Distributism and Perfect Competition

Contemporary economic sciences is built upon a large body of assumptions or simplifications that allow for the study of economic activity using advanced mathematics. Under these assumptions, economists make numerous powerful claims about the economy and justify them with rigorous mathematical proofs. One set of those assumptions (and there are others that are worth investigating) is the set related to what is called “perfect competition”. Under the perfect competition assumptions, a powerful statement is made about the economy as a whole. It is said that market economies reach an equilibrium that maximizes the efficiency of the market and creates a state where no one in the economy can be made better off without making someone else worse off. (better off and worse off are expressed as more or less “utility” respectively) This state is called pareto optimal. It is worthwhile to investigate the assumptions of perfect competition and the claims of pareto optimality and see what conclusions can be drawn about Capitalism[note]Capitalism here will be defined here as the laissez-faire economic system, free from government intervention (often any intervention at all), that is supported to a great extent by contemporary conservatives.[/note] and Distributism.[note]I do not write this article claiming that all the assumptions in contemporary economics are valid nor am I claiming the economics as a mathematical hard science is justified. I do not promote a stance on either in this article. Rather, I write this to investigate Distributism on what could normally be considered to be capitalist grounds to see if it could be supported from contemporary mathematics based economic theory.[/note]Perfect competition is an economic environment that contains a large number of competitive firms in each market. This number of firms must be large enough that each firm does not have enough market share such that its production of some good can affect the price of that good. Another way to put it is, each firm is a “price taker”. It must sell its goods on the market at whatever price the market sets and it will determine how much to produce based on its own internal costs of production. The same scenario is present for consumers. There are a large number of consumers in the market such that no consumer can affect prices with his/her purchases, once again making them price takers. To reinforce this assumption, further assumptions are made. First, consumers must have perfect information about them, especially the prices throughout the market for that good. Second, there are no barriers to entry into the market of that industry. The first assumption ensures that prices will remain the same throughout the market for a particular good because it allows for consumers to always purchase the lowest priced good. The second ensures that new firms can enter the market when there are profits to be made in that market. Under perfect competition there is always market equilibrium, that is, supply equals demand and the market clears (all goods are sold). Under perfect competition, no firm has power over the market, no firm will make profits in the long-term, and wages will accurately reflect the productivity of the workers.Under these conditions, economists argue that pareto optimality will be achieved. This state optimizes the efficiency of the market and creates a condition where no one could become better off without making someone else worse off. Pareto optimality or efficiency is the desired outcome of free market enthusiasts because it is that optimal state that only the invisible hand can create and where, it is suggested, the whole society is better off. Further economic analysis shows that interferences in markets only reduces the efficiency and creates net loss. It is clear from economic analysis that implementing taxes, regulations, price controls, tariffs, etc. keep the economy from reaching the optimal market equilibrium. Since competitive equilibrium is not reached, these government induced market interferences have cost society the optimal outcome of the market and this loss is called dead weight loss. This loss of efficiency cannot be regained or redistributed. From these results it could be argued that even policies to help the poor would ultimately hurt the poor because the overall wealth of the society is reduced through dead weight loss. The argument then follows that it would be more favorable for the poor if the market reached its optimal efficiency and produced the most wealth so that this increased wealth could become available to them. To increase the size of the pie is better for everyone than changing the distribution of the current pie, is often the "go to" argument. Reinforcing this, under pareto efficient allocations in market equilibrium, the poor cannot be made better off, without hurting someone else and the economy as a whole. These results help to make a strong case for the unregulated free market.There is another side to the coin of pareto optimality. Pareto optimality in and of itself does not take into consideration distribution of wealth or any sort of equality within the economy. It is possible that an efficient outcome could be considered quite unacceptable by some standards of equality and justice. Remember, pareto efficiency only means that to increase someone’s well being would hurt another’s, it does not speak directly to equality. However the economist is not lacking in the foundations for a response to seeming inequality. Further results from economic analysis show that there can be many different pareto optimal outcomes within an economy based on different initial endowments of wealth. When economic agents have different and presumably more equitable initial endowments the economy will reach (through trading) a different equilibrium which may be a more desirable pareto optimal point. That is, some scheme of wealth transfers within the economy could result in a different and more socially acceptable pareto efficient outcome. Therefore, the results of economic analysis into market efficiency could be used to justify redistribution schemes despite the damage that could be caused by the taxation. If the impact of a given tax on economic efficiency is small and the money is distributed well, it could be argued, that the market could be driven towards some more socially acceptable pareto efficient outcome. In conclusion, economic analysis could be used to support state guided, welfare state capitalism.[note]Needless to say there is much more that could be said from economic analysis to support contemporary economic practices related to Keynesian economic theory.[/note]In this very basic overview of market equilibrium we see that it can be used to support both ideological laissez-faire capitalism and big government capitalism or some may say a mild form of socialism. However, both approaches miss the mark when it comes to responding to the conclusions of this economic analysis. Both approaches move forward with the findings under the assumptions of perfect competition (to some degree or another). Neither the laissez-faire approach nor the big government approach addresses the assumption of perfect competition on which the economic conclusions are based. Looking more closely at perfect competition will show that a different approach is needed to achieve optimal economic outcomes.Perfect competition does not exist in the real world. Only in rare cases have there ever been markets that could be considered close enough to perfect to be treated as such. Policy cannot move forward without taking seriously this truth. Now it is in no way a surprise to any student of even basic economics that perfect competition is not a reality, so this is nothing new. Yet the impact of this fact is no less important. The error of underestimating this truth seems at the heart of the capitalist system. While capitalists proclaim the remarkable efficiency of their system, they fail to see how their system actually undermines its own foundation and no amount of redistribution will fix the underlying problem.Capitalism is not a system that protects or promotes the competition which would capture the proposed pareto results. The “anything goes” mentality inherent within capitalism actually results in the destruction of competition in general. There is an incentive to eliminate your competitors in the capitalistic system because then you can make more profit due to the reduction in competition. And in the real world, because there can be significant barriers to entry, eliminating competition is possible and profitable. When we look at the global economy today we see an economy characterized by oligopoly and a continued trend towards consolidation. (let us not forget that this trend existed quite well even when governments were much smaller than they are today, think of the trusts of the late 19th century). An economy that is characterized by a small number of producers in each industry is not perfect competition and actually can have very little competition at all. This lack of true and complete competition gives each producer something they could not have under perfect competition, market power. They have power to set prices (or at least affect prices), they have power to increase revenue beyond what would be needed to cover costs, they have power over the labor market (allowing them to maintain lower wages), they have power over government, all in all, they have power. And the fewer firms there are and the bigger the firms get, the more power each individual firm has. The more power they have the more profits they gain which can be used to acquire more power. They spend it on consolidation efforts (buying up other firms), they use it to enact predatory pricing, they spend it on clever advertising meant to trick the consumer into consuming their goods or to create demand for their products out of thin air. When firms are too large they begin to affect prices not only through production but also through their consumption of inputs. When one consumer of inputs is much larger than others, its consuming power can impact the price of that input driving its prices down and once again giving the firm a greater advantage. When the government is big, powerful and open for bribery, the situation gets even worse. Money from profit is spent in large sums to buy economic favors from the government. Laws are passed that favor particular industries or products at the expense of others and the whole of the nation. Government policy will come to either directly or indirectly subsidize those businesses with power. The government no longer seeks the common good but the good of the most powerful economic agents. The economy in the United States exemplifies this process and shows its flaws.The economic assumptions that form the foundation of modern mathematical economics should not be seen as supporting the laissez-faire economic system and the hands off political scheme that it requires. Nor should they be seen to support large-scale redistribution schemes which only move money around within an already broken system. Rather, a system should be in place that will promote those conditions under which the favorable outcomes of perfect competition may occur. That is, a system that seeks to increase competition within industries, eases market entry to allow access to markets for new firms, and promotes uniform information about the market to consumers. One such system is Distributism.Distributism is an economic theory based on Catholic social teaching which seeks an economic environment that supports human dignity, the independence of the family, and the common good of society. The centrality of the family and the dignity of man within the system, far from weakening its message, has actually allowed distributists to formulate numerous beneficial economic perspectives. The main perspective focused on here is the promotion of widely distributed ownership of productive property. This position uniquely brings the economy closer to perfect competition and those positive outcomes. With widely distributed ownership of productive property, the economy will naturally come to be filled with a greater number of firms in numerous different markets. When many firms are active in markets, the perfect competition conditions are more closely met and therefore the economy in general comes closer to achieving the beneficial economic outcomes of pareto optimality. To be more specific, increased number of firms leads to increased competition which reduces the possibility of firms gaining excessive market power and therefore distorting the market through the numerous means mentioned above. Simultaneously, as property ownership becomes more widespread, the economy will have a more equitable distribution of initial endowments thus it may be presumed that a more socially acceptable pareto optimal outcome will be reached. Therefore, Distributism captures the advantages claimed by both approaches addressed above. To realize this goal and to see its positive effects, distributists call for two main changes. The first is a change in mindset and the second is a change in policy.The first change, that of a change in mindset, would come in a few major ways. First, and most fundamentally, we require “a favorable state of mind present in society, a desire to own property, sufficient to support and maintain the movement and to nourish institutions which will make it permanent”.[note]Hilaire Belloc, Servile State.[/note] This desire for property ownership is foundational because it would promote a culture of entrepreneurship and it would provide a check within society against the accumulation of ownership in the hands of a few. Second, building on the first, is a change of mindset within society to value not only ownership for one’s self but also for others. This would manifest itself in greater value given to small and family businesses over massive corporations whose existence consolidates ownership into the hands of a few. This perspective will fundamentally change how we make consumption decisions and will naturally push the economy in a direction towards having a greater number of firms. Third, is a change in mindset towards greater community and closeness with our neighbors. We fundamentally need to think more locally and communally. The combination of these changes in perspective will ultimately impact how the government functions and the policies it makes.Building upon a change in mindset, a change in the role of the state would also be required. The different role of the state is that its primary role in the economy should be to “favor ownership, and its policy should be to induce as many as possible of the people to become owners.”[note]Rerum Novarum, no. 46.[/note] That is, the role of government is to increase ownership within the society which would result in many firms being active in as many markets as possible. Such policies promoting ownership should include policies that ease market entry for small firms as well as removing those government actions that actually subsidize large corporations and wealth accumulation. To be more specific, some ideas for such policies are as follows: Strong and rigorously enforced anti-trust laws, targeted assistance for small businesses through favorable taxation policies and lending, elimination of subsidies and tariffs that favor consolidation (especially in the agricultural industry), favorable regulatory environment for small businesses (especially small banks and credit unions), eliminate tax loopholes and simplify tax code to remove the advantage created for larger corporations, strong investments in education and job training, and implementation of social services through intermediate bodies (applying the principle of subsidiarity) which would combat entitlement issues and increase community centered assistance. An additional role of the state would be to help ensure access to accurate (symmetric) information in the market. One look at this (and there could be many) would be to use the example of advertisement. Policies should ensure that advertisements are honest in their presentation of products and do not manipulate the consumer (through appealing to our base instincts for example) to ensure that consumers have accurate information on which to base consumer decisions.By centering its focus on widespread ownership, Distributism uniquely offers a framework that can help society to achieve more optimal economic outcomes. A society of widespread ownership is much closer to perfect competition than a society of consolidated ownership. Therefore, Distributism actually offers a promising perspective to the contemporary economic discussion even when considered in light of contemporary neoclassical economic theory.