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Over the weekend, there was a great article which encapsulates everything that is wrong with what passes for modern economics.

It's an old story, really. Companies cut workers in a downturn, and squeeze more out of those remaining. And so profitability rises smartly -- only to fall again in the recovery as sales and payrolls rise once more.

This doesn't make a whole lot of sense according to FreeMarketTheoryTM. In a truly free market, workers are paid their marginal product of revenue, ie how much they produce. If they are producing more, then they should be paid more.

Which is why in a truly free market, economic profits are zero. Except, they are not.

Though just a third of companies in the Standard & Poor's 500 have reported quarterly earnings results so far, the picture is impressive. Profits are booming. Eight out of ten companies have beat earnings expectations, according to Thomson Reuters. The average jump in profits is 33 percent.

In a truly free market, there are no barriers to entry, and competition will drive profits to zero (economic profits, there are still accounting profits).

Yet that is not happening either.

What kind of economy is it that doesn't produce for its citizens? Well, it produces for some:

83 percent of all U.S. stocks are in the hands of 1 percent of the people.

I think I will repeat that:83 percent of all U.S. stocks are in the hands of 1 percent of the people.

This is not how the free market is supposed to work. It is not how Adam Smith and Milton Friedman claimed it was supposed to work. When conservatives defend this system, they are defending an aristocratic crony capitalism.

It used to be conservatives claimed that markets were better because they had better outcomes. Now that this is not the case, they still defend it. It is part of a religion, like thinking that chanting tax cuts will solve every problem.

Originally posted to bay of arizona on Tue Jul 27, 2010 at 09:02 AM PDT.

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Comment Preferences

  •  Market theory needs to take.... (5+ / 0-)

    into account the human nature factor.  Ethics and a sense of responsibility to the greater good are missing from most business models.  

  •  This may be true (4+ / 0-)
    Recommended by:
    Gooserock, bay of arizona, DBunn, majii

    But a "true" free market is practically impossible in the classic sense (zero profit and complete mobility). Governments and private interests always ensure that some barriers will exist. I might also note that in a perfect economy, everyone is "rational."

    •  Well Compare Economics to Mechanics (4+ / 0-)

      As a kid you learn you can push one way on the end of a stick that's wedged in particular ways, and it will move something at the other end.

      This is the simple, idealized lever.

      You have the basic concept not long after you can talk, and it will serve you fairly well through college and your entire life.

      As a kid you also learned that you can make a trade with somebody else for goods or services.

      This is the simple, idealized economy.

      You have this concept too not long after you can talk, and within days you will be ripped off or defrauded for the first time.

      You won't be old enough for kindergarten before you have learned that trading is one of the more risky and unpredictable activities there are. You learn that it's never safe without plenty of adult supervision.

      It takes years of education to make you forget the reality you knew by kindergarten.

      We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

      by Gooserock on Tue Jul 27, 2010 at 09:20:51 AM PDT

      [ Parent ]

    •  the problem with the term "FREE market" is... (3+ / 0-)

      The term "free market" is inherently misleading.  A market is in fact defined by its limitations: a market is an institution which allows certain people to buy and sell certain stuff under certain rules, using certain means of exchange and certain units of measure.  Some markets are more heavily regulated than others, but a truly free market would be no market at all.  You can't have a market without some form of government, and without some restrictions.

      The term "market" derives from the markets of medieval and earlier times--- which still exist in rudimentary form (e.g, farmers markets) in modern society.  Those markets were very highly regulated: if you wanted to trade, you first had to get permission from the local powers that be to even participate at all in the market, and to participate you had to go to a specific place at a specific time--- and you were in big trouble if you tried to trade somewhere else at some other time.  

    •  So what is your plan then? (0+ / 0-)

      My point is that the holders of capital are gaining productivity from workers but not paying them the share that they would get under normal conditions.

      Why is that acceptable? According to their own theories, workers should be earning more.

      •  Worker's pay is only loosely tied to productivity (1+ / 0-)
        Recommended by:
        bay of arizona

        in that productive workers are more valuable and thus a company should be willing to pay more to get them in a competitive market.

        Productivity should not necessarily directly relate to pay. Let's consider a thought experiment.  You are making a product by hand.  You can make 20 a day.  I spend $1,000,000 to buy a machine to make the product, now you run the machine and make 2000 a day.  Your productivity is increased a hundredfold.  Should your salary be increased proportionally, probably not.  If it was, there would be no way to pay for the machine.

        •  Have you taken a course on economics? (1+ / 0-)
          Recommended by:
          QuestionAuthority

          Should your salary be increased proportionally, probably not.

          Actually, yes.

          http://en.wikipedia.org/...

          This is Econ 1 type stuff. Basic conservative economic theory. Not radical or liberal or new.

          •  Actually the pay may well drop (1+ / 0-)
            Recommended by:
            VClib

            If the manually created product required someone with a year's experience to properly make one and the machine allowed someone to be trained to run it in a week, then the skills required are lower and the competitive market would allow a lower price to be paid for the worker.

            Frankly, I understand the theory you are quoting, I think it simply has nothing to do with how wages and prices are actually determined.  It entirely discounts the value of that $1,000,000 investment in equipment.

            If there is no profit to be made by the investment, it will not happen.  Now the worker's pay may be improved, or even lowered by the investment, but the consumers of the product will find a significant improviment in price which will add to everyone's standard of living.

  •  20-25 Years Ago Ads on Sunday Talk Shows Touted (7+ / 0-)

    "95% of the global market is offshore."

    In this period they had already made it clear that they don't need our labor. The impression these slogans made on me at the time (alas there was no way to share it) was that they were saying they ultimately don't need us as consumers either.

    We see a lot of talk around here to the effect that the right and the corporatists are riding for a fall, because their actions are going to harm "their" country and the world of their children.

    Your diary and the AP article underscore my often repeated comment that ownership is simply finished with our system and with our country. They're willing to accept any level of damage in the course of getting the control they seek.

    So there is no self correcting mechanism with ownership, there's no turning or tipping point.

    If we don't stop them, they'll take everything.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Tue Jul 27, 2010 at 09:15:32 AM PDT

  •  Take a close look at the table and (2+ / 0-)

    notice how much more the lower percentiles went up from 1962.  Much more than the top 1 percent.  In 1962 the top 1 percent had 94 percent.  

    I don't belong to an organized party, I'm a democrat.

    by thestructureguy on Tue Jul 27, 2010 at 09:31:00 AM PDT

  •  If competition for products (2+ / 0-)

    sold was done like our labor has been done, there would be no profit for any corporation.  It would not be fair to them no more than it is fair for the workers who are being ruined by unfair competition by outsourcing and insourcing.

    A decent government would stop the carnage.

    We know we can expect from the Republicans...war...tax cuts for the rich....bail outs for the corporations...cuts in Social Security. They are setting back, hiding, while the Democrats do the job for them.

    Ed Rendell, Kent Conrad and Obama are but a few Democrats that have joined the republicans.  Creating a deficit commission out of people like Alan Simpson and traitorous Alice by Obama showed he was not going to defend Social Security.

    It is no longer Democrats against Republicans.  It is the corporations and the wealthy against the rest of us.  

    We will have to join forces with everyone in the middle class, because the political lines are blurred and merging.  It is no longer clear what we can expect from the Democrats in power.

    All of us Democrats need to join forces with the Republicans to fend off the attack of us by corporations allowed by our government.

    They want to cut Social Security.  They won't stop until they have dismantled it.  They mean to bankrupt Medicare, why else don't they bid for prescription drugs?

  •  Change cap gains tax law. (1+ / 0-)
    Recommended by:
    bay of arizona

    Tax cap gains at the same rate as 'earned income' - AND increase the tax rate progressively as it used to be, back when there were over 20 tax tiers, not 6 like there are today.

    But no one in Congress dare say a word.

    Except Sanders.

  •  The Free Market can never work. (2+ / 0-)

    It has never worked and it never shall.

    Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning.

    by hestal on Tue Jul 27, 2010 at 10:05:17 AM PDT

  •  Why would a free market be profitless? (1+ / 0-)
    Recommended by:
    bay of arizona

    It seems to me that labor would be paid a competitive price and be subject to supply and demand.

    Profit is an essential part of a free enterprise system because profitability is what redirects resources to areas where the market has indicated a need for additional capacity.  Once the capacity meets needs, then profitability falls cutting down on future investment relative to other needs.

    •  Economic profits are different than accounting (0+ / 0-)

      profits. Profits should be the same as most long term interest rates (the opportunity cost for investing in your own firm).

      If the profits for a given industry are high, then more firms should enter that market and gradually reduce the margins for all firms. Individual firms are forced to innovate to find profitability, which is supposed to be the essence of capitalism.

      This model has broken down; the market is not working correctly. Why should the price of labor be subject to supply and demand but not the price of capital?

      •  Profits should be higher than long term interest (1+ / 0-)
        Recommended by:
        VClib

        If I have some cash and want to invest it for the future I have to balance risk and reward.  Investing in stock is clearly riskier than simply banking it at the long term interest rate.  If I don't have a reasonable chance of making more by taking the risk, I'll play it safe and put the money in the bank.

        What makes me risk my investment is the liklihood that the profits will generate higher revenue than passive interest.  

  •  A few of the problems with the "free market" (0+ / 0-)

    Economics is based on various theoretical constructs that invariably oversimplify the situation and the outcomes.

    One construct is the "rational consumer" who is out to maximize his/her gain in every transaction. That person doesn't exist. Emotions invariably cloud the comsumer's judgement. Advertising is well-known for this effect on consumers.

    Another is that economics includes the assumption that all participants have the same amount and quality of knowledge about the transaction. In reality, the seller always has the advantage in knowledge.

    These two alone are enough to ensure that the so-called "free market" is a bunch of self-justifying BS.

    "Ridicule may lawfully be employed where reason has no hope of success." -7.75/-6.05

    by QuestionAuthority on Tue Jul 27, 2010 at 11:58:18 AM PDT

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