The horizon is not so far as we can see, but as far as we can imagine

The Power Parable

“The strong do what they will and the weak suffer what they must ” – Thucydides

Imagine that you have crawled out of the desert. You have not drunk in days, and if you do not have water soon you will die. Only one man has water, but he will not give it to you for free, he wants to be paid.

What is that water worth? To put it another way, what is your life worth?

One answer is that your life is worth everything you will ever earn, minus the cost of subsistence. The water-seller might say “if you die, you will never earn anything again. Therefore everything you earn is because I gave you water. So this water is worth your life’s income.”

Now you might not find life worth living under these circumstances, which amount to slavery. If the water-seller had many possible customers crawling out of the desert, he might find that too many people would rather die than pay, and might reduce his price somewhat to maximize his profit. If one quarter of people would rather die than pay, he might reduce the price to two-thirds of his customers life earnings, and see if most of them were willing to pay that.

Over time he might find that, knowing he’d take two-thirds, once saved his customers wouldn’t work very hard: just enough for subsistence and some alcohol, perhaps. So he might continue to experiment—how much could he take to maximize his profits?

But there is another possibility, back at the original bargain “your earnings, or your life?” What if you decide to take the water whether the water-seller wants you to have it or not? What if you’re willing to use violence? You’re weak, you might not win and if you lose you’re dead, but you might win and if you do you don’t have to pay anything. And if you win, you could start selling water yourself.

The water-seller has to take this into account. Which means he either has to reduce the price he charges so it’s not worth people trying to kill him, or he has to spend some of his profits on security. Thugs, pretty much.

But why pay for his own thugs? Why not pay government, and use its thugs? Everybody chips in some money, the government creates police and an army, and they make sure that customers don’t just take the water. They also solve another problem we hadn’t mentioned, making sure that people keep paying up later once they are no longer dying for thirst. The government enforces the water-seller’s contracts.

It should be pointed out that the water-payer is getting a lot more out of the governments thugs than most ordinary people are. Even if we assume the new police enforce all contracts and stop violence against everyone (as best they can), this guy has a lot more enforcement needs and a lot more people who want to kill him than an ordinary person. So even if everyone pays, say, 10% of income for the police, our water-seller is doing well out of this.

But why should the water-seller pay 10%? If the government has politicians whose money is separate from the government’s money, who can’t just use it as their purse, why not give them personally, say, 2% in gifts. That’s enough money to make them, personally, filthy rich. And they can lower water-seller taxes (after all, he saves lives and is a lynchpin of the economy) and raise them on other people. With a bit of work he might not pay any direct taxes, only gifts, and the rest of the population will pay for the enforcement of his contract rights. Yes, that reduces the post-subsistence money he gets from the people whose lives he saved, but for every dollar spent on enforcement he would have only gotten two-thirds anyway.

This is power pricing in a parable.

Back in the eighties I was very poor and did not have a phone. Ever try to get a job without a phone? It limits you to a set of very menial, low paying jobs. How much is a phone worth if you need it to get a better job? In the modern world, where job-hunting is done through the internet, how much is it worth to have email?

For years I didn’t have a credit card. I eventually got one because I needed to travel, and only the lowest grade of hotels will let you stay if you don’t have a credit card. Likewise you can’t rent a car without a credit card. How much is not having bedbugs and having blackout drapes and a good mattress worth to you? How much is being able to drive worth to you?

Let us say you live far from where you work, and there is no public transportation. How much can you be charged for gas before you refuse to pay? Probably just slightly less than the difference between your current job and the best paying job near where you live, minus whatever price you put on the annoyance of having to drive a long ways.

What if there aren’t any jobs near where you live that you can find because the economy is in a prolonged slump? How much can they charge you for gas, and repairs, and car insurance and driver’s license fees then? You have to have a car, you can’t make a living without it. Everyone who sells you something related to cars knows that.

There are two answers to these what-ifs. There’s the free market answer, and there’s the government-for-the-people answer.

The free market answer is that if it is easy for new suppliers of gas, or repairs, or insurance, to start a new business, if the current suppliers charge more than the cost of getting into the business, someone will start a new business and undercut them. The threat of that, and the actual occasional reality of that, will keep current suppliers from gouging you. If there are a lot of people selling, even without new people coming into the business, one of them may “betray” the others and sell for cheaper, so long as they can still make a profit (or to drive people out of the business they might sell for a loss, so they can later charge the full “power price”.)

The second answer is that the government says “that’s not fair” or “it is not in our interest to let you take such high profits, because it reduces economic activity and thus our tax base” and simply doesn’t allow businesses to take maximum profits.

If the government doesn’t stop it, and if the market doesn’t stop it, however, profit maximization will occur.

“What this is really worth to you is just slightly less than every dollar this will earn you or save you. And that’s what we’re going to charge.”

In the real world, of course, there are multiple demands on each consumer – food, water, housing, transportation, education, healthcare, entertainment. So even if in one field there is no government or market reason not to gouge, there is a limit to how much a business can gouge because there are so many businesses trying to do so.

But notice something about that list: food, water, housing, transportation, education, healthcare, entertainment—every one of those things, except entertainment, you either need to survive, or you need to maximize your income. You pretty much must have those things, so anyone who is in a position to take them away is in a position to profit maximize. Now, let us say that in many of those fields the businesses are constrained either by the market or the government so they can’t take almost all of the value of what they offer. In such a case, the field or fields which isn’t constrained is going to make much higher profits. So if water companies are not subject to the possibility of new competition, nor are they regulated that field is going to be making much higher profits than housing, food, education, healthcare and so on.

So every business wants other industries to be subject to regulation, and to be a free market, but they want themselves to be free of regulation and free of real competition. A small number of other firms in the industry, all of whom do business the same way, and none of whom seriously undercut each other is acceptable to profit maximizers, but if it is easy to enter their business, then there is a free market and that’s not good for profit maximization.

Whenever you see an industry where profits are routinely higher than the norm for the society there is a good chance it is neither properly regulated nor a free market.

Because ordinary citizens do not have market power, because they cannot individually break a major firm, they must take prices. If the phone company, or the water company sets a price, you pay, or you don’t have a phone, or water.

Now consumers do have power as a group. If large numbers of consumers move together they can destroy or make a company. However it’s hard for consumers to do this when there is collusion between companies. If they’re all basically the same, if the product and the service is the same, consumer revolts are unlikely, especially for any must-have products. You must have water, you must have food. If you want a good job you must have a phone and internet, and any place without good public transit, you must have a car.

Consumers have power as consumers in markets that are actually free, where there is actual competition. Citizens also have power to the extent that they have power in government, and thus can use government to control industry, either to make sure there are actual free markets, or to ensure that if there aren’t, they are regulated.

To go back to our initial example, if you come crawling out of the desert and anyone can give you water, not just one person or a few people colluding, you’ll probably get it for little more than it usually costs. Indeed, a good samaritan may give you wate for free. If the government is responsive to ordinary citizens sense of outrage and morality “that’s not fair!” then even if there is only one water-seller, the government won’t let him charge you more than anyone else.

Individual consumers are in a weak position. As consumers they have very little power. It is as citizens that they have power, and it is in actual free markets that the producers do not have enough power to take advantage of consumer weakness. Free markets, however, are very fragile things, and usually only exist if government makes sure they do, which comes back to consumers being weak, but citizens having power through government. Citizens who treat politics as consumption, however, will lose both power and prosperity.

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  1. Your parable is why there can never be a real market for healthcare — specialists (the doctors who get the big bucks, people like heart surgeons, oncologists, etc.) and drug companies selling drugs necessary for people to live can *literally* say, “your money or your life”. That’s not a market, that’s a mugging. When there are a few people who literally control life or death via their (often government enforced) monopoly on critical resources , there is no “free market” for those resources, there is a mugging.

    But there’s another aspect of power that I never see discussed, which is the opposite of yours: the case of a lot of sellers, and few buyers. This is called oligopsony. In an oligopsony, the buyers can drive down prices to basically the lowest price needed for the sellers to stay in business. Indeed, in an oligopsony, the end state is where the weaker sellers have gone out of business — have died, basically. When you are talking about the market for labor — where there are roughly 150 million people in the US workforce trying to sell their labor and maybe a quarter million businesses vying for their labor — “stay in business” = “stay alive” — the so called “Iron Law of Wages” which says there’s a bottom to wages, which is the bare minimum needed to sustain life, and those not able to sustain life on that bottom simply die.

    The thing is, the wages being paid are *already* below those needed to sustain life for the entire bottom of the work force (where there are 150 million people capable of filling the job, as versus a few thousand people worldwide with my particular skills filling my particular job). The people at the bottom of the workforce are already being paid below what the Iron Law of Wages says they’d have to be paid in a free market. How? All those social safety net programs that conservatives deride, which keep those people alive when they would otherwise be dead if forced to rely on wages alone.

    So what happens if conservatives got their way and eliminated all social safety net programs? Simple: businesses would have to raise their wages or their work force would die.

    In other words, the right-wing attacks on the social safety net for the working poor (and most food stamps, Medicaid, etc. *do* go to the working poor, not to bums etc.) are not only bad for the poor, but *bad for business*, since the social safety net is basically a government subsidy to business allowing businesses to pay low wages without their workers dying. I.e., the social safety net is actually a subsidy to employers of low-wage workers. In short, owners of low-wage businesses who spout conservative ideology are not only working against their workers’ best interests, but they’re also working against their own best interests. Good luck on getting them to see that, though… they have been well and truly indoctrinated by the lies our system teaches them.

  2. Ian Welsh

    I have discussed the other case elsewhere, and it’s a big part of the book I’m writing.

    If the workforce dies, as long as long as the labor market stays loose, they’re ok with that. In that case, they’d become pro-immigration overnight.

  3. LorenzoStDuBois

    Fantastic as always Ian.

    Your example is less theoretical than you may know:

    P.S. Do you ever do radio aside from your biennial podcasts on VS? And when is your next one coming out?

  4. Ian Welsh

    I’ve done a couple radio shows years ago, but not recently. Speaking on VS tonight, I’ll put up a link when I have it.

  5. Bruce Wilder

    Public utility regulation and a lot of other public health and labor regulation can be understood as consumers organizing, through politics, to act against, or negotiate as equals with, producers, who are already organized, just by the nature of organizing a business or industry.

    If the political and social organizing of consumers and workers is pre-empted or suppressed, then they (we) are just sheep for the shearing, or mutton, as the case may be.

  6. On all the watchlists

    Nice post.

    Bastiat summed this up best for me, basically;

    – You give redistributive power to the government
    – People use their power to selfishly influence the government to redistribute in their favour. The poor use votes (or threats of civil unrest / violence), the rich use money.
    – Eventually it tips in the favour of one group (usually money) and that group monopolises government redistribution (e.g. bank bailouts) to the detriment of the other.
    – The state becomes predatory (e.g. the US) and the power of the maligned group atrophies to the point that they have no recourse (e.g. the militarisation of the police reduces any threat of civil unrest, voting is ineffectual due to 1 party system; the US again)
    – You end up with totalitarianism or revolution

    As much as I detest the thought of some Randian free-for-all, I don’t really think a centralised redistributive government is the answer either. A heavily decentralised system of (government?) redistribution, however…..

  7. S Brennan

    Very well written Ian

    & Great response Badtux

    To Badtux’s point on oligopsony, this is exactly what retailers did to US manufacturers with “free trade*”. Retailers margins soared…with people literally starving on the street in the 3rd world, China’s elite will gladly offer up it’s peasants as slaves to industrialize…send us samples and we’ll have them made “over here”…all wrapped up in a tax incentive.

    As asinine as the US has been over the last 30 years…well, God help us when the Hans of C-Han-a regain what they see as their rightful place of world dominance. The US was 17th in military power in September of 1939, but #1 in industrial output thanks to mercantilism…

    * Anybody who uses the term “free trade” with the slightest trace of sincerity is either a fool, a liar, or a foolish liar.

  8. David Kowalski


    I was just looking at old immigration stats for the U.S. for the period of 1820 through 1860 when immigration was very high compared to the population totals of the U.S. Over 5.4 million people immigrated to the U>S. during that time. Over 60% of the total came from Germany, Ireland and (surprise, to me) Canada. The largest group, by prior employment, was merchants. The largest need was clearly for farmers and farm labor. No problem.

    The 1860 U.S. Census even bragged that the immigration totals proved how strong the U.S. economy was. We were just coming out of a recession (the Panic of 1857_) that lasted from 1857 through 1859. The propaganda machine was at work 150 years ago even in the Census Bureau.

  9. Your last paragraph sums it all up quite succinctly.

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