The Achilles Heel Of The Free Market System Is Massive Imbalances In Bargaining Power
Without relatively equal bargaining power between buyers and sellers/ employers and employees, the free market fails.
By David Grace (www.DavidGraceAuthor.com)
The Struggle For Wealth & Power
At the most fundamental level, politics and economics are about the struggle for wealth and power.
More Wealth — — — — —-–>More Bargaining Power
More Bargaining Power — –>More Wealth
Less Wealth — — — —-– — >Less Bargaining Power
Less Bargaining Power — –>Less Wealth
Less Wealth — – — — — — >Less Freedom
Below some point, the poorer you are, the less free you will be.
It’s All About Bargaining Power
Other than armed conflict, who gets what goods, services and wealth is governed by the relative bargaining power of the parties.
All arguments about systems of government are founded on differing theories about how governments should (or should not) react to huge imbalances in bargaining power.
Equal Bargaining Power……………Hugely Unequal Bargaining Power
Strong Market Competition……………………………………Monopoly
Low Price/Good Terms……………………………High Price/Bad Terms
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The magnitude of the imbalance in bargaining power dictates where the price and terms for a good or service fall on the continuum between a competitive price (cost plus a reasonable profit) and a monopoly price (all the market will bear).
………………………………….Price…………………………………..
At Cost…Cost+Reasonable Profit……………All-The-Market-Will-Bear
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When reduced to the very fundamentals, there are two basic theories about how society should deal with vast imbalances in bargaining power.
On one extreme is the notion that the government should do nothing about huge imbalances in bargaining power and on the other extreme is the idea that the government should eliminate all imbalances in bargaining power by eliminating all private commercial transactions in the first place.
Do Nothing……………..Do Something………..…….Do Everything
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These two extreme philosophies are:
- The Law Of The Jungle (Libertarianism/Anarchism)
- Share The Wealth (Communism)
Libertarianism/Anarchy………Pragmatism……………Communism
Law Of The Jungle……..…What Works…………Share The Wealth
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Every other philosophy falls somewhere in the continuum between those two.
The flaws in the Share-The-Wealth philosophy have become so apparent that I’m going to skip over them here.
The Law Of The Jungle System
The Law Of The Jungle philosophy holds that there should be no government action and every corporation and individual should be free to:
- Do anything and everything it wants short of murder, rape, robbery and breach of contract.
- Keep any money it can get in any way possible (other than rape, robbery, murder and breach of contract).
Its motto is: To the victor belongs the spoils.
The Law Of The Jungle System Is Based On The Theory That All Contracts Are Voluntary
Believers in the Law Of The Jungle philosophy think there is no such thing as a coercive imbalance in bargaining power and that no matter how severe is the duress (short of physical violence) on one party to agree to a contract, all contracts are, by definition, voluntary and valid.
Since the Law Of The Jungle philosophy holds that there is no such thing as coerced consent to a contract:
- All-the-market-will-bear pricing is perfectly valid, and
- As they are just another way to profit from an extreme imbalance in bargaining power, monopolies and cartels are perfectly valid.
For example, suppose you were hiking alone in the wilderness and you fell into a deep hole from which you could not escape. A peddler has secretly been following you in the hope of selling you something.
The peddler comes up to the edge of the hole and tells you that he will toss you a rope and haul you out if you give him everything you own. He wants your credit cards, your PIN, the keys to your house and car, your bank account numbers, your passwords, and your signature on a blank deed.
If you don’t agree, he will walk away and let you die in the hole.
Under the Law Of The Jungle philosophy, your agreement to his demand is irrevocably deemed to be voluntary and if you accept his demand you have made a legal and enforceable contract because any agreement not made under threat of violence is, by definition, always voluntary regardless of the amount of duress.
Problems Caused By The Law Of The Jungle System
The Law Of The Jungle System Is Toxic To A Free-Market Economy
The free market is a powerful and useful system, but it only works well in those instances where the bargaining power of the contracting parties is more or less equal.
The main benefit of the market system is its efficient allocation of resources through the tool of market competition and competitive pricing.
The free-market system shatters into inflated, monopoly pricing when the bargaining power of the parties is vastly unequal.
Contracts between parties with vastly unequal bargaining power distort the economy and introduce inefficiencies into it.
The Law of the Jungle philosophy causes a distortion of the free-market economic system and its efficient allocation of resources by facilitating noncompetitive, all-the-market-will-bear terms and pricing.
Monopoly or cartel pricing makes the cartel sellers wealthy far beyond the economic value of the products they supply at inflated prices while the sellers of other products are impoverished by the diversion of consumers’ resources to the monopolists and away from those other sellers’ products.
If a cartel gains control of some resource — insulin, coffee, water, fuel, whatever — and raises the price for that good from a competitive, market price to a monopoly price, the buyers’ wealth that would have been spent elsewhere to purchase the goods and services from other sellers gets diverted to the monopoly sellers in the form of inflated prices for the monopoly products.
The Law Of The Jungle philosophy is toxic to the purposes, benefits and goals of a free-market economic system.
Additionally, parties with relatively equal bargaining power strike agreements that are truly voluntary. Truly voluntary agreements are not only acceptable to both sides but, equally important, they are perceived to be fair and reasonable by both sides.
When bargaining power is greatly unequal, the weaker party inevitably feels taken advantage of which leads to social unrest and, ultimately, to demands for legislative redress of the perceived unfair situation.
The Law Of The Jungle Philosophy Ignores 3rd Party Losses
A Law Of The Jungle society forbids environmental laws and zoning laws.
Unlimited two-party transactions often impose serious consequences on third parties, but the Law Of The Jungle philosophy gives those 3rd parties no recourse whatsoever. It prohibits any requirement that affected third parties will have a say in the terms of the transaction and it forbids the enactment of any laws that might have prohibited that transaction in order to protect those third parties.
While the Law Of The Jungle Philosophy applauds Big Corp A’s massively enriching itself by imposing onerous terms on Mr. B through its overwhelming imbalance in bargaining power, that philosophy simultaneously provides no recourse for the transaction’s collateral impoverishment of C, D, and E.
It’s bad enough to claim that Mr. B’s agreement to onerous terms under extreme duress is merely an affirmation of Corporation A’s freedom of contract, but it’s even worse to construct a system that has forbidden the enactment of any laws that would prevent the contracting parties from inflicting material collateral damage on C, D and E.
It Causes A Concentration Of Wealth & Power
The Law Of The Jungle system inevitably causes a concentration of wealth and power.
In a Law Of The Jungle society where citizens are barred from enacting any laws limiting the conduct of wealthy and powerful enterprises, almost all economic power will be held by large corporations and extremely wealthy individuals. In it, humans are forbidden from exercising their political power to limit the bargaining power of those wealthy and powerful entities.
When humans are coerced by a massive imbalance in bargaining power and have no ability to protect themselves through the exercise of their political power, power and wealth will always concentrate in huge corporations and few wealthy individuals, though the members of the elite class will, of course, change from time to time as new power centers emerge and old ones fade away.
Because of their relatively low bargaining power, the majority of the ordinary human members of a Law Of The Jungle society do not and cannot materially share in either the society’s wealth or power, rendering these systems unstable when the impoverished majority eventually demands restraints on the exercise of power by those on top.
Huge Imbalances In Bargaining Power Prompt Government Regulations
The Interaction Between Bargaining Power & Political Power
In the physical world:
Matter–>Energy, and
Energy–>Matter
In a society where individual humans can exercise political power, there is a similar interaction between bargaining power and political power.
Bargaining Power–>Political Power
Political Power — –>Bargaining Power
Regulations Increase The Weaker Party’s Bargaining Power
The vast majority of the humans in a Law Of The Jungle society have insufficient bargaining power to counterbalance the bargaining power of the monopolies, formal and informal cartels, and huge corporations, but in a democracy those same people do have political power which they can use to restrain those massive enterprises’ bargaining power.
Legislation adopted through the exercise of political power complements the weak bargaining power of individuals and restrains the massive bargaining power of corporations.
Government regulations are almost universally the result of the exercise of the political power of the individual human buyers and workers as a restraint on the overwhelming bargaining power of the corporate sellers and employers.
For example, unskilled workers who have very little bargaining power compared to corporate employers countered that imbalance by using their political power to enact laws requiring those employers to pay the medical costs for on-the-job injuries (worker’s compensation legislation), something they would have obtained on their own had their bargaining power been roughly equal to that of their corporate employers.
Regulations Prevent 3rd Party Collateral Damage
Similarly, third parties exercise their political power by enacting environmental and zoning laws to protect themselves from the collateral damage inflicted on them by corporate action.
Differences Between Law Of The Jungle Ideologues & Pragmatists
All-The-Market-Will-Bear Pricing Vs. Cost + Reasonable Profit Pricing
Followers of the Law Of The Jungle philosophy believe that all-the-market-will-bear pricing obtained by a massive imbalance in bargaining power is fine. For them there is no such thing as price-gouging or profiteering.
Pragmatists view all-the-market-will-bear pricing as the product of an environment that is so coercive that it negates the voluntary consent required to form a binding contract.
Pragmatists believe that prices should be based on the market-competition pricing model of cost plus a reasonable profit.
Unlimited Profit Vs. Enough Profit To Spur Innovation & Investment
Followers of the Law Of The Jungle philosophy believe that the goal of a political system should be to facilitate individuals and corporations obtaining unlimited power and unlimited wealth. For them, more is never enough.
Pragmatists believe that the goal of the system should be to provide an incentive for individuals and corporations to accrue enough power and wealth to be motivated to continue to innovate, invest, and produce new products and services but not so much as to motivate high prices, low wages, shoddy products and abusive terms and conditions.
Coercive Bargaining Power
Followers of the Law Of The Jungle philosophy believe that the government should never act to reduce or counterbalance a huge imbalance in bargaining power.
Pragmatists believe that a huge imbalance in bargaining power produces conduct that is toxic to a society and that the goal of the system should be to diminish coercive imbalances in bargaining power.
Reasonable Terms Vs. Coercive Terms
Followers of the Law Of The Jungle philosophy believe that all terms not gained by threat of violence should be allowed no matter how one-sided or onerous they may be.
Pragmatists believe that terms roughly equal to what two reasonable parties of equal bargaining power would have negotiated should be the foundation for commercial activity.
Balancing Bargaining Power With Political Power
The Law Of The Jungle people contend that restraining bargaining power through political power is unfair and should always be prohibited.
Pragmatists believe that imposing terms far beyond what two reasonable parties with equal bargaining power would have negotiated is coercive and economically inefficient, and thus those excessive terms should be prevented, limited or counterbalanced in some effective way.
A Philosophy That Designates Humans As Corporations’ Economic Prey
The Law Of The Jungle philosophy is the philosophy of the lions seeking to protect and justify their continued freedom to eat the antelopes.
It’s one thing to applaud the strength and cunning of a pack of wolves bringing down a bear. It’s another to applaud the strength and cunning of a multi-national corporation impoverishing a flock of high-school-graduate human customers just because it can.
While no one would seriously claim that the law of the jungle is fair because the antelopes are just as free to attack the lions as the lions are free to attack the antelopes, proponents of the Law Of The Jungle political system will tell you that the Law Of The Jungle System is fair because Joe Sixpack is just as free to negotiate prices and terms with United Airlines, Pfizer, Allstate and Wells Fargo as they are free to negotiate prices and terms with him.
The Law Of The Jungle may be applicable to the wilderness where the role of some animals is to be prey for others, but a society that designates humans of ordinary, average, non-remarkable skill, education, and talent as the natural economic prey of wealthy and powerful corporations is neither desirable, useful, nor efficient.
— David Grace (www.DavidGraceAuthor.com)
