The economic
theory and thinking revolves around two poles. One is often termed the economic
right borrowing from the political conservatism and secondly the economic left
borrowing from those subscribing to the Marxian line of thinking and related to
the political left. However, these poles are not water-tight. There is of
course however wide streams of thoughts that fall in varying shades of right
and left. In fact economic thinking far from being a water-tight compartment
operating in silos is actually a spectrum offering shelter to varying streams
of thought. These streams of thought give rise to numerous possibilities in
understanding human behaviour. Moreover, these streams of thinking offer
insights to the complementarities and conflicts between the various modes of
thought.
Those who subscribe
to the spectrum of right wing economic thinking favour the primacy of the
markets in allocation of resources. Those who advocate the left stream of
thinking normally favour the primacy of the state in economic resource allocation.
Resources rest on the productive efficiency, allocative efficiency and
distributive efficiency. Those favouring the right believe the markets are best
means to achieve these efficiencies. The left normally believes the markets
distorts these efficiencies making it imperative on the part of the state to
intervene. Yet as with many theories, there are many shades of grey. These shades
of grey point towards the synergies and conflicts that possibly between the
various lines of economic thinking. It also points to the location of the roots
of flaws that distort these efficiencies thus below Pareto optimal state of the
economy.
Resource
allocation ensues through four different means. The first is through the
markets. This is where it usually the price that determines the change of hands
of the good in question. The secondly is through legislative framework that
ensues the resource allocation to meet its intended objectives. The third
method is the norms. There are no laws nor price mechanism but the social norms
play a role in securing an optimal efficiency in resource allocation. Fourthly,
the very architecture of the product can be used to ensure the allocation
happens to only those who need it. In other words, it is the technology that
determines the allocation of the resource. Contrary to perception, these
mechanisms move hand in hand and complement each other.
In the market
model, it is the prices that matter. The demand supply dynamics determine the
prices. The firms produce at their marginal cost while they sell at the market
price. In a pure market setting, the firm has only control over the production
but the price is determined by the market. The firms, as a consequence will
earn zero supernormal profits in the long run. This is due to what is termed as
the ‘cash on the table’ principle. The markets in their purest form are absent
of artificial barriers of entry and exit. Therefore, whenever a firm generates
a supernormal profit, this serves as an incentive for other firms to plan an
entry into the market. As more firms enter the market, the output increases
relative to the demand patterns thus bringing down the prices. These lowering prices
ensure that only those firms whose marginal cost of production equals this new
price can produce and thus remain in the market. In other words, sustenance in
the market entails a trade-off. This trade-off is the sacrifice of the
supernormal profit.
However, to the
incumbent firms, the desire to perpetuate supernormal profits implies a need to
erect the barriers of entry. There are however instances where there natural
barriers to entry and as such there is a first mover advantage. These are found
in industries where economies of scale are extreme and only one firm or perhaps
two can operate on minimum efficient scale. In such instances, the first movers
will naturally move along. To ensure prices remain low and not to exploit the
price elasticity of demand to increase prices, the government regulation is
normally suggested in these domains.
There are other
industries wherein the firm seek to set up artificial barriers of entry. These instances
are not even one-off but are perpetual attempts to prolong their monopoly. Given
the expenditure on research and development and the need to recoup their expenses,
make the government offer patents and thus a temporary monopoly on the same. Yet
as many instances show, the firms keep actively lobbying to increase the patent
period. They further seek to take advantage of legal loopholes to extend their
patent period for further number of years. There is sufficient evidence to
demonstrate the copyright laws are increasingly getting extended in terms of
the copyright period to protect the interests of a few firm. Implied is a corporate
lobbying to create conditions for regulatory capture and thus a long monopoly
for their stars and cash cows.
This is where
the paradigm shifts from pro-market to pro-corporate. In the pro-market line of
thought, the market forces will keep the firm away from making supernormal
profits. It is akin to climbing a greasy pole wherein the threat of sliding
down is omnipresent. In the pro-corporate thinking, it is about sticking on the
top of the pole while pushing the others who wish to climb it. It is about
market avoidance. The firms once they entrench themselves into the market seek
to perpetuate their market dominance. Implied in this line of thinking is the
erection of barrier to prevent other firms from entering. These barriers take
shape of legislative interventions (regulatory capture), architectural
interventions (technology) among others. This is where the battle between the
pro-corporate forces and pro-market forces start to evolve. Ironically, these
market forces seeking to impose competition find greater synergy with the
forces of the left. To the left, these interventions to erect barriers of entry
distorting prices, profits and welfare cannot be undertaken by the forces of
the market themselves. To the left wing streams of thought, the only way for
this to happen, is the intervention by the state. As a step further, they seek
the state itself to function as a producer and distributor. There is a further belief
that the ownership rests with the people (communes) and the state merely
functions as an agency of the people or the labour who actually own the firm. Irrespective
of the differentials in the nature of interventions sought, there is considerable
synergy in the objectives these conflicting thinking streams seek to achieve in
enhancing consumer and producer welfare.
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