| 0:36 | Intro. Listener question:How do you distinguish when the government or the market is the more appropriate route for fixing a problem? Standard, mainstream economic approach: Look for market failure. So long as markets are competitive, no externalities, public goods, imperfect information, monopoly, then everything will turn out fine. Leads to the conclusion that if any of those things do exist, everything won't turn out fine and government is necessary. Some conclude that that's what government does--it fixes those things. Called "market failure" but technically they are not market failures. They are failures of the institutional arrangements to allow markets to work. E.g., if property rights for say fish in the ocean are too costly, then markets can't work to efficiently clear. When people say "the market" or "free markets" they're often talking about commercial transactions, but economists are really talking about decentralized, uncoerced decision-making within some sort of institutional framework. Traffic, fishing: If you go fishing and nobody owns the ocean or individual fish--called a commons--there is an incentive to over-fish, stock of fish gets too small, fewer or smaller than the fishermen, if they could act in concert, would like to achieve. Economists are not just talking about retail markets. Foundations of what markets need don't exist. That said, standard view is probably more questioned now. Francis Bator, market failure, Paul Samuelson, public goods; Coase introduced more sophisticated view. General agreement among economists on standard view with regard to public goods, but what about unequal income distribution? Often described using the words "market failure," but it's not clear why it's a market failure on economic grounds. Different category. |
| 9:44 | Fishing: Host of ways to increase the size of the fish catch over time, both size of average fish and quantity. In a world of free market fishing there is too much fishing because the ocean is not owned, so the size of the average fish decreases and the quantity caught in each time period decreases. Different ways to solve that problem.- 1. Do nothing. Let stock of cod become smaller. Will be an incentive to farm cod. Might or might not work, but some fish can be farmed.
- 2. Regulate it. Command and control. Put limits: you can only catch a certain number, only can fish at some times, have to throw back ones that are too small. Problem: Have to monitor it. Punish people: if we catch you catching a fish too small we punish you.
- 3. Create system of property rights. People can buy and sell rights.
- 4. Do nothing and see if moral system evolves, like littering--social norms.
More ways, but these are some. Of those solutions, which one will government choose, and which one do we want government to choose? Which will be most effective in terms of cost and outcome, and which will be most attractive to politicians? Not necessarily the same thing. Public choice scholarship, Buchanan and Tullock, George Mason U. and Charlottesville. A government is a human institution just like markets, and it's just as illegitimate to presume that government will work in an idealized way as it is for markets. "The notion of government as ideal problem solver still seems to be the default mode" for a lot of people. Confusion between what we'd like and what is. It still may be that in a particular situation government regulation is the better solution to just letting things alone, but it's a scientifically mistaken approach to say that this institution doesn't work very well, therefore this other institution is the way to go. Shocking and surprising idea to many. Journalists often offended or bewildered by it. We like the idea that politicians will help us, but we understand they are not saints. They say they are in public service and public sacrifice, but what's the evidence that government is going to do what politicians claim? Sometimes those of us who say we like freedom we get mocked as seeing the world through rose-colored glasses. But it's equally absurd to think the government will handle it. Big, insoluble problems may have the best solution of letting a thousand flowers bloom, competition among different creative ideas is more likely to result in a solution than letting the government deal with it. Why do we expect a single hierarchical institution, even if can hire lots of individuals, will do it better than lots of individuals? Once government gets going in a given direction it creates interest groups. Market has bankruptcy, failure, losses, no incentive to maintain people in mistaken courses of action. "Let the market handle it" is more sophisticated and humble than saying "Let the government handle it" because latter presumes an expert exists and can be depended upon to act in the public interest. |
| 21:04 | Pollution example. In 1980s problem with smokestacks from power plants, sulphur dioxide in atmosphere. Government mandated a particular form of technology, scrubbers, unbelievably expensive. Alternative way--which would still involve government--would have been, "For every pound of SO2 that you pump into the atmosphere, you have to pay a fine." Gives people incentive to find cheaper ways to reduce pollution. Government solution doesn't have to be one-size-fits-all. Sometimes call the latter a "market solutions" or "market-based solutions"--tradable emission rights. But they are not markets! But they are more attractive than fining or sending someone to jail. Decentralized. Actual politicians have an incentives to prefer centralized solutions. Automobile pollution: cars required to have catalytic converters was the method chosen by the politicians. Works but there was a better way to do it--tax or fine car-makers for polluting a certain amount. At the time of the law requiring catalytic converters, Honda was already doing better than required, but it was required to put it on anyway. Goal was to handicap a foreign competitor. Nothing to do with making the world a better place, everything to do with making Chrysler and Ford more profitable. Turned out that GM held the patent on the catalytic converter. When we advocate for issues like pollution control it's not enough to say, "Private individuals acting in their own self-interest will often pollute, and therefore we need regulation." That's true. Regulation has the ability to make the world a better place. But not every kind of regulation does it equally well. Honda story is identical to what happened with the coal-burning power plants. Bruce Ackerman and William Hassler book, Bird Amendment, affected Senator Bird's home state of West Virginia. Coal in W.V. is closer to the surface than coal at west but is dirtier. By requiring scrubbers, a firm will now buy the cheapest coal available. Bird did it to protect jobs and profits in W.V. Environmentalists by and large supported the Bird Amendment. But no obvious reason. Levels of pollution were not changed in any significant way--it was a more costly way to get there. Motivation of activist groups is to signal that they are on the job, impressions they make. Typical donor doesn't follow the debates in detail. "The best is the enemy of the good." Reality of politics that compromise is inevitable is sometimes invoked to justify things that are not really attractive. |
| 31:41 | Antitrust. Virtues of decentralized outcomes, competitive markets. We teach people in economics what's called the "competitive market." A lot of undergraduates are taught that this means an infinite number of firms selling a homogeneous good, free entry, perfect information, one price for all transactions. Maybe that works for wheat, but everything else is not competitive under these restrictions. People jump to the conclusion that governments have to make conditions competitive. In economist's point of view, power is constrained by competition; in centralist world-view, government is what constrains power. A lot of people who love free markets argue that the key is anti-trust. But what is anti-trust? Just because an industry does not have an infinite number of firms doesn't mean it has monopoly power. Knowledge of history is very useful. Doesn't prove it, but it does shed light. History of anti-trust laws: first statute commonly believed to be 1890 Sherman Act. But in fact State statutes began in 1889 and continued to be enacted through 1892. Common view is that you had the robber barons, and they had monopolies, they were exploiting the consumer so the government had to step in to help the consumer. The railroad, the telegraph, personalities, the Carnegies, the Rockefellers; government just couldn't let it go on, so we'll pass the Sherman Act because we care about consumers. The first hint that this story is not that accurate when you realize that John Sherman was the sponsor in the Senate for the McKinley Tariff, passed in Oct. of 1890, largest tariff increase in U.S. history. Tariffs are in fact a tool for granting monopoly power. The industries that were singled out as being the most monopolized were the industries that were growing large; but prices in those industries were falling by more than average (it was a period of general deflation, gold standard era); and outputs were expanding by more. Tom DiLorenzo, 1985 article in International Review of Law and Economics. No evidence of monopoly. Standard Oil, American Tobacco, Carnegie Steel. They were growing and had big market shares but in fact they didn't have monopolies and they were benefiting consumers, as evidenced by their price declines. Gary Libecap, economic historian, at Arizona, came to same conclusion. The legislation got sparked by the meat packing industries. Gustafus Swift had brainstorm that by centralizing the slaughter of beef, chicken, and pork he could make a lot of money. Very quickly was shipping beef, refrigerated railroad cars helped; prices of beef from 1879 to 1886 price had fallen by 30% in real terms for consumer. Local butchers were undercut; and other meat-packing competitors sprang up. Explosive industry. Reaction to that industry sparked anti-trust. Economy was becoming so much more competitive that the old-line producers complained and got the ear of legislators, giving rise to antitrust. Antitrust was an attempt to halt that competition. |
| 43:09 | Antitrust in modern times. Political forces always make it different from economists' models. Is it maybe more attractive now than its historical roots? Since about the mid-1970s it's gotten better. Triumph of scholarship in ideas, Federal Judiciary became influenced by scholarship, U. of Chicago, which showed overwhelmingly that much of what economists and lawyers thought of as anti-competitive behavior was actually innocuous or pro-competitive. Judge Richard Posner, Judge Robert Bork, are yet advocates of antitrust legislation even though they are aware of the scholarship. Would like to see evidence of predatory pricing actually working to hurt consumers, of mergers actually leading to long-run consumer harm, of firms becoming so large and secure that they raise price, reduce quality, and lower output in ways that hurt consumers. Tying or exclusion behavior--show evidence that it hurts consumers. Collusion--competitors getting together to agree on a high price and that they won't compete--may not even hurt consumers. George Bittlingmayer, writing under Lester Telser, showed how collusion under plausible circumstances can actually help consumers over the long run. What the FTC and Justice Department worry about is if your market share gets sufficiently large you have enough control over the price that you can take control and take advantage, exploit consumers. Taken as a fact, but that worry may be misplaced. Schumpeter. If two companies want to get together and one wants to buy another, most people would say that shouldn't be allowed. Won't it inevitably lead to lower competition and consumer harm? Tradeoff between today and tomorrow. There is a long-term benefit from letting firms swallow each other. "Capital is greedy and capital is fast." If a large firm starts making above-normal profits, others will jump in. Real form of competition is not just via imitation of same products, but by innovation. The higher the profits, the greater the lure for competitors. Overwhelming evidence that this kind of competition is real and seldom fails except when stomped on by state interference. Schumpeter said only source of monopoly power is government. Companies are always subject to the "gales of creative destruction." Wal-mart: Why do they keep lowering their prices if they are a true monopoly? The best long-run strategy is to continue to innovate, making small amount on a lot of sales, reduces the possibility of attracting competitors. You can raise your price, and lower them only if a competitor comes in. But it turns out to be rare. Instead they just keep their prices down because someone could be enticed to come in and do it a totally different and maybe even better way. IBM example. Recent example: Microsoft, one of the claims is that it is so dominant and has so large a market share that it will just grab markets for all its applications. But Firefox is now the dominant web browser. Ironic. Stan Lebowitz and Steve Margolis research: MS kept pushing its prices down and its quality up. If it truly had monopoly power why would it have done that? If there'd been no antitrust laws would they have exploited monopoly power that they did have? |
| 57:22 | Dynamic process. At any point in time there's a firm that scary, large. People complain about MS that it's software is dull. Other competitors that have grown up--Apple, but even more open-source software; Google--and now people are afraid of Google. People don't seem able to look to the past and see that in the past competitors came along, and found new ways to do that activity. Wal-mart vs. A&P (Atlantic and Pacific Tea Company)--A&P was dominant supermarket chain but now isn't even remembered. Big four auto makers: How could you start a whole new car company? Looks silly now to have considered them so big. Our children will live to see Wal-mart go bankrupt and people will then be sad to see it go; and it will happen with Microsoft; iconic firms. Nature of a dynamic economy. Schumpeter: maximizing output today is at the expense of reducing output over the long run. People always try to do better in their personal lives; but that might not be the best analogy for government despite its universal appeal. Directed and controlled solutions may not be best. Tendency to want to leap in is in reality then filtered by the political process, and also by our lack of knowledge. With centralization, discovery and experiments in a decentralized market process is dampened. |
Don Boudreaux of George Mason University talks with EconTalk host Russ Roberts about when market failure can be improved by government intervention. After discussing the evolution of economic thinking about externalities and public goods, the conversation turns to the case for government's role in promoting competition via antitrust regulation. Boudreaux argues that the origins of antitrust had nothing to do with protecting consumers from greedy monopolists. The source of political demand for antitrust regulation came from competitors looking for relief from more successful rivals.
READER COMMENTS
Dion G
Oct 1 2007 at 11:08am
Great podcast.
You could also add Adobe Photoshop & Winamp as competitors of Microsoft’s software (plus countless others). I really doubt they wield much market power at all. Windows is competing with both open-source (Linux) and itself (unauthorized copying).
However OPEC seems to get less media attention than Microsoft or the “evil” oil companies which “are” fixing prices.
I’m curious your opinion on OPEC?
Is their influence on oil more to do with short term stickiness of their quotas on the quantity of oil supplied, than a direct affect on price (which is doubtful since they only control 1/2 of the world’s reserves and the problems they have with playing a non-infinite prisoner dilemma game) or am I completely missing another relevant point for OPEC’s continued participation in the market?
Dion G
Oct 1 2007 at 11:13am
*Relevance is probably a better word than participation in the last sentence
Luke O
Oct 1 2007 at 12:06pm
Good podcast overall although there is one additional aspect to Wal-Mart that you didn’t mention. The reason it is so good is that it fools most people for awhile.
Wal-Mart prices fool people by what they see. They see the price they pay now for a given product.
What they do not see is that Wal-Mart uses special government tax incentives as well as the welfare state to make their consumers pay what should be their costs(that would be included in competitors prices) later down the road. So when you pay
$4.88 for something at Wal-mart you are actually paying more probabilistically for that item(through tax) later down the road. So the argument against Wal-Mart is not that their prices are low, but that they are deceptively low.
Russ Roberts
Oct 1 2007 at 1:19pm
Luke O,
Do Wal-Mart employees have their own welfare benefits that Target employees can’t receive? Does Wal-Mart have its own tax incentives that other competitors can’t receive?
Tax incentives and welfare may or may not be good ideas. But I don’t think Wal-Mart gets a special edge that makes their prices especially low. And I don’t think that government welfare or tax incentives have become dramatically more generous over the last ten years. Yet the prices that Wal-Mart and Target and other competitors who can keep up (there aren’t many) keep falling. So I suspect the source of those lower prices has something to do with how Wal-Mart and Target use technology more effectively rather than changes in government incentives.
Mike
Oct 1 2007 at 2:19pm
I was struck by both Russ and Don’s puzzlement about why the environmentalists would have supported Senator Bird’s self-serving legislation mandating scrubbers when a more economic solution was available that would have benefited Western coal over West Virginia coal. Western coal really means coal mostly coming from Utah which is a very “red” state over coal from West Virginia which is a much more “blue” state. I think their behavior was very understandable particularly when they are much more into command and control solutions vis market based solutions to our environmental challenges.
Lauren
Oct 1 2007 at 2:20pm
Hi, Russ.
You said
I think Luke O is worrying about a different question, one that sensibly tries to infer the ultimate market equilibrium that may result from the innovative stategy of an individual firm.
Suppose Company A is indifferent between paying workers $6/hour without health insurance, or offering them $5/hour and using the difference to buy a group insurance plan for those it employs. Suppose Company A settles on the latter combination–lower wage plus private insurance benefit–and is content that it gets the satisfied employees it is looking for.
Now suppose Company B comes along and notices that there are plenty of potential employees around (elastic wages), and they’ll all happily work for somewhere between $5/hour and $6/hour without being offered any insurance benefits. We can even imagine that $5.01/hour is the market wage without insurance benefits.
Now Company B can definitely underprice Company A for selling identical products.
Now, if an employee at Company A gets sick, he surely uses his private insurance plan, which presumably dominates the government’s welfare-based plan–a plan that is available to employees at both Company A and Company B. But if an employee at Company B gets sick, he definitely uses the government’s welfare-based plan.
Luke’s question is this: What is not being accounted for when Company B employees happen to get sick? Because there is a government-supported plan in place that requires hospitals to treat even the uninsured in some U.S. States or circumstances, those individuals get treatment at the taxpayer’s expense. It’s as if they have a health insurance policy after all, but without bearing the full insurance cost themselves in lower wages. The cost is shifted to taxpayers, who have agreed to pay health care costs for the uninsured in some circumstances.
And the upshot is that the cost of the products sold at Company B is being financed by the taxpayer. That’s what Luke is saying: the consumer buying products at Company B’s store is able to buy goods at a price that doesn’t reflect the ultimate price, which includes the ultimate insurance repercussions paid by that very same consumer as a taxpayer.
Now here’s the real question Luke is asking: Is that innovation of not offering private health insurance to its employees something competitively clever that Company B is doing, something that Company A ought to be doing and is missing?
And most importantly: If Company A follows Company B’s suit and quits offering private insurance, is that what we as citizens want? Which equilibrium is better for the economy as a whole–what Company A is doing, with private insurance, or what Company B is doing, to rely on the dole?
Lauren, trying to continue the goal of engaging the debate
Luke O
Oct 1 2007 at 2:44pm
Russ,
I agree with you that there are some things that they do better than their competitors, and that many peoples opposition to Wal-Mart is for the wrong reasons. They do some things that do bring down the costs of products and that is good. Just because they aren’t local should make no difference. Their prices however are not as low as they would like you to believe. There are “hidden” costs that are difficult to see.
There are many situations where they will negotiate a temporary tax haven and offer lower prices in a given community, snuff out competition, then simply abandon the store or move or raise prices back up. They exploit the rules of the game. Did they really offer prices as low as what the people paid at check out counter? Probably not, but it is harder to see those costs, and therefore people are fooled. Lauren outlines many of the ideas I am trying to get at.
Because of the probabilistic aspect of their price people will choose Wal-Mart over the other sellers even though the long term price of both products may theoretically be similar. You might call this a price failure. Wal-Mart does violate social morals and exploits the tragedy of the commons.
Take for instance Wal-Mart’s wages. The reason that many are willing to accept the low wages at Wal-Mart is because they can fall back on the welfare state. This isn’t a special advantage, but it’s certainly one that they exploit that others don’t. If this did not exist the wages(and the at the counter prices) would rise as people would rebel and refuse to accept the wages without the additional government benefits. Wal-Mart’s prices would not appear as low. Government programs are artificially lowering their prices.
• In 2004, a study released the UC Berkeley Labor Center found that “reliance by Wal-Mart workers on public assistance programs in California comes at a cost to taxpayers of an estimated $86 million annually; this is comprised of $32 million in health related expenses and $54 million in other assistance.”
• Source: Ken Jacobs and Arindrajit Dube, “Hidden Costs of Wal-Mart Jobs” [PDF file], UC Berkeley Labor Center, August 2, 2004.
Bastiat had it right 150 years ago when outlined all of this in “That Which is Seen, and That Which is Not Seen.” Wal-mart’s executives understand the idea perfectly and have hidden their costs in that which is not seen.
Russ Roberts
Oct 1 2007 at 4:33pm
Luke O,
You write:
“There are many situations where they will negotiate a temporary tax haven and offer lower prices in a given community, snuff out competition, then simply abandon the store or move or raise prices back up.”
I know this is a popular argument among people who worry about Wal-Mart. I don’t think it’s true. If Wal-Mart jacked up prices after it entered an area it would be a major news story. I’ve never seen such a story. But maybe I missed it. If anyone out there knows of such a story, please let me know. And while I’m sure that Wal-Mart sometimes closes a store, I doubt it does it for strategic reasons. I think it does it because the store isn’t profitable. I’d like to see how many times Wal-Mart has closed stores.
You write:
“The reason that many are willing to accept the low wages at Wal-Mart is because they can fall back on the welfare state. This isn’t a special advantage, but it’s certainly one that they exploit that others don’t.”
What do you mean that “they exploit it” and “others don’t?” Is it a secret? Are you suggesting that Wal-Mart workers shouldn’t be eligible for government programs? Are you suggesting that somehow, Wal-Mart employees are the only ones who know about these programs?
The Jacobs and Dube study has no direct data on the pay or benefits of other retailers. The subsidies to other retailers is inferred from testimony given by a consultant in a law suit against Wal-Mart. It might be accurate. It might not be. I will try and find out if the study has been published.
Richard Sprague
Oct 1 2007 at 11:02pm
As usual, another great podcast. One nit about Boudreaux’s comment about Microsoft Internet Explorer versus Firefox. IE remains far and away the most popular browser, even among new users, simply because the vast majority of customers use the default browser that comes with their OS.
I’m surprised nobody brought up the idea of path dependence as a justification for antitrust laws, how an early lead in some markets can suppress innovation later. This was the argument against Microsoft, that the operating system is more important than the rest of the value chain, and that once one firm dominates it, the switching costs are too great to allow for other innovators.
In my opinion the path dependence argument was successfully debunked by Margolis and Lebowitz, but you still see it surface regularly, including in the comment discussion about Wal-Mart. You might argue that Wal-Mart hurts consumers even if it doesn’t raise prices. Once they’ve shoved out all the competition from a local economy, Wal-Mart prices and service just need to be “good enough” to prevent new entrants. Many people make the same claim about Microsoft, that its software is not great, but just “good enough” to keep out the competition. In the long run of course Microsoft (or Wal-Mart) would be out-competed by clever new entrants, but by then we’ll all be dead. What’s wrong with a benevolent politician just giving the market a little kick?
Michael Ulm
Oct 2 2007 at 12:43am
Throughout the podcast you claim that the fact that an alleged monopoly lowers its prices is evidence that it doesn’t really wield monopoly power. This is a false argument. A true monopoly will price its goods to maximize its profits. Usually, when prices go down, the consumer base will increase, and so, a monopoly may decrease prices to increase profits.
Since most of your arguments against anti-trust laws hinged on this false argument, I cannot agree with your conclusions.
Michael Ulm
Oct 2 2007 at 1:02am
You mention the study by Liebowitz and Margolis as an argument against Microsofts monopoly power. They basically argue, that when Microsoft enters a new market, prices go down and quality goes up. This is not surprising, since Microsoft can use its monopoly power and deep coffers to undercut competition. Once they have eliminated competition, it then is in their self-interest to keep prices low enough to keep the barrier of entry high; potential competitors who have to bear the full R&D cost can not expect enough profit, and so the only viable competition is open source software.
As for raising quality of their products, this can only be observed during the phase when they are competing directly. Once they have monopoly in a
sector, innovation dwindles to a stop (prominent examples include Internet Explorer and Excel).
Luke O
Oct 2 2007 at 3:25am
Russ,
I have tried to think very deeply about your questions. Whenever you are dealing with uncertainty there is always an aspect of things that is hard to figure out. There is an aspect of uncertainty to Wal-Mart’s prices.
Like Richard Sprague mentioned they may also have gained some initial lucky advantages because of subsides but and also do have some effective methods of reducing costs.
You said: “I know this is a popular argument among people who worry about Wal-Mart. I don’t think it’s true. If Wal-Mart jacked up prices after it entered an area it would be a major news story. I’ve never seen such a story. But maybe I missed it. If anyone out there knows of such a story, please let me know. And while I’m sure that Wal-Mart sometimes closes a store, I doubt it does it for strategic reasons. I think it does it because the store isn’t profitable. I’d like to see how many times Wal-Mart has closed stores.”
I would disagree here. It doesn’t jack up prices after it enters a territory; it jacks them up after being there for years. Usually after their negotiated tax-subsidy runs out. They either raises prices or find another nearby community willing to give them a negotiated subsidy and the process starts over again. Why is the nearby community willing to oblige? They don’t get probabilistic pricing. There is story of Wal-Mart using its special tax status and bailing when it was over here at:
http://www.aflcio.org/corporatewatch/ns05242004.cfm
You are probably right in that Wal-Mart is not the only offender. TARGET and even small business owners may sometimes try and do the same thing. Small businesses are not immune to trying and exploit advantages. However, Wal-Mart is the biggest offender and so should face the largest amount of scrutiny. We very well may be paying the costs (through taxes) of other businesses as well.
Lauren asked the very important question of is this an inherent cost that we pay for all businesses or do just a few businesses exploit the system?
While the Jacobs and Dube study does not have direct data on the pay or benefits of other retailers, it does showcase than any retailer who does provide benefits and includes such benefits in the immediate cost will be punished. People will choose Wal-Mart over other(possibly better gamble alternatives) even if the long term cost may be the same(or worse). This is related to the ideas of Daniel Kahneman and Amos Tversky as it has to do with how people make decisions under risk.
You said: “What do you mean that “they exploit it” and “others don’t?” Is it a secret? Are you suggesting that Wal-Mart workers shouldn’t be eligible for government programs? Are you suggesting that somehow, Wal-Mart employees are the only ones who know about these programs?”
Actually what I am suggesting is this. Like evolution the ones who have not exploited this idea have been eliminated, or will be eliminated in the future. Wal-Mart has not been favored because they are “best” in an objective sense of what is best for the consumers, but that they happen to not be fittest to the environment(of negotiated government subsidies) and of people having difficulty understanding probabilistic pricing. People are irrational and the fittest is not necessarily the best. Read about the case of Red Esry from Hamilton, MO here:
http://wakeupwalmart.com/news/20051101-alt.html
Eventually most will copy them(or will be eliminated). Because of the disincentives inherent in government programs this could very likely to lead to a reduction of the of quality(and true wealth) for individuals and in the system overall. When a consequence is probabilistic, it can a take awhile for people to work it out. If you are familiar with the world of derivatives the problem is easy to see. How do people pass on risk(and costs) to other people without them noticing it? Through probabilistic rather than direct consequences. In this case through government programs, which is what Bastiat knew long ago. Taxpayers hold the risk, Wal-Mart get the prospect of gains, with a minimal probability of losses. The producers act in a way contrary to the way they would act if they faced the prospect of the losses, and the taxpayers can’t exercise normal market control.
People embrace the low price now, leaving taxpayers with a down the road gamble that is potentially large. Tversky and Kahneman showed that when it comes to making probability based decisions, people operate on biases and heuristics, not upon probabilities. The push and pull of markets is normally a combatant to this concept. What I am suggesting is that Wal-Mart has discovered how to get around this idea and that government interference has messed with normal market forces.
The local and national tax communities are holding bills they don’t even know about. It begs the question: When you buy at Wal-Mart are you actually buying a derivative?
Quote: “Wal-Mart’s reaction to the 2004 survey of its reach into taxpayer subsidies was classic bait and switch. The company responded by saying it couldn’t verify the figures, but that if they were correct, then “it looks like offering tax incentives to Wal-Mart is a jackpot investment for local governments.”
It is in situation that I must refer to the wisdom of Barry Greenstein when he said: “My gambling training has taught me to be leery of people who are trying to hustle me into doing something they say is good for me, when the only thing I know for sure is that it’s good for them.”
Lauren
Oct 2 2007 at 7:18am
Hi, Luke.
You wrote
You and I differ in thinking about the question of insurance starting with your using the phrase “exploit the system.” It’s not a phrase I would use.
When a government (or for that matter a private company) comes up with a program, say insurance for the uninsured, that program is going to get used. You can use the word “exploited” if you wish, perhaps to capture the ways in which the program is used that were not anticipated at the time the program was initiated. But in economics, those other ways the program gets used are simply the natural economic responses to the incentives created by the program. The program was badly designed if it gets badly misused.
It’s the job of those who come up with a program to think about how the program is going to be used and how to price it. Private companies go out of business if they get it wrong. Governments–perhaps unfortunately–do not go out of business; but they still have to re-evaluate their programs and make decisions such as whether the program can be made viable and how to fund it. The one thing that is not fair game is to yell that someone noticed that the program exists and used the program. The program, like any product, is intended to be used! It’s the job of the supplier of the program, not those who are using it, to redesign the program.
If a toothpaste supplier discovers its product is not always used to brush teeth but instead is being purchased and separated into its components, which are then sold overseas for more money, the toothpaste supplier doesn’t rant about how it’s being “exploited” by some other company. It just starts selling the components overseas itself. And it raises the price it’s charging for the toothpaste. It may also fire its president for not thinking properly about how to make money. It responds to the market forces.
Your use of the word “exploit” is leading you astray in other ways. You wrote
That’s definitely not what I was talking about at all. I was asking about how market forces may cause us to evaluate government programs and ultimately ask whether the programs themselves are viable, specifically in the case of health insurance (which, by the way, has long been known by actuaries to be an uninsurable risk).
Your story veers in a different direction from the insurance issue. No one forces consumers to buy at a given department store. If a store lowers prices for a while, only to raise them later, consumers still get the benefit temporarily. Hooray! The question is whether later the higher price is a monopoly price. And in the case of department stores, it simply can’t be! There’s lots of competition, today including the entire internet itself.
And its also a misunderstanding of what was discussed in the podcast. The podcast spent a lot of time discussing how even economists who were worried that this kind of behavior might happen in theory, have learned that, on the basis of the evidence, it doesn’t happen in practice. Why not? During the period when the prices are held artificially high, the competition is enticed not only to enter, but to enter bigger and better than the original company. This appears to deter even monopolists from engaging in using their market power.
I think where you have started in a right direction is in thinking about how government programs are used. For example, you mentioned how local governments do give tax breaks, sometimes only to discover that the companies they gave those tax breaks to are not doing what they–the government leaders and the community–had hoped. Governments do come up with insurance and welfare programs, only to find out that the programs are not used in the ways they intended. The party to blame is not the citizens and companies who use those programs, but the government leaders themselves, who failed to think hard and long and who failed to consider the hidden costs before leaping into implementing an ill-advised program. Focusing on those who respond to the incentives is the wrong direction to go if you want to find a solution to the problem!
Nathan Adams
Oct 2 2007 at 8:34am
I wonder to what extent actual politicians understand the real economic implications of the policies they champion. Do they spend a lot of time figuring out which shift of the law will be politically popular and at the same time beneficial to their contributors — or do the successful ones simply conduct an ongoing auction for their support/opposition to the various legislation that comes up? If the latter, who are the actual players in the political process who understand that, for instance, anti-monopoly regulation will appeal to the masses while actually helping the powerful in the targeted industry?
On a different note, I was at the Colorado-San Diego “play-in” game last night and I’m working on about 3 hours sleep … innings 9-13 provided a great example of the sustained tension that other sports have a hard time providing!
Richard Sprague
Oct 2 2007 at 10:38am
I don’t understand Luke O’s final comment about Barry Greenstein. It is always, always, always better for me as a consumer to buy an identical good for less money at Wal-Mart. It’s impossible for me to know for sure whether any Wal-Mart workers are being exploited, or whether the complicated probablistic argument about “subsidies” is actually bad for the overall economy, but we consumers know for sure that we’re better off with the lower prices.
Isaac Crawford
Oct 2 2007 at 11:09am
I am usually of the opinion that “the market” should have the first crack at solving problems, and I agree with you (can’t remember who said it, maybe it was Don) that if government programs are initiated, they are very difficult to get rid of. I have noticed a potential problem with letting “the market” try to solve something, and it may be just as intractable as a similar government program would be.
The traffic here in Yemen is, for the most part, frightful. There is legislation, but very few “laws” in the Hayekian mold. I have yet to meet anyone that has experienced both this traffic, and a more western top-down organized type of traffic that doesn’t think that the western style is more efficient, safer, and quicker. Perhaps this is an area in which government control might provide the best solution. The problem now is how do you go about fixing this problem? If we think about Hayekian laws, there is only one in place here, it is the rule of “me first.” If there had been much more structure imposed on the traffic system in the formative years, I believe that more “laws” would be observed today. I think that this is a case where the application of “the free market” and its subsequent inability to reach a solution that people like will be just as intractable as any government imposed plan would be. Granted, this is the only example of this sort of thing that I know of, but I think that it could be a thorny issue. Yemen has, if nothing else, taught me that market failures, though rare, do exist…
Isaac Crawford
Blogging in Yemen
http://www.isaharr.com
Russ Roberts
Oct 2 2007 at 11:45am
Isaac,
Not all emergent phenomena are beneficial to mankind. When resources are unowned, emergent outcomes are often unpleasant. Traffic is the most common example. But traffic is analogous to the fisheries problem we discuss in the podcast. Without property rights, unpriced (because they are unowned) resources often get overused and congestion does the rationing that pricing does more efficiently. Traffic lights are usually better than no traffic lights (at least at busy intersections). Would private roads do better? How about a government toll road? Or how about waiting for norms to evolve to solve the problem? Choosing among these alternatives is the right way to think about the problem.
Bruce Boston
Oct 2 2007 at 11:46am
In response to the following options:
—-
* 1. Do nothing. Let stock of cod become smaller. Will be an incentive to farm cod. Might or might not work, but some fish can be farmed.
* 2. Regulate it. Command and control. Put limits: you can only catch a certain number, only can fish at some times, have to throw back ones that are too small. Problem: Have to monitor it. Punish people: if we catch you catching a fish too small we punish you.
* 3. Create system of property rights. People can buy and sell rights.
* 4. Do nothing and see if moral system evolves, like littering–social norms.
—–
I wanted to place my vote for “Create system of property rights”
Personally, while I’ve never taken the time to gather the needed examples to defend this position, this seems like a method that a) becomes very powerful over time, and b) has a sense of ‘fairness’ to it, c) can be crafted with fewer economic holes than the other plans d) can be crafted to benefit the average person.
Let’s walk through an example of how this might work with Carbon pollution.
Assuming that California had Carbon targets for the year 2020, what if they did the following.
—–
1) Calculated the citizen base of ‘California’ for the year 2020
2) Equally divided the Carbon credits for the year 2020 among all citizens.
3) Created a simple market mechanism to exchange these credits for money
—–
I would expect the following
a) Because the ‘average Carbon use per citizen’ is going to be less than ‘total carbon use/total citizens’ each citizen will be allocated more then enough carbon credits for personal use (on average).
b) in the case that a citizen, a non-citizen, a business, an organization, etc, has need of Carbon credits, the market mechanism would ensure perpetual availability at an optimized price.
c) any increases in market value due to scarcity, or increases in utility will benefit the average citizen directly, as it will cause an increase in the value of their excess credits.
d) any organization that felt that the value of decreasing the use of carbon was greater than the current market price of the carbon, could remove carbon from the market by buying the credits.
e) because individual citizens are allocated more carbon credits than they need (on average) for personal use, they are protected against fluctuations in market prices.
There may be more, but this is enough for me.
-bruce
Luke O
Oct 2 2007 at 12:09pm
When I use the world “exploit” perhaps I am being misleading. I was using it in the context of game theory. In game theory there are optimal and exploitive strategies. An optimal strategy is one that you can tell everyone exactly what you are doing and there is nothing they can do to beat you. An exploitive strategy is one that has a given advantage over someone else’s sub-optimal strategy.
Lauren, you are right that none of the problems are because of Wal-Mart itself.
It is the government officials that embraced the extent of the welfare programs and subsidies. They created the environment. Apologies if I misconstrued what you were saying earlier.
Yes, no one forces anyone to buy at Wal-Mart, but what I am saying is that people don’t price things bought there correctly because of the insurance costs later on.
I do not think we should try and get rid of Wal-Mart. I do think that we should get rid of the subsidies to Wal-Mart and stop holding their insurance risk as taxpayers. I do not think they would as dominant as they are now.
James H
Oct 2 2007 at 2:31pm
I am new to the theories of economics, but it seems to me that if there is a monopoly, they ought to have more expendable income than other companies. With this expendable income they should in most cases be able to buy out the innovative start up companies that should be competitive enough to crush the monopoly. The monopoly should then be able to employ this newly purchased innovative technique to lower their costs while keeping their price the same. This in turn allows them to have more expendable income which allows them to buy more start ups that threaten them.
I don’t think that this process would be a threat without the use of patents, since start up companies would be too numerous to buy out, but since the monopoly obtains the patents they can ensure that new innovative processes can’t be used against them.
If my reasoning is incorrect in some way, please correct me.
Russ Roberts
Oct 2 2007 at 2:46pm
James H,
The basic intuition of your idea is OK, but think about the following question–what is the start up willing to accept to be bought out? Is it less or more than the monopolist is willing to pay? If it’s less then the monopolist is willing to pay, they can strike a deal that makes both better off. But what if the start up wants more for the innovation than the monopolist is willing to pay? Then the buy-out won’t take place. Start thinking about why that case might happen. It must be pretty common, because lots of monopolists in the past (before antitrust laws) got destroyed by new competitors. Why didn’t the monopolists just buy up the new competitors? Evidently they couldn’t find a price that made both parties better off. Why not? Can you think of reasons why the entrepreneur might want a higher price than the monopolist was willing to pay? A simple answer is pride. But forget pride for the moment. Suppose the upstart new entrant only cares about money.
Floccina
Oct 2 2007 at 4:07pm
Lauren and Luke O., why would someone with an opportunity to work at store A (that gives Health insurance) opt to work at store B (that does not give Health insurance)? The private insurance will generally be more hassle free.
My observation is that the retailers that pay more than Wal-Mart have better quality employees. How much would those Wal-Mart employees cost tax payers if they either had to take the next best compensated job or be unemployed?
Now if you are saying that a person might opt to work in the nicer retail environment of Wal-Mart rather over a harder manufacturing job that compensates it employees with health insurance because of the existence of Medicaid then I would say that the structure of Medicaid is the problem.
(I have heard that contrary to popular belief manufacturing jobs are among the most difficult to fill these days due to people not liking the hard work and harsh environments.)
Floccina
Oct 2 2007 at 4:10pm
Isaac Crawford I tend to agree with you but must at least consider that people in Nothern Europe and Japan are more polite drivers for reasons other than laws.
Lauren
Oct 3 2007 at 6:46am
Floccina asked a great question
and made an excellent observation:
Companies that are looking for a higher quality employee–more skilled, which can include more personal skills–do have to offer higher salaries. As a customer, I know I expect more skills from the employees at some stores than others, particularly along the lines of customer service.
For example, at Target, an employee walking around was able to key into a handheld and tell me that some bookshelves I wanted were in the stockroom, and that he’d get them for me. Finding that employee wasn’t as easy at it would be at, say, the high-end Arhaus, but it was definitely easier than at Wal-Mart. At Wal-Mart, nearly identical shelves cost less, but to find out whether more were in stock I had to do a lot of walking around the store, and eventually gave up. (I shop at both stores, by the way. Wal-Mart has Target beat for some things and vice versa.)
I think we can safely hypothesize that Target is paying a higher wage deliberately, and commensurately expecting a higher skill level.
An employee with lower skills might apply for and want a job at a higher pay level, but simply might not qualify. I’ve applied for lots of jobs in my life that paid salaries bigger than I was qualified for. Why not? Sometimes you win and get the job. The first day at work is pretty stressful, though, and there’s a lot of learning to do fast!
Now, the question of how those higher salaries are paid out–solely in dollars, or in some package of fewer dollars plus benefits–is a different question from which total is higher. Note, though, that for this part of the question, the right comparison is within a company: Your wage at Target without benefits is definitely higher than what your wage would be at Target with benefits. The question you ask as an employee is: are there benefits that the company can buy on your behalf that would be cheaper for you to purchase if you let the company do it for you?
Insurance is one of the benefits which has exactly that economy of scale. It’s cheaper for the firm to buy it on behalf of all its employees than to pay each employee enough to buy it individually. That’s surely why private insurance benefits are commonly one of the ways in which salaries are paid.
Of course, if the wage is very low, it’s not enough even to cover the cost of the private insurance package. (Plus, minimum wage laws even prohibit subdividing the total wage below that level even if the employee wanted to take home fewer dollars in exchange for insurance benefits.) So, low skill levels will correlate with low wages as well as with low benefit levels.
As for individual choices such as how dangerous the work is or how well-lit the work environment, or how far you have to drive to work, those, too, are factors in the complicated question of job-matching. You have to consider each factor in turn to work out what effect it will have on the wage for that job. Just remember to focus first on the total–inclusive of any benefits–and then think about the subdivision into dollar wages and benefits.
So, then we get to this
That may be, but I’m not sure. It’s an interesting question, though. You’d first have to figure out if and why the manufacturing job is not offering a salary (or salary-benefits combination) high enough to clear the market (the market for labor with the particular manufacturing skills it requires). Maybe the very existence of the government’s insurance program means that all wages for low-end jobs are lower. In essence, the government’s program competes with private sector insurance.
gator80
Oct 3 2007 at 7:45am
Headline in Wall Street Journal today (Oct 3 2007): Wal-Mart Era Wanes Amid Big Shifts in Retail.
Was this all just a big set up? We’ve been punked! 🙂
Verdejoe
Oct 3 2007 at 8:06am
I enjoyed the podcast as usual. I have one question for Lauren O and one suggestion for Russ.
First the question. Is it reasonable to simultaneously assume that Company A is indifferent to paying $6 w/o insurance and $5 with, and that Company B observing elasticity being able to step in and pay people $5.01 w/o insurance? I don’t think so, unless you think Company A is not paying attention to the market for employees. The indifference you layout is a false dichotomous choice given the labor market that both A and B face.
Russ, you asked for ideas on guests that might be more “pro-antitrust.” I am not entirely sure if these are good suggestions, but I thought of Carl Shapiro or Joe Farrell from Berkeley. Both worked for the DoJ (or FTC) and I think Shapiro was supportive of the government’s case against Microsoft, although I am not positive. A second suggestion comes from an SSRN Public Choice email I received. A paper by Ilya Segal & Michael Winston caught my eye(“Public vs. Private Enforcement of Antitrust Law: A Survey”). The abstract states:
“There are two basic approaches to deterring socially harmful behavior: with the threat of litigation by private parties or with enforcement by public agencies. Both approaches are used in most countries, but in varying degrees. Private litigation is common in the United States and (to a lesser
extent) the United Kingdom and other common law jurisdictions. In contrast, the civil law countries, such as those of continental Europe, have far less private litigation, and rely more on enforcement by public agencies. The difference between the two systems is notable in many areas of law, but it is particularly prominent in the enforcement of antitrust law….”
I would guess that your guest Don Boudreaux would argue they have ignored a third possibility of letting the market take care of “socially harmful behavior” over time. It appears that Segal and Whinston are implicitly supportive of government action in antitrust issues given they ignore a market based solution. Of course I could be 100% wrong since I have only read the abstract.
Verdejoe
Oct 3 2007 at 9:34am
I said Lauren O. Sorry to Lauren and Luke O.
Lauren
Oct 3 2007 at 10:07am
Verdejoe writes, right on target
Exactly. What I was trying to do with my simplistic example was to show that there were market forces that would drive toward a new equilibrium, in the (unlikely) case that a company was to happen upon some cleverly innovative idea that took advantage of a government program, an idea that somehow the rest of the market had previously overlooked. (I believe this is the straw man some have accused Wal-Mart of doing–profiting by cleverly “exploiting” the government insurance program.) You’ve got it.
Russ Roberts
Oct 3 2007 at 4:08pm
Richard,
I don’t know what you mean by “benevolent politicians.” That is a species I rarely expect to encounter.
Michael Ulm,
Yes, monopolists try and maximize profits. But if their most profitable strategy is to act as if they have competitors and they lower price to keep them out, their ability to maximize profits at the expense of consumers is not much different than a competitive firm.
Luke O,
We agree that government tax incentives are a bad idea. It isn’t clear, btw, what the impact of such policies is on Wal-Mart’s pricing. It does improve their profits. They are a nasty way for politicians to court corporate suitors.
Luke O
Oct 3 2007 at 6:21pm
Floccina,
You asked:
“why would someone with an opportunity to work at store A (that gives Health insurance) opt to work at store B (that does not give Health insurance)? The private insurance will generally be more hassle free”
Employees(at least the best ones) will mostly choose the one with private insurance, but the consumers will eventually choose for them and eliminate store A. This is because the insurance will included in at the counter prices, which will make them higher. People will shop at Store B because of lower prices. Taxpayers are picking up the tab for health insurance at store B. These costs are difficult to see thus its difficult for consumers to make an accurate “long term price” comparison between purchases at the two stores.
Unless of course consumers think employers shouldn’t provide health insurance(but they then can’t prevent the government from doing it anyway).
Consumers and the environment(government laws in this case) are the ones that ultimately have the say of where employees can work.
tony
Oct 3 2007 at 10:25pm
Russ – Another awesome podcast. One follow up item, however: early in this podcast you asked your guest about the propoer role of government…but the question never really got answered. In your opinion, what is the appropriate role of government in the ideal world? Is there a way to get away from government regulation of things like utilities, somehow allowing a market to be created and allowing competition to manage the prices?
Isaac Crawford
Oct 4 2007 at 10:31am
“Isaac Crawford I tend to agree with you but must at least consider that people in Nothern Europe and Japan are more polite drivers for reasons other than laws. ”
I was referring to the distinction that Hayek made between laws and legislation. My basic idea is that over a long enough time, legislation can affect the “law” in the Hayekian sense. Obviously, there are an endless number of things that influence what people think is reasonable and just. Culture is one of those things, but it is a moving target, many things affect that too. The point I was trying to make was that even though I usually prefer allowing people to figure things out themselves, it may lead to problems that are as intractable as government based solutions.
Russ, I think the big problem with traffic working as an emergent phenomena is the fact that transactions costs are too high. This leads to a tragedy of the commons as you say. It isn’t obvious to me what the solution would be here, but changing the Hayekian laws would go a long ways towards solving a lot of the problem. How that’s done I have no idea…
Isaac Crawfprd
Blogging in Yemen
http://www.isaharr.com
Brad Hutchings
Oct 5 2007 at 2:14am
Hey Luke,
The other side of this WalMart slash welfare criticism is that if it is 100% true, it’s exactly what Clinton’s welfare reform was designed to do: ensure that welfare recipients were doing some work. Any coincidence that Hillary was a WalMart board member at the time and it coincided with the expansion of WalMart from heartland niche to coast-to-coast institution? Nope.
The context drop and ignorance of recent history that the WalMart welfare thing requires boggles my mind. If there were better jobs paying more money for the people working at WalMart, those people wouldn’t be so stupid as to continue to work there or line up by the thousands for a couple hundred jobs each time one opens up. If you half believed in the liberal ideas of helping the poor, you’d be thankful of WalMart for finding a way to employ the otherwise unemployable and give them some purpose in life consistent with civil society.
Off topic a little… I saw a long commercial today by Chevron, which (the gall of the these people) defended the use of energy from oil and laid a case for a balanced approach to alternative energy sources. I wish WalMart would produce a similar thoughtful smackdown of its whiny detractors.
Floccina
Oct 5 2007 at 9:22am
Luke O. wrote:
“Employees(at least the best ones) will mostly choose the one with private insurance, but the consumers will eventually choose for them and eliminate store A. This is because the insurance will included in at the counter prices, which will make them higher. People will shop at Store B because of lower prices. Taxpayers are picking up the tab for health insurance at store B. These costs are difficult to see thus its difficult for consumers to make an accurate “long term price” comparison between purchases at the two stores. ”
This seems to me to be a Mathusian argument that ends up in continually falling compensation until some subsistence level is hit. The opposite argument is equally strong one could say: That since company A gets better employees who will produce more per dollar of compensation than the people who would be left for company B. Company A would then have to pay more or go out of business.
But neither of those alternatives is what happens. Compensation is set by the market for workers and reaches an equilibrium where both companies might survive. In reality there are not just company A and company B thousand of firms competing for customers and employees. Some employees are highly compensated.
BTW I do not think that much of Wal-Mart’s advantage comes from the low wages that they pay but from other efficiencies. I think this after working for year managing in the low wage restaurant industry where I learned that employee productivity varies greatly even among low skill workers, some dishwasher were more than twice as prodcutive as others.
Schep
Oct 7 2007 at 12:10pm
One of the most interesting things you said was that the projection that governments provide are ussually direr and extreme. The examples of England not existing struck home. We see Texas Transportation Institute (TTI) publishing how much time we waste in traffic each year. Quietly in an addendum section they acknowledge that they had been over estimating the delay that new data (applied to their 2007 report) shows that people are shifting off peak to travel, some are using transit, carpooling. Mostly shifting off peak.
In the TTI calculation they don’t show how much capital cost it would cost to construct roadways or transit to convey people delay free nor the operating costs to maintain that extra capacity. Taking the capital and operating costs TTI’s waste projections may be an order of magnitude over estimated. Is it possible that the users refusal to raise gas taxes and to only allow 6% capacity expansion in the same time when traffic volume increased close to 60% was the best economic decision.
To exemplify the libertarian solution. Take note of the new transportation term “slug”. In Washington DC you need a certain number of passengers to use the HOV lane. Privately organized areas to pick passengers are now appearing. Regular drive alone drivers are filling their seats with passengers “slugs” to enable a regular driver to go in the fast lane (HOV). No Carpool time table, sort of like Dr. Roberts Example of a Bagel (previous podcast) being available for him every morning. This gives credence to Bordeaux’s point that the government can develop non-market based programs but the market including the black market will always respond.
mulp
Nov 27 2007 at 2:00am
I think this might be one of the most disappointing discussions that I’ve heard. I don’t disagree with the premises, I think, but the examples presented involved companies and people that I know something about. I keep mentioning Clayton Christensen’s The Innovator’s Dilemma in my responses because he nails one of the most critical factors in radically changing the nature of industries, and the establish, “can’t fail” companies.
When mention is made of IBM and Microsoft and Gates, as it was in this podcast, to justify points about innovation destroying monopoly or whatever, I gnash my teeth. Microsoft became so dominant, not inspite of government, but because of its skillful use of government to impose costs on its competitors.
The examples are many, but the most telling one is that Microsoft managed to obtain a trademark on the word Windows, a term that had long been used to descibe operating environments where “windows” were the way you saw each of several applications running concurrently on your computer. If the trademark Windows applies to any operating system at all, it would be unix. Remember that many trademarks were lost because they moved into common language, classically, aspirin, and most people use xerox as a generic term, not a trademark. How was it possible for Microsoft to turn a generic term used in the computer field by developers and customers alike into a trademark? Only by skillfully using the government. And Microsoft did that many times, especially with patents. Armed with these government provided weapons, Microsoft bludgened many companies to death using the government in lawsuit after lawsuit. And in the case of Windows (TM) they sued Lindows.com for trademark infringement – Lindows was offering a version of Linux (TM) running X Windows (TM). The founder of Lindows had cashed out on his prior software company, so he paid to pursue the case as was on the verge of a likely court invalidation of the Microsoft Windows trademark, and then Microsoft bought him off for something close to a quarter billion. (Lindows was likely to have failed if Microsoft had ignored it, by the way.) Microsoft could not afford to have its trademark invalidated and thus loss its government weapon against competitors.
Corporations have been very effective in extending their monopoly power by using the government to extend copyright, patent, and to a lesser degree trademark into new realms far beyond the reach of the people like Franklin and Jefferson who make a good bit of their wealth from limited copyright and limited patent protection.
Gates’ and Microsoft’s key innovation was the legal right to give IBM a non-exclusive license for DOS (for $150K which they could have bought from its developer for $75K), which allowed Microsoft to sell DOS to IBM’s competitors. Microsoft then used the government, via the courts, to go after competitors who wrote such programs as DR-DOS which was a lower cost competitor to MS-DOS.
Thus, I argue that to use Microsoft as the example of why government don’t need to deal with monopolies like IBM, what you are saying is that instead of the government acting to limit the anti-competitive practices of corporations like IBM, you instead find another company and give them special government power to create a competing monopoly.
And, as I believe that Russ is a Mac user, he is proof that personal computers didn’t need the special “innovation” of Gates and Microsoft to create an entirely new market that would revolutionize the world.
Let me be clear; I don’t see Gates or Microsoft as evil, but I don’t admire the fact that they used the tools they were given by the government to kill off competitors.
But now Microsoft has overshot the needs of its customers. And if you watch the Apple ads these days, they point this out in a humor and obtuse fashion by noting the some customers are upgrading their windows computer experience by downgrading back to XP. Meanwhile, while recent versions of Apple’s OS are not equal to recent versions of Windows because they lack many many features, Windows has so many features that people don’t need that Apple’s inferior simulation of Windows is good enough for many people, and the inferior Apple apps are so much less costly to learn to use that customers find paying more in dollars to get less in Windows capability to be cheaper, for time and frustration are also costs. The inferior Apple software is competing with the monopoly power of Microsoft Windows.
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