Can market exchange create new value?

No misconception is more common among free market proponents than the idea that simple exchange creates new value. I wish to show how this reasoning is flawed.

free lunch
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A very common argument from economists and generally free market proponents is that the only thing that creates value are market interactions.  The basic idea they try to promote is that the Capitalist system is not a zero sum game as one person’s gain does not need to come from another person’s loss. You can see an example of this argument from this latest post on Techdirt.

Too many people, it seems, assume that “there is no free lunch” means that the market is entirely static. That is, they believe it’s a zero sum game. If I do x, then y loses out. So, if I am offered free internet service or a free lunch, then whoever provided that is out the same. But that’s simply not true. Economics is not a zero sum game, but is built around economic growth — where the sum of economic activity can be greater than the parts. If I do a transaction with you, and in the end, we’re both better off (i.e., we both got more value than we gave up), then the amount of overall value in the world increased. It might not be a “free” lunch (the economic transaction cost me something), but new utility is created above and beyond what was there before.

(Emphasis mine)

I will not argue on the liberal use of vague concepts and examples that seem valid (eg Why “Free Internet” and not “Free Apples”? Because the argument sounds more plausible that way) but I will point out the black hole in the end.

What the author is telling us in effect is that when you and I trade commodities, new utility is created. So if I give you an apple and you give me an orange, new utility has been created out of thin air. What this utility is, the author does not deem worthy to mention so your guess is as good as mine.

We can safely assume that the author is rather talking about utility in the economic sense, which can roughly translate as satisfaction. In that case however, new utility has not been created but rather the individual utility of each person has been increased. But this kind of utility does not affect the cumulative value of the world, it only affects the individual. The amount of value in the world remains constant.

It is this kind of fallacious reasoning that leads to events such as the rise and fall of Iceland, where their “value” skyrocketed simple because the traders agreed upon themselves that their stuff was worth more. What they basically did was trade amongst themselves and with each trade, they were creating “new utility”. By the logic above, that is perfectly normal and acceptable. The result of which was that Iceland’s “wealth” ballooned to such an extraordinary degree and then popped at the slightest disturbance.

But the reality is that utility, and by that I mean objective value of any single commodity can only be created through one of two ways. Human Labour and Natural Phenomena. The only way to create a new car is to build it. The only way to create a new microchip is to build it etc. It is funny that the author quotes someone else who goes very close to this but fails to grasp it

A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects.

But of course the extra value that is created in the kitchen does not come from simply possesing lots of inexpensive ingredients. By this reasoning, the best cooks would be the ones who could trade their material best and get the biggest array of them, or trade for the ones that gives them personally the largest amount of satisfaction. After all it’s the trading that would “create new utility” and thus “value” isn’t it?

But that of course is patently absurd. The extra value that is created in the kitchen does not lie in the ingredients. It lies in the amount of labour the cook will put in his cooking. And if we take into account the skill of the cook, then we can speak about the SNLT to be more accurate. The more labour the cook puts into his cooking, the more value the end result will have.

It is understandable that economists would be avert to recognise where the value comes from, but this dooms them to simply a series of equivocations.

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Microsoft is building the best products says Techdirt

Just because someone is gaining market share does not automatically mean that they have better products. Apprently the free market supporters of Techdirt are unable to understand that.

Image by Getty Images via Daylife

I’d never imagine I’d see this argument by anyone, especially by someone who aims to be an authority in tech sector reporting but it seems that ideology trumps facts. See Techdirt’s Mike’s (I assume Masnick?)  latest quote:

And, for that matter, I’d suggest that you’re wrong in your initial assessment. Microsoft beat all of the companies you listed above by creating a BETTER PRODUCT.


Now let’s see

  • MS Word VS Wordprerfect
  • Exchange VS Lotus Notes
  • Internet Explorer 6 VS Opera
  • MS-Dos VS DR-Dos
  • Active Directory VS Novell Netware

There’s a lot of other products that suffered the same fate because of the way MS “competes” which has nothing to do with building better products. Indeed all tech experts were scratching their head how an upstart competitor with a clearly inferior product could be winning market share against his well entrenched opponents.

The answer of course is by anti-competitive tactics, which is to say, by doing anything else except building a better product. If there’s anything to be said about Microsoft products is that they have always been second class with a lot of bugs features that nobody wanted. And yet, they win.

Still, Techdirt seems unable to recognise this fact. This can only be because free market idealism has clouded their minds so much that monopolies and shady practices don’t even register. No, everything is fair competition as far as they’re concerned. But this is of course a fallacious reasoning as their argument goes like this.

  • Products/Companies  in the free marketwho  gain market space do so by building better products
  • Microsoft is gaining market space
  • Therefore Microsoft must be building better products.

Of course this is patently ridiculous, as the very first premise is wrong. Companies have many means in their disposal to gain market space that don’t involve building better products. From using your monopolistic market share to strong arm your allies to drop the competitor’s products, to setting fire to the other’s stores.

Wether Microsoft is gaining or losing market share is does not tell us anything about the quality of their products or their tactics from the very simple fact that correlation does not equal causation. To find out what is causing this, you need to look deeper into practices and product comparisons, something which Techdirt is apparently unwilling to do and much prefers the lazy way out.

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If someone fights unfairly and you nevertheless win, it doesn't mean they don't deserve condemnation

Techdirt believes that Mozilla has no basis to be siding with EU against Microsoft on browser anti-trust issues. I point out why this is the wrong way to see it.

Image representing Mozilla as depicted in Crun...
Image via CrunchBase

I have been a fan of Techdirt for a few years now but as Masnick becomes more and more rabidly pro-“Free” Market Capitalism,  I start to reconsider. I keep seeing articles which seem critical of one action only because it opposes the free market, not because of any utilitarian argument.

The latest post commenting on the recent siding of Mozilla with the EU anti-trust action against Microsoft is the latest such example of this trend. Within, the author complains that such a move is obviously wrong as well as misguided as obviously there isn’t a monopoly since Firefox has managed to gain market share. In the same breath however, he also mentions that the original instigator, Opera is an “also-ran”.

Basically what Masnick is saying is that if a complaint is made by someone who cannot gain any market share, it’s because they are not good enough. But if it’s made by someone who managed to gain a foothold, it’s disingenuous. Whatever happens, there can’t be a monopoly issue brought up at all.

Anyone can easily see the fallacious reasoning here. The truth of course is that Microsoft is not simply abusing its market position to stiffle innovation on the browser space ((mainly because it was in their best interest to have apps based on the OS or an OS-locked browser instead of a multiplatform browser)) but it has been doing so aggressively and for a very long and well documented time.

Firefox managed to achieve market acceptance despite Microsoft’s monopoly on the space. When the new browser came out, it didn’t even register on the radar until the first major grass root advertising and word-of-mouth campaigns started. Even though it was vastly superior to any of MS’ offerings, its growth was slow and tortured, owning mostly to the fact that most webpages were “optimized” for IE and flat-out refused to work with Mozilla based browsers.

Not only that but the fact that MS bundled IE with their OS ((After they hastily made it an “integral part” of the OS during the Netscape anti-trust case, in order to claim that they couldn’t remove it)) made any viable alternative difficult to discover. Why would most normal users even consider looking for an alternative browser which most of the time couldn’t access their banking portals? Many times. even when you put an alternative browser on one’s desktop and advised them to use it, they wouldn’t because it was not what they were used to. This is how deep the IE conditioning had gone.

There is no more striking example than what Techdirt dismisses quickly: Opera. Almost everyone will tell you that for a long time before even Firefox got conceived, Opera was the undeniable leader in features, standards-implementation, speed and basically all there was in a browser. And yet, it didn’t even make a dent in the market share of MS. Techdirt, the stalwart defender of innovation for some reason does not even wonder why Opera didn’t make it but rather assumes that it must have been because they were not good enough or something. In other words the classic  selective view of reality that annoys me so much about Free Marketeers.

Of course Firefox managed to compete, in the same way that GNU/Linux managed to compete, by being adopted immidiately by the Free Software movement who then went had to fight uphill for every percentile of market share. The reason they achieved it is because of their distributed nature, philosophical backing and knowledge of technology which allowed them to be unaffected or quickly overcome many of the hurdles in their way. Does that mean that the competition was fair? Not at all. It was stacked against them on every turn. But they persevered.

Opera unfortunately had neither a huge community behind them, nor the budget required to raise awareness of its existence which is why then, and still now, it still can’t get market share, even though it is still considered by many as one of the better browsers. However, were MS Windows to come bundled with Opera and IE and ask the user which one they wanted to use, then things would have been much much different. Most people who didn’t know either, would give a try to each and stick with Opera overwhelmingly.

The author also brings as examples of competition Google’s Chrome and Safari, both of which don’t sustain his argument in the slightest. The only reason either of those managed to achieve any market share is not because of any innovation but because of the popularity of their respective distributors. Apple has a well known fanatic fanbase and a considerable market share in the OS, for which they also bundled their own product. Google did a smart marketing campaign but overall Chrome, even though an inferior product from all others, gained share because it’s suggested in the front page of the most popular search engine.

And with all this, IE still stands at ~70% even though it’s the worse of them all and Microsoft has done practically no marketing whatsoever about it and only a half-arsed effort to improve their own offering (mainly by copying popular features). If that does not give you a very clear hint that something is amiss, then I do not know what will. Everyone must strive infinitely more to achieve even a single market share percentile while MS without doing anything can still enjoy a monopolistic percentage.

So yes, Firefox has managed to crack MS iron grip on the browser but that is not because a monopoly “obviously” doesn’t exist but rather despite this very clear, for all but the Free marketeers, monopoly. Just because they have managed to a degree to overcome the mountain of challenges posed by the anti-competitive business practices of MS does not mean that these practices should be left unpunished.

If you play a game and you opponent is obviously cheating but you nevertheless manage to defeat him by playing fair, does it mean that they do not deserve condemnation and punishment? Of course they do. You do not punish them only when you lose, you do it regardless – not out of spite or revenge – but as a lesson and a warning for the future. Leaving them unpunished simply gives the incentive to cheat the next time as well.

But the view of Techdirt is more inane than that. When you play with a cheater and you lose, you’re just a sore loser. If you win, then they couldn’t possibly have been cheating could they?

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