Friday, June 15, 2012

CSOs and State 15: Old Debate on Competition and Markets

Many civil society organizations (CSOs) leaders remain unfriendly to the idea of moving society from more government to less government via more CSOs and voluntary groups. Below is one of the debates I've had with some friends more than eight years ago. I think a number of arguments remain relevant, hence posting them here. A bit long, get your popcorn. :-) 

Exchanges on Competition and the Market

June-July 2004

Hey Vince, folks, If GMA will do or support this -- fewer bureaucrats and higher pay for those who will be retained -- I say halleluiah for her! Enough of "more taxes" moves. I say "less tax rates" and there will be larger tax base.

Expenditures cut through merger, corporatization, if not outright abolition, of some govt. agencies, will inspire taxpayers that the money they surrender to govt. (nay, govt. automatically expropriates) is wasted less and less. Will the group possibly support these developments, or it will keep its focus on tax admin reforms?

-- Nonoy

Noy, I would dare say that the group effort will stay focused on tax administration reform. But I do agree with you, enough of the "more taxes" approach, it merely masks the problems in tax administration.

-- Vince
P.S. Why am I not surprised at your response to this article?

ha ha ha, right Vince -- you know my advocacies are very clear: small government, small bureaucracy, small taxes; more and freer markets and trade. so my reaction to news reports like these are highly predictable.

I have a new org. Vince, folks -- Minimal Government. Among our major advocacies are (a) flat 10% individual income tax (vs. the current 6-tiers, from 10% to 32%), and (b) a lower, 16% of net corporate income (vs. the current 32%). These smaller taxes will be compensated by fewer line departments, bureaus, and state universities and colleges, smaller bureaucracy.

So, somewhere we shall complement each other's advocacies. The group on tax admin reforms, us and other orgs. and individuals on tax rates and policy reforms. Pero mahirap magbago ng utak pre, when people's minds are "statist" -- that the state should intervene, regulate, subsidize, etc. in almost all aspects of our lives.

-- Nonoy

Folks: Today, I speak purely as a taxpayer and not as a reform BIR advocate.

I am tired of new taxes (or at least proposals for new taxes). I think the government should not be able to impose new taxes unless it can show: 1) that it can improve collection of existing taxes; 2) that it can plug leakages on the collection side; 3) that it can plug leakages on the expenditure side; and 4) that the first three are not enough to narrow the budget gap to manageable levels. Otherwise, any time there is a revenue shortfall, the government will resort to new taxes. If the figures coming out of the office of the Ombudsman or the World Bank are accurate, anywhere from P240-P400 billion is lost EVERY YEAR through "leakages" in the BIR. As far as I know, these leakages are still rampant and SOP. I am aware of several firms that are at the moment being extorted for money by BIR examiners. Despite vigorous, and largely successful efforts, by Parayno to clamp down on tax loopholes, extortion by BIR officials seems to go on unabated. Another P20 billion or so is lost in the procurement process. One can only guess how much is lost through inefficient government service or substandard delivery of goods and services.

Imposition of new taxes increases the burden on the taxpayer, while relieving pressure on the corrupt BIR official and pork barrel-gorging politician. New taxes are a means to subsidize the corrupt lifestyles of the tax collectors and politicians.

And that's plain and simple, WRONG!

-- Vince

He he, nice piece Vince. It's all related to the unstoppable budget deficit and ever-expanding public debt. Govt. doesn’t want to seriously tinker with the expenditures side of the problem, it only thinks of the "where, how, how much" to bleed us taxpayers. It doesn't want to displease some underperforming government personnel, bureaucrats and politicians -- these guys are organized and can easily mobilize protest actions. Taxpayers are plentier yet diffused, less organized as taxpayers unions, so easier to gamble displeasing them.

In addition, I am not even in favor of govt. "properly collecting" the right taxes from us. Why? Because current tax rates given current govt. services are unreasonably high, exorbitant, and unjust. Take individual income tax rates: 6-tiers or layers, from 10% to 32%; if you're a fixed income earner, and your taxable gross individual income is P500,000/year or more, govt. will get or expropriate 32% (or nearly 1/3). Is this fair? Nope sirs. Govt. not only gives you just 2/3 of your income, it further taxes you of many things that you consume or buy -- hamburger, softdrinks, shoes, clothes, gasoline, cars, car registration, etc.

So, my fear Vince, is that should tax administration reform be enacted, the new agency will implement and collect unjust and exorbitant income tax laws. It will become an efficient machine to bleed us taxpayers.

Where's the alternative, then? One is to have smaller income tax rates -- let the citizens keep a big portion of their hard-earned money. A better alternative actually, is to ABOLISH income taxes, shift to consumption tax. Smaller overall taxes in exchange for smaller govt. services, fewer bureaucrats and legislators.

-- Nonoy

I gotta give it to you, Noy: your message is consistent. Who knows, you may yet convert me one of these days!

-- Vince

Vince, When you really ponder about the role of govt. that the market or the private sector cannot provide, it's very basic and very limited: enforcement of property rights and contracts, protection of human rights and individual liberty, foreign policy and national defense, currency/monetary regulation. All the rest, I will argue, can be done or provided by the market, the local communities, and local govts.

So, this one's a good punchline:
"A strong state is a minimal state."

-- Nonoy

sa totoo lang, marxist talaga through and through kahit noong magkasama pa kami sa UP. di ba sabi ni marx, in the end, the state shall wither away. o...lumalabas na talaga ang kulay mo noy with your minimalist government.

-- Jeck

In my opinion, only Marxists (or closet ones) can truly understand the requirements of capitalism. From what i have seen so far, Marxists can make capitalism work over and above the objections of near-sighted and selfish (unmindful of systemic requirements; attuned only to one's own p & l statements) capitalists themselves.

-- Bong

Bong, Tama ka dyan, true-blue Marxists and truly competitive capitalists have an unholy similarity of opinion and objective.

In microeconomic theory, in a perfectly competitive market (say a market for tomatoes of similar sizes, similar quality and variety, in a particular public market), profit will be zero. Revenues will enough to cover the producer's and trader's operational cost and wage for himself. That's how fierce and heartless capitalism is! So soft-hearted capitalists always go to government for all forms of rent-seeking policies: high tariffs and quantitative restrictions from competitors, single franchises, monopoly or oligopoly position, etc. So, the state and govts (national or local) are instruments by weak-hearted capitalists.

The really fierce and competitive capitalists don't want the state, except in very focused, very limited, function -- mainly the enforcement of property rights and contracts between and among individuals and groups. Final arbiter. All the rest -- education, health care, housing, food subsidy, etc. are just ek-ek functions of a state.

-- Nonoy

The problem is the world is populated only by a few and fiercely-competitive capitalists. Most of them, as Machiavelli opined centuries before Marx, are of the weak-kneed and fair-weather variety. The capitalist state was organized to take care of the collective interests of capitalists--those few with virtue and the countless others without.

-- Bong

Or, for that matter, Adam Smith, who knew full well how much capitalists hate competition.

-- Steven

Steve, Can you expound your statement? Because my understanding of Adam Smith's "invisible hand", is that he depicts a situation of "no buyer or seller is big enough to influence the price outcome of exchange"; ie, both sellers and buyers are price-takers. So, if both buyers and sellers want welfare via the invisible hand, they must love competition.

Bong, May I disagree a bit here. Me thinks the capitalist state is formed by some factions of capitalists to protect themselves from another faction of fellow capitalists. Look how many local capitalists hate foreign capitalists, that's why they invented high tariffs, QRs, and other forms of trade protectionism. Or they invented Constitutional barriers against foreign investors and capitalists. Or they capture the state, them and their friends avoid paying taxes while their competitors are taxingly-harrassed.

-- nonoy

I have time to google up juicy quotes from Smith:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Buyers love competition, sellers do not. Consumers are mostly buyers, businessmen are mostly sellers.


Of course, pareng adam is right. there is a fundamental contradiction between sellers' and buyers' interests. adam thought the free market will keep all our noses clean because of the magical pressures of competition. but sellers apparently can resolve their collective action problems better and faster than buyers (because at the end of the day, sellers will be less than the number of buyers; the competition amongst consumers does not result in consumer attrition i think at the scale that competition amongst sellers would put some sellers out of business, that is, they become non-sellers and become buyers as they lose the previous status).

however, karl marx and the some non-vulgar bourgeios political economists recognized that left to itself, a free market will then become an unfree monopolized market so that there will be tremendous assymetry of power between sellers and buyers. capturing the state will be a favorite strategy of sellers.


Steve, May I disprove you again as wrong. Sellers also love competition.

Look at thousands of small stalls or "tiangge" in various malls like greenhills selling generally the same products -- dozens of rows of stalls for clothing, rows of stalls for shoes, for jewelries, for telecomms accessories, etc.
Look at dozens of food shops in food courts of big malls, all selling food and drinks.
Look at public markets, rows of sellers of pork, of chicken, of vegetables, of fruits, of fish, of flowers, etc.
Look at Banawe St. in QC, long stretch of sellers of car parts, accessories, car electrical products, etc.
Look at rows of bicycle shops, of shoe shops, in Cartimar, Pasay.
Look at rows of garments and apparel shops in Binondo and Divisoria. The list is endless.

Why do sellers who compete with each other selling generally the same products, with some product differentiation of course, like to be side by side with each other?

Because consumers love competition. If you're a seller of a particular commodity and you got no competitors nearby where buyers can compare prices and quality, you'll attract less consumers. So, as a seller, you must love competition also.

Besides, sellers are also consumers. You manufacture catsup, you shop around for cheaper catsup-processing machines, for cheaper tomatoes, for cheaper office rentals, etc.

-- Nonoy

Small sellers cannot but love competition although they would want the competition to disappear. big sellers hate competition and they do something to reduce competition by capturing the state.

-- Bong

Bong, kaya nga kami may Minimal Government movement eh. Reduce the role of the state to a few, focused, limited function, mainly the enforcement of property rights and contracts among individuals and market players, ensure human rights and freedom, among others.

The state should get out of running corporations and financial institutions, running state universities, running many hospitals, running a military academy, running many regulatory agencies, hiring many employees and bureaucrats.

-- nonoy

Just a quick note on the sellers in tiangge in Greenhills: while they all seem to be competing against one another for the buyers' hard earned pesos, they (the sellers) are in fact one and the same. Many of these sellers own several stalls selling the same merchandise. So in the end, if you go to stall A or stall B, it's the same seller. Not really competition, if you ask me.

-- Vince

Yes, because sellers would always want to have greater control of the market which translates to more profit. kaya nga they try to influence policies, etc. There maybe lots of sellers but that doesn't mean they love competition.

-- Cielo

Vince, True that some businessmen own 5, 10, 15, 20 stalls. But there are more than 1,000 stalls there I think. So there is still competition among large stall owners. In microeconomic theory, that market structure is called "monopolistic competition". Not monopoly or oligopoly, nor perfect competition, it's in-between these extreme market structures.

Cielo, hep-hep, correct and wrong ka dyan, although largely wrong. Incumbent sellers want to "control" a particular market, hence, in this aspect, they dislike competition. But potential and incoming sellers want to "eat" into the "controlled market" by the incumbent sellers. These guys like competition.

That’s why there’s "contestable market", di ba? High profit situation in a particular industry will attract lots of competitors, lots of potential sellers and suppliers. These guys who are coming in to take advantage of high-profit sectors or industries love competition because they're the ones "invading" the turf of the incumbent sellers or suppliers.

Overall, market players -- suppliers and demanders, sellers and buyers -- would have to embrace competition, consciously or unconsciously.

Ang trabaho naman ng estado, to put lots of brakes to competition. Kaya nga may trade barriers, may investment barriers, may high taxes, may pyramid of bureaucracies and maze of regulations.

That's why we need minimal or limited government.
And smaller taxes to support a small government.

-- nonoy

I agree with you that yes more players would enter the market especially if the particular industry is very profitable. But these new comers enter the market because they want a share of profit, then it's not that they naturally love competition. they have no choice but to compete in order to have a share of the market. So competition is just an implication of the decision of sellers to enter the market. These players will eventually become incumbent players and will discourage competition (that's why there are huge investments in r&d and marketing). On the other hand, it is not just the government that creates barriers to enter the market, some firms would also create barriers to reduce or discourage potential players.

-- Cielo

he he he, friendly debate lang naman cielo, di ba?
I just want to drive one important point kasi eh. Let's not dwell too much on those "sellers/suppliers/ capitalists/hate competition" thinking. Know why? Because the implication of it is that since there's market imperfections in every step of the way, then govt. should come in, regulate and intervene left and right, create regulatory agencies left and right, have regulatory bureaucrats left and right. So, taxes and fees left and right to maintain those interventionist agencies and their bureaucrats and the politicians. Later on, the tax rules and fees have become a maze and pyramids of endless regulations. And that's what we find ourselves now.

Whereas if we put some faith in the market system, in the limited role of government and bigger role of the market, then we don't need too many govt. regulatory agencies, too many bureaucrats, too many politicians, too many tax rules, high tax rates, to maintain those politicians and bureaucrats.

The market system generally works in this country. Look at food production and distribution for instance. All those rice, corn, vegetables, fish, chicken, beef, pork, fruits, are produced by private growers and farmers. They are transported by private traders from the farms to public markets or talipapa or grocery stores. They are cooked and processed by private restaurants or carinderias, hotels or foodshops, etc.

Government has minimal role in the whole chain.

-- nonoy

Noy, sige nga. Push kita nang kaunti. Can we be assured that a government with minimal role can not be captured? I have seen arguments to the effect that an effective bureaucracy is a guarantee for a free market. Notwithstanding some issues of subsidies, and favoritism of some companies with military contracts, etc. the markets here in the US are generally competitive because the government bureaucracy works. Predatory practices are eventually brought to the open. Even now, CEOs are beginning to take stock of their behavior because some of their ranks are being hauled to jail. So minimal or a government bureaucracy that works?? Do these go hand in hand?

-- Manolete

Yo Manolete, To your 1st question, "Can we be assured that a government with minimal role can not be captured?"
--> No. But neither any assurance that a big government cannot be captured.

To your 2nd question, "So minimal or a government bureaucracy that works?"
--> A minimal or limited govt. can assure freer markets even compared to a big bureaucracy that "works". Why? A number of Americans I have encountered were asking questions like "The US govt. now gets 40% of average americans' income. Why is this not enough? How much do you want, 50%? 70%? or all of it?" US big bureaucracy may be working for some, but not for others.

To the 3rd question, "Do these go hand in hand?"
--> Yes. A smaller govt. will have fewer, more focused functions. And it will require smaller taxes from citizens to maintain the bureaucracy. Citizens will have higher take-home pay, it's like a pay rise for them all.

More questions? he he he.

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