Free Market: How would it work

[Shodan]

@Shalmanese

I’m having a little trouble understanding exactly how your defining marginal utility. The question is quite simple, 2 companies, 1 makes 100 autos, 1 makes 50 autos. We don’t know what else they are making with the money, the first could be making 1000 buggy whips and the second could be spending it on hookers and blow. Which has the greater marginal utility?

As I said, you are comparing apples and oranges.

If company A produces 100 autos with a million dollars, and company B produces 50 autos with the same inputs, then by definition company A is more efficient than B. But to determine if A is gettting the most marginal utility out of its resources, you need to compare it, not to B, but to A as it would be if it did not waste money on buggy whips.

Every penny A spends making buggy whips is a detriment to its marginal utility. It is still more efficient than B, but not as efficient as it would be if the market drove it not to create goods for which there is no demand.

It is not a net benefit to anybody to make buggy whips, because nobody wants buggy whips. Therefore, it is a waste of time to create them, no matter how efficiently you create other goods for which there is demand.

@Shalmanese

Yeah, but thats just an unavoidable cost of the government producing things.

No, it is not unavoidable. It is also not a net benefit, as you proposed it was.

@Shalmanese

I would still prefer the government to be making the 100 autos as opposed to private enterprise making 50 though, even if they were wasting money making buggy whips as well.

So would I. But there is no market in your example, and therefore no tendency to become more efficient. And pervert (hi, pervert) seems to be coming up with data that show your estimate that a government monopoly is 10X as efficient as the free market are more than slightly off.

@Shalmanese

But my point is the only way for it to be possible to forgo all marketing is if this entity could establish by fiat a complete monopoly in this industry.

No, my example of store brands has already shown this not to be the case.

@Shalmanese

I assumed what you were trying to get at was that it were indeed the case that a monopoly could produce something cheaper, the market would automatically move towards a monopoly.

No, you are the one arguing in favor of monopolies, not me. The part you quoted from me was a list of reasons why the advantage on which you are pinning your argument - that a government is the only entity who can reap the benefits of no advertising - is invalid. If advertising costs are overall a net loss, then any company can out-compete the companies who use advertising by simply firing its ad company - no monopoly is necessary.

And all your excellent arguments that a free-market monopoly wouldn’t last also work to show that a government one wouldn’t work either. For instance:

@Shalmanese

First of all, it wouldn’t work because free market monopolies have no power to arrest people entering the market.

Governments have the same trouble preventing such things as well. When it happens in a command economy such as you describe, it is called “the black market”. And it tends to rise to meet demand as does any other free market. I have read estimates that up to 25% of the economic activity in the old Soviet Union was dealt na levo, or “under the counter” as we would put it. Even in a system where the government had a monopoly on pretty much everything, the demand was such that a free market sprang up. The government, even with its alleged advantage of no advertising, could not maintain the monopoly.

@Shalmanese

Second of all, it won’t work because even if it were the case that a monopoly could produce something cheaper, it doesn’t follow from that that the free market would move towards a monopoly. Free market systems and evolutionary systems have the same tendancy to get stuck at local maximas. To take a rather artifical example, image we have a good that costs $1 to produce if you have 50% market share, $2 to produce if you have 60% market share and $0.10 to produce if you have >90% market share. If 2 producers each have 50% market share, none of them can increase their market share so both will be producing at $1. The free market has no mechanism to move production to $0.10 even though this is the more efficient point.

Such a situations could arise quite easily…

Interesting example. If I were the head of either of your companies, I would offer my product as a loss leader until I had 90% market share, and then take over the industry.

@Shalmanese

Yeah, they made money, good for them. But unless they become they become drastically more successful then they do now, they really don’t factor into the calculation.

Actually, they are vital to the equation, because they show that not spending money on advertising does not guarantee a five-fold increase in efficiency. There is, therefore, no reason to believe that a government monopoly will enjoy the same

@Shalmanese

Remember we’re looking at the entire market as a whole. So if the government took over, it would be bad for people who buy Sams Club cola but good for people who buy Coca Cola. Given that there are more people who buy Coca Cola than Sams Club Cola, the net effect is good.

No, exactly the opposite. Since there are more people who want Coke over Sam’s Club, more people are hurt by the loss of Coke than the loss of Sam’s Club. The net effect is thus to deprive more people of their first choice. The greater demand is not being met.

This is assuming the only difference between Sam’s Club and Coke is how much they spend in advertising.

@Shalmanese

Sorry, I forgot to make it clear before. Cannabalistic marketing only refers to the second type. Cannabalistic marketing is a complete dead loss as far as the consumer is concerned.

No, all costs are a dead loss to the consumer. Her preference would always be that companies gave their products away for free. Price is the equilibrium between the desire of the buyer to buy as low as possible, and the producer to sell as high as possible. Any factor that goes into that negotiation is the same as any other factor. “Sunk costs”, as Milton Friedman once said, “are sunk costs”.

@Shalmanese

I might not personally care if you get your tax returns back on time but if my boss cares then I’ll at least pretend to care too otherwise he’ll fire me.

That’s a market force.

@Shalmanese

Government agencies work because there are enough people in them who care about providing a good service even if they don’t have to.

And the free market works because there are even more people who care about their own self-interest, because they do have to.

The true altruist is a rare bird indeed. The guy who wants to make money is not rare at all, and he tends to be much more highly motivated.

Not everyone cares, but everyone has to eat. In an ideal free market, if he doesn’t care, he doesn’t eat. It tends to work out better than relying on the “kindness of strangers”.

Regards,
Shodan