Competition, Monopoly, and “Loving Mises to Pieces”

Image

In his treatise “Human Action”, Mises devotes a short chapter (5 pages) to explaining what competition is, and what competition is not. He combats the misunderstanding of markets that is at the root of Antitrust legislation and interventions to break up “monopolies.” The fact that monopolies exist is not a  problem as long as new competitors have the opportunity to pitch their ideas to the consumers without legal barriers. The consumer decides how successful an entrepreneur will be based on how well the entrepreneur serves the customers. As Mises puts it, a poet may have a monopoly on his own rhymes, but that doesn’t mean he can command the market for them.

You can read Mises’ excellent chapter on competition here on Liberty Fund’s Online Library of Liberty.

Advertisements

The Source of All Reform

Bastiat is a treasure trove of wisdom, and a quote of his that I recently came across in The Man and the Statesman reads:

“Trade is the exchange of the superfluous for the essential.”

In ten words, he distilled the amorphous verb “trade” (which has 11 different definitions in the OED) to its most essential form- it is the means by which we can improve our standards of living.  Each person focuses on the tasks he can do most efficiently compared to others and then trades his excess for the other things he needs to live.  Bastiat’s fervent belief in the power of free trade to make people better off was the driving force of his lifelong battle against protective tariffs and embargoes.  He was convinced that freeing trade, especially with England, would help alleviate poverty in France. The Mercantilist policies of aggressive trade regulation were crippling France’s economy. In his correspondence with British freedom-fighter Richard Cobden, Bastiat explains his frustration with the anti-free trade public sentiment and his enduring devotion to freedom:

“And I want not so much free trade itself as the spirit of free trade for my country.  Free trade means a little more wealth; the spirit of free trade is a reform of the mind itself, that is to say, the source of all reform.”

Why Are You Breaking Windows?

Because it stimulates the economy!

No, not really. It is an allusion to a prevalent economic error known as “The Broken Window Fallacy,” a term coined by French economist Frederic Bastiat (1801-1850). This fallacy asserts that destructive activities, like war, natural disasters, or children with wayward rocks stimulate the economy because resources have to be expended to repair the damage.

In Bastiat’s essay “That Which is Seen, and That Which is Not Seen,” he debunks this myth with a story of a shopkeeper whose careless son breaks a window. One might say that the glassmaker is better off because he must be paid to replace the window, but Bastiat insists that there is more to the story.  Because the shopkeeper must have his window fixed, he is unable to buy a pair of shoes or  a new book. If the window had not been broken, the shopkeeper could have had new shoes and a window.  In the same way, large-scale destruction diverts money and supplies from productive activities to the rebuilding efforts. As Bastiat put it, “Society loses the value of things which are uselessly destroyed.”

By ignoring the less obvious implications of economic activities, we fall into the trap of missing critical consequences of these actions.

“Between a good and a bad economist this constitutes the whole difference – the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee.”

I highly recommend reading the entire essay, even if you’ve read it before: That Which is Seen, and That Which is Not Seen; by Frederic Bastiat.