Sunday, October 04, 2009

The Problem With Austria.

Well not Austria the country, but Austria the school. The Austrian School is a school of economic thought that advocates completely free economic markets. The are against copyright and patents, government intervention in any way, and the belief that economic modeling is impossible. Remember, Austrian Scholar's are entirely against any government regulation, and that includes all forms of antitrust. Austrians aren't the only extremists, though. Many mainstream economists accept some arguments against much government intervention. I'm just using Austrians as a broad term to describe all those strongly against government regulation.

There are many criticisms of the school, namely a distinctly post-hoc aspect to their analyses and a lack of econometric support to their theories, but I'm interested in a big one that rarely gets mentioned.

The goal of any economic system is to increase competition. Monopoly is bad, competition is good. But economics work in many ways like thermodynamics. So much so that one tenet of psychological research is a reference to thermodynamics: a system left to itself will fall to its lowest possible energy state. Humans act if motivated to act. If there is no motivation, we will conserve energy. An economic system being made of humans is very similar.

An economic system's energy can be equated to competition. The more competition, the more energy, the more development, and history bears this out. An economic system left to itself will fall to the lowest energy state: monopoly. Unless there is a powerful agent with no interest in specific parts of the economic system, and only interested in the system as a whole, monopoly is inevitable in an economy.

I actually think that having super-large corporations, much less monopolies, can be problematic. Look at today. While I think that letting many of the big banks fail would have been the best course of action, just think of the chaos that would have been caused by the collapse of Citi or Bank of America. When too much of a market is dominated by a single company that becomes unstable, we have today.

Again, I'm a full-on free market advocate, but history shows that they can't be too free. Yes, they're essentially still stable. Ups and downs in the markets will kill the monopolies, but those cycles can take generations and during the reign of the monopoly progress is all but dead. Government regulation is a necessity in a modern economy if we want what we have grown accustomed to.

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