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.
19 thoughts on “On monopolies, part two.”
I’ve actually not been formally taught microeconomics by anyone, so there in lies the issue, I think. I suppose I’ve been speaking out of my ass, in a manner.
I did, though, do some research before formulating a lot of my previous response, so I think a lot of the problem rests with an ineptitude at articulating concepts which I don’t have a clear enough understanding of. And I think you both corrected me, and also misunderstood aspects of my arguments at different points.
I will concede to your superior knowledge of monopolies and admit defeat. And I do thank you for your polite response, you could have been much barbaric, I know. But then I wonder do you support an idea of an unregulated market, or rather, are you against adding additional regulations? And what of the FED, which many people mistakenly believe is actually a part of our federal government, rather than being a mostly private organization “under the sway of New York bankers”? Should it be abolished entirely or should it be more heavily regulated and/or taken back under the wing of the government?
It seems difficult for me to grasp the concept that we as the most prominent capitalist economy in the world owe the world’s most prominent communist economy an entire quarter of our foreign debt.
“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 decline in the amount of regulation did.”
I was not intending to assert the claim that deregulation led to the 2008 crash, rather that poor regulation did. I apologize if my response was in any way misleading.
“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?”
I also did not mean to make the claim that government regulation could make up for the mistakes of said governments’ citizens; But is it equally naive to believe that it can, at the very least, help to lessen the effects of these mistakes? Or create a safety net for these mistakes? In regards to voting – Well, I think we should have less politicians and more professionals, and in this area, actual economists – and in a perfect world, economists without any personal stake or bias in creating regulation or reforming the system. But I already know where you’ll tear down this argument – There’s no such thing as a perfect world, and there’s no use waiting for that to happen. I know, I’m just trying to give you a more cogent idea of where my argument is coming from, even if it is youthful idealism.
I also wonder, because you do make perfect sense on the function of the market amp; the repercussions of market regulation, if there is a gap between functionality of economics and a more favorable system for people. Is the success of a free market and the benefits for people (not corporations, despite the SC) equatable or synonymous? Or are they two entirely separate things all together, as OWS would argue? Because it is becoming clearer to see why an unregulated market would be great for numbers, but I’m having trouble seeing that directly translate into a favorable humanistic perspective.
As for taking microeconomics at my local university… Why would I pay for a class when I’m getting all of this wisdom right here? And anyhow, a major amp; two minors are keeping me busy enough, but I’ll let you know how political econ goes in the spring.
Sorry to break the flow of the argument but I have a somewhat related question for you Mr.V. I am going to be able to take a social science course next semester and discussions like this have always interested me. In order to be able to better follow and form my own opinions on these topics I want to take either micro or macroeconomics. Which in your opinion is more important to have a fuller grasp of and is more interesting to learn?
I tip my hat off to you good sir. Well done. Well done.
I can’t speak for other Universities, but for any students planning on, or currently attending UNF, there are 3 economic professors that definitly qualify as not being “total yutzes”. Take them.
W. Thomas Coppedge
Dr. Louis A. Woods
Dr. Paul M. Mason
@Scott: If you want to understand the terminology they use on in the national news, you’re probably better off with macro. Some find macro theory more interesting because it’s more debatable. I did my thesiseses in macro (optimum currency area theory).
However, micro is the foundation, and micro is far more provable (though there’s still plenty to debate). It won’t necessarily change your mind about any issues, but a really good micro class is more likely to change the way you look at the world and think about things and stuff. Macro informative, micro transformative.
I found this series of articles very interesting and illuminating, since I hold many ideas about the economy, but admittedly, limited knowledge about economics. I wish I could have taken economics classes at Paxon, but there was no room in my schedule.
One question I have for you, Mr. V, is if you think state-run economies are absolutely doomed for failure? Obviously China is one of the biggest economic powers now, they don’t necessarily have a high standard of living, and a lot of it is becoming state-regulated capitalism (if I understand it correctly, anyway). However, the country of Belarus is an interesting case.
Just because I haven’t really looked at any where I else, Wikipedia points out that Belarus’ economy is “Soviet-style” and mostly state-run. Despite this, it has the highest GDP of the CIS states, and is the richest country out of the CIS. As of 1991, it is also one of the most industrialized countries in the world. Do you think that Belarus will eventually hit a plateau and then fall, or do you think there’s a chance of success?
“I will concede to your superior knowledge of monopolies and admit defeat. And I do thank you for your polite response, you could have been much barbaric, I know. But then I wonder do you support an idea of an unregulated market, or rather, are you against adding additional regulations?”
I support regulations that are efficient and necessary, and oppose those that aren’t. By that rule, we and most countries would end up with far fewer regulations.
For instance, I think we need laws/regulations to protect private property rights and enforce contracts. We should regulate public goods (but I’m using the economic definition of “public good,” i.e., goods that are non-rivalrous and non-excludable).
“And what of the FED, which many people mistakenly believe is actually a part of our federal government, rather than being a mostly private organization ‘under the sway of New York bankers’? Should it be abolished entirely or should it be more heavily regulated and/or taken back under the wing of the government?”
People believe the Fed is actually a part of our federal government because… the Fed is actually a part of our federal government. True, there are private elements to it; for instance, the Fed has some private owners, but that’s partly because membership in the Fed is required for any nationally chartered bank. The Fed and the rest of the banking system are already very heavily regulated. It’s called “central banking” for a reason.
That said, I think we could stand to allow competing currencies (i.e., de-monopolize the currency). I tend to agree with Friedman that as long as there’s going to be a Fed, then it should essentially be a computer that slowly, steadily, and predictably increases the money supply. That regulation would probably be more efficient that those currently governing the Fed (though there are plenty of monetary economists who disagree).
“It seems difficult for me to grasp the concept that we as the most prominent capitalist economy in the world owe the world’s most prominent communist economy an entire quarter of our foreign debt.”
“I also did not mean to make the claim that government regulation could make up for the mistakes of said governments’ citizens; But is it equally naive to believe that it can, at the very least, help to lessen the effects of these mistakes? Or create a safety net for these mistakes?”
Good questions. First, “can” and “does” are different. Second, look up “moral hazard.” If there’s going to be a safety net, it should be extremely uncomfortable.
“I also wonder, because you do make perfect sense on the function of the market amp; the repercussions of market regulation, if there is a gap between functionality of economics and a more favorable system for people. Is the success of a free market and the benefits for people (not corporations, despite the SC) equatable or synonymous? Or are they two entirely separate things all together, as OWS would argue? Because it is becoming clearer to see why an unregulated market would be great for numbers, but I’m having trouble seeing that directly translate into a favorable humanistic perspective.”
The OWS folks make a vital and important point when they complain about the alliance of government and big business. Aside from that… I’ll be kind and change the subject. What do you consider “favorable” and “humanistic”?
In a nutshell: if an economy is heavily state-run, it will operate less efficiently and grow slower than it would be otherwise. Other factors may lead to growth (discovery of new natural resources, importation of new technology, etc.), but not as much as there would be in a freer market, all else being equal.
China’s recent growth is generally understood to be due to liberalizing (i.e., de-communizing) some sectors of the economy; those are the sectors accounting for most of the growth.
“Just because I haven’t really looked at any where I else, Wikipedia points out that Belarus’ economy is ‘Soviet-style’ and mostly state-run. Despite this, it has the highest GDP of the CIS states, and is the richest country out of the CIS. As of 1991, it is also one of the most industrialized countries in the world. Do you think that Belarus will eventually hit a plateau and then fall, or do you think there’s a chance of success?”
Did Belarus already have a higher GDP than the other former Soviet states? Have they pulled further ahead, or have the other CIS countries caught up?
The more relevant question is, “Will Belarus grow more under ‘Soviet-style’ management than it would as a free market economy?” I say no.
Firstly, let me defend my honor in regards to the Federal Reserve. I would very much argue that it is NOT an agency of the federal government. In fact, it’s probably only as federal as the federal express. When defending itself against a Bloomberg request for information under the Freedom of Information Act, the Federal Reserve objected by declaring that “it was not an agency” of the U.S. government and thus it was not subject to the act.
– 100% of the shareholders of the Federal Reserve are private banks. The government owns no shares. (http://www.globalresearch.ca/index.php?context=va&aid=10489 with sources)
– The ownership of the 12 Central banks:
Rothschild Bank of London,
Warburg Bank of Hamburg,
Rothschild Bank of Berlin,
Lehman Brothers of New York,
Lazard Brothers of Paris,
Kuhn Loeb Bank of New York,
Israel Moses Seif Banks of Italy,
Goldman, Sachs of New York,
Warburg Bank of Amsterdam
Chase Manhattan Bank of New York (Ref.)
Click to access US%20Federal%20Reserve%20pdf.pdf
You can read more in depth about the privatization of the Federal Reserve in that article. It seems more efficient than attempting to summarize, since I’d probably mess it up.
As for the last question, I’ll try to clarify. I understand that deregulation or limited regulation are beneficial to markets and thus are beneficial to profit progress and even complimentary factors such as employment, etc., but I’m asking whether or not that’s synonymous with a favorable (a good for, the best outcome of) experience for people. Limited regulation may boast numbers and economic successes, but couldn’t it harm an infinite number of other factors? As examples I could use the environment, I could use the exploitation of people by corporations, banks, and other businesses, or I could point to unions, etc.,
I understand what’s best for the market, but is that what’s best for us? Does that make sense?
(Blonde), the government gets all of the profits of the Fed (after a dividend payment to its member banks, many of which are legally required to join). The President and Senate pick the Board of Governors and its Chairman. That Board has to approve the selection of the regional bank presidents. The whole system is heavily regulated by the government, and you’re not allowed to create a competing currency. It does have private elements, as I acknowledged. But the laws surrounding it, the regulations it faces, the power it holds, and the leadership all make it safe to say that the Fed is a part, and yes, an agency of the federal government.
And if not, then for a non-agent of the government, Ben Bernanke looks pretty damn worried when he has to answer to Congress and the President.
Of course, they won’t claim to be an agency of the federal government when it’s legally/politically convenient. That’s to be expected– VP Cheney once claimed to be part of the legislative branch in order to dodge an executive order. I wouldn’t be surprised to know that the Post Office, Fannie Mae, Freddie Mac, and the FDIC had all tried the same ploy.
As for the rest of your comment, I understand what you’re asking. Bear with me:
Who is the market?
What do you mean by exploitation?
Why do you think the environment would suffer from too little regulation? I assume that it would, but why do you think it would?
Okay, I suppose I’m swayed by your argument on the FED. But not entirely. I’m still confused. I understand it claiming to be a part of the government and claiming to be independent of a government when politically necessary. But. It’s still entirely privately owned, even if it takes orders and abides by government regulation – So isn’t it reasonable to assume that it IS a private organization of sort? I mean, it’s not just a few privatization aspects here and there, it sounds rather substantial to me.
I see where you’re going. The market is the American populous, etc., etc., etc., but I think in reality it’s more or less corporations (although, hey, they’re people too). I do understand that there IS trickle down, that corporations ARE job providers, and that of course there will always be class divisions of upper, middle, lower, and everything in between. But I think that those who actually control the market, and actually benefit the most substantially from it are (hate to be cliche) only about 1% of the population. And still, a healthy market is good news for the rest of the population, too, but not when the price of it is exploitation, environmental degradation, or what have you.
By exploitation I mean corporate exploitation of the population for profit or gain. Treating human beings as mere ends to a mean, that mean typically being power or profit. It can be seen in short changing people in trade, directly or indirectly forcing someone to work, using someone without their knowledge or will (Take a look at how many corporations can take out life insurance policies on their employee’s without their consent or knowledge), or organizational or structural exploitation if speaking strictly in an macro/micro economic sense. Or wage slavery – is a person employed or enslaved to their corporation? To their bank?
Moving on to the detrimental environmental affects of too little regulation – In the most obvious sense environmental degradation. That is, corporations not regulated strictly on dumping, building, emissions, etc., will harm the environment in their endeavor to appease that bottom line, to increase profits and efficiency with little to no regard for the environment. Then there’s agriculture, with too little regulation the synthetics inputs in production can pose a threat to both human health as well as the environment. Deforestation, native plant destruction, overgrazing leading to desertification, etc.
@Blonde/Brunette: you sound like the people in my Great Depression history course. I think you would enjoy and benefit from reading this (http://www.brookings.edu/~/media/Files/Press/Books/2011/policyandchoice/policyandchoice_book.pdf), it’s a pretty easy read. Mathematics is virtually non-existent and there are no graphs, it presents material in a purely an intuitive sense.
“the detrimental environmental affects of too little regulation”
Most negative externalities may be corrected by Pigouvian taxes or Lindahl taxes. Yes, this is government regulation/intervention, but it will create more efficient outcomes (by “fixing” the dead weight loss) absent of a market to correct for whatever externality you’re thinking of.
Economists do recognize that in reality, people are irrational, that’s why there are books like Robert Shiller’s Irrational Exuberance and Richard Thaler’s Nudge; it’s also why two psychologists (Kahneman and Tversky) won the Econ Nobel back in ’02.
George Stigler’s Capture Theory of Regulation states that the regulators of monopolies have been “captured” by the monopolists that they’re supposed to regulate. The data finds that regulators are part of the revolving door phenomenon (that we learned about in AP Gov!) thus the government, through regulation, is essentially guaranteeing the monopoly.
I also want to add that a natural monopoly is usually a firm that is what V said but also it’s more efficient to be a monopoly than not.
I read somewhere that some firms decrease their profits just so they can maintain monopoly power on whatever they were producing, I don’t know how true this is but it seems to follow through.
Also, please remember that economic models are not supposed to represent reality, just an idealized version of reality.
@ V: I know you believe in private property rights; what are your views on intellectual property (patents and copyright)?
“That said, I think we could stand to allow competing currencies (i.e., de-monopolize the currency).”
Whoa! Wait a minute, wouldn’t that jack up transaction costs and thus be a pareto inefficient move?
Sorry if I’m rehashing old points, but it’s been a long day and I’ve been meaning to comment on this post for a while.
Food for thought from Weber: the State has a monopoly on violence.
@5: I support patents and copyrights. However, I am muddling through an e-book that a former student sent me that argues against much of the current intellectual property legal structure, and may come to change my mind.
[re competing currencies] “Whoa! Wait a minute, wouldn’t that jack up transaction costs and thus be a pareto inefficient move?”
Maybe. Are you happy with your dollar bills? If not, what can you do about it?
“Food for thought from Weber: the State has a monopoly on violence.”
Not in any economic sense. There are too many substitutes for State-brand violence.
I disagree that those who benefit the most substantially from markets are only about 1% of the population. Markets do allow the filthy rich to because filthily-richier, but they also allow the poor to become richer. The rich get extra baubles, but the poor get extra sustenance and shelter. To play off your cliche, our 99% is the rest of the world’s 5%. The poor in market economies have little in common with the poor in non-market economies.
Aside from “shortchanging people in trade” (which is covered by anti-fraud laws that nobody would oppose, and in some cases by laws designed to ensure “symmetrical information,” which are debatable) and “taking out life insurance policies on their employees without their consent,” (which is specific and potentially actionable) your exploration paragraph reads like a largely emotional laundry list. Much of the “exploitation” you allude to cannot occur without the exploitat-ee’s consent.
By the way, you need to remove “wage slavery” from your vocabulary as soon as possible– otherwise, actual slaves will laugh at you. If you can walk away from your job or bank, you’re not enslaved. If your boss or bank holds power over you because you signed up for it, you’re not enslaved.
I should re-phrase that. You should remove “wage slavery” from the vocabulary you use when thinking and reasoning. However, it is emotionally and politically powerful, so keep it in your quiver if you ever need to win an election.
Re: environmental effects of too little regulation. I think that environmental regulation is probably the most justifiable kind– but that’s because markets and property rights are usually ill-defined when it comes to the environment. For instance, if you litter on my lawn, you have plainly and obviously violated my property rights, and I have recourse against you– or I can set a price for the right to leave garbage on my lawn. If a company dumps toxic waste on my lawn, they have plainly and obviously violated my property rights, and I have recourse against it– or I can set a price for the right to pollute my lawn. No problem.
Problems exist when nobody privately owns certain environmental goods (air, water) and when it would be very difficult to assign and enforce private ownership to those goods. Thus, markets for air and water aren’t as efficient as are markets for most goods and services. It’s harder to make polluters pay the market price for their pollution– hence cap-and-trade proposals, pollution taxes, etc. Most of what I’ve read favors Pigou taxes (as 5 mentioned) over cap-and-trade proposals, assuming property rights can’t be assigned or markets can’t be constructed in the first place.
1. Touché, VDV, touché. The point you make about our 99% being the world’s 5% was rather poignant. I hadn’t thought of it from that perspective. One of the reasons I abandoned interest in a political career was my time interning in a South African law firm in Cape Town. Our political, social, and economic issues tend to look rather petty when compared.
2. You caught me. But aside from my failure to articulate exploitive tendencies of corporations on people except for politically and emotionally charged “issues”, are you honestly telling me that you don’t think they exist? Or that the right regulation couldn’t help put an end to the exploitation?
3. As for environmental, we’re more or less on the same page. I’m more well read on cap-and-trade, but I’ll do some research on Piguo taxes.
I’m not telling you that whatever you’re thinking of doesn’t exist. I’m telling you that “exploitation” is an emotionally and politically charged term that you’re using to describe something that (A) you don’t like, but (B) may be mutually beneficial to buyer and seller, or business and customer, or boss and employee.
There probably are examples of what you’d call exploitation that I would agree should be restricted or entirely illegal. But there are also probably plenty of examples of what you’d call exploitation that I would call none of your concern, and that “exploiter” and “exploited” would call none of your concern. Come up with examples, and I will comment on them.
In the interest of examining the word “exploit” a bit more, do customers ever exploit businesses? Do workers ever exploit their bosses?
Really quickly, an article I’m reading for class on Dubai labor reform has re-ignited by wage slavery argument. Yes, you sign up for it, you can technically leave. But, as the Human Rights Watch says: exploitation is taking advantage of someone’s desperation. In America, coupled with an inability to afford education for a better job or higher wages, a person can somewhat become enslaved to their job and to their low wage. People who have hundreds of thousands of dollars of medical bills to pay, rent, utilities, children to feed. They may be barely scraping by on the wage they currently have, and unable to leave the position because of sheer economic inability.
To your final question, do they? I cannot think of an example that would match the level of exploitation that corporations reach. The ability to take out a life insurance policy on an unknowing employee is just an illustrative example. I’ve never heard of a person taking out a life insurance policy on a corporation (aka, a person).
Brunette, I can think of two corporate examples which I would consider analogous to purchasing a life insurance policy on a person. I’m sure there are others.
1. Credit Default Swaps are basically bets that a corporation will not be able to pay back its debts. If the corporation defaults, you get paid. That’s basically saying you think the company is going to fail.
2. Shorting a corporation’s stock is also a bet that the company will do poorly, or even fail. Taking the example to the limit: Let’s say I short Company XYZ at, say, $5o/share. Then, XYZ goes bankrupt and the stock goes down to pennies a share. I just made a killing off that company’s “death.”
(Blonde), indulge me:
You own a business. It doesn’t matter what kind. Karl and Fred walk into your business and apply for two jobs that pay ten bucks an hour. You can assume whatever you want about the job, full- or part-time, benefits, whatever, but the jobs they are applying for are identical.
Fred and Karl are equally qualified. However, Fred faces some difficulties that Karl does not. Fred has “an inability to afford education for a better job or higher wages,” has “hundreds of thousands of dollars of medical bills to pay,” all on top of having to clothe, house and feed his family. Karl, on the other hand, has no children, has the time to go to school if he wishes, and has no medical concerns.
You hire both of them. Are you exploiting either of them? Is either a “wage slave”?
Comments are closed.