Follow-up from radio: Businesses still love profits

Anybody that listens to my appearances on the Jarrod Thomas Show will know the voice of my radio stalker. I am not sure I could live in the black-and-white world this individual inhabits. All roads lead to evil investment banks, every political party is wrong, China is the ultimate source of trouble, and so on. Usually he just does his little drive-by rant, selectively quoting anyone that agrees with his ill-pre-conceived notions about the economic world. Last week though he revealed the fatal lack of follow-through that taints all his ramblings.

His shock last week was that a businessman would find the notion of limited competition imposed by the Chinese government attractive. His argument was that businesses should love the free market competition that the United States promotes, I think. It is tough to follow irrationality through all its disjointed hoops. Political discussions and arguments aside, there is a reason businesses would like that model: they want market power. Businesses attempt to create and exploit market power. Much of the reason behind advertising is to create distinctions between your product and rivals, that is create your own little monopoly. Businesses want market power because it gives them the ability to raise prices and profits.

As a consumer you surely want competition. Competition allows you to increase consumer surplus, the difference between the value placed on a good and the market price. These gains come at the expense of producer surplus, the difference between the cost of production and the sales price. So without a doubt the consumer would prefer the U.S. economic model to the Chinese. But there is no reason to believe that businesses would not see some benefit to them from the other form.

Businesses want to maximize profits, pure and simple. If there are different rules or regulations that will help them achieve better profits, they will argue for them. If there are better prices in other markets they will look to enter those and exit current markets. They do all this because they must for survival. Shareholders demand the best returns which typically will come from the most profits. This is capitalism at work. If investments in China are paying better than investments in Oregon, why shouldn’t businesses look to be involved there? Essentially because someone believes China is bad and investment banks are bad. So says one listener, and every newspaper article and interview that ever agreed with him.

Convinced? Me neither.

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