Monday, August 27, 2012


I've recently been reading Arthur Brooks' "The Road to Freedom".  (I'll review it fully once I've finished reading it.)  After making the moral case for freedom, liberty, and limited government, he makes policy suggestions.  One of the policy suggestions that he makes is that the government should be involved in the prevention of monopolies.

I agree that monopolies are bad.  They charge too much.  They do not improve over time.  Their consumers have no alternatives. And their potential competitors are driven out of existence by the monopolies.

Here is the interesting point of this post:  There are not, and have not been, any monopolies without it being the government's favored businesses, or the government itself.

Read my paragraph about the bad aspects of monopolies.  Then consider how well the education system in this country meets those negative aspects.  We've been hearing for years how poorly our schools compare to those of other countries.  We have been spending more than most other countries. There have been no dramatic changes in many decades.  Customers have alternatives, but you need to get permission to homeschool.  And there are all sorts of government rules and regulations, from the government, imposed on private schools.  In any case even if you homeschool, you are still required to pay for the public schools.  Even if you have no kids.

I heard on the radio recently that the University of Wisconsin system's next proposed budget asks the state's taxpayers for 21 million more dollars.  (This does not, of course, include the something like $80 million on new buildings that will be constructed.)  Tuition has gone up nearly every year, the quality of education has not improved and yet they always want more from the taxpayers.

The only true monopolies that exist are parts of the government.  The government is the sole legal organization that can: deliver mail, impose taxes, print money, incarcerate people, use lethal force, etc.

The only other monopolies are created with the help and support of the government.

Let's look at the standard examples of "big, bad monopolies" and see how bad they were.

Standard Oil is often used as the example of a bad monopoly.  "It was supposedly a company which used the free market to become too big and used the power to hurt the consumer."

But how bad was it?

"Its output and market share grew as its superior efficiency dramatically lowered its refining costs (by 1897, they were less than one-tenth of their level in 1869), and it passed on the efficiency savings in sharply reduced prices for refined oil (which fell from over 30 cents per gallon in 1869, to 10 cents in 1874, to 8 cents in 1885, and to 5.9 cents in 1897). It never achieved a monopoly (in 1911, the year of the Supreme Court decision, Standard Oil had roughly 150 competitors, including Texaco and Gulf) that would enable it to monopolistically boost consumer prices."

Standard Oil controlled a large percentage of the oil in America, but prices went down and they had many competitors.

Those weren't the only benefits to this "monopoly":

"Through its superior quality goods and uniform standards, Standard Oil helped to increase the standard of living in millions of homes using kerosene. Furthermore, in efforts to create new markets, Standard Oil distributed heat stoves, lamps, and other utensils to consumers for little or no profit[32]."

How about another classic monopoly example?

"Telephone service was said to be a "classic" example of market failure and that government regulation in the "public interest" was necessary. But there was nothing "natural" about the telephone monopoly enjoyed by AT&T for so many decades; it was purely a creation of government intervention.

Once AT&T's initial patents expired in 1893, dozens of competitors sprung up. By the end of 1894 over 80 new independent competitors had already grabbed 5 percent of total market share. By 1907, AT&T's competitors had captured 51 percent of the telephone market and prices were being driven sharply down by the competition. Moreover, there was no evidence of economies of scale, and entry barriers were almost nonexistent.

Politicians began denouncing competition as "duplicative," "destructive," and "wasteful," and various economists were paid to attend congressional hearings in which they somberly declared telephony a natural monopoly. "There is nothing to be gained by competition in the local telephone business," one congressional hearing concluded. The crusade to create a monopolistic telephone industry by government fiat finally succeeded when the federal government used World War I as an excuse to nationalize the industry in 1918. AT&T still operated its phone system, but it was controlled by a government commission headed by the Postmaster General. Like so many other instances of government regulation, AT&T quickly captured the regulators and used the regulatory apparatus to eliminate its competitors. "By 1925 not only had virtually every state established strict rate regulation guidelines, but local telephone competition was either discouraged or explicitly prohibited within many of those jurisdictions."

We could look at more examples of monopolies...

"In his masterpiece, Antitrust and Monopoly: Anatomy of a Policy Failure, Dominick Armentano carefully examined fifty-five of the most famous antitrust cases in U.S. history and concluded that in every single case, the accused firms were dropping prices, expanding production, innovating, and generally benefiting consumers. It was their less-efficient competitors who were "harmed," as they should have been.

For example, the American Tobacco Company was found guilty of "monopolization" in 1911, even though the price of cigarettes (per thousand) had declined from $2.77 in 1895 to $2.20 in 1907, despite a 40 percent increase in raw material costs."

"The assertion that free markets lead to monopoly is wildly incorrect. If the market is allowed to work freely over time, an apparent monopolist soon discovers that it indeed has competition. A company operating in a market economy looks like a monopoly only under myopically static analysis. A broader definition of any industry will show that there is plenty of competition, just as a narrow enough definition will show that any brand name product has some monopoly characteristics, such as a popular brand of ice cream."

In conclusion, monopolies exist only when it is the government is the monopolist or it is the government creating a "private" monopoly.  When someone opposes monopolies, it may be interesting to show them that the only monopoly power comes from the government.


  1. There is no such thing as a free market. Oddly enough, I think feudalism is the system that offers the most freedom, because it seems to match up with human nature. But it ain't gonna happen.

    1. I heard once that a benevolent dictator is the best form of government; I think that makes some sense.

  2. I'd settle for one if we could find one! Actually, it's usually in a feudal lord's best interest to be benevolent. Not only are his subjects his entire army, but if he's hated, they will leave, preferring to brave the "lawless" existence outside of his protection.