Natural Monopolies and the Failures of Government Interventionism: A five-part critique of modern interventionist economics
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Natural Monopolies and the Failures of Government Interventionism: A five-part critique of modern interventionist economics published by Liam Thomas
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Posted on 2021-01-13
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“The very term "public utility" … is an absurd one. Every good is useful "to the public," and almost every good … may be considered "necessary." Any designation of a few industries as "public utilities" is completely arbitrary and unjustified.”
— Murray Rothbard, Power and Market
One of the most common and widespread misconceptions of our time, at least when it comes to the economist’s point of view, are the necessities of government interventionism, or, a top-down governmental approach to so-called “market failures”. Government authorities have found a way of gaining more power and making their job seem necessary and “in the best interest of the people” through falsified, engineered, and inorganic economics. Problems that never even existed in the first place and perhaps were completely and utterly fabricated, are used as the rationale for increased economic regulation. These “problems” in the free market seem to keep arising with every new regulation, which are all now new failures of the market as well of course, according to the state, and are now reasons for more regulations.
One so-called market failure which was a reason for this drastically increasing government intervention in economics, and the one I will primarily be focusing on in this paper, is the idea of natural monopolies. Many businesses that are thought to operate in an industry that is “naturally monopolizable” have been granted governmental franchise monopolies as “public utilities”. In simple terms, natural monopolies are supposed to exist when production technology causes long-run average costs to decline as output increases. In industries such as this, it is stated that one producer will eventually be able to produce at a much lower cost than any other firm, thus creating a natural monopoly and controlling the entire market for a singular commodity. This will result in higher prices. Governments also claim that competition in these industries can be harmful to consumers due to the construction of duplicate facilities. Things like digging up the streets to put in dual gas or water lines, or multiple factories being built in a small area are used as alternative reasons for the government to intervene in the market and “protect” consumers.
The idea that economists developed the theory of natural monopolies and then the state used that to justify their regulation of them is a complete myth. At the time of the creation of these franchise monopolies, the consensus among economists was that monopolies were only created with legal privileges. It was decades after these franchise monopolies were created when interventionist economists formalized the natural monopoly theory. Lawmakers then used these theories as an ex-post rationale for their intervention. It was common knowledge among most economists of the time that constant competition and large scale production was not harmful to consumers but rather a very desirable aspect of the process of competition.
The theory of natural monopolies stems from an inherent misunderstanding of this competitive process. Essentially it is the idea that “If I cannot see competition, then the business must have destroyed it all and therefore is a monopoly and must be regulated.” This statement, of course, is erroneous in the sense that it sees market competition as a static and visible market phenomenon, rather than a dynamic and rivalrous one. It is important to understand that competition is a permanent market force, just because a business can temporarily stop its competitors does not necessarily mean that it will prevent competition from propping up should there arise a place for it. To quote Giddings (1888), "Competition in some form is a permanent economic process. … Therefore, when market competition seems to have been suppressed, we should inquire what has become of the forces by which it was generated. We should inquire, further, to what degree market competition actually is suppressed or converted into other forms." (p.21)
Another thing fundamental to the understanding of competition is the idea of potential competition. That is, competition which may not be visible, but surely will happen given certain business situations. The price motive incentivizes production by entrepreneurs in the same or similar fields when there is profit to be made. The market has even shown that even goods and services that are monopolized by force can be competed with through emergence. Postal services are a great example of this. No other entity than the government and its monopolized institutions are allowed to transfer letters from one person to another, and yet, market emergence created the internet, and then email, which allowed us to send messages without worrying about the governmental monopoly on our communication. This shows us what would be likely to happen if, on the extreme off chance, a monopoly would become existent in a free market. The market allows us to find new goods and services to work around old, unusable ones, which goes hand in hand with the idea of competition. Only when we understand the fundamentals of market competition, more importantly, both the potentiality and permanence of it, can we begin to understand competition as a market force and how it rarely, if ever, allows true monopolies. This then begs the question, why do we see so many mega corporations today such as Boeing that stagnantly remain at the top of the market? The true answer to this is that we do not live in a free market. There is nothing more antithetical to the true idea of a natural free market than corporations being held up by government subsidies. As we have mentioned, competition is a dynamic process. Whenever we see big corporations that stagnantly remain at the top without providing any innovations, we must deduce that this is not a product of the free market, but rather one of an unnatural intervention into it. The common belief that America is a free-market country has been a myth long since the mid-1800s.
The Ahistoricism of Free Market Monopolies
For being such a widely believed phenomenon, free-market monopolies are totally and completely ahistorical. There has never been an example of a free-market monopoly materializing in the history of mankind. Demzets (1989) gives a great example of market competition in industries that are thought to be naturally monopolizable,
"Six electric light companies were organized in the one year of 1887 in New York City. Forty-five electric light enterprises had the legal right to operate in Chicago in 1907. Prior to 1895, Duluth, Minnesota, was served by five electric lighting companies, and Scranton, Pennsylvania, had four in 1906. … During the latter part of the 19th century, competition was the usual situation in the gas industry in this country. Before 1884, six competing companies were operating in New York City … competition was common and especially persistent in the telephone industry … Baltimore, Chicago, Cleveland, Columbus, Detroit, Kansas City, Minneapolis, Philadelphia, Pittsburgh, and St. Louis, among the larger cities, had at least two telephone services in 1905." (p.78) One commonly cited example of a “free-market monopoly” by both lay folk and some modern economists is the Standard Oil company of the early 1900s. This, just as any other accusation of a free market monopoly, is blatantly false and rooted in a deep disdain for the free market. Standard Oil started in its early years with a 4% ownership of the petroleum market but its owner John D. Rockefeller, being obsessed with increasing the efficiency of his business, raised his ownership to an astounding 85% by 1880 by increasing output and decreasing prices impressively. All the while, the price of oil plummeted from 30 cents per gallon in 1869 to an astounding 8 cents per gallon in 1885. In brief, John Rockefeller created an efficient, innovative business that simultaneously created thousands of well-paying jobs. Standard was at the top because of the free market, and rightfully so. Standard never used monopolistic practices such as predatory pricing to gain his share of the market because it would have been foolish of him too. The second he would have begun to raise prices or decrease output, his competitors would have immediately undercut him and stolen his business. McGee (1958) further backs up this in his extensive analysis of the 11,000 court pages of the court testimony which included charges brought by his competitors. In this analysis, he concluded that he was “convinced that standard oil did not systematically if ever, use local price-cutting in retail, or anywhere else, to reduce competition.” (P. 168)
However, it seems that neither the supreme court nor Standard’s competitors could pick up on this, and instead, they ruled Standard a monopoly and ordered it to be broken up. In contradiction to the standard theory of monopolies, Standard’s control over the market had dropped from close to 90% in the late 1800s to about 65% at the time of the court's ruling. Once again, neither the Supreme Court nor Standard’s competitors seemed to take note.
In other words, one of the most commonly thought of monopolies did the exact opposite of what the standard monopoly theory entails. They increased productivity, decreased prices, and paid fair wages to their workers. This is the outcome produced by free-market enterprise, which is trampled on by government interventions. It would truly behoove us as consumers, laborers, and entrepreneurs, to consider the situation of Standard Oil, the business “responsible” for a majority of our antitrust regulations today, and ask ourselves if government intervention in the market is truly helping us, or if it is doing more harm than good.
Duplicate Facilities and the Free Market
In addition to the myth that is the theory of natural monopolies, government authorities also claim that regulations that grant monopolies to certain corporations exclusive access over a certain area prevent us, consumers, from harmful competition which leads to the construction of duplicate facilities and disruption among citizens. This, however, as you may have guessed, is not a product of the free market whatsoever.
The construction of duplicate facilities, instead, is a result of the mismanagement of scarce resources by governing bodies. It represents a failure of the government to put a price on resources like roads and land that causes problems such as these to arise. As Demsetz(1988) points out,
"The problem of excessive duplication of distribution systems is attributable to the failure of communities to set a proper price on the use of these scarce resources. The right to use publicly owned thoroughfares is the right to use a scarce resource. The absence of a price for the use of these resources, a price high enough to reflect the opportunity costs of such alternative uses as the servicing of uninterrupted traffic and unmarred views, will lead to their overutilization. The setting of an appropriate fee for the use of these resources would reduce the degree of duplication to optimal levels." (p.81)
Another issue arises when we notice that even if the government were to put a price on such resources, there is no rational way of economically calculating the most efficient price without a market. Regulation of public industries results in a disincentivization of investment in said industry, thereby resulting in a misallocation of scarce resources. The problem of excessive duplication is once again a problem that has been perceived to be natural to the free market but is simply a result of intervention that would have otherwise been non-existent.
The Inefficiencies and Dangers of Interventionism
In 1940 an economist named Harold Gray, an assistant dean at the graduate school of the University of Illinois analyzed the history of public utilities specifically in his essay called “The Passing of the Public Utility Concept” in the Journal of Land and Public Utility Economics. He observed that during the 19th century, it was the common belief among the people that it was in their best interest for the government to grant privileges to private persons for sole market controls over a specific area. Land grants, subsidies, and monopolistic franchises alike were granted to private corporations to “protect” consumers from harmful business practices. However Gray (1940) observed, "The final result was monopoly, exploitation, and political corruption." (p.8) Businesses that were unable to attain wealth through private, market means, were now drawn to government privileges as their eternal haven from any real innovation or business practice. It is hard to imagine how anyone could believe that this kind of scenario could reduce corruption instead of raising it. The government, from the beginning, painted themselves as the savior of the people from the chains of big business, but the people never stopped to question if the two could be working together.
The power dynamic between big business and the government is a story that played a huge part in politics then, and which still does today. Big business and lobbyists meddle their way into politics to vouch for legislations that give them power over other businesses in the market. Take Amazon for example. Recently they have been lobbying for a 15$ minimum wage. Why would they do this? Isn’t Amazon, according to the interventionist narrative, a big corporation and therefore selfish and evil, and should, therefore, have great disdain for our regulations? Amazon isn’t likely lobbying for the minimum for any kind of moral reason, but rather a profit reason. Amazon has a competitive advantage over most other firms in its market. The 15$ minimum wage would likely put a huge dent in the earnings of companies like Target and Walmart, two of Amazon’s biggest competitors. It is not hard to see how this regulation will do nothing other than allow Amazon to face less competition and remain stagnant at the top by increasing barriers to entry. Regulations are things which upon the first realization, look beneficial to everyone, but when you understand the actual market effects of them and therefore on everyday people, you begin to realize that they only result in an unnatural balance of market power that is beneficial to nobody but the government and the mega-corporations involved. These regulations muddy the water of the free market and destroy the idea of true market emergence. Without government interference, other actors simply choose to do business with the group which benefits them the most. This is what we did for years, and what led us to great innovations and technological advances like those which took place during the Industrial Revolution. However, this entirely changes when we let the government choose which businesses rise and fall instead of consumers.
The reason for this is that the government is not as concerned about which company is best benefiting consumers, or which will innovate the most, but rather which one brings them the most revenue. Although it is comforting to think that all our public officials are thinking in our best interest, it is not a great idea to assume this. The fairest assumption to make, and one which is made throughout classical economics, is that the individuals will act in their self-interest even if they are elected individuals and they will choose the most favorable outcome for themselves. We can see this assumption play itself out on numerous occasions of government action, look no further than the increasing rates of inflation, or our affairs with the middle east. Of course, as some of you may be thinking, this logic applies to business owners and CEOs as well, but as consumers, we can hold businesses accountable, for the only thing that they can do is to offer us their goods. The government, however, has the self-granted privilege to use force just about wherever they see fit, and with little to no repercussion. It is a reasonable conclusion to say that without government intervention, what is best for businesses is what is best for the majority of consumers. The same of course, can not be said about government. Who is there to hold the government accountable for their actions? More government? It is obvious that the government is not susceptible to market forces in the same way a parent is not susceptible to the rules they set for their children or a teacher is not susceptible to the same class rules as his or her students. It is time for us, as citizens, laborers, and consumers to reject the false interventionist economic narrative and embrace the alternative, a truer free market that works best for everyone, not just mega-corporations and public officials.
The free market, in contrast with a regulated market, as an economic system has proven itself, on numerous occasions, to be more beneficial to the greatest amount of people, not because of the specificity of these occasions, but because of the underlying principles of competition within it. Lie after lie perpetrated by the government, their corporate allies, and modern economists have destroyed the ideals of the free market upon which our founding fathers imagined the future of our country. These lies have made economic myths conventional knowledge among everyday people. They have plagued our population allowing for government to regulate as they please and continue their ongoing cycle of perpetual power. This cycle may only be stopped when we, as a collective, truly embrace the free market as our tool for the progress of the human race and not the corruptive menace on society it has been made out to be by too many people.
Sources: Demzets, H. (1989). Efficiency, competition, and policy. DiLorenzo, T. J. (1996). The myth of natural monopoly. The Review of Austrian Economics, 9(2), 43-58. https://doi.org/10.1007/bf01103329 Gray, H. M. (1940). The passing of the public utility concept. The Journal of Land & Public Utility Economics, 16(1), 8. https://doi.org/10.2307/3158751 Green, D. (2018, October 4). An economist explains how Amazon could use its lobbying for a $15 minimum wage as a 'weapon' against other retailers. Business Insider. https://www.businessinsider.com/amazon-lobbies-for-15-wage-weapon-over-walmart-target-2018-10 McGee, J. S. (1958). Predatory price cutting: The standard oil (N. J.) case. The Journal of Law and Economics, 1, 137-169. https://doi.org/10.1086/466547 Natural monopolies. (2020, January 20). Economics Online. https://www.economicsonline.co.uk/Business_economics/Natural_monopolies.html Rothbard, M. N. (2011, May 1). Monopoly and competition. YouTube. https://www.youtube.com/watch?v=76pWdExqfkY Rothbard, M. N. (2012, September 21). YouTube. https://www.youtube.com/watch?v=H6Opvlmy8i8 The myth of natural monopoly | Thomas J. Dilorenzo. (1996). Mises Institute. https://mises.org/library/myth-natural-monopoly Weinberger, D. (2018, December 26). The myth that standard oil was a “Predatory monopoly”. Foundation for Economic Education. https://fee.org/articles/the-myth-that-standard-oil-was-a-predatory-monopoly/#:~:text=Put%20simply%2C%20Rockefeller%20increas
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