Friends, we come here to day to witness me engage in another fruitless rant about flaws in Capitalism that to me seem completely obvious. I must therefore include the usual disclaimer about how I don’t actually know anything about Economics, so if an economist would like to post in the comments section and tell me why I’m wrong that would be most welcome.
Seriously, if I’m wrong then I want to know about it so please tell me.
The downside of not knowing anything about Economics is that I often get corrected on things (which isn’t actually that bad because that’s how I learn). The upside is that if I cannot be beaten in an argument on these issues, by people who have studied Economics, then that means there is something seriously wrong with their ideas.
If you can’t even beat me what the fuck are you going to do against trained opponents?
So anyway, what am I doing today? Oh not much, I’m just trying to debunk the very basis of the global financial system: the idea that profit is always good. You probably know it as “Free Market Capitalism”.
It is accepted Free Market doctrine that if a company makes a profit then it is a good company, good for both itself and society as a whole.
And profit is, of course, obtained by selling something for more than it is worth to oneself. But how do we measure worth? It is usually suggested that things things don’t have inherent or absolute value, only monetary value. Since people are willing to pay different amounts for things at different times it is thought to be silly to try and speak of something’s “actual” value.
But I disagree. Food, shelter, heathcare and certain other “products” all have definite, biological, quantifiable benefits, that are inherent to them. Let’s call these “essential goods”.
The fact that someone would pay more for water during a drought than during a flood is irrelevant: the quantifiable impact of that water does not change, only the means one is willing to devote to obtaining it change. Just because a wealthy person would pay more for a heart transplant than a poor person does not mean that the poor value their health less.
In other words the price of the water will change but the effect of the water will not, and it is the effect of the water that gives it its absolute value (inb4 “but if you’re dying of thirst the effect of the water is also different”, the effect is the same, only the amount required differs).
Of course ascribing a quantified value to these is probably practically impossible, but we can use a hypothetical value. So, let’s use ‘Utils‘, which is the amount of usefulness a person gets out of it (e.g. the benefit of drinking the water).
In the Free Market Capitalist tradition the market determines how much something costs. Producers charge a certain amount of money for certain goods and services and if consumers think the price is fair they will pay it. If they don’t think it’s fair they simply won’t pay it. Thus, the system is thought to be self-regulating and inherently fair.
But I disagree with this and to illustrate why let’s create 3 imaginary price structures: “cheap”, “fair” and “desperation”. If something is “cheap” that means it is being sold for less than it is worth in absolute terms, a loss of utils for the seller. If something is “fair” then it is being sold for exactly the right amount. The seller gives away one util and receives one util in return, usually in the form of money.
If something attains a “desperation” cost then that means it is expensive, but the person who needs it has no choice other than to purchase it, even though they know it is not worth what is being paid. The seller gives away one util, but receives two utils in return.
[Yes, I know people typically expect some sort of "profit" on their transaction so, strictly speaking, it is not a 1 util for 1 util transaction. This does not affect my point. Keep reading.]
The more perceptive of you will have realised that “cheap” and “desperation” are actually the same thing because the only reason a producer would sell something “cheaply” is if they were desperate to get rid of it. So we can pretty much discard it now and just stick with “fair” and “desperation” costs.
And you can probably already see that this only really applies to things that a person does not have a choice but to buy: basic foodstuffs, basic healthcare, basic housing, and basic education.
In this view the classic supply/demand curve becomes incorrect, or rather it needs to be adapted. Because the supply/demand curve assumes that it is possible for demand to drop. In the case of the vital services I listed above it is not possible for demand to drop, no matter what the price.
Of course this is where the free market comes in. If a consumer believes they are being overcharged then they will look for another producer who will offer the same service at a better price.
Note: a “better price” doesn’t mean a lower one, it means one that has greater value. It could be a higher price, but with larger quantity or higher quality of service. “Value” is more important than cost.
Anyway, it is believed (correctly) that the free market is a good idea because it promotes efficiency. Companies want greater profits so they will strive to offer services as efficiently as possible, and because they don’t want to lose consumers they will ensure that the service they offer is at a fair price.
However, the search for efficiency is finite, whereas the search for increased profits is infinite. This creates a problem because it means that after a certain point the interaction between sellers and buyers becomes a zero sum game where every gain for the sellers becomes a loss for the buyers.
It does, in fact, become an Ultimatum Game: they give you the price and you either accept it, or fuck off.
One can of course claim that technological advancement never ceases and thus greater efficiency can always be found. But that doesn’t help either. Investors typically expect not only profits but steadily increasing profits. This makes matters even worse because it places a timetable on “efficiency”; something that cannot be predicted.
The point is that after a certain level of efficiency every increase in profit must be caused by a decrease in value. In other words consumers are paying the same price, but getting less for it. The “value” of their purchase has decreased. That is the first problem with the free market solution: increases in profits must, at some point, necessitate a decrease in value.
Some will say that this is not true, and that the battle between consumers and producers isn’t an ultimatum game because you can always go somewhere else. And this brings us to the other problem with the free market solution: there is a way to game the system. And I use that term deliberately because Game Theory has proven that companies make more money if they do not compete with each other.
Look at these two examples:
Under a “fair” system a consumer who needs 2 utils of healthcare will pay two utils worth of money and get their two utils of healthcare.
But under a “desperation” system…
…a consumer who needs two utils of healthcare needs to pay 4 utils to get them. The healthcare providers collectively make more money under this sytem than under a fair system.
Of course some will say that this is impossible because no one would pay 4 utils for healthcare worth only 2 utils. The problem with this idea is that they assume people have a choice, and often they don’t.
Let’s take the healthcare example. If you need medication to prevent a heart attack, and you know that it only costs 2 utils, but the only place you can get it will only sell it you at 4 utils, then you don’t really have a choice other than to buy it, even though you know you are being ripped off.
But won’t healthcare providers then drop their prices to attract new customers?
No, they won’t, because Game Theory has proven that they will all make more money if they don’t compete, and it’s true.
How do I know it’s true? Simple: because it’s completely fucking obvious that it’s true.
Remember what I said above: at a certain stage the battle between sellers and buyers becomes a zero sum game. Every gain for a consumer is a loss to the producer, and vice versa.
Competition over pricing is good for the buyers therefore it is bad for the sellers, and will be avoided at all costs. They will still compete for customers, but they won’t drop their prices. Ever.
So one of the fundamental tenets of Capitalism, that profit is always a sign of a good company, is not true.
In fact it may be worse than that, because a reduction in the value of certain items may have a knock-on effect that is bad for society.
For example a drop in the quality of water leads to an increase in profit for water treatment companies but also an increase in medical costs as people are sickened. So an increase in profits may actually be bad for the society as a whole.
So, in summary:
1. When prices for vital goods and services are too high the Supply and Demand curve predicts demand will drop. But it can’t because people don’t have a choice in whether or not they need certain goods.
2. Competition in the market should mean that companies compete for customers, thus leading to lower prices. But this doesn’t happen because Game Theory has demonstrated that companies make more money if they all raise prices, and compete for customers in other ways.
3. A company’s ability to make profit is supposed to be an indication of its own success and its value to society. But since the system can be gamed profit is only proof of one thing: the ability to make a profit. And lastly,
4. It is believed that the interaction between sellers and buyers can benefit both. But sometimes this is not true. Sometimes a gain for one is a loss for the other. Sometimes it is a zero sum game.
All of this stuff may seem pretty uninteresting and obvious to most people. But the thing is that the ideas I’m criticising here are literally the basis for the entire global financial system. They aren’t just considered true, they are truisms, considered so obviously correct that questioning them is a waste of time.
So, am I crazy? Or am I on to something?
Tell me below.
[Standard Disclaimer: this post was entirely my own opinion and was not paid for in any way, directly or otherwise, by anyone or anything that stands to gain in any way from the ideas expressed herein]