Monday, November 16, 2009

The Paradox of Competition

One of the key assumptions of the free market approach to Economics is the benefit of competition in ensuring greater efficiency in the provision of goods and services. And indeed from one valid perspective this has considerable merit. For example look at how the airline industry was revolutionised (for the better) through greater deregulation allowing private operators to compete against the - formerly - state owned airlines!

However there are subtle problems inherent in this approach. Some companies will always for various reasons be "more equal" than others with a strong incentive to use inherent advantages to achieve a more permanent dominance in their sector.

For example we might view Microsoft in this light. Now, one can theoretically argue that any firm is free to enter the software sector and compete with Microsoft. However Microsoft has already built up such a strong position that it would not be able to do so on equal terms. So it is only the possibility of new technological revolution - led by another pioneer firm - such as Google that can really hope to threaten its position.

So if we are to ensure that firms such as Microsoft do not abuse market power we need more rather than less regulation (which goes against free market instincts).

However there is an even bigger potential problem which has received very little attention. Once again the benefit of free markets is based on the preservation of competition. However for the the free market system - as both an economic and political ideology - since the ending of Communism in the early 90's, there has been no such competition.

Indeed one can justifiably argue that the near collapse of the international financial crisis recently has been due to the unhealthy dominance of just one ideological system (devoted to unfettered market competition).

There are inherent weaknesses in the capitalist system that remain continually ignored. Unfortunately despite this latest near miss I expect in the short-term that there will be an attempt to return to business as normal.

If it is justifiably considered unwise to have markets without competition, it is even more unwise in ideological terms to then attempt to maintain a monopoly for the market system!

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