By David Grace (www.DavidGraceAuthor@gmail.com)
Communism: The First God That Failed
In 1949 six former communists published a collection of essays titled, The God That Failed, in which they explained their reasons for abandoning the communist ideology.
True believers and their political religions are like the mother who tells the police, “Oh no, my sweet Johnny would never do something like that.”
When three witnesses testify that they saw her son drag the victim into his car she replies, “They’re all lying.”
When she’s made to watch surveillance video showing Johnny raping the young woman, she shouts, “That hussy lured my boy. Johnny’s innocent.”
Like the disbelieving mother, communists promoted the mythology of their political religion because they believed in the moral values that communism was designed to promote, and for the sake of those beloved moral principles they kept lying to themselves that communism could be made to work.
Conservatives, libertarians and anarchists have their own God. It’s called The Market and they want to believe the fantasy that it will automatically deliver only quality products and reasonable terms of service without the need for consumer-protection laws or regulations.
This is a myth equivalent to the communists’ fantasy that central planning will spawn a prosperous and efficient economy.
Here’s why the Market is yet another God That Failed.
Libertarians’ Foundation Belief About The Market
One of the libertarians’ foundation beliefs is that almost all consumers will almost always act in their own rational, intelligent, and well-informed self-interest and that in doing so they will so reward the sellers of quality products that almost all producers will strive to deliver high-quality, low-priced, non-toxic goods and that those same rational, well-informed, self-interested consumers acting collectively from the same common motives will all so avoid toxic or defective products that those few sellers who offer defective products will be promptly driven out of business.
This theory is founded on the false assumption that the overwhelming majority of consumers act the same way at the same time from the same motives.
From this false assumption libertarians make a second false assumption — that consumers will always have Bargaining Power sufficient to obtain good products under reasonable terms without the need for consumer-protection laws, government standards, or safety or disclosure regulations.
From that second false assumption, libertarians wrongly conclude:
“We don’t need to regulate how big a late fee a bank can charge because the Market will keep the banks from charging too much. We don’t need a law requiring airlines not to keep you trapped on the runway because the Market will stop them from doing that. We don’t need a law . . . .” Well, you get the idea.
The libertarians’ theory that consumer-protection laws are unneeded is based on their failure to understand two facts:
- Consumers generally do not mostly make the same product choices driven by a shared policy of following their intelligent, well-reasoned, well-informed, economic self interest
- Consumers generally do not have material Bargaining Power relative to large sellers.
The Libertarians’ Fundamental Error About The Market
The libertarians’ fundamental error is that they completely misunderstand what the Market is. They think that the Market is a mechanism that itself determines prices and terms.
It is not.
As a physical newspaper is only a container for information, not the information itself, the Market is merely a venue where prices and terms are determined. It is not the mechanism that actually determines what those prices and terms will be.
Prices and terms are actually determined by the Bargaining Power of the buyers versus the Bargaining Power of the sellers. The Market is only the stage upon which that Bargaining Power competition takes place.
The existence of the stage does not guarantee the quality of the performance.
The Mere Existence Of The Market Guarantees Nothing
Libertarians think that the simple existence of a Market for goods and services guarantees that prices will be lower, quality to be higher and terms will be fairer without the need for consumer-protection legislation.
It does not.
Libertarians have wrongly assumed that the mere existence of a battlefield (the Market) where the two sides (sellers and buyers) are able to wage their Bargaining Power contest guarantees that the result of that contest, the price and terms, will be reasonable to the buyers. Of course, that is nonsense.
A product’s price and terms are represented by the final battle line between the two forces. That battle line, the price, quality and terms, may be deeply inside the Sellers’ territory, a victory for the consumers, or deeply inside the Buyers’ territory, a victory for the producers. The final result is determined by power, not fairness.
In most cases, in real world competitions between the Bargaining Power of insurance companies, banks, airlines, communications companies, large manufacturers and the like on one side and individual consumers on the other, the consumers lose.
The libertarians’ failure to understand the crucial difference between the Market being merely the venue where pricing decisions are made rather than being the actual source of those pricing decisions is the fountainhead from which many of the other errors in their philosophy flow.
Four Factors Determine Bargaining Power
Market Prices are the result of Bargaining Power. Bargaining power may be extreme on one side or the other depending on the factual situation.
Bargaining Power is determined by the answers to these four questions:
- How united or fragmented are the sellers?
- How badly do the sellers need to sell?
- How united or fragmented are the buyers?
- How badly do the buyers need to buy?
Libertarians Misunderstand The Nature Of Consumers’ Bargaining Power
Libertarians wrongly assume that almost all consumers make similar buying decisions at the same time, driven by the same motive, namely a well-informed, intelligent, logical, economic self-interest.
They therefore incorrectly conclude that most consumers will act in a unified manner and thus consumers exercise great Bargaining Power.
In almost all cases, there is no real shared or focused consumer Bargaining Power because each of these tens of millions of individual consumers makes different buying choices driven by different individual levels of intelligence, training, energy, time, commitment, interest, financial resources, access to information, and personality.
In 2016 Professor Richard Thaler, the winner of the 2017 Nobel prize in economics, said that old economic models wrongly assume that people are rational, unemotional, and self-controlled. In his view most people make poor financial decisions because humans are driven by emotion, not logic, and that people think short term, not long term.
“I believe that for the last 50 or 60 years, economists have devoted themselves to studying fictional creatures,” Thaler said. “They might as well be studying unicorns.”
Acting independently, those tens of millions of consumers are inevitably uncoordinated, scattered, and unfocused. Forming them into an effective force to increase their Bargaining Power is like trying to herd cats. Occasionally, you may get them to act as a mob, but unlike the unified front projected by the sellers, you will almost never be able to forge them into an army.
Without acting as a unified body AND ALSO without the ability to boycott the product in question for a material period of time, consumers will always lose the Bargaining Power contest to large, well-organized sellers.
The Market Does Not Always Cause Companies To Offer Good Products Rather Than Bad Ones
For two reasons, Libertarians/conservatives wrongly believe that the Market will always cause sellers to produce good products under fair terms:
- They overestimate the consumers’ Bargaining Power, and
- They assume that fearing consumer backlash from shoddy products, sellers will always choose to make better products in order to avoid losing sales when, in fact, sellers are not primarily motivated by sales volume but rather by profits
Sellers’ primary motivation is not the pursuit of market share, not the pursuit sales volume, not the pursuit of product quality, but rather the pursuit of the maximum profit over the minimum term. Selling fewer numbers of more profitable products results in greater profits.
The sellers’ pursuit of profit is restrained only by the buyers’ Bargaining Power or legislation.
While the fantasy is that sellers uniformly act under the principle that “Good Products Always Equal More Sales” in reality sellers know that “Shoddy Products And Onerous Terms Often Equal More Profit” and “often” happens often enough to damage millions of consumers.
There are at least two situations where bad products make more money than good ones.
Short-Term Profits Trump Long Term Losses
Companies don’t need to stay in business forever. They just need to stay in business long enough to make a big enough profit to justify starting the enterprise.
Without regulations, you can sell sugar water as infant apple juice (Beechnut once did this), make a large profit, then go out of business and start up again under another name, and another, and another.
Serial bad behavior under different identities is immensely profitable.
Long-Term Profits Can Be Made From Shoddy Products
If the customer base is big enough the market may never drive the seller of a defective or shoddy product into the red.
You can deliver bad products and make more money if there is a big enough pool of new customers to replace the ones you lose.
On a per-unit basis, bad products make more money than good ones. You don’t need many customers to make a substantial profit from bad products because their cost is low and their profit margin/unit is high.
As long as there’s always a new sucker to buy your defective, unregulated product, you can go on cheating people for years.
If a seller of shoddy products knows that he can make a sustained profit from new buyers he won’t act as fantasized by The Market Theory.
Lack Of Standards Lowers Product Quality
The profit motive often causes unregulated sellers to offer defective products because in the short run shoddy products are more profitable.
Government product standards benefit quality producers because they ensure a level playing field.
If a company can legally produce defective products then it will be able to undercut the price its competitors charge for quality products and still make more profit per unit sold. Those competitors will then be unable to compete unless they too lower their own quality standards.
Gresham’s Law has a far wider application than just in matters of currency.
If other baseball players are getting big contracts by juicing, then I’m going to have to start taking steroids in order to compete with them.
If other banks are getting rich by making subprime loans and selling them to Wall Street then in order to stay in the game I will also have to also make subprime loans in order to pump up my bottom line.
Profitable bad behavior often forces other producers to also engage in similar bad behavior. In this way, rather than deterring bad behavior, the Market often encourages it.
Cost/Benefit Analysis Can As Easily Encourage Bad Products As Good Ones
The underpinning of the libertarian idea that anticipation of greater sales volume and the fear of a lower sales volume will cause businesses to act responsibly is the assumption that a cost/benefit analysis will always tell a business that it will make more money by selling quality goods under fair terms than it will by selling shoddy goods under abusive terms.
This assumption is false. Cost/benefit analysis often tells a business that it will make more money by behaving badly depending on the time frame over which the analysis is calculated.
Libertarians don’t understand this because they think that there are only two elements in a cost/benefit analysis — likely cost and likely benefit — and that therefore all careful cost/benefit analyses will tell executives that good products make more money than bad ones. That is wrong because libertarians make a false assumption that the time frame used in the analysis will always be several years instead of several months.
See my article: Risk/Reward Analysis Doesn’t Work The Way You Think It Does
There are actually four elements in every cost/benefit analysis:
- The time period over which costs and benefits are calculated.
- The group of people who will suffer those costs and receive those benefits.
- The likely cost to that group of people over that time period.
- The likely benefit to that group of people over that time period.
The result of a cost/benefit analysis using a time frame of six months will often be completely opposite from the result of such an analysis using a time frame of six years.
Because people are often biased toward thinking in the short term and executives are also financially rewarded for generating short term profits, cost/benefit analysis often uses a short-term time frame.
The cost/benefit analysis for a policy of bad business behavior over the long term will often say, “Bad idea. Don’t do it” while the result of the same analysis using a time frame of twelve months will be, “Cha Ching! Yes! Do it!”
Seven Ways The Market Does Not Act To Eliminate Defective Or Dangerous Products
The conservatives’/libertarians’ idea is that we don’t need consumer-protection laws because people can always protect themselves by buying the good products and avoiding the bad ones.
In many situations, in the real world that isn’t true.
1. False, Nonexistent or Hidden Product Information
The consumer can’t pick the good products and avoid the bad ones without being able to tell one from the other. Without legally-mandated labeling, minimum standards, and required disclosures, the consumer has little or no ability to learn or understand the benefits and detriments of the various competing products.
2. Time Constraints Prevent Most Consumers from Vetting Most of Their Purchases.
For most products the consumer doesn’t have the time or energy required to separate the sheep from the goats.
Even if some level of disclosure is theoretically available, consumers are exposed to thousands of different products every week.
You reach for a can a tuna fish. Do you have time to research it’s safety, cleanliness, manufacturing conditions, nutritional value and compare and contrast them with those of the five other brands on the shelf? No.
You move five feet down the aisle. You reach for a bottle of salad dressing. Same situation. Multiply that by a hundred items in your shopping cart. Now add in your airline ticket, credit card agreement, checking account terms, etc.
People already have lives that take all their time.
There is no time left over for anyone, leastwise the vast majority of consumers, to investigate, evaluate, research and ponder even 10% of the hundreds of competing products and services that they buy every week.
3. Most Consumers Are Unable to Understand the Terms of Service For Many Products
Even if the disclosure information were provided, ordinary people don’t have the ability to even understand the terms of many common transactions, leastwise the ability to find better options even if they did exist.
Almost no consumers have the ability to understand the details of their car loan, retirement plan, cell phone contract, insurance policies or dozens or hundreds of other agreements and transactions which almost everyone enters into in an urban society.
Without understanding the terms in the take-it-or-leave-it, fine-print contracts the consumer has no ability to pick and choose between providers even assuming that the dominant providers didn’t all include the same onerous provisions.
4. Consumers Don’t Have the Power to Negotiate Better Terms
Even if they know what abusive terms they would like to have removed, people don’t have the ability or the power to obtain desired terms from the sellers.
Even if the consumer could understand the details of their home loan, credit card agreement, cell phone contract, medical insurance policy, automobile warranty, airline ticket, etc. the individual consumer does not have the technical ability to craft less abusive terms, even if the provider were willing to negotiate different terms, which the providers never are.
Most lawyers don’t have the specialized training needed to read, understand and modify these contracts leastwise the majority of customers. And even if they had that ability, these are “black box” take-it-or-leave-it contracts.
As a practical matter, Mr. Smith can’t go to the B of A, carefully review all the provisions of its car loan contract, discover some problems, then go to Wells Fargo, do the same analysis, then go to Chase, etc.
In the real world consumers have to just close their eyes and sign the contract. The market has no curative powers here.
5. The Dominant Producers May All Adopt the Same Consumer-unfriendly Terms
If all the products in a market segment have the same terms then there is no competitive Market, no opportunity for the consumer to choose a good product instead of a bad one.
If three credit-reporting agencies control 95% of the industry and if all of them have the same policy about not correcting false information, there is no market competition. The same with health insurance policies, bank loans, telephone providers and a host of other services.
Also, the consumer is often not the customer. The consumer may want changes to how his credit reports are handled but the banks and finance companies are the credit agencies’ customers, not the consumer. The consumer has zero Bargaining Power.
On a more fundamental level, it’s far more profitable for the two or three dominant companies in an industry to maintain abusive or excessive policies on fees and limitations on services than for one of them to break with the rest and offer different terms in the hope of getting a few more customers.
It’s far more profitable for each of them to all charge high fees than for one of them to give up the fees and have a few more customers.
Almost all businesses are motivated by profit, not sales volume.
6. A Legal Monopoly Prevents Market Competition
If only one company can legally sell a product then there is no Market-competition mechanism to protect the consumer.
The patented technology does not need to encompass the entire product. It might only involve a small but critical component or process used in the manufacture of the product, or a link in the chain of manufacturing or distribution, e.g. a patented process that is used only by one manufacturer can be sufficient to defeat competition in that product market.
7. Humans Usually Don’t Act In Their Intelligent, Rational, Well-Informed, Economic Self Interest
Counting on market competition to promote good products and weed out bad ones only has a chance at working if almost everyone picks all their products based intelligent, informed, rational, thoughtful, economic self-interest.
The Libertarians’ theory is that consumers all act the same way, as rational, intelligent, informed, thoughtful buyers and therefore consumers will automatically exercise massive Bargaining Power that will drive out bad products.
This is not how real people act at all.
By and large, people’s actions in almost every area of their lives are not based on intelligent, rational, enlightened self-interest. Many if not most people, much of the time, act on impulse and emotion.
If people principally acted on logic like Star Trek’s Mr. Spock they would not become drug addicts, drunk drivers, or embezzlers etc. Every day vast numbers of people make purchasing choices that are demonstrably not in their rational, intelligent, or enlightened self interest.
In the real world most people are not Mr. Spock, and they have neither the time, the information, the skills, nor the inclination to make most of their hundreds of buying decisions on informed, rational, intelligent, thoughtful, carefully-researched, unemotional, self-interest.
That fact alone gives the lie to the fantasy that the market will eliminate bad products without any need for consumer-protection laws.
Acting Properly Most Of The Time Isn’t Good Enough
Implicit in the idea that we don’t need consumer-protection legislation because market forces will always, eventually, drive out bad products, is the idea that a certain level of defective, dangerous, fraudulent or toxic products is acceptable.
“Yes, Acme is a terrible company and their product was junk and their customers were ripped off,” the libertarian will tell you, “but they went out of business so the market worked.”
What that blithe comment ignores is that while the unregulated Acme was still in business it defrauded thirteen million customers out of a quarter of a billion dollars. The libertarians’ answer, “Tough luck, sucker” is not an acceptable reply.
Suppose the Market for a particular product works as the libertarians promise 70%, 80% or even 90% of the time without any government regulations. That means that out of a million units sold, 100,000 or more will be defective, dangerous, or fatal. That means that hundreds or thousands of insurance claims will not be paid, that tens or hundreds or thousands of people will be cheated, sickened or damaged.
In an industrialized society, a large number of people’s lives, health and fortunes are at stake and supplying effective, non-toxic products and services most of the time is absolutely not good enough.
The Market Price Isn’t Necessarily An “Accurate” “Correct” Or “Proper” Price
There’s an unspoken belief that Market prices/terms are always the “correct” prices/terms or the “right” prices/terms or the “fair” prices/terms. There’s a feeling of morality or at least propriety attached to market prices/terms as if it’s “right” to pay the market price and “wrong” to want a lower price or better terms than the Market price/terms.
This is completely wrong. Market prices are inherently neither right nor wrong, neither correct nor incorrect.
This idea that the Market price is always the “correct” price is, I think, rooted in the fallacy that market prices are set by the “law” of supply and demand. This is false for two reasons:
- Market prices are not set by the law of supply and demand*. In point of fact, they are actually, primarily, set by the bargaining power of the respective buyers and sellers, and
- The word “law” makes people feel as if the Market price is determined by an immutable principle of nature and that questioning that price is like refusing to acknowledge the inevitability of the laws of nature.
[*For a detailed examination of how real-world prices are actually determined, see my column:
Real-World Limitations On Bargaining Power, Not The Law Of Supply & Demand, Are The Primary Reasons For The Low Price For Unskilled Labor. Supply And Demand Are Only Two Of The Many Factors That Affect Bargaining Power, And Bargaining Power, Not Supply & Demand, Is The Main Factor That Determines Price.]
For these two reasons many people have the feeling that a refusal to accept the Market price/terms is equivalent to standing on the sea shore and ordering the tide not to come in.
Even if it were true that the “law” of supply and demand alone actually does set the price for products and services (and it doesn’t), accepting the prices set by that “law” is not required as either a moral obligation nor as a sign of your obedience to the laws of Nature.
When an avalanche powered and directed by the Law of Gravity hurtles down a mountainside and destroys a village we don’t say, “It’s right and good that happened because that’s how the Law of Gravity works.”
If the village elders realized that an avalanche was imminent and they proposed breaking up the ledge of snow or diverting the impending avalanche away from the village nobody would object with the argument that doing so would be wrong because it would be an attempt to defy the Law of Gravity.
Just because the Law of Gravity says that if I fall out of a plane that I will be killed, is no reason not to thwart the Law of Gravity by wearing a parachute.
As a real-world example, for several years the market price for a device that injects epinephrine to counteract a life-threatening allergic reaction has been extremely high in relation to its cost of production and distribution. In no way would any rational person consider the price for that device to be a “correct” “proper” or “fair” price even though it is the Market Price.
You could say the same for the cost today of insulin, digitalis, and numerous other products.
Neither fairness nor correctness enter into Market price calculations because neither fairness nor correctness are elements that determine the level of the buyers’ or sellers’ bargaining power.
What Do We See In The Real World?
If we test the libertarians’ theories in the real world, has it been anyone’s experience that banks, insurance companies, airlines, etc. generally treat their customers better than the minimum level required by existing consumer-protection laws?
How many times have we heard a company respond to some charge with the statement: “Our product meets all federal requirements”? In other words, “We did the very least we could possibly get away with without being prosecuted.”
On its face, the theory that “We don’t need any consumer-protection laws because consumers usually act as a group which is powerful enough to force businesses to play nice” is ridiculous.
Consumers Don’t Deserve To Be Mistreated & Overcharged
Implicit in the libertarian philosophy is the moral judgment that those lazy, stupid, foolish or emotionally driven consumers who buy shoddy or defective products deserve to be cheated or injured as the reward for their stupid or lazy buying habits.
In short, the moral judgment is that people are supposed to always act like Star Trek’s Mr. Spock and if they don’t then they deserve to be cheated, mistreated and overcharged.
Here’s a flash:
- Humans aren’t like Mr. Spock and they never were.
- People should be expected to act like people, not emotionless androids.
- Women don’t deserve to get beaten up because they’ve foolishly picked the wrong husband.
- People don’t deserve to get robbed because they foolishly picked the wrong neighborhood to drive through.
- People don’t deserve to be defrauded because they foolishly believed the con man’s lies.
- People don’t deserve to be sold shoddy, defective, or dangerous products because they didn’t discover its crappy nature before they purchased it.
Unified Action Through Proxies
Is there a way that consumers can act in a unified manner and thus increase their Bargaining Power?
While libertarians don’t oppose the idea of buyers forming a voluntary organization, for example, a boycott, they’ve adopted it as an element of dogma that consumers must not be allowed to express their collective power through the ballot box.
In the catechism of the libertarians’ political religion, consumers’ collective action is only legitimate if it is conducted privately, person to person, rather than through the proxies of their elected representatives. That is an artificial and irrational rule.
Most American travelers believe that airline seats are too small and too close together, but as independent consumers they have no mechanism to bargain for and force a change in the airlines’ product.
If they could act in a united way consumers would use their power to force the airlines to install better seats, farther apart, but there is no effective mechanism for them to do that other than the ballot box.
They can elect representatives who pass legislation requiring bigger seats farther apart.
Why shouldn’t consumers be able to exercise their power through proxies, namely, elected legislators who will negotiate for the desired terms of sale and service on their behalf?
If the majority of airline travelers want larger seats what difference does it make if that majority of buyers obtains that improved product via a different forum?
It’s the same result on the same sellers from the same desires of the same buyers. The only difference is that the result was obtained by the buyers’ exertion of their power in an alternate forum, the ballot box.
The ballot box and the threat of the ballot box is the only effective Bargaining Power tool available to consumers.
The Bottom Line
Claiming that consumer-protection laws are largely unnecessary because the Market will automatically keep all sellers honest defies all real-world experience.
Claiming that the Market alone will promptly punish bad practices is about as valid as claiming that police and prisons are unnecessary because fear of God’s punishment will keep people from committing crimes and that God will punish those few wrongdoers who don’t follow his rules.
God and the Market may keep some people from committing some bad actions some of the time but not so many that we would be anything but utter morons to disband the police and close the prisons or abandon the creation of and enforcement of consumer-protection laws.
The true source of good products and services is the buyers’ Bargaining Power being equal to or in excess of the sellers’ Bargaining Power and that is often not the case.
In many circumstances the only effective, practical way for consumers’ to exercise sufficient power to protect themselves from sellers’ abuses is for them to exert their power through the ballot box or through the establishment of Customer Controlled Companies (CCCs).
–David Grace (www.DavidGraceAuthor@gmail.com)