This is one for the keyboard economists amongst us (including myself here!). Highly educational piece by David Grace that can be applied to pretty much any form of commercial activity including e-commerce and DeFi.

Large Imbalances In Bargaining Power Are Cholesterol In The Economy’s Arteries
Strong Competition Creates An Efficient Economy. Large Imbalances In Bargaining Power Destroy It

By David Grace (Amazon PageDavid Grace Website)

Society’s fundamental competing interest groups are:

The level of competition between these competing interests can be anywhere between

  • (1) highly balanced competition and
  • (2) totally unbalanced competition

between

  • (1) parties in a free market with relatively equal bargaining power in fierce competition and
  • (2) parties in a closed market with a monopoly and no competition.

Every Consumer Wants Competition. Every Producer Wants A Monopoly

Every provider wants to have a monopoly on what they sell, but they absolutely don’t want there to be a monopoly for the products they buy.

Everyone is a consumer of something, and every consumer wants to buy what they need in a competitive market where balanced bargaining power and fierce competition provide products with the highest possible quality at the lowest possible price.

This is the promise of capitalism.

Monopolies Are Inefficient

Monopolies are inefficient because

  • Monopolists are already making maximum profits and thus they have little to no incentive to reduce price, improve products, add additional features, increase quality or release new and better products, and
  • Monopolies drive more money to monopolists than they need to earn in order for them to continue to deliver their products to the market.

That excess revenue received by monopolists is money that is no longer available to buyers to purchase goods and services from other sellers.

E.g. each dollar of unnecessary revenue received by a monopolist is a dollar that consumers aren’t able to spend on the purchase other goods and services from other sellers — other businesses starve while the monopolist gets needlessly fat.

Monopolies and cartels are the cancerous reality of uncontrolled capitalism.

Competition Is Efficient

Fierce competition is the hallmark of an efficient market and an efficient economy.

Because everyone is a consumer, an efficient economy is good for everyone, and an efficient economy is good for the country as a whole.

The Paradox Of The Profit Motive

The paradox of capitalism and the profit motive is that

  • For commodities with balanced bargaining power, the profit motive drives lower prices and higher quality
  • In a market with unbalanced bargaining power, the profit motives drives higher prices and lower quality.

In a competitive market the profit motive does two things:

  • (1) it drives sellers to lower prices while at the same time
  • (2) it encourages sellers to do whatever they can to increase their bargaining power so that they will be able to operate in a less competitive market that will allow them to charge higher prices.

The Conduct That Political Systems Reward

A political system can give the victory in the conflict between competing interests either to

  • The most economically powerful party, a victory criteria that ignores the price, value and usefulness of the products provided by that powerful party, or
  • The most efficient party, a victory criteria that rewards the price, value and usefulness of the products provided by a party and ignores the economic power possessed by a party.

A Political System Can Either Benefit The Few Or Benefit The Many

A small number of individuals and groups benefit from a political system that rewards more bargaining power — uncontrolled capitalism.

An uncontrolled capitalist system (a libertarian system) that rewards competing interests in proportion to their bargaining power creates an inefficient economy.

The country as a whole benefits from a political system that promotes an efficient economy (controlled capitalism).

An efficient economy is one that rewards competing interests in proportion to the low prices, high value, and the usefulness of their products. It does this by discouraging or countering disparities in bargaining power and rewarding competition.

What Is A Controlled Capitalist System?

A controlled capitalist system is one where the political system sets rules that tend to equalize the bargaining power between competing interests and/or reduces the effects of disproportionate bargaining power. Cancelling the benefits of having greater bargaining power yields more competition which, in turn, produces products that have lower prices and a higher value, usefulness and efficiency.

A Controlled Vs. An Uncontrolled Capitalist System

An uncontrolled capitalist system (a libertarian system) is one that rewards unbalanced bargaining power by giving greater wealth to the individuals and organizations who have the greatest disparity in bargaining power.

In an uncontrolled capitalist system (a libertarian system)

  • “Might makes right” where the more bargaining power you have, the richer you get.
  • Individuals and organizations are rewarded in proportion to the level of unbalanced bargaining power they possess.

In a controlled capitalist system, a highly competitive one with equalized bargaining power or neutralized excesses in bargaining power:

  • Wealth is earned by those who compete most effectively, in proportion to the value created by individuals and organizations — the better and cheaper your products are, the more of them you sell and the more money you get.
  • The creation of low cost/high value products and services creates greater wealth for the country as a whole.
  • “Efficiency and value make right” where the better your products the more money you get.

Capitalism is like fire — useful when controlled and highly damaging when not controlled.

How Would A Controlled Capitalist System Work?

Competing Interests Other Than Employee/Employer

In situations where there is a material disparity in bargaining power, the unlimited profit motive is the driving force behind high prices, low wages, and low quality goods and services. If every dollar of a higher price and lower costs yields more profit then businesses will do everything possible to gain more bargaining power so that they can increase prices and lower costs.

If the economic system includes a cap on profits, then beyond a certain point excess profits will be taxed away and higher prices and lower costs will gain the producer nothing so that only greater sales volume will earn the producer more money and that higher sales volume will need to come from delivering better products at lower prices.

That cap on profits could be an excess-profits tax of 100% of all taxable profits that exceed XX% of deductible costs, where “XX” is someplace between 20% and 25%.

Neutralizing The Bargaining Power Disparity Between Employees and Employers

These capped profits may still result in low wages to many employees because of the bargaining power disparity between low-skilled employees and employers so we will need a mechanism as an alternative to unionization to deal with that bargaining power disparity.

That mechanism could be a regulation specifying that companies with more than XXX employees must allocate their labor costs according to an algorithm.

Establishing A Ratio Between The Compensation Paid To The Highest Paid & Lowest Paid Employees

For example, if the percentage of total payroll that is paid to the top 10% of all employees is more than XX times the average compensation paid to the bottom 10% of all employees then the excess amount will be subject to a penalty tax.

For example, if a company had 1,000 employees and if the average hourly wage (based on a 40 hour week) for the 100 lowest paid employees was $16/hour X 40 hours X 52 weeks = $33,280/year and if the multiplier is 30, then the average compensation for the 100 most highly compensated employees could not exceed 30 X $33,280 ($998,400) and the total compensation to the top 100 employees could not exceed $99,840,000.

If the total compensation to the top 100 employees was $125,000,000 then only $99,840,000 of that amount would be tax deductible and the company would owe a tax penalty of $125M minus $99,840,000 = a $25,160,000 tax penalty.

In short, if the executives want to get more money, the company will need to increase the pay of the lowest-paid employees.

An Alternative Formula For The Allocation Of Total Payroll

Accountants could experiment with other formulas, e.g. XX% of all employee compensation would need to be paid to the bottom AA% of all employees with the 20% highest paid of those AA% of employees receiving no more than 100% greater than the 20% of lowest paid AA% of employees;

At least YY% of all employee compensation would need to be paid to the next BB% of all employees leaving no more than ZZ% of all compensation being paid to the top CC% of employees.

There are many formulas that might be crafted to reduce the gap between the lowest paid employees and highest paid employees in order to negate the unbalanced employer bargaining power vis-a-vis the bargaining power of the lowest paid employees.

Summary

A society can reward power, the more bargaining power an individual or an organization can garner, the more wealth it can accrue — an uncontrolled capitalist system.

Or, a society can create an environment that reduces or neutralizes imbalances in bargaining power so that the only path left to gain more wealth will be competition for a higher volume of sales — a controlled capitalist system.

Competition & Balanced Bargaining Power Are An Alternative To Gov’t Regulation & Unionization

Instead of using a never-ending, complicated, expensive, whack-a-mole government regulatory system to rein in each individual undesired consequence of the unbalanced bargaining power of sellers, lessers, lenders and employers, it makes more sense to abandon tens of thousands of government regulations and unionization in favor of

  • an excess-profits tax and
  • a wage-allocation algorithm

that will more quickly, cheaply, and effectively accomplish the same goals, namely, reducing the toxic consequences of imbalances in bargaining power between society’s competing interests.

— David Grace (Amazon PageDavid Grace Website)

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