NationStates Jolt Archive

Serious political discussion on NS, "quite quiet", but I'll try nevertheless.

Capitalism is defined as an economic model where an independent, private party maintains capital.

Watching Discovery, I came across this. There's this scenario of producing aluminium from bauxite. As you might know, this requires a huge amount of electricity. A bauxite-to-aluminum processing company, call it B2AP Corp., is out to buy this electricity, because it builds a processing plant in a remote mountain.

A dominant power company, call that DPC Corp., produces electricity by various methods. One of them is cheaper than the others, call it Energy From Nothing (EFN), yet can cover only a small part of the total demand. The rest of the demand has to produced by other, More Expensive Methods (MEM).

Now, there's a bauxite processing plant situated at the same site as the EFN plant, so DPC doesn't have to do any wiring to reach the consumer. But, then the EFN plant is cut off from the DPC main grid, making the electricity unavailable for the general public. The general public pays MEM prices. With which price does DPC sell the electricity to the B2AP plant?

Now, because DPC can produce the EFN electricity with the price of the EFN, it could sell it with a price based on real EFN costs. This is justified by DPC's inability to sell the electricity anywhere else. But, it's a corporation, so it must demand the same price as the MEM electricity. (Corporate law requires corporations to take into account only the shareholder's benefit.) This means, that aluminum is more expensive, because DPC can pocket a "tax" levied only because it "sits" on the EFN plant.

Also, if B2AP Corp. decides that it won't do business with DPC, it has to build electric wiring from some other corporation's plant to the site, and this is expensive. Thus, if B2AP wants DPC to viably compete with some other corporation, B2AP has to pay for it, which B2AP wants to avoid. This enables DPC to demand even more money.

Whereas, if the entire system of the EFN plant and the bauxite processor was controlled by one entity (corporation or government), then aluminium would has its "real" price instead of an inflated one.

Is this a distortion? I think so. Is this a systemic problem with capitalism?

The problem is that sitting on something expensive is over-rewarded in capitalism. It's happening in the real world, think oil sheiks.

As a libertarian this is one of the two toughest questions I have to answer:

1. When something is needed by a consumer, and they don't have the priviledge of refusing to buy it (like B2AP in your example, or in general, something essentially needed like health care, food, or energy) the seller of this good can demand any price they want.

2. Someone sitting on a natural resource can make a fortune, without having to provide any service outside of being lucky enough to own the natural resource.

I think you are right though, as much as I would want to try and justify this in terms of capitalism in some way, at the moment I just can't! Good example!

One point I should bring up though, is that the problem this creates, presents immense profit for anyone who could provide a viable solution (say, cheap power that people can generate on their own without needing power companies).

Capitalism would be just as ready to reward the person who solves that problem.

I don't think it answers the question entirely, but it is a point that should be noted.

Serious political discussion on NS, "quite quiet", but I'll try nevertheless.

Capitalism is defined as an economic model where an independent, private party maintains capital.

Watching Discovery, I came across this. There's this scenario of producing aluminium from bauxite. As you might know, this requires a huge amount of electricity. A bauxite-to-aluminum processing company, call it B2AP Corp., is out to buy this electricity, because it builds a processing plant in a remote mountain.

A dominant power company, call that DPC Corp., produces electricity by various methods. One of them is cheaper than the others, call it Energy From Nothing (EFN), yet can cover only a small part of the total demand. The rest of the demand has to produced by other, More Expensive Methods (MEM).

Now, there's a bauxite processing plant situated at the same site as the EFN plant, so DPC doesn't have to do any wiring to reach the consumer. But, then the EFN plant is cut off from the DPC main grid, making the electricity unavailable for the general public. The general public pays MEM prices. With which price does DPC sell the electricity to the B2AP plant?

Now, because DPC can produce the EFN electricity with the price of the EFN, it could sell it with a price based on real EFN costs. This is justified by DPC's inability to sell the electricity anywhere else. But, it's a corporation, so it must demand the same price as the MEM electricity. (Corporate law requires corporations to take into account only the shareholder's benefit.) This means, that aluminum is more expensive, because DPC can pocket a "tax" levied only because it "sits" on the EFN plant.

Also, if B2AP Corp. decides that it won't do business with DPC, it has to build electric wiring from some other corporation's plant to the site, and this is expensive. Thus, if B2AP wants DPC to viably compete with some other corporation, B2AP has to pay for it, which B2AP wants to avoid. This enables DPC to demand even more money.

Whereas, if the entire system of the EFN plant and the bauxite processor was controlled by one entity (corporation or government), then aluminium would has its "real" price instead of an inflated one.

Is this a distortion? I think so. Is this a systemic problem with capitalism?

The problem is that sitting on something expensive is over-rewarded in capitalism. It's happening in the real world, think oil sheiks.
Simple. B2AP sells stock options to the general public to raise sufficient capital to build their own power plant next door to the bauxite plant, then amortizes the cost through tax exeptions over the next ten years. They sell any excess electicity generated to the power grid. After ten years, they buy back all the stock options and lower their price, driving the others out of business and promptly buy the other plants. Problem solved. :D

No system is perfect, and there is, under any system going to be variuation due to circumstancial factors. In this case, however, you are not seeing the way the negotiation would go too clearly.

The EFN has no value to the DPC until the B2AP Corp builds its plant. Now why would they build their plant exactly there. Normally you only build a B2AP plant at a location where power is available, and this is negotiated before you build. The cost of transporting Bauxite is low compared to the energy cost, so the energy cost determines the location. Now the DPC is going to offer a low price on the energy from the EFN, as it has no market for it unless the B2AP Corp plant is built there.

End result. DPC does not have extra demand on its MEM grid, so prices to the consumer do not rise. The B2AP Corp has cheap power which satisfies its shareholders and DPC generates more revenue which satisfies its shareholders.

Capitalism determining the optimum usage of available resources.

Sheesh. I can't believe you didn't see the flaw yourself. Here;

"DPC's inability to sell the electricity anywhere else. But, it's a corporation, so it must demand the same price as the MEM electricity. (Corporate law requires corporations to take into account only the shareholder's benefit.) "

That is the flaw in your assumption; the bogus and incorrect law as well as defining capitalism as solely the realm of corporate transactions.

Invalid assumptions = invalid hypothesis and irrelevant conclusion.

One point I should bring up though, is that the problem this creates, presents immense profit for anyone who could provide a viable solution (say, cheap power that people can generate on their own without needing power companies).

Capitalism would be just as ready to reward the person who solves that problem.

I don't think it answers the question entirely, but it is a point that should be noted.
That's right. Capitalistic economies are the most innovative.

Yet, in this case, it is unlikely. Massive amounts of energy may be generated only by select methods. By chemistry, massive amounts of energy are needed.

Simple. B2AP sells stock options to the general public to raise sufficient capital to build their own power plant next door to the bauxite plant, then amortizes the cost through tax exeptions over the next ten years. They sell any excess electicity generated to the power grid. After ten years, they buy back all the stock options and lower their price, driving the others out of business and promptly buy the other plants. Problem solved. :D
This might just as well be possible...

Yeah, now I see it.

The problem there is that DPC is too large a corporation. If B2AP could buy off the specific plant on the site, then B2AP would win. But, now the problem is, that DPC has no incentive to do this, as B2AP is a huge cash cow to them.

So, it's not capitalism that's the problem, it's megacorporate capitalism.

No system is perfect, and there is, under any system going to be variuation due to circumstancial factors. In this case, however, you are not seeing the way the negotiation would go too clearly.

The EFN has no value to the DPC until the B2AP Corp builds its plant. Now why would they build their plant exactly there. Normally you only build a B2AP plant at a location where power is available, and this is negotiated before you build. The cost of transporting Bauxite is low compared to the energy cost, so the energy cost determines the location. Now the DPC is going to offer a low price on the energy from the EFN, as it has no market for it unless the B2AP Corp plant is built there.
I see. This is more realistic, and is certainly better than I thought, as B2AP can say that "if it's not you, someone else will".

Yet, we have a scenario, where the optimum is different from the result. The optimum would be the location of the EFN plant and the bauxite plant immediately next to each other, next to a bauxite mine. That negotiation result would be different, as you'd need to transport the bauxite somewhere. And isn't transporting bauxite more expensive than wiring?

Still, I'm not convinced that DPC would sell the electricity with a reasonable cost-based price. B2AP still needs to build wiring if it wants competetion between DPC and other power companies.

Capitalism determining the optimum usage of available resources.
This is what I want to question. Google Nash equilibrium to see some price-setting scenarios.

I see. This is more realistic, and is certainly better than I thought, as B2AP can say that "if it's not you, someone else will".

Yet, we have a scenario, where the optimum is different from the result. The optimum would be the location of the EFN plant and the bauxite plant immediately next to each other, next to a bauxite mine. That negotiation result would be different, as you'd need to transport the bauxite somewhere. And isn't transporting bauxite more expensive than wiring?

Still, I'm not convinced that DPC would sell the electricity with a reasonable cost-based price. B2AP still needs to build wiring if it wants competetion between DPC and other power companies.


This is what I want to question. Google Nash equilibrium to see some price-setting scenarios.

Why would either company move away from the optimum. Yes they would threaten to. Certainly B2AP Corp would use its power as a major power customer to negotiate the best power rates it can get. Now If EFN is not distribuitable, then DPC, surely would offer this power at a vastly cut rate (almost all profit anyway) to B2AP if it builds the plant at the optimal site.
It only goes away from optimum if DPC get too greedy, or if some other supplier undercuts even EFN prices.

I am not an economist as such, but I will look at the Nash curve and come back to you with an opinion though.

EDIT:
The optimum solution here is a Nash equilibrium point in this game. Neither DPC nor B2AP can gain by moving away from agreeing terms that result in the plant being built anywhere else. AT least the way you set it up this is the case. If the matter becomes more complicated (as real life game theory examples do tend to)with the introduction of a second power company, offering cut price power, then there are a lot of figures to be calculated. It may be that there would be only one resulting Nash equilibrium point in the matrix, but it is more likely that there would be two. (One for each power supplier chosen.) Under those circumstances, in real life, there is a maximisation game to be run through by B2AP Corp.

This might just as well be possible...

Yeah, now I see it.

The problem there is that DPC is too large a corporation. If B2AP could buy off the specific plant on the site, then B2AP would win. But, now the problem is, that DPC has no incentive to do this, as B2AP is a huge cash cow to them.

So, it's not capitalism that's the problem, it's megacorporate capitalism.
HORN'S RULES FOR LIFE, Number 1,501: All things being equal, too much of anything is a bad thing. :)

HORN'S RULES FOR LIFE, Number 1,501: All things being equal, too much of anything is a bad thing. :)
I just hate that "ceteris paribus" statement, it's formatted like this: "If this theory holds, then <theory>".

Why would either company move away from the optimum. Yes they would threaten to. Certainly B2AP Corp would use its power as a major power customer to negotiate the best power rates it can get. Now If EFN is not distribuitable, then DPC, surely would offer this power at a vastly cut rate (almost all profit anyway) to B2AP if it builds the plant at the optimal site. It only goes away from optimum if DPC get too greedy, or if some other supplier undercuts even EFN prices.
Well, you're right. I'm pointing out the fact that it would hurt B2AP more. But, you're right, they'd require a contract for a good part of the estimated lifetime from DPC. DPC would be unwilling to take such a risk without some compensation by a higher price. This, again, would be paid to DPC nonoptimally.


The optimum solution here is a Nash equilibrium point in this game. Neither DPC nor B2AP can gain by moving away from agreeing terms that result in the plant being built anywhere else. AT least the way you set it up this is the case. If the matter becomes more complicated (as real life game theory examples do tend to)with the introduction of a second power company, offering cut price power, then there are a lot of figures to be calculated. It may be that there would be only one resulting Nash equilibrium point in the matrix, but it is more likely that there would be two. (One for each power supplier chosen.) Under those circumstances, in real life, there is a maximisation game to be run through by B2AP Corp.
Yet, the result might not fall on the optimal position. The problem is, that B2AP can only lose by moving away from the optimum, while DPC can only win.

Serious political discussion on NS, "quite quiet", but I'll try nevertheless.

Capitalism is defined as an economic model where an independent, private party maintains capital.

Watching Discovery, I came across this. There's this scenario of producing aluminium from bauxite. As you might know, this requires a huge amount of electricity. A bauxite-to-aluminum processing company, call it B2AP Corp., is out to buy this electricity, because it builds a processing plant in a remote mountain.

A dominant power company, call that DPC Corp., produces electricity by various methods. One of them is cheaper than the others, call it Energy From Nothing (EFN), yet can cover only a small part of the total demand. The rest of the demand has to produced by other, More Expensive Methods (MEM).

Now, there's a bauxite processing plant situated at the same site as the EFN plant, so DPC doesn't have to do any wiring to reach the consumer. But, then the EFN plant is cut off from the DPC main grid, making the electricity unavailable for the general public. The general public pays MEM prices. With which price does DPC sell the electricity to the B2AP plant?

Now, because DPC can produce the EFN electricity with the price of the EFN, it could sell it with a price based on real EFN costs. This is justified by DPC's inability to sell the electricity anywhere else. But, it's a corporation, so it must demand the same price as the MEM electricity. (Corporate law requires corporations to take into account only the shareholder's benefit.) This means, that aluminum is more expensive, because DPC can pocket a "tax" levied only because it "sits" on the EFN plant.

Also, if B2AP Corp. decides that it won't do business with DPC, it has to build electric wiring from some other corporation's plant to the site, and this is expensive. Thus, if B2AP wants DPC to viably compete with some other corporation, B2AP has to pay for it, which B2AP wants to avoid. This enables DPC to demand even more money.

Whereas, if the entire system of the EFN plant and the bauxite processor was controlled by one entity (corporation or government), then aluminium would has its "real" price instead of an inflated one.

Is this a distortion? I think so. Is this a systemic problem with capitalism?

The problem is that sitting on something expensive is over-rewarded in capitalism. It's happening in the real world, think oil sheiks.

You are correct.

Capitalism IS fundamentally flawed, since it is entirely powered by greed.

The perfect situation would be a model where no currency was attached to any transaction, where energy was supplied based on need, where materials were supplied based on need.

Everything being regulated, of course... so that 'need' for aluminium (for example) wasn't artifically inflated, just to garner 'extra' energy rations.

Another example of capitalism gone awry, is the US's ridiculous medical establishment - which is making SO MUCH profit on each product that... even when FORCED to sell at lower prices to overseas customers (which will not buy at US inflated prices), and even including import AND export costs... even THEN, it is STILL cheaper to import US drugs from overseas, than to buy them in the town in which they are made.