The All-Seeing Eye

Musings from the central tower…

Panoptic Power and Competition

It is fairly uncontroversial in classic economic theory that free and fair competition is often vastly more productive than limited competition or no competition.  Many economists view a monopoly as a market failure and believe that anti-trust laws must be created and enforced in order to preserve competition.  So-called “no-bid contracts,” in which firms are granted lucrative government contracts based on cronyism rather than competition, are slammed, correctly, for costing a great deal more money than competitive contracts would cost.  As a general rule, when agents compete on the market, the goods or services that the agents are selling become more productive and/or less expensive – in other words, competition allows buyers to get more for less.

How is this related to panoptic power?  Economic competition conforms closely to the panoptic model of power.  Let us compare economic competition to the two hallmarks of the panopticon:  self-surveillance, and isolation.

In the panopticon, self-surveillance is produced within a subject by causing that subject to behave as though at any moment she might be under surveillance by a central observer.  Who is the central observer of the competitive market?  The consumer.  At any time, the consumer might evaluate the quality of the products offered up for sale by the competitors.  Competitors earn reputations based on the quality of their products, and these reputations greatly affect the profits of the competitors.  The consumer is also somewhat unpredictable, in that one never knows exactly what a consumer’s preferences might be.  Perhaps your innovative new product might become the next iPod – or perhaps it might become the next Betamax. Competitors must strive towards innovation and invention and reinvention, and must also master marketing, and still success is not guaranteed.  The point here is that competitors are always being evaluated, and they may live or die based on the results of these evaluations.  This is a powerful incentive towards self-surveillance.

In the panopticon, isolation is caused by physically separating prisoners in individual cells.  In a competitive market economy, isolation comes in the form of patents, trade secrets, and the information asymmetries that arise when competing agents each try to find and maintain a competitive edge.  If you own a restaurant, you might make the best marinara sauce in the county, but if you give away your secret recipe, that will not be the case for long.  Isolation also comes from the fact that individual agents may earn more profits through competition than through cooperation – because there will be fewer people to share the wealth.  Laws against cartelization and other forms of corporate cooperation can produce isolation effects.  In a situation where workers are competing for jobs, the workers may become isolated from each other because some wish to go on strike for higher wages while others wish to take over their jobs.

If the productive power of a competitive market is related to the productive power of the panopticon, then do the same downsides exist?  Sure.  One of these is that PD-like situations may arise in which competitors end up reaching a suboptimal equilibrium state because of their isolation.  An example of this is an industry in which advertising costs comprise a significant percentage of the industry’s income but do not effect a significant redistribution of market share for any one firm nor attract a significant number of new buyers to the market.  Each firm would be better off if no firm advertised, but if any firm advertises, they all must in order to avoid losses.  In the end every firm advertises, and the entire industry essentially throws money away.  The tobacco industry is one such example (although you won’t hear me mourning their suboptimal profits.)  There are also cases like railroads or utilities where, without collusion or intervention, redundant services may be established (imagine the case of two competing rail lines running parallel to each other).

Because the effects of panoptic power are generally experienced as difficult and unpleasant, free markets tend toward a mix of competition and cooperation.  Many agents would like to collude with each other in order to avoid the panoptic effects – in other words, break isolation to resist the power of the panopticon.  A cartel is a good example of this – competitors get together and decide that rather than compete with each other, they’ll fix prices and production at a certain level so they can all profit equally.  These cartels often result in higher prices and lower quality and quantity for goods produced – they are less productive, but they make things easier for those involved.  Labor unions are a form of cartel for workers, who agree to band together to achieve higher labor prices (wages) and shorter working hours (less production).  Such cartels and unions suffer from the risk that one agent will defect or a new agent will enter the market, thus destroying the cartel or union, and as a result an equilibrium can be reached.

The free market, which depends on competition for its functioning, is thus an example of panoptic power at work.  This is an important insight because many experience panoptic power as something which imprisons them, which calls into question how much “freedom” agents in the free market actually have and provides a theoretical framework to contrast, rather than conflate, liberty and productivity.

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October 25, 2008 - Posted by | Economics, Power | , , , , , , ,

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