Mr Peters,
I think we are close to the point where we can spare everyone else in this forum any further boredom on this subject. I'll make this my last lengthy post on this topic (though unfortunately this particular one has become unseemly long), and I'll confine any further lengthy replies to email.

I read your last essay with some interest and it answers most of my questions, though I must confess I found that it answered some of them not quite satisfactorily. I'll get to specifics in a moment, after some more general prefatory comments.

Again, I think free trade, low taxes, and minimal regulatory burden are Good Things. My biggest fear in this series of posts is that I come off sounding like some kind of tie-dyed communist or something. I'm not making a case for increased government intervention in the economy; I actually think that from where we are now much government intervention could be profitably eliminated. I'm simply disputing as too simplistic your assertion that there are no circumstances whatever where the government has any constructive role.

If you don't consider yourself a Libertarian I certainly won't try to persuade you otherwise, but your policy recommendations seem distinctively libertarian (small L) at any event. I think we are splitting hairs when we argue whether you think government is "good" or "bad," based on your particular definitions of those words.

While I agree with you that the founders insisted that any government secure individual and property rights for its citizens, I don?t really believe that they meant for its purpose to be so thoroughly limited. Read the preamble to the Constitution of the United States:

>> We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America. <<

This is a wonderful sentence that does include "secure the blessings of liberty" and "establish justice" as two of the Top Six Reasons for Founding a Constitutional Republic, but also includes some other stuff as well. Among those other things are to "promote the general welfare." The precept of liberty is a critical element, but liberty will sometimes be restricted if it is contrary to domestic tranquility, injurious to the general welfare of the nation, etc.

We're reaching a level of diminishing returns on discussions of this point. We agree on most elements of liberty and free trade, but I think that in certain, fairly rare cases these should be limited in order to subordinate them to the general welfare of the nation. We just disagree over this point, as you seem to be insisting that this should never ever ever NEVER EVER happen, and I just think that's too absolute and too extreme to be true. I would take no great pride in being a free but savage nation. I'm not clear whether you would find that an acceptable outcome so long as liberty is preserved; or whether you simply don't think that the sort of liberty you insist on could lead us to that point. Those are two separate choices, and I think it matters which of them you believe.

Labor laws are one good example of this. Back in the bad old days, kids younger than 18 could work all manner of dangerous jobs at great toll upon themselves and their future (with respect to their schooling). Assuming that they were not physically compelled to perform these jobs, and they and their employers arrived at their employment agreements voluntarily, would you suggest that the laws preventing this be overturned? Or, would you suggest that workplace safety laws (applying to adults, so we establish that we're talking about those of majority age) be overturned so that the employer and employee negotiate individually upon workplace safety as part of the "voluntary exchange" of labor for pay?

Now for a few particulars:

1a. MP (7/20/2003): "There isn't even _one_ example in history of a dominant company harming its customers in the way you suggest is possible"

1b. MP (7/22/2003): "Next, I'd like to state what I consider to be 'harm': violating somebody's rights, which means initiating physical force (or threatening it) against a person or his property. This can be called 'political' harm.

Other types of harm are _moral_ issues, not political ones, and hence the government has no legitimate role in responding to them (or acting to prevent them)."

I think at least we've gotten to the bottom of this one. I'll address the last sentence first since it's the easiest. The government responds to one form of non-physical ("political") threats already (in a non-economic context) by way of slander and libel laws. Once you insist on such a broad and general statement ("government has no legitimate role in responding to non-physical threats), it has all kinds of consequences. Be prepared to defend the idea of striking libel and slander laws from the books.

But I have a more general problem with this pair of excerpts from your previous posts. I think it's just a little bit sneaky to make so broad and universal a claim, and to later justify it by explaining that the original statement is (of course) true, provided you use the following very particular definitions of harm. I'll agree that there's not much occurrence of companies violating the physical integrity of its customers or their property. It's bad business to do so. But price gouging occurs sometimes, as does collusion among competitors, and there is no question that financial harm can be done to a consumer, even if the amounts are minor or duration is short (and even if the consumer voluntarily paid his money despite the outrageous price).

In rare circumstances, applied sparingly, the government can actually contribute to the general welfare of the nation by interfering in some really offensive transactions. Loan sharking at 1000% interest; collusion and price fixing; disaster area price gouging; abuse of monopoly power; etc. I just don't find the argument convincing that says we should never interfere in a voluntary transaction under any circumstances, no matter how egregious. That just can't be right.

2. MP: "Such companies can be handled with normal criminal law - anti-trust isn't necessary."

I'm not clear where you would draw the line between "normal" criminal law and anti-trust. The Sherman Act is itself criminal law, just like the laws that ban fraud.

>> Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony[.] << (§ 2 Sherman Act, 15 U.S.C. § 2)

3. MP: "Predatory price wars - this is one of the specific fallacies exposed by the economists I mentioned. The main thing to keep in mind here is that a successful business manager would have to be almost literally _crazy_ to try this - and his boss ought to fire him if he tries (and the board of directors should fire _him_ if he doesn't)."

I realize that yours is one interpretation, and there is much to support this idea, but this is not actually the end of the discussion on this. While what you say with respect to actual predation of this sort is generally (though probably not always) true, asymmetric information plays a role in this subject and it cuts both ways. Forgive the long excerpt, but this (from The Economist) is too on-topic to pass up:

>> The consensus of the early 1980s said that preying on would-be competitors [via predatory pricing] would be too expensive...Game theorists showed otherwise. An incumbent firm may convince entrants that it will cut prices sharply if they dare to compete. It is the credible threat of predation, not the actual making of losses, that deters competition--and issuing threats is cheap. Game theorists had made predatory pricing seem feasible again. ...

The debate takes another twist with a new book by John Lott, a fellow in law and economics at the University of Chicago...As Mr Lott says, a chief strand of the game-theory account of predatory pricing relies on the idea that incumbent firms have an advantage over would-be entrants--they know more, especially about their own costs, than newcomers do. This advantage helps them to issue a credible threat to cut prices. The role that "asymmetric information" plays in the analysis has gone largely unchallenged. This was a mistake, says Mr Lott.

For entrants, too, have privileged access to crucial information--information about their own intentions. And they are in a position to profit from this knowledge. Suppose a monopoly is enjoying high profits, deterring competition by the mere threat of predation. The stockmarket values the firm accordingly. A would-be entrant knows that once it announces its arrival, the value of the monopoly will fall (whether or not the firm actually carries out the threat to price at a loss). The entrant can short-sell the monopoly's shares before beginning to compete, thus boosting its expected returns. ...

The potential entrant's information changes things. In cases where the game-theory models say that one would be very unlikely to appear, this new factor pushes the other way, making competition more likely than before. The current presumption that threats can be credible because of asymmetric information therefore needs to be re-examined.

Mr Lott next investigates empirically a different aspect of the current consensus. For the threat of predation to be credible, the monopoly's managers must be rewarded in ways tied to output, not short-term profits (because profits would suffer if the threat were carried out). The managers must also be entrenched (for instance, protected from threat of hostile takeover); otherwise, owners could renege on their promise to disregard short-term losses. Mr Lott examines companies that have been sued for predatory pricing, comparing those that were sued successfully with the others, and also with benchmarks for similar firms that were not sued at all. Managers of accused companies were on the whole no better entrenched than the rest; and their incomes were about as much tied to short-term profits. This is consistent with the old view of predation?that the threat to price at a loss is not credible, and predation is no good as a strategy.

Mr Lott makes some other good points. For instance, he argues that government enterprises are far more likely to engage in wasteful, anti-competitive pricing than private ones (and he finds empirical evidence to support this). Yet there is a nagging omission. Mr Lott refers now and then to the antitrust action against Microsoft, making it clear that he regards it as wrong-headed. That is, of course, consistent with his free-market, Chicago-school outlook--but nowhere does he discuss Microsoft or other high-tech companies head-on.

This is a troubling gap. On Mr Lott's own analysis, Microsoft looks exceptionally well-placed to make credible threats. Could any manager be more firmly entrenched at the head of his company than Bill Gates? And Microsoft's bosses take their rewards principally in the form of increases in the value of their shares--which puts long-term profits at a premium over short-term profits. << (The Economist, "Preying on Theory," 7/8/1999)

So maybe it's possible to do, maybe it isn't; I just don't think current theory has answered this one. To suggest that we have a definitive answer here seems optimistic to me.

4. MP: "Lastly, my main objection to allegations that anti-trust remedies like breaking up a company are beneficial on net balance is that they commit a major economic fallacy. These allegations pay attention to what can be seen (the wealth produced in the aftermath), but not to what _cannot_ be seen: the wealth that did not come into existence because the original company was broken up.

It is _understandable_ that people would do this, since nobody can measure what doesn't exist, but it is a mistake, and that mistake invalidates the allegations of benefit."

This is a hard objection to accept. I previously cited two examples of wealth being created in the aftermath of a breakup; your reply that there are unmeasurable offsetting reductions in wealth is possibly true, but how much are those benefits? How do you know which is the more significant (the measurable wealth-creating instances cited or the unmeasurable wealth-destroying effects)? Really, as convinced as you are of the veracity of your theory even without the availability of numbers to support it, it sounds like this is your "gut feel." This gets back to my suggestion that part of economic theorizing today is based on political preferences. At a minimum we should acknowledge that the verdict is undecided on this one. Personally I would argue that in such cases where evidence is ambiguous, but what we've been doing seems to have produced the world's best economy, the burden of proof is on those who would argue that what we've been doing all along is wrong.

So where does that leave us? Oddly enough, for all the discussion, it leaves us in agreement on most substantive issues; our disagreement only surfaces at fairly rare and extreme edges of capitalism. I'd argue for some occasional consideration to the general welfare where you argue that such consideration is actually detrimental.

I've greatly enjoyed the discussion, and I hope you have as well.

JKS.

Return to the index for this subject.