Monday, August 19, 2013

Barriers to Entry: Why They Hurt the Ancap Position

In my brother's write up entitled Anarcho Capitalism Dogmatism he argues that the economic model for the ancap society is the perfect competition model.  I agree with this assessment for a few reasons, but I recently got into a debate with an ancap about one of the assumptions in the perfect competition model, namely, zero barriers to entry, so I would like to address the arguments in this post.

When debating an ancap there are two common arguments you will hear.  One is that "the market will provide it" and the other is that "we will defund the company we are dissatisfied with and fund a different one that provides better service."  When making these arguments, they will not theorize how the market will provide the good or service, and they will not explicate how they can switch providers if there is currently only one that exists.  This does not mean that ancaps have not theorized about certain issues but when discussing these potential problems with neo-ancaps theory is usually unimportant to them.  This unfortunate characteristic more often than not leads to dogmatic assertions and a priori conceptualization.   

In the debate, I mentioned two things that are noncontroversial economic theories.  One is about natural monopolies and the other is about airlines (my ancap opponent brought up airlines).  The point I made about natural monopolies is that often times it is more efficient to have one utility company to provide a service over a geographic region.  This is because of the extremely high start up costs and they do not reach diseconomies of scale, i.e., it is cheaper for them to provide the natural good to more people than less people.  Thus, the people of this region can get their water at a cheaper price.  To stop this single company from charging obscene prices I posited a solution that a governing agency could hinder them from doing so. (NOTE: I said governing agency, not government.  Could the free market handle this? possibly, however, complications arise.  I think this could be one justified role of a LOCAL government.)

In response to my argument the ancap asserted that there has never been a natural monopoly, claimed I don't know anything about how the market works, and called me a socialist.  It seems as though the original Anarcho-Capitalistic Dogmatism is vindicated once again.  

Now I would like to transition to the point of how airlines have barriers to entry.  The ancap brought up airlines in an attempt to refute my brother's point about the perfect competition model.  This was surprising to me because I believe it actually refutes the ancap argument that people can simply "switch providers".

There are major barriers to entry for airlines.  High costs, few firms, and airlines can control their prices (minus of course some costs like the changing prices of fuel).  These barriers to entry make it extremely difficult for a new firm to enter the market and survive.  This is because one must have a lot of capital to start up a new airline.  With such high costs there is more risk, which in general can discourage investors.   Moreover, with such few firms and their control over the prices it is easy for existing firms to lower prices to cause new start up firms to fail.  (I would like to point out that when I argued this he acted as if it was ridiculous but asserting something to be ridiculous is not the same as proving it.  The argument I was presenting is studied in depth by economists, it is known as the field of Industrial Organization, hence it is the theory of how certain industries are organized)  The problem with the airlines could also be an issue when it comes to a police force or national defense.  The ancaps frequently argue that the market will provide a police force and a national defense but the fact of the matter is that it is hard to switch services when it is a service outside of perfect competition.  This is ultimately why I think ancaps need perfect competition in order for their theory that consumers can switch providers to be plausible.

I would also like to point out that I am not arguing that these potential problems are examples of market failures where the government is needed to intervene.  I am simply pointing out that these situations are much more complex than the ancap would like you to believe.  The assertion that the market will fix it or we will switch providers is much too simplistic for these complicated issues.

11 comments:

  1. A few things, I'm unsure of the basis to claim the ancaps economic model for society is perfect competition. What exactly do you mean by this? No Austrian economist let alone a neoclassical would claim that the perfect competition model represents any form of reality let alone a Stateless one. Perfect competition holds these assumptions about the model – 1) a homogeneous product available in infinitely divisible units 2) an infinite number of buyers and sellers 3) the absence of any barriers to entry & 4) each firm having access to perfect information.

    Perfect competition is an “ideal type” just as Mises’ Evenly Rotating Economy model is an ideal type. It’s an intentional caricature and imaginary constructs useful for explaining a particular economic concept such as the role of entrepreneurship, profit, and interest in the case of the ERE.

    I've taken Managerial Econ and I'm familiar with Game Theory, Cournot, Bertrant, Nash, Prisoner's Dilemma, etc. I do think Game Theory is useful in some ways to better understanding areas of economics - especially within the context of firms. But, I do think the study of entrepreneurship is sorely lacking from the Game Theory economics and the theory of the firm and the role they play even within game theory on how entrepreneurs can change the very game they are playing.

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  2. The reason we say the ancap theory implies perfect competition is because when discussing actual issues with ancaps their only response is ever the market will fix it, or, we will switch funds. As i stated. Clearly, there are no ancaps running around claiming it is perfect competition. This is not a perfect argument by any means. But just something to point out that ancaps always claim that is not necessarily feasible. There are many situations in which without something that resembles a perfect competition those slogans fail. Which is what I tried to point out here, and what I think Luke was getting at in his initial post

    One thing I will mention about your view on entrepreneurs and game theory is that you are correct. When I listened to the lecture at MisesU on game theory and entrepreneurs I did not disagree with anything he said (I stopped listening like 30 minutes in though). However, I would also like to point out everything he claimed has been addressed in different branches of game theory. His example on the prisoners dilemma making a contract about getting ones knees broken is dealt with in game theory with communication, or cooperative game theory. Or it could be dealt with by credible threats and so forth.

    For the study he points out about the prisoners and cigarettes, who is to say they were not informed about the game they were about to play and therefore could cooperate. That totally changes the foundation of prisoners dilemma. OR, it could be in a prison there are certain "mores" that could produce a focal point equilibrium that changes it. The prisoners dilemma is just a foundational example to build from. Clearly no situation in real life resembles it perfectly. (other than if two criminals got caught and faced the exact assumptions)

    If you do think game theory is a good way of looking at things I would suggest reading up on it. There are definitely problems within game theory, but game theorists have made remarkable strides towards solving them in the last 20 years or so. A lot of the results are very exciting and intuitive. A lot of it is highly mathematical but there is a lot of literature out there that makes it available to the non-mathematicians. Games and Decisions by Duncan and Luce is essentially an overview of Von Neumann and Morgenstern's Theory of Games and Economic Behavior with very little math. If you are good at math there are tons of papers improving Nash equilibrium. Perfect equilibrium, Proper Subgame equilibrium, sequential equilibrium are a few of the most popular. The papers addressing oligopolies are very interesting.

    Honestly wondering, I didn't think Austrians studied the firm at all? I think it is vitally important but most the time I get scoffed at by Austrians for thinking so. All of the Austrian theory I have read is on competing currencies, Hazlitt's famous work, and a few booklets on education and depressions. None of which really discussed individuals or firms too extensively so I honestly can't make a judgement on their view of the firm. Other than what I have encountered through articles or discussions, of course; all of which have seemingly been against it.

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    1. NOTE: about the cigarettes, I meant to say that prisoners who already were tested could have leaked it to prisoners about to play. That is what I meant by being informed

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    2. Thanks for the reply Jacob.

      On the "oh the market will solve it" reply, I understand your unsatisfaction and frustration to this answer regarding each and every problem given a Stateless society. I think people antagonistic to a free society do find it hard to digest without any concrete "if x, then y" pronouncements about what will happen, ex ante. Honestly, I get that. But, in many cases we cannot know what a completely free society would look like or what products/services would be offered to solve problems in certain areas of the economy - including law, defense, and justice. That really is the role of the entrepreneur that is unfortunately missing from a lot of the mainstream economic textbooks.

      For any specific question you have, I'd love to take a crack and answering it from an Austro-libertarian perspective.

      But, I really do think entrepreneurship is the missing ingredient from a lot of Managerial Econ courses. For example, Google hardly even existed when I was in college late 90s/early 2000s and now it is one of the biggest companies in the world. Microsoft chopped the legs out from under IBM in the business software/computing world by basically inventing the PC. These are examples of how critical competition is to a rivalrous and dynamic economy that brings wonderfully new, exciting, and innovative products to the market at the cheapest possible price point. There really is no such thing as a natural monopoly in a world without any government privilege. Now, there ARE certainly monopolies that exist when/where the government grants exclusive right to operate while discouraging competition.

      As to your example of airlines, yes you are absolutely right that there are high barriers to entry for any capital intensive industry, but there are always substitutes for travel - train, bus, car, etc. As for those who must fly - there are always chartered planes and innovative companies like NetJets or MarquisJet. And, the TSA/Homeland Security has created more barriers to entry for any new entrants to start an airline.

      As for the game theory aspect, Rothbard mentions that Theory of Games is a branch of Praxeology and I do think there is a lot of work that could be done in the Austrian tradition on Game Theory. Obviously, the applicability or usefulness of mathematical models usually derived from the perfect competition model are another topic which I won't get into here.

      On the theory of the firm, Peter Klein and Nicolai Foss (sp?) are probably the most well known Austrians in the modern sense who have dedicated a lot of work to the area of entrepreneurship and the firm. Have you listened/read any of this lectures/papers?

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    3. A natural monopoly is simply something with extremely high start up costs and fixed costs who don't reach diseconomies of scale. (consider putting in water pipes for a section of a city as start up costs) I think the word natural is throwing everyone off. It is simply a name given. Utility companies ARE natural monopolies. You may be right that they need the government to be a monopoly but thats not the definition. To claim there has never been a natural monopoly without the government is a misunderstanding or representation of what a natural monopoly is. Given the definition they certainly exist

      If I am understanding you correct, I think you are arguing that competition amongst water companies will increase technology and in the long run decrease costs. This could be true in certain areas. But, I would like to point out that these are firms dealing with a natural resource. It might not even be feasible for more than one competing company in an area if the first company owns the land with the watershed that provides the water. Furthermore, your theory does not address the negative externalities of having multiple water companies. Also, comparing two completely different industries does not really prove anything. This would be like me analyzing the shoe industry to get a better understanding of the banking industry.

      Let me point out again I am not trying to say this is the only way to do it but something to consider. I appreciate the fact that you are engaging in it and not just calling me a socialist like the kid on Facebook did.

      I personally think when ancaps say we can't theorize how the market will solve national defense it is because they have no clue and are copping out of dealing with a problem in their theory. There have been national defenses for all of modern history, if someone can't come up with a theory by now that’s pretty telling. Even David Friedman admits it is a huge problem with the theory. Milton Friedman said he would have been an anarchist in an interview if someone could solve the problem of national defense. These are brilliant economists who see there might be a problem, yet because Rothbard says so they are wrong.

      I also like how in the first paragraph you call people antagonists of a "free society". That wording really benefits your arguments because it implies I am actively opposed to a free society if I am not willing to accept the theory, nay, lack of theory for a national defense. This is a typical ancap misrepresentation of the situation. I am not opposed to a free society; I am arguing that minarchism yields a freer society.

      No, I have not read either of them. I have my favorites who I think deal with economics properly. Kreps from Stanford is one of my favorites. I will have to look them up though because I have always thought if Austrians studied the firm more they would make big strides.

      The last thing I want to say is that it is surprising to me that Rothbard thinks this about game theory. Game theory is mathematical and uses extensive form models to better analyze things such as oligopolies and firms. So, if we go by what Mises says, that models can’t capture human action and assumptions used in mathematical economics are false which lead to fallacious results it seems as if Rothbard is going against Mises here. Mises also point out in Human Action that strategies, such as those analyzed in game theory are not real but rather metaphors. So, I think it is good that Austrians might be willing to study game theory, but, they will have to go against Mises's methodology if they want to study it. From what I have encountered modern day Austrians are not willing to say a single bad thing about Mises. In all of his works they will never point out an error. Robert Murphy, by the way has a pretty negative opinion towards game theory.

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    4. Regarding the natural monopoly - or whatever we want to call them given the examples of utilities (gas, electric, water, etc) firms, these are government granted monopolies that face little if any competition based on the various regulations, rules, franchise fees, permits, carve outs, and protectionist cover given by the governing authority. Take ObamaCare for example if you’d like with the guarantee issue and community rating style of insurance of the legislation and everything else. It’s clear the intent of the bill is to turn the insurance companies in to public health-care utility companies. So, the whole point here is that the legislation erects monopoly privileges which pose as significant artificial barriers to entry which intentionally shields these companies from smaller/startup competition. Another great example is the issuance of taxi-cab medallions in metro areas which artificially limits the supply of competing taxi commissions, etc. In all these cases, the utilities do not have to compete for business given their competition is intentionally limited through the use of government. If even the slightest bit of competition is encouraged and or allowed even in the area of utility services, we see what economic theory of competition, monopoly, and entrepreneurship tells us – a dynamic, rivalrous process of entrepreneurial discovery.

      A great article that really covers a lot of the issues at hand here is The Myth of Natural Monopoly by Tom DiLorenzo http://mises.org/daily/5266/. In there he talks about the history of public utilities and how even if there are few firms competing for such services as power/gas – the outcome is fierce and dynamic rivalry of competition where companies do have to compete for business and lower prices. And, sometimes it does make sense to merge and achieve economies of scale, but that does not always guarantee success and often creates the opposite effect than what was expected. He also covers the “duplicate services” externalities argument you bring up so hopefully that will peak your interest.

      I’m glad you appreciate my sincere attempt to discuss in a civil and charitable manner. I happen to disagree with tactics of many of my peers who share my enthusiasm but lack the tact and manners to thoughtfully engage others in critical thinking. I disagree with that tactic even though I do think one’s reasoning is flawed, contradictory, or just plain wrong. I think MORE debate should occur and not less. So, these methods of name-calling (deserved or not) I find off-putting. My goal is the truth and to get there we do need to have a vigorous discussion in the hopes all parties will continually evaluate their positions and arguments.

      As to the national defense question (which I think is the primary “public good” example people use) and war in general, I guess I’d need to know a lot more about the specific hold up or points of contention you have about it. At the end of the day, I think quite a bit of work has been done (but obviously more needs to occur) on how private defense, protection, and insurance companies would exist in a free market (check out anything by Walter Block, Robert Murphy, Hans Hoppe, Rothbard, Guido Hulsmann, etc). Also, I think you question of “national defense” implies the existence of modern States like we have today when the modern state is a relatively recent thing.

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    5. Lastly, I meant “Stateless society” when I said “free society”... so apologies if that was confusing. Obviously, I recognize you’re a minarchist and that’s the key reason for my engaging with you to (hopefully) better understand some misconceptions you might have about a Stateless society. I’ll try to put it this way – as a software developer who works mostly on the web, a big craze these days is JavaScript development and how much software is being written using JavaScript. To say the least, JavaScript is being used in a completely different way than anyone would have expected 10-15 years ago and yet amazing things are being done with thousands of lines of code written in JS. No one EVER would have predicted this would be the case and that we would just replace JS with something different. So, what the hell is my point here? Simply put, we cannot know what our future states of knowledge will be in evaluating the best possible way to achieve our goals – whatever that may be. But, we do know that entrepreneurial discovery, new knowledge, and especially technology play an important role to bring those goods/services to the market to allow us all to flourish.

      Take things like KickStarter & 3D Printing. These two things are game changers in such things as financing those so-called “public goods” and distributed manufacturing (respectively).

      Okay, last item on Game Theory – I obviously have objections to parts of Game Theory, but I’m of the opinion it deserves more attention from an Austrian scholarly/critique standpoint. Again, Nicolai Foss wrote an interesting take on it. http://mises.org/journals/scholar/Fossgame.PDF. What is so disappointing to me in mainstream/neoclassical economics is the lack of attention paid to entrepreneurial discovery.

      As for “going against Mises”... I think you need to recognize that all economists are going to have imperfections and make mistakes – some more than others. But, that is the beauty of economic thought. Every economist is going to build on the shoulders of other economists or try and correct the mistakes of others. While I do hold Mises is extremely high regard, he not above reproach - nor is Rothbard. One thing I detest is the “appeal to authority” argumentation I see so often. Be original for goodness sake.

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  3. Since I made the initial, yet incomplete, argument about the ancap society being one that fits the perfect competition model (PCM), I want to elaborate on my point.

    As you point out Andy, the PCM does not exist in reality which is exactly why I made the claim I did that the ancap society fits the PCM model. The ancap theory of society, in my view, overlaps with the PCM assumptions, hence, this is why it doesn't exist, nor can it exist in reality. The ancap society IS an ideal type. I am quite certain we have interacted on this point in other posts. I absolutely recognize that Austro-ancaps do not make this argument and I believe it is because it is a philosophical problem for their theory of society.

    In addition to that, you sort of agree with mine and my brother's view that the claim "the market will take care of it" is unsatisfactory and then revert to it by essentially arguing that while this answer is not sufficient we do not know how the market will take care of various issues. So basically, it seems, you do not like that answer but implicitly endorse it.

    I am not really sure why you do this, but your argument that "people antagonistic to a free-society" cannot digest answers lacking "if x then y", is something that I find to be quite frustrating. You are implying that myself or my brother, that when asking for a theory to solve problems in the ancap society are somehow antagonistic with our inquiries of this theory of ONE kind of a free society. Forgive me if the appeal to platitudes is not intellectually satisfying. I most certainly desire answers on these problems from the ancaps especially when they will levy the charge of statist against me while adhering to platitudes to prove my alleged statist agenda. I need something a bit more concrete than that.

    It is quite plausible to argue that without a strong national defense the ancap society will be invaded and enslaved by a tyrannical force. So when I ask an ancap how a market would provide a national defense and all I hear are crickets, the loud chirping is not compelling reason for adopting the ancap theory.

    Another problem that exists for the ancap is that they are making the "water and diamonds" mistake that Smith made. They are making decisions about society as entire classifications, namely, a stateless-society or Government, or freedom vs. slavery. This is an error in thinking because decisions are made at the margin and not in entire classifications. To this I am relatively certain that the reply from ancaps (maybe not you but others) would be something like, "How do you make decisions at the margin about slavery!?!?! Statist!"

    While the ancap may not like my answers to how a legal system or a national defense are established in a Constitutional Republic, they are still answers or theories provided that are concrete, and can be critiqued. When arguing on behalf of Federalism I would not just claim, "The Government will provide it" and act dismayed when such a platitude is rejected.

    LW

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    1. As you point out Andy, the PCM does not exist in reality which is exactly why I made the claim I did that the ancap society fits the PCM model. The ancap theory of society, in my view, overlaps with the PCM assumptions, hence, this is why it doesn't exist, nor can it exist in reality. The ancap society IS an ideal type. I am quite certain we have interacted on this point in other posts. I absolutely recognize that Austro-ancaps do not make this argument and I believe it is because it is a philosophical problem for their theory of society.

      Okay, I’ll just comment by saying your claim that an ancap society (or “Stateless society” as I like call it) = PCM is wrongheaded. That’s about the most charitable I can be in saying that. I’m not sure why it is so hard to comprehend that a Stateless society is simply the absence of a monopoly of ultimate decision making in a given territory where property rights are respected and the Non-Aggression Principle is respected. While obviously groups of individuals could group together to form autonomous governing bodies of authority in the same way the Catholic Church is a governing authority and command respect. It does not compel its subjects to do this or that, but it does have a corpus of law. I also see local residential covenants as a form of autonomous governing authority which works in the same way. It has a form of law that says what people can or cannot do within their property, but it is also voluntary, decentralized, and the jurisdiction is on a very small scale. Private arbitration services or private courts would seem to me to be a pretty simple concept to understand and recognize. Competing law enforcement or private protection insurance agencies also seem like a very rational, yet simple thing to understand as well. David Friedman’s written about the Amish as a form of a Stateless-anarcho society. I sometimes watch “Amish Mafia” on TV and while I question how real some of the dramatization is ... what is real and what is staged... I’m amazed at the concept of “Amish AID” where this is paid out as basically the private insurance I mentioned before. If the people/church are unhappy by the “mafia” folks, they can be shunned and withhold their dues. I could go on, but hopefully I’ve at least posed some decent arguments why the Stateless society is not a never never land “ideal” type caricature.

      Okay to the issue of definitive, prescriptive, ex ante pronouncements of how a Stateless (sorry for using “free society” if that offends you) society would solve every single problem in society in concrete, description terms, I think the corpus of Austro-libertarian scholarship is very theoretical on multiple fronts.

      On the economic side, obviously a praxeological analysis shows the effects of what happens in the form of (X government policy will result in Y effects while it is important to consider the Z unseen effects as well). On the side of ethics, obviously Mises was a Utilitarian and did not think there was a scientific objective ethics where Rothbard and Hoppe differed here and thought otherwise. Rothbard’s Ethics of Liberty & For a New Liberty present a natural law perspective where Hoppe’s Economics and Ethics of Private Property as well as his Theory of Socialism and Capitalism is based more on his perspective of argumentation ethics So, in this regard, the scientific analysis of what society “ought” do does fly in the face of those in the Empiricist camp that say all normative pronouncements are simply just arguments of emotions. But.... that is a whole other blog post :-).

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    2. As we’ve gone back and forth other past few months, I think we at least respect each other enough to acknowledge we’re both after the truth and want to fight for the BEST system possible. But, we just differ on what that might look like, how to get there, or what is the best system.

      On the point about advocating a completely free-society versus marginal cuts, here, there, anywhere to shrink the State, here we’re concerned with strategy for advancing liberty. Here are my thoughts. Would a minarchist society be better than what we have today? Sure, absolutely and I’d be all for every State, Municipality, or City/Village, or even person to secede and withdraw his or her consent from the governed. So, whatever avenue is best to shrink the State I am 100% for. However, I’m of the Leonard Reed and Étienne de La Boétie mindset. Only through a fundamental change of ideas AND a recognition that governments draw their power through the consent of the populace can such changes occur at all. That is really the entire point I’m discussing this type of subject with you guys. But, I also agree with Leonard Reed that before we can change the hearts and minds of others, we must first change ourselves through our own example and the way we live our lives.

      As I’ve said, I disagree with the tactics of calling people a Statist/Socialist/Faschist/Commie-Pinko since it doesn’t really achieve anything from changing the hearts and minds. With that being said, sometime being proactive and yet reasoned to point out flaws in logic or contradictions can be affective if not also off-putting. Personally, I don’t have the wit, shtick, or personality to be very proactive so I’m take the more charitable route (although I often fail there sometimes).

      Anyway, to close it is very apparent you guys are critical thinkers and we obviously both seem to enjoy this type of dialog and get something out of it. I will try my best going forward to hopefully present arguments for you to consider and think about even though that might be a fruitless endeavor.

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