Ideal Taxes Association

Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

Why Stock Markets Boomed While Economic Growth and Employment Stagnated
Raymond Richman, 5/16/2014

Economists have been unable to explain why the stock market has been booming while the economy has been stagnating. Perhaps one reason is that they have ignored the economic theory that could explain it.

The most important contribution to economics in the twentieth century got little recognition from economists. Prof. Edward Chamberlain of Harvard invented monopolistic competition which unlike perfect competition describes most of the economy. It is not “imperfect competition”, economist Joan Robinson’s phrase. All enterprises have some monopoly power except for producers of agricultural products, raw materials, and minerals whose prices are determined by nearly perfect markets. The degree of monopoly varies from nearly zero to 100 percent. Producers of homogeneous natural resources and farm products operate in nearly perfectly competitive markets. Automakers and nearly all manufactures not protected by patents all have some degree of monopoly power largely created by advertising (illusory product differentiation) and with varying degrees of real product differentiation. Some businesses enjoy location advantages such as greater accessibility, better access to transportation, parking, etc. And many enterprises gain greater confidence by its consumers and their competitors enjoy simply as the result of the experience of their customers.

As a result, enterprises enjoy varying power in their ability to charge higher prices than their competitors. 

It is true, as many economists believe, that monopolistic-competitive enterprises are affected by changes in demand and production cost as are predicted in the case of perfect competition. But as Prof. Chamberlin points out, “Its thesis is that both monopolistic and competitive forces combine in the determination of most prices, and therefore that a hybrid theory affords a more illuminating approach to the study of the price system than does a theory of perfected competition, supplemented by a theory of monopoly…  A comparison of the conclusions with those of pure competition indicates that that economic theory is often remote and unreal, not because the method is wrong, but because the underlying assumptions are not as closely in accord with the facts as they might be.”  Where monopoly elements are present, the equilibrium set of prices, each of the prices set by each competitor, is inevitably higher than the one indicated by the theory of perfect competition. The forces of product differentiation, whatever the causes of the differences, are omitted altogether in the theory of perfect competition.

Even pure monopolies, like patent monopolies, face competition from products produced by others that satisfy some similar consumer wants. They have to set a market price below the profit-maximizing monopoly price though it remains above the price that would be established by perfect competition.

What is significant about the fact that nearly all production and distribution takes place under conditions of monopolistic completion is that, while prices are established by the forces of supply and demand, all entrepreneurs have some control over prices. Under perfect competition, prices are determined by market forces over which neither buyers nor sellers have no control. Those with greater monopoly power have more control.

This is where the large firms have their greatest advantage. Illusory differentiation is largely determined by the amount of advertising expenditures. The ability of large firms to spend large amounts of advertising gives them a great advantage compared with small firms and small proprietorships. This fact may explain the phenomenon of the stock market booming while the economy is still in recession and wages and employment are stagnating.

Of course, innovation, increased efficiency (cutting costs!) and out-sourcing to countries with lower costs are principal causes of rising earnings. But few listed firms are innovators and out-sourcers. What explains the fact that the vast majority of listed firms participated in the stock market boom while the economy was in the doldrums? Increased effdiciency? Some, maybe. A possible explanation is that most producers have some control over the price of their product. As pressure mounted on their earnings, they raised prices. 

Your Name:

Post a Comment:

  • Richmans' Blog    RSS
  • Our New Book - Balanced Trade
  • Buy Trading Away Our Future
  • Read Trading Away Our Future
  • Richmans' Commentaries
  • ITA Working Papers
  • ITA on Facebook
  • Contact Us

    Sep 2021
    May 2021
    Apr 2021
    Feb 2021
    Jan 2021
    Dec 2020
    Nov 2020
    Oct 2020
    Jul 2020
    Jun 2020
    May 2020
    Apr 2020
    Mar 2020
    Dec 2019
    Nov 2019
    Oct 2019
    Sep 2019
    Aug 2019
    Jun 2019
    May 2019
    Apr 2019
    Mar 2019
    Feb 2019
    Jan 2019
    Dec 2018
    Nov 2018
    Aug 2018
    Jul 2018
    Jun 2018
    May 2018
    Apr 2018
    Mar 2018
    Feb 2018
    Dec 2017
    Nov 2017
    Oct 2017
    Sep 2017
    Aug 2017
    Jul 2017
    Jun 2017
    May 2017
    Apr 2017
    Mar 2017
    Feb 2017
    Jan 2017
    Dec 2016
    Nov 2016
    Oct 2016
    Sep 2016
    Aug 2016
    Jul 2016
    Jun 2016
    May 2016
    Apr 2016
    Mar 2016
    Feb 2016
    Jan 2016
    Dec 2015
    Nov 2015
    Oct 2015
    Sep 2015
    Aug 2015
    Jul 2015
    Jun 2015
    May 2015
    Apr 2015
    Mar 2015
    Feb 2015
    Jan 2015
    Dec 2014
    Nov 2014
    Oct 2014
    Sep 2014
    Aug 2014
    Jul 2014
    Jun 2014
    May 2014

    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013
    April 2013
    March 2013
    February 2013
    January 2013
    December 2012
    November 2012
    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    March 2012
    February 2012
    January 2012
    December 2011
    November 2011
    October 2011
    September 2011
    August 2011
    July 2011
    June 2011
    May 2011
    April 2011
    March 2011
    February 2011
    January 2011
    December 2010
    November 2010
    October 2010
    September 2010
    August 2010
    July 2010
    June 2010
    May 2010
    April 2010
    March 2010
    February 2010
    January 2010

    Book Reviews
    Capital Gains Taxation
    Corporate Income Tax
    Consumption Taxes
    Economy - Long Term
    Economy - Short Term

    Environmental Regulation
    Last 100 Years
    Real Estate Taxation

    Outside Links:

  • American Economic Alert
  • American Jobs Alliance
  • Angry Bear Blog
  • Economy in Crisis
  • Econbrowser
  • Emmanuel Goldstein's Blog
  • Levy Economics Institute
  • McKeever Institute
  • Michael Pettis Blog
  • Naked Capitalism
  • Natural Born Conservative
  • Science & Public Policy Inst.
  • Votersway Blog
  • Watt's Up With That


  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]