power and markets

[GN842@xxxxxxxxxxxxxxxxx id <01HVRR21EORK8X57XK@xxxxxxxxxxxxxxxxx> for pkt@xxxxxxxxxxxxxxxx; Wed, 27 Sep 1995 12:50:03 -0400 (EDT)]

I've had a number of discussions with Peter Breiner, a colleague of mine
here at SUNY, who has a brilliant discussion of Max Weber and marginal
utility theory in one of the chapters of his book, forthcoming in
the next three to six months on Cornell Press.  (I forget the title
but there's only one book on Max Weber written by Peter Breiner)

In any case I'm not going to raise the issues raised by Peter's discussion,
as I would have to re-read it (more than once) before doing so, but I
would like to raise for discussion the problem of the relationship between
firms and the state, specifically, what happens when firms use state power.

The most extensive literature that I know on this topic within the
field of bourgeois economics is the public choice/rent-seeking kind of
stuff put out by Buchanan, Stigler, Tollison, and the like.  There, the
nefarious effects of "state intervention" are identified with the
malevolent desire of firms to "cheat the market" by using their political
influence to control entry, prices, etc.

One of the curious effects of this literature is that it tends to try to
quantify the "cost" of rent-seeking activity as the prices charged to
consumers over and above what would nominally be the cost in a free market.
But what if, for several decades, there is no "free market", but we instead
bounche around from one cartelistic regulatory arrangement to the next?  (Such
was the case in the oil industry in France for most of its first 100 years)
It would seem that a "free market price" becomes a meaningless reference
point.   What we really have is a "market" which is the expression of the
institutional/political power of specific groups which tend to be perpetually
vying for control.

One might be tempted to say that the "free market" is really the
indicator of lack of political power of its participants.  This is the
implicit argument of the rent-seeking school, which would like to find
some way to constrain rent-seeking activity, either through restrictions
on state authority, or on the activity of the rent-seeking firms.  But
this is itself an absurdity.  The "free market" itself may be the
institutional expression of power of specific groups.  Polanyi makes
a convincing case of this (as does Marx) in the general sense; but even
talking about less cosmic transformations than the transition from
feudalism to capitalism, it is sometimes the case that a specific
"free market" may rather be the expression of a particular form of
control.  For example, de-regulation of the French market in 1920 was
really an indicator of the triumph of Standard Oil over Royal Dutch
Shell.  Standard Oil was not committed to "free" markets as such,
and indeed supported cartelization in 1928, but was opposed to regulation
proposed by its adversary and preferred no regulation to regulation against
its interests.   It would not seem that the free market price of oil
during the period immediately following 1920 had any "true sense" with
regard to a competitive price.

More recently, Ed Morse, publisher of Petroleum INtelligence Weekly, has
written a piece in which he establishes that part of the "preconditions"
for OPEC's success in the 1970s was the nature of U.S. domestic regulation.
U.S. regulation kept oil prices higher than world prices in the 1960s,
but in the 1970s worked to the opposite effect, keeping prices down
and encouraging consumption beyond what the "world market price" would
have creasted.  Since U.S. productive capacity withing the protected
bubble of the U.S. market was limited, the excess demand forced an
a "must buy at any price" relationship with the OPEC suppliers, who
found they could raise prices.  With decontrol (and certain other
measures, such as the Corporate Average Fuel Economy Act, which he
does not discuss) foreign producers were no longer selling into a U.S.
market where "artificially high" demand created a situation where the
"controlled U.S. producers" had to sell their product first, cheaply,
while the "uncontrollable foreign producers" were able to price high
for the fraction of the U.S. market that was "theirs."

Another way of saying this is that the world price of oil to some extent
represented the insitutional arrangements which reflected the relative
(and changing) balance of power among domestic groups in the U.S.  The
U.S. market being large, shifts in its pricing and demand profiles
had an impact on total world demand, and hence on total world prices.

It would seem that marginal utility theory always works within the
assumption of a given power relationship which structures a market, but
which is usually unexamined.  The only exception is when the issue
being examined is monopolisitc control, but here it is always assumed
that once monopolistic control is relinquished that there is a "free
market" price to revert to.  But in fact that free market price will
merely reflect whatever new institutional arrangment succeeds the old
one, and that power, as such, always remains present to some degree
as a component of prices.

I thought I would toss this one out and see if anyone wishes to pursue
it.

Greg Nowell