| | Jordan wrote, Academics will claim subsidies cure "market failures," which are basically said to occur wherever some market does not tend (or correct) to a more perfectly competitive market quickly and constantly enough. This is why we tend to see subsidies in highly imperfect markets, e.g., healthcare, energy, agriculture, etc. These markets have highly imperfect information, high barriers to entry, and high external effects. Whoa! Agriculture is a highly imperfect market?? I don't think so! According to contemporary economics, agriculture is the closest thing we have to a perfectly competitive market, and is often used in economics classes as a paradigm of that form of competition.
A perfectly competitive market is defined by four characteristics:
1) Firms sell a homogeneous product, such as wheat.
2) Firms are price takers, meaning that they have to accept whatever the prevailing market price happens to be, because there so many sellers, no individual seller can influence the price.
3) Firms can easily exit and enter the market.
4) Firms have perfect information.
Why this is called perfect competition is anyone's guess, because there's no real competition here. According to this model, firms don't compete on the basis of their products, because the products are exactly the same. They don't compete on the basis of price, because there is no attempt by any firm to raise or lower its price. They don't compete on the basis of gaining an advantageous position in the market (e.g., a monopoly), because no monopoly is possible; and they don't compete on the basis of gaining specialized or proprietary information, because every firm already has perfect information. There is in this version of competition, absolutely no rivalry, which is the very meaning of competition. So how could it be considered "perfect"? It doesn't even meet the definition of the word. The best one can say about it is that it's a perfect oxymoron.
Perfect competition not only does not exist anywhere in the economy; it cannot exist even in theory, except perhaps in some Alice-in-Wonderland fantasy. But that suits the critics of capitalism just fine, because they can then point to its absence as a way of showing that capitalism doesn't work the way it's supposed to.
Contrary to Jordan, subsidies in agriculture do not exist because there is imperfect information, high barriers to entry or externalities; they don't exist in order to improve competition. They exist, because of the farm lobby and the fact that it was traditionally thought that agriculture is the backbone of our economy and is at the mercy of the vicissitudes of weather and climate. That rationale is no longer plausible. Far from encouraging competition; subsidies interfere with it, because they prevent the better, more efficient farms from from gaining an edge over their less efficient rivals and thereby freeing up the latter's misallocated resources for a more productive employment.
Nevertheless, the doctrine of perfect competition persists in contemporary economics textbooks and university classrooms as some sort of "ideal" worth striving for, which does little more than give capitalism a bad name.
- Bill
(Edited by William Dwyer on 2/18, 10:42pm)
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