Conspiracy Economics; J. Cobb

Does this seem childish and silly? Unfortunately, any sample of public opinion will confirm that most people subscribe. to this Joe Cobb of Chicago is Secretary of the Eco nomic Civil Liberties Association. 748 JOE COBB theory of economics. Consider the powerful groups in our society which trade every day on this theory: (1) consumer groups who blame supermarkets for inflation; (2) labor unions who blame the boss for low wages; (3) students who blame the corporations for making profits; (4) Congressmen and Sena tors who derrland price controls and price rollbacks. Ask any citizen whether or not he be lieves that the American economy is "competitive" and you will dis cover the conspiracy theory. The scientific study of econ omics has become a highly techni cal field, replete with mathematical models, esoteric theorems, and sta tistical regressions. Popular eco nomics, however, is still in the 1975 CONSPIRACY ECONOMICS 749 stone age. Most popular thinking in the field is of the "bricks and mortar" variety. For example, take a walk downtown in any major city. Observe the tall buildings em blazoned with the names of the Fortune 500 corporations. The average person will get the impres sion that tall buildings and giant corporations are the essence of the economic system; and who, indeed, would not feel very small and im potent in the canyons of Manhat tan, Chicago, or Los Angeles?

Aggravated by Inflation The feeling of powerlessness which this "bricks and mortar" impression produces is compound ed during a time of inflation, when the unit of account is depreciating. Any consumer who goes to the store two days in a row and finds that the· price has been changed, that his money is worth less, wants to blame the first human being he sees marking prices. Is it not true that the power to set prices is the power to increase profits ~ How helpless the poor consumer must feel. How open he must become to arguments based on the conspiracy theory. Samples of public opinion re garding the level of profits in the American economy reveal the com mon belief that businessmen make something like 30 to 40 per cent profit. The fact that the actual rate of return on capital is more like 3 to 4 per cent (and this measure ment does not include business failures, which Frank Knight once suggested might make the society wide rate of return negative) is almost unknown to the mass of voters. Those who have heard the correct numbers probably don't believe them. After all, conspir ators will systematically lie, won't they?

The problem of shallow think ing about economic processes, how ever, runs much deeper than sim ple errors in information. The study of economics is the investi gation of the indirect consequences of activity. Popular theories al most always rely upon direct ac tion, without giving thought to the indirect effects. Do you see a prob lem? Solve it! Make the trouble go away! Wave your magic wand. Pass a law. Never mind the fact that the problem is possibly a mirage, and that the law you pass will probably create a real prob lem in its place. Consider one sophisticated version of the con spiracy theory. Economic theory tells us that a monopolist may set his price above the "natural market rate" and col lect monopoly profits. The theory relies upon an absence of substi tutes and alternatives for the buyer. If you accept the conspiracy theory, you can broaden this no750 THE FREEMAN December tion of monopoly to include H con centrated industries" - that is, those industries where the biggest three or four companies sell over 60 per cent of the products. Take a guess about profits in, those in dustries : will they be above aver age? If you 'find some that are above average, will they persist above average over a long period of time? Is it true that the Big Three are exploiting a monopoly position, and the poor little con sumer is getting robbed?

Look at the Record Based on a small sample of con centrated industries, Professor Joe S. Bain published an article in 1951 which seemed to support the "market concentration doctrine" that we described above. This arti cle touched off some investigations which, also based on small sam ples, seemed to confirm the report. And so it became part of the con ventional wisdom that Big Busi ness rips you off. What are the facts? In 1971, Professor Yale Brozen published a series of arti cles in the Journal of Law and Economics; his conclusion: Persistently high returns do not appear to be characteristic of high stable concentration industries. "High" returns occur in small, spe cially selected samples of high-stable industries, but not in larger samples. Above average rates of return for both sets of, samples, even when in significantly above the average in the earlier of the' comparison periods, converge on the average of all manu facturing industries as time passes.!

Of course, there is a movement in Congress to amend the antitrust laws in order to "break up" the concentrated industrie~. Consider the public policy impli cations of a more vigorous and ex panded enforceIl1ent of the anti trust laws. In the first place, it will probably be entertaining to the public for the government to pros ecute a series of "economic con spiracies." The voters will be pleased, because they believe in the conspiracy theory of economics and it might take their minds off the problem of runaway inflation (caused by Congress and the Fed). Yet, consider the longer run, indirect consequences of more government control. As F. A. Hayek has pointed out, the belief in incorrect economic theories has produced the bulk of "bad" law in the past 100 years. The growth of the administrative State, economic regulations and bureaucracy with 1 Yale Brozen, "The Persistence of 'High Rates of Return' in High-Stable Concentration Industries,"J. Law & Econ., XIV (Oct. 1971), p. 504. See also Brozen's article, "The Antitrust Task Force Deconcentra tion Recommenda tion," J. Law & Econ., XIII (Oct. 1970), pp. 279-92, (available as a reprint from the American Enterprise Institute).

1975 CONSPIRACY ECONOMICS 751 wide-ranging authority to collect information and issue command ments, and the belief that we need economic planning by some central agency, are all based on a peculiar theory of economics. Unlike the self-regulating system described by Adam Smith in 1776, which moves towards an equitable distri bution of goods and services by indirect effects of trade and profit seeking, the conspiracy theory of economics assumes that the so ciety is populated by evil spirits which must be consciously fought and regulated in order to stave off disaster and misery. It will be interesting to see if the careful, empirical research of economists in the tradition of Adam Smith will be able to gather enough information to disprove the conspiracy theories of the pop ulace, or whether the economic magicians who cater to the popu lar mood will ultimately be awarded control of the economy "to save us from disaster." It will be interesting to see the real causes of disaster. ~ IDEAS ON LIBERTY "The Other Fellow Will Pay"

SOME HUMAN BEINGS like to get benefits - with less, rather than more, work and thrift. "For free" - paid for by "the other fellow" - has tempting appeal. And experience shows that polittcs can be used to obtain services which others will pay for (or ~eem to pay for). Political campaigns in America include pandering to this human characteristic. Various trains of thought, and ratio nalizing, have supported such selfishness. A business cannot say, "Select my product, and someone else will pay." The political process, however, can hold prospects of benefit to one group at the expense of others. "The candidate who uses his own money to buy votes," someone has said, "is called corrupt; the one who promises to use someone else's money is called a liberal." And "liberalism" has been a pow erful force in American politics. Obviously, spending programs must be paid for. Who, then, is being fooled? Why may use of the "for f.ree" argument continue in a society with as many educated people as here? One explanation, I suggest, is that a combination of graduated tax rates and hidden taxes does give plausibility to "the-other-fellow-will-pay" atti tudes.

C. LOWELL HARRISS, from an essay, "Economics and Politics: Thoughts on GO'lJernment Finance"