On monopolies, part one.

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.

One comment

  1. I just wanted to note that I never saw this post prior to this moment, and that I’m going to read over everything and think on it and use it in my subsequent responses. But I will go ahead and say thank you for this little tidbit:

    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.

    Because that is the exact area where I thought we were disagreeing the most, whether or not monopolies could/ did develop in the absence of government regulation. That being said, I think my responses will be more relevant and less repetitive. And I guess I did not factor in the variables of whether or not the economy actually /suffered/ from the existence of monopolies, rather that I held the ideal that monopolies were in essence, negative, which I now see has the possibility of being false.

    Like

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