This is the second in my new series of posts debunking foolish or misguided economic concepts. In the first ("Bad Economics Part 1") I argued that the belief we are "running out of resources" is disproved quite handily by the prices we pay. In this one I will deal with something a bit more abstract, that being one of many justifications used for the intervention of government into the private sector. Specifically, I will look at the concept of "damaging competition".

To present the most simple explanation, at one time the public did not believe in socialist theories, they were, for the most part, convinced that competition and the free market were generally good ideas. They may have sometimes given in to populist demagogues and protectionist rhetoric, but for the most part, they really did believe in the free market. So, to push through government intrusion into the private sector, ground breaking interventionists such as Wilson and FDR, as well as the host of faceless state bureaucrats and local politicians, had to tap into popular discontent, even if they had to manufacture it. And so, taking a page from the aforementioned populists, they invented situations in which the market supposedly "failed", where "big business" could exploit such "defective market conditions" to stick it to "the little guy", and then claim their new intrusion would correct such distortions. Or else, if they eschewed drumming up paranoia about big business, they would instead try to sell their policy based on the other popular explanation, incompetence¹, arguing that under some circumstances, people could foolishly follow market forces and, mislead by such deceptive, and incorrect, market forces, could cause the entire economy to crash.

It is that second category that gave birth to the concept of  "damaging" or "destructive" competition, a concept I hope to debunk in this essay. But before doing that, I suppose I should define my terms, and provide an example or two. And, as is fitting, one of the earliest examples comes from one of the earliest expressions of Wilsonian big government, bank regulation, though my specific example actually comes form the other paragon of early big government FDR. My other example comes from another area I have discussed, and one often in the news today, medical regulation².

First, let us discuss the principle in general. The basic argument is that, in some specific segment of the economy, competition, instead of being beneficial, is harmful³. Sometimes the fear is that competition will drive competitors out of the market and create a cartel or monopoly, but more often the worry is that either competition will result in paradoxically higher prices, or that it will inspire the competitors to lower prices too greatly, destabilizing the entire industry. (For the purpose of this essay, we are ignoring the monopoly fears, as that will be the subject of a separate entry in this series, antitrust laws being filled with so many misconceptions that they need a chapter to themselves.)

A good example of the final worry is exemplified by "Regulation Q". This FDR era law basically set limits on the interest banks could pay, and prevented the payment of interest on demand deposits, that is, checking accounts. The argument offered was that banks, being interested in attracting deposits to fund additional loans, would offer excessively high interest, and in the process would bankrupt themselves and destroy the monetary system.

Of course, this is nonsense. Perhaps some bank might make a mistake and do this, but the chance of all doing it is zero. We need only look at the history of banking prior to Regulation Q, or since it was largely repealed, as well as the 18th and 19th century history of relatively free banking in Scotland to see that this is nonsense. Or we can look at analogous enterprises, such as the interest paid out to those who lend money to venture capitalists. The competition for venture capital doe snot inspire venture capitalists to bankrupt themselves.

No, all this law did was prevent individuals from receiving interest on some of their money, as well as allowing bad banks to remaining in business, by preventing better managed banks from gaining any competitive advantage by being able to offer higher interest. In the end, what it really did was spur the creation of fictions such as money market funds with checking privileges, or the ability to roll large checking accounts in money market funds over night, all means of gaining interest on checking without explicitly doing so.  (And note that the ability to create money market funds with checking did not drive banks into bankruptcy either.)

A second example can be found in the many regulated areas of medicine, a field rife with bad economic thought. For example, based on the theory that expensive medical equipment is driving up prices, regulators have placed restrictions on the acquisition of medical equipment. The theory being that limiting purchases will prevent prices form rising. In truth, this has caused exactly the opposite. First, by creating effective cartels, it has destroyed what little price competition exists in medicine⁴, at least where medical hardware is concerned. Second, because there is reduced demand, the advantages of economies of scale and mass production, which turned cars, radios, computers and many others from rich man's toys into commonplace items, do not work for medical equipment. Demand being stunted, we do not gain the advantages a greater demand would bring. And finally because we have demand greater than supply, we actually see prices rising rather than falling, as the regulators artificially restrict supply, driving up the prices they claim to be reducing.

A similar absurdity exists in the area of hospitals. Again, claiming that competition between hospitals would somehow increase prices, the government restricts which services can be offered at which hospital, trying to ensure that certain specialties are offered at only one hospital in a given region. Of course this too is nonsense. As in every area of human endeavor, competition serves to lower prices, nto raise them⁵. And ther eis no reaosn to think hospitals would differ. After all, less regulated private medical practices, such as cosmetic surgeon offices or pain management clinics, often have many competitors and the vibrant competition leads to lower prices, not higher.

In fact, to dismiss both arguments at once, one need only look at privately run medical practices. Two areas immediately come to mind. Cosmetic surgery and Lasik eye surgery. Both were very costly at one time. However, as both have seen an increase in demand, not only have the number of providers grown, but prices have dropped. Despite the costly equipment required for Lasik, or even outpatient plastic surgery, there has been no general rise in prices.
 
And that, in the end, is the best argument against this silly theory. We an look at area after area of the economy, find conditions which precisely mirror those of these "special situations" and see that competition did nothing that the regulators claim. Yes, soemtiems competition causes momentary inconveniences. When a firm closes, it may inconvenience employees and those who used their goods or services. But if they closed down, obviously they had fewer customers and employees than those still in business, so closing that firm would do the least harm. And, whatever the harm done by competition, it is quickly remedied, and is, in the end, less harmful than the damage done by limiting competition. Whatever one may say against free competition, it is nothing compared to the harm done by government created monopolies or cartels, or by laws attempting to "perfect" competition.

"Enforcing" the free market is a contradiction, and trying to legislate competition is absurd. Either the free market works, or it doesn't., and if ti works, then we need to stop trying to find "special cases", allowing us to regulate bits and pieces of an otherwise free market.

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1.As I have explained over and over, all interventionism is based on either incompetence or malice. Most modern intervention is based on the premise that "other people" lack competence to make decisions for themselves (see "Those Other People", "Our View of Our Fellow Citizens" and "Seeing People As Stupid"), and so must be directed to the optimal solution. However, at times an alternate theory is proposed, arguing people are not inherently incompetent, just easily led astray by malicious forces which lead them into bad decisions. As I explained in "Appealing to Arrogance", "The Citizen Dichotomy", "In A Nutshell", "Cognitive Dissonance Part 2", "Changing Incentives" and "Three Types of Supporters of Big Government", among others, these arguments both lead to the same place, a total takeover of all decisions by an omnipotent authoritarian state, so the distinction makes little difference.

2. In fact, I have written on related topics in "Government Efficiency" and "High Cost of Medical Care". Though I did not explicitly discuss the justification in those posts.

3. In some ways this is similar to many antitrust laws and laws preventing prices that are "too low", as well as laws which prevented, for example, ophthalmologists from working out of stores selling eyeglasses, or prevented convenience stores or others from selling gasoline at below cost as an incentive to attract customers. All were deemed "dangerous" competition at one time or another, sometimes only in certain states. (See "Saving Us From Lower Prices" and  "When Help Hurts".)

4. I discussed this absurdity in "Government Efficiency". For a discussion of the lack of price competition in medicine see "High Cost of Medical Care", "Medical Reform, An Overview" and "Redefining Insurance... To Actually BE Insurance".

5. Sometimes the alternate argument is offered that hospitals will all try to offer every specialty, find they have too few patients, and go bankrupt, leaving us without coverage. But that assumes that hospital administrators are worse at business than the fellow who runs your local gas station or convenience store. Even if that somehow happened, if the market were open, instead of a government created and managed cartel, a new hospital would step in to provide coverage. Only the regulatory regime keeps new hospitals out of the market and prevents active competition. To understand how foolish this is, look at essential goods such as food. Yes, grocers do go under, but because the market is open to all entrants, we do not see ourselves starving due to a single grocer's bankruptcy. Open entry for hospitals could do the same.

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POSTSCRIPT

It is not exactly relevant to the post, but I discussed in  "Smaller Government , Fair Weather Friends and Special Cases", "Special Cases", "The Endless Cycle of Intervention" and "The Inevitable Spread of Regulation" how these "special cases" have a logic all their own. If we admit that sometimes competition is dangerous and the market needs to be regulated, then that logic allows others to argue for regulating other areas, and, eventually, leads to the conclusion that any regulation is permissible. So , no matter how limited any special case may be, the inexorable logic of that regulation leads, over time, to the total regulation of the economy. It sounds implausible, but how else to explain how a handful of "reforms" starting in 1890 have led us to the regulation riddled economy of today?

The logic embodied in laws leads us to their logical conclusion, whether we choose to go there or not.

POSTSCRIPT II

My writing on medical regulation can be found here:

Lifespan
A Most Dishonest Commercial
Medical Regulations
There ARE NOT 46 Million Uninsured!
Envy Kills
Medical Regulation II
Envy And Analogy
A Thought on Healthcare
Misunderstanding Profits
A Passing Thought on ObamaCare
Government Efficiency
A Useless Measure
High Cost of Medical Care
A Potential Problem With Universal Insurance
Negative and Positive Rights
Private Charity
The Devil is in the Definitions (And Assumptions)
Two Examples of "Inefficiency" in Capitalism
Private Charity Take Two
Cutting "Costs"
Clarification of My Argument for a Free Market in Medicine
Big Government Creates New Problems
ObamaCare on the Ropes?
AARP Proves They Are Partisan Hacks and other Thoughts on Health Care Reform
Red Herring
The Problem With Tort Reform
Shameless Self-Promotion
Who Will Decide
Confirmation, Yet Again
My Health Care Plan
First Kill All the Lawyers, Looking Back at Katrina
The Insurance Sham
One Real Life Example
Public Insurance
Again?
Medical Reform, An Overview
The Absurdity of Mandatory Insurance
Medical Reform, An Overview
The Absurdity of Mandatory Insurance
"Compassion"? Well, For Some
ObamaCare's Achilles Heel
Private and Public Coexisting
Preexisting Conditions
Interetsing Cuts in Budget
Symmetry and Greed
Disgruntled Workers
So, Why No New Medical Posts?
Desperate Media
Redefining Insurance... To Actually BE Insurance
How to Tell They Lost on Health Care Reform
A View From the Inside
2010 and Health Care

I will not list all my posts on banking, as most deal with inflationary pressures and bank policy. However, I will suggest a few posts concerning bank regulation, such as "The Limits of Econometrics", "The Limits of Technocracy", "Technocrats", "Monetary Issues Made Simple Part I", "Monetary Issues Made Simple Part II", "The Inflation Engine", "Our Financial Problems", "Explaining Past Crashes", "Didn't I Say This?", "The Free Market?" and "A Thought on the Clinton Surpluses". (I do have plans to write on inflation alter in this series, so expect to see a more comprehensive list of articles on banking and inflation attached to that post.)