I have just read a FEE article on monopoly vs. free markets and it has me riled up. It’s got a couple of good points but it misses everything important. So let me set it out.
1. If you are calling for an end to something you call monopolies and monopoly pricing, you can go straight to hell. Who are you to tell producers what they should do with their property and their lives?!
Put more decorously, businesses don’t make demands on you regarding what you must buy or what line of work you should go into, so have the same respect for rights and dismiss any thoughts about what business should be doing with their production, their output, and their lives.
If you don’t like the “monopoly price” (an invalid term), don’t pay it: don’t buy the product.
2. That ends the discussion of what ought to be. But for those who are interested in how a free market operates, and are not open to plans to violate individual rights by interfering with it (i.e., negativing the choices of buyers and sellers by the muzzle of a gun), several never-considered points are of interest.
a. There are no more or less competitive markets under laissez-faire. All markets are equally “competitive” or equally “uncompetitive.” Production for sale is not like sports. In sports, more entrants can mean a more competitive game. Or, increasing the prize money can stimulate more effort, more training, more search for winners, etc.
But life is not a game. Production is not a game. A market is not a playing field. For one thing, sports are zero-sum. There’s only one winner. Everyone else is a loser. And it matters little what the score is: 10 to 0 is a win, and so is 10 to 9. The 9 points scored by the loser have no consequence. In production for sale, the reverse is true: if Home Depot earns $10 per share and Lowe’s earns $9, both can be almost equally happy. Nor is it the case that if Home Deport had earned only $1 per share, that would per se have meant Lowe’s earned $18.
In business, every dollar of profit made is a positive good and that good is essentially unaffected by how much more or how much less competitors make.
The goal of business is profit, not beating others.
All of this is to shake the idea of more competitive vs. less competitive markets. Every dollar invested is a dollar seeking sales (sales revenue of more than a dollar). But every dollar spent by the buyer is part of his budget and impacts every other buying decision he makes. If he spends $1,000 for a new laptop, that’s $1,000 he doesn’t have to spend on, say, dining out or buying tickets to the Superbowl, or flying business class instead of coach or . . .
Economists talk, with some justification, about “substitutes” for particular goods. As butter becomes more expensive, people start to switch to margarine. As Corvettes become more expensive, people start to substitute Camaros (sometimes called “the poor man’s Corvette”). That’s a real phenomenon but hardly worth mentioning. The real substitute is the next most valued item in the person’s hierarchy, which may not be margarine or a Camaro but a new Apple Watch or a vacation in Switzerland or a combination of three other things. Dollars are fungible; when X becomes more expensive, people may choose to buy X’, a substitute, but often they’ll buy something entirely unrelated, B.
So, it doesn’t matter whether the “monopolized” good has “close substitutes” or any substitutes. There may be a few exceptions (clean water comes to mind) but they are irrelevant, and the antitrust laws are not aimed at them.
3. Barriers to entry. This is a ridiculous idea, pushed by anti-capitalists and bought into by pro-capitalists (to their discredit). There is only one barrier to entry: physical force. The fact that producing something requires factors of production is the opposite of a barrier to entry: it is the means of entry. You want to enter the steel industry to compete with existing steelmakers? Nothing is preventing you. That is, nothing is stopping you from buying the iron, blast furnaces, equipment, factory, and paying the wages, as the existing steelmakers are doing and have been doing for as long as they’ve been in business.
“But, but . . .” sputter the economists, “it may not be a barrier in some high-falutin’ philosophical sense, but what we economists mean is that the existing steelmakers know that they can raise their prices a little, and make an above-average rate of profit, because it would take a lot of capital to start a new firm to compete with them.”
It’s mind-boggling how divorced from the actual facts that conception is. In actual reality, the alternative isn’t a software engineer deciding to ask his buddies and families for loans to start a steel mill. In actual reality, the alternative is somebody in a closely related industry (nickel producers?) or suppliers (the equipment manufacturers) or the buyers (Ford) moving into steelmaking.
And even more mind-boggling is the economists’ (Left and Right) blindness to a gargantuan sector of the economy that’s reported on minute by minute and which they probably follow in their personal lives: the capital market. Have they not heard of the New York Stock Exchange, of Goldman Sachs, of the stock exchanges around the world, of the market for commercial paper, of venture capitalists, like Peter Thiel, Mark Cuban, of Bain Capital and Blackrock and Berkshire Hathaway and . . . ?
There are many trillions of dollars sloshing around daily in the capital markets. What are they looking for? An above-average rate of profit. What is it that the supposed monopolists are supposedly restricting output in order to get? An above-average rate of profit.
Those dwelling in the fantasy world of the Left would try this comeback: “But as soon as Goldman started arranging for a competitor to the steel cartel, the cartel would lower their prices to forestall them.”
Correctement! And the threat of amply financed competitors is why they don’t try to raise their prices in the first place.
Leftist comeback: No, the threat of the cartel temporarily lowering prices (“predatory price cutting”) is what makes Goldman turn down proposals to finance new entrants.
My answer: Gee, poor passive Ford. Poor, passive Toyota. Poor passive customers buying steel in construction and other fields. I guess there’s nothing they can do but pay the “monopoly price” for steel. Oh, wait, they can make advance contracts with the new entrants before the cartel cuts its price?! This is permitted?!
In other words, in a capitalist economy, where ambition and initiative are rewarded, buyers don’t have to roll over or play the victim. If cartels of producers form in the attempt to raise prices, cartels of buyers can form to attempt to lower them. In reality, neither would have any real clout, and there are no organizations on a free market attempting to twist the law of supply and demand—not for long, anyway.
In principle: every buyer is a seller and every seller is a buyer. Present consumption is paid for by past production (Say’s Law). That’s value-for-value economics 1.01.
From that perspective, there’s no “power” or “clout” possessed by businesses over “consumers” or sellers over buyers or “bosses” over “labor”—these are all just traders. And what they trade is: value for value, each judging what is or isn’t a value by using his own mind to make his own “teleological measurements” applying his own hierarchy of values.
There’s only one entity with a special “power,” the power to disregard the minds and value-hierarchies of those it interacts with: government. Government is and ought to be a literal monopoly. It does not and must not allow “competitors” in the wielding of force.
The actual, proper, non-package-dealing concept of “monopoly” is: a field insulated from competition by government-enforced barriers to entry.
It’s not a matter of numbers. Lawyers number in the tens or hundreds of thousands, but they have monopoly power, courtesy of the government licensing laws. The same of course is true of doctors, psychotherapists, engineers, barbers, and all those in the hundreds of fields limited by government-imposed licensing requirements.
Thus, the sickening perversion of using government—the source and embodiment of all monopolies–to combat alleged business monopolies.