Unit 3: The Business System | Unit 4: Ethics in the Marketplace
MODULE II: THE MARKET & BUSINESS

Unit 3: The Market System: Government, Markets, and International Trade (Chapter 3)
Introduction | Objectives | Key Concepts | Study Directory | Assignments | Summary | Self-Test

Introduction

In this chapter the nature of the business system is explored through consideration of controversies surrounding it.  Regulative and antiregulative (or laissez faire) policies are associated with communitarian and individualistic ideologies, respectively.  Command economies (towards which regulation tends) and free market economies (towards which absence of regulation tends) are different ways of solving the fundamental economic problem of coordinating the production and distribution of goods.  Since pure command and pure free market extremes seem unworkable, all existing economies are mixed, incorporating elements of both: nevertheless heated controversy remains concerning the extent to which regulation is morally justifiable and economically advisable, to what ends, and under what circumstances.

Followers of John Locke argue for minimal regulation on the grounds that free market economies best conserve negative life, liberty, and property rights: regulation interferes with individuals’ free exercise of their natural rights to use and control their own property.  Critics of the Lockean case may appeal to positive life and liberty rights or to offsetting concerns about distributive injustices of Capitalist distribution.

Followers of Adam Smith argue for minimal regulation on utilitarian grounds: free market economies, they maintain, are economically most efficient and, thus, best promote the general welfare.  Criticisms of Smiths’ defense of free markets focus on various dubious assumptions and, again, to offsetting concerns about injustices of Capitalist distribution.  Keynesian economists argue that some regulation and “public sector” investment actually helps to stabilize markets and moderate the business cycle.

Social Darwinism argues capitalism can be morally justified as leading to the improvement of the human species since under capitalistic competition, as in biological evolution, the fittest survive.  It is generally thought to be fallacious, however, to argue from facts (fitness for survival in a given [economic] environment) to values (the human or moral superiority of the survivors), as Social Darwinism seems to do.  There are further objections to Social Darwinism, especially the individualistic version.

Karl Marx and his Communist followers allege that the distributive injustice of Capitalism leads to increasing immiseration of workers and increasingly severe economic depressions; and these are fatal flaws, calling for wholesale replacement of the Capitalist system of private ownership and “free” exchange by a command economy wherein the means of production are communally controlled rather than privately owned.  Defenders of free markets reply that Capitalist distribution is not fatally flawed – increasing immiseration increasingly severe economic depressions have not occurred as Marx predicted.  Neither are free markets distributively unjust, defenders claim, according to contribution-based justice.

In reality, what exist today are all mixed economies – mixing free market economic and command economic elements.  There remain substantial differences between national economies as to the degree to which command or free market elements predominate.  There also remains substantial debate regarding what is the best mix of governmental regulation and property rights & free markets. 

Learning Objectives

  1. Understand the controversy about free markets and governmental regulation and the contrast between market systems and command systems.
  2. Understand John Locke's case for free markets as the best guarantors of natural human rights, and criticisms of it.
  3. Understand Adam Smith's Utilitarian defense of free markets and criticisms of it.
  4. Understand John Keynes case for certain sorts of governmental economic intervention.
  5. Understand classical (individualistic) and modified (corporate) Social Darwinist defenses of free markets and criticisms of classical Social Darwinism.
  6. Understand Marxist criticisms of free markets and the proposed Communist alternative to them.
  7. Recognize the ascendancy of mixed economies and issues remaining about the right mixture.

Key Terms and Concepts

  1. Globalization: The process by which the economic and social systems of nations are connected together so that goods, services, capital, and knowledge move freely between nations. (126)
  2. Command economy:  system of economic planning and regulation in which governing authorities make production and distribution decisions by issuing enforceable commands. (128)
  3.   Market economy:  system of private ownership and “free market” exchange in which production and distribution regulate themselves by the law of supply and demand. (128)
  4. Mixed economy:  any economic system featuring both market and command elements. (153)
  5. Supply and demand:  law of economics according to which low supplies drive prices up (as buyers compete), and hence production up (as more profitable); and low demand drives prices down (as sellers compete), and hence production down (as less profitable). (136)
  6. Proletarian: wage laborer.  In Communist theory all wage laborers – blue collar or white, salaried or hourly – are proletarians.  Likewise, only wage laborers are proletarians.  The unemployed are lumpenproletarians.  Similarly, small business owners and independent trades people are petit bourgeoisie, not full-fledged Capitalists. (150)
  7. Bourgeoisie:  Capitalist owners of the means of production who are the ruling class in capitalist societies (150).
  8. Capitalism:  economic system in which industrialized (and other) means of production are privately owned and operated for private gain in a market economy. (§3.4)
  9. Communism:  economic system in which industrialized (and other) means of production are publicly owned and operated for public benefit under a command economy. (§3.4)
  10. Business cycle:  Cycle of overproduction leading to periodic downturns (repressions and depressions) characteristic of the early development of capitalism, which Karl Marx held to be among capitalism’s chief flaws. (§3.4)
  11. Alienation:  separation of the worker from the product of his or her labor (which the capitalist owner of the means of production “expropriates”), and from and control over the labor process itself (which the owner dictates). (146)
  12. Keynesian:  relating to the economic theories of John Maynard Keynes according to which “public sector” expenditures and investments help to moderate the ups and downs of the business cycle. (139-41)
  13. Social Darwinism: the view that capitalism is, morally, the best economic system because, like Darwinian evolution, capitalist competition favors the “survival of the fittest” and hence leads to the improvement of the human species. (141-2)
  14. Intellectual property: Property that is abstract and nonphysical. (154)

Page or section numbers given are not the only places where the terms are found in the text.  Many of theses terms will appear on the module exams.  You should write a definition of each term as you encounter it in your reading for use as a convenient review.

Study Directory

Self-Diagnostic Exam Items

Textbook Pages

Objective

1

 128

1

3

 130-1

2

4, 5, 10

135-6,  138-9, 136-7

3

6

 139-41

4

7

 141-2

5

8, 9

 150, 146

6

2

153-4 

7

Assignments

Summary

 In this chapter the nature of the business system is explored through consideration of controversies surrounding it.  Here, regulative and antiregulative (or laissez faire) policies are associated with communitarian and individualistic ideologies, respectively.  Command economies (towards which regulation tends) and free market economies (towards which absence of regulation tends) represent different ways of solving the fundamental economic problem of coordinating the production and distribution of goods.  Under command systems, control is centralized and "top-down": a governing authority decides system wide policy and communicates its decisions to those responsible for carrying it out as enforceable commands.  The U. S. and British economies during WW2 as well as the Soviet economy (especially between 1928 and 1953) provide examples of command economies.  In free market systems control is decentralized and "bottom up": individuals and privately owned and controlled corporations make their own production decisions and seek the most advantageous prices in exchanging their goods with other firms and consumers.  Price level fluctuations in such exchanges, due to supply and demand, serve to coordinate system wide production by encouraging investment in profitable enterprises and discouraging investment in unprofitable ones.  The two main components of a free market system are

  1. a system of private property embodied in property laws, and
  2. a market system, such as our system of monetary exchange, enabling individuals and corporations to freely contract to exchange goods or property.

Few advocate an absolutely pure market system – putting no restraints on rights of ownership and exchange whatever: this would allow trade in sex (prostitution), drugs, and even people (slavery).  All real market systems impose restrictions on ownership and exchange out of concern for the public welfare.  Still debate continues over to what extent governments should intervene in the workings of the market system.

John Locke, and his followers argue that a free market system best serves to guarantee fundamental human "natural rights" to life, liberty, and property.  Governments are instituted, by the consent of the governed, in order to protect these rights and the consensual nature of this compact or covenant imposes moral limits on government.  Governmental interference with the life, liberty, and property of individuals – except in order to prevent their infringement on the same rights of others – is unjust and unwarranted.  Government regulation of the marketplace infringes on individuals' natural rights without such just warrant and, hence, is a wrongful violation of individual rights that should not be tolerated.  Critics of Locke complain, that Locke's assertion of natural rights is baseless and his assertion of the priority of negative (life, liberty, and property rights) is too.  If humans do have natural (life, liberty, and property) rights, it doesn't follow that such rights override positive rights to food, housing, and medical care (for instance).  Furthermore, critics maintain, Lockean (life, liberty, and property) rights conflict with and may sometimes be overridden by the demands of distributive justice, and free market economies by their very natures create distributive injustices.  Finally critics dispute the individualist assumptions underlying Locke's approach, contending that individuals are endowed with life, liberty, and property not by nature alone, but as members of society: since these rights are granted by society, society may rightfully restrict these rights when doing so best promotes the general welfare.

Adam Smith and his followers argue that free market systems best promote the general welfare by maximizing economic utility.  Such a system ensures that the economy produces what consumers want with maximum efficiency: the law of supply and demand causes the marketplace to produce the goods consumers desire, and competition between producers puts the inefficient out of business.  Consequently, free markets best serve economic efficiency.  In such markets agents motivated only by self-interest (a desire for their own profit) are led to serve society's needs "as if by an invisible hand."  Government intervention in the workings of the market interferes with the self regulating effect of competition, thus reducing its beneficial consequences, since human planners can never regulate markets as efficiently as the "invisible hand."  Critics complain, first, that his argument rests on several false assumptions.

  1. Smith unrealistically assumes there always to be many producers freely competing to provide various products to consumers.  But monopolies and oligopolies arise which, being able to set prices artificially high and keep production artificially low, are, largely immune to control by market forces.
  2. Smith falsely assumes that producers pay for all the resources they use in production and consequently will conserve resources to keep down costs.  But this overlooks resources (such as air and water) for which producers do not have to pay and, consequently, have no reason to conserve and will carelessly exploit.
  3. Smith assumes that profit is the only human motive driving economic behavior, such that each "intends only his own gain" by following the rule of "economic rationality."  But people (even corporations) are not purely rational or exclusively profit seeking: they are frequently actuated by noneconomic goals and often behave irrationally, besides.  Worse, socialist critics charge, capitalism actually makes people materialistic and selfish . . .a bad thing.

Critics also point to many successful attempts at economic planning as showing that planning is feasible.  But, Velasquez observes, it may only be feasible so long as it remains one component within a largely market based economy.

John Maynard Keynes and his followers maintain that government, by investment in the "public sector" and other interventions can help moderate the ups and downs of the business cycle.  By judicious governmental intervention, the periodic recessions and depressions that unregulated free markets suffer can be controlled if not avoided entirely.  Given the immense economic and human costs of such economic downturns, Keynes maintains, timely governmental interventions to enlarge effective demand and decrease unemployment improve on Smith's laissez faire approach when it comes to maximizing social utility.  Post Keynesians address the seeming paradox of stagflation – inflation in conjunction with unemployment – and explain this as the effect of nonmarket forces (especially, unions and monopolies & oligopolies).  Post Keynesians propose an even larger role for government: besides boosting aggregate consumption and demand (as Keynes advocated) governments should also curb the power of oligopolies and monopolies.

Social Darwinism maintains that economic competition works like natural biological selection to insure the "survival of the fittest" and thus the improvement of humanity since, under Capitalism, only the fittest individuals and enterprises survive and prosper.  In its individualistic form, Social Darwinism is biologically naive in its understanding of "fitness", logically dubious in its transition from the fact of survival to the goodness of the survivors, and mean-spirited with its let-the-weak-die attitude.  Social Darwinist sorts of claims when reinterpreted as applying to the evolution of firms or corporations, however, may be more defensible.

Karl Marx and his Communist followers develop the most thorough and severe criticism of the capitalist system of private ownership and free markets.  According to Marx the exploitative excesses of early capitalism were symptomatic of the underlying dynamic of a system that promotes distributive injustice, undermines communal relations, and causes alienation.  Alienation severs the connection between the worker and both the process of and the products of the production: the product of the wage laborer or proletarian's labor belongs to another, and the process of the production is dictated and controlled by that other, the capitalist.  The capitalists or bourgeoisie own the factories and other means of production.  The real purpose of government being to serve the interest of the ruling class, in capitalist societies, the government is, in effect, "a committee for managing the common affairs of the whole bourgeoisie" (Marx & Engels).  Other aspects of capitalist culture constitute an ideology that seeks to justify the continued rule of that class.  Capitalism, however, contains the seeds of its own destruction in the form of

  1. concentration of wealth in the hands of the few leading to monopoly conditions and to swelling the numbers and increasing the misery of the working class;
  2. the business cycle & periodic economic crises.

These contradictions must eventually give rise to a violent revolution wherein workers seize control of the means of production for themselves and institute the "dictatorship of the proletariat."  Under this regime the means of production will be collectively (rather than privately) owned and the economy will be centrally planned and managed (rather than left to the working of the market).  With the advent of a classless society and the "new socialist man," it's maintained, the dictatorship of the proletariat will gradually "wither away."  Critics complain, first, that Marx's predictions have proved false: immiseration of workers has not occurred; the business cycle has been controlled; and capitalism has not caused the breakdown of community (if this has occurred, it can plausibly be blamed on other factors, and communism causes worse breakdowns).  Critics also defend the morality of capitalism on the grounds that capitalist distribution is just on contribution based accounts of distributive justice, and that the utilitarian benefits of capitalist production outweigh any injustices there may be.

In reality, what exist today are all mixed economies – mixing free market economic and command economic elements.  There remain substantial differences between national economies as to the degree to which command or free market elements predominate.  There also remains substantial debate regarding what is the best mix of governmental regulation and property rights and free markets.  The ideal mixture would best combine the efficiency of free-markets with social-welfare serving and justice preserving effects of governmental regulation.  Intellectual property rights issues seem to require a similarly mixed approach balancing individual-ownership and community-access considerations.

Self-Test

The following questions will help you judge your comprehension of the materials covered in Unit 3. Please remember you are responsible for the glossary terms above. You need to check your responses against the key included. 

  1.  What are the two main components of a free market system?
    1. A system of private property and a market system allowing parties to exchange goods and services.
    2. The principle of utility and the egalitarian principle of distributive justice.
    3.   A communitarian ideology and a market system allowing parties to exchange goods and services. 
    4. A individualistic ideology and a command economy.
  2. According to Velasquez,
    1. the U. S. economy is a pure free-market economy having no command-elements.
    2. the Swedish economy is a pure command economy having no free-market elements.
    3. both A and B.
    4. neither A nor B.
  3. According to John Locke or his followers,
    1. free markets are best because of their superior productivity and efficiency.
    2. free markets are best because they best preserve negative liberty and property rights.
    3. since free markets violate positive health and welfare rights they should be eliminated.
    4. governments have an unlimited moral authority to regulate commerce and trade.
  4. According to Adam Smith,
    1. Government regulation of markets is necessary to ensure distributive justice.
    2. Free markets regulate production & exchange of economic goods "as if by an invisible hand.
    3. Governmental intervention in markets helps moderate the ups and downs of the business cycle.
    4. People are naturally unselfish and idealistic.
  5. Which of the following is a “socialist” criticism challenging Adam Smith’s fundamental assumptions.
    1. People aren't naturally selfish, it's the capitalist system that makes them so.
    2. Free markets clearly violate capitalism’s own contribution-based principles of distributive justice.
    3. Free markets always give rise to governmental interference by their very nature.
    4. All of the above.
  6. According to the central doctrine of John Keynes and his followers,
    1. People are naturally unselfish and idealistic.
    2. Government regulation of markets is necessary to ensure distributive justice.
    3. Free markets regulate production & exchange of economic goods "as if by an invisible hand."
    4. Governmental intervention in markets helps moderate the ups and downs of the business cycle.
  7. According to Velasquez Social Darwinism
    1.   is undeniably right in its assertion that Capitalism, like natural selection tends toward the biological improvement of the human species.
    2. is certainly right in its assertion that allowing the poor to die off is natural and desirable.
    3. seems more defensible in its application to firms or corporations than to individuals.
    4. None of the above.
  8. By Marx's definition a proletarian is
    1. anyone who works for wages.
    2. only hourly employees: salaried employees are bourgeois.
    3. only blue-collar employees: white-collar employees are bourgeois.
    4. a small tradesperson who owns their own means of production.
  9. Alienation, according to Marx,
    1. cuts the connection between the worker and the product since the product of the worker's labor belongs to another.
    2. cuts the connection between the worker and the process of production since that process is dictated and controlled by another.
    3. both A and B.
    4. neither A nor B.
  10. What regulates production and exchange in a free market, according to Adam Smith?
    1. Supply and command.
    2. Command and demand.
    3. Supply and demand.
    4. Government functioning as "a committee for managing the affairs of the whole" of society.

Self-Test Key

Question

Answer

Objective

Pages

1

A

1

128

2

D

7

153-4

3

B

2

130-1

4

B

3

135-6

5

A

3

138-9

6

D

4

139-41

7

C

5

141-2

8

A

6

150
9
C
6
146

10

C

3

136-7

NOTE:  The questions on the module end examination will be closely based on the self-test you have just taken.  Often, the examination will even repeat the question-part of self-test questions while varying the answers and distracters (A, B, C, D) choices.  For example, question 10 above might appear instead with this set of options –

  1. Market forces
  2. Political commands
  3. Both of the above
  4. None of the above

– making “market forces” (A) the correct answer, since supply and demand are market forces.

CONSEQUENT ADVICE:  The self-test questions can be very useful for studying for the module end examination, but only if used in the right way.  As the example above shows, ” in the absence of background understanding, (from reading the text, and the study materials) it might not have been helpful to have studied for the exam by memorizing that the answer to the one about market regulation according to Adam Smith was “supply and demand.”  In the absence of background understanding, from reading the text, and the study materials, just memorizing “supply and demand” might even be counterproductive in misleading you into guessing “None of the above” (D), which is incorrect.  The following points are noteworthy in this connection:

In taking the module end examination it is extremely important that you read the examination questions and options carefully: a little word like not or and can make all the difference between a right and a wrong answer.  Pay attention to italicized words and phrases – italics are for emphasis and often provide clues to the questions being asked and the answers being sought.

Unit 4: Ethics in the Marketplace (Chapter 4)
Introduction | Objectives | Key Concepts | Study Directory | Assignments | Summary | Self-Test

Introduction

Competition gets its moral importance from that fact that the self-regulative abilities of free markets – due to supply and demand – provide the main benefits alleged for free markets:

  1. serving demands of capitalist (contribution-based) justice;
  2. maximizing economic utility;
  3. safeguarding negative rights of economic liberty.

Monopolies (single seller markets) and oligopolies (where a few sellers control a market), being anticompetitive, keep markets from delivering these benefits.  Monopolies & oligopolies foster distributive injustices (e.g., price gouging), distributive inefficiencies (demand is less well served), and productive inefficiencies (due do lack of competitive pressure); and monopolies & oligopolies undermine economic liberty in various ways (limiting consumers' discretionary preferences and sellers' access to markets).

True monopolies are rare, but oligopoly conditions are common and have similar anticompetitive dynamics and effects due to the ease with which the few firms controlling the market can join forces and create virtual monopoly conditions thereby.  Horizontal mergers between former competitors are the chief cause of oligopolistic conditions.  There are three principle schools of thought regarding what, as a matter of public policy, to do in light of this long-term trend in our economy towards diminishing competition.

Learning Objectives 

  1. Understand the case for the morality of free markets as the best guarantors of capitalist distributive justice, economic utility, and liberty rights: appreciate the limitations of this justification.
  2. Understand how the case for the morality of free markets depends on the assumption of perfect competition.
  3. Know the defining features and essential presuppositions of perfectly competitive markets.
  4. Understand how perfect competition is a useful idealization, and how the principle of diminishing marginal utility and of increasing marginal costs interact to determine the equilibrium price.
  5. Understand the nature of monopoly markets and their negative impacts on perfect competition.
  6. Understand the nature of oligopoly markets, their negative impacts on perfect competition, and the several different ways in which oligopolistic influence may be exercised.
  7. Understand the do-nothing view, the anti-trust view and the regulative view as competing schools of thought about appropriate public policy with regard to oligopoly markets.

Key Terms and Concepts

  1. Perfectly competitive market: a free market in which no buyer or seller has the power to significantly affect the prices at which the goods are being exchanged. (167)
  2. Distribution(LH): first defining condition of perfect competition: a market is distributed to the extent that “there are numerous buyers and sellers, none of whom has a substantial share of the market” (167).  To the extent that markets lack distribution (as monopoly and oligopoly markets do) they are said to be concentrated. (181)
  3. Openness(LH): second defining condition of perfect competition: a market is open to the extent that "buyers and sellers can freely and immediately enter or leave the market.  To the extent that markets lack openness they are said to be closed. 
  4. Monopoly markets: markets in which a single firm is the only seller in the market and which new sellers are barred from entering. (167)
  5. Oligopoly markets: markets that are dominated by a few large firms. (167)
  6. Horizontal merger: the unification of two or more companies that were formerly competing in the same line of business. (181)
  7. Diminishing marginal utility: principle governing demand according to which the more units of some item you already have, the less demand you will have for additional units.  In effect, “the price consumers are willing to pay for goods diminishes as the quantity they buy increases.” (169)
  8. Increasing marginal costs: principle governing supply according to which, beyond a certain point, each additional unit produced costs more to produce than earlier units. (170)
  9. Equilibrium point: the point at which the amount buyers want to buy equals the amount sellers want to sell and the price buyers are willing to pay equals the price sellers are willing to take. (171)
  10. Discretionary preference satisfaction(LH): he ability of buyers to decide between purchasing different types of goods thus "putting together the most satisfying bundle of commodities given the commodities they can purchase and the money they can spend" (180).
  11. The do-nothing view: view that nothing need be done about the growth of oligopolies and increasing concentration of markets. (190)
  12. Antitrust view: view that large firms should be broken up into smaller firms, each controlling only a small share of the market. (190-2)
  13. Regulation view: view that oligopolies should not be broken up but need to be regulated to prevent anticompetitive abuses. (192-3)

Page or section numbers given are not the only places where the terms are found in the text.  Many of theses terms will appear on the module exams.  You should write a definition of each term as you encounter it in your reading for use as a convenient review.

Study Directory

Self-Diagnostic Exam Items

Textbook Pages

Objective

5

168

1

3, 6

167-8, 180(LH)

2

2, 9

176/181, 181

3

4

169

4

2, 7

176/181, 181

5

8, 10

185, 187

6

1

188-194

7

Assignments

Summary

If free markets are moral it's because they allocate resources and distribute commodities in ways that are just, that maximize utility, and that respect the liberty of buyers and sellers.  Since markets having these benefits depend crucially on their competitiveness, anticompetitive conditions and practices are morally dubious.  Monopoly practices and markets and oligopoly practices and markets are two principle types of anticompetitive practices and conditions that free market economies spawn.  Under monopoly conditions a single seller controls a market segment.  Under oligopoly conditions just a few sellers control a market segment.

Though real markets are all imperfect, perfect competition serves as a useful idealization both for economic purposes of explaining and predicting market behavior, and for ethical purposes, for understanding and assessing the moral case for keeping markets competitive.  A perfectly competitive market is defined in terms of seven conditions:

  1. distribution: numerous buyers and sellers, none of who has a substantial market share.
  2. openness: buyers and sellers are free to enter or leave the market
  3. full and perfect knowledge: each buyer & seller has full and perfect knowledge of each others' doings
  4. equivalent goods: goods being sold are similar enough that buyers don't care whose they buy.
  5. nonsubsidization: costs of producing or using goods are borne entirely by the buyers & sellers.
  6. rational economic agency: all buyers and sellers act as egoistic utility maximizers who seek to “buy low and sell high” always.
  7. nonregulation: no external parties such as governments regulate the price, quantity, or quality of goods.

Freely competitive markets, in addition, presuppose

Perfect competition gets its ethical import from that fact that the self-regulative abilities of free markets – in response to supply and demand – provide the principle arguments for their morality.  Where supply exceeds demand, prices, profits, and production decrease; where demand exceeds supply, prices, profits, and production increase: thus under conditions of perfect competition production naturally tend toward the equilibrium point (where supply equals demand). 

The principle moral benefits alleged for free markets are three:

  1. serving demands of capitalist (contribution-based) justice
  2. maximizing economic utility
  3. safeguarding negative rights of economic liberty

Even so, this would-be moral justification is limited by additional considerations of positive rights, of care and of character; and it is challenged by competing egalitarian, needs-based and socialist-contribution-based conceptions of distributive justice.  Finally, to the extent that actual "free-market" policies fail to be perfectly competitive, their claim to actually having the alleged benefits (and with it their claim to morality) is diminished.  Monopoly and oligopoly conditions are morally problematic due to their violation, especially, of the two "basic conditions" for the existence of perfect competition, distribution, and openness.

Monopoly markets, being – "markets in which a single firm is the only seller . . . and which new sellers are barred from entering" (p. 221) are by definition not distributed (rather, concentrated) and not open (rather, closed).  Under monopoly conditions, the nonexistence of competition and the inability of competitors to enter (to increase supply and bid prices down) results in artificially high prices; prices above the equilibrium point or natural price.  This equilibrium point, being the point at which investors make a fair return (equal to the going-rate across comparable markets), is the point at which capitalist justice is served.  Consequently, under monopoly conditions such justice is ill served: the seller charges more and the buyer is forced to pay more than the goods are worth (i.e., their natural price).  Furthermore, monopolies foster distributive inefficiency, since demand is less well served; and monopoly conditions remove competitive pressures ordinarily making for increased productive efficiency.  Discretionary preferences of consumers also suffer under monopoly conditions: consumers are forced to cut back more on other items than they would have had to (under "normal conditions") to afford the monopolized goods.  Finally, monopoly conditions do no so well safeguard economic liberty as open competition does: sellers are not free to enter the market; and buyers buy overpriced products under duress in the absence of alternative vendors.

True monopolies are rare but oligopoly conditions – where a few firms control most of the market – are common and have similar anticompetitive dynamics and effects.  Horizontal mergers – between former competitors – are the chief cause of oligopolistic conditions.  Oligopoly markets, not unlike monopolies, are not distributed, but largely concentrated: the fewer firms control the market the more "highly concentrated" the market is said to be.  Such markets are not open, but relatively closed due to various factors, including anticompetitive stratagems on the part of the oligopoly firms.  The anticompetitive effects of oligopolies are aggravated by the ease with which the few firms controlling the market can join forces and create virtual monopoly conditions by their collusion.  The anticompetitive effects of such collusion are similar to those of actual monopolies, with the same detrimental effects: capitalist justice is ill served; utility in the form of productive and distributive efficiency is undermined; and rights of economic liberty are infringed.  Anticompetitive practices frequently used to maintain oligopolistic control of markets include the following.

Whether a payment is a bribe – and how wrongful a bribe it is – depends on three factors:

  1. whether the offer of payment was initiated by the seller;
  2. whether the payment was made to induce the payee to perform contrary to the duties of his or her office;
  3. whether the form of payment is locally accepted and customary.

Factors 1 and 2 are aggravating: the more these apply the more wrongful the payment, and the more it constitutes a bribe.  Factor 3 is mitigating: where no competitive advantage is expected in return, customary payments may -- in effect -- not be bribes at all.

Oligopolies pose a special public policy challenge since the long-term trend in our economy is towards diminishing competition.  There are three principle schools of thought regarding what to do in light of this fact.  The Do-Nothing view maintains this trend is no problem, claiming competition between industries with substitutable products takes the place of competition within industries; that the countervailing forces of other large organization (especially governments and labor unions) blunts the effects of economic concentration; that markets can be economically efficient with as few as three competitors (as the "Chicago School" claims); and that economies of scale more than offset any ill-effects due to diminished competition.  The Anti-trust View advocates breaking up larger firms into smaller units each controlling not more than 3-5% of the market in order to restore competition with all its beneficial effects. The Regulation View advocates the middle course of allowing concentration to preserve economies of scale while using regulation to prevent collusion and ensure that oligopoly firms maintain competitive relations among themselves.

Self-Test

The following questions will help you judge your comprehension of the materials covered in Unit 4. Please remember you are responsible for the glossary terms above. You need to check your responses against the key included. 

  1. The public policy view that advocates breaking large firms up into smaller units (each controlling not more than 3-5% of the market) is called
    1. "the Chicago school view."
    2. "the do-nothing view."
    3. "the anti-trust view."
    4. "the regulation view."
  2. The conditions defining perfect competition that are principally violated by monopoly and oligopoly markets are,
    1. nonregulation and nonintervention.
    2. distribution & openness.
    3. rational economic agency and equivalent goods.
    4. nonsubsidization and full and perfect knowledge.
  3. Competition
    1. is never really absolutely perfect.
    2. is the basis for the moral benefits claimed for free markets.
    3. Both A and B.
    4. None of the above.
  4. The principle of diminishing marginal utility principally governs
    1. market distribution.
    2. market subsidization.
    3. supply.
    4. demand.
  5. The three main moral benefits alleged for free markets are
    1. serving contribution-based justice, maximizing economic utility, and preserving positive welfare rights.
    2. serving needs-based justice, maximizing economic utility, and preserving negative liberty rights.
    3. serving contribution-based justice, maximizing economic utility, and preserving positive welfare rights.
    4. serving egalitarian justice, maximizing economic utility, and preserving negative liberty rights.
  6. "Discretionary preference satisfaction" concerns
    1. the ability of sellers to sell to whomever they choose.
    2. the ability of buyers to buy the same type of goods from whomever they choose.
    3. the ability of buyers to decide between purchasing different types of goods.
    4. all of the above.
  7. Which of the following is true?
    1. Both monopoly and oligopoly conditions are rare.
    2. Both monopoly and oligopoly conditions are common.
    3. Monopoly conditions are rare and oligopoly conditions are common.
    4. Oligopoly conditions are rare and monopoly conditions are common.
  8. What anticompetitive tactic was Continental Pie using against Utah Pie by selling cut-rate in the Salt Lake City as compared to elsewhere?
    1. price-fixing
    2. price discrimination
    3. tying arrangements
    4. price-setting
  9. The opposite of a distributed market is one that is
    1. highly concentrated
    2. fully open.
    3. fully regulated.
    4. partly subsidized.
  10. The identical pricing of cigarettes by the different major tobacco companies that has gone on since the 1930s without explicit agreements or collusion among the companies involved an example of
    1. price-fixing
    2. price discrimination
    3. tying arrangements
    4. price-setting.

Self-Test Key

Question

Answer

Objective

Pages

1
C
7
188-194

2
B
3,5
176/181

3
C
2
167-8

4
D
4
169

5
D
1
168

6
C
2
180(LH)

7
C
5
181

8
B
6
185
9
A
3
181

10
D
5
187

NOTE:  The questions on the module end examination will be closely based on the self-test you have just taken.  Sometimes the examination will slightly modify the question-part of self-test questions while varying the answers and distracters (A, B, C, D) unchanged.  For example, question 1 above might – keeping the same distracter/answer options the same – be changed to read as follows:

  1. The public policy view that holds that large firms should not be broken up into smaller units but subjected to substantial governmental restraint and controls is called
    1. "the Chicago school view."
    2. "the do-nothing view."
    3. "the anti-trust view."
    4. "the regulation view."

This makes “the regulation view” (D) the correct answer.

 CONSEQUENT ADVICE:  The self-test questions can be very useful for studying for the module end examination, but only if used in the right way.  As the example above shows, ” in the absence of background understanding, (from reading the text, and the study materials) it would not have been helpful to have studied for the exam by memorizing that the answer to the one about public policy was "the anti-trust view."  In the absence of background understanding, from reading the text, and the study materials, just memorizing “the anti-trust view ” might even be counterproductive in misleading you into answering “the anti-trust view” (D) to this different question, which is incorrect.  The following points are noteworthy in this connection:

In taking the module end examination it is extremely important that you read the examination questions and options carefully: a little word like not or and can make all the difference between a right and a wrong answer.  Pay attention to italicized words and phrases – italics are for emphasis and often provide clues to the questions being asked and the answers being sought.