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Tuesday, November 10, 2009

"Powerful Interests are Trying to Control the Market"

For the first few years I was doing this, I'd often complain that government regulators weren't doing enough to intervene in cases where firms had substantial market power. But this was mainly an economic worry about how market power leads to the inefficient utilization of resources. Over time, however, I've started to worry more and more about the harm that comes when large firms have the ability to exert undue influence on the political process (see health care, financial, or greenhouse gas emission reform just for starters). So I agree with this call to limit rent-seeking activities:

Powerful interests are trying to control the market, by John Kay, Commentary, Financial times: ...Control of rent-seeking requires decentralisation of economic power. These policies involve limits on the economic role of the state; constraints on the concentration of economic power in large business; constant vigilance at the boundaries between government and industry; and a mixture of external supervision and internal norms to limit the capacity of greedy individuals in large organisations to grab corporate rents for themselves. Vigorous pursuit of these is the difference between a competitive market economy and a laisser-faire regime, and it is a large difference. ...
[T]he scale of corporate rent-seeking activities by business and personal rent-seeking by senior individuals in business and finance has increased sharply.
The outcomes can be seen in the growth of Capitol Hill lobbying and the crowded restaurants of Brussels; in the structure of industries such as pharmaceuticals, media, defence equipment and, of course, financial services; and in the explosion of executive remuneration.
Because innovation is dependent on new entry it is essential to resist concentration of economic power. A stance which is pro-business must be distinguished from a stance which is pro-market. In the two decades since the fall of the Berlin Wall, that distinction has not been appreciated well enough. ... The essence of a free market economy is not that the government does not control it. It is that nobody does.

On government's role in the economy, this is from a previous post:

Free markets - where free simply means minimal government involvement - are not necessarily the same as competitive markets. There is nothing that says what many interpret as freeing markets - lifting all government restrictions - will give us competitive markets, not at all. Government regulation (as well as laws, social norms, etc.) is often necessary to help markets approach competitive ideals. Environmental restrictions that force producers to internalize all costs of production make markets work better, not worse. Rules that require full disclosure, or that impose accounting standards help to prevent asymmetric information improve market outcomes. Breaking up firms that are too large prevents exploitation of monopoly power (or prevents them from becoming "too large to fail") which can distort resource flows and distort the distribution of income. Making sure that labor negotiations between workers and firms are on an equal footing doesn't move markets away from an optimal outcome, just the opposite, it helps to move us toward the efficient, competitive ideal, and it helps to ensure that labor is rewarded according to its productivity (unlike in recent years where real wages have lagged behind). There is example after example where government involvement of some sort helps to ensure markets work better by making sure they are as competitive as possible.

    Posted by on Tuesday, November 10, 2009 at 09:03 PM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (36)

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