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The great circle of intervention

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Tags Free MarketsInterventionismMonopoly and Competition

07/19/2006

Dr. DiLorenzo's article "Should Wal-Mart be Broken Up?" is a good example of how government interventions in the economy are like bacteria: you only need to start with one, and before long, you have another, and another, and another, until there are more than you can count (though there are limits on how much bacteria can reproduce themselves. I see no such limits with government). In effect, antitrust is the intervention to fix the problem that intervention created.

In a free market, large companies can reap the advantages of economies of scale. But the potential growth of a firm in the market is not infinite. At some point companies can grow so large that they encounter diseconomies of scale (a point made by Roderick Long in his recent seminar). These can include internal calculation problems, similar to those that take place in a socialist economy where there is a lack of monetary prices that make calculation possible. In a free market, these problems can limit the size to which companies can grow. However, the current market is distorted by government intervention in the form of subsidies and tax breaks (which lower the cost of business for some companies but not others), regulations (the costs of which are more easily absorbed by large firms than small ones) and other restrictions on entry and competition. Government intervention on behalf of corporations can stifle competition and insulate certain companies from competitive forces. In such an environment, it may be possible for such a company, facing fewer penalties for inefficiency, to grow in size beyond what it might achieve in a truly free, competitive market.

I do not know if this is the case specifically with Wal-Mart, but it is a possibility. If so, this is another example of how one intervention begets another and another and another: by intervening in the economy for the benefit of large corporations, the government allows them to grow beyond what they would in the free market. Once they reach a size people find somehow threatening, it spurs calls (probably from competing businesses) for the state to intervene again, this time to "encourage competition" and "benefit the consumer" by breaking them up. Once they're broken up, it can make room for their growing competitors to get in on the lucrative business of lobbying the government for special favors. Once they're on the receiving end of government favoritism, they start growing and growing. And the cycle begins again…

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