A difference between being true and being useful

Just one of those little observations. There are many things in economics - in life - which are strictly true but also not useful.

For example, there’s an economist out there who insists that any analysis which assumes free markets is not just valueless but actively wrong and damaging. We’ll not mention names to spare blushes. The argument is that as we never do have actually infinite suppliers, nor consumers, therefore any and every one has some measure of market power. Thus that vaunted idea of all being price takers disappears in a puff of pure logic.

We cannot - not just should not - analyse the economy as containing free markets therefore. Everything is an oligopoly and therefore government should have much, much, more power to regulate.

This does have the merit of being true. We do not have infinite suppliers. Everyone does have some tad at least of market power.

But is this useful?

No, not really. For of course everything is just a model, we all know that no structure is actually wholly representative of reality - that’s why we’re using models. From observation we also get to a reasonable conclusion, that having four or five suppliers is usually enough for it all to be much more like that mythical free market than it is an oligopoly. True, some eight might meet even for merriment and then become that cartel as, say, the vitamin industry was once said to be. But we really can observe that only a handful gives us results much more like that free market. The UK supermarket industry for example. Just the arrival of two more companies - Aldi and Lidl - has led to the halving of profit margins at the incumbents over the past couple of decades. That’s a pretty free market result even as it’s also suggesting not enough competition that couple of decades back. We’ve even proof of markets solving their own problems - juicy margins lead to the competition that erodes them arising.

Another way to put this point. Economics contains many models and the useful trick is to apply the one that most concords with that reality out there - not necessarily the one that is wholly and strictly true.

Tim Worstall