and the people have little choice but to buy it.  Which is why a lot of businesses in a planned economy like China do things like this.  Because they can get rich.  Until someone catches them.  Because without unfettered capitalism other competitors can’t enter the market to keep them honest.  Leaving you to rely on a bloated, ponderous and often corrupt public sector to police that planned economy.  And because they aren’t that good you get people trying to sell gutter oil in China.  While food manufacturers police themselves in the United States.  Because they know their brand is not the only brand on supermarket shelves.

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Free Trade, the Corn Laws and The Economist

Posted by PITHOCRATES - September 8th, 2013

Week in Review

Today the political left attacks capitalism as being unfair.  And mean.  Whereas they laud government intervention into the free market.  To level the playing field.  And to redistribute income.  To help those who can’t be as successful as others.  They support unions.  And oppose free trade.  Because free trade lowers prices for consumers.  By breaking up monopolies.  And giving them choice.  Free trade is an essential element of capitalism.  But the fight to make people’s lives better with free trade wasn’t easy.  As people who got rich with government-protected high prices opposed free trade (see Why did The Economist favour free trade? by C.R. posted 9/6/2013 on The Economist).

IN NINETEENTH century Europe and America, debates over whether tariffs or free trade produced the most economic growth dominated the political scene. Up until the early 1840s, protection appeared to be winning the argument. In Britain, high tariffs were imposed on agricultural imports in 1819, by legislation known as the Corn Laws. The ideas of Friedrich List, a German economist who argued that tariffs boosted industrial development through the protection of infant industries, were gaining ground, particularly in the United States. One Pennsylvanian legislator even joked in 1833 that the dictionary definition of man should be changed to “an animal that makes tariff speeches” so frequently were they heard.

Against this atmosphere, James Wilson founded The Economist in 1843 to campaign for free trade. His first target was to repeal the Corns Laws in Britain. He argued:

They are, in fact, laws passed by the seller to compel the buyer to give him more for his article than it is worth. They are laws enacted by the noble shopkeepers who rule us, to compel the nation to deal at their shop alone.”

The UAW got very generous contracts with the Big Three during the Fifties and the Sixties.  Raising the price of cars.  Which wasn’t a problem when they were the only ones making cars.  But then came the imports.  Which told the people how much more they were paying than these articles were worth.  And started buying the imports.  As they did those generous pay and benefit packages became more difficult to pay.  So the Big Three lobbied for tariffs on those less costly imports.  And got them.  Raising the price of the imports.  Forcing Americans to deal with the Big Three alone.  And buy their more costly cars.

More people bought cars than made them, though.  And the people who made the cars were better paid than most Americans.  So these tariffs forced poorer people to spend more on a car leaving them less for their families.  So richer people could have more.  This is what tariffs do.  They allow fewer people to have more.  While more people have to do with less.  So fewer buy more.  While more buy less.  Because there are more people who buy cars than make them these tariffs, then, reduce economic activity.  And because the Big Three didn’t have to figure out how to give more for less to their customers they didn’t.  Giving their customers ‘rust buckets’ in the Seventies.  Something else that tariffs do.  Lead to inferior goods.  Because if the government forces people to buy from you then the quality of what you sell doesn’t matter.

Wilson believed that protectionism caused “war among the material interests of the world”, in other words, war between nations and classes. A high tariff regime was no longer economically “productive”; Britain was stuck in an economic depression in the early 1840s. In contrast, free trade produced “abundance and employment”. It was appropriate for Britain’s economy where “a large proportion of the population and property depended on commerce and industry alone”. On the other hand, List’s ideas about protection were dismissed as unnecessary “swaddling clothes” for a mature economy, such as Britain’s.

The Economist’s early views on free trade were strongly influenced by the classical economists Adam Smith and David Ricardo, as Ruth Dudley Edwards, a historian, has pointed out. Wilson, like Smith, realised that trade was a two way exchange. Countries needed to “increase imports to increase exports” to boost economic growth. Consumers, Smith argued in the Wealth of Nations, should buy products from where they were cheapest. All protection did was create monopolies, which were “a great enemy to good management”. Ricardo took Smith’s ideas further, arguing that all countries benefit from free trade by producing what they were best at relative to other countries.

That’s what the Big Three wanted.  A monopoly on cars sold in America.  And there is only one way to get one.  The government has to create them.  Hence the Big Three’s request for tariff protection.

David Ricardo’s comparative advantage said nations should make what they can make best and trade for those things they can’t.  For example, if two countries can both make one thing but one can do so at lower costs they can make more of them for the same costs.  Giving them a larger surplus to trade for other things.  While the other nation will consume more resources to build the same quantity leaving less to make the other things they need.  While having fewer things available for export.  So if you try to make things you can’t make efficiently you end up consuming more resources to have less.  Whereas the nation that makes only what it can make best ends up consuming fewer resources that are then available to make other things.  And they have more things to trade.  Leading to a higher standard of living.  And if their trading partners do likewise they, too, experience a higher standard of living.

Free trade leads to greater economic activity.  Which made Britain wealthy.  Allowing them to extend their empire for another 70 years or so.  Despite the warnings of the rich landowners who said repealing the Corn Laws would cause harm.  Instead, repealing the Corn Laws led to greater economic activity.  And less costly food. Allowing people to feed their families more easily.  The only harm suffered was to the profits of the big landowners.  Who lost their monopoly.  And could no longer charge more than their food was worth.

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Big Government in Europe is worried about Glencore cornering the Zinc Market

Posted by PITHOCRATES - November 24th, 2012

Week in Review

With the price of natural gas falling some providers are capping their wells until prices go up.  During the Eighties the price of oil soared, pulling oil producers into the oil business left and right.  Resulting with the oil glut of the Eighties as supply greatly outpaced demand.  OPEC tried to set the price of oil by limiting production.  But they sometimes fail as member states often cheat, selling a little more than their quota to profit from those high prices.  In America, when John D. Rockefeller was selling refined oil products cheaper than any of his competitors it was his competitors who urged the government to bring antitrust actions against him.  Not the people buying his products at low prices.  President Obama has shut down most drilling on federal lands.  But because of demand drilling on private lands is soaring.

Trying to maintain monopoly control is difficult.  And rarely can be done without the help of government (even with the help of government it’s not that easy).  Or by selling at a price below your competition.  Which rarely hurts consumers.  No, low prices hurt those who can’t sell at low prices.  Those who want consumers to pay their higher prices.  This is the power of market forces.  And greed.  For when prices go up greed lures others into the market place to cash in on those high prices.  Which brings prices down.  Supply and demand.  It’s how we have pretty much whatever we want in a complex economy.  Even just the right amount of zinc (see EU steelmakers unhappy with EU conditions on Glenstrata deal by Silvia Antonioli posted 11/22/2012 on Reuters).

EU steelmakers said Europe’s antitrust conditions for Glencore (GLEN.L) to go ahead with its $33 billion takeover of Xstrata (XTA.L) are not sufficient to prevent the dominant influence of one zinc supplier…

“The European steel industry, which uses the lion’s share of zinc metal traded in Europe, will still have to face a leading provider effectively controlling the zinc supply chain from mining to warehousing operations,” Eurofer said in a statement.

Post-merger, the parties will still have a share of around 35 per cent of the European zinc market and the vertical integration of the new entity, which includes mining, smelting, trading, logistics and warehousing, is also concerning according to Eurofer.

What’s really of concern here?  Economies of scale.  The bigger Glencore gets the lower its production costs per unit become.  And the lower their selling price can be.   This is what economies of scales get you.  Not monopoly power.  And who is hurt by lower selling prices?  Glencore’s competition.  And those supplying the other 65% of the European zinc market.

Of course, the argument always goes once someone corners the market (by driving their competition out of business with low prices) they’ll then start raising their prices.  A lot.  Oh my.  Imagine what would happen if zinc prices soared.  It would pull zinc suppliers into the European zinc market left and right to cash in on those high prices.  Can anyone name a supplier who cornered the market with low prices and now is selling at high prices that isn’t propped up by the government?

No.  Because it doesn’t happen.  Because it can’t happen.  Not with free markets.  Because of greed.  For if prices go up more people enter the market out of greed.  And the greater this greed the greater the supply brought onto market.  And the greater prices fall.

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Rent-Seeking

Posted by PITHOCRATES - June 11th, 2012

Economics 101

Wealth Creators Freely met and Made Trades they felt were Mutually Beneficial

The human race started as subsistence hunters and gatherers.  Our ancestors spent all of their time hunting.  And gathering.  If they were successful they propagated our species.  Making it possible for us to be here.  If they weren’t their family tree was a barren one. 

So that was life.  A rather short and brutish life.  Except that part about propagating the species.  And we lived that way for some 2 million years.  Eating.  Fleeing.  Fighting.  And, of course, propagating.  As we grew more intelligent we did a lot of things that ushered in the modern world.  But perhaps the single greatest advancement that brought on the modern age was our evolution from hunters and gatherers to farmers.  Everything followed from this.  We learned to live together in cities.  And we increased crop yields so much we created food surpluses.  Which gave us time to do other things.  It allowed the rise of artisans.  A middle class.  That built things and traded them for their food.  These new goods helped produce more food.  And the greater food production allowed more people to do other things.  Creating a complex economy.  Where people traveled to market with the things they created.  And traded them for the things other people brought to market.  We traded things of value for other things of value.  Because these traders, these wealth creators, each created something of value.

These wealth creators freely met and made trades they felt were mutually beneficial.  Each felt they came out a winner after their trade.  For they each received something they valued more than what they traded away to get it.  Which means going to the market was where to go to get valuable things.  Which provided an incentive to make more things so you could take them to market.  And trade for things you valued more.  As everyone did this the overall wealth in the economy increased.  People specialized.  Focused on what they were good at.  To produce as much as possible so they could trade for more.  And because they specialized they improved quality.  And used the available resources as efficiently as possible.

Rent-Seeking People took more Wealth from the Market than they Brought to It

There are many competing schools of economics.  But if you go back to where it all began what you find is laissez faire free market capitalism.  Where the profit incentive drove people to create wealth.  Which they then traded for the things they didn’t make.  Then things started to change.  Some people didn’t want to work hard and innovate.  And bring new things to market.  What they wanted was influence.  Privilege.  And a rigged market.  So they could get more in trade than the value of the things they produced for trade.  One of the first vehicles used for this was the artisan guild.

In medieval Europe if you wanted to be a blacksmith you had to join a guild.  If the guild accepted you a long apprenticeship awaited you.  But the guilds denied more people entry than they allowed.  Why?  To limit competition.  So blacksmiths could keep their prices high.  At any given time a city, town or village had a very limited number of blacksmiths.  The guild worked to keep it that way.  For the last thing these blacksmiths wanted was other blacksmiths opening up shop.  Putting more goods onto the market.  And lowering prices.  No, the guild wanted to fix prices above their market value by keeping would-be blacksmiths out of the trade.

The economic term for this is rent-seeking.  Which is sort of the opposite of profit seeking.  In profit-seeking people create wealth to trade (or to pay) for other wealth.  They work hard to earn more so they can buy more.  Both buyer and seller add wealth to the economy.  Not so in rent-seeking.  In rent-seeking you try to garner more wealth not by working harder but by using the power of government.  By getting tariffs placed on foreign competition.  By getting prices fixed above market prices.  By getting onerous regulations enacted to hurt your competition.  By restricting entrance into the industry thus limiting domestic competition.  Such as the guilds did for those medieval blacksmiths.  This interference into laissez faire free market capitalism reduced economic activity.  Because rent-seeking people took more wealth from the market than they brought to it.

The Government caused the Great Depression by Favoring Rent-Seeking over Free Market Capitalism

Some say a better name for rent-seeking is privilege seeking.  For that is what they are seeking.  Special privilege so they don’t have to compete in the free market.  For the cost of a little lobbying can remove the need for innovation.  Maintaining the level of quality.  Or satisfying customers.  For if you have a government-imposed monopoly you don’t have to do any of those things because the people don’t have anywhere else to go.

Rent-seeking is rife in crony capitalism and state capitalism.  Neither of which is true capitalism.  These companies are granted monopolies (or near monopolies) by the government in exchange for political support.  Which they can afford when they can sell their goods above market prices.  They get rich.  Their cronies in government get rich.  But the consumers suffer.  As they have to pay higher prices. Suffer poorer quality.  And less innovation.  Rent-seeking is common in the older industries.  Particularly ones with strong unions.  Who have negotiated costly wage and benefit packages.  Which they can afford to pay until new innovation and new competition enters the market.  Putting out a higher quality product at a lower price.  Prices so low that an old firm saddled with a costly union wage and benefit package simply can’t sell at and pay their bills.  So they go to government.  And lobby for privilege.

What typically happens is that they delay the inevitable.  All the protected industries in the U.S. have failed.  Textile.  Steel.  Even the automobile (well, two of the Big Three have failed.  Ford hasn’t).  For when you take more wealth from the market than you bring to it you’re just transferring wealth.  You’re not creating it.  Which is a problem.  Because you have to create wealth to increase economic activity.  So when you protect an industry you’re just pulling wealth out of the private economy and transferring it to the rent-seekers.  Who give so little in return.   Which results in a decline of economic activity.  And if it spreads enough it can and has caused recessions.  Even a Great Depression.  Such as when domestic industries lobbied government to enact the Smoot-Hawley Tariff.  Which launched an all-out trade war.  All because the government favored rent-seeking over free market capitalism.

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Even Cutting 28,000 Jobs will not help the USPS Compete against the Internet

Posted by PITHOCRATES - May 27th, 2012

Week in Review

The United States Postal Service (USPS) hates the Internet.  Before the Internet they had a monopoly in the letter industry.  If you wanted to send Granny a letter you had to go through them.  There’s only one problem with a monopoly.  Because they have a captive audience they don’t have to innovate.  They don’t have to improve anything.  Just make a lot of money.  And give your employees generous wage and benefit packages.  Just like the railroads did.  Before trucks came around, that is.  The trucking industry nearly destroyed the railroad industry.  But the railroads learned how to compete.  They helped redefine the transportation industry that now includes trains, ships and trucks.  The railroads are back.  Stronger than ever.  And making money.  But is it too late for the USPS?

The Internet is the USPS’ trucking industry.  It has all but destroyed the snail mail industry.  To survive the USPS has to do what the railroads did.  Reinvent itself.  Reinvent the industry they participate in.  If they can.  And they better hurry.  Because their monopoly is gone.  Not from other people entering the snail mail business.  But by new technology that created a better alternative to the snail mail business.  The Internet.  And it’s tap-dancing all over the USPS (see U.S. Postal Service offers buyouts to 45,000 workers by Emily Stephenson posted 5/25/2012 on Reuters).

The mail agency, which lost $3.2 billion in the first three months of 2012, plans to begin this summer moving mail-processing activities away from smaller sites to reduce annual costs.

As part of that plan, the Postal Service will offer $15,000 in two installments to full-time mail handlers who take early retirement or leave the agency, USPS spokesman Mark Saunders said on Friday…

The Postal Service has been hit hard by tumbling mail volumes as more Americans communicate online and by massive payments for future retiree health benefits…

The agency needs to reduce its workforce by 150,000 people by 2015, Saunders said. Consolidating and closing processing facilities, which will continue through 2014, could eliminate up to 28,000 jobs and save $2.1 billion a year, the Postal Service has said.

Saunders said he could not speculate how many mail handlers would take buyouts this year, but added that the change “will not affect mail service.”

It’s not enough.  If you annualize that $3.2 billion quarterly loss that comes to a $12.8 billion loss for the year (4 X $3.2 billion).  Cutting only $2.1 billion per year will not solve their problems.  They’ll still have an operating deficit of approximately $9.6 billion.  And if the Internet doesn’t go out of business in the foreseeable future these numbers are only going to get worse.

It’s pretty interesting that a company can cut 28,000 jobs without affecting its business operations.  Why, it’s almost as if they never shrunk their labor force all these years that their business has shrunk.  It’s as if 28,000 people have just been sitting around waiting for the work to pick up again.  While collecting a paycheck.  And while the USPS pours billions into a pension plan for their future retirement.  Hmm.  I wonder if this could have anything to do with that $3.2 billion quarterly loss. 

The clock is ticking.  While the USPS is still struggling to compete with email texting is giving email a run for its money.  And it just may be that the USPS is not as nimble as the railroad industry in pulling up its tracks and laying them on the road to profitability.

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Byzantine Empire, Bosporus, Silk Road, Dutch East India Company, English East India Company, Tea Act and Opium Wars

Posted by PITHOCRATES - May 15th, 2012

History 101

To encourage Risk Takers to Travel Halfway around the World Mercantile States granted Monopoly Charters

The modern world began because Europeans had a penchant for silk and spices.  Something they enjoyed during Roman times.  When the Romans ruled the world.  And the Mediterranean Sea was nothing more than a Roman lake.  But when the empire stopped conquering new lands and sending the spoils of war home they had to turn to other means to pay for the cost of empire.  Taxes.  To pay for the Roman government and their public spending.  And the Roman legions.  This excessive government spending led to the fall of the western half of the empire.  But the eastern half lived on for another 1,000 years or so.  Why?  Because the capital of the Byzantine Empire was Constantinople.  On the Bosporus.  Trade crossroads of the world.

This city was so rich everybody wanted to conquer it.  So they could have all those riches.  For everything that came along the Silk Road from China crossed into Europe at the Bosporus.  Soon Muslims fought Christians in the Holy lands.  Then more Christians came.  The Crusaders.  Those who didn’t die went back to Europe with some of those Chinese luxuries.  Spices.  Silk.  Porcelain.  Etc.  Sparking a renewed interest in these finer things in Europe.  Especially the spices.  For European cooking was horribly bland at the time.  The Ottoman Turks eventually took Constantinople.  Renamed it Istanbul.  And controlled that lucrative trade.  Making those much sought after Asian goods rather expensive in Europe.  Which they had no choice but to pay.  Because if you wanted those luxuries you had to go through Istanbul.  Until the Portuguese sailed around Africa and found a direct route to those cherished goods, that is.

It was the Commercial Revolution.  A new age of international trade.  A trade even more profitable than what the Ottoman Turks controlled.  Because big ocean-going vessels can carry more cargo than anything coming over land on the Silk Road.  And these new European maritime powers wanted that wealth.  And the power it would provide.  To encourage risk takers to get into those wooden ships and travel halfway around the world they granted monopoly charters.  The Dutch East India Company (VOC) was one of the largest.  And one of the wealthiest.  But this was not your typical company.  The VOC established overseas colonies.  It waged war.  Established treaties.  Even coined its own money.  Because of this thousands of VOC ships stuffed full of valuable cargoes sailed to Antwerp and Amsterdam, making the Dutch very wealthy.  And powerful.

The Tea Act allowed the Company to Ship their Tea Directly to America and exempted them from any Duties

Of course the Dutch weren’t the only ones doing this.  They had competition.  Portugal.  Spain.  France.  And England.  Who would bump into each other numerous times fighting for control of this trade.  And those colonies.  The English and the Dutch would fight 4 wars.  Which is how Dutch-founded Manhattan became part of the British Empire and, subsequently, one of America’s greatest cities.  The English East India Company gave the VOC a run for its money.  Parliament even passed legislation to give the English a monopoly on all trade with their American colonies.  The Navigation Acts.  Which stated that all trade to and from America had to be on English ships.  And all trade had to go through an English port.  Where the ships were unloaded and the cargoes inspected.  And taxed.  Then they could reload their cargoes and continue on their journey.  All tenets of mercantilism.  This kept the lower-priced Dutch goods out of America.  And prevented the Americans from selling to the Dutch directly for higher prices.  So it shut down the Dutch from all American trade (except for a prosperous black market). And brought in some lucrative tax revenue for England.  While extending shipping times and increasing prices for the Americans.  Which they were not happy about in the least.

The English East India Company (the Company) was similar in structure to the VOC.  And soon made the Indian subcontinent a wholly owned subsidiary of the Company.  But it wasn’t cheap.  Waging war was costly.  As was managing those conquered territories (something the Romans had also learned).  Then a famine in Bengal in 1770 claimed about one-third of the local population.  Making laborers more scarce.  And more expensive.  All at a time when the sales of their imported goods were falling in Europe.  There were warehouses full of unsold Chinese tea that they couldn’t sell.  Making for a bad time for the Company.

Higher costs and lower sales spelled trouble.  And that’s what the Company had a lot of.  Trouble.  So the Company turned to Parliament for help.  And Parliament helped.  By allowing the Company to ship their tea directly to America without having to unload it in a British port.  Or pay a duty on that tea.  Which would greatly reduce their costs.  And allow them to sell it in America cheaper than they did before.  So Parliament passed the Tea Act in 1773.  Making life better for all involved.  But the Tea Act left in place another tax in the previous Townshend Acts.  Which was a bigger problem than getting cheaper tea (which they could get on the black market from the Dutch).  These taxes on the British subjects in America were unconstitutional.  Because there were no Americans sitting in Parliament.  This was taxation without representation.  A much bigger issue than cheap tea.  So they threw that first ‘cheap’ tea into Boston Harbor.  The Boston Tea Party being a major step towards war with the mother country.  And American independence.

Britain became the Lone Superpower after Abandoning their Protectionist Mercantile Policies and Adopting Free Trade

The American Revolutionary War was not the only headache the British got from their mercantile policies.  Part of those policies required maintaining a positive balance of trade.  So there was always a net inflow of bullion into the mother country.  That’s why raw materials shipped into Britain from America.  And finished goods shipped out to America.  Finished goods are more valuable than raw materials.  So the Americans had to make up for this balance of trade in bullion.  Resulting in a net inflow of bullion into the mother country.  Very simple.  As long as you can manufacture higher valued goods that other people want to buy.

And this is the problem they ran into with the Chinese.  For though the British wanted those Chinese spices, silk and porcelain the Chinese didn’t want anything the British manufactured.  Which meant Britain had to pay for those luxuries with bullion.  Including all that Chinese tea they craved.  Which resulted in a net outflow of bullion to the Chinese.  The British fixed this problem by finding the one thing that the Chinese people wanted.  Indian opium.  Grown in Bengal.  Of course, this turned a lot of Chinese into opium addicts.  The addiction problem was so bad that the Chinese banned opium.  But the British were able to smuggle it in.  They sold so much of it that they used the proceeds to buy their tea.  Thus reversing the bullion flow.

Not the finest hour in the British Empire.  The Chinese and the British would go on to fight a couple of wars over this opium trade.  The Opium Wars.  Which the British did all right in.  Even gaining Hong Kong in the bargain.  They didn’t build any long-lasting love with the Chinese people.  But Hong Kong turned out pretty nice under the British.  Especially after they abandoned their protectionist mercantile policies and adopted free trade.  Which made the British the lone superpower for about a century as they modernized the world by leading the way in the Industrial Revolution.  And the Chinese in Hong Kong were very happy indeed to be there when the communists took over the mainland.  And caused a famine or two.  For they lived comfortably.  In a state founded on mercantilism.  That achieved its greatest prosperity during the free trade of capitalism that followed Britain’s mercantile ways.

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