Tuesday, April 8, 2008

Atlas Shrugs Again

I am teaching market competition in class. One of the obvious principles that has great analytical power is as follows. If there are many competitors that have various options, they will pick the most attractive option first. But the more competitors that choose an option, the worse that option becomes.

For instance, the "best" ride at a theme park will have a long line. The long line means that people who want to ride the best ride get less rides per trip to the park and will wait longer.

If no one were in line, then it would be good to get in line--and ride without waiting. But as the line gets longer, you give up more other rides in order to wait in line (which is not fun at all). So you might ride some mediocre rides that have short lines because you will be able to ride more, rather than wait more.

Overall, competitors at the theme park end up with about an equal amount of entertainment per time devoted to each ride, considering its attendant waiting.

By the same token, if you have 10 possible business opportunities, you choose the one that has a highest potential profit, but so does everyone else (assuming that the options are all equally fun). The more people that enter your industry, the less profit there will be for you.

After everyone has chosen an industry, if you saw a lot more profit in another industry, you would jump to that industry, increasing the competition and lowering the profit there. And when you leave your industry, there is less competition and more profit in the industry you left. So eventually the amount of profit in each industry will tend to be equal.

This gives us the following insight. If the government taxes one of those 10 industries, people will likely jump to other industries over time. Less competition in the taxed industry means higher prices for consumers--to the point that the consumer is really paying the tax.

The only way that the government could tax the industry and not harm the consumer is to make it illegal to leave the industry. That is the story in Ayn Rand's novel, Atlas Shrugged. In the novel, government increases the burden on business to the point that the most productive people stop producing (shrug). Then the government makes it illegal to stop.

At this point in the class discussion, I heard the voices of dozens of interventionist politicians in my head (only a momentary hallucination). "We have to stop outsourcing. Let's keep American jobs at home!" and, "We should only trade with countries that have the same labor, safety, and environmental standards as we do!"

As we make it more expensive to do business at home, more companies move (like when you move to another ride at the theme park to avoid the line). Economics is large enough for people either to advocate or to oppose more stringent labor, safety, and environmental laws. But economics points out the costs of more stringent legislation--lower wages and fewer jobs.

I have taught and done research at universities for many years. So most of my flashes of insight are in the past. But apparently there was at least one remaining.

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