Markets, Equilibrium, and

One of the fundamental concepts of Economics over the past 50 years has been market equilibrium. Simply stated, if markets are left to their own, they will naturally balance supply and demand for all products and markets will efficiently determine the prices and amounts of all products. No need for government intervention or price controls; it will all be achieved by the “invisible elbow”* of market competition. In fact, Equilibriumists believe that the government is the force that prevents markets from achieving true equilibrium. If government were only kept from interfering with markets, market equilibrium would be restored to the throne of Shangri-La and riches and profits would stream out of the mountains of commerce to quench the thirst of everyone.

IF THIS IS TRUE, then why do all markets move in the direction of monopolies? Recent history demonstrates this point.

When Bell telephone was broken up into multiple phone companies, reducing the barrier to competition, the number of phone companies exploded. Now, 30 years later, we’re down to 4 or 5 mega-phone companies.

When the US airlines were deregulated, the number of airline companies increased, providing increased competition. Now, 30 years later, the number of airline companies in the US is down to a handful, with a bunch of regional airlines handling the less-profitable scraps. How long until they’re all consolidated into a handful or regional airlines?

When I was first old enough to buy beer, there were about a dozen nationwide beer makers. That number has been reduced to only a few – the latest merger of SAB Miller and AB InBev ensures that 1 in 3 beers purchased in the US will be bought from AB InBev. And when the trend for craft beers runs its course, AB InBev will probably sell 2 out of 3 beers.

It is irrelevant what equations or theories the Equilibriumists produce; the evidence of what actually has happened is quite different from their beliefs. For equilibrium to exist, the number of producers of any product must be large enough to develop a healthy competition. Without competition, markets lose their invisible kneecap* that regulates prices. That is why most economists are against monopolies and oligopolies – they reduce competition among sellers that produces the lowest prices that “the most benefits for society at large.” (Lowest prices producing the most benefits for society is a different subject open for debate.) Instead of moving in the direction of increased competition, markets always move in the direction of consolidating competitors into fewer, larger competitors, despite the efforts of the government to limit the consolidations.

Equilibriumists and conservative economists in general agree that the government shouldn’t be in the business of picking winners and losers in business and that competition should be the sole determinant of said winners and losers, underpinning their beliefs that markets work best when left alone. However, when competition is the sole determinant of winners and losers, the market will always move in the direction of monopolies.

The commonly accepted economic thought is that the winners (or luckiest or most efficient producers, etc) will do better and sell more product and thereby claim increased market share, driving out the less efficient or more obsolete producers. However, this fails to follow the thought to its logical conclusion, that the winners eventually out-produce the majority of their competition, driving out the competition, which leads to oligopolies or monopolies, thereby producing a market for that product that is out of equilibrium because the winners no longer are constrained by competition. They can charge whatever they want.

In other words, free markets always end up destroying free markets.

Consider this: the description of markets always moving in the direction of monopolies is similar to the description of the universe and how stars and planets formed. In this description, the early universe is filled with an almost uniform distribution of atoms and nothing else. The tiny differences in uniformity causes the atoms in slightly more densely populated areas to be pulled together into clumps. Those clumps attract more of the surrounding atoms until they start to form a large body. That large body draws in even more surrounding atoms and the body grows until it is so large that it’s combined gravitation attraction forms the body into a planet or into a stars. Eventually all of the free atoms are absorbed by the planets and the stars.

Market equilibrium is a description of a perfect, ideal state which can never exist for very long, just like the early universe with its (almost perfectly) uniform distribution of atoms. Eventually, without any outside forces or influences, the markets (and atoms) begin to consolidate into larger units. Because the competitors in a market will never be exactly equal, true market equilibrium can exist for only moments because competition and innovation and efficiency and just plain good (or bad) luck will upset the equilibrium and send the market into consolidation and reduction of competition.

Market equilibrium is cloudy economic thinking; it focuses on only one part of the issue (of the cloud) and ignores its effect on other parts of the economy (on the rest of the cloud). For economics to become a useful tool, we have to move beyond wishful thinking and our dreams of ideal perfect worlds that can never exist. We have to accept that markets will twist and turn and change because of innovation and chaos, because of fashions and consumer whims, because of improvements and resistance to change. We have to abandon our (bordering on) religious belief that markets will always right themselves because of equilibrium or that bubbles can’t really exist in a market, or ONLY government interference prevents the proper functioning of markets. W have to accept that markets can, by themselves, run off into a ditch and fail. It is the nature and the essence of the beast called free markets.

*If the “invisible hand” really is invisible, how do they know it’s a hand? An elbow or a buttock are equally valid body parts UNTIL someone actually sees the invisible hand, at which point it is no longer invisible!!!

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