A GOOD ECONOMICS LESSON
Two professors, one lesson in deregulation

From the Houston Chronicle editorial page:

In college, I was taught, by a different professor, that certain industries are better regulated than unregulated. This was to avoid uncontrolled monopoly or oligopoly in industries where few competitors could survive because of the huge costs involved in operating companies like airlines and utilities. Today, this would be considered heresy, if not socialism.

My professor taught that after the deregulation of such industries there would be an initial burst of competition producing lower prices. This would be followed by a winnowing process in which the weak companies would fail. Even if they were large.

Ultimately, the industry would consolidate either into monopoly or, at best, oligopoly. Prices would then rise as service deteriorated because of lack of competition. The airline business has followed that model in the way my professor taught me.

When Professor Kahn unveiled his plans to deregulate airlines, it was very popular with both parties. This was the beginning of the era when government regulation was becoming a disreputable concept because of the inflationary economic policies of Carter's time. Republicans had demonized all government regulation as one of the roots of the inflationary evils of that time.

So when Kahn came up with the idea of deregulating the airlines, he had strong bipartisan support for a concept that my professor had taught was doomed to failure.

Just as taught, everything went swimmingly at first. Peoples Air, a small East Coast carrier, established itself with low-fare marketing. The big airlines were forced to match them and prices went down, for a while.

The only problem was that the winnowing phase followed soon after.

Click here for the rest.

Clearly, the concept of the "free market" has, on a cultural level, gone well beyond any sort of serious, rational, economic analysis. People now support free markets and deregulation because they have been told that they are good, and even when the evidence clearly shows that this is not always the case, it simply doesn't matter: those who take issue with the concept of unfettered markets are denounced as lunatics, communists, or just plain stupid.

The power of human belief is amazing, indeed.

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