Wednesday, September 26, 2012

Economic Equilibrium Without Perfect Competition

I propose here a very simple solution to the problem of achieving and keeping economy in equilibrium. It can easily be called capitalistic communism. It doesn't requires ANY changes to way democratic capitalism currently works. It works within the constraints of the capitalism. No state ownership of capital assets is necessary. No redistribution of capital assets is required. The crux of the proposition is that not just greed of one person is good for all (capitalistic principle), sometimes greed of set of people is good for each one in that set (communism). To deal with impossibility of defining what is preferred by all based on individual preferences, I propose partition of the set based on these preferences. These partitions are dynamic in the sense that individuals might shift from one set to another as their preferences change. The prices are decided by the relative economic power of these sets of individuals and their interdependence on each other for their own welfare.

Consumer Corporation
The goal of a consumer corporation is demand aggregation and taking collective decisions on behalf of its members. Because of its size, it can negotiate better prices (Groupon) or create new alternatives for handling that demand (Kickstarter). It could be based on location (where) or time (when) or products (what) or kind of consumers (who) or any combination of them.  The consumer corporation causes discrete fluctuations in demand, making prices stick for a longer time. A small increase in price might cause large swing in demand, making the company unable to survive. Home loans can be negotiated. School bus can be arranged without asking schools to have one. May be not everyone needs to have a washing machine. The economy of scale can happen at demand side of the equation too and not just at the supply side. Examples could be people living in an apartment or whose children study in same school or owners of mobile phones or customers of Airtel. The only real power of consumer corporation is that it can cause significant change in demand that can be used to keep prices stable.

Labor Corporation
The goal of labor corporation is skill aggregation and taking collective decisions on behalf of its members. It is different from employee union because union is restricted to a company. Labor corporation can span multiple companies, multiple skill sets, multiple regions, etc or may be a small subset of labor in a company. Basically any organisation of labor that increases its collective bargain power. This make labor as a product or service which can only be purchased from Labor Corporations. Labor corporation can for example decide to reduce the supply of labor to the market if it can bump up the wages to a point that increase in wages makes up or increases the total income of the labor corporation. It also acts as an insurance agent against unemployment. We don't need any specific labor laws because labor corporation can handle that as part of price of its product, the labor and kind of contract it signs with the company. The same kind of competition that exists between normal corporations can exist in labor corporations. Such corporations can arrange education/training to convert "one kind of labor" to "another kind of labor" if that is what will maximize the total income of the labor corporation. It can even help fund education of children which will ultimately join these corporations. Their main purpose is to fiddle with "labor supply" to keep wages relevant. Because all that the employer gets is labor, it can be effectively shared. Everyone works but may be only once a week and half a day or at multiple companies. Companies don't own the person, just labor time and that time can come from multiple persons. The core job of labor corporation is keeping labor prices relevant by controlling the supply of labor to maximize returns for corporation as a whole.

What we get because of this arrangement is three kind of organizations. Capital, Consumer and Labor. All of them depend of each other to make the economy work. Without Labor consumers don't gets the product they want and Capital is wasted. Without capital, labor don't get jobs and consumers don't get any products. Without consumers capital is wasted and labor don't get jobs.  You could even call it economic cold war. Note that the core assumption here is interdependence. Any set that achieves interdependence from the rest is essentially not part of the economy anymore as it can survive on it own.

What we get because of this is balance or equilibrium in the economy in spite of perfect competition, because each set needs the other two to achieve survival. Even monopoly can be made to work if consumer and labor also make a monopoly. They make is easy to study economy because instead of 7 billion participants, we can may be talk about 7 million or 7 thousand or may be even 7 consumer or labor corporations with different labor power or buying requirements. They can be broken up if they are not in the interest of its occupants, creating more diversity or combined to fetch more benefits. Labor and consumer corporation can be a single entity with same members. In this special case, they operate with the same premise that other corporations exist, namely profit.

Somehow both these "concepts" are handled by government. All consumers and all labor somehow depends on government to interfere to make life work for them. Sadly governments are too busy preparing for the next elections. This dependence on government is artificial, not required. People can organize as labor and/or as consumers and work/consume at their own terms without government intervention. Political systems organizes people according to political buckets (religion, region, ideology, gender, age) to create power delegated to government. The same can be done via economic buckets to create buckets of economic and labor power and solve the economic problems or at least giving them a fair chance. May be Adam Smith was actually right. We don't need governments and its intervention. Just like capitalism creates pockets of capital power, we just need similar organization of labor and consumers to keep the economy in balance.

It is very simple to create, given the communication systems that connect people instantly across the globe. We don't need to change government or create new policies or anything else. Capitalism itself provides the solution to the economic problems we face today. All we need is greedy employees and greedy consumers, using the inverse principal - good for "my corporation" is good for me, reducing competition among themselves to counter the increasing power of producers. And that probably is the best way for "communism" to exist side by side with "capitalism" without needing any violence or revolution.

May be we have been evaluating the best of the two approaches for a long time. The answer probably is both. 

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