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TGIF: Monopoly and Aggression

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The concepts monopoly and aggression are intimately related, like lock and key, or mother and son. You cannot fully understand the first without understanding the second.

Most of us are taught to think of a monopoly as simply any lone seller of a good or service, but this definition is fraught with problems, as Murray Rothbard, Austrian economists generally, and others have long pointed out. It overlooks, for example, the factor of potential competition. If a lone seller knows that someone could challenge his “monopoly” by entering the market, that will tend to influence the seller’s pricing and service policies. Is he then really a monopolist even if, for the time being, he’s alone in the market?

In deciding who is a monopolist, we also face the problem of defining the relevant market. The Federal Trade Commission once charged the top few ready-to-eat breakfast cereal companies with monopolizing “the market.” But what market? The FTC meant the market for ready-to-eat breakfast cereals. But that’s not all that people eat or can eat for breakfast. If you define the relevant market to include bacon and eggs; oatmeal; yogurt; English muffins and butter; bagels, lox, and cream cheese; breakfast burritos; and anything else people may find appealing in the morning, a “monopoly” in ready-to-eat cereals looks rather different. Even a single cereal seller (assuming no government privilege) could not price his product without taking into account what his rivals in other foods, and consumers, were doing. He could not even be sure who his rivals were until they arose in response to his consumer-alienating actions.

The conventional notion of monopoly has also been subjected to the reductio ad absurdum. In deciding who is a monopolist, where do we stop? Only one shop can occupy the northeast corner of Elm and Main in Anytown. A particular consumer could decide it’s too costly in time or effort to cross the street and buy at the rival shop on the northwest corner. Does that make the first shop a monopoly?

I have exclusive domain over my own labor services and tools (laptop, etc.). The same is true for each reader. Does that make us all monopolists? If so, how useful is the concept? (Much of what I’ve learned over many years about monopoly and antitrust I learned from Dominick T. Armentano. See Antitrust and Monopoly: Anatomy of a Policy Failure.)

Ludwig von Mises, I should acknowledge, believed that in theory there could be “instances of monopoly prices [harmful to consumers] which would appear also on a market not hampered and sabotaged by the interference of the various national governments and by conspiracies between groups of governments.” However, he added, these “are of minor importance. They concern some raw materials the deposits of which are few and geographically concentrated, and local limited-space monopolies.”

In chapter 10 of Man, Economy, and State, Rothbard critiqued the concept monopoly price as useless in a free-market context because identifying it would require knowledge of a product’s competitive price, which itself cannot be identified. All we can observe is the price that emerges from buying and selling on the market. Other Austrian economists, such as Israel Kirzner, think Mises was right.

Adam Smith’s approach to monopoly makes more sense than the mainstream neoclassical view. To Smith, monopoly denoted a privilege, a legal barrier to competition, such as a license or a franchise — in other words, a grant from the state. Anyone who attempted to compete with the monopolist would run afoul of the law and be suppressed by force, because that’s how the state assures its decrees are faithfully carried out. When someone whose actions are consonant with natural rights is suppressed by force, that is aggression.

Hence my claim that the concepts monopoly and aggression are intimately related. Quod erat demonstrandum.

Monopoly-building interventions take forms other than outright franchises and licenses. Tariffs and other restrictions on foreign-made consumer goods impose monopolistic, or at least oligopolistic, burdens on consumers by preventing or hampering competition from producers outside the country and thereby raising prices. If the restricted goods are producers’ goods, they burden domestic manufacturers as well as consumers.

Intellectual-property laws — patents, copyrights, and the like — have a similar effect by hampering competition through prohibitions on the use of knowledge and forms that people possess mentally. The creation of an artificial property right through patents is practically indistinguishable from a franchise or license. Its harm to consumers is the same.

Frédéric Bastiat appears to have understood this, though he was not always clear. (Yes, this whole thing has been an excuse to write about one of my favorite thinkers.) In his unfinished magnum opus, Economic Harmonies, Bastiat said some interesting things that bear on this issue.

Bastiat praised the competitive market process — where the state abstains from plunder on behalf of any special interests — precisely because it transfers “real wealth constantly … from the domain of private property into the communal domain.” (I detail his argument in “Bastiat on the Socialization of Wealth.”) What he meant was that, when economizing, profit-seeking producers substitute the free services of nature (water, gravity, electricity, wind, etc.) for onerous human labor, competition drives down prices to reflect the lower production costs. When consumers obtain the same or greater utility at a lower price, they enjoy free of charge some of the utility they previously had to pay for with their labor. Innovation-with-competition delivers the fruits of the services of nature gratis, and the whole community benefits.

This is why Bastiat said that the market transfers wealth from the realm of private property to the “communal realm.” Producers who formerly reaped returns on human services that provided utility to consumers now instead employ nature’s services from which they can reap no return at all. As a result, we all get increasing amounts of free stuff.

But free competition is crucial. Bastiat used the example of a producer, John, who invents a new process “whereby he can complete his task with half the labor it previously took, everything included, even the cost of making the implement used to harness the forces of Nature.” In that case, Bastiat writes, “as long as he keeps his secret, there will be no change” in his product’s price, that is, its exchange ratio with other goods.

(For Bastiat, prices are formed, not according to the amount of labor that goes into goods, but by the toil and trouble, subjectively conceived, that consumers are saved by engaging in exchanges of services rather than by producing goods for themselves. He calls the English economists’ axiom Value comes from labor “treacherous.”)

Why will there be no change in price, or what Bastiat calls “value”? “Because,” he replies, “the service is the same. The person furnishing [the good] performs the same service before as after the invention.” So long as John can keep his secret, other things equal, the terms of exchange will remain unchanged.

The important question is: how long can John keep his secret? Bastiat went on to say that the old price will fall “when Peter, [a consumer and producer of another good to be offered in exchange], can say to John: ‘You ask me for two hours of my labor in exchange for one of yours; but I am familiar with your process, and if you place such a high price on your service, I shall do it for myself’” (emphasis added).

Bastiat is clearly happy about this. I interpret this to mean that he did not approve of patents, which would prevent Peter from exploiting his knowledge of John’s invention in order to save himself (and other people) money.

In fact, Bastiat follows up that passage with this:

Now this day comes inevitably. When a new process is invented, it does not remain a secret for long. [Emphasis added.]

The resulting fall in price “represents value [not to be confused with utility] eliminated, relative wealth that has disappeared, private property made public [emphasis added], utility previously onerous, now gratuitous.” (As my earlier article notes, Bastiat expected this kind of talk to get him accused of being a communist. Can you imagine?)

What I want to emphasize is this: in Economic Harmonies, which Bastiat wrote late in life and despite what he may have said elsewhere (and in distinguishing between patents and copyright, he was by no means unambiguous), he appeared not to regret that an inventor was unable reap returns by forcibly thwarting imitators. (In a letter, he wrote, “I must admit that I attach immense and extremely beneficial importance to imitation.” Hat tip: David Hart of Liberty Fund.) He expressed no concern that imitation would discourage innovation.

So-called intellectual property is the dominant engine of monopoly in modern economies. Fortunately, cheap technology makes enforcement increasingly difficult, and we may look forward to the day when it disappears entirely. Which underscores my point: to rid society of monopoly we must rid society of aggression.

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    Sheldon Richman is former vice president and editor at The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.