The Cost of Space Exploration | Ones and Tooze Ep. 49 | An FP Podcast

As NASA prepares for new missions Adam and Cameron look at the cost of space exploration and how America views its return investing in the space program. The two also discuss what a possible lunar economy might look like. In the second segment Adam answers listener questions on everything from how to get the rich to pay their fair share to the economics of union organizing.

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[troubleman]

20:30 Hi Cameron and Adam my question is: In our current economy where one can find monopolies and oligopolies almost in
every relevant sector, why do we still use perfect competition models to understand our reality
instead of monopolistic competition models? Thank you so much for answering the question.

Hi Mateo so this is a great
question it's also slightly technical so perhaps we should start by explaining the difference that you assume and you're quite you're absolutely correct about. So perfect competition models are one of the most commonly taught sort of
workhorse models in microeconomics courses so economics courses which are directed not towards understanding the economy as the whole but businesses and markets - individual businesses and markets. And a perfect competition model is one which describes the situation of if you like maximum competition. I mean technically it assumes and literally I mean mathematically it assumes an infinite number of firms um which is kind of hard to wrap your
head around so just imagine a very unthinkably large number and all of them are price takers.
So the market imagined as some rather kind of abstract mechanism for settling the price that governs what the price is and
firms then orientate their decisions around that but the firms themselves do not individually influence the price.
So it's a bit like you know a kind of market trader type model uh imagine
you're a very small supplier to amazon and you're selling some widget that thousands of other companies also supply
and you just position yourself in that kind of a space or um that kind of a market. They're not actually very common
in the real world. You also then have to assume that these markets exist not just for one good in one place but in a sense
are general everywhere because otherwise the imperfections in other markets would intrude into your the market you've
defined as perfect. And when you put all of that together you have what's called a general equilibrium model and if those
exhibit all of these properties - in other words there is an abstract price setting mechanism, which everyone takes as a
price and then orientates themselves around it, has no influence over it, and these prices exist for all goods over
all time periods and literally to infinity - then certain things follow which make
economists quite happy. Namely there will be an equilibrium it will be unique it will be optimal it will be stable. In
other words you can then make this claim that the world is as good as it could possibly be because of the market.
The problem of course is that there is no world like this in the world. So you know if if the world were like this you
might be able to plausibly maintain that claim but Mateo is completely right to say that in fact
you know no economy really resembles this um in all major sectors of the world the economy you have a discrete
number often quite a small number of producers which in fact do engage in price setting, there are a small number either because
they exploit regulation to establish monopoly positions, or they are gaining aggressive market behavior, or they
exploit technical advantages economies of scale which mean that the bigger you are the more efficient you are so you
race your competitors to get as big as possible say in car manufacturing for instance and that means by definition
you can only have a small number of companies engaged in this head-on head you know Toyota versus VW who can be the
biggest in the world. And if that's the case then these firms don't have some abstract market to orientate themselves
towards and then they have to set prices themselves, and then frankly in terms of modeling this all hell breaks loose. So one reason that
economists are loath to use these kind of models is that they're very indeterminate, you can have multiple equilibria, they're not necessarily
efficient in other words they don't meet the criterion of maximization of profit or efficiency in some simple sense, they're
not stable you can oscillate between one and another type of equilibrium, all of the nice mathematical properties that
you like to generate from these kind of models basically break up. Now
in fairness to economists they're all perfectly aware of this, and this is the cutting edge of economic research and has been for decades and standard new
keynesian macroeconomic models for instance incorporate imperfect competition as price-setting mechanisms
it's one of the ways in which they generate the prediction there will be unemployment for instance. So at the technical level economists are
wrestling with this problem in fairness to them I think it's important to say this but Mateo is right that in public
discourse in some societies at least there is a kind of pervasive belief that the market is best and there's also a
kind of pervasive belief that a science called economics shows you that the market's best. And to that extent and to the extent
that that combination of ideas is actually held it's just simply ideological. It's motivated thinking by a
bunch of people who have real interests in as it were trying to convince themselves or other people that this is
true because there's really nothing in economics that would uh persuade you that this is the case. Not not serious uh
analysis of modern economies that's a it's essentially a politics pursued by means of a particularly crude reading
of what a certain sort of economics once upon a time in some textbooks somewhere said. But it's certainly it's not fair to
economics to say that that is as it were how they would advocate us seriously describing the world. They're not blind
to reality to that to that extent by any means.