Tommy

“Common sense alone reveals the essential problem that economic theory ignores. Just imagine what would become of a firm that develops computer software or a new pharmaceutical if its product were priced at the cost of making another copy of its program! Bankruptcy would be certain.

To prevent such bankruptcy, we grant developers of software or pharmaceuticals protection through copyrights or patents, which limit competition. Because of the longstanding use of these monopolistic arrangements, we readily accept that they are consistent with the principles of free competition. In fact, they are not.

More and more, the existence of sunk costs makes industry resemble a software industry without the protection of copyrights or patents. For example, airline bankruptcies have become almost commonplace. Like the railroads of the nineteenth century or the software developer of the twentieth, an airline commits an enormous investment in an industry where the cost of servicing another customer is minimal. As competition drives prices down toward this level, the firm becomes unable to meet its financial commitments.

Economic theory as it stands today is irrelevant to understanding this process. Economists may employ scientific tools, such as mathematics and statistics, but they apply them in a context that is questionable at best. Economics purports to be scientific because it grounds its ideology on a rigorous theoretical foundation, but this foundation rests on wildly unrealistic assumptions.”
― Michael Perelman, The End of Economics