“Democracy must be something more than two wolves and a sheep voting on what to have for dinner” – James Bovard
The “Occupy Wall Street” movement (and Occupy Other Places) continues on today. To be honest, I don’t know what these guys want. I’ve read articles and looked for some sort of guidebook or manifesto, but the details are sketchy at best. It seems they’re upset (a point on which we agree). It seems they want less corporate greed and corruption (good luck with that), and less corporate control over the system (amen, brothers).
Since I can’t find anything explicit about the movement (maybe it’s out there, I just haven’t found it), I thought I’d chat for a bit about free market participation, barriers to entry, and who benefits.
My Employment History … Well, Some of It
When I was in college I worked for a friend who had a car-washing business. We didn’t have our own facilities, we just picked up cars from nearby businesses, drove them over to the spray & wash at the local gas station, cleaned them (by hand, not just spray & wash), and took them back. Eventually my friend left town and I continued on working for another person who took over.
I remember having debates with the new boss about the nature of the business and the room for profit margin. You see, I was making $9 an hour, and was bringing in about twice that much in profits ($20 a car minus the few coins to run the wash & vacuum – and it took a bit under an hour to do a car, but I rounded for simplicity). To my mind, this was a HUGE profit margin for the boss. We take the pre-wage profits that I generate (using his customers) and split it 50-50.
If I ever felt like I didn’t like the deal, I could easily start my own car-washing business. The capital needs for startup amount to maybe $30 for buckets, sponges, rags, armorall, windex, etc. After that it’s just clientele and sweat, both of which I could come by rather easily. There was really no reason I couldn’t have just started my own business and made nearly double my wages – other than I didn’t really want to and would soon leave anyway to take a teaching position and then on to graduate school.
A few years earlier I worked for a porta-toilet company back in my hometown of Conover, NC. I know what you’re thinking (OK, I don’t know exactly what you’re thinking – but I’m sure whatever you are thinking is colorful). It was actually a good job (and I was in good with the boss). The contrasts between the two were dramatic though, simply from a barrier-to-entry standpoint.
To run a porta-toilet company, you’d first need a truck, which could cost quite a bit of money. We’ll say we get a good deal on a serviceable $50,000 truck. Then you need toilets, which can run upwards of $400 a piece. Let’s suppose you need at least 125 of those (probably more like 200, but let’s keep it small). Now we’re up to $100,000. Add on other equipment (pressure washers, pickup truck for deliveries, etc.) and a facility to store your non-deployed toilets – you can easily be looking at $150,000 just to start a one-man toilet company. And that’s just to scrape by. Best case you’re probably only looking at $8000 or so a month in revenue (supposing all toilets deployed at $70/month), minus fuel, dumping fees, loan payments … you’d be lucky to see $1000 a month at the end.
My point? This is a huge barrier-to-entry. People don’t just up and start a toilet company when they have an idea on how to do it better – but they could up and start a car-washing company any time they choose.
Why Barriers Matter – the Balance of Capital
So why do these barriers matter? It has been said (and I believe it) that the free market is the most ruthless force we have for eliminating profit. As soon as somebody is making a buck at something, somebody else comes along with a better idea, or a willingness to take less profit, and undercuts them. The profits get wiped out quickly and people have to work harder and continually find better ways to get the job done.
Barriers to entry slow the feedback process that destroys the profits. They add inertia to the process, or perhaps just viscosity.
More than that, they shift the balance of power in the market. Consider that it takes both resources (e.g., money) and capability (e.g., the know-how to wash a car or pump a toilet) to make the business productive. When the resource requirements (the barriers-to-entry) are small, the balance of power is shifted toward the skill, ingenuity, productivity, and drive of the worker. He owns the market and can command a wage that is utterly and intrinsically consistent with his productivity.
However, when barriers are high, when large resource quantities are needed to enter the market, the balance of power is shifted toward the holders of resources – the necessary capital to buy a seat at the table. In case you missed it, that’s the wealthy.
Ultimately, the barriers-to-entry hurt the consumer in the form of higher prices.
Consider another example (not really focused on the wealthy, we’ll get back to them in just a moment). I have a number of friends who have started photography businesses. In the old days it took a good deal of capital to run your own photography business. You needed expensive cameras, expensive lighting, expensive film, and your own dark room. You were selling not only your expertise as a photographer, but also your equipment and facilities.
Then, all of a sudden, the digital camera boom hit (technology is great, isn’t it?). Now the cameras are cheaper (and probably better). It’s all digital, so you don’t need a dark room. The film is just flash memory (awesome). Start-up costs have dropped by at least an order of magnitude.
This is great for aspiring photographers. It’s easier to get into the business. Further, you don’t have to do it full time to justify the purchases. Yes, profit margins will necessarily shrink because you’re now only trading your skill as a photographer and not as much your ownership of great equipment. Still, you get to break into a business that you like and perhaps make some money too.
It’s great for consumers too. Not just in the form of better prices – but also in the form of an expanded talent pool. There really are people out there who are great at photography, but don’t have the time, risk aversion, or start-up capital needed to make a full-time business out of it. Now they can get into the market and offer their talents to the consumers.
The “Pain” of Regulation …
I say all of this as a set up for a brief discussion of regulatory overbearance. Candidates in various presidential primary debates and commercials have made a big deal about there being too much government regulation. The free market “proponents” claim this slows down the engine of the economy. Defenders of regulation say that they are necessary to protect the consumers.
I’ll let them have that fight, my interest lies more with who actually benefits from these barriers.
Suppose the government passes a regulation that makes my business 10% less productive. Is that bad for me? Well, if I don’t tell you anything else, then you’d assume the answer is “yes, that is bad”. But now suppose that the same regulation actually makes my nearest competitor’s business 30% less productive. Now is it bad? I think not. I now have a significant price cushion over my competitor (that equals profit margin). Further, the regulation likely pushes us further out on the supply-demand intersection, and may well push him out of business before me – leaving me as the owner of a larger share of the market.
The regulations set up to protect the consumers (and the employees) actually have the impact of preventing the motion of the free market.
Employees who tire of their treatment at work and wish to start their own, similar business, find that they need not only the necessary equipment and facilities, but a gaggle of compliance officers, accountants, and lawyers just to stay square with the law. This gives the entrenched, established business owners, the large corporations, and the wealthy greater leverage in the employment debate. They know that their ace talented employee can’t just leave to start his own shop, so they can extract a higher percentage of his productivity into their pockets.
The very system that the grass-roots-left thinks can be used to reign in corporate greed (regulations meant to “punish” business and force them to “play nice”) actually plays right into the hands of the mega-corporations. They know how the system works. They know that regulations may require them to hire another lawyer or two, but will force their small business competitor out of the market.
In a freer market, the people (isn’t that who the left defends?) get to keep a greater portion of their productivity. They have much greater leverage at the bargaining table. They can work in their own capacities doing what they are best at, or doing what they find most rewarding while also feeding their families. They are free – and they are empowered.
Isn’t that what we all want? Well, all of us except the mega-corporate powers and perhaps the “Occupy Wall Street” crowd … if we can ever figure out what they stand for.