Tuesday, April 7, 2015

Are monopolies really as dangerous as Marx said they were?

Most people today know Karl Marx was an opponent of free markets, and that he gave all kinds of objections to them in his writings. But lesser-known is an objection he gave to free competition: that competition inevitably destroys itself - through monopoly.

Karl Marx

Quote from Marx about competition "destroy[ing] its very self"

In the words of Marx himself:

"Competition engenders misery, it foments civil war, it 'changes natural zones,' mixes up nationalities, causes trouble in families, corrupts the public conscience, 'subverts the notion of equity, of justice,' of morality, and what is worse, it destroys free, honest trade, and does not even give in exchange synthetic value, fixed, honest price. It disillusions everyone, even economists. It pushes things so far as to destroy its very self." (Source: "The Poverty of Philosophy," Chapter 2, Part 3, as translated into English at Marxists.org)

Is it true that competition inevitably destroys itself through monopoly?

The idea that competition needs to be watched - that monopolies need to be guarded against - is held by many today, who are otherwise in favor of free markets. Competition is a good thing, many say; but it needs to be monitored. But ... is it true that competition inevitably destroys itself through monopoly?

Capitol Dome

My own history with this idea

I once believed that this was true, and that there was a needful function for anti-monopoly laws, such as the Sherman Antitrust Law of 1890. This was one of the arguments that fascinated me; because if it was true, then that meant that competition could be dangerous if unfettered, which would undermine my faith in the free market if true. Thus, I had to know whether or not this argument held water; and whether competition was something to be celebrated or feared.

Senator John Sherman, the principal author of the Sherman Antitrust Act

My change of heart in this matter

But I have since come to the conclusion that monopolies are not something to be feared - that there are many forces in place to prevent their rise; and which ensure that if they do appear, that they will not have much power. This might seem to be a strange argument, and I acknowledge that I once saw it as strange myself. But I have come to the conclusion that competition doesn't really destroy itself through monopoly - that free-market forces prevent this from happening, and that Mr. Marx exaggerates their dangers and effects.

Pleas for an open mind in the reader

I will present arguments in this blog post to support this point of view, and challenge Mr. Marx's objection to free-market competition. If this seems counter-intuitive to you, I ask only that you entertain my arguments with an open mind; and refrain from judging them until after you've heard them. So with that in mind, I will now turn to my arguments about free-market competition, and use quotes from Dr. Thomas Sowell to support them. These will show why competition being destroyed through monopoly is not something we should worry about.

Thomas Sowell

Many monopolies are created by government corruption ...

In the words of the economist Thomas Sowell: "monopolies are very hard to maintain without laws to protect the monopolistic firm from competition." ("Basic Economics 4th Ed," p. 158) Many a firm has gained a monopoly by government restrictions on their competition, through bribing government officials for special privileges. Thus, many of the monopolies painted as "failures of the free market" are really nothing more than failures of government - and un-free markets. The solution to these failures is greater vigilance against corruption, and not greater restrictions on market freedom.

Standard Oil refinery, Cleveland 1897

Laws are not the most efficient way to fight monopolies and cartels

Because a number of large corporations were once known as trusts, legislation designed to outlaw monopolies and cartels are known as "anti-trust laws." But in the words of Thomas Sowell, "such laws are not the only way of fighting monopolies and cartels ... Private businesses that are not part of the cartel have incentives to fight them in the marketplace. Moreover, private businesses can take action much faster than the years required for the government to bring a major anti-trust case to a successful conclusion." ("Basic Economics 4th Ed," p. 161) It's true that people can erect barriers against competitors without government help, but "other businesses have incentives to be just as clever at circumventing these barriers," because they want a share of the profits currently being hogged by the monopolist. ("Basic Economics 4th Ed," p. 163) Thus, the vast majority of monopolies are stopped by free-market forces, without government having to do a thing. Thus, government intervention may well be unnecessary.

John D. Rockefeller

Rockefeller's "Standard Oil Trust": One of the biggest monopolies in American history ...

One of the most hated monopolies in American history was the Standard Oil Trust, led by John D. Rockefeller. The Sherman Antitrust Act of 1890 was largely passed with him in mind. PBS did a documentary about the Rockefellers, in which they paint Standard Oil as a dangerous monopoly. They show the biographer Ron Chernow saying that Rockefeller "control[led] what is not only a national but an international monopoly in a commodity that is about to become the most important strategic commodity in the world economy." (see program transcript) Chernow also said that Rockefeller "was a monopolist ... a rough and often unscrupulous monopolist," and the narrator says that Standard Oil's business address became "a hated symbol of a monopoly so powerful that no law seemed able to control it." The narration notes later that in 1911, "the Supreme Court of the United States declared that Standard Oil was a monopoly in restraint of trade and should be dissolved." (see program transcript)

... was created by government corruption

Yet the historian Judith Sealander is also shown saying that "there were plenty of other things [in the allegations against Rockefeller] that were true - about the rebates, the bribing and so on." (see program transcript) If there was "bribing" here, then it would seem possible that the monopoly was formed with government support, as bribes are the classic mechanism by which this happens. This would tend to strengthen the argument that monopolies are unsustainable without government support, as I believe the Standard Oil monopoly would never have been formed without such support. Thus, this antitrust law designed to stop it may well have been unnecessary, because the real problem was likely government corruption, rather than free markets.

Microsoft Windows

The theory of "predatory pricing" has some serious flaws in it ...

The proponents of antitrust laws have often claimed that they prevent people from charging high monopoly prices. But in the words of Dr. Sowell: "In practice, most of the famous anti-trust cases in the United States have involved some business that charged lower prices than its competitors. Often it has been complaints from these competitors which caused the government to act. Obviously, if it eliminates all competitors, then the surviving firm would be a monopoly, at least until new competitors arose, and could then charge far higher prices than in a competitive market. But that is extremely rare." ("Basic Economics 4th Ed," p. 170) The prosecutors of these cases would claim that these actions stop monopolies before they start; but if the monopolies would never have started to begin with, then there is a serious problem with this argument. There are some cases where pre-emptive strikes are necessary, but they are often used when there is no danger of anything happening, and the specter of monopoly is raised when no high monopoly prices are being charged. Quite the contrary - the prices are low, and thus beneficial to consumers - undermining the whole theory of predatory pricing, and the rationale for applying pre-emptive strike doctrine to anti-trust cases. "We think they'll charge high prices later, because they're charging low prices now." Somehow, that doesn't strike me as a strong argument.

Even when monopolies do happen, they're not as dangerous in practice as they are in theory

Another point needs to be made, about monopolies not always being as dangerous as they're claimed to be. Suppose for a minute that I founded a company which gained a monopoly over hamburgers - that I drove McDonald's, Burger King, and Carl's Jr. out of business; not to mention hundreds of others. I would undoubtedly be a monopolist if I did this; but if people didn't like the monopoly prices I charged for hamburgers, they could switch to pizza, spaghetti, burritos, or chow mein. They could become vegetarians, or go on diets. Perhaps my company would have competition from weight-loss programs or diet pills, or from any number of other substitute products. Diet pills and weight-loss programs don't have any functional similarity to hamburgers, but they would nonetheless be competitors to my hamburger monopoly. Thus, even if I gained a monopoly over the hamburger industry, I would not be as protected against competition as you might think. I'd still have plenty of competitors, and my monopoly over one industry would still face competition from other industries with substitute products - including diet pills and other seemingly dissimilar products. My hamburger monopoly would not be as damaging to the economy as Marxist hype suggests.

Golf swing

Substitute products are competing with monopolies of the one product, so it's not as dangerous as it might seem at first

Thus, in the words of Thomas Sowell: "Even in the rare case where a genuine monopoly exists on its own - that is, has not been created or sustained by government policy - the consequences in practice have tended to be much less dire than in theory." ("Basic Economics 4th Ed," p. 174) "Even products that have no functional similarity may nevertheless be substitutes in economic terms." ("Basic Economics 4th Ed," p. 178) Dr. Sowell gives his own example of golf courses competing with trips to cruises, or with hobbies like photography or skiing; which compete for money that might otherwise have been used to play golf. "The fact that these other activities are functionally very different from golf does not matter," he says - "In economic terms, when higher prices for A cause people to buy more of B, then A and B are substitutes, whether or not they look alike or operate alike." ("Basic Economics 4th Ed," p. 178) But advocates of antitrust laws seldom see it that way, with the result being that misleading statistics are often used, which make the company's dominance of the market appear much larger than it really is.

World Trade Organization, Geneva 1998

Statistics used to justify attacks on monopolies are often misleading, as Dr. Sowell shows here ...

Another problem with the statistics used to justify attacking monopolies, is the presence of international free trade. In the words of Dr. Sowell, "even a genuine monopoly of a particular product in a particular country may mean little if that same product can be imported from other countries." ("Basic Economics 4th Ed," p. 177) "Those bringing anti-trust lawsuits generally seek to define the relevant market narrowly, so as to produce high percentages of the market 'controlled' by the enterprise being prosecuted." ("Basic Economics 4th Ed," p. 175) A Supreme Court case from 1962, for example, prevented a merger between two companies because they would dominate "domestic production of nonrubber shoes" ("Basic Economics 4th Ed," p. 173) By eliminating both rubber shoes and imported foreign shoes from their definition of the market, they created a statistic that made the company's dominance seem very large and threatening, when in reality the company had plenty of competitors (namely, the rubber shoes and imported foreign shoes). Thus, they ruled against a company based on misleading statistics, which should never have been used in the first place.

U.S. Supreme Court building

The costs of antitrust laws tend to outweigh the benefits of them

I should acknowledge that anti-trust laws have some benefits as well, but they are outweighed by the costs, and should be discarded for that reason. In the words of Dr. Sowell: "Perhaps the most clearly positive benefit of American anti-trust laws has been a blanket prohibition against collusion to fix prices. This is an automatic violation, subject to heavy penalties, regardless of any justification that might be attempted. Whether this outweighs the various negative effects of other anti-trust laws on competition in the marketplace is another question." ("Basic Economics 4th Ed," p. 180)

Karl Marx

Conclusion: Marx's ideas about monopoly are somewhat inadequate

So the Marxist idea that competition destroys itself through monopoly would seem not to hold water. Free competition is not something to be feared, but something to be celebrated. It keeps prices low and quality high, balancing these things in the way that consumers prefer. It gives consumers many choices about what kinds of goods to purchase - perhaps Mexican food one night, and Chinese food the next. It offers them all kinds of choices about what kind of entertainment to get, with a cinema competing for the same dollars as a sporting match. And it does all these things with only minimal power entrusted to government, the greatest monopoly of all.

Karl Marx

Some monopolies in government are okay, but free competition in the market is still good

*(There are some things that need to be the monopolistic domain of government, but most need not be; and the free market with its system of free competition is the best way to produce the kinds of goods and services that consumers need. And that is why we should not fear competition, but celebrate it.)

Part of a series about

Communism in theory: Why Marxism can never work

The "Communist Manifesto" (and how Marxism got started)
Marx's "labor theory of value" (and why it doesn't work)
Problems with equalizing income (even in theory)
Problems with rewarding good behavior (under communism)
In defense of John Locke: The need for private property

Communism in practice: The results of the experiments

Revolution in Russia: How the madness got started
History's horror stories: The "grand experiments" with communism
Germany and Korea: The experiments that neither side wanted
Civil war in China: How China was divided
Chaos in Cuba: Castro and the communist revolution
Fall of the Wall: The collapse of the Soviet Union
Actually, communism has been tried (and it doesn't work)

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