Here’s the continuation of my response to some of (Blonde’s) comments on a recent post. She wrote:

Firstly, the definition of a monopoly is the exclusive possession or control of the supply or trade in a commodity or service. Thus any competition, no matter how limited, could be argued as a negation of the term.

First, be careful not to define your argument out of existence. There are no examples of businesses or governments that have such exclusive control over a commodity or service that there is literally no competition or substitute. You think there is? Fine. Name it, I’ll come up with a substitute product—a competitor, “no matter how limited”– and there goes any claim to monopoly.

Now, in real life, that would leave us little to talk about. Again, when people discuss monopolies, they are talking about firms with at least one competitor (however weak) that produce a product with at least some substitutes (however imperfect), but still have a lot of price control (a.k.a. “monopoly power”).

There will always be natural monopolies, even with government regulation, but I can’t think of an example where there exists absolute monopolies under government regulation, at least in a comparative sense (government regulation vs. lack there of).

As I explained in part one, governments often make it easier to gain monopoly power. Robert Fulton had a monopoly on all steamboat traffic in New York– a monopoly granted by the state (it was the subject of a historic Supreme Court decision). AT&T had a legal monopoly on most types of phone service for roughly a century. My dad’s full of stories about the high-tech phone services that were blocked from the market for years because they would’ve interfered with AT&T’s monopoly. The railroad industry of the robber baron era received massive land grants and cash subsidies, which often allowed the bigger railroads to consolidate monopoly power. Monopoly power is more likely to be created by government regulation than by the lack of government regulation.

You can’t think of an example of “absolute monopoly” under government regulation? I can’t think of an example of anything close to an absolute monopoly without government regulation.

Free markets work much like natural selection, and it tends to maximize profits of the powerful while extinguishing competition.

Firms intend to maximize profits and intend to extinguish competition, whether it’s in a free market or not. However, the tendency in free markets is to whittle away what economists call “economic profits.” When actual or potential competitors see excess profits, they tend to swim towards the profits like sharks to blood. The existence of and potential for competition make it very difficult to maintain economic profits in the long run.

But, you might say, what about industries that naturally aren’t competitive? Well, if the market is unregulated, or not too heavily regulated, someone, somewhere usually finds a way to compete for those profits. Somebody will develop something that serves as a substitute. They aren’t going to just sit there and let Uncle Moneybags rake in the cash unchallenged.

These are tendencies. You may be able to find some exceptions, but the tendencies of freer markets are toward efficiencies that more regulated markets have great difficulties achieving.

I’m not educated enough on the topic to declare an outright no-capitalism approach, but I think unregulated capitalism does not work. Unregulated capitalism depends on the concept that people are rational with regard to money management and purchasing. But this doesn’t happen, people are emotional and irrational with regard to economics and it’s in part why the market crashed in 2008. It’s why people don’t save. It’s why we need economic regulation for capitalism to function at its highest capacity. Simply put, people don’t correctly calculate value and self-interest and entire markets fail to as well.

I… I don’t know where to begin. Since you made vague assertions (and since it’s getting late), I’ll respond in kind:

I contend that regulation was more of a factor in causing the 2008 crash than deregulation was, partly because there was virtually no deregulation. I can accept the argument that poor regulation led to the crash, I refuse to accept the argument that a decline in the amount of regulation did.

The idea that economic regulation can make up for people’s mistakes is an incredibly vain one, hence the title of Hayek’s The Fatal Conceit. Keep in mind that the term “market” is a metaphor for countless buyers and sellers engaging in hundreds of millions of transactions a day. Do you know better than all of them combined? Do you trust yourself to vote for someone who knows better than all of them combined? Do you trust them, once elected, to design just the right regulation to correct the mistakes all the little people make?

Markets tend to do a remarkable job of regulating themselves– if they’re allowed to do so. Markets are far better at calculating value and determining self-interest than government regulators are– if they’re allowed to do so. Markets work when people and firms are allowed to reap the rewards of their success and suffer their losses. Unfortunately, firms and governments have historically pushed for regulations that prevent firms and people from suffering their losses, which means the market isn’t being allowed to work its magic.

…

I have to leave it there tonight. The brain is fried and requires sleep. Must edit tomorrow.

It may be that I have misunderstood your argument. If so I apologize and humbly await correction or elucidation. It may be that you know what you’re trying to say, but your argument suffers from not having been taught microeconomics by a particular teacher with a barbaric yet soft persona. Ask your friends; you missed out. I recommend signing up for a micro class at your local university and making sure your prof isn’t a total yutz.

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In a comment on a recent post, Blonde wrote:

A look on our history as a country, not even taking into account the experiences of other states, is enough to show that times wherein the government did not play a significant role in regulations resulted in imperative issues of monopoly, unbalanced classes, and fiscal disaster save for a select few.

After informing her that she was generally wrong and that I was going to write a post-length response, she wrote:

Whoa whoa, you can’t just throw that in there with your parentheses and what not. How does lack of government regulations not add up to corporate monopolies, historically?

First, it’s my blog, and I’ll put parentheses around anything I want.

Second, I grant that monopolies can develop in the absence of government regulation. But your comments suggest that the economy suffered from the emergence of monopolies during times of low regulation. I say this is false.

(Blonde), there are two ways to gain what economists call “monopoly power,” i.e., control over the supply of a product and therefore over the price you charge. The first is called “natural monopoly,” which means you dominate your industry by producing goods or services at costs lower than your competitors can match. This is generally good for the economy: the gains to the monopoly and the consumers outweigh the losses to the monopolist’s former competitors.

Can you name a natural monopoly that emerged in the era of relatively low regulation that existed before the Civil War? I’d settle for a company that came close to being a natural monopoly. I don’t mean one that existed because the government gave a company an exclusive license to operate—that would be an example of regulation leading to monopoly, which isn’t what you claim the problem to be. I mean can you think of any natural monopoly that emerged before the Civil War because there wasn’t enough government regulation to stop it?

No? Me neither. Maybe there were some examples; I’ll have to dig around. But shouldn’t an era with relatively low regulation have at least one obvious example of natural monopoly?

So, let’s move on to the Gilded Age. That’s usually the example folks point to when thinking of unfettered monopolies and low government regulation (although regulation was intensifying at the state and, to a lesser degree, federal levels). Some industries saw the emergence of “trusts,” companies that controlled so much of the market that it’s easy to think of them as monopolies. Much—definitely not all– of the monopoly power gained by these trusts was gained via low-cost production.

The result was that many goods– oil, kerosene, sugar, steel, tobacco, produce, various modes of transport, textiles, meats, etc.– became less expensive and more available to the public over time. The standard of living increased. Real wages increased. The improvement wasn’t non-stop (there were panics in 1873, 1893, and 1907), and some certainly benefitted more than others, but it’s difficult to claim that there was “fiscal disaster save for a select few.” Those rich guys didn’t get rich by selling exclusively to other rich guys—there weren’t enough of them around, and they couldn’t consume that much stuff by themselves.

Have a look at this link, specifically the paragraph beginning “I will repeat again…” I think it illustrates the point I’m trying to make here quite well, though I think James Hill (builder of the first non-subsidized transcontinental railroad, the only one that remained profitable during the 1893 Panic) would’ve been a better example than Vanderbilt.

The trick to natural monopolies is that you have to keep finding ways to produce products of the quality and at the price that consumers demand, or else you’re dead meat. I remember when Microsoft was accused of being a monopoly, or of having too much monopoly power. Funny– you wouldn’t expect a “monopoly” to have to constantly improve its hardware and software and sell it at decreasing prices during inflationary times in order to retain market share (which MS lost anyways). For a supposed monopolist, Bill Gates has had an awful lot of competitors nipping at his heels.

But then there’s the second way to achieve monopoly power, which is “legal monopoly” or “statutory monopoly.” That’s what happens when a company gains legal or political advantages over competitors, whether actual or potential. This can happen through patents and copyrights, through granting exclusive licenses to operate (British East India Company in the 1700s, Fulton’s steamboats in New York in the 1800s, AT&T from the late 1800s to 1984-ish), through regulation that makes it difficult for some companies to survive and new companies to start up (meat-packing industry in the wake of the Pure Food and Drug Act), and through subsidies, taxes on competitors and tariffs on foreign competitors.

Regulation is not only not a guarantee against monopoly, it often helps contribute to it. A lot of monopoly power is gained through government regulation of the economy, sometimes intentionally and sometimes not. Look at the Sherman Act, the first federal anti-trust law. I’m sure Mr. Sherman meant well (try saying that in Atlanta). At first companies resisted heavy regulation, but the savvier ones figured out how to use a heavier regulatory environment to restrict competition and bust unions.

So far, (Blonde), we’ve got a pre-Civil War period in which no natural monopolies emerged in the absence of government regulation. We’ve got a post-Civil War period in which some natural monopolies emerged but drove the real costs of food, energy, transportation, etc. downwards and the standard of living upwards. And we’ve got monopolies that emerged (or lasted longer than they would have otherwise, e.g., Ma Bell) precisely because of government regulation.

My point is not to bash regulation. Some regulation is useful, some is harmful, but that’s a different discussion. My point is to show that the historical attempts to achieve natural monopolies had a far more positive impact that your comments suggest, positive enough to call your comment “wrong.”

Thus, “the W word.” I’ll edit this and write part two tomorrow.

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I spent last weekend in Clemson with some dear friends from college. Here is the indisputable visual evidence. You may click to embiggen the pictures.

Behind the new student center (“new” in that they built it after I left many years ago) are brick walkways etched with the names of the Classes of 1996 and 1997. Dr. Hmnahmna was kind enough to send me a shot of my brick a few years ago, but now I have my own:

Note that if you ignore my first initial, the bottom two rows read “MR VINCENT D VISCARIELLO.” So I have two-thirds of a brick while everyone else is stuck with a single line. I also got shots of some friends’ bricks from the Classes of 1996 and 1997, so if you’d like I can e-mail them to you for a small shipping fee.

Aabrock-sans-Nikita and I walked around campus a bit. Here’s a so-so shot of the first five holes of the Clemson frisbee golf course, aka the Reflection Pond, from the walkway above the fifth hole.

Sirrine Hall, home to the Econ Department:

Here’s Cope Hall, where I met my archnemesesdear friends Mole (first conversation: “Excuse you.”), DFJ3 (“Which room is the shaggy haired guy in?”, a reference to Mole), Dr. Hmnahmna (“Are you a grad student or something?”), Scott (I don’t remember our first conversation, but I remember my first conversation with his girlfriend, which I won’t repeat here), Major Patton (Me: “Is Simon [the RA] in?” Him: “I’m sorry, I’ve retired for the evening.”), Robert (probably something bizarre and rambling that formatted my brain), Aabrock (probably something football related due to time spent in the lounge), and Brundgren (he talks so rarely I think we haven’t actually completed our original discussion). Apologies to those I omitted; it is sheer forgetfulness. I was on the top floor, third from the left. Used to have a bunch of sodas duct-taped together, hanging out the window in winter.

My dorm was right next to Fort Hill, one-time home of none other than rabble-rouser-in-chief John C. Calhoun. The story was that if you entered the mansion, you’d never get your degree. I toured the place two hours before graduation.

Then off to downtown. The Astro was still closed, the Newsstand hadn’t miraculously come back, this dinky little restaurant had still misappropriated the proposed name of my buddies’ coffee shop, “356.” The bastards even stole the font. Look carefully at the picture and eventually you’ll see the biggest problem.

Thank God Nick’s was the same, and open, and serving French dip sandwiches and Woodchuck for breakfast:

I only got three decent shots in the stadium. Here’s the east end zone, with members of the 1981 championship team walking onto the field:

Here’s the marching band, forming the famous flaming toilet bowl:

It’s upside down from my perspective, so either flip your laptop or yourself over and the nickname for this particular logo will make more sense.

It occurs to me that the evidence is at least partly disputable because I didn’t post any pictures of my pals. I’ll photoshop them in later.

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In the wake of Saddam’s execution, almost five years back, I wrote:

However history judges either aspect of the execution, I hope for at least one small benefit: that the next would-be tin-pot dictator sees this grainy, graphic, grotesque reminder of what could happen when his people get hold of him, and chooses a more benevolent path.
–Me, _ _ _ _    _ _ _ _ _ _ , January 2, 2007

Gruesome footage of Gaddafi’s final moments were posted online (please note that the link leads to a violent video intended only for a mature audience). Hard to believe that of those Beirut conspirators, only Fidel and Gorby remain. The boogeymen of the 1980s are dropping like flies.

I worry that the Libyan and Egyptian revolutions are going to go the way the Iranian one did in 1979. Hopefully events will assuage my concerns.

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An anonymous reader recently asked: “What is your honest opinion of each of the GOP candidates for president?” Last week I wrote about seven of the nine major Republican candidates before succumbing to a massive headache. Here’s my take on the last two, in alphabetical order:

Gary Johnson: He has gubernatorial experience, he seems unassuming, and he has promised to veto any budget that is not balanced. Given that recent budgets have seen a 40-45% gap between revenues and expenditures, that promise may seem unrealistic. It is a sad sign of the times that the promise is unrealistic, and perhaps sadder that he’s the only one willing to make it. He’s got two big problems, aside from a near-total lack of name recognition. First, in recent interviews he has seemed exasperated that he wasn’t getting more attention and that he was being left out of the debates. No matter what the message is, exasperated won’t score any points. His second and larger problem is that there’s already a candidate who’s staked out the libertarian wing of the party, named…

Ron Paul: He’s got the name recognition he was missing last time around, he’s more consistent than the other Republicans, he’s energetic enough to overcome his age problems, and he (and current events) have made the Austrian school much more popular in recent years. The bad news is that he can come across as a wacky old man, nobody likes a Cassandra, and the electorate will find his foreign policy to be isolationist and unrealistic. The whole “being right about the recession” thing probably won’t be enough to get him the nomination.

They both have another problem: they keep talking about what government shouldn’t do. That’s generally not a good way to win nominations, never mind national elections.

Anyhow, right now I think that Romney’s the most likely to win the nomination. He’s doing well enough in the polls, he’s raised all kinds of money, and the GOP has a habit of nominating candidates who came close to winning earlier primaries (Nixon lost in 1960, Reagan lost in 1968 and 1976, Bush 41 and Dole lost in 1980, Bush 43 is an exception, but can be seen as a re-nomination of his dad, McCain lost in 2000, Romney lost in 2008). But the voting is still a few months away, and anything can happen.

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