Saturday, July 10, 2010

BUST THE TRUSTS: Tax the Rich to Break Up Demand-Side Monopolies

What’s the matter with monopolies, anyway?  Do we need anti-trust laws?

For one thing, capitalist theory goes, monopolies foul up the supply-and-demand dynamic that keeps a market economy honest. Industry delivers the most value and prosperity to the most people if we just leave pricing, production, and quality to be sorted out by supply and demand, goes the theory. Alternatively, a centrally planned, communist, economy can seem to work fine—if you’re one of the oligarchs in charge. But centralized controllers tend not to spread the wealth around, as centralized banking in the United States demonstrates.

Competition, in particular, is a key cog in the machine that distributes wealth, by keeping supply and demand in balance. Suppliers without competitors are free to disregard the demands of consumers. Monopolies have no incentive to keep prices down or product quality up or customer service responsive. They put a drag on the free-market economy by defeating the self-correcting mechanism of supply-and-demand.

So, a monopoly system flunks the test of delivering the full benefits of a market-based economy. But the traditional idea of a monopoly covers only the supply side. An equally pernicious market distortion can occur when there’s a demand-side monopoly. That’s when buying power (demand) is concentrated in too few private hands.

Demand-side monopolies are just as efficient at distorting markets and stalling the capitalist engine as are their supply-side counterparts. When personal fortunes become excessive, that side of the equation comes to represent the demands of too few people. Excessive concentration of private capital frustrates demands that otherwise would force suppliers to innovate, improve quality and keep prices low. The familiar “pump and dump” cycle of market manipulation illustrates another serious downside of demand-side monopolies, of large private fortunes.

When private fortunes enjoy overwhelming purchasing (demand) power, then the distinction between a market system and a centrally planned economy becomes a nominal one, because both will function in the same way. Both will fall under the dictates of the monopolistic oligarchy—whether it controls the demand side, the supply side, or both—and the general population will suffer impoverishment.

If anti-trust measures serve the greater good when enforced on the supply side, to break up large corporations, then they might work as remedies on the demand side, too, breaking up large private fortunes.

“Tax the rich” is just another way of saying, “break up demand-side monopolies.” It is a call to explode a shackle so that the invisible hand of the market can get back to work.