But it’s more than that, because the theory says that to reach equilibrium (the point at which prices match everyone wishing to buy with someone wishing to sell) we should do exactly what in the real world allows those with existing wealth to become richer.
Equilibrium economists claim this can’t happen, because in equilibrium everybody pays everyone else exactly what is needed for them to provide the good or service desired – no more and no less. This means that that there should be no ‘profits’ beyond the absolute minimum required to keep firms in business.
But this requires the absurd assumption that we can know exactly the right price to pay for any good. This price has to take account of everything leading up to its production and everything about its use in the future. Life is too short for each one of us to be so vigilant. So at least some of the time, some people (or firms they own) earn more than they need to do what we want them to do. (Sometimes they can earn less, but those that make a habit of this will soon go out of business!) As far as economists consider this – and since it cannot occur in their framework theory, they tend not to – any such surplus is considered as a reward for good business and so as some sort of additional consumption.
But this is nonsense – businesses are not really ‘consumers’ at all. When prices are more than costs, the extra cash is available to further the prime business activity – maximising money revenue while minimising money costs. For example, if we own a business, a cash surplus means we can manipulate the market by temporarily setting our prices lower than our cost of producing goods. While our firm makes a loss in the short term, the surplus acts as a cushion as other firms go bankrupt. Once they’ve been driven out of the market, our firm has a monopoly and can then put up prices again and increase profits further. And, as economists frequently forget, markets don’t float free but are part of the social fabric.
Economic power can be translated into social and political power and vice versa. Wealth can be used to purchase emotionally persuasive advertising, to lobby politicians to change market rules or employ lawyers to suppress adverse information about our product or production methods.
In the framework theory of economics, the monitoring and regulation of markets only get in the way of equilibrium being reached. Since equilibrium is the economists’ ‘nirvana’, these all have to go. But when nirvana fails to materialise, the absence of monitoring and regulation leaves us hopelessly exposed to rampant grabbers for wealth and power.
– Diarmid Weir
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Four Horsemen is an award winning independent feature documentary made by the Renegade Inc. team which lifts the lid on how the world really works.