Freeman

ARTICLE

Conspiracy Economics

DECEMBER 01, 1975 by JOE COBB

Joe Cobb of Chicago is Secretary of the Economic Civil Liberties Association.

One of the most popular theories in economics is the belief in conspiracy: if you are not getting "your fair share," it must be because somebody is plotting to take it away from you. Since the vast majority of the population almost daily feels the frustration of a budget constraint — not enough cash to spread among food, clothing, recreation, toys, taxes, and so forth — the superficial empirical evidence would seem more than plentiful to "prove" that the fat cats are ripping you off.

Does this seem childish and silly? Unfortunately, any sample of public opinion will confirm that most people subscribe to this 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 Senators who demand price controls and price rollbacks. Ask any citizen whether or not he believes that the American economy is "competitive" and you will discover the conspiracy theory.

The scientific study of economics has become a highly technical field, replete with mathematical models, esoteric theorems, and statistical regressions. Popular economics, however, is still in the 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 emblazoned with the names of the Fortune 500 corporations. The average person will get the impression that tall buildings and giant corporations are the essence of the economic system; and who, indeed, would not feel very small and impotent in the canyons of Manhattan, Chicago, or Los Angeles ?

Aggravated by Inflation

The feeling of powerlessness which this "bricks and mortar" impression produces is compounded 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 regarding the level of profits in the American economy reveal the common 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 measurement 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, conspirators will systematically lie, won’t they?

The problem of shallow thinking about economic processes, however, runs much deeper than simple errors in information. The study of economics is the investigation of the indirect consequences of activity. Popular theories almost always rely upon direct action, without giving thought to the indirect effects. Do you see a problem? 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 problem in its place. Consider one sophisticated version of the conspiracy theory.

Economic theory tells us that a monopolist may set his price above the "natural market rate" and collect monopoly profits. The theory relies upon an absence of substitutes and alternatives for the buyer. If you accept the conspiracy theory, you can broaden this notion of monopoly to include "concentrated 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 industries: will they be above average? 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 consumer is getting robbed?

Look at the Record

Based on a small sample of concentrated industries, Professor Joe S. Bain published an article in 1951 which seemed to support the "market concentration doctrine" that we described above. This article touched off some investigations which, also based on small samples, seemed to confirm the report. And so it became part of the conventional wisdom that Big Business rips you off. What are the facts? In 1971, Professor Yale Brozen published a series of articles 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, specially selected samples of high-stable industries, but not in larger samples. Above average rates of return forboth sets of samples, even when insignificantly above the average in the earlier of the comparison periods, converge on the average of all manufacturing industries as time passes.¹

Of course, there is a movement in Congress to amend the antitrust laws in order to "break up" the concentrated industries.

Consider the public policy implications of a more vigorous and expanded enforcement of the antitrust laws. In the first place, it will probably be entertaining to the public for the government to prosecute a series of "economic conspiracies." 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 wide-ranging authority to collect information and issue commandments, 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 distribution of goods and services by indirect effects of trade and profit-seeking, the conspiracy theory of economics assumes that the society 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 populace, or whether the economic magicians who cater to the popular 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.

 

1Yale 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 Deconcentration Recommendation," J. Law & Econ., XIII (Oct. 1970), pp. 279-92, (available as a reprint from the American Enterprise Institute).  

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Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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