Monday, April 12, 2010

The Case for Monopolies

Let's go back a bit through American history to the time known as the "Gilded age", which began roughly at the end of Reconstruction (1877) and ended with the Progressive Reform Era (~1900). It was at this time that the American economy industrialized, as the free market ruled and allowed the liberty necessary to encourage such innovation. It was also at this time that America experienced an unprecedented growth, not only with respect to the past American economy, but also with respect to the rest of the worlds. We managed to become almost as economically powerful as much of Europe, and our products began to become known worldwide.

The Gilded Age brought out some of the most famous industrialists, like John D. Rockefeller, Andrew Carnegie, and Cornelius Vanderbilt, who all built massive companies that were really the backbone of the capitalist era. Rockefeller created an oil company called Standard Oil, and he quickly became one of the richest men to ever live in America. Carnegie produced steel, and the Carnegie name became world renowned and universally associated with steel. Vanderbilt built railroads, which provided much of the foundation on which the American industries could stand on.

The Gilded Age also gave birth to the one thing which the American's had for the most part avoided: monopolies. These industrialists were ruthless. In order to limit competition, they would force other companies to sell or gradually take over their territory. Sometimes, they even blatantly defrauded the other companies out of money or power. This led them to be known as "robber barons". Ironically, these men were also some of the most famous and biggest philanthropists in history.

The idea that a single company could force their way into a monopoly scared not only the citizens but the federal government, so in response they passed the 1890 Sherman Antitrust Act. This gave the federal government the ability to investigate and pursue trusts in order to limit cartels and monopolies. How did they do this? They broke the companies up. Standard Oil was split into dozens of separate entities, of which two still exist. The American Tobacco Company was broken down into several other major tobacco producers, and the Northern Securities Company (which owned railroads) was completely dissolved.

The Act is still used today to justify government investigations into monopolies. A good example is Microsoft, who was constantly being investigated for violating antitrust law in the 1990's. Other prominent cases include suits against Wal-Mart, 21st Century, Google, Oracle, and many others.

There are even some regulated monopolies, that is, monopolies that are legally allowed to be exist. They include the MLB, NFL, NHL, and GameStop. Those four companies dominate their respective markets (GameStop for used games), but came about not by imperialist business practices, but by out-competing everyone.

With all of this knowledge, we have come to an important question: should monopolies be allowed to exist freely? The answer is a resounding yes, and this is why.

Let's understand that it is not the monopoly the government has a problem with. It's the monopoly that is gained through illicit means, such as the forcing of other companies out of competition. This is why monopolies like the NFL are regulated, not dissolved.

So, in a free market, it takes an extraordinary amount of work to create and support a monopoly. In order to be in that position, you have to be able to out-compete every other business in that industry, by providing a better product at a lower cost. Now, of course, it doesn't always happen this way, so we need two rules. The two fundamental rules of capitalism: that one group may not engage in force or fraud against another. These two rules, if enforced PROPERLY, fix most of the problems associated with monopolies. How, you may ask?

These two rules get rid of the unnatural ways to acquire a monopoly. Removing the ability to force companies into submission or defraud them out of business means that the only thing any company can do is try to out-compete the competition. It must sell a better product at a lower price, or if the monopoly already exists, it has to continue selling a better product at a lower price. This is how a natural monopoly forms, and they work well. Does anyone worry about the NFL blocking competition? No, they gained the monopoly naturally, and so do have no incentive to subvert the market.

So, how does the government enforce those rules? Through regulation and restriction? Hell nah. The two rules exist to level the playing field. They would exist as laws that don't block the market, but rather gives a company legal ground to sue a potential aggressor: one who may be initiating force or fraud against the company. The only government intervention here is a judge saying, "yes, you initiated force, he wins", and then the aggressor has to pay reparations. They'll learn. The key is that the repercussion of violating those two rules is not regulation, but payment.

But, don't monopolies limit competition? Even if they exist naturally, don't they still block others from getting into that market? Of course they do, that's the definition of a monopoly.

The real issue here, is that is the competition necessary? If we apply the two rules and assume the monopoly formed naturally, out of competition, then they are already offering the best product at the lowest price. What need is there to have price lowering competition when a business has already achieved the maximum efficiency (through competition)? It sounds like it limits opportunity, but it really doesn't; the market will adapt.

What about pricing? Why wouldn't a company who has a total monopoly jack up prices to maximize profits, knowing that the market doesn't have a choice? Because they can't.

Raising prices opens the door to competition. If the product starts to become too expensive, then competitors (which would be mostly startups) now have room to actually compete. If the monopoly tries to force that new company out? They've just violated one of the two rules, and they can be sued.

Monopolies are not bad. In fact, a natural monopoly is the peak of capitalist achievement. If we abide by the two fundamental rules of capitalism, then unnatural, "bad", monopolies would be MUCH harder to come by. They can function in a capitalist system, and they can do it well without disrupting it or causing problems.

No matter how strong a company gets, the MARKET is always the one in control. This is the beauty of capitalism.


  1. "What about pricing? Why wouldn't a company who has a total monopoly jack up prices to maximize profits knowing that the market doesn't have a choice? Because they can't." This is true in most cases but things such as oil that we as americans are helplessly addicted to must pay a high price whenever there is a "shortage". Yes there is competition even during these "shortages" but when the price for a necessity is to high then something has to change. Monopolies exist all around us just check your bills... energy, sewage, and garbage control all have our nuts in a vise..

    The trust charges against microsoft wasnt just against them having the leading OS at ridiculously high prices but after selling the OS m$ still wanted to control what the users did with THEIR software such as what internet browser they were allowed to use.

    P.S. OH you got a new layout..

    P.P.S. I can see where your coming from with capatilism but really without some regulation the companies would take over and we would be worse off..

    P.P.P.S Why isn't apple getting sued for being a monopoly? Oh yeah cuz no one important uses mac's just the select few douchebags. Hahaha

  2. Yes, the only places that bad monopolies can happen is in utilities, I'll concede that. But, things like oil where supply is not based on geography (like utilities), a simple change in demand will offset high oil prices. There is always a threshold that will be reached before people will simply stop buying something, even for oil.

    I didn't really feel like explaining the MS trust suits, but what I meant by it was that MS controls such a huge portion of the market not through involuntary coercion, but through good business.

    Yes, I got a new layout.

    No, companies cannot take over because they can't violate the two golden rules of capitalism. Those two rules apply to ANY group, including the citizens.

    And Apple is just retarded, simple as that.


  3. I didnt mean companies would take over in the way it seems. What i meant to say, at @ twelve o clock in the morning, was that regulations need to be there to prevent companies from taking advantage of what they have at the consumers expense. For example lead paint, and other obviously dangerous things. I'm not saying that regulations haven't gone too far cuz i think we crossed the line a loooong time ago but some regulations need to exist.

    haha apple is retarded

  4. True, but that's a whole 'nother issue completely separate from monopolies. Besides the two golden rules, there are also ways to self-regulate.