Monday, March 8, 2010

Why Your Car Runs On Gas And Can't Fly

The market demands I compete,

Apparently fair, no mean feat,

I'll absorb my opponent

(A 'free' market component)

There's no innovation! That's sweet!


One topic that seems to pervade our readings is the constant tension between ideal economic circumstances and practical economic circumstances. So much of economic theory seems defined by the former and is reluctant to engage in legitimate policy proposals based on the latter. The limited readings we did of Schumpeter illustrate this point quite handily, as he attempts to disengage from speculative conjecture on economic policy and push more aggressively to dealing with realistic policy issues. I am not entirely certain if he is successful in this endeavor—I’d have to read a lot more of his work and study a great deal more economic theory—but I do appreciate the need to engage the reality of a marketplace.

While this topic is explored in his touching on issues of socialism and unemployment, the most particular moment for me exists on page 80. “In the general case of oligopoly there is in fact no determinate equilibrium at all, and the possibility presents itself that there may be an endless sequence of moves and countermoves, an indefinite state of warfare between firms. It is true that there are many special cases in which a state of equilibrium theoretically exists. In the second place, even in these cases not only is it much harder to attain than the equilibrium in perfect competition, and still harder to preserve, but the ‘beneficial’ competition of the classic type seems likely to be replaced by ‘predatory’ or ‘cutthroat’ competition or simply by struggles for control in the financial sphere. These things are so many sources of social waste, and there are many others such as the costs of advertising campaigns, the suppression of new methods of production (buying up of patents in order not to use them) and so on. And most important of all: under the conditions envisaged, equilibrium, even if eventually attained by an extremely costly method, no longer guarantees either full employment or maximum output in the sense of the theory of perfect competition. It may exist without full employment, it is bound to exist, so it seems, at a level of output below that maximum mark, because profit-conserving strategy, impossible in the conditions of perfect competition, now not only becomes possible but imposes itself… Is it not quite true after all that there is little parallelism between producing for profit and producing for the consumer and that private enterprise is little more than a device to curtail production in order to extort profits which then are correctly described as tolls and ransoms?” (p. 79-80)

So essentially it seems that if perfect competition actually existed (it doesn’t), then the larger macroeconomic goals of the market would be perfectly in line (equilibrium) with the consumer and all would prosper. However, as Schumpeter attests here, actual competition involves undercutting competition and squashing innovation in order to preserve pre-existing profits, minimize workforce while increasing prices, prevent sustainable opposition and encourage government involvement that reinforces corporate interests while remaining resistant to leveling playing fields. How is that compatible with the overall economic progress and innovation necessary for a large economic entity (whether multinational corporation or state) to function within a global marketplace, particularly one with socialized or semi-socialized businesses? Simply put, in the long run, it isn’t, and this methodology stunts the potential growth of the industry and participants while continuing to marginalize the average consumer/wage laborer.

What bewilders me, and always has, is how corporations seem to prefer squashing innovation rather than co-opting it. If Ford and Exxon had teamed up to offer electric cars that ran on clean sustainable energy sources right now, they would dominate the global market, guaranteeing profits the likes of which they’d never seen, and creating a sustainable business model to take them into the next hundred years. Instead we see the death of the electric car and the beginning tentative industrial explorations of renewable energy sources by organizations that lack the capital to do the R&D necessary to innovate effectively.

I digress too far from the text now, but not the spirit, I think. Schumpeter also says, “The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.” (p. 67) In that vein, entrenched industries would only seem to stand to gain from embracing innovation, but perhaps this is the same idealistic trap that many economists fall prey to when studying theory rather than practice.

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