How Big Business Makes Everything LESS Efficient

Eclipse of the Sun by George Grosz

The great argument for the destruction of public services is that ‘business is more efficient’. But this is a mathematical lie, even within the lying domain of economics.

Figure 1. Monopolistic Competition, Entry, and Exit. (a) At P0 and Q0, the monopolistically competitive firm in this figure is making a positive economic profit. This is clear because if you follow the dotted line above Q0, you can see that price is above average cost. Positive economic profits attract competing firms to the industry, driving the original firm’s demand down to D1. At the new equilibrium quantity (P1, Q1), the original firm is earning zero economic profits, and entry into the industry ceases. In (b) the opposite occurs. At P0 and Q0, the firm is losing money. If you follow the dotted line above Q0, you can see that average cost is above price. Losses induce firms to leave the industry. When they do, demand for the original firm rises to D1, where once again the firm is earning zero economic profit. (Lumen Learning, or any Economics 101)

One of the first things you learn in Economics 101 is these supply/demand curves, which might as well be tea leaves or entrails. They don’t predict shit in the real economy, but I’ll go on. The broad theory is that supply (how much it costs to make a widget) and demand (how much people are willing to pay for a widget) should meet. They meet ‘in the marketplace’, through competition.

For example, if you’re willing to pay $10 for a widget and it costs me $5 to make it, I’ll happily sell it to you for $10. I’m making $5 profit, which is an inefficiency. Competitive forces are supposed to iron this out. A competitor should get the same machinery and starts selling widgets for $9 undercutting me. So I sell it for $8, and so on. Eventually, the market reaches ‘equilibrium’, where every firm is operating efficiently and earning zero economic profit*. Supply meets demand. All is right with the world. Praise Moneta.

That asterisk next to economic profit is an important one. It’s important to understand that economic profit is not accounting profit, as in “I made $1 million last year.” If I spent $10 million to make $11 million that’s great, unless interest rates are 20% and I could have made $12 million by just keeping it in the bank. My business would have made accounting profits but economic losses. Much of Donald Trump’s fortune is like this. He inherited a bunch of money and made a big show of activity, but he actually lost money compared to more boring investments.

That asterisk also shows you how intimately connected government is to business even in abstract ‘free markets’. When I was pitching my startup, I always had to include something called a Net Present Value. How much my startup would compared to just putting the money in a fixed deposit with interest. When I was doing it interest rates were like 15% (in Sri Lanka) so we had to use Excel-Fu to show much greater returns. Every activity of private investment is still suckling the money supply teat in this way.

You have to ask, where do those interest rates come from? Interest rates come from Central Banks giving free money to oligarch banks at a certain rate, which they then re-lend at a markup. And countries in Sri Lanka are ultimately contained by the American imperial bank, because everybody still buys essentials in imperial coin (the Petrodollar).

Why not just give people Central Bank accounts directly, or invest in productive economic activity without all the middlemen? The big bankers obviously take home big bonuses, speculate wildly, crash everything, and then require public bailouts. Couldn’t we cut their obvious inefficiency out? These are questions we’re not supposed to ask. The greatest market inefficiency of all is hidden behind that little asterisk. The foundation of all investment activity, the difference between accounting profit and economic, which is fundamentally a dependence on the public purse.

When neoliberals say business is more efficient they’re just lying, both theoretically and practically. Theoretically, profit is inefficiency. Their reasoning is that competition will magically lower prices, but that’s just demonstrably false. Privatized healthcare in the United States delivers high profits and declining life expectancy. Privatized education delivers high profits and a nation of debt-slaves that aren’t very productive. Privatized energy delivers record profits while people freeze in their homes.Privatization is wildly inefficient precisely because it is so wildly profitable.And that’s what this is all about.

Neoliberalism vs socialism is not a struggle in economics class. It is a class struggle. Neoliberals think the rich should get priority access to the public purse, and socialists think it should be the poor. Hence you get the relentless cannibalization of public services. The dismembering of basic needs like transport, health, housing, and education into private fiefdoms, ruled over by capitalist lords. Extracting labor and rents from us poor serfs, and telling us it’s for our own good. That it’s more efficient this way.