Theoretical underpinnings of objectivist economic philosophy - problems (was monopolies, etc.)

From: Jeff Bone (
Date: Sat Apr 14 2001 - 13:00:59 PDT

So pulling the discussion up a level or two, here's my take on the fundamental
theoretical problems which underlie objectivist economic thinking and the
arguments that free marketers make against antitrust. (Again, note that I'm
generally one of "those" --- a radical for capitalism, free marketer,
objectivist, etc. It's not dogma, though, and antitrust is a nagging thorn in
my side.)

We've got two general economic theories that form the basis of free market
arguments: Classical (Keynesian) and "Neoclassical" / econometric (Arrow,
Debreu, Samuelson, Koopmans, McKenzie, et. al.) models. These bear much the
same relationship to each other in terms of formulation that relativistic
gravitational macro-scale physics and quantum chromodynamics have to each
other. The former in both cases is very good at making predictions of
relatively simple linear systems interacting across large enough distances in
time and space (and information;) the latter is in both cases a more rigorous
and statistical / probabilistic model. The difference is that where the
standard model of physics makes incredibly precise predictions at very small
scales, neoclassical economics is still only able to make predictions about
things on a fairly large, macro scale --- and then only approximately.

This is evident in the controversy (cf. Brian Arthur, Berekeley / Santa Fe
Institute) over the existance of increasing returns. There is no room in the
standard economic models for increasing returns; they are completely outside
the scope of and provably impossible under these models. However, it's more
than evident that increasing returns exist, particularly in a world of "value
networks" and intangible assets.

Objectivist economic philosophy was initially developed during the 40s-60s, and
relies primarily on the Keynesian economic models, with deference to the
then-evolving econometric models. It is a theory designed to describe a world
where economic activity was largely based on the production of tangible goods.
It is also an older, more mechanistic world view --- despite the formulation of
econometrics as a kind of ersatz quantum mechanics, there is very little
fundamental uncertainty and very little attempt to capture the nonlinear
dynamics that clearly mold our economic reality at small enough time scales.

This all adds up to the following problem -wrt- treatment of monopolies. An
objectivist will claim that a coercive monopoly cannot exist, because the
capital markets will self-regulate such. This may in fact be true over a long
enough timescale --- the fundamental economic assumptions being rather good at
long-term approximations --- but that's beside the point. That's like making
the claim that totalitarian statism is an acceptable governmental form because,
in the long haul, all governments fail for one reason or another and it
therefore cannot persist indefinitely. An objectivist will vociferously defend
the former while just as aggressively protesting the latter.

The particular gap that we fall into is that the capital markets adapt and
react to the market and competitive landscape at a much smaller timescale than
the model predictions of free markets accomodate. The net of this is that
while, at a low resolution, the free market predicts balanced competition, at
the higher resolution which capital markets act in there can be large "gaps" in
competition. These gaps coupled with the uncaptured notions of increasing
returns and network effects *MAY* open a window of opportunity for totalitarian
(is that any better than coercive, Gojo? :-) and damaging monopolies to
naturally develop.

Economics in-the-small (i.e., over short timescales) looks more like ecology
than it does like kinematics / dynamics. We need a theory of economics that
operates precisely in the small, which yields predictions --- even
probabilistic ones are fine --- which are precise in the small. There have
only been a few and recent attempts to capture formally in economic theory the
notions of increasing returns, network effects, switching costs, integration
costs, value networks, and other non-production oriented concepts. Until we
have such, we must realize that all statements about the operations of free
markets are based on theories that only generate long-term approximations. As
long as that's all you are concerned about, that's fine; but there are
consequences of the long-term view which are inevitably in conflict with the
short-term humanism / individualism on which objectivism is morally based.



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