Tag Archives: economics

Antithesis of Market Capitalism– Market Failure: Government Intervention Vs. The Invisible Hand…

Market failure: As comfortable as you may be with the successes of market capitalism, you must also have an uneasiness about its failures; rising wealth inequality, long-term unemployment, threats to environment, out of control health care costs, workers inequality, consumer protection…

Hence, although free markets can fairly and efficiently distribute most goods and services, it may not be best system for all goods and services… According to Stan Sorscher; you can arrange the conventional mechanisms for market failure into two broad categories: Imperfect Markets and Misaligned Interests:

Imperfect (or Defective) Markets, e.g.; market domination, asymmetric information, inequity… Monopoly is an example of market failure by market domination; a monopoly can dominate a market and limiting choice for consumers… Asymmetric information is another example of a defective or imperfect market, which means no one person or group has insider information– ideally all buyers and sellers have the same information…

And another defect is inequity— markets often produce inequity… But, some economists object when they hear ‘inequity’ characterized as market failure. Rather, they hold that markets are not responsible for fairness. Fairness is a political or social issue, not an economic one. Nevertheless, some market rules magnify inequality, while other market rules results in greater fairness…

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Then there are– Misaligned Interests, e.g.; Externalities, Moral hazard… Economists believe that self-interest drives behavior, and market failure can occur when the public interest is not aligned with narrow interests of market decision-makers…

Externalities is the term used to describe shifting of costs or benefits outside of the market between buyer and seller, e.g.; carbon dioxide is dumped into the atmosphere, where the public pays extraordinary environmental costs, whereas the producer of carbon dioxide pays nothing for the free use of the atmosphere– this is classic market failure by externalities…

Moral hazard is when someone or an entity makes a market decision and someone else pays for it, e.g.; if a bank lends money to a borrower knowing that they cannot repay the loan and sells the bad loan to an investor, and this action insulates the bank from any liability, then the bank is guilty of a moral hazard…

In order to reduce or eliminate market failures, government can intervene and choose two basic strategies: One strategy is to implement policies that changes the behavior of consumers and producers by using price mechanism, e.g.; this could mean increasing the price of ‘harmful’ products, through taxation, and providing subsidies for ‘beneficial’ products. In this way, behavior is changed through financial incentives, much the same way that markets work to allocate resources…

Another strategy is to use force of the law to change or control unwanted behavior, e.g.; license sale of alcohol, tax sale of cigarettes, penalize polluters… However, Milton Friedman’s concept is skeptical of government’s ability to correct market failures through interventionist policies.. in fact, government often does not truly know what the ‘right outcome’ is in most cases, and government failure should be just as much a concern as market failure; therefore societal welfare would be best met by finding market-based solutions to misallocation of resources that sometimes arises under conditions in which externalities exist…

In the article Market Economies by Thomas Metcalf writes: Market economies are based on the laws of supply and demand; and left unfettered by government intervention and regulation, a market will theoretically find an equilibrium… Market economies are based on the concept that people are free to make their own choices about what services or products to purchase. In theory, market economies are efficient because a capitalist market system aims to produce goods with a minimum of wasted resources…

Rational people do not throw away resources or money, so producers work to maximize their profits by minimizing waste… Consumers likewise spend their money in ways that maximize their satisfaction… However, the downside of a market economy is that costs associated with production are not always paid by the supplier, for example; if pollution is a by-product of manufacturing it may not be factored into the price that a consumer pays for the product; these external elements are passed on to others who are not party to the production or sale of the product…

Also, market outcomes may not be equitable, e.g.; a rock star earns substantially more than a teacher because fans are willing to pay much more money for concert tickets, than for teachers salaries… Nevertheless, this outcome reflects the value that a market economy places on different services; a market economy produces what people want, and not necessarily what they need… Also, a market economy is ill-equipped to handle, e.g.; national defense, regulation of industrial safety, environmental protection in areas, such as; utilities, pharmaceuticals, food production, energy…

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In the article Market Failure: The Back of the Invisible Hand by Ernest Partridge writes: Some economists insist that the free unregulated markets always brings about the socially optimum result, hence the government should never interfere with markets. Furthermore, government should not own property, which is better managed by private individuals or groups:

In short: let the free market decide… An extension is the mysterious ‘invisible hand’ of the free market, which will promote the best wishes of everyone… (note: the concept of ‘the invisible hand’ has its origin in Adam Smith’s Wealth of Nations.) But practical experience tells us otherwise… it’s obvious that in numerous undeniable cases the unregulated free market fails to make everyone better off… And the reasons for the failure of free markets to produce optimal results for many societal issues is ingrained in its very nature– the driver for free markets is profits…

According to William Vanderbilt; the public be damned; I work for stockholders… Moreover individual entrepreneurs and workers also want and strive for what is best for themselves. Indeed, as any neo-classical economist will insist, personal satisfactions (i.e., profits…) is what drive market economy. Also, implicit in ‘market absolutism’ is the belief that– what is best for individuals and  corporations is also best for society at large…

Market absolutism is a dogma: Market– good; Government– bad: Period! Those who are not captivated by the dogma of ‘market absolutism’ know better: They trust the scientists who say that– pesticides damage the ecosystem, CFCs erode ozone in the stratosphere, continuing use of fossil fuels is changing the climate, smoking causes lung cancer and premature death (the cigarette packs tell us so, not because the tobacco companies warn us out of a sense of social responsibility, but because the government requires them to print the warnings)…

Government regulation, and laws restricting commercial activity, arise, not from dogma, but through accumulated practical experience and political action. As human institutions they are imperfect, which means, to be sure, they are sometimes excessive… According to James Galbraith; markets have their place; they are reasonably open and orderly way to assure the distribution of services and goods. They are not a general formula for expression of social will and the working out of social problems…

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Most everyone has an opinion as to what’s wrong with ‘free markets’, and what government should do about it: On one end of the spectrum are those who remain persuaded that government intervention in the economy inevitably distorts private incentives, and thus that ‘free markets’ function best when they are left alone.

In other words; If it ain’t broke: Don’t fix it… On other end are those who believe that government must be assertive to curb market excesses and rein in corporate power. In other words; It’s broken: Fix it now… A technocratic middle reconciles these two extreme viewpoints by invoking the concept of ‘market failure’. The logic is presumably simply: a role for government exists if, and only if, a market failure exists.

The burden for policy lies in establishing the nature of the market failure, and then specifying the mechanisms by which it can be corrected… Whereas, many have an exaggerated opinion of what markets can achieve. They think of markets (and more so, free markets) as some magical force that acts in the best interests of society and makes all people better off in the end…

Consider that a market is not a moral entity that can be judged as right or wrong; a market cannot make decisions or take actions; a market is simply, information sharing. People provide information about things they have for sale, and other people can choose to buy it or not, but the market itself is not a moral actor, because it does not act or make decisions…

Market failure exists when the competitive outcome of markets is not efficient from the point of view of society as a whole. This is usually because the benefits that the free-market confers on individuals or businesses carrying out a particular activity diverge from the benefits to society as a whole… Some experts suggest that market failure is an economic concept that justifies government intervention in economic activities… Others suggest that market failure considers health of the whole economy and not just isolated economic actors…

According to some economists; one of the issues with government intervention is that it can also contribute directly to the failure, and thus makes the problem worse by failing to allocate resources appropriately… Knowing how and when to intervene is a difficult decision that is complicated by political and social issues, and the people and institutions involved in the decision-making…

Government justifies intervention in the name of public interest, whereas some economists argue that government should not even attempt to solve market failures, because the costs of government failure might be worse than the market failures it attempts to fix…

Marketing Authorities and Economists Think Differently: How They View– Market Structure Vs. Market Segmentation…

Market structure: Many companies look to market structure and market segmentation to better understand the composition of markets and to identify and profile groups of people (i.e., potential customers) to grow their business… but is  ‘market structure’ the same as ‘market segmentation’ or do they differ?

Market structure is often defined as interconnected characteristics of a market, such as; relative strength of buyers and sellers, degree of collusion, types of competition, differentiation, barriers of entry… Whereas, market segmentation is defined as process of subdividing, targeting a mostly homogenous market into clearly identifiable segments having similar need, want, characteristic, demand… In segmentation the objective is to design a market mix that precisely matches the expectations of the customers…

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According to Jeanne Grunert; economists and marketing people each define the terms a bit differently: Economists look at the overall market structure with the goal of defining and predicting consumer behavior… Whereas, marketing professionals seek to define the market structure to create competitive strategies as part of their overall marketing plan…

Economists examine market structure to help with decision-making and they seek to analyze broad trends in order to better understand consumer motivation… While marketers also look at trends, but they defer in that economists tend to focus more on the big picture… The economist want to know more about how this information affects large segments of various populations. Whereas, marketing is keen to understand the information, but apply it to their company’s specific marketing strategy…

Economist define market structure according to how an industry– that’s serving a market– is organized, and these structures typically include:

  • Monopolistic competition: Type of imperfect competition such that companies sell products, services… that are not identical with each other, but competitive… they are differentiated from each other by branding, pricing, quality… hence, they are not perfect substitutes…
  • Oligopoly: Market is controlled by small number of companies that together have the majority of market share… Duopoly: Special case of oligopoly with only two controlling the market.
  • Monopsony: Only one buyer in a market…
  • Oligopsony: Many sellers but meet only a few buyers…
  • Monopoly: Only one seller of a product, service…  Natural monopoly: Serves the entire market demand, typically at lower cost than any combination of two or smaller, and more specialized companies…
  • Perfect competition: No barriers to entry, an unlimited number of sellers and buyers, and a perfectly elastic demand curve…

Marketing, in contrast, defines market structure a little differently, when they know that an industry is organized as describe as one of the above restructures, i.e.,  oligopoly, perfect competitive… typically they will dig deeper into industry, searching to better understand other factors, such as; nature of competition, vulnerability, customer behavior, price sensitivity… Understanding the market structure and landscape helps marketers develop relevant and effective marketing strategies… Hence, defining a structure from marketing perspective tends to seek answers to questions, such as:

  • What are the key motivational drivers that determine how, why, what… consumers buy?
  • How do product, service… packaging, features, brand, pricing… and other factors play into the consumer decision to buy?
  • What and where are the opportunities for growth in an industry through major innovation?
  • What are the key market differentiators and competitive factors?
  • Where are the key market opportunities, threats, risks?

Defining market structure isn’t always easy. Definitions remain fluid and subject to change even among various functions-groups within a company…  and it’s common that different companies view the same market structure differently… As may be observed, both marketing and economists confuse the terms; segments and structures, so much so that the line between the two is nearly obliterated. You can have a conversation with some of these people and, at the end, not only will you not know what they are talking about, but you feel completely confused about both subjects…

In the article What Can Economics Learn From Marketing Market Structure Analysis?  by Charles Fischer writes: The concept of market structure is central to both economics and marketing. The problem for economists and marketing professionals is that a meaningful operational definition of market structure is elusive… Each discipline takes a different methodological approach toward the definition… and each has its own strengths, limitations.

Economics is concerned with broad socio-economic,  micro-economic issues, e.g., competitive fairness, predatory pricing… Whereas, marketing is more concerned about the managerial aspects of market structure… Although, each discipline touches on the primary domain of the other, the primary distinction between the two is just a matter of relative emphasis… 

In economics, markets are classified according to the structure of the industry serving the market… Industry structure is categorized on the basis of market structure variables which are believed to determine the extent and characteristics of competition… In the traditional framework, these structural variables are distilled into the following taxonomy of market structures:

  • Perfect Competition: Many sellers of a standardized product, service…
  • Monopolistic Competition: Many sellers of a differentiated product, service…
  • Oligopoly: Few sellers of a standardized or differentiated product, service…
  • Monopoly: Single seller of a product, service… for which there is no close substitute…

These four market structures each represent an abstract (generic) characterization of a type of real market… Market structure is very important because it affects business outcome through its impact on the– motivations, opportunities and decisions of economic players participating in the market… A key element of the economic market structure is product substitutability, which is strategically linked to market definition… however, this also complicated by the fact that consumers have their own perceptions of product substitutability…

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In the article Market Structure Analysis by Steven Struhl writes: Some of the confusion surrounding market structures arises from the fact that two contrasting traditions of– marketing and economics– have embraced it… Comparing and contrasting the marketing vs. economic methods are briefly summarized as:

  • Marketing approach: Basic elements– analyze the relationships among– target markets and segmentation, potential customers, competing brands, risks, opportunities, business strengths and weaknesses, pricing strategy…
  • Economic approach: Basic elements– analyze the trends of buyers and sellers, extent to which products, services… are substitutable, analysis of comparative costs, market barriers to entry, extent of mutual interdependence– extent to which buyers and sellers depend on each other…

One important point that the economists have in common with marketers is that they include demand elasticity and cross-demand elasticity (or words meaning the same thing) in market structures. Also, how economists get to their answers is usually very different from marketing practices, for example; economists can do much of their work without ever talking to an actual person, and some even act as if asking people what they do or think is, in fact, superfluous to understanding what is happening in a marketplace.

This may seem slightly ridiculous, but we should remember that these people win ‘Nobel’ prizes, while humble marketers and market researchers do not, but perhaps they are onto something… The basic consideration in market analyses is reaching a definition of exactly what constitutes the market… Traditionally this is done by focusing on these factors:

  • Degree to which products, services… can substitute for each other, based on consumer perceptions…
  • Extent to which products, services… are intended to serve similar purposes…
  • Impact of products, services… on each other and as measured by elasticity of demand and its effects on each other, as well as cross-elasticity

In typical marketing approaches, it always start with the consumers… but, to reach an overall market structure, the needs of each consumer must be aggregated… This is an aggregated list of each consumer’s– behaviors, perceptions… The  two main aggregation methods are:

  • Behavioral aggregation; (linked to studying market impact)…
  • Subjective aggregation; (linked to the extent to which products, services… can substitute for each other, ratings, opinions, and perceptions)…

Aggregation is problematic: One question often asked is– what happens when aggregation consists of many idiosyncratic consumer opinions; in other words, how do you meaningfully aggregate all the individual consumer choices or opinions when these often reflect great diversity?  Since most marketing authorities do not consider market structures to be the same as market segments, hence finding segments almost always is taken to mean looking for groups that fit these following criteria:

  • Defined product, service… related needs different from those of all other groups…
  • Characterized or identified specific customer– needs, wants…
  • Reachable selectively (or targeted) through communications and marketing efforts…

Different segments of a market, may structure a market differently, since their needs are different… A clear understanding of a market’s structure and segmentation is paramount to understanding it’s– needs, buying processes, preferences, value perceptions, revenue potential… but then, as important, translating these insights into an actionable strategy is precursor to developing a successful business…

Manifesto or False Assumptions or Rubbish: Web Economy to Reach $4.2 Trillion in a World Economy of Over $80 Trillion…

Leaving aside the question of whether economics has ever accurately predicted anything, the argument that ‘the more significant the theory, the more unrealistic are the assumptions’ is simply bad philosophy. ~Steve Keen

The World Economy in 2010 was worth $74.007 trillion in GDP terms, using the Purchasing Price Parity (PPP) method of valuation. This is expected to grow to $78.092 trillion in 2011. Fueled by the rapid growth of mobile Internet access, the value of Web Economy will nearly double, from $2.3 trillion to $4.2 trillion in G20 countries by 2016, in a report by the  Boston Consulting Group (BCG). “If the report’s predictions are correct, then speaking of a ‘web economy’ will soon become redundant terminology, and this could be reached as early as 2020” says David Dean, managing director at BCG.

The Web is the largest human information construct in history. The Web has transformed the way we live, communicate, entertain, work, and doing research. Nowadays, more than 2 billions users, worldwide, are accessing some trillion web pages, spending 700 million minutes per month in Facebook, ordering 73 items per second in Amazon, and sending 1.3 exabytes from mobile Web devices.

During the last decade, the Web has been metamorphosed from an information software system to a major socio-technical  ecosystem and this has transformed and transforms human societies. Web technologies have been proven to be an enormous stimulus for market innovation, economic growth, social discourse and the free flow of ideas. After the hard lesson of the dot-com bubble in early 2000’s, the Web economy is now an important part of the real economy, bigger and more robust with new services ranging from search to social networking, virtual entertainment and giant multi-stores.

But this also raises concerns, notably in the area of reliability, scalability, security and openness of access. If global supply chain management depends on the Web, then a breakdown or security breach could cause major economic damage. If people’s personal data are compromised online, it may breach their privacy or affect many other aspects of their lives. Looking forward, the Web is poised to connect an ever-greater number of users, objects and information infrastructures.

This means that policy framework governing its use and development also needs to be adaptable, carefully crafted and coordinated across policy domains, borders and multiple stakeholder communities…

In the report The Digital Manifesto: How Companies and Countries Can Win in the Digital Economy” by Boston Consulting Group (BCG) writes: Businesses will be fundamentally transformed over the next five years. “No company or country can afford to ignore this development. Every business needs to go digital. The ‘new’ Internet is no longer largely Western society, accessed from your PC. It is now global, ubiquitous, and participatory said David Dean, coauthor of the report. Consumers are starting to derive extraordinary value from the Internet, according to the BCG report.

The uninterrupted growth of the Internet economy is not a foregone conclusion and businesses need to take an adaptive approach to strategy: Managing their legacy businesses while creating new ones, developing new capabilities, organizational structures, and cultures. “We are still only at the beginning of realizing the potential of the Internet. To compete, companies need to strengthen what we call their digital balance sheets by building their digital assets and reining in their digital liabilities to create digital advantage” said Paul Zwillenberg, coauthor of the report.

The report also urges that governments must take actions that support rather than impede progress. “In setting policies, government should be guided by what is needed to encourage growth, innovation, and consumer choice rather than by dogma. In most areas, governments should let the market sort out the winners and losers” said Zwillenberg.

The biggest drivers are; dramatic increase in the number of users around the globe, rise of emerging markets, increasing popularity of mobile devices–especially smart phones, and growth of social media. The economic impact of the Internet will grow from 1.9 billion users in 2010 to a projected 3 billion users in 2016, about 45% of the world’s population.

In the article Understanding the Economic Potential of the Web Economy” by Tim Weber writes: The Boston Consulting Group (BCG) report’s projected numbers look impressive, but they are still just a fraction of the global economy.We don’t fill empty holes on websites any more, we engage customers” says Michael Lazerow, CEO of Buddymedia.  In 2010, the internet economy in the G20 group of leading nations was worth $2.3 trillion, but a mere 4.1% of the total size of all G20 economies.

The Boston Consulting Group researchers speak of the emergence of a ‘new internet’ where: web access will not be a luxury any more, and the majority of web users will live in emerging markets (within four years, China is expected to be home to 800 million people using the Internet; that is more than the United States, India, France, Germany and the UK taken together) about 80% of all Internet users will access the web from a mobile and the Internet will go social and allow customers and companies to engage with each other directly.

This trend will be coupled with another huge technology shift that will fundamentally change the nature of how to run a business – the rise of the so-called ‘internet of things’, where all kinds of devices, widgets, sensors… will be connected to the web. “Understanding the economic potential of the web should be an urgent priority for leaders… [with] a powerful case for countries and companies to get online and reap the rewards of an age of data says Patrick Pichette, Google CFO. IBM estimates that by 2015, one trillion devices will be internet-connected.

However, what the BCG research fails to capture is the balance of employment between new, more efficient digital companies and old-style businesses. A problem with BCG’s research is that it’s difficult to define the actual digital economy: “During the research we discovered very quickly that there is no approved way of measuring the Internet economy” says David Dean. Official statistics simply do not capture the sideways move of old technologies into the digital world; for example, when a widget maker starts upgrading its devices so that they can be hooked up to the internet…

In the article The Great Transformer: The Impact of the Internet on Economic Growth and Prosperity by James Manyika and Charles Roxburgh write: The Internet is changing the way we work, socialize, create and share information, and organize the flow of people, ideas, and things around the globe. Yet the magnitude of this transformation is still underappreciated. The Internet accounted for 21% of the GDP growth in mature economies over the past 5 years.

In that time, we went from a few thousand students accessing Facebook to more than 800 million users around the world, including many leading firms, who regularly update their pages and share content. While large enterprises and national economies have reaped major benefits from this technological revolution and individual consumers; small upstart entrepreneurs have been some of the greatest beneficiaries from the Internet’s empowering influence. If Internet were a sector, it would have a greater weight in GDP than agriculture or utilities.

Yet, we are still in the early stages of this transformations that the Internet will unleash and the opportunities it will foster. As a result, governments, policy makers, and businesses must recognize and embrace the enormous opportunities the Internet can create; even as they work to address many of its risks…

The Internet is a vast mosaic of economic activity, ranging from millions of daily online transactions and communications to smart phone downloads of TV shows. Little is known, however, about how the Internet in its entirety contributes to global growth, productivity, and employment. According to new McKinsey research that examined the Internet economies of the G8 nations (Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States), as well as Brazil, China, India, South Korea, and Sweden.

It found that the Internet accounts for a significant and growing portion of global GDP. The extensive study “Internet matters: The Internet’s sweeping impact on growth, jobs, and prosperity” by the McKinsey Global Institute (MGI), includes these findings:

  • The Web accounts for 3.4% of overall GDP in these thirteen countries. More than 50% of this relates to private usage (mainly advertising and online purchases). The Web economy now exceeds sectors such as agriculture and energy.
  • In the mature countries studied (the G8 countries plus South Korea and Sweden), McKinsey found the Web to have accounted for as much as 21% of GDP growth between 2004 and 2009.
  • McKinsey found most of the economic value of the Web to fall outside the technology sector with 75% of the benefits captured by the more traditional industry sectors.
  • In Sweden (the country where the Web economy has had the biggest contribution to GDP growth), the Web economy contributed to as much as 15% of GDP growth between 1995 and 2009 and 33% between 2004 and 2009. Germany comes second with 14% between ’95 and ’09 and 24% between ’04 and ’09.

All these numbers sound amazing, except that they still only represents a tiny proportion of the World Economy: It’s around 5% of the total world economy; yes, we have ways to go. While the BCG’s Web Economy projections sound like a major shift, they’re actually slightly more conservative than other estimates…

A report from Ericsson, for example, predicts mobile data subscriptions will hit five billion in 2016, 10 times larger than the current figure. However, the big takeaway for worldwide businesses is pay more attention to the Web; it’s critical for the survival and growth of the business…

Economics is the intellectual ‘Trojan Horse’ of our time with political propaganda hidden by known-false assumptions. The conclusions follow logically from the deception, so if you accept the known-false assumptions, then you accept the deception. ~Robert Kuttner