COMPETITION IN THE US FREE MARKET ECONOMY

This paper describes the role of competition in a free market economy, contrasting its place in the financial sector as financial firms move from a monopoly position in initiating innovative financial procedures to an oligopolistic position as competitors adopt the same procedures. The motivation is abnormal profits. Enormous profits among a relatively small number of firms have led to political power making it unlikely for states or international organisations to secure legislative control of these firms.

ELTON KESSEL

The article “Reform of Capitalism” (Elton Kessel, World Affairs, vol14, no3, 2010, pp16–28) describes the implications of the growth of oligopolistic firms in the financial sector of the United States (US). Missing is a description of the economic growth of these firms and what motivates this growth, which is attempted in this paper. A series of successive financial innovations are described as derivatives, hedge funds, collateral debt options and credit-default swaps. Early use of these innovations led to high profits until competitors adopted these innovations, forcing innovators, such as Goldman Sachs, to invent new investment methods to maintain high rates of profit.

FINANCIAL INNOVATIONS

Financial innovations used in financial oligopolistic firms are not protected by patents or trademarks, but are recipes that provide monopolistic positions with monopolistic profits for the first firms utilising the innovations, which last until rival firms adopt them. The lowering of monopolistic profits is the incentive to develop other innovations. What is the economic and social impact of these innovations in the financial sector? The monopolistic aspect results in higher prices for services of oligopolistic financial firms. Even if the increase were only two per cent, it would involve a large amount of the total cost of financial services of many trillions of dollars. Not all oligopolistic “firms” have negative economic and social impacts. For instance, a network of large trade unions obtained increased wages for workers in large manufacturing plants, which led to the growth of a large middle class in America without increasing unemployment in the 1970s. The case of oligopolistic financial firms however, is quite different. Their enormous wealth and power have led to significant support of lobbyists, which distorts the legislative process. They provide campaign support for incumbent legislators to ensure re- election. This is the main negative implication of this process. The huge salaries and bonuses of chief executive officers (CEOs) and senior employees of financial firms and the need to bailout those with systemic risks, is disturbing but not a threat to the nation.