An Observation on Our Economic System

There was a day in the American colonies when the government decided how much profit a firm could make. That was definitely not a 'free market', yet America thrived because our economy was largely agricultural and to some extent based on barter.

Later when America became industrialized and more people were employed to work by/for companies, the markets became more sophisticated, but were still regulated in significant ways by government. Still, the world of business was free for robber barons to buy politicians and the laws they wrote and controlled resources their competitors needed and the competition could be quite fierce. Fortunes were made, even as employees were being paid better and better. America flourished.

In the early years of my life the idea of more accurate product pricing was still new and based somewhat on the cost of production and "a fair markup". In those days America did well, unions existed, and America was mostly a domestic economy. The nation's wealth was being shared almost equally between workers and companies.

Then a new idea came to the fore: pushing government back to let businesses compete and letting market rules be limited to contract enforcement. This was a slow-changing process, but government bent to the will of the rich. Even as late as the 1970s the trucking, communications, airlines, stock markets, and other things were quite regulated. Ma Bell still ruled the telephones of America.

As government deregulated, something surprising began to happen -- unions began to decline because businesses moved from states where unions were prevalent to other states, and eventually they moved out of the U.S. altogether. They hated the strictures of unions and government. They wanted to be free from all hindrances (like paying the kinds of wages which had been typical for decades). They wanted to reduce their costs. This also meant reducing the numbers of people working for them in America. Needless to say, this was a dramatically different concept than what had gone before.

It used to be that a growing powerhouse company was steadily employing more people and offering higher wages to get the best people. Now they were cutting the labor force and claiming this made the company more profitable. They also introduced many more computers as the microcomputer industry boomed. They also began to employ more women whom they could pay lower wages. Maybe the nation's GDP was doing better, but individuals were frustrated, unemployed, underpaid, going nowhere. That condition has largely remained for several decades now.

What's the solution to the problem of too many unemployed people? Even as late as the 2012 presidential election the Republican party proposed spending more money on the military, as an economic stimulus plan. That is bizarre and not helpful.

So, let's look at the situation a bit more closely and understand it better.

When companies moved from the "cost plus a markup percentage" model to the "charge what can be paid by the customer" model it meant prices would be set differently. It meant employee pay was no longer a neutral factor, but a cost to be minimized. It meant that the number of employees indicated how much drag there was on a more pure company model of selling nothing for all the money in the world (that is their ideal). Once companies had computers and this new economic model and enough money to buy politicians they could change the world -- and they have.

They say employee pay is decided by the market and when globalization was in full-swing the market only required them to pay pennies for foreign labor rather than tens of dollars for American labor. It was almost like having slave labor (and indeed some people claimed there were slaves doing some of the work).

So, the system was putting more money into the pockets of the company stockholders and leaving more people unemployed. How can this be understood in terms the field of economics would use?

Once the price began to be set using the Demand Curve concept it always meant that those below the curve, those who couldn't afford to pay the price would be left without that product. If sellers could set various price points specifically for certain customers they could milk the market for every penny available. So, they began to price airline seats and hotel rooms at different rates depending on the day of the week, how long you would require the product and with other critiera which helped companies distinguish between the deep-pocketed business traveler and the normal family travellers. They began to offer a basic price and then higher prices for every little amenity to let ordinary people afford a hotel room, but for a business traveler who had corporate deep-pockets they would have the high-priced amenities available. For automobiles which use gasoline they would charge one price and diesel fuel which is primarily for big trucks they could charge differently. Not long ago (within the last 10 years) they charged corporate truckers less for diesel than the gasoline using family driver. That flipped and now diesel is higher by about $0.40/gallon.

So, they are essentially designing a pricing structure which gouges everybody at the rate they can pay. If you are in a business where your material costs are dictated by someone else you might not have much pricing flexibility for your own finished products. If you have high costs to produce the market may not be elastic enough to pay that.

In the new area of 'green energy' wind turbines and solar panels begin with high costs and for them to be self-sufficient they are requiring assistance from government and corporate customers (or wealthy individuals) and science to produce new technologies which will be cheaper in the near future.

It's an exciting industry to follow because the new technological developments have been appearing and costs have been declining, so that more and more it appears these will become very important energy sources for the future. Their costs have declined sufficient that no new nuclear or coal-burning electricity plants are being built: they won't be competititve in the near future, so there's no reason to invest for the long-term. That's market competition in action.

Another example is diamonds. They are expensive, and have been for a long long time, not because they aren't plentiful or because they're expensive to produce, but because the people controlling that industry ensure few of them get to market. They artificially control the supply and that combined with the natural delight people take in these sparkling rocks ensures they can price them to make a very nice profit. If they were priced according to supply or cost they would be very cheap.

So, why doesn't market competition hold down prices in the healthcare field?

First, all the companies are pricing to get the maximum possible and they aren't competing to bring costs down, but to raise them higher. Second, they have customers who require care when they're ill and the ER (Emergency Room) care in hospitals is naturally the most expensive care there is. Seeing a specialist doctor is also very expensive. Naturally the advent of the "specialist" was about the time in the 1960s or 70s when the new economic model came to the fore. Doctors ensured they had plenty of reason to charge high prices by raising the cost of getting a medical education and by restricting the number of medical college openings were available to maintain a limit on the number of doctors offering a service. Market control is a powerful mechanism. Having a captive customer (like a dying patient) is also powerful. It's no wonder Americans pay more than 15% more for healthcare than OECD nations and we get nothing more for that money spent.

How much would companies charge for air or water if they could own that? The sky is the limit. Everybody needs those and everybody would die without them, so we would all pay every penny and offer to pay more for those. If we require government to regulate those, then why don't we require government to regulate healthcare? People require that too.

A modern economy is a complicated thing, but when there are a handful of basic concepts which companies and governments use to run the thing, then it's important to know how they work or don't work. Today workers are suffering tremendously in America, but they say the stock market is at an all-time high and the national GDP is great. Why do we allow the American worker to suffer being at the mercy of the companies? Can this kind of economy be sustainable when the inevitable ups and downs of the world bring us another recession? How many people must be unemployed for the system to work and for a handful of people to be wealthy beyond anyone's wildest imagination? It seems to me that a system which has so much wealth, but so much despair, is just not good.

Yet, there is no thought of changing it in Washington or in the corporate boardrooms. Nobody (currently) seems to have a clue how it could be changed to keep it profitable and yet to make everyone's lives better. The thought of a digital blockchain-based currencies should terrify us all because a private economy where the government doesn't know transactions are occurring or where individuals are being paid or even where monies are being held (in banks and nations) could mean the end of our current systems of raising revenues for government operations.

It isn't yet a Brave New World. At the moment it seems pretty terrifying.