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Consumers Can’t Choose Not to Do Business

2009 October 28
by Ian Welsh

One argument free market fundamentalists use often is that if you don’t like how a company does business, just don’t do business with them, go to a better company, and the market will get rid of bad companies.  So, for example, if you don’t like the way your credit card company is raising arbitrary fees and interest rates, well, find another credit card company.

A good idea.  If, of course, there was a free market.  With credit cards, the terms tend to be pretty universal.  If your credit rating is X, and you have Y assets, credit card companies will generally all treat you the same way.  One may be marginally better than another, but it is marginal.  They make more money by all engaging in the same practices which increase fees and interest than by engaging in price wars, and they understand that

Same thing with telecom service.  If there are 3 providers, and they all provide about equivalent services, then there isn’t a free market.

In many rural markets for health insurance, one provider may control 90% of the market, and in many others two or three controlling the majority is very common.  Nor is their much difference between their offerings at any given price point (or their customer service/denial rates, etc…) even when you have multiple “options”.

And since doing without a credit card is actually very difficult (I did it for years, I know what I’m speaking of—I invite you to travel without one one day to see what I mean) and so is doing with phone or internet service, well, you’ve got little choice.

In fact, what the US has in many industries are largely unregulated oligopolies, because the regulators mostly don’t bother.

I’m a big believer in free markets, myself.  I’d love for more of them to exist.  But it is basic economic theory (and something Adam Smith understood very well) that the first thing people do when they win the market is try and make sure there isn’t a market.   The best profits are monopoly or oligopoly profits.

Free market mechanisms by themselves cannot ensure the continued existence of free markets.  Government is needed, but so are the proper mores.  When John Kenneth Galbraith, in the post war period, looked into why executives didn’t pay themselves a lot more (they could have) he came to the conclusion that it was essentially a cultural thing—managers wouldn’t tolerate it, it was against what they believed in.

Their ethics.

Likewise in 19th century America belonging to certain religious groups was a big plus for a merchant.  People would go out of their way to do business with you, because they knew it was much more likely you wouldn’t cheat them or price gouge them, that you believed in a fair profit, but only a fair profit.  Ethics.

Free market fundamentalisms in the US has done a great deal of damage by claiming the only ethic that matters is greed.  The free market is not self regulating, the invisible hand does not always work to the benefit of society as a whole (as Adam Smith well knew), greed is not always good, and free markets naturally tend towards unfree markets in which the choice for consumers is to take what is offered or go without.  (If you don’t believe me, take one of the “contracts” given to you by a big firm, and cross out the parts you disagree with, and write in your own wording.  “Negotiate” with them.  Let me know how it works out.)

Free markets are grand things.  Every once in a while they even exist.

27 Responses
  1. BDBlue permalink
    October 28, 2009

    This is why I’m a verizon customer. I have little choice in the matter for my local phone. I could go to a computer phone system, but I would still need an internet connection. That leaves me with verizon, a company I freaking hate, or my one available cable company, a company I freaking hate. Since I don’t have cable, I use verizon. But I pay more for it because I refuse to use them for my long distance or mobile phone. I use them for the bare minimum service (local, DSL) and get screwed. It’s more for those two services than it would be if I got local, unlimited long distance, voicemail, and DSL from them. I don’t know how poor people do it because local only is $30-40 a month.

    None of that is competition, local phone and cable are both monopolies where I live and unregulated ones.

  2. October 28, 2009

    The freest market I’ve ever observed, with the least regulation and smallest penalties, has been the market lobbyists employ to purchase elected representatives. Overt bribery, of course, is prohibited, while 6-lane highways of loopholes are built to make equally overt bribery perfectly legal.

  3. October 28, 2009

    If you’ll forgive me for the OT, but this is where I start getting sympathetic with blinkered Obama-worshippers. FCOL the point of Krugman’s column was that a bad reform wasn’t a death knell for health reform. 60% support of an annoying policy quite a bit after implementation is extremely good.

    If you CAN NOT concede that, there’s no reason why any elected policymaker should listen to you. Not that they really were.

  4. October 28, 2009

    I don’t think it was OT, either, after all—with mandates Consumer’s Can’t Choose Note to Do Business.

  5. October 28, 2009

    Me type too fast, make typos. *facepalm*

  6. Ian Welsh permalink*
    October 28, 2009

    Huh? Why are you attacking a post in Corrente on my blog? There are things I like about Corrente, but I certainly don’t agree with everything someone there writes.

  7. October 28, 2009

    Sorry, remember I posted about Krugman’s mention of that poll on your “support for public option” thread, and I hit the roof when I read that belated critique. I won’t do it again.

  8. October 28, 2009

    Progressives need to drop neoliberal shibboleths like “free markets,” “free trade,” and “free capital flows,” because they exist only as concepts of economic philosophy and as assumptions of models that aren’t representative of what actually happens in any modern state economy interacting in the global economy.

    These terms are used to perpetuate myths that favor capital over workers and are damaging to society as a whole. Steve Keen has done a fine job debunking the memes that underlie the established narrative in Debunking Economics.

    Everyone in advertising knows that the most powerful word in the copywriters toolbox is “free.” “Free” appeals to both fear and greed, the two most powerful motivators. Everyone wants a something for nothing, and when there’s something free available, people fear lost opportunity, that they won’t get theirs. “Free” also appeals to the desire to do as one wishes. No one enjoys being told what to do. Because of this “free” has a strong positive charge in the popular mindset, and “unfree” the opposite.

    Neoliberals use this strong positive reinforcement to their advantage to misrepresent economic reality through simplistic models with assumptions that don’t withstand scrutiny, which lead to conclusions that are at odds with fact. They pretend that “free” markets, “free” trade, and “free capital flows are scientifically shown to be superior to those that are “unfree.” Sounds intuitively logical if one doesn’t realize that “free” is code for the absence of regulation and oversight.

    Unregulated capitalism inexorably tends toward oligopolies and monopolies. These are anti-competitive and have nothing to do with “free” markets other than the companies can do as they wish without constraint. That exploits workers and fleeces consumers. Worse, it condemns the developing world to exploitation that often results in poverty and disease. Naturally, wealthy, powerful and influential interests want to keep it that way because they are making out like the bandits they are.

    Free markets in the economic sense are competitive markets. The neoliberal system does not lead to competition, in spite of what its so-called principles may be stated as. It seeks the advantage of accumulated capital. “Too big too fail” is one of the results. Massive unemployment explained as “a market correction” is another. Pursuit of rent-seeking over production is another. Capitalizing gain and socializing liability is another. Etc.

    Instead of “free markets” and “free trade,” progressives are better advised to use”fair markets” and “fair trade.”

  9. S Brennan permalink
    October 28, 2009

    Mandos,

    You didn’t ask for forgiveness, for intentionally being off topic, you demanded it.

    As for this dribble

    “…but this is where I start getting sympathetic with blinkered Obama-worshippers…60% support of an annoying policy quite a bit after implementation is extremely good.” -Mandos

    Here what you are missing in your simplistic thinking, if I ask a question that is implicitly: “is this better than that” then it pays to know what “this” is and “that” is.

    In this case, “that” is the worst health system on earth measured through the economic paradigm of “bang for buck”.

    So when “this” beats out “that” it’s not telling us whether “this” is good, it’s saying, it’s better than the worst the world has to offer. All of this will be quite confusing to a mind such as yours…so to make it understandable to you, I offer up a mental exercise with a much lower intellectual bar:

    Most people would think rotting away in prison for the rest of your life is a pretty terrible fate…however…there is a group of men on death row where polls show that life imprisonment has well over 60% support “even after implementation”. So you will always find a group who say shitty is better than shittiest…and that’s what Krugman said, nothing more.

    Just because I generally agree with Krugman, doesn’t mean I’m married to the guy, nor do I go in for the “Jim Jones” approach to living…but I’m not surprised you’d find commonality with people who do, but I am surprised you would cut off a conversation to brag about it. It’s akin to running a marathon with 500 people your age and bragging about being 499th after beating out some guy with MS and a heart condition by a couple seconds while 598 finished thirty minutes before you.

  10. October 28, 2009

    Let’s not forget what the enemy is. It’s conservatism, both economic and social. Economic and social conservatism define the GOP. There are also a few economic and social Dem conservatives from red states., but by and large Dem conservatives are economic conservatives. The “centrist” Democrats have made a strategy of “triangulating” by espousing some social conservative causes (think “responsibility”).

    However, the overwhelming majority of Democrats, conservative and liberal, are caught in the neoliberal universal of discourse that is based on the norms of free markets, free trade, and free capital flows, along with “fiscal responsibility,” meaning that government spending and taxation are always bad for the economy and the country, other than for “national security.” This is tilting the playing field, and Democrats will not be playing on level ground until they can change the contemporary mindset, which has been shaped by decades of conservative propaganda.

    Progressives really need to focus on undermine the conservative agenda, not only by proposing progressive policies and opposing conservative ones but also changing the political and economic universe of discourse, not only to the left but also in the direction of reality.

  11. Ian Welsh permalink*
    October 28, 2009

    Mandos often makes good points, and actually I sort-of agree with Krugman in this case: the strongest case for the health care deal as it stands right now is indeed the fact that once you have universality, it doesn’t get taken away. A shitty deal we can fix later might be a good deal. Not sure I agree with that last sentence, but it’s a respectable argument simply because of all the people who will suffer through the shitty deal.

    At the same time, I have sometimes disagreed with Krugman in the past (on Bernanke, on oil prices, on Geithner) and no doubt will in the future. But I do take his arguments seriously, and believe he operates in good faith. His main blind spot isn’t policy, it’s people—people he knows and considers respectable he gives too much benefit of the doubt too, imo (for example, Bernanke, who hired him.)

    Obama’s not completely awful (some parts are missing). But he’s not a liberal, he’s not a progressive, and he doesn’t care about liberal or progressive issues by and large. He’d be a half decent Republican president, as a Democrat though, he’s to the right of Clinton, with less excuse.

  12. October 28, 2009

    Rather than belabour a point I really shouldn’t have brought up, I would just say that “fair” is fraught with more ambiguity than “free”. I prefer “democratically managed.” It conveys the thought in a more concrete fashion.

  13. October 28, 2009

    “Fair” is a popularly understood and positively charged word that characterizes progressivism. For example, the big popular complaint of the WS bailouts while Main Street suffers is that it is not fair. In the political (and economic) sense, fair implies managing the country for the common good rather than through favoritism for special interests and privilege for the wealthy and powerful.

    Importantly, “fair” is a popularization of the technical term, “distributive justice,” a key concept in political philosophy and political science. Distributive justice is measurable, e.g., by the Gini coefficient.

    As I see it, the country is not managed democratically in two senses. The first way in which democratic management fails is through buying influence. Getting the money out of politics a necessary condition, but it is not sufficient.

    The second is not managing according to the will of the people. Regarding this, my point is that political propaganda is being used effectively to convince people to think and vote against their interests, mainly through misrepresentation. This requires correcting these representations, like economic neoliberalism.

  14. October 28, 2009

    I thought this very Tarantino-esque story on how an LA couple tortured a loan mod agent was interesting, a straw in the wind. After all, if lawless elites torture, why shouldn’t lawless peasants do the same? (Cf. Algernon’s remark in the Importance of Being Earnest: “Really, if the lower orders don’t set us a good example, what on earth is the use of them?”)

    * * *

    OT, so do feel free to skip. Mandos snarks that he’s “holding his breath” for a Corrente post on Krugman’s column, then drags this thread off topic to complain that he hates the post when it’s written. We’ll be waiting for our non-apology apology. Ain’t moderation grand? “Progressives,” I’m tellin ya…

  15. October 28, 2009

    From the HuffPo link:

    The Detroit Free Press on October 8 reported that a near riot broke out at Cobo Center in the downtown section of the city when an estimated 35,000 people showed up “desperate for help with mortgage and utility bills…threats were made, fights broke out and people were nearly trampled. The huge crowd that day was part of over 65,000 people seeking a portion of the area’s $15.2 million in federal stimulus money intended for individuals to avoid foreclosure or for the homeless to get shelter. About 3,500 men and women, or just over 5 percent of those applying, will get any help.”

    Katrina without Katrina! Well, we may yet be reaching the roving armies smashing factories thing that Ian mentioned way back when.

  16. October 28, 2009

    Ian Welsh writes:

    A shitty deal we can fix later might be a good deal.

    It might in the abstract. But I connect this idea to something else Ian wrote that I vehemently agree with. Re-ordering, I hope with justification:

    I didn’t get into blogging in 2003 to be a partisan Democrat. I’m not even an American. I got into it to tell the truths that Americans needed to hear if they were going to save their souls and the bodies that house those souls … Too many folks are dancing with the Devil, because he or she is a Democrat.

    The people who are telling me to eat their shit sausage today (“public option”) because there will be a better sausage tomorrow are also the people who sold that sausage using “bait and switch” tactics — Hacker’s Medicare-style “public option,” with 130 million enrollees, was morphed into today’s pathetic “public option” with 9 or 10 million — all with no notice given or taken of the morphing. I just don’t think it’s possible for that to have been done in good faith. It’s one thing to compromise; it’s quite another to (pre-)compromise, for others, without any transparency on the compromise actually made. So, I’m very dubious about the “fix later” concept, since (a) the strategy was bad at best, (b) the policy is bad at best, and (c) the advocacy wasn’t carried out in good faith. In other words, the entire process from the “progressives” had nothing to do with the “truths Americans need to hear,” and I see no reason to believe that will change.

  17. October 28, 2009

    Importantly, “fair” is a popularization of the technical term, “distributive justice,” a key concept in political philosophy and political science. Distributive justice is measurable, e.g., by the Gini coefficient.

    As I see it, the country is not managed democratically in two senses. The first way in which democratic management fails is through buying influence. Getting the money out of politics a necessary condition, but it is not sufficient.

    Oh, I wasn’t arguing that we have democratically managed anything. The problem is that terms like “fair trade” have already been co-opted to mean something else. Lots of young liberals buy fair trade coffee, so much so that I think it now represents a stereotype.

    I think it’s important to figure out which memes have been co-opted/corrupted, and how to reconstitute them. A lot of what would have worked at the time of, eg, the forgotten Seattle WTO riots won’t work now.

  18. October 29, 2009

    This is great, this concept has been floating around in my head for years now, but I haven’t heard or read anything that agrees with what I see of the world with my own eyes. On the news and political TV, noone has ever used this concept to denounce the “free” market, or to argue for more regulation, not even the most liberal of politicians. It seems that in the world today the “free market” concept is Allah and saying anything bad about it is like drawing a cartoon of the free market.
    P.S. – Sorry, forgot to tell you great post!

  19. Hugo permalink
    October 29, 2009

    If the problem is that there is not a free market, lets get one.

    Stop goverment regulations that only benefit big corporations and hurt the consumers.

    Free marketers dont believe greed does good for everybody. Its the self interest that does it. And no matter how much goverment regulations you put or what system you try, people (including politicians) are allways going to act in their own self interest. Politicians regualte in their own self interest and its usually get money from big corporations. And you should try to give some reason as why you think the free-market does not work, instead you blame an un-existant free market for the present problems, when they are because of the regulatory system the USA has.

  20. October 29, 2009

    Hugo, the so-called “free market,” meaning a market in which competitors are free to do as they wish and do anything to win, without regulation or oversight, ends up in the winners dominating the market as oligopolies or monopolies, allowing them to set the prices they choose. This is anti-competitive.

    This is the point of Ian’s post, that consumers don’t have real choice, especially in necessities, the demand for which is inelastic. Banking and healthcare, for example are oligopolies. In retail, Walmart is a monopoly in many markets, having driven the competition out of business.

    There are already anti-trust laws on the books, but they are uninformed and pretty much out of date, since they were passed in Teddy Roosevelt’s time. The only “free markets” are probably the tribal bazaars in so-called backward countries. In a totally free market, all prices are negotiated not fixed.

    The supposed laws of supply and demand do not work in a modern economy to create a free market for price discovery, because of fixed pricing. When demand falls, prices do not fall. Rather, suppliers draw down inventory and then reduce capacity, resulting in unemployment, further reducing demand and resulting in more unemployment. That’s were we are not. Demand is falling, but not prices, and unemployment is rising. In a truly free market operating on the supposed laws of supply and demand, as the model show, this would not happen. So, obviously there is something wrong with the theory and models. See Steve Keen, Debunking Economics. Until the public wakes up to this, they are going to be fleeced and suffer chronic unemployment.

    There is a fix. See L. Randall Wray, Understanding Modern Money: The Key to Full Employment, in addition to Steve Keen’s book.

  21. Ian Welsh permalink*
    October 29, 2009

    That definition of a free market isn’t a free market as defined even by mainstream economics.

  22. jbaspen permalink
    October 29, 2009

    Ian, I’m beginning to think that ALL economics is Voodoo! JB

  23. October 29, 2009

    Ian, apparently that’s what Alan Gtreenspan thought it was when he said that he didn’t dream that corporations would blow up the system if they weren’t regulated. According to his view, natural market forces are entirely sufficient to the task.

    In the US, the Fed regulates and is charged with oversight of the financial system. Greenspan decided that this was unnecessary (as did the heads of the SEC, FDIC, etc. under Bush) Then, when the system imploded, the justification for bailing out the banks to the tune of trillions was that the financial system is the heart of free market capitalism so government has to save it instead of put it into resolution (which was deftly described as “nationalization — a dirty word in the US, closely related to “socialism”). What a load of self-serving hogwash. We still don’t have meaningful reform and from the looks of it, loophole will gut anything meaningful. The game goes to keep the playing field tilted by preventing regulation and oversight, even criminal.

    The neoliberal justification for so-called free markets is that markets are ruled by natural forces like competition and supply and demand.. The argument is that all government intervention in markets is intrusive, inhibits growth, and disrupts price discovery according to the natural forces that regulate market operation.. That argument is made constantly and consistently, and most Americans have come to believe it. It is at the bottom of the debate over health care, for example.

    Steven Keen takes this myth apart in Debunking Economics by attacking the models based on the assumption about these natural forces working inexorably to regulate markets by keeping them in equilibrium don’t represent reality. The simplified models in Samuelson, Mankiew, and other texts, which just about everyone not a graduate economist was taught, are based a tribal bazaar, and they are not representative of a modern economy and financial system.

    I’m not arguing against fair (level-playing field) and genuinely competitive markets being the best way to discover prices in most situations, but that’s what conservatives mean by free markets. According to them, “free market” means the absence of all government interference in the from of regulation and oversight. This is the fundamental platform of the Republican Party, both its conservative wing and its libertarian wing.

    Milton Friedman was not just one of the world’s most distinguished economists — he may have also been America’s most famous and influential libertarian.

    Writing in Liberty magazine (February 2007), Bruce Ramsey made the argument that “Milton Friedman was not just a figure in the libertarian movement. He was, to Americans generally, a figure emblematic of freedom.” Brian Doherty, in his book Radicals for Capitalism (2007), wrote that Friedman “has done more to make more people understand and respect the general tenets and thrusts of libertarian ideas than any other libertarian advocate.”
    Advocates for self-government

    Speaking of economists, the Chicago School is famously libertarian. Friedman didn’t even want the government connected in any way with central banking, although he realized that this was impractical to advocate politically at the time. Now, Ron Paul is leading the charge, and lots of people are lining up.

    Do you see any move even to prosecute the massive fraud that has been perpetrated in the US? Apparently, even that is OK as long as it is in the name of free markets. Business would rather have the fraud that have to deal with the government in any way. That’s the real meaning of “free market” in the US now.

  24. October 29, 2009

    We have little choice in the services you speak of, if we continue to demand those services.

    It must be tough to imagine, for those who came of age in the late 60s or later, but there was a time when we didn’t live on credit cards. Travel was accomplished fairly well by the use of traveler’s checks (and we can thank the Knights Templar for that idea).

    I agree that we consumers should have more choice, and more control over services where we have less choice, but let’s acknowledge that there are less attractive alternatives–doing without those services altogether.

    Health care is a special case, of course, as it’s much harder to do without.

    Carolyn Kay
    MakeThemAccountable.com

  25. October 30, 2009

    I think Americans are lazy and lack creativity when it comes to money and credit cards. Not to beg the obvious; but having a credit card doesn’t require one to use it. If only used when nothing else will do; and using cash for everything else, would seem to be fiscally responsible and severely cut down on income to said companies. I think there is far more freedom in the markets (not financial) if one puts forth the effort to find them. Only play by the rules as required. But alas, convenience rules and for many; and regaining control over ones life is a low priority.

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