It’s a consistent complaint from over on our left that the economy is riddled with cartels. Big Business teams up in order to make sure they screw over the workers, the customers, everything that is just and holy in fact, in order to maximise their profits.
If it were possible to do this consistently then Big Business, being greedy bastards, would indeed do this. It’s just that it’s a difficult trick to pull off. As this little detail from the GameStop saga tells us:
The drops compounded a tough session on Monday for the stocks, with Redditors gathering in the site’s WallStreetBets forum to tell of heavy losses and implore one another not to sell their shares.
One popular post on Tuesday said: “This only works of [sic] we work together. Buy the dip and hold. For all of us.”
Another user, natenicholson, said: “WE HOLD THE —ING LINE. Great moments are born from great opportunity.”
Some users said they were planning to redouble their efforts and “buy the dip”, while others spoke of their “diamond hands” – slang for a willingness to hold onto an investment, even if its price is crashing – with an increasingly defeatist tone.
If they all work together consistently then they can all make large – paper – fortunes. If everyone else works together and you’re the only one who defects by selling at $300 then you have a real fortune. The effect of this being that as a group gets larger it’s near impossible to stop someone defecting. The fact that such structures contain humans – all of whom are subject to some amount of greed – means that they’re very difficult to hold together.
Sure, cartels do in fact exist. The largest – from memory – that I’ve heard about was European vitamin manufacturers which had, I think, about 14 participants. The larger a goup is the more difficult it is to stop defection.
This has two important implications. The first is, well, what do we do about such cartels? How do we find them and stop them? We leverage this difficulty by making defection more attractive. Which is, largely, what we have done. If a company is part of a cartel it can defect by going and sneaking, of course it can. But if sneaking leads to the same punishment as everyone else then why should they? What we actually do is let the sneak off all the punishment – civil and criminal I think – for revealing the cartel.
We’ve just raised the value of defection. Not least by giving the sneak the competitive advantage of not having to pay the fines about to be levied on everyone else – all their competitors.
The second is rather wider and much more important.
Steve Keen is insistent that we don’t have a free market economy. His logic is that a true free market requires infinite producers and infinite consumers. We don’t have either, therefore every producer, every consumer, has some market power. We cannot model the economy as a free market therefore – one in which no one has market power – but must instead use models of oligopolistic competition. The advantage of that to the sort of people who like Steve Keen being that oligopolistic markets justify lots of lovely government interference – POWER!
The correct response to which is well, yes, we see what you’re saying Stevie laddie. But which is the most useful model to use in surveying that economy? If cartels are very difficult to hold together, if the difficulty rises exponentially with the number of participants, then at what point is it rational to think of a market as not being oligopolistic but in fact free?
Empirical works seems to show that three or four participants is enough. More than that and it’s just not possible to hold the cartel together – although there are occasional exceptions.
As those laddies ramping GameStop are, rather expensively, finding out.