While I was fussing with the translation of Friedman, slowly and sadly posting one chapter at a time, Sergei Ankapov completed his own translation, and is now raising money for a print edition. Since my version of the translation is also close to completion, I will, of course, hurry up now, and soon you will have two options to choose from: a free amateur one and a paid official one, with a preface by the author (although, if the preface is worth it, I will also pull it over to my version in time).
That’s how competition works: because of me, it will be harder for Sergei to raise money, and I will simply be ashamed that I didn’t manage within a shorter timeframe, and thus partially undervalued my own work.
In the script for the video about the free-rider problem and the tragedy of the commons, I emphasized how bad this is for users of a shared resource and what strategies have been developed to combat it. Now, I want to talk about a case where the tragedy of the commons is actually a good thing, and fighting it is bad.
The entire focus is on what exactly constitutes the shared resource. Imagine a rare resource such as consumer demand. Everyone has the opportunity to produce a certain good or service, sell it, and make a profit. While the market is empty, a few producers will make superprofits, and the thirst for gain will attract many other suppliers to this patch. Competition for the consumer’s attention quickly leads to a decrease in margins. To maintain profit, volumes must be increased, and this finally exhausts the shared resource. The consumer receives an enormous abundance of cheap goods, which they are ready to push in the greatest possible quantity, as long as the consumer is willing to buy. Here is a “buy one get one free” promotion, here is an installment plan, here is a sale, here is unlimited access for a fixed subscription—just buy it.
Admit it, if you put yourself in the consumer’s shoes, this phenomenon cannot help but be pleasing. But the producer, for whom this is a terrible tragedy of the commons, tries to fight it. As we know from the video, two strategies are possible here: privatization and cooperation.
Privatization means the appropriation of consumer demand in a certain industry by a specific producer—in other words, the creation of a monopoly. Other suppliers are forbidden from selling certain goods and services to consumers. That’s it; now there is no need to chase sales volumes, and superprofits can be earned with fairly modest investments in production. However, part of the profit will have to be invested in protection against competitors, and they are not idling, so these costs will tend to increase.
Cooperation means that anyone can satisfy consumer demand, but a number of restrictions are imposed upon it. This is usually expressed in strict industry standards that effectively secure the dominant position of those players who are ready to invest significant capital into production, while outsiders are filtered out. However, a lot of attention must be paid to controlling that producers do not cheat. In this regard, a recent case comes to mind with some European auto concern that faked data on the exhaust emissions of its engines to save money on complying with environmental standards. But the classic example is, of course, medieval guilds. The quality of their goods was high, production volume was low, and profits were magnificent. Only the black market eventually undermined their dominant position, and a tragedy of the commons occurred, which we know as the Industrial Revolution.
So, when you are told about the harm of competition and the benefits of cooperation, as well as the inevitability of natural monopolies, it is important to understand: these people are quite sincere and not fools at all. It’s just that you are a resource to them.
A Christmas market is a tragedy of the commons in all its glory: consumers are happy, they are lured in with all their might, and they look more than they buy
What do you say about the idea that the costs of ensuring security and protecting property rights are higher for private companies than for the state, and that the state, by virtue of its exceptional efficiency in applying force and maintaining order, can better provide the protection and guardianship of law and order, as well as courts, than private companies, and therefore it is necessary in this regard?
анонимный вопрос
How can the state’s costs for protecting property rights be lower than those of a private company? Only through games with budget line items. Yes, for a police officer, it is enough to hang a sign saying “forbidden, fine is so-and-so” and carry out a couple of exemplary fines—whereas a private entity would have to constantly hover and be vigilant to ensure the prohibition is not violated. But this does not mean the police officer is mega-efficient. It means that he himself might receive pennies, or even feed entirely on bribes, while the state must bear the primary costs of ensuring that people are afraid to contradict this police officer. And the costs of maintaining this fear are spread across a heap of budget items, from education to the maintenance of prisons.
A private entity, on the other hand, often has to compete with the state under completely unequal conditions. Where the state provides a service already paid for via taxes and requiring no additional money, the private entity is forced to charge the client additional money, since the state does not share taxes with them.
The state introduces distortions, often quite unpredictable ones, into the market picture, and as long as these distortions persist, judging market efficiency becomes more difficult. One might start a business relying on the current market conditions, only to encounter a completely new regulatory framework in the middle of the project, and that’s it—the project must be shut down and the losses written off. State institutions can usually count on their interests being considered during legislative innovations, so planning is a bit easier there. But it is somehow strange to conclude based on this that the state is necessary. This is simply an example of unfair competition, which is created by the state itself.
To summarize. Indeed, the state can impose arbitrarily high costs on private companies for anything by using force or the threat of force. But who needs such a state? Certainly not the consumer, onto whom all these costs will eventually be shifted.
For example, telling factories not to work with others, otherwise they will lose profits from their main customer (a much larger capitalist).
Japan (NathanTikhonov)
Of course, nothing prevents one economic agent from negotiating various additional terms before concluding certain deals, including those that have no direct relation to the subject of the transaction. For instance, a very common type of deal is an agreement on joint household management, accompanied by a condition of exclusive sexual services, and there is no reason to believe that in the absence of a state, deals of this type would be immediately wiped out entirely.
But, as we clearly see in the example of the institution of monogamous marriage, an exclusivity clause, even when clearly stated, is observed quite sloppily, yet not every violation of this clause leads to the immediate termination of the main contract. The fact is that the contracting parties are interdependent. Even if one party to the deal is significantly stronger, to punish the second party for violating the additional terms of the agreement, they would have to incur certain costs, and this would weaken them. Moreover, the direct damage from the violation of an additional condition may be quite small, or even non-existent, while the contract itself may remain very profitable for the strong party. In other words, empty tyranny is wasteful.
Therefore, the economically stronger party, although they may puff out their cheeks and demand special attention, will find themselves forced to turn a blind eye to the fact that not every whim of theirs will be satisfied; otherwise, their habit of petty vindictiveness will quickly correct the fact that they happen, by some misunderstanding, to be the strong party in most market transactions. Thus, through excessive arrogance, once influential companies sink into insignificance.
I think no one doubts that they have the technical capability for such actions, which means they cannot be ruled out. Of course, such excesses will occur; the only question is what they will lead to.
First, let’s consider an example of a monopoly security structure like the “police.” If a competitor emerges, wishing to provide security services to someone other than the police, the police will, of course, enter into a physical struggle with them. This might look boring: initiating a case, conducting an inspection, arrest, investigation, trial, fines, and imprisonment. It might look exciting: chases, shootouts, a coffin, a cemetery. One way or another, the competitor is eliminated, simply because most citizens are convinced of the benefit of a state monopoly on violence, as Hobbes himself proclaimed and Shulman herself confirmed. Will the police torture those who do not use their services? Worse. They will torture those who pay for their services, simply because they can, and there is nothing to oppose them with. More precisely, it is proposed to oppose this lawlessness with the activities of specialized alternative security enterprises: the prosecutor’s office, the internal security department, and so on. In other words, even in current reality, no one is ready to agree to a full and comprehensive monopoly on violence by a single actor. It is proposed that the watchmen be watched.
Now let’s consider a gangster “protection racket” like those that, according to legend, flooded the streets in the nineties. If a city is large enough, there may be several competing rackets. In what cases do rackets enter into physical clashes with competitors? First, the clashes must be inexpensive (plenty of cheap fighters). Second, the disputed business must be quite lucrative. But if a certain business is potentially capable of bringing good money to a racket, it can afford to choose the racket that works better and cheaper, because otherwise, one can always turn to competitors. Thus, competition between rackets will inevitably lead to a reduction in extortion, meaning that physical clashes with competitors will become increasingly unjustifiable. Again, the faster fighters are spent, the more expensive they become. And so, bloody clashes become a rarity, and instead, the bosses settle everything “according to the code.”
And what about torturing those who are not clients? Of course, it is profitable for a racket to spread rumors about punishments for the stubborn. In reality, however, conducting such activities will become completely redundant over time, especially since just a couple or three well-publicized precedents—and few will risk being completely without protection, and bothering someone else’s client is already against the code and fraught with danger. Again, if someone is without protection, it does not mean they are completely harmless, or that there is no one to stand up for them. Simply put, in general, the people standing up for them will be amateurs, but amateurs can also be rare psychos. So why risk it?
The fighters are cheap, but already a bit worn out
Among many oppositionists, there is an opinion that it is enough to do in Russia “as in Europe” and we will live almost in paradise. They usually praise Western countries for the separation of powers, honest courts, a transparent budget, smart regulation, fair taxes, freedom of speech, and many other things missing in the RF. But some of these people then begin to notice that all those achievements, for which they were ready to leave their homes, are slowly but surely fading even in their beloved West, let alone being transferred to Russia.
Why does this happen, and why is it pointless to wait for the state to improve, just as it is pointless to emigrate? I am ready to propose a hypothesis based on thoughts from the lectures of the famous sociologist Ella Paneyakh (they are on YouTube). I cannot guarantee the absolute accuracy of this hypothesis, but I believe the probability of it being true is over 99%.
In her lectures, Ella explains the theory of the stationary bandit, explaining the positive (creative, progressive) vector along which the state guided society as a necessity for military superiority over other stationary bandits. If one of them preferred traditional values and obscurantism, while another preferred progress and human rights, the latter would sooner or later achieve technological superiority over the former. Ultimately, traditionalists and supporters of a “brutal” violent hierarchy were simply conquered by more progressive states. Since the development of technology is impossible without respect for the individual and human rights, states were forced to adopt the best practices for ensuring personal freedoms from one another, increasing trust in the tax system through a transparent budget, creating social elevators for youth, fighting corruption, and offering asylum to defectors.
After World War II, as a result of the emergence of the doctrine of deterrence through the threat of mutually assured destruction, wars between more or less developed countries ceased completely. After all, no politician will dare to start a war if they know they themselves can be destroyed. As a result, the incentive to develop and create better conditions for their own citizens disappeared. After all, no one is threatening you, and your own population can be suppressed even with ordinary batons and tear gas.
The lack of an incentive to develop does not mean a stop in the competition of state practices; it is just that now states adopt methods of oppressing their own citizens from one another — hidden taxes, internet censorship, fighting protests and rallies, social ratings, surveillance, etc. You have probably noticed that some of these appeared first here and then in the West, others vice versa. But in general, both here and in the West, the volume of rights and freedoms is gradually, and at an increasingly rapid pace, decreasing. Emigration becomes pointless, because after a certain amount of time, all those shortcomings for which you left will also appear in your new location.
How can we bring back the competition of positive practices? By getting rid of the territorial monopoly of the state and moving to a system of extra-territorial contractual jurisdictions (ETCJs), we will create an incentive for individual ETCJs to compete for citizens. After all, switching to another ETCJ would be as simple as changing a mobile operator. Consequently, the managements of these companies will be interested in offering the best conditions for citizens.
Of course, other OSs exist, but Windows is much more popular than something like Debian. Moreover, as far as I know, this monopoly status is not supported by the state (quite the opposite), but arose precisely in the free software market.
анонимный вопрос
As I understand it, you are proposing to discuss Microsoft as an example of a monopoly that emerged and remains stable in a free market.
Indeed, Microsoft once created a very successful solution that significantly lowered the entry barrier for users into the world of personal computers, both due to ease of use and the fact that MS DOS was very undemanding of resources compared to the monstrous Unix. Then, a decent graphical shell was created on top of the system. Later, when software compactness became non-critical for most users, the company’s products responded in time and began to evolve toward expanding functionality and improving design. In general, skillful adherence to market incentives allowed the company to gain a good share of the desktop OS market. The accumulated network effect is such that individual failed products, like Windows Vista, are no longer capable of killing the company; a long series of bad decisions would be required for that. Nevertheless, such a thing is quite possible. For instance, Google’s browser dealt with Internet Explorer, despite its deep rooting in the system and its initially almost monopolistic position.
Of course, one could argue that the state supported Microsoft by pursuing pirates. If software monetization issues were left entirely to the producer, there would be fewer distortions. But this does not look like a factor that helps only Microsoft and not its competitors. So, in general, we can consider the market here to be free in a first approximation.
And how is this large company faring under free market conditions? It is having a hard time. In the shrinking market for PC operating systems, its share is consistently large, although far from 100%. It failed to really squeeze into the mobile OS market, where two other manufacturers dominate. Gaming consoles, augmented reality glasses, and many other products also haven’t quite taken off powerfully.
In other words, we see that all the horrors that political economy textbooks frighten us with regarding monopolies are not applicable to Microsoft: it cannot relax, hike up prices, and collect monopoly rent; it must, just like everyone else, diligently improve its products and maintain a flexible pricing policy so that even low-income clients prefer to buy Windows rather than pirate it — and yet, one by one, IT companies are surpassing it in capitalization.
