Crawl Across the Ocean

Saturday, August 01, 2009

21. Morals by Agreement, Perfect Competition, Perfect Monopoly and the Market as a Moral-Free Zone

Note: This post is the twenty-first in a series. Click here for the full listing of the series.

This is the third of what should be a few posts on the book Morals by Agreement, by David Gauthier.

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While thinking about Jane Jacobs' Guardian and Commercial syndromes, one of the notions that occurred to me was that the Commercial syndrome reminded me of the microeconomic notion of 'perfect competition', while the Guardian syndrome reminded me of the microeconomic notion of 'Perfect Monopoly*'

Given that the ethics in the two syndromes often seem to come in opposing pairs (shun force vs. exert prowess, industriousness vs. making rich use of leisure), it seemed plausible to think they might represent two opposite conceptions, such as competition and monopoly.

However, it was not until reading chapter 4 of David Gauthier's 'Morals by Agreement' that I came across any substantiation of my intuition about the two syndromes. So before I get into chapter 4 of Morals by Agreement, let's first clarify what is meant by perfect competition and perfect monopoly.

Wikipedia describes Perfect Competition as follows:

"In neoclassical economics and microeconomics, perfect competition describes the perfect being a market in which there are many small firms, all producing homogeneous goods.
...
A perfectly competitive market may have several distinguishing characteristics, including:

Many buyers/Many Sellers – Many consumers with the willingness and ability to buy the product at a certain price, Many producers with the willingness and ability to supply the product at a certain price.

Low-Entry/Exit Barriers – It is relatively easy to enter or exit as a business in a perfectly competitive market.

Perfect Information - Prices are assumed to be known to all consumers and producers.

Transactions are Costless - Buyers and sellers incur no costs in making an exchange.

Firms Aim to Maximize Profits - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit.

Homogeneous Products – The characteristics of any given market good or service do not vary across suppliers."


I don’t have much to add to this description. Basically, the idea is that each seller in the market is powerless to change the terms of the market and the only way they can pursue their interest is to maximize the amount of goods that they produce and can sell into the marketplace.

Now, perfect monopoly:

"In economics, a monopoly (from Greek monos , alone or single + polein , to sell) exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. Monopolies are thus characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods.
...
a pure monopoly can -unlike a competitive firm- alter the market price for her own convenience: a decrease in the level of production results in a higher price. … An important consequence of such behaviour is worth noticing: typically a monopoly selects a higher price and lower quantity of output than a price-taking firm; again, less is available at a higher price."


Again, I have little to add here. The idea is that in this case the seller has the power to decide how much they want to produce, since they don’t have to worry that if they cut back production, someone else will just take their place. Economics assumes that both the firm under perfect competition and the monopolist want to maximize their profits. However, under perfect competition, maximum profit is achieved via maximum production whereas under monopoly, maximum profit is achieved via optimal production, where the optimal production level does not equal the maximum production level.



So, back to Gauthier. Chapter 4 of Morals by Agreement is titled, "The Market: Freedom From Morality"

Gauthier comments that
"the idea of such a [perfectly competitive] market illuminates our understanding of rational interaction by revealing a structure in which the divergent and seemingly opposed interests of different individuals fully harmonize. Conceived as an ideal type, the perfect market, as we shall see, guarantees the coincidence of equilibrium and optimality, and so its structure is the very antithesis of the Prisoner's Dilemma"


Gauthier suggests that it might be an ideal world if every market could be perfectly competitive but, "because the world is not a market, morality is a necessary constraint on the interaction of rational persons."

He further notes that,
"the absence of force and fraud is essential to the workings of the market. Before [Adam] Smith's invisible hand can do its beneficent work, [Thomas] Hobbes war of every man against every man must first be exorcized. And this, as we shall see, means that the ideal of free interaction which Smith celebrates is not natural but artificial, arising, for rational persons, only within a framework of agreed constraints. In understanding the perfect market as a morally free zone we shall be led back to its underlying, antecedent morality."

To be honest, I'm not sure I follow the argument that the market is morally free but has an antecedent morality (where people give up using force or fraud to get what they want) which somehow precedes the market but is not a part of the market.

At any rate, Gauthier goes on to specify a few more conditions of the market as a morally free zone:

1) No externalities, either positive or negative.

2) Private ownership, composed of two parts:
- initial factor endowment
- free individual market activity

3) Private consumption, composed of two parts:
- private goods
- mutual unconcern (note that this is an extension of the initial conception of rational behavior from chapter 2 which permitted one person to have an interest in another's well-being (for its own sake) - now in the morally free zone, such concerns are no longer allowed)

4) Both production and exchange are carried out under certainty (perfect information)

Gauthier then makes reference to what is known as the 'The First Theorem of Welfare Economics' which states that a perfectly competitive market is 'pareto efficient' or pareto optimal meaning that given the results of the competitive market, nobody can be made better off without anyone else being made worse off. It might be interesting to see if their are any moral assumptions smuggled into the First Theorem, but that would be a project for another day.

Gauthier then notes that the market takes as given the initial distribution of factor endowments and comments that the results of the market are fair only if these inputs are fair. The question of what makes for fair inputs is left for another chapter.

Gauthier then moves on to argue that the market does not contain any form of partiality that would justify a moral constraint needed to overcome this partiality. I didn't follow exactly what Gauthier means here. He seems to be trying to establish that nobody is unfairly harmed or benefitted by the operation of the market, but I'm not 100% sure on that. At any rate, the only form of partiality he detects in the market is (economic) rent. Says Gauthier,

"to the extent to which certain factors are in fixed supply - to the extent to which certain abilities or materials are not freely substitutable in the market - there is the possibility that demand for the goods produced with the use of these abilities or materials will bring about a market price for their use that includes rent.

...

We shall return to the subject of rent, in considering the establishment of the perfectly competitive market as one of the terms of agreement among rational persons. For the present, we should note that our argument in support of the claim that the perfect market would create a morally free zone has not been shown to apply to those parts of market transactions that involve rent."



The next section, which I literally read 10 times but still don't quite follow, explains why there is the assumption of mutual unconcern or 'non-tuism' or that people take no interest themselves in other peoples interests. In Gauthier's words,


"It is neither unrealistic nor pessimistic to suppose that beyond the ties of blood and friendship, which are necessarily limited in their scope, human beings exhibit little positive fellow-feeling

...

The fundamental distinction between 'us' and 'them', between blood-brothers and strangers, has limited the scope of co-operation ... among much of humankind. We invoke the assumption of mutual unconcern to determine if that limitation is an inescapable evil of the human condition."


But if Gauthier is assuming that mutual unconcern exists (it seems he has never gone to the movies, where large groups of people squirm and laugh and cry and get angry on behalf of characters they have never met before and that they know are fictional, but I digress), then why the need to further make it an assumption of the competitive market? Why not just remain silent on the topic unless mutual concern would somehow interfere with the operation of the market. And if mutual concern interferes with the operation of the market (as we noted that Joseph Heath argued back in post 9 of this series, as I'm sure you recall :), then wouldn't the need to refrain from exhibiting mutual concern itself be an impartial constraint on people's behaviour and thus qualify as a moral rule by Gauthier's standards?

Anyway, Gauthier then goes on to note that the scope of this mutual unconcern is properly limited to the market,
"In real quasi-market societies there is a temptation, manifest both in thought and practice, to see the social world as falling within the scope of the market, and thus free from all forms of constraint. On the one hand the ideal of a morally free zone is extended to embrace all social interaction, and on the other hand all human relationships are interpreted as self-interestedly contractual, lacking in interpersonal concern. Thus neither the need for moral and political constraints nor the possibility of genuinely affective human ties is sufficiently recognized.

As we have already insisted, one of our fundamental themes is that the morally free zone created by the market can arise only within a deeper moral framework. We shall show that moral constraint is not only compatible with mutual unconcern, but indeed rationally required given this unconcern and the typical structures of interaction."



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* economists typically just use the term 'monopoly' or 'pure monopoly' rather than 'perfect monopoly' but I felt the language used for the two concepts should be parallel in order to reflect the nature of monopoly and competition as opposite ends of a single scale.

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3 Comments:

  • Declan, please publish this series as an e-book or something similar

    By Anonymous Cassandra from woodland Acres, at 4:02 PM  

  • Fantastic post, Declan. It seems that Gauthier is taking the position that politics can (or should?) be removed from the market world of mutual "unconcern" as well.

    By Blogger Josh, at 2:53 AM  

  • Well so far its mostly just book summaries and summaries of a few concepts - I'll need some original content before I publish the e-book...

    Josh - yeah I hadn't really noticed the political bit, but you're right, he seems to suggest the (perfectly competitive) market is not just moral free but politics free as well.

    By Blogger Declan, at 9:33 PM  

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