Krugman Strikes Again: Lower Prices Are Un-American

Paul Krugman. Only he could convince us that a company lowering prices is a bad thing. In a New York Times article from 10/20/14, that is exactly what he was positing in the article “Amazon’s Monopsony Is Not O.K.”. As a prominent Keynesian and Nobel Laureate, the people should bow down and just trust him on this.

His argument follows along like this:

Amazon has too much power that it uses this power to hurt America. Back in May, the major publishing house Hachette was approached by Amazon for a larger cut of the profits of their books sold on Amazon. Hachette refused so Amazon then started to disrupt the publisher’s sales by delaying their delivery or raising the price of Hachette books. Although Amazon has not squeezed consumers, it is still acting like a monopsonist, “a dominant buyer with the power to push prices down”. Publishing houses rely heavily on Internet retailers like Amazon to sell their products, and by diverting the sale of Hachette books, Amazon is hurting America. To prevent Amazon from abusing their position, we as a people must come together to pass legislation similar to that of 1911 when the monopoly of Standard Oil was broken up to end the Robber Baron era.

Do you follow? Of course it follows that government is our savior. You know, because government officials are made of entirely different clay than the rest of us. Standard Oil was never a monopoly either. Anyways, let’s evaluate his argument.

 

“Power” is earned because the consumers approve of a business

The only exception to this is when government grants legal privileges to companies that protect them from competition, but this is not one of those cases. Any online retailer is free to compete with Amazon and sell books. Any publishing house is free to distribute their material. Krugman bemoans the power Amazon has accumulated, but he does not bother to ask how it has accumulated that power.

Amazon has accumulated such “power” by giving the consumers what they want. In an economy, the consumers are voters, and they vote with their wallets by purchasing or abstaining from purchasing a given product. The only way to profit in a market economy is providing a good more cheaply and more efficiently than competitors.

Amazon doesn’t have any power outside of the will of the consumers. Krugman argues that we as a people must urge our legislators to protect us from these monopsonists. But if we as a people have the power to exert influence on our legislatures, would we not also have an even greater influence on these monopsonists by abstaining from purchasing their products? The latter is a far more direct and easier method for approving or disapproving of businesses and their products, and is an inherent mechanism in a market economy that always forces producers to comply with the will of the consumer.

 

Preventing the “power” of monopsonists protects producers not consumers

What Krugman proposes is nothing more than a reanimated form of protectionism that has long since been debunked. Forcing companies to pay a certain amount to a supplier is comparable to a tariff, which forces consumers to pay a certain amount to a producer through higher prices as cheaper, more efficient competitors are prevented from entering the market because of the tariff. In this case, consumers must pay more to Amazon so that Amazon can pay more to Hachette. That is what it boils down to.

The price Amazon fetches for Hachette’s books is not worth the cost of carrying them. That is why Amazon is requesting concessions. The consumers are not willing to pay the higher, current price that Amazon requests. Rather than having the consumer decide what producers make, Krugman wants to have government decide.

We would all in la-la land like to think that we can force companies to pay higher costs without affecting the price to consumers, but this simply isn’t true. A company is composed of 3 stakeholders: the consumers, the employees, and the investors. Any increase in costs must fall on 1 of the 3 stakeholders. Forcing Amazon to pay Hachette a greater amount would fall as a cost on Amazon consumers, Amazon employees, or Amazon investors. All 3 of these stakeholders themselves are presumably American so would not monopsonist legislation also be hurting America?

There’s nothing “un-American” about 2 parties haggling. Hachette does not see themselves better off by making greater concessions to Amazon, and it is not forced to do so. Amazon cannot force Hachette to contract with them, so why should it be ok for government to step in and force Amazon to contract with Hachette? Such is the ludicrous double standard of neo-liberal “economics”. Businesses should be free to produce and distribute their goods as they best see fit.

 

Amazon cannot hurt America without hurting itself

“So far Amazon has not tried to exploit consumers.” Well, that’s a relief. And we only have to thank the free market for this. As mentioned before, the consumers vote with their wallet by purchasing or abstaining from purchasing a product. They cannot be exploited unless they willingly choose to enter into an exchange that would leave them worse off. However, most humans act to improve their lot, not hurt it, so they will never consciously engage in harmful exchange except by error or miscalculation.

The purpose of any enterprise is to provide goods to consumers more cheaply and more efficiently. Why on earth are we complaining about something that lowers prices of goods for consumers? Krugman complains that Amazon after being rebuffed by Hachette offered their books with less attractive conditions. If a company cannot lower costs, it must raises prices. Hachette would not accept less money and Amazon faced a higher cost, so it instead raised prices by making conditions of Hachette books less favorable to the consumer.

Amazon, by reducing the potential sales of Hachette books, can only hurt “America” (whatever he means by that, even though America was predicated on the freedom to contract as we best see fit) by hurting itself. Amazon must raise the price of Hachette books, reducing the amount of people that will purchase Hachette books from Amazon, leaving Amazon with less revenue.

Exercising any malice or spite against Hachette is unprofitable for Amazon. The market does not promise to eliminate companies from exercising biases, but it does impose a cost for doing so. Amazon hurts its own bottom line if it willfully tries to divert sales of Hachette books because Amazon itself cannot profit if some of its books are not sold.

Leave it to Krugman to convince us that lower prices for consumers are a bad thing. Leave it to Krugman to convince us that freedom to contract is un-American while government coercion is American. Leave it to Krugman to convince us that we must pay producers a certain price regardless of what the consumers want.

 

 

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