Bigness does not make markets more efficient, it harms competition.
The recent global financial crisis has raised widespread concern for the sustainability of the global economy and much has been written concerning the negative impacts of economic development on natural ecosystems and civil societies. Unfortunately, few viable alternatives to the prevailing economic paradigms have been suggested for consideration. Those that have been are typically little more than suggestions for fine tuning capitalist or socialist economies.
In his new book The Essentials of Economic Sustainability, John Ikerd addresses the basic principles and concepts essential to economic sustainability. Some of these concepts are capitalist, some are socialistic, and others are general principles validated by philosophy or common sense. What results is a synthesis: something that is neither capitalist nor socialist but fundamentally different. In part eight, he outlines the basic principles that drive market behavior -- and why economies fail when it comes to the common good as a whole.
Virtually all nations of the world have mixed economies with characteristics of both market and planned economies. In a pure market economy, the use of natural and human resources would be allocated among alternative uses entirely through decisions made by individuals participating in competitive markets. Prices would be determined by markets.
In a pure planned economy, all resources would be allocated among alternative uses through collective decisions made within various planning agencies of governments. The government also would be responsible for determining the prices for goods and services exchanged among individuals. In practice, all governments incorporate some aspects of market economies and some aspects of planned economies, as explained in The Essentials of Economic Sustainability.
Markets, Competition & The Collective Interest
Markets can be an efficient and effective means of serving the collective economic interests of individuals within societies but are fundamentally incapable of meeting the relational or common interest of societies as wholes.
However, markets can serve the collective economic interest of society only to the extent that specific conditions of economic competition are met or exist:
- First, there must be many buyers and sellers in each market.
- Second, it must be easy for sellers of new products to enter markets and easy for existing sellers to exit markets.
- Third, buyers and sellers must have accurate information regarding products and terms of sale.
- Finally, buyers and sellers must be free to act or trade without being subjected to persuasion or coercion.
Economically competitive markets must have so many buyers and sellers that actions of any individual buyer or seller have no appreciable or significant effect on market prices. This is necessary to ensure that benefits from increases in economic efficiency or reduced costs are passed on to consumers in the form of lower prices rather than retained as excess profits by suppliers or sellers. Under competitive conditions, any seller who keeps prices high to enhance their profits will lose sales to competitors with lower prices.
The basic purpose of economic competition is to minimize prices paid by consumers rather than allow profits to be retained by producers.
Ease Of Market Entry & Exit Critical For Market Function
Ease of market entry and exit is necessary to ensure that producers with better products, services, or ideas are able to replace those with inferior products, services, or ideas. As consumers’ needs, tastes, and preferences inevitably change, suppliers must be able to respond effectively and efficiently to inevitable changes in consumer demand. Again, the objective is to ensure that consumers are provided with choices from an assortment or collection of different products and services that include those with the greatest potential economic value at the lowest feasible costs.
Information, Choice & Market Function
To ensure accurate determination of economic value, buyers must be able to anticipate the value they ultimately will receive from a product or service at the time they make their purchase decisions. They must have accurate information regarding the ability of a good or service to provide current and continuing benefits to them individually. Lacking such information, their choices will not reflect their true needs, tastes, or preferences and thus will not reflect the true economic value of the good or service.
Finally, buyers must be free to make choices in the absence of intimidation or coercive pressures, such as aggressive marketing tactics or persuasive advertising. Any form of coercion or deception can alter consumers’ perceptions of needs or change their tastes and preferences.
Expenditures made for advertisements that “create” consumer demand that did not exist previously represent economic wastes, if not outright economic fraud. New markets should be “discovered,” rather than “created,” by simply informing potential buyers of the characteristics of new products. Sustainable market economies must accept consumer’s tastes and preferences as given.
Size, Allocation & Efficiency
Markets can also provide incentives to increase economic efficiency. Market economies are characterized by two distinctly different types of efficiency. Operational efficiency is a reflection of the technical efficiency of production, and can be measured in terms of output and price.
Economies with lower overall production costs may be able to produce larger quantities of economic output at lower prices and thus may be more operationally efficient. Specialization, standardization, and consolidation of control, the essence of industrialization, are means of increasing operational efficiency through “economies of scale.”
A few large economic organizations may operate at lower costs than would a larger number of small operations. If each operation keeps its profit margins low while vying for a larger market share, markets with fewer large operations may offer lower prices to consumers than would markets with more small operations.
However, once a few large operations gain control over a market, they invariably find ways to increase profits, through formal or informal collusion that raise prices or keep prices higher than necessary, thus depriving consumers of the economic benefits of their greater operational efficiency.
The Myth of Efficiency & Economies of Scale
Allocative efficiency is the effectiveness with which markets provide consumers with an assortment of goods and services capable of best meeting their individual wants and needs. The effectiveness of markets in meeting needs and wants of individual consumers depends on the efficiency with which scarce resources are allocated, as well as the technical efficiency of production.
Ultimately, allocative efficiency depends on maintaining highly competitive markets. There is no other means of ensuring the efficient use of resources other than through a large number of relatively small buyers and sellers, ease of market entry and exit, accurate consumer information, and consumer sovereignty.
Today’s global economy is dominated by larger corporate organizations that have gained their economic and political power by proclaiming their superiority in operational efficiency. They claim their size is necessary to achieve the “economies of scale” needed to produce goods and services at the lowest possible costs.
However, in the process of consolidating production into fewer and larger economic organizations, primarily large public corporations, many of today’s markets have lost their allocative efficiency. There is no longer any assurance that global markets are allocating scarce natural and human resources efficiently to meet even the collective needs of individuals within society.
Today’s global markets lack the characteristics essential for economic sustainability.
Part 7: Economic Sustainability: Ultimately about Energy
Part 6: The Essential Characteristics of Economies -- And How They [Could] Drive Sustainability
Part 5: The Three Economic Principles of Sustainability
Part 4: From Utilitarianism To Ethics: The Social Principles of Economic Sustainability
Part 3: The Three Ecological Principles of Economic Sustainability
Part 2: The Hierarchy of Economic Sustainability: Getting The Principles Right
Part 1: Ethics & The Challenge of Economic Sustainability