Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP Posting-Version: $Revision: 1.6.2.16 $; site inmet.UUCP Path: utzoo!lsuc!watmath!clyde!burl!ulysses!bellcore!decvax!genrad!panda!talcott!harvard!think!inmet!nrh From: nrh@inmet.UUCP Newsgroups: net.politics.theory Subject: Re: Laws of Libertaria Message-ID: <28200613@inmet.UUCP> Date: Wed, 29-Jan-86 03:59:00 EST Article-I.D.: inmet.28200613 Posted: Wed Jan 29 03:59:00 1986 Date-Received: Thu, 6-Feb-86 10:49:43 EST References: <28200585@inmet.UUCP> Lines: 122 Nf-ID: #R:inmet:28200585:inmet:28200613:000:6318 Nf-From: inmet!nrh Jan 29 03:59:00 1986 Pardon me, Jan and Mike, for butting in, but.... >/* Written 5:15 pm Jan 23, 1986 by mrh@cybvax0 in inmet:net.politics.t */ >In article <28200587@inmet.UUCP> janw@inmet.UUCP writes: >... > >> Two sides should be discerned in this question: the *mechanisms* >> of getting satisfaction; and the *motive force* activating >> these mechanisms. E.g., in our society, the Congress, the press, >> the lobbies etc. are the machinery through which the *interests* >> of, say, polluters and anti-polluters work. > >You also need to consider the efficiency of the machinery for >transmitting power. That's a strong point of one government, and a >weak point between governments. Indeed. Of course, one doesn't want too strong a mechanism for this, any more than one wants too "strong" a dollar! The problem with a SINGLE mechanism is that you can't simply imbue it with fairness: you can't create a court and say: "This court's decisions will be fair" and make it stick. Thus we're left with a choice between multiple conflicting authorities and a single one, neither of which (in this imperfect world) will work properly. The best answer I've heard to the "Who will Watch the Watchers" is: "The other watchers!". One is too few, and I'd rather have an inefficient government at its own throat than an efficient government at mine. >> The difference between [Libertaria] and status quo is that no institution >> has an artificial *monopoly* on the functions it is supposed >> to serve. The advantages are many. Competition is an incentive >> for the institution to *really* serve the supposed function. Thus, even >> where de facto there is a monopoly (a natural monopoly) >> it works better and is sensitive to customers. > >By the definition of a natural monopoly, it is uneconomic for anyone to >compete. So why would there be efficiency and responsiveness? I suggest you call someone who knows economics and whom you trust, but briefly: A "natural monopoly" is a situation in which a the greater the size of the firm, the lower its production costs. Given such a situation, one has positive feedback -- the largest firm, in the absence of regulation-threat, may lower its prices (because its costs are lower) and still make money while charging less than the others. Having lowered its prices, it finds that it has gotten a larger share of the market, thus lowering its costs still further, and so on until it has captured the whole market, and, since its costs are lower than those of any likely new firm it may prevent any new firm from entering the market by either keeping its prices low, or making it clear that it could lower the prices should someone try to enter the market. An entering firm would, the argument goes, be unable to match the low costs, and hence the potential low prices offered by the old firm, hence the monopoly position is stable. In my economics class, electric power provision was offered as an example of natural monopoly. Now, here's the surprise: ANY company, natural monopoly or not, is trying to make more money. It can do this, in the case of natural monopoly, by charging a price that causes the most profit. It turns out that this is not simply "the highest price the market will bear" -- but rather a price calculated on (as I recall) the average cost of production. Let us say, for example, that the electric power provider finds himself a monopoly. He does NOT then raise the price of electricity to $100,000 per kilowatt-hour. Why? Because he would lose customers. fewer customers mean less money. Instead he charges something like his average cost, calculating a maximum (price*unit-sales)-costs. He also remains responsive to customers, in order to keep them from switching to substitutes (steam power, private generation) and to make greater use of electric power (and thus more profit, given the declining cost of providing power). The power company does this not as efficiently as if he had competition, but not as inefficiently as if he were guaranteed buyers (electric power demand is elastic, that is, responsive to changes in price). I think it was Ben Franklin who applied this logic to the US postal system of his time, LOWERED the price of services, and increased revenue. Second surprise: such monopolies are not stable. In OUR society they tend to be regulated immediately by government, or threatened with such regulation. Often, the firm accepts this as a way of cementing its monopoly. In a free society monopolies would be unstable for several reasons. Besides the more obvious ones of innovation (no good to have a monopoly on rubber trees if someone invents a cheap synthetic rubber), and substitution: (no good to have a monopoly on firewood if people find they can burn coal) there is my current favorite instability: to the need of a large monopoly to lower its prices all over the country to match any upstart that comes along. If, for example, I decide to go into kumquat production, and form "Little Kumquats Inc", it is true that "Big Kumquats Inc" may cut its prices to match mine, but if I cut mine still further, so that I'm LOSING money, then Big Kumquats must do the same, and not just in my area -- but ALL OVER -- wherever my Kumquats may reach. They lose $1 billion a day, I lose $1000. Neither of us LIKES it, but they'll like it less than I do. I can thus threaten Big Kumquats into NOT trying to undersell me. I can hear you objecting already, Mike: "But things like that don't happen in the Real World". Wrong. This same drama was enacted between Standard Oil (Big Kumquats) and Cornplanter Refineries (Little Kumquats) with the only interesting variation being that Cornplanter had been in the refining business for a while. You can read about it in "Machinery of Freedom"'s chapters titled "Monopoly -- How to Lose Your Shirt". >For that matter, what do you think is an example of a natural monopoly, >and why aren't governments natural monopolies by that standard? This was for Jan, but I'll answer it anyhow (and hope Jan has a chance to answer it also). Because smaller areas (to a point) are disproportionately easy to govern compared to large ones. If you doubt this, compare your federal tax cost (oh, go ahead, take out national defense) to your city and state taxes.