Economics is largely a worthless discipline. Its axioms, like humans being rational utility maximizers, are simply wrong and everything built on top of them is thus flawed. It reminds me of pre-Copernican astronomy, which was based on the idea that the sun and planets revolved around the Earth. The difference is that pre-Copernican astronomy more or less worked and economics mostly doesn’t.
But there are insights in economics, and there’s a cluster around free, or rather, competitive markets. In order for competitive markets to work:
- There must be lots of buyers and sellers, so no one has pricing or buying power.
- There must be no significant barriers to entry. If you can’t start a new business doing whatever it is, market incumbents can jack up prices. Barriers to entry are both legal and technical: if there’s no availability of whatever is needed to make the product, that’s a barrier to entry.
- Products must be roughly the same. If one producer is able to produce much better products, then people will buy that. This means, in effect, that intellectual property laws must be open, or people won’t be able to produce roughly equal goods.
- Collusion in setting prices cannot be allowed, nor can special deals like larger buyers getting better prices. (A large supermarket which pays lower prices will drive smaller ones out of business till there are only a few major supermarket firms left.)
Now the problem with competitive markets, from the point of view of capitalists, is that they keep profits low. If you start jacking up your prices, your competitors will get the business, since the products are about the same and since other firms can easily enter the business.
Competitive markets lead to fast innovation and low prices, with any high profit periods due to innovation lasting only as long as it takes for others to reproduce the new product. If you want high profits over a long time period you have to keep innovating, you can’t make essentially the same product forever and expect to make more than average (low) profits.
But business hate competitive markets, exactly because they do make it almost impossible to make high profits over the long term.
So business profs and consultants read the economic literature and said “if we want to make high profits we have to find or create businesses which are not competitive.
Reverse engineering, high profits come to companies which are oligopolies or monopolies so they have pricing power; to companies in industries where there are significant barriers to entry, whether thru intellectual property laws or vertical integration; to companies that have a better product because no one else is allowed to make that product (pharma is great at this); and to businesses which collude on prices. Right now, for example, a lot of landlords subscribe to a software service which sets prices and even keeps rental properties off the market in order to keep rents high.
There are other tricks, of course. Health providers, in general, have an advantage. When someone’s seriously sick they can’t really comparison shop and they’re desperate, they’ll pay whatever they have to save their life or get well.
Another one is network externalities. If everyone’s on one site or a few, then other sites have a hard time competing. Think of Facebook’s suite of sites, or think of Google’s monopoly on search.
When Private Equity and investors who provide seed capital roll up firms or invest in new firms, they’re either looking to liquidate those they buy (PE likes this) or they’re trying to destroy a competitive market so they can charge much more than a competitive market would normally allow.
One of the things which has made China so dynamic is that it has much more competitive markets than America or Europe. There are dozens of EV firms, for example. Tons of drone makers. Multiple space companies. Absolutely massive supply networks where you can buy anything you need to make whatever it is, or get them to make anything new you’ve thought up. IP laws are weaker, and often not enforced, and so on. Where there is market power, the government often steps in either to regulate what firms can charge (in natural monopolies like power distribution, for example) or to prevent the use of that market power to freeze out competitors.
As the US and the West have financialized, they’ve destroyed most of the laws which were in place to keep markets competitive. Eggs, for example, are not high priced primarily because of Avian bird flu, but because there are only a few oligopoly suppliers in the market, and they’re making more money with shortages than they would by providing as many eggs as people really want to buy at lower prices. Those prices would still be profitable, but they would be obscenely high.
Almost all Western industries are now entrenched behind various barriers designed to give them pricing power: to allow them to charge more than they could in a competitive market.
So China, with competitive markets, produces EVs which cost under 20K in many cases. Everything they produce is cheaper than in the West. This isn’t all about barriers and non-competitive markets, but a lot of it is and most of what seems to not be about competitive markets, like needing to pay American workers more, really is. American workers need more money because of high rent, high health care costs, high tuition, high real estate prices and just, in general, high prices. When Chinese show Americans their grocery bills, Americans are startled and some even cry, they are so much cheaper.
So driving up prices deliberately makes US goods in particular, and Western goods in general non-competitive because it jacks up the cost structure.
But the simple takeaway is that your life sucks and the West can’t compete because of non-competitive markets and the regulations which are bad are those which make it non-competitive: horrific IP laws, non enforcement of anti-trust, allowing huge mergers and so on.
If America and the West are ever to be competitive again, we must make markets competitive and where they can’t be, in natural monopolies like energy and water and so on, we must have regulations that directly control prices, as we did in the 50s and 60s, where utilities were basically guaranteed a 5% profit, and forced to reinvest in infrastructure (no California fires because PG&E would rather pay dividends then replace century old power lines and poles).
This isn’t really a hard problem, conceptually. We know how to create competitive markets, and regulate non-competitive markets. We’ve done it before. It is entirely a political issue, because incumbents with tons of money also have tons of political power.
But don’t let anyone spew nonsense like “it’s complicated” or suggest it’s an unsolvable problem, it isn’t.
Mark Pontin
Michael Hudson has also been banging on about the untenable nature of US cost structures given the predatory rent extraction levels. But yeah.
Economics — the neoclassical kind, anyway — has always struck me as today’s equivalent of the medieval Divine Right of Kings. A doctrine designed entirely to justify why elites are elites, and should remain so.
Though even flimsier. The Divine Right of Kings wasn’t falsifiable in the real world (well, till they started cutting monarchs’ heads off, arguably.) Conversely, real-world events like the GFC in 2008 and the growing inability of neoliberal states to perform competently make blazingly clear that it’s a tissue of lies without basis in reality.
Yet they keep shoving it down our throats.
Feral Finster
A human I know was getting an MBA and really wanted to go into investment banking, but was convinced that he was not smart enough, as the markets demand only the finest minds to perform such a critical function.
I made the point of introducing him to some actual live working investment bankers. The aspiring banker was shocked at how ignorant the people he imagined to be intellectual powerhouses, Einsteins, but with better tailoring, were of basic economic theory.
Didn’t know, didn’t care. I had to explain that they didn’t need to know or care. What matters is salesmanship and signaling, That’s what gets you ahead.
The wannabe banker never has learned. He’s hard-working and technically very competent. but nobody cares, so glad-handing, back-slapping bullshitting frat boys keep on passing him by.
someofparts
https://journal-neo.su/2025/04/08/worst-case-scenario-trumps-tariffs-walling-us-off-ahead-of-wider-world-conflict/
Brian Berletic looks at US position papers and reports that tariffs are part of a plan to wreck global shipping/trade capacity while walling off the US. The hope is that if the US deliberately wrecks global trade, China will suffer more and the US will emerge as the dominant power again after the chaos.
My first thought is that if stupidity is planned instead of unplanned, it is still stupidity. The thinking (such as it is) is that the US will certainly suffer economically, but China will suffer worse and in the end it will be worth it.
That post from Aurelian that TW shared in links was distressing to read but profound. He made the point that even if 80% , or more, of the US public were reduced to African levels of poverty, as long as the 10% of the population who are doing well managed to hang on to their ill-gotten wealth, they would be just fine with consigning the majority of citizens to extreme misery.
bruce wilder
I agree that mainstream economics is largely worthless as an intellectual discipline.
I hope I will not offend by offering a comment critical of the OP’s endorsement of “competitive markets analysis”.
The worthlessness of economics as an intellectual discipline is directly tied to core economic theory being a theory of markets, when very few actual markets exist in the actual economy. Some markets exist, of course: tellingly, most markets are for financial securities and financialized commodities such as the famous pork bellies or orange juice futures or spot market crude oil. In every other application of the term, economists are using “market” as a metaphor, and in using the market metaphor, economists are obscuring the reality of how economic systems of production and distribution are structured, are managed and function.
If I may be permitted a small digression, I would like to make a meta-level observation about how the market metaphor disables economics as a scholarly mode of inquiry. The economic theory of a competitive market economy is quite elaborate. The standard college textbook going back at least to Marshall more than a century ago elaborates the theory in a semester or year-long course. Since Samuelson, the theory has taken on the form of Euclidean geometry, complete with elaborate, axiomatic proofs of theorems. Graduate-level courses elaborate the math further, “proving” more esoteric theorems about “social welfare properties” of markets and the “existence” of “general equilibrium” under more-or-less restrictive assumptions. Business and liberal arts undergraduates are tutored in rhetorical storytelling: how to spin out a plausible-sounding “explanation” for the kind of economic events reported in the media and of the generic political policy proposals touted by politicians. They learn to “explain” that a higher price will be associated with less quantity demanded, for example — an idea that seems obvious in the imaginary “geometry” of Samuelson.
In all likelihood, at no time in their study of economics will students (even those studying economics as a professional undertaking) be asked to learn anything factual about the real, institutionalized economy. There will be some classroom handwaving “out the window” in the direction of common experience, but it will be kept vague. The only empirical methodology in economics is the statistical sewer of econometrics.
The OP mentions the supposed association of “many sellers, many buyers” with the “competitive market” ideal case in which no firm has the “market power” or strategic awareness to set a price above the theoretically efficient level where price equals marginal revenue equals marginal cost. This is the classic example of vague hand-waving being substituted for precise, closely-reasoned logical analysis, but hardly the only one. Inexplicably, economists, for all their claims to “rigor”, love to perform slight-of-hand where a vague, almost poetic metaphoric claim is sent in to play a critical role in an argument where logic doesn’t cut it. My favorite in this category are claims of efficiency for “flexible labor markets” and I may come back to that last. For the moment, it is enough to know that a large number of sellers will not erase the strategic awareness of any player in an actual market that the individual seller’s output choice or other actions affect price. Steve Keen belabors the proof that the number of sellers cannot erase a seller’s awareness that output affects price in a market, if anyone wants to work thru the logic, which is ultimately trivial imho. (And, ultimately, irrelevant to the real world in any case.)
My point here is that the market metaphor obscures. A theory of markets is designed to help students to think about markets, but there are very few markets in operation in the actually existing political economy. A theory of markets handicaps anyone trying to think about how the institutions of the economic system work. One suspects, by design.
There is no general “labor market” to be “flexible”. If you search long and hard enough you might find examples of a market for jobs — maybe outside Home Depot?
Why is the “market metaphor” so persistent? A big reason is that its “as if” nature puts all reasoning into a subjunctive realm where it is not necessary to know any facts of particular institutional structures — nothing of a technical nature, no engineering detail say nor a legal category. Once you’ve mastered Samuelson’s “Euclidean” system of arguments, you can spin up a plausible-sounding analysis a priori (before knowing anything factual) and with no more qualification to your confident conclusion than ceteris paribus (all else being equal). The other worldly aspect of the rhetorical engine of “market analysis” makes it a convenient theology for a civic religion, which economics often is. Instead of how many angels on the head of a pin, one can argue for any number of “market solutions” that solve nothing but give you plausible deniability regarding your good intentions.
I do not envy Matt Stoller his task, which is often to struggle against subversion of antitrust policy and litigation by the market metaphor. Economists wield the Greek of “monopoly” (literally, one seller) like a bludgeon to narrow arguments against overweening power into a box where they can be trapped into meaninglessness by the inherent nonsense of the market metaphor. Lawyers will argue fine distinctions to establish whether there are a sufficient number of sellers of rival substitute products to obviate some vague notion of “market power” derived from that waving-out-the-classroom-window at the supposedly perfectly competitive market of many buyers, many sellers.
So, if we do not have the imaginary market economy, what do we have?
We have not a market economy, but we do have a money economy, for one thing. The ubiquity of money prices is a feature of a money economy that I think makes the market metaphor seductively appealing. The market metaphor explains prices after all. It is a wrong, misleading explanation oftentimes. (By design?) But, it is an explanation generally compatible with some variation on the “just world hypothesis” that most people unconsciously require to reduce anxiety. The market metaphor explains prices as being conditioned on cost as determined and mediated by good ol’ supply-and-demand, given sufficient “competition”.
Our money economy is also a heavily bureaucratic economy, dominated in many sectors by huge enterprises with complex supply chains, governed imperfectly by contract and commercial law and public and private regulatory bureaucracies. I still hope that just drawing attention to the existence of the vast institutional apparatus of the actual economic system might cause more people to hesitate to repeat the shibboleths of the mythical market economy.
The economy of the massive industrial, commercial or financial enterprise is historically recent. It is traditional to trace the business corporation with a marketable equity shareholding to the Dutch East India Company or its English counterpart, circa 1600. Railroads required bureaucracies and professional managers to operate and it is only with the advent of railroads that the business corporation as we know it began to emerge in the mid-19th century. After a flirtation with other legal forms for coordinating business investment and activity, industrial business corporations began to emerge in the 1880s and 1890s and quickly dominated the modern economy.
It is among the ironies of history that The Marginal Revolution in economic theory which did so much to enable economics as an academic discipline to ignore the reality of the bureaucratic economy also emerged in the 1880s. Karl Marx, whose ambivalence about the ability of capitalists to mobilize resources and technology into large-scale systems of production colored the reaction from the left, did not live to see it really take off, dying in 1884.
The bureaucratic economy has a cost structure quite at odds with the assumed cost structure necessary to make the theoretical market economy work. The market economy posits firms, whose marginal unit costs are rising and therefore firms willing to produce and sell just so much and no more; such a cost structure is logically necessary for the market per se to determine an equilibrium price. The bureaucratic firm has more or less massive sunk costs as well as significant fixed or “overhead” and is typically pursuing “scale economies”. The bureaucratic firm’s marginal unit costs may well be less than its average unit cost and continuing to decline as it expands output volume. There is no equilibrium price logically possible. Economists are only able to convince themselves otherwise by combining ignorance with furious handwaving.
The bureaucratic firm typically wants to sell more at or even below prevailing prices. The bureaucratic firm is willing to spend substantially on advertising and promotion to sell more. Since the market is incapable of setting an equilibrium price, the firm must administratively manage its price, or rather prices, because the “profit-maximizing” solution is always elaborate price discrimination schemes. In fact, there may be no profit possible without price discrimination, even if the firm enjoys a so-called monopoly position. Railroads figured this out rather quickly by the 1880s. Electric utilities would discover as much in the 1920s.
This money economy is not incidentally also the Keynesian economy. Contrary to the expectations of devotees to the market economy ideal, there is no market equilibrium price in a great many so-called “markets” (industry sectors if you prefer) and so no general market equilibrium. It is not possible to drive down wages and wage-costs to some level at which market prices can equilibrate aggregate supply with aggregate demand. It is non-sensical to imagine such a thing.
However, in the money economy, injecting money in a way that finances additional demand will lead firms always eager to sell more at current prices, given current costs, to expand output and, in a virtuous cycle, to invest in further expansion of output capacity.
“Profit-maximizing” is another ill-considered concept. It can be defined in the context of the imaginary market economy under certainty of information. You can even relax that assumption to managed uncertainty, where sufficient statistics become the basis for decisions that always meet expectations. But, it is not how the economy works.
Real firms are built on business strategies that focus on seeking rents on sunk-cost investments. Rent-seeking is pervasive because it is the only thing that is calculable in advance. Sunk-cost investments, by their nature, earn nothing in market competition. Business strategies look to political power in bureaucratic administration and property rights to secure rents. A money economy finances sunk-cost investments on the expectation of rents. There is no natural limit of the ability of finance to seek rents from corporate administrative consolidation and manipulation.
Sorry for the long lecture. I am newly retired. Maybe I need a hobby after all.
Purple Library Guy
Just to be clear, competitive markets solve ONE set of problems involved in capitalism: Productivity, innovation and like that. They do NOT solve all the problems. It was not competitive markets that gave us 8 hour days and the weekend and votes for non-property-owners. It was trade unions and socialists and anarchists and things like the Chartist movement. Competitive markets still make sweatshops and tons of very poor miserable people working in horrible, dangerous conditions.
It was not competitive markets that solved the Great Depression or created the so-called “golden age” of capitalism in the 50s-70s. It was Keynesianism and large scale wealth redistribution.
As for things like utilities, regulating them works much better than not regulating them. On average, making them public works better still.
Soredemos
Stoller is good for deep dives into the lack of real competition and the need for meaningful regulation.
But he has a massive blindslot in that he absolutely refuses to engage with the idea of a world fundamentally beyond capitalist markets. When I used to follow him on Twitter it would occasionally come up, and his reasons are literally ‘Black Book of Communism, gorillions of people murdered!’ level brainrot.
His political imagination has firm boundaries he can’t go beyond. His book is in some ways a clunkier liberal retread of various Marxist points, but without the fundamental foundation in inevitable class conflict. He wants a world of better regulation, but is unable to grapple with the current impossibility of achieving it. He views the system as essentially necessary, and somehow changeable within the confines of the system itself. He can only hope that one day another president will come along and appoint another superwoman like Lina Khan to save us all.
Jan Wiklund
The sad thing is, though, that if all business was carried out under perfect competition nobody would make any money. That is, for instance, the reason why farmers are generally poor (unless they let illegal immigrants do the job and skim off the little profits there are). Farming fulfils all criteria for perfect competition.
Another sad thing is that without economies of scale everyone would also be poor. And if there is to be some economies of scale there can not be to many firms in this business, i.e. there must be an oligopoly at best.
Eric Anderson
How to create an “economics” American style:
1. Assume a tiny cohort of sociopaths have amassed great fortunes by breaking with all civil laws and moral conventions .
2. Assume the rest of the people play by the rules.
3. Create a “science” that rationalizes the former’s existence because that’s who endowed your institution.
Viola.
JR
@Eric,
“Laws are like spider’s webs: If some poor weak creature comes up against them, it is caught; but a big one can break through and get away.” – Anacharsis 6th-century bc
marku52
I would suppose that Bruce has read Steve Keen’s “Debunking Economics” It’s a brilliant read. The moron assumptions that underlie their grand theories go way beyond just homo economus. For example, a fundamental assumption is that a dollar of extra income is identically valuable to a homeless guy and to Bill Gates. Insane.
And health care can never be a “market”. Asymmetric information. You are going to the Dr because you don’t know what’s wrong with you. And pricing information is not available. Ask at the hospital what an aspirin costs. Good luck.
And as Bruce points out, because of economies of scale, you never reach the magical pricing point.
Microeconomics can kind of work. Macro, never. At lease as it’s practiced in the West. China seems to have figured it out, at least to a functioning level.
Joan Robinson: “The only reason to study economics is to avoid begin deceived by economists…..”
bruce wilder
I have read/skimmed Steve Keen’s book critiquing Economics and think highly of him. There are a lot of such “inside baseball” critiques out there, because economics dogma is indefensible on its own terms and most economists remain incorrigible. Why? Why do they remain unrepentant?
I think a big reason is they don’t have to as long as the laity (that is you, dear Reader) do not speak or act as if you have absorbed any part of the critique. Steve Keen subtitled his major book, “The Naked Emperor” in a reference to the parable of the Emperor’s new clothes in which charlatans pranked a pretentious monarch into parading naked.
I don’t think any one uses the tropes of neoclassical economics carelessly out of a misplaced fashion sense. It might be worth looking more closely though at why economics is so persuasive in the hypnotic sense. People do get drawn into its conceptual vocabulary and frames, even when they are ideologically hostile, as I take it, Ian is.
From my point of view, as a one-time economist of no accomplishment, I tend to believe it may be because economics shelters so close to the cognitive bias known as the just-world hypothesis. Economics posits that the economy is a general system that works to achieve a balance in solving the problems it is set to solve. That notion anchors on a human need to see the social world as organized and somewhat predictable. It is adjacent to similar need addressed by religion. And calls forth a pseudo-religious response.
Jan Wiklund
I would also, to the literatur discussion, like to add Erik Reinert: How rich countries got rich and why poor countries stay poor, https://www.abebooks.com/9780786718429/Rich-Countries-Got-Why-Poor-0786718420/plp.
His explanation is that rich countries produce under economies of scale, high technology, division of labour, and synergies, while poor countries do not. And none of these is possible under perfect competition. You need organization and big units.
Some competition is necessary, though. But it doesn’t need to be perfect.
Reinert’s book has also the advantage of being *fun*. It’s the most joyful ditching of neo-classic economics I’ve read.
Senator-Elect
No need to apologize for your wonderful comment, Mr. Wilder. Thank you! That so many people think there are lots of markets out there in the real world that meet the theoretical criteria is amazing when you consider how little observation and thought it takes to realize they do not. I recall when Paul Krugman remarked how big corporations are giant bureaucracies and in essence top-down controlled economies themselves, and it sounded like heresy but is so obviously true. Yet few economists speak as if such facts matter.
Your point about the religiosity of economics is also well taken. But I do think there is quite some good work in the field and that many mechanisms are understood, and we could create a much better society very simply by pulling different economic policy levers. We haven’t done so because those in control are fervent believers in neoliberalism and do not want to give up their advantages.