Capitalism is Pro-Market and Pro-Consumer, All at Once

Every once in a while I learn something new. Actually, I try to learn something new every day, but I am talking about learning something unexpectedly. Today I noticed in an opinion piece by Stephen L. Carter that he used a phrase in an unexpected way:

"...I wrote in praise of Luigi Zingales’s book, “A Capitalism for the People.” At that time, I examined his call for elevating pro-market values over pro- business values."

What caught me off-guard was his use of "pro-market" and "pro-business" in a way that indicated they were completely different.

Being born an American, having read John Locke and Adam Smith, Stewart Brand, "The Discipline of Market Leaders", several Warren Buffett biographies, several textbooks on economics, Ayn Rand, and many, many newspapers over the years, among other sources, I was sure that I understood what the phrase "pro-business" meant.  Clearly, it means "favoring open markets and open competition by reducing barriers to trade and facilitating information flow by marketplace mechanisms." Right?

Then what does "pro-market" mean? Doesn't it mean "favoring open markets and open competition by reducing barriers to trade and facilitating information flow by marketplace mechanisms?"

You can see my dilemma. If "pro-market" and "pro-business" mean exactly the same thing, then how could you "elevate" one over the other?

The solution to the mystery is strictly perception. When Carter (and Zingale?) use the phrase "pro-business", they don't mean "open markets." They literally mean, "favoring business over consumers." This is a quite a surprise, as few hardcore capitalists would ever have considered that meaning. No true capitalist thinks that government should favor business over consumers. It is all about the markets. This is an absolute, with no room for negotiation on the meaning.

It looks like there is a cultural divide over the use of an economics term.  Pro-consumer groups use the phrase "pro-business" in a way that makes them look Marxist from the perspective of the capitalists. When a pro-consumer person like Carter says "pro-market is better" the response of the capitalist is "now you are finally starting to be correct in your thinking"(!). Which I am sure would shock Carter, though he shouldn't be.

So if both capitalists and pro-consumer advocates believe in pro-market policies, what the heck does "pro-business" mean? I have to conclude that a pro-business government, which chooses to support businesses over consumers, is either fascist or communist, but it is certainly authoritarian or a corrupt oligarchy. (If you squint, you might just see modern China in that definition, though that would be too harsh a judgment.) It is a very short stride from "pro-business" to state-controlled businesses that are held as sancrosanct because their output serves the people as a whole, not some little individual "consumer brat."

An Introduction to Nanoeconomics

Many years ago I had a heated discussion with a person who lamented the high profits made by some businesses. The implicit assumption made by my opponent was that the seller's profit was at the expense of the buyer, and that it should be curtailed, perhaps even by legislation.

That got me thinking, and I countered with this proposition: That the buyer made a profit as well, and that instead of the seller gouging the buyer, the buyer might even be making so much profit that they were gouging the seller instead.

That conversation eventually became an academic paper and a fairly straightforward formulation of the dynamics of single transactions. It was easily proved that the buyer profits. The buyer has an opportunity cost, which establishes the value of the transaction to the buyer. The three numbers cost, value, and price are different and the differences between them establish the social surplus, seller profit, and customer profit for the transaction. The existence of the profits for both parties makes intuitive sense; if either party were no better off after the transaction, then they would have no incentive to engage in it.

If you draw a picture of the transaction, it looks something like the diagram at left. The seller profit is price minus cost, the buyer profit is value minus price.

For those readers who have been exposed to supply and demand curves in microeconomics, this single transaction diagram will match up fairly well to what you might see if you take a vertical slice from a supply/demand diagram. The customer profit is part of the consumer surplus. The advantage to putting this on a single transaction diagram is that you can see the real profits in the transaction, whereas the supply/demand curve aggregates many buyers and sellers together in one vast undifferentiated mass.

Nanoeconomics diagrams become very useful when analyzing monopoly, monopsony (single buyer), and monopoly/monopsony situations.