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The Paradox of Competition: Power, Markets, and Money - Who Gets What, When, How?

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The Paradox of Competition: Power, Markets, and Money - Who Gets What, When, How? Yale University EliScholar – A Digital Platform for Scholarly Publishing at Yale Cowles Foundation Discussion Papers Cowles Foundation 1-1-2018 The Paradox of Competition: Power, Markets, and Money - Who Gets What, When, How? Martin Shubik Follow this and additional works at: https://elischolar.library.yale.edu/cowles-discussion-paper-series Part of the Economics Commons Recommended Citation Shubik, Martin, "The Paradox of Competition: Power, Markets, and Money - Who Gets What, When, How?" (2018). Cowles Foundation Discussion Papers. 157. https://elischolar.library.yale.edu/cowles-discussion-paper-series/157 This Discussion Paper is brought to you for free and open access by the Cowles Foundation at EliScholar – A Digital Platform for Scholarly Publishing at Yale. It has been accepted for inclusion in Cowles Foundation Discussion Papers by an authorized administrator of EliScholar – A Digital Platform for Scholarly Publishing at Yale. For more information, please contact [email protected]. THE PARADOX OF COMPETITION: POWER, MARKETS AND MONEY WHO GETS WHAT, WHEN, HOW? By Martin Shubik January 2018 Revised March 2018 COWLES FOUNDATION DISCUSSION PAPER NO. 2118R COWLES FOUNDATION FOR RESEARCH IN ECONOMICS YALE UNIVERSITY Box 208281 New Haven, Connecticut 06520-8281 http://cowles.yale.edu/ THE PARADOX OF COMPETITION: POWER, MARKETS AND MONEY Who Gets What, When, How? Martin Shubik 12/11/2017 © Copyright Martin Shubik, 2017 1 Contents Preface Acknowledgments PART 1: THE EMERGENCE OF POLITICAL AND FINANCIAL CONTROL 1 The Emergence of Civilization with Money and Financial Institutions 2 Ownership and the Allocation of Wealth 3 A Preliminary to Understanding Markets and Competition 4 Markets and Minimal Financial Institutions 5 Process and Formal Institutional Economics 6 Time and Institutions 7 Uncertainty and Chance 8 Innovation and Ecology 9 The Summing Up: Economics the Next Hard Science? PART 2: THE APPLICATION OF ECONOMIC THEORY TO POLITICAL REALITY 10 Custom, Law, Markets and Measurement 11 Moral Philosophy and Economics 12 Alice in Wonderland and the Gap between Economic Theory and Application 13 Political Economy and the Future? A Brave New World? 14 Political Economy, the Future Dystopias, and Space? A Preferences and Utility B The Basic Game Theory Concepts Used Here B.1 Details, Strategies, and Diplomacy B.2 Zero-sum or Nonzero Sum? B.3 Solutions Bibliography Preface Money is a mystery and financial institutions are often regarded as guardians and promoters of the mystery. These sketches are designed to help any reader interested in, but not technically trained in economics, understand markets, money, credit and the evolution of a mass market 2 system set in the rich context of its political environment and society. We all want a good society. What is a good society is given by our joint vision, mutual respect and social concern but the implementation of the vision calls for the use and understanding of money, markets and finance. The efficient functioning of a dynamic economy calls for the presence of money and financial institutions. The great variety of financial institutions in any advanced economy requires an understanding of what the whole looks like. Verbal description provides an overarching view of the mixture of history, law, philosophy, custom, habit, and political structure that supplies the background for the functioning of the economy. This has been vividly illustrated by Adam Smith, his teacher the Reverend Francis Hutcheson and his close friend David Hume. There are two different but highly allied themes covered here. The first explains the worth of economic theory and its importance while connecting it with the world of politics in which the economy dwells. The second is the application of economic thought to the operating problems of every society. The first theme is covered in the first nine chapters. Chapters 1, 2, and 3 supply the rich context of history, society, polity and law in which every economy is embedded. These chapters require no symbols or technical depth to be understood. In contrast Chapters 4 to 9 offer a reasonably nontechnical exposition of some of the considerable development in formal economic theory pertaining to money and financial institutions as economics becomes more scientific, balancing quantitative measures with qualifications that help to explain what the numbers mean. The second theme is developed in Chapters 10-13 where economic theory with all of its abstractions has to be connected with social and political reality before it can be of use. This calls for both and understanding of physical and social facts, and an appreciation of the role of moral sentiment. Chapters 13 and 14 consider some alternative scenarios that we face in the near future. 3 Acknowledgments I am indebted to many colleagues over a span of 65 years. I thank all, but rather than add a small address book. I let them be mercifully anonymous so that they can avoid all blame for the contents. I also thank the readers and editors. 4 PART 1: THE EMERGENCE OF POLITICAL AND FINANCIAL CONTROL Chapter 1 The Emergence of Civilization with Money and Financial Institutions Presented here is the sketch of an adequate basis for understanding economic dynamics and the means for social, legal and political guidance of an economy. It is shown that markets and money are emergent phenomena. They will come into existence regardless of the political structure. However not all goods and services are amenable to distribution by markets. Many public goods and bads exist and a society must devise methods to deal with them. Markets depend on measurement. It is relatively easy to quantify apples for the market; but even there the listing of the number of types, the freshness, the size and quality of the apples pose problems in specifying weights and measures. In contrast the measures of many varieties of pollution such as smog, or noise are far harder to quantify. Even harder and closer to the domain of basic philosophical dispute are items such as the modern versions of Blood Money or payments made to compensate for injury or death. At least since the British utilitarian philosopher Jeremy Bentham there has been an emphasis in economics to consider the measurement of pleasure and pain. The virtues of measurement have been seen in every science; but it is important to consider that measurement may easily be prematurely imposed on phenomena that are not, given our current state of knowledge, susceptible to the precise quantification required. Many of us in the United States become poll junkies. We have to be fed our daily numbers, be they the poll-of-polls showing Politician A is ahead by 6% over Politician B; or there may be a special foodie publication which according to the latest hype runs The World Great Restaurant Poll; this establishes that the world’s greatest restaurant is a little known gem in Outer Mongolia. Furthermore real estate boosters may plug popular residence polls to show that taking all factors into account the best city in the United States for year round living is Terre Haut, Indiana, leading the runner up, Fresno, California, by 23.52%. In a sober mood most of us know that many of these numbers are salesman hype combined with specious accuracy to give them extra authority. We know that popular saviors lie and that hucksters exaggerate; but in getting our daily fix we want to know what the numbers are, not how they were generated and what they mean. It is quicker, easier and more fun to supply our beliefs as to what they mean rather than bore ourselves by reading footnotes, or even worse, having to look up documents with technical descriptions. Life is too short to do so. In the United States economy there has been a tendency to try to monetize virtually everything. 5 Oscar Wilde aptly described one of his characters as “a man who knows the price of everything and the value of nothing.” This quip distinguishes between the process of valuation and the outcome of many valuations which may form price. As a good approximation, in every-day life the prices formed in a market for eggs or canned beans do a pretty good job in connecting price and broadly accepted valuation. The histories on the production and consumption of eggs and beans are reasonably well known by both consumers and producers. Attempts to evaluate the worth of health, cultural heritage, criminal justice, defense, the citizens’ army and many other features of life in a complex society are difficult, market price may not exist or may not have much meaning. The stress in these sketches in Part 1 falls heavily on those parts of the economy where, measurement, markets and money all play a critical role. These parts are large enough and sufficiently important to merit understanding as a separate topic from other means to distribute resources. Putting matters bluntly it is marvelous to know that market price signaling and decentralization in decision-making works amazingly well to feed us and the masses of population in China, India and elsewhere; but the much deserved praise of the wonders of markets is easily distorted by Ayn Rand cheer teams calling for the misapplication of individual free choice in many parts of political and social economic life where the competitive price system left to itself will not work. We need an appreciation of the broader context of the society and a feeling for where modified markets and other methods of resource allocation are needed. As my aim is to provide an overview moving between the qualitative and the quantitative I give, on occasion, crude figures or “guesstimates” to sweeten the intuition or raise questions, as well as produce direct figures from specified sources. Accuracy is a function of purpose. The precision called for in trying to indicate that there has been a rise in crime in Chicago differs from the precision needed to land a machine on Mars.
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