Monopoly and Competition: Recent Episodes
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Monopoly and Competition includes the nature of competition, criticism of neoclassical, works on the nature of monopoly, antitrust legislation, unions.
Hunter Hastings of Economics for Business joins Jeff for a thoroughgoing discussion of how monetary and fiscal policy distort capital markets and create perverse incentives for financialization rather than real production.
Jeff Deist, "Does M&A benefit the economy?": Mises.org/HAP373-ARothbard's America's Great Depression: Mises.org/AGDThe Economics for Business Podcast: Mises.org/E4Bpod
Jeff and Bob break down the good, bad, and ugly behind Elon Musk's purchase of Twitter.
Higher education signaling, grade inflation, federal aid and student debt, free speech, and university bureaucracy.
Download the slides from this lecture at Mises.org/MU21_PPT_34.
Recorded at the Mises Institute in Auburn, Alabama, on 29 July 2022.
Government attempts to limit “monopoly power” cannot improve well-being.
Download the slides from this lecture at Mises.org/MU22_PPT_15.
Recorded at the Mises Institute in Auburn, Alabama, on 26 July 2022.
The ruling class is claiming that free markets are nothing more than a "trickle-down" scheme. But a free market system really does serve society best.
Original Article: "Consumers, Workers, and Monopolies: Free Markets Serve All"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Download the slides from this lecture at Mises.org/MU21_PPT_35.
Recorded at the Mises Institute in Auburn, Alabama, on 23 July 2021.
Download the slides from this lecture at Mises.org/MU21_PPT_14.
Recorded at the Mises Institute in Auburn, Alabama, on 20 July 2021.
We're now hearing many calls for more antitrust legislation applied to Big Tech because these firms are allegedly monopolies. But old-fashioned antitrust was a disaster, as will be new efforts against tech companies.
Original Article: "The Problem with the "Robber Baron" Narrative"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Recently Tim Poole alluded to the so-called “shopping cart theory” of why self-governance is impossible. Specifically, because people can’t even bother to take back the shopping cart when this is clearly the socially right thing to do, we can’t hope to have a system relying on everyone’s good nature. Bob explains what’s wrong with this argument.
Mentioned in the Episode and Other Links of Interest: The blog post for the “Adventures in Pacifism: Louis CK edition” contest.Ben Powell on SomaliaBob’s book Chaos Theory, his article on libertarian law and military defense, his lecture on the market for security, and his lecture on military defenseThe Federalist No. 51 For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Why don't corporations just get bigger and bigger until they take over the whole economy? Unlike states, firms aren't necessarily better off as they get bigger.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Original Article: "Why the Economy Isn't Controlled by One Big Corporation".
Social media has lied about user privacy and has misled the public about the platforms' status as open forums. But none of this makes these companies monopolies.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Original Article: "Social Media Companies Aren't the Good Guys. They're Also Not Monopolists.".
Power and Market was never meant to be an addendum to Man, Economy, and State, but a vital part of the book’s unbridled economic analysis of a truly free market — and a searing new typology of interventionism. Dr. Patrick Newman joins the show for a fascinating look at Rothbard’s groundbreaking conceptual work in private defense, private courts, and the stark realities of political incentives.
Read the book free of charge in searchable HTML format here.
Use the code HAPOD for a discount on Man, Economy, and State from our bookstore: Mises.org/BuyMES
Additional Resources Bob Murphy's study guide to Man, Economy, and State: Mises.org/StudyMES
Man, Economy, and State: Mises.org/MES
The political entrepreneur succeeds by using the implicit violence of government to cripple his competitors and harm consumers. The market entrepreneur, on the other hand, makes his fortune by providing consumers with products they need at prices they can afford.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The Misplaced Fear of 'Monopoly'".
When Murray Rothbard wrote Man, Economy, and State in the 1950s, monopoly theory was a mess. Even Mises did not have a full understanding of where neoclassical economics went wrong in diagnosing "market failure." But in Chapter 10 of his great treatise, Rothbard demolished the myths surrounding monopolies and cartels. His friend Dr. Walter Block joins the show to discuss Rothbard's breakthroughs and draw downward-sloping demand diagrams for us!
We discuss why deadweight loss is nonsense; why government privilege and forced union bargaining are the real culprits; and why cartels are inherently unstable. Even Google should not worry us, says Dr. Block—but with a caveat. Don't miss this show on groundbreaking Rothbardian monopoly insights!
Read the book free of charge in searchable HTML format here.
Use the code HAPOD for a discount on Man, Economy, and State from our bookstore: Mises.org/BuyMES
Additional Resources Dr. Joe Salerno's introduction to Man, Economy, and State: Mises.org/SalernoMES
Man, Economy, and State: Mises.org/MES
Download the slides from this lecture at Mises.org/MU20_PPT_34.
Recorded at the Mises Institute in Auburn, Alabama, on 17 July 2020.
Download the slides from this lecture at Mises.org/MU20_PPT_11.
Recorded at the Mises Institute in Auburn, Alabama, on 14 July 2020.
Today's solo show kicks off our reading of Rothbard's landmark Man, Economy, and State with a look at Chapter 1, "Fundamentals of Human Action." So much of what economics texts get wrong is laid out brilliantly here by Rothbard, who gives readers the basics of action, means/ends, time, ranking, factors of production, and capital in this 77 page master class. The short appendix at the end of the chapter alone is a bombshell—demystifying the correct form for economic analysis, and explaining why psychology is not praxeology. Don't miss this introduction to the book you know you need to read!
Use the code HAPOD for a discount on Man, Economy, and State from our bookstore: Mises.org/BuyMES
Additional Resources Man, Economy, and State: Mises.org/MES
Bob Murphy's Study Guide to Man, Economy, and State: Mises.org/StudyMES
Economists have long tried to use the idea of "public goods" as justification for a wide variety of government interventions. But there is no objective measure for what's a public good and what's not.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Why "Public Goods" Don't Justify Government Intervention".
BBC images from India show the human toll of the coronavirus shutdown. Americans should take note, and soon.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Will It Take Food Shortages to End Support for the Shutdown?"
The whole idea of government regulating so-called monopolies in order to promote competition is based on fallacies. If anything, such intervention only stifles market competition and lowers living standards.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Government Regulation against "Monopolies" Only Lowers Our Standard of Living"
We dive into Part Four of Human Action with Professor Jeffrey Herbener, Chair of the Economics Department at Grove City College.
This is a fantastic discussion of money and market exchange, with Mises proving timely as ever given the current financial meltdown and crazed response from Washington. Dr. Herbener and Jeff Deist cover catallactics and how imaginary constructs help us understand basic economics; markets as a system of social cooperation; how ordinal preferences find expression in money prices; the structure of production; consumer sovereignty; Mises's conception of monopoly; and the various media of exchange which complicate what ought to be the market's provision of commodity money.
Use the code HAPOD for a discount on Human Action from our bookstore: Mises.org/BuyHA.
Additional Resources Human Action: Mises.org/HumanAction
Bob Murphy's Study Guide to Human Action: Mises.org/Study
The true test of our commitment to personal liberty doesn't come when we permit others to engage in those peaceable, voluntary acts with which we agree. It comes when we permit others to engage in peaceable, voluntary acts we find offensive. Walter Block's Defending the Undefendable II contains thirty chapters defending behavior that is probably offensive to most Americans, and many that are downright illegal.
This book features a foreword by Ron Paul. Narrated by Patrick Smith.
Download the complete audiobook in one ZIP file here. This audiobook is also available on Soundcloud, Google Podcasts, Apple Podcasts, and via RSS.
Need the state to provide national defense? Think again, and get ready for a wild intellectual ride. With eleven chapters by top libertarian scholars on all aspects of defense, this book edited by Hans-Hermann Hoppe represents an ambitious attempt to extend the idea of free enterprise to the provision of security services.
Narrated by George Pickering.
Download the complete audiobook (14 MP3 files) here. Also available on SoundCloud, Apple Podcasts, Google Podcasts, and via RSS.
Compiled by Edward W. FullerEdited with an Introduction by David Gordon
Are you a Murray Rothbard fan? Do you love his writing? His clarity and style? His razor-sharp economic analysis? His penchant for slaying sacred cows?
One of the most remarkable aspects of Murray Rothbard's career wasn't simply the power of his ideas, or his razor-sharp wit, but the sheer breadth of his knowledge.
A brilliant economist, revolutionary political philosopher, bold revisionist historian, and even joyful cultural commentator, Rothbard was one of the most prolific scholars — perhaps one of the most quotable.
This is the ultimate Rothbard reference book, and your single source for his best excerpts and quotes on all the core subjects: economics, philosophy, epistemology, ethics, history, law, and libertarianism.
Considering Rothbard's 62-page bibliography — consisting of 30 full-length books, 100 full chapters for edited works, and more than 1,000 scholarly and popular articles — consuming all of his work is almost impossible. Now, thanks to Rothbard A to Z, the ability to search for Rothbard's unique views on hundreds of topics is now at your fingertips.
Compiled by Edward W. Fuller and edited by David Gordon, this massive book is a must-have for any true Rothbard aficionado.
Prolific and radical hardly begin to describe him — but his important work has never been brought together like this, a reference guide and a fun book you can open at random for the best “Murrayisms” on any topic!
Here are just a few teasers:
Deflation, far from being a catastrophe, is the hallmark of sound and dynamic economic growth. Deflation — Making Economic Sense, p. 16 ...throughout history, despots and ruling elites of States have had far more need of the services of intellectuals than have peaceful citizens in a free society. For States have always needed opinion-moulding intellectuals to con the public into believing that its rule is wise, good, and inevitable; into believing that the “emperor has clothes.” Intellectuals — For a New Liberty, p. 14 Integration cannot be achieved by law and coercion; it must first come willingly into the hearts of men. Racism — Left and Right, p. 491 Professor Mises has keenly pointed out the paradox of interventionists who insist that consumers are too ignorant or incompetent to buy products intelligently, while at the same time proclaiming the virtues of democracy, where the same people vote for or against politicians whom they do not know and on policies which they scarcely understand. To put it another way, the partisans of intervention assume that individuals are not competent to run their own affairs or to hire experts to advise them, but also assume that these same individuals are competent to vote for these experts at the ballot box. Democracy — Man, Economy, and State, p. 886 Secession is a crucial part of the libertarian philosophy: that every state be allowed to secede from the nation, every sub-state from the state, every neighborhood from the city, and logically, every individual or group from the neighborhood. Secession — Libertarian Forum v. 1, p. 17
This three-lecture course with Professor Peter Klein reviews mainstream and Austrian theories of competition and monopoly, with a focus on theory and applications to business strategy, antitrust and regulation, and innovation.
He begins with a brief overview of the neoclassical model of “perfect competition” and the theory of “market failure,” showing how this particular understanding of markets underlies mainstream economists’ beliefs about taxes and regulation, antitrust, environmental policy, and more.
Klein then turns to various approaches to competition and monopoly within the Austrian school, including the views of Menger, Mises, Rothbard, and Kirzner.
The final section focuses on current applications of these debates to minimum-wage laws, patent and innovation policy, environmental regulation, and more.
The live lectures were originally broadcast on 2/9, 2/16, and 2/23.
Attend this online course for free. As an enrolled student, you can watch lecture video, review and download lecture materials, take quizzes, and utilize a full list of all required readings.
There are numerous well-known definitions of economics, but the one that best captures what economics is about is James Buchanan's definition, namely: "Economics is the science of markets or exchange institutions."
Why is the aviation world all atwitter? Peter Klein explains what free market competition is and is not. Klein is the Mises Institute's Carl Menger Research Fellow.
Politics operates according to principles that would horrify us if we observed them in our private lives, and would get us arrested if we lived by them. The state can steal and call it taxation, kill and call it war, writes Lew Rockwell.
This audio Mises Daily is narrated by Ben Wiegold.
The very first votes of the 2016 presidential election season were cast this week in the Iowa caucuses. This is supposed to fill us with happy thoughts about self-government, civic virtue, rational deliberation, and about politics as the way the people’s will is put into effect.
But to the contrary, we should spurn what the establishment would have us celebrate. Politics operates according to principles that would horrify us if we observed them in our private lives, and that would get us arrested if we tried to live by them. The state can steal and call it taxation, kidnap and call it conscription, kill and call it war.
And yet we are taught to fear capitalism, of all things.
But what, after all, are capitalism and the free market? They are nothing more than the sum total of voluntary exchanges in society.
When we engage in a voluntary exchange — when I buy apples for $5, or when you hire someone for $25 per hour — both sides are better off than they would have been in the absence of the exchange.
We can’t say the same for our interactions with the state, since we pay the state under threat of violence. The state sure winds up better off, though. That’s for sure.
Business firms that increase their profits thanks to some new innovation cannot rest on their laurels. Other firms will adopt the innovation themselves, and those abnormally high profits will dissipate. The original firm must continue to press forward, striving to devise still newer ways to please their fellow men.
The state operates under no such conditions. It can remain as backward as it likes. Other firms are typically prohibited from competing with it.
The state’s priorities arbitrarily override your own. Ethanol “is important for the farmers,” one candidate says. So because the state has decided some interest group’s foolish and economically nonsensical pet project is “important,” what you yourself would have preferred to do with your money is simply set aside and ignored, and you are forced to subsidize what the state seeks to privilege.
Our schools and media portray corporations as sinister, and government as benign. But who wouldn’t rather take a sales call from Norwegian Cruise Line than an audit demand from the Internal Revenue Service?
Or imagine if a corporation fabricated a web of untruths, used them as a pretext to launch a violent attack on a people that had never caused Americans any harm, and brought about as many as a million deaths and millions more internal and external refugees. That corporation would be broken up and never heard from again. It would be denounced ceaselessly until the end of time.
Now all those things did happen, but they were carried out by the state. And as we all know, there have been no repercussions for anyone. No one has been punished. In fact, the perpetrators earn six-figure speaking fees. The whole thing is shrugged off as at worst an honest mistake. Some people are still outraged about it, but even they seem to take for granted that there’s really nothing that can be done about behavior like this on the part of the American regime.
Imagine there were a corporation that was somehow so entrenched that despite being responsible for a staggering death toll, it evaded all responsibility and simply carried on as before. The outrage would be deafening and overwhelming.
But so relentless has been the propaganda, ever since all of us were children, about the state’s benign nature that many people simply cannot bring themselves to think as badly about the state as they have been taught to think about corporations — even though the crimes of the state put to shame all the misdeeds of all existing corporations put together. Meanwhile, opponents of the state are routinely portrayed as incorrigible misanthropes, when in fact, in light of the state’s true nature, we are mankind’s greatest advocates.
The market brings people together. People of divergent and sometimes antagonistic racial, religious, and philosophical backgrounds are happy to trade with one another. Beyond that, the international division of labor as it exists today is the greatest and most extraordinary example of human cooperation in the history of the world. Countless firms produce countless intermediate goods that eventually combine to become finished consumer products. And the entire structure of production, in all its complexity, is aimed at satisfying consumer preferences as effectively as possible.
The state, on the other hand, pits us against each other. If one of us wins a state favor, it comes at the expense of everyone else. For one group to be benefited, another must first be expropriated. At one time or another the state has pitted the old against the young, blacks against whites, the poor against the rich, the industrialists against agriculture, women against men.
Meanwhile, all the anti-social effort devoted to extracting favors from the state is effort that is not available to produce goods and services and increase the general prosperity.
The market is about anticipating the needs of our fellow men and exerting ourselves to meet those needs in the most cost-effective manner — in other words, by wasting the fewest possible resources, and making what we offer as affordable as we can for those we serve.
Ah, but we need the state, virtually everyone tells us. Whether it’s “monopoly,” or drugs, the bad guys overseas, or the scores of other bogeymen the state uses to justify itself, we’re constantly being reminded of why the state is supposed to be indispensable. To be sure, these and other rationales for the state sound plausible enough, which is why the state and its apologists use them. But the first halting steps toward intellectual liberation come when someone considers the possibility that the truth about these things might be different from what he hears on TV, or learned in school.
The small minority of people who administer the state with funds expropriated by the productive private sector need to justify this situation, lest the public become restless or entertain subversive ideas about the real relationship between the state and themselves. And this is where the state’s various platitudes about the people governing themselves, or taxation being voluntary, or government employees being the servants of the people, enter the picture.
Think for a moment just about this last claim: that government employees are our servants. These people staff an institution that decides how much of our income and wealth to expropriate in order to fund itself. They will imprison us if we do not pay. And we are to believe that these people are our servants?
For those not gullible enough to fall for such a transparent canard, the rationales become mildly more sophisticated. All right, all right, the state may say, it’s not quite right to say that the people govern themselves. But, they hasten to add, we can offer the next best thing: the people will be represented by individuals chosen from among them.
As Gerard Casey has argued, though, the idea of political representation is not meaningful. When an agent represents a business owner in a negotiation, he ensures that the owner's interests are pursued. If the owner’s interests are defended only weakly, ignored, or downright defied, the owner chooses different representation.
None of this bears any resemblance to political representation. Here, a so-called representative is chosen by some people but actively opposed by others. Yet he is said to “represent” all of them. But how can this be, when he can’t possibly know them all, and even if he did, he’d discover they have mutually exclusive views and priorities?
Even if we focus entirely on those people who did vote for the representative, is their vote supposed to imply consent to his every decision? Some of them may have voted for him not for his positions or merits, but simply because he was less bad than the alternative. Others may have chosen him for one or two of his stances, but may be indifferent or hostile on everything else. How can even these people — who actually voted for the representative — seriously be said to be “represented” by him?
But the idea of political representation, while meaningless, is not without its usefulness to the modern state. It helps to conceal the brute fact that, despite all the talk about “popular rule” and “governing ourselves,” even the “free societies” of the West amount to some people ruling, and others being ruled.
When the results are announced this primary season amid cheers and celebration, then, remember what it all represents: the triumph of compulsion over cooperation, coercion over freedom, and propaganda over truth. The civics textbooks may write with breathless awe about the American political system, but this is by far the worst thing about the US. Rather than celebrate the anti-social world of politics, let us raise a glass to the anti-politics of the free market, which has yielded more wealth and prosperity through peace and cooperation than the state and its politicians could with all the coercion in the world.
One day in 1959, hundreds of students, educators, and grandees filled the enormous lecture hall of the University of Buenos Aires to capacity, overflowing into two neighboring rooms. Argentina was still reeling from the reign of populist president, Juan Perón, who had been ousted four years before. Perón’s economic policies were supposed to empower and uplift the people, but only created poverty and chaos. Perhaps the men and women in that auditorium were ready for a different message. They certainly got one.
A dignified old man stepped before them, and delivered a bold, bracing message: what truly empowers and uplifts the people is capitalism, the much-maligned economic system that emerges from private ownership of the means of production.
This man, Ludwig von Mises, had been the world’s leading champion of capitalism for half a century, so his message was finely honed. Not only a creative genius, but a superb educator, he boiled down capitalism to the essential features that he believed every citizen needed to know. As his wife Margit recollected, the effect on the crowd was invigorating. Having spent years in an intellectual atmosphere of stale, stagnant ideas: “The audience reacted as if a window had been opened and fresh air allowed to breeze through the rooms.”
This lecture was the first in a series, the transcriptions of which are collected in the book Economic Policy: Thoughts for Today and Tomorrow, edited by Margit.
Life (and Death) Before CapitalismTo demonstrate in his lecture how revolutionary the advent of capitalism was in world history, Mises contrasted it with what he called the feudalistic principles of production during Europe’s earlier ages.
The feudal system was characterized by productive rigidity. Power, law, and custom prohibited individuals from leaving their station in the economic system and from entering another. Peasant serfs were irrevocably tied to the land they tilled, which in turn was inalienably tied to their noble lords. Princes and urban guilds strictly limited entry into whole industries, and precluded the emergence of new ones. Almost every productive role in society was a caste. This productive rigidity translated into socio-economic rigidity, or “social immobility.” As Mises reminded his Argentine audience:
a man’s social status was fixed from the beginning to the end of his life; he inherited it from his ancestors, and it never changed. If he was born poor, he always remained poor, and if he was born rich — a lord or a duke — he kept his dukedom and the property that went with it for the rest of his life.Over 90 percent of the population was consigned to food production, so as to precariously eke out sustenance for their own families and contribute to the banquets of their domineering, parasitic suzerains. They also had to make their own clothing and other consumers’ goods at home. So, production was largely autarkic and nonspecialized. As Mises highlighted, the small amount of specialized manufacturing that existed in the towns was devoted largely to the production of luxury goods for the elite.
From the High Middle Ages onward, production in Western Europe was higher, and the average person much less likely to be a chattel slave, than during antiquity and the Dark Ages. But the economic system was still fixed and moribund; the common man had no hope of progressing beyond a life teetering between bare subsistence and starvation.
And in the eighteenth century, in the Netherlands and England, said Mises, multitudes were about to go over the ledge, because the population had grown beyond the land then available to employ and sustain them.
It was then and there that capitalism entered the scene, saving the lives of millions, and vastly improving the lives of millions more.
Four key distinguishing features of capitalism can be gleaned from Mises’s lecture. What follows is an exposition of those features, which can be thought of as, to paraphrase Richard Feynman, “Mises in four easy pieces.”
It is important to note that, as Mises fully noted elsewhere, what emerged in the eighteenth century and developed subsequently was never a purely free market. So, the following characteristics have never been universal. But these features did come into play far more extensively in this period than ever before.
One: Dynamic ProductionUnder what Mises called “capitalistic principles of production,” feudal productive rigidity is replaced by productive flexibility and free entry. There are no legal privileges protecting anyone’s place in the system of production. Lords and guilds cannot exclude new entrants and innovations. And an upstart enterpriser’s capital, products, and proceeds are secure from the cupidity of princes and the jealousy of incumbents.
Of course free entry amounts to very little without the corresponding right of free exit. With capitalism, peasants are free to leave their fields and former masters for opportunities in the towns. And proprietors are free to sell or hire out their plots of land and other resources to the highest bidder. (Although, during the transition between feudal and capitalist production, it really should have been the peasants doing the selling and hiring out, as they were owed restitution never delivered for their past serfdom and expropriation.)
Free entry/exit is the logical corollary of liberty: inviolate self-ownership and private property. It is the freedom of an individual to put his labor and earnings to whatever productive use he finds advantageous, irrespective of the pretenses to privilege of vested interests.
Under capitalism, no longer can nobles rely on a captive labor force and “customer” base, or enjoy the impossibility of having resources bid away by more efficient producers. No longer can these robber barons turned landed barons rest on such laurels of past armed conquest.
Mises identified resentment of this fact as a prime source of anti-capitalism, which thus originated, not with the proletariat, but with the landed aristocracy. He cited the consternation of the Prussian Junkers of Germany over the Landflucht or ”flight from the countryside” of their peasant underlings. And he related a colorful story of how Otto von Bismarck, that prince of Junkers who founded the welfare state (with the express purpose of co-opting the masses), grumbled about a worker who left Bismarck’s estate for the higher wages and pleasant Biergartens of Berlin.
Under capitalism, no longer can tradesmen idle in old methods and old markets. To do so is impossible in a world in which any man with savings and gumption is a potential underseller and overbidder. Industry incumbents also loathe the competition, so their special pleading is another major source of anti-capitalist rhetoric.
Free entry/exit imposes the stimulus and discipline of competition on producers, impelling them to strive to outdo each other in satisfying potential customers. As Mises announced in Buenos Aires: “The development of capitalism consists in everyone’s having the right to serve the customer better and/or more cheaply.”
Production, formerly adrift in the standing water of feudalistic stagnation, sets sail under capitalistic dynamism, driven by the bracing winds of competition.
Two: Consumer SovereigntyWhen producers vie with each other to better serve customers, they unavoidably act more and more like devoted servants of those customers. This is true of even the biggest and wealthiest producers. As Mises brilliantly expressed it:
In talking about modern captains of industry and leaders of big business … they call a man a “chocolate king” or a “cotton king” or an “automobile king.” Their use of such terminology implies that they see practically no difference between the modern heads of industry and those feudal kings, dukes or lords of earlier days. But the difference is in fact very great, for a chocolate king does not rule at all, he serves. He does not reign over conquered territory, independent of the market, independent of his customers. The chocolate king — or the steel king or the automobile king or any other king of modern industry — depends on the industry he operates and on the customers he serves. This “king” must stay in the good graces of his subjects, the consumers; he loses his “kingdom” as soon as he is no longer in a position to give his customers better service and provide it at lower cost than others with whom he must compete.With capitalism, just as producers play the role of servant, customers play the role of master or sovereign: in a figurative sense, of course. It is their wishes that hold sway, as producers strive to grant them. And strive they must, if they want to succeed in business. For, just as a sovereign of the ancien régime was free to withhold favor from one courtier and bestow it upon another, the “sovereign” customer is free to take his business elsewhere.
This relation is even expressed in the language we use to describe commerce. Customers are patrons who patronize shops and other sellers. These sellers say, “thank you for your business” or patronage, and insist that, “the customer is always right.” The polite, respectful deference formerly given by the ancient Roman cliens (client) to his patronus (patron) is now instead given by the producer to his customer/patron, except generally in a much more self-respecting and less groveling manner.
If the customer is himself also a producer on the market, he must pay forward that same solicitousness and deference to his own customers, lest he lose their business to competitors. Thus, his desires for goods from his eagerly attentive suppliers are shaped by his own eagerness to fulfill the desires of his own customers. Therefore, the higher order producer, by striving to make his customer happy, indirectly strives to make his customer’s customers happy as well.
This series terminates with the customers who have no customers: namely, the consumers, who are therefore the “engine” of this “train” of final causation. Thus, with capitalism, it is the consumers who hold ultimate sway over all production. Mises referred to this fundamental characteristic of capitalism as, speaking figuratively, consumer sovereignty.
Again, this is constrained to the extent that state intervention hampers capitalism. “Leaders of big business” can and often do use the state to acquire powers and privileges that enable them to flout the wishes of consumers and acquire wealth through domination instead of service. In fact, one of the most clear recent instances of this involved a real life person actually nicknamed, as in Mises’s example, the “chocolate king”: a confectionary tycoon named Petro Poroshenko who parlayed his business success into a political career which recently culminated in his election as president of the US-sponsored junta now ruling Ukraine.
Three: Mass Production for the MassesIn the first lecture of his online course “Why Capitalism,” David Gordon drew from his limitless reservoir of scholarly anecdotes to relate that Maurice Dobb, a British economist and communist, replied to Mises’s point about consumer sovereignty by averring that this feature of capitalism hardly does the common man any good, since the most significant consumers are the wealthiest. Dobb’s mistake, of course, is to neglect the fact that the relative importance of single consumers is not the issue here. The combined purchasing power of the preponderance of typically wealthy consumers vastly outstrips that of the atypically wealthy.
Therefore, as Mises pointed out, the capitalist’s main route to becoming one of those few wealthy consumers of extraordinary means is through mass producing wares that cater to the masses of consumers of ordinary means. Even a small per-unit profit margin, if multiplied millions or billions of times, adds up to some serious dough. Boutique enterprises catering only to the elite, as feudal era manufacturers did, simply cannot compare. And that is why, as Mises informed the stunned Perónistas:
Big business, the target of the most fanatic attacks by the so-called leftists, produces almost exclusively to satisfy the wants of the masses. Enterprises producing luxury goods solely for the well-to-do can never attain the magnitude of big businesses.
That is why, as Mises never tired of saying, capitalism is a system of mass production for the masses. It is overwhelmingly the masses of “regular folk” who are the sovereign consumers whose wishes are the guiding stars of capitalist production.
Capitalism flipped feudalism on its head. With feudalism, it was the elite (the landed aristocracy) whose will dominated the masses (the enserfed peasants). With capitalism, it is the wishes of the masses (ordinary consumers) that hold sway over the productive activity of the entrepreneurial elite, from retail giants to dot-com millionaires.
As Mises’s address implied, the yearned-for “people power” always promised by demagogues like Perón, but which invariably turns to ashes in the mouths of the masses, as it did with the Argentines, is the natural result of capitalism, a system so often derided as “economic royalism.”
Imagine his audience’s surprise!
But the full truth that Mises was imparting was even more surprising than that. Not only does capitalism fulfill the broken promises of economic populism, but, as Gordon brilliantly remarked in his lecture, it also follows through on the more specific promise offered by syndicalists and Marxian socialists: worker control over the means of production. That is because, as Mises stressed in his lecture, the vast majority of the masses of ordinary “sovereign” consumers are also workers.
With capitalism, the working people really do hold ultimate sway over the means of production. They just don’t do it in their role as workers, but in their role as consumers. They exert their sway in checkout aisles and website shopping carts, and not in the halls of labor unions, syndicates, soviets (revolutionary councils of workers), or a “dictatorship of the proletariat” that reigns in their name while it rides on their backs.
Capitalism has the charming arrangement of empowering the working person, while still preserving economic sanity by placing means (factors of production, like labor) at the service of ends (consumer demand), instead of the insanity of doing the opposite, as the labor fetish of syndicalism does.
Four: Prosperity for the PeopleCapitalism not only empowers the working person, but uplifts him.
Capitalism, as its name implies, is characterized by capital investment, which was the solution to the crisis of how the marginal millions of eighteenth-century England and the Netherlands were to integrate into the economy and survive.
Labor alone cannot produce; it needs to be applied to complementary material resources. If, with given production techniques, there is not enough land in the economy to employ all hands, then those hands must be placed upon capital goods, if the connected mouths are to eat. During the Industrial Revolution, such capital goods were lifelines that the owners of new factories threw to countless economic castaways and that pulled them from the abyss and back into the division of labor that kept their lives afloat.
Knowing this truth of the matter, Mises was rightly appalled at the anti-capitalist agitators who “falsified history” (Gordon identified Thomas Carlyle and Friedrich Engels as among the worst offenders) to spread the now dominant myth that capitalism was a bane to the working poor. He set the issue right with passion:
Of course, from our viewpoint, the workers’ standard of living was extremely low; conditions under early capitalism were absolutely shocking, but not because the newly developed capitalistic industries had harmed the workers. The people hired to work in factories had already been existing at a virtually subhuman level.The famous old story, repeated hundreds of times, that the factories employed women and children and that these women and children, before they were working in factories, had lived under satisfactory conditions, is one of the greatest falsehoods of history. The mothers who worked in the factories had nothing to cook with; they did not leave their homes and their kitchens to go into the factories, they went into factories because they had no kitchens, and if they had a kitchen they had no food to cook in those kitchens. And the children did not come from comfortable nurseries. They were starving and dying. And all the talk about the so-called unspeakable horror of early capitalism can be refuted by a single statistic: precisely in these years in which British capitalism developed, precisely in the age called the Industrial Revolution in England, in the years from 1760 to 1830, precisely in those years the population of England doubled, which means that hundreds or thousands of children — who would have died in preceding times — survived and grew to become men and women.
And as Mises further explained, capitalism not only saves lives, but it vastly improves them. That is because capitalism is also characterized by capital accumulation (which is why Mises embraced the term, in spite of it originating from its enemies as an epithet), which is the result of cumulative saving and perpetual reinvestment being unleashed by greater security of property from meddlesome laws as well as grasping princes and parliaments. Capital accumulation means ever growing labor productivity, which in turn means ever rising real wages for the worker.
These higher wages are the conduits through which workers acquire the purchasing power that crowns them with consumer sovereignty. And they are no petty sovereigns either. Thanks to his capital-enhanced high productivity, a modern worker’s wage-powered consumer demand guides the deployment of a globe-spanning, dizzying plethora of sophisticated machines, factories, vehicles, raw materials, and other resources, as well as the voluntary labor of the other workers who use them, all of which conspire to churn out a cornucopia of quality household staples, marvelous devices, amazing experiences, and other consumers’ goods and services for the worker to choose from for his delectation. Purchasing such goods with his higher wages is how the worker claims his portion of the greater abundance, which approximates to his own capital-enhanced contribution to it.
And higher wages are not the only way that the average working person can enrich himself through capitalism. Especially since the advent of investment funds, he can supplement, and upon retirement, even replace his wage income with interest and profit by putting his high-wage-fed savings to work and partaking in capital investment himself.
Because of these characteristics, as Mises proclaimed to those assembled: “[Capitalism] has, within a comparatively short time, transformed the whole world. It has made possible an unprecedented increase in world population.”
He returned to the subject of England for one of the more paradigmatic examples of this:
In 18th-century England, the land could support only 6 million people at a very low standard of living. Today more than 50 million people enjoy a much higher standard of living than even the rich enjoyed during the 18th-century. And today’s standard of living in England would probably be still higher, had not a great deal of the energy of the British been wasted in what were, from various points of view, avoidable political and military “adventures.”In one of those wonderful flashes of dry wit that would illuminate his discourse from time to time, Mises urged his auditors that, should they ever meet an anti-capitalist hailing from England, they should ask him: “… how do you know that you are the one out of ten who would have lived in the absence of capitalism? The mere fact that you are living today is proof that capitalism has succeeded, whether or not you consider your own life very valuable.”
Mises furthermore cited the more general and clearly evident fact that: “There is no Western, capitalistic country in which the conditions of the masses have not improved in an unprecedented way.”
And in the decades following his speech, the conditions of the masses improved incredibly in non-Western countries (like China) who partially opened up to capitalism as well.
Mises concluded his talk by urging his Argentine fellows to seize the day and strive for the economic liberation that would unleash the wonderworks of capitalism, and not to sit and wait for an economic miracle:
But you have to remember that, in economic policies, there are no miracles. You have read in many newspapers and speeches, about the so-called German economic miracle — the recovery of Germany after its defeat and destruction in the Second World War. But this was no miracle. It was the application of the principles of the free market economy, of the methods of capitalism, even though they were not applied completely in all respects. Every country can experience the same “miracle” of economic recovery, although I must insist that economic recovery does not come from a miracle; it comes from the adoption of — and is the result of — sound economic policies.ConclusionIf the subsequent policies adopted in Argentina, South America, and the world are any indication, Mises’s message, as lucid and affecting as it was, did not propagate far beyond the auditorium walls that day. Perhaps in the age of camera phones, YouTube, and social media, it would have. But his brilliant encapsulation of the beneficence and beauty of capitalism did not dissipate vainly into the Argentine air. Thanks to his Margit and to his institutional namesake, his message was preserved for the ages, and is now only a mouse click away for billions.
Ludwig von Mises can still save the world by posthumously teaching its people the unknown truth about the inherently populist nature of capitalism in a way which speaks to their hopes and longings: that private property means dynamic production, which means a competitive, consumer-steered economy, which means a production system geared toward improving the lives of the masses, which first means widespread succor and ultimately ever-rising prosperity for the people of the world.
Written the year of Mises's death, this is the book that brought new prominence to the Austrian theory of the entrepreneur. Kirzner views him as the discoverer of opportunities in the competitive process, and contrasts this view with the general equilibrium view-which defines away the entrepreneur-and the Schumpeterian view that discovery is always disequilibrating. For its lucidity and focus, this remains an Austrian classic.
The old Marxist apocalyptical fear of ever-rising inequality in capitalist societies is growing. The capitalist elite, it is said, benefit from a dynamic of infinite accumulation of wealth and will be able soon to buy everything and everybody, including the government. This fear of unlimited accumulation of wealth by a few was the main theme of Thomas Piketty’s Capital in the Twenty-First Century, published in French in 2013. For example, Piketty writes:
It would be a serious mistake to neglect the importance of the scarcity principle for understanding the global distribution of wealth in the twenty-first century. To convince oneself of this, it is enough to replace the price of farmland in Ricardo’s model by the price of urban real estate in major world capitals ...
To be sure, there exists in principle a quite simple economic mechanism that should restore equilibrium to the process: the mechanism of supply and demand. If the supply of any good is insufficient, and its price is too high, then demand for that good should decrease, which should lead to a decline in its price. In other words, if real estate and oil prices rise, then people should move to the country or take to traveling about by bicycle (or both). Never mind that such adjustments might be unpleasant or complicated; they might also take decades, during which landlords and oil well owners might well accumulate claims on the rest of the population so extensive that they could easily come to own everything that can be owned, including rural real estate and bicycles, once and for all. (Piketty 2013)
Let us put aside the fatuous example involving a bike as a market response to scarcity — that is a negative technological shock despite the fact that we are today in a highly innovative world. Piketty actually believes that a single person or entity owning “everything” can be a possible outcome of free-market capitalism. According to him, if r > g (i.e., if the rate of return on capital is superior to economic growth) there will be an “endless inegalitarian spiral.” If Piketty had read Austrian economists and had mastered the economic calculation debate, he would have noticed that the unhampered market cannot lead to a situation of wealth accumulation where there is only a single individual or cartel owning everything. Indeed, a situation with one big cartel or one owner is equivalent to full socialism and therefore, to a situation where no rational allocation of resources would be possible, as Mises showed in Socialism. It is Rothbard who brilliantly pointed out that calculability is an upward limit to the size of the firm. But this argument can equally be applied to individual ownership concentration. As Rothbard points out:
[T]he free market placed definite limits on the size of the firm, i.e., the limits of calculability on the market. In order to calculate the profits and losses of each branch, a firm must be able to refer its internal operations to external markets for each of the various factors and intermediate products. When any of these external markets disappears, because all are absorbed within the province of a single firm, calculability disappears, and there is no way for the firm rationally to allocate factors to that specific area. The more these limits are encroached upon, the greater and greater will be the sphere of irrationality, and the more difficult it will be to avoid losses. One big cartel would not be able rationally to allocate producers’ goods at all and hence could not avoid severe losses. Consequently, it could never really be established, and, if tried, would quickly break asunder.
Thus, contrary to what Piketty and other egalitarians think, unlimited wealth concentration is technically impossible in a market economy. This is the reason why a “one big cartel” controlling all the economy never appeared on the free market, and this is the reason why wealth concentration will always be limited.
The lack of theoretical rigor in Piketty’s book is striking. Whereas he is supposed to study the dynamics of income inequality in capitalist societies, he barely analyzes the role of entrepreneurship, and, when he does, he gives absolutely no definition of what it is. This lack of rigor enables him to lead an ideological battle against the rich that he considers as being “undeserving.” Similarly, whether it is Piketty or Anthony Atkinson, none of these modern egalitarians mentions the role of division of labor in the distribution of wealth.
We know however that division of labor is a necessary feature of the market economy. Indeed, the very existence of rich capitalists is not a matter of inheritance or undeserved ownership but is the result of the law of comparative advantage. A capitalist is someone who has a comparative advantage at allocating capital and therefore is specialized in this task. On the unhampered market, those who tend to be the wealthiest tend also to be the most efficient men at allocating capital. If their ownership ability is poor, the consumers sanction them. If their ownership ability is good, the consumer will reward them.
Frédéric Bastiat, while on his deathbed in Rome, and despite being severely ill, made it very clear to his friend Prosper Paillottet, that economists should focus primarily on the consumer. The consumer, he said, is the primary source of any economic phenomena. The major flaw of Piketty’s book is that he explains inequality not by starting from consumers’ choice but by starting from capital ownership. Owners, Piketty says, benefit from a rate of return and when this rate is higher than economic growth, it intensifies income inequalities. For Piketty, the rate of return on capital is a mythical stream of income which depends not upon ownership abilities but on how much capital you own. But the distribution of wealth is not as arbitrary as Piketty would like to think. The consumer has the final word in the decision of who must own the factors of production. As Mises in Human Action explained, the wealthy “are not free to spend money which the consumers are not prepared to refund to them in paying more for the product.” On the unhampered market, the rich can accumulate more wealth only if he is efficient to the task of allocating capital, for the benefit of all. We must admit that we see nothing morally wrong about that. Quite the contrary, we applaud it.
Because the economic theory underlying Piketty’s thesis is weak, his explanations do not match with empirical evidence. In fact, Piketty (2015) himself had to admit that he does not “view r > g as the only or even the primary tool for considering changes in income and wealth in the twentieth century, or for forecasting the path of inequality in the twenty-first century.” And indeed, r > g is not a useful tool for the discussion of rising inequality of labor income. But surprisingly, Piketty himself admitted the weakness of his model since the rise of top income shares in the United States over the 1980–2010 period is due for the most part to rising inequality of labor earnings.
We should also highlight that 56 percent of Americans are, during at least one moment of their lives, part of the top 10 percent in incomes (a ratio of 5.6), and 12 percent are in the top 1 percent (a ratio of 12). Therefore, we can conclude that the richer you are, the more volatile is your wealth. This is a valid critique we can address to Thomas Piketty, Atkinson, and many other egalitarians.
Indeed, if wealth is that unstable in the 1 percent, we can then conclude that infinite concentration of wealth is a myth and does not happen in a market economy. On the contrary, capitalist societies are more prone to intergenerational mobility, upward and downward. Therefore, if inequality of income at a particular point of time in capitalist societies can be higher than in more socialistic economies, the market economy might very well offer more equality when we consider the lifelong income disparities between individuals.
More than 100 years ago, a French economist published a book about inequality. Like Thomas Piketty’s Capital in the Twenty-First Century, this book was celebrated in the United States. But unlike Thomas Piketty, Paul Leroy Beaulieu tried to explain in his book Essai sur la Répartition des Richesses (1881) why he thought inequality, without being eradicated, would decrease in capitalist societies. The radical difference of tone between those two books is a good illustration of the intellectual bankruptcy of both the United States and France since the Belle époque. From classical liberalism, we succumbed to the illusion of egalitarianism, and from liberal optimism about the free-market order, we went to egalitarian and socialist pessimism. Today, many inequalities are due to government violent intervention in the market order. And we should therefore wonder, after all, if it is not wiser to listen to Paul Leroy Beaulieu rather than to Thomas Piketty.
Quarterly Journal of Austrian Economics 18, no. 3 (Fall 2015)It wouldn’t be a stretch to compare patent trolls to the playground bully, initiating scare tactics to gain control and in the case of the trolls, revenue. Following Bill Shughart’s informative foreword, William Watkins packs a good amount of information into his book about patent trolls. Watkins begins by giving the reader a brief history of patent law, explaining how trolls operate, outlines problems with the current laws and court system, as well as providing some recommendations for reform. The focal points of the book are not only the trolls themselves but also the incredibly plaintiff (troll)-friendly U.S. District Court in Eastern Texas.
Watkins calls on Congress to change the rules for corporate residence, inviting the Federal Circuit to revisit how it establishes personal jurisdiction, and again calls upon Congress to investigate creating a special patent court system with professional jurors. A modernized court system, according to Watkins, would greatly reduce the (rent-seeking) behavior of trolls, reduce the incidence of litigation, and would restore the incentive to innovate back to the forefront for U.S. businesses, a key component for economic growth.
On Tuesday, Vermont Senator Bernie Sanders stood up on the stage of a Democratic Party presidential debate and proudly proclaimed himself a “democratic socialist” to an adoring crowd. Spurred on by myths about the success of socialism in countries like Sweden and Norway, the horrors of a centrally planned economy have never been more popular in American politics. As Mises President Jeff Deist highlighted in Thursday’s Mises Daily:
These ideas, and the people who hold them, are not outliers in America. There are millions … who believe exactly as Bernie believes. They may prefer to vote for Hillary Clinton purely as a tactical matter because they are unsure the country is “ready” for full socialism … but average progressives and Democrats agree with Bernie Sanders across the board …
Ninety-five years after Ludwig von Mises published his indispensable essay Economic Calculation in the Socialist Commonwealth, it is as critical to stand up to the tyranny of statism — on any scale — now as ever before.
The devastating consequences of government intervention into healthcare markets is the topic of this week’s episode of Mises Weekends. Charles Hugh Smith joins Jeff to discuss how Washington’s desire to eliminate markets from medicine has led to the industry being captured both by incompetent government regulators and insurance lobbyists.
In case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
Charles Murray's Tepid Radicalism by David GordonWhat "Progressive" Corporate Welfare Looks Like by Andrew SyriosThe Dirty Business of Government Trash Collection by Allen MendenhallSanders and His Followers Are Not Outliers by Jeff DeistHow Modern Sweden Profits from the Success of Its Free-Market History by Yonathan AmselemGeorge Akerlof, Meet Oliver Williamson by Peter KleinAngus Deaton and Modern Economics by Peter KleinThe Mistake of Only Comparing US Murder Rates to "Developed" Countries by Ryan McMakenThe Fed’s Quadral Mandate and Impossible Balancing Act by Jonathan NewmanRothbard on Economic Ignorance by Matt McCaffreyTrue Money Supply: August Money Supply Growth Remains Way Down from 2012 Levels by Ryan McMakenDonald's Remarks on the Bubble and the Fed Are on the Money by Joseph SalernoNo way, Norway! by Carmen Elena Dorobăț
I moved to Auburn, Alabama, in January 2013. I love Auburn.
It's been nearly ten years since The Wall Street Journal profiled the Mises Institute and claimed that Auburn was an ideal spot for studying libertarian ideas and the Austrian tradition. I don't know how much has changed since then, but I arrived in Auburn expecting a free-market sanctuary, a veritable haven where the ideas of Menger and Mises and Hayek were in the air and imbibed by the majority of people who weren't members of the Auburn faculty, and even by some who were.
Once settled in Auburn, I realized I'd been quixotic and naïve. Even before national media picked up the story about the officer who spoke out against his department's ticket and arrest quotas, even before the city of Auburn squeezed out Uber with severe licensing regulations, even before Mark Thornton highlighted the Skyscraper Curse in town, there was the matter of my trash bin.
I bought my house from a relocation company, the previous owner having been assigned a new position in another city. He was, this owner, in a hurry to move. Before he left town, he and his family rolled their trash bin to the side of the home, away from the street, where the garbage collector refused to retrieve it. They had stuffed the bin with garbage: food, paper, cardboard boxes, dirty diapers, and other junk. There was so much trash in the bin that the lid wouldn't fully close. It looked like a yawning mouth. The house was on the market for approximately eight months before I purchased it, and I assume the bin had been sitting there, at the side of the house, the entire time. Naturally it had rained during the last eight months, so, with its half-open lid, the bin was flooded with soupy garbage and untold parasites. And it reeked.
The City enjoys a virtual monopoly on garbage collection; it tacks its fees onto the City's water and sewage bill. The few private garbage-collection companies in town service mostly restaurants and businesses: entities that simply cannot wait a week for garbage pickup and need a service provider capable of emptying whole dumpsters full of trash. The City does allow residents to opt out of their collection services, but this only masks soft coercion with an illusion of consumer choice.
Government opt-out clauses are malicious precisely because of the impression that they're harmless if not generous. Contract law is premised on the principles of mutual assent and voluntary agreement. Government opt-out clauses, however, deprive consumers of volition and bargaining power. They distort the natural contracting relationship by investing one party, the government, with power that the other party cannot enjoy. Not contracting for services is not an option, and government is the default service provider that sets the bargaining rules; the deck is stacked against the consumer before negotiating can begin.
The onus, moreover, is on the consumer to undo a contract that he's been forced into, rather than on the government to provide high-quality services at competitive rates in order to keep the consumer's business. Opt-out clauses make it difficult for the consumer to end his relationship with the government provider, and they force potential competitors to operate at a position of manifest disadvantage.
My wife and I took turns calling the City to ask about getting a new trash bin. No amount of cleaning and sterilization could rid the current bin of its stench. We couldn't keep the bin inside our garage because of the oppressive odor. We left voicemails with different people in different departments at the City, begging for a new bin and explaining our situation, but our calls weren't returned. There was no customer service of the kind a private company would have. After all, there was little danger of losing our business: the City was the service provider for nearly every neighborhood in town because of the difficulty private companies had breaking into a market controlled by government. We were, for now, stuck with the City’s inefficiencies and unresponsiveness. With much persistence my wife was eventually able to speak to an employee of the City. She was informed, however, that we could not get a new trash bin unless ours was broken or stolen. That stunk.
I learned in time about other drawbacks to our government-provided garbage service. During the holidays, collection schedules changed. When my wife and I lived in Atlanta and used a privately owned garbage company, our collection schedules never changed. Our collections were always on time. Our garbage collectors were kind and reliable because, if they weren't, I could hire new collectors who would materialize in my driveway the next morning with shining smiles on their faces.
It's simple enough to follow an altered holiday schedule, so that's what we did in Auburn, only the collectors declined to follow that schedule themselves. After Thanksgiving, when trash tends to pile up, we placed our trash bin out on the street according to schedule. So did our neighbors. Yet nobody picked up our trash. Our entire street tried again the next week, on the appointed day, and once again nobody picked up the trash. A concerned neighbor called the City, and we were able to remedy the now-messy situation, but not without spending time and energy that could have been channeled toward better things.
When I was a child my brother and I were tasked each year with clearing trees, weeds, and shrubs that were growing along the pond in our backyard. We would pile sticks and sawed-up tree trunks and other debris on the curb of our driveway, along with bags of grass clippings, and our garbage collectors, who worked for a private company, would always pick up these items without question or complaint. We were so grateful that sometimes we'd leave them envelopes with extra cash to express our thanks.
In Auburn, however, I was once unable to squeeze an additional garbage bag into our trash bin, which was full, so I rolled the bin to the street and placed the additional bag beside it. I then lumbered inside for my morning coffee, when all of a sudden the garbage collector drove up and parked beside my bin. I watched from the window as he descended from his truck, shook his head, climbed back into his truck, picked up a pad and paper, and began scribbling with his pen. The next thing I knew he was issuing a yellow citation for an alleged infraction. It turned out to be a mere warning, but it indicated, right there in bold letters, that the next time we did something so egregious as putting our trash out for collection without using the bin, some repercussion — I forget what — would visit us.
When I think about the things the garbage collectors would remove from our driveway in Atlanta — an old door, a broken toilet, a malfunctioning lawnmower — I marvel that the City requires you to purchase tags at the Revenue Office if you wish to place things like dryers, water heaters, refrigerators, or microwaves on the street for garbage collection. Yet I remain optimistic, and not only because Joseph Salerno is coming to town to hold the newly endowed John V. Denson II chair in the Department of Economics at Auburn University.
I’m optimistic because I see some positive change. We recently organized a garage sale and came to discover, two days before the big day, that the City required a permit for such events. This time when we called the City to ask about the mandatory permit for garage sales, we received good news: those permits were no longer required as long as we conducted the sale in our own driveway. However minor, that’s progress. Perhaps it'll spill over into other sectors of our little local community. Until then, War Eagle!
Includes an introduction by Jeff Deist. Recorded via Skype at the Mises Institute in Auburn, Alabama, on 23 July 2015.
University of Sussex Professor Mariana Mazzucato is making headlines with her 2013 book The Entrepreneurial State, which argues that government, not the private sector, ultimately drives technological innovation. In a series of detailed case studies from information technology, pharmaceuticals, biotech, and other industries she argues that government labs and public agencies are mainly responsible for the fundamental, high-risk discovery and development that makes these technologies possible, with profit-seeking entrepreneurs jumping in only later, after the difficult work has been done.
This is a very old argument, skillfully brought to life in Mazzucato’s writings (and a popular TED talk). Remember President Obama’s “you didn’t build that” remark to entrepreneurs, during his 2012 presidential campaign? “Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.”
The view that private actors are short-sighted, and that only government can afford (or is willing) to make the long-term, high-risk, patient investments in research and development needed for technological progress is in every basic economics textbook. Even economists who are generally favorable toward free markets and limited government will say sure, the market is good at producing shoes or trucks or laptop computers, but the market cannot provide basic research — it is a “public good” that only government can provide. The New York Times recently opined:
Fundamental innovations such as nuclear power, the computer and the modern aircraft were all pushed along by an American government eager to defeat the Axis powers or, later, to win the Cold War. The Internet was initially designed to help this country withstand a nuclear exchange, and Silicon Valley had its origins with military contracting, not today’s entrepreneurial social media start-ups. The Soviet launch of the Sputnik satellite spurred American interest in science and technology, to the benefit of later economic growth.
There are several problems with this kind of argument. First, it confuses technological innovation (impressive to engineers) and economic innovation (valuable to consumers). Second, it confuses gross and net benefit — of course, when government does X, we get more X, but is that more valuable than the Y we could otherwise have had? (Frédéric Bastiat, call your office.) Third, it confuses treatment and selection effects of government spending — government typically funds scientific projects that would have been undertaken anyway, such that a main benefit of government spending on science and technology is to increase the wages of science and technology workers. Fourth, as writers like Terence Kealey have pointed out, if you look carefully at the details of the sorts of programs lauded by the Times, you find they were grossly inefficient, ineffective, and potentially harmful. (Kealey offers a powerful critique of Mazzucato’s specific views here.)
Does War Drive Innovation?It’s useful to illustrate these points by considering the specific argument that war is an important, and even necessary, source of scientific progress, because technologies developed by the state to fight wars often have important civilian uses. Innovation is a side benefit of war, say war’s defenders.
Social science textbooks also assume that war spurs innovation and note that the large-scale manufacturing of penicillin, for example, and the development of nylon and aerosol sprays occurred during the First World War. But that’s nothing compared to the many benefits of the Second World War, we’re told, which brought us benefits ranging from atomic energy to jet engines and the world’s first electronic computing devices, which were developed to break the Nazi “Enigma” codes. Moreover, key innovations in management practice came out of the Second World War, we’re reminded, including management techniques used to improve logistics, procurement, and operations research.
The Second World War changed the nature of scientific research as well. After the war, large-scale federally-funded laboratories devoted to practical applications for new research replaced the small academic laboratories that had existed before the war. Naturally, these new laboratories were geared toward producing new technologies that the federal government wanted, and scientists flocked toward these jobs and new well-funded facilities.
It’s true that many (though not all) of these technologies were developed — typically not invented, but refined — by government scientists working on military projects. The question nevertheless remains as to whether or not this model of innovation benefits society at large. Is this a “good side” of war?
“Crowding Out” and Interest-Group PoliticsThe answer is no, for multiple reasons. First, if we look at each of these cases carefully, we find that the government was usually inefficient, chose bad technologies that crowded out other, privately-funded technologies, and led to inertia in research in directions that the private sector would likely never have supported.
But there is a more basic theoretical problem with the claim that military research gives us great new technologies we otherwise wouldn’t have.
It is certainly true that governments spend money on building things or doing things that otherwise would not have been built or done. But this is not necessarily a good thing.
Take the Egyptian pyramids, for example. Had there been no pharaoh, commanding a huge budget, with the ability to mobilize vast quantities of resources (including labor), there would be no pyramids. But were the pyramids unambiguously good for the people of Egypt? They were not, of course, and the pyramids were simply monuments to the power of the pharaoh and the state religion. To this day, governments build monuments to themselves all the time, whether they’re huge statues or atomic bombs. Sure, without the federal government, we might not have the Lincoln Memorial. Is that an argument for government?
Pyramids and statues are cases of the state producing a good that likely would not have been produced in any form by the private sector, but even in cases in which the government shapes the development of private goods and technologies, the distorting effects on the final outcome of research and development can be significant.
We can see these distortions in the effects of the work of Vannevar Bush, the initiator of the Manhattan Project. Bush was chairman of the National Defense Research Committee (NDRC), and later director of the Office of Scientific Research and Development (OSRD), in the Second World War.
Bush wanted a peacetime successor to the OSRD and pushed for creation of the National Science Foundation, which was established in 1950. The NSF was controversial (one proposal was vetoed by Truman in 1947) because of the lack of accountability. A key figure was Senator Harley Kilgore of West Virginia, who initially opposed Bush’s plan to distribute the money through universities (he preferred the government to own the labs) but later agreed to Bush’s model. As Kealey describes it, Kilgore’s goal was not to generate new knowledge. Rather,
Kilgore wanted to create a reserve of scientifically trained personnel who could be mobilized for strategic purposes. ... The National Science Foundation, therefore, was created in 1950, in the same year (and for the same reasons) as the National Security Council.Economic Laws of Scientific Research, p. 154.
A few scholars have recognized the potentially harmful effects of this approach. Best known is the “distortion thesis” of historian Paul Forman, which holds that WWII and Cold War national security concerns distorted the path of the physical sciences.
Applied to technology, there is the “crowding out” thesis, most closely associated with Seymour Melman, which maintains that, during the Cold War, commercial R&D was crowded out by government-funded R&D. As summarized by the distinguished historian of technology David Hounshell,
“Research, development and manufacture for a single customer (the national security state or the military) led firms and whole industries into a kind of fatal attraction, which ultimately undermined their ability to compete in the global economy in which consumers had very different wants than those of the military; “spin offs” from military projects into the civilian economy simply did not compensate for the drawbacks of being dependent on military contracting.
Again, the Broken Window FallacyWe see once again the relevance of Frédéric Bastiat’s Broken Window Fallacy. That is, the research and development institutions created and sustained by government are like the pane of glass in the broken window. We see it being repaired but cannot see what might have been produced with those same resources had the glass not been broken.
Similarly, we see what is produced by government scientists producing R&D for the state, but we don’t see things we would have had the market been able to function in the absence of a giant militaristic government.
There is no doubt that military spending had a substantial effect on technological innovation. But was it a good one? Military spending distorts the efforts of scientists and engineers, and redirects them to particular projects, ones that do not necessarily generate benefits for consumers.
Military-funded R&D, like any government-funded projects, does not have to pass any kind of market test, so there is no way to know if it is actually beneficial to consumers. We cannot rely on the judgments of government scientists and scholars to say what are the “best” technologies. Remember Betamax? The experts told us that Betamax technology was superior to VHS tapes, from an engineering point of view. Yet, in the end, VHS proved to be economically superior in that consumers ultimately chose VHS over Beta. Betamax failed the market test in spite of its arguably superior technology.
Today, when we look at private companies like Google, Apple, and Facebook and marvel at their innovations, we should remember that these companies are constantly subject to market tests, and that the goods and services they innovate must be accepted by consumers to be profitable. When they succeed, we know that they are creating value for society because consumers have chosen their products and services over others.
Success, for government-funded researchers and engineers, on the other hand, means winning grants and contracts, and getting more money from the taxpayer, who has little say in what gets done.
The reality is far more complicated than the myths repeated by those who claim that many of the technologies and innovations we now value were produced single-handedly by government. Yet, the historical reality does not diminish the ease with which Obama and other fans of government spending can point to innovations like the internet and the interstate highways and say “you didn’t build that.” We can only speculate on what might have been produced had the market been allowed to function. Likewise, we can still see the pyramids today and marvel at the innovation that went into their construction, but unfortunately, the wealth and labor stolen from ordinary Egyptians to build them has now been long forgotten.
The recent Amtrak accident in Philadelphia should lead us to ask two questions: (1) why isn’t there competition within the railway sector, and (2) what is the safety record of state-owned and run railway systems compared to private-run systems. It is often said that privatizing passenger trains would lead to more accidents because greedy capitalists would sacrifice safety requirements for profits. Yet, there is no evidence that supports this assertion. In fact, the two safest railway networks in Europe (i.e., the Swedish and British systems) are open to competition. Likewise, the development of railway socialism at the end of the nineteenth century lead not to fewer accidents, but more.
To be clear, liberalism — used here to denote the philosophy of laissez-faire — should not be considered as being the utopian opposite of socialism. It is not a magic recipe that guarantees perfect solutions at all times and for all things. Socialists like to imagine that liberals believe the market can cure every ill. In other words, they think liberalism is a mirror reflection of socialism. It is not. True liberalism does not promise perfection. There will always be problems. Our goal should be to find the best way to improve the situation, not to achieve an ideal world of fantasy.
Of course the private sector is quite capable of compromising the safety of its consumers in quest for profits. Theoretically, it should be up to legal institutions to provide restitution for persons who are in fact harmed by such negligence. Nevertheless, the recent Amtrak accident does not prove or disprove the fact that state-owned and operated railroads tend to be less safe.
There is, however, a bias in the media. On one hand, each time an accident occurs on a monopoly, state-run railway system, it is said that the lack of resources is responsible. On the other hand, when a private railroad company has an accident, the blame is put on the free market and capitalism. As Schumpeter said, “capitalism stands its trial before judges who have the sentence of death in their pockets. They are going to pass it whatever the defense they may hear.”
Jean François Revel, one of the greatest French liberals of the twentieth century, showed how absurd and irrational was the behavior of the anti-capitalist and the media. With his usual punchy style, he wrote:
Revealing likewise are some of the media’s knee-jerk responses to events. Thus on the morning of October 5, 1999, two trains collided in the London district of Paddington, killing twenty passengers and injuring several hundred. The instant reaction to this accident by the French media was predictable. From every side rose the unanimous buzz, the same commentary repeated all day long: since the privatization of Britain’s railways, the new companies, motivated only by their quest for profit, had slashed their spending on safety improvements, especially with regard to infrastructure and signaling technology. The conclusion was obvious: the killed and injured were victims of liberal excess.
Were that true, then the 122 victims of the 1952 railway accident in Harrow were slain by socialism, since British Rail was then nationalized. Likewise, in France on June 27, 1988, a collision between trains at the Gare de Lyon, which killed fifty-six people and injured thirty two, was imputable to France’s nationalization of her railways in 1937 and therefore to the Popular Front. And on June 16, 1972, the tunnel at Vierzy, in L’Aisne, collapsed on two trains, killing eight hundred passengers. Structural integrity was not exemplary here either, even though the company responsible for tunnel’s maintenance was state-run.
In fact, historically, the rise of train socialism coincided with a rise in the number of accidents. This was particularly apparent with the 1908 nationalization of the Compagnie de l’Ouest in France. Murray Rothbard remarked upon this particular nationalization:
The effects of the new regime of government ownership were rapid and far exceeded the warnings of the opposition. The entire railroad was in disorder. A series of major accidents occurred on the government line, although there were no such accidents on the private lines. An economist sardonically observed that the French government had added railway accidents to its growing list of monopolies. The nationalized train service deteriorated to such an extent that many people preferred to travel by wagon.
Indeed, the eminent French economist Yves Guyot noted that the major train accidents between 1907 and 1912 were monopolized by government owned railroads:
The six greatest railway accidents that France has suffered during five years have thus all occurred on the government system: three on the Western, and three on the old government system, which the state has operated during nearly 35 years, and which has only 2 292 kilometers (1,433 miles), making the line about a fifth in size of the important systems of France.
Furthermore, in his book, Where and Why Public Ownership Has Failed (1914), Yves Guyot, using both statistics and economic theory, shows systematically that private railways are safer, cost less, and more efficient. An unsafe private rail company is penalized by consumers whereas nationalized industries escape all material and moral penalty. Therefore, safety requirements are more likely to be respected in the private sector. Furthermore, bureaucratization in government owned industries tend to generate irresponsibility and therefore corrupt morality. People who do not feel responsible cannot act morally. If one does not feel responsible, why should he try to avoid a train accident? Thus, as Guyot showed, the total average number of passengers killed and injured from 1905 to 1909 in France was:
Despite the rise of railway socialism in France since 1878, the French railways system remained one of the most privatized system in Europe. Not very surprisingly, it was also one of the safest. Compared to the very public Belgian or German railway systems for example, the superiority of French private companies was incontestable. The statistics for the year 1909 are shown in the following:
Those enamored of “public services” think that labor for personal profit must be replaced by labor for the sake of quality. The paradox is that when you suppress the profit/loss system, people stop working for the sake of quality and endanger consumers. The advocates of railway socialism during the early twentieth century declared with admirable assurance that “wherever private initiative has proven inadequate the State must step in.” Today, experiments in the way of nationalization of railways have been sufficiently numerous to demonstrate the failure of public ownership. Should we not declare then: “Wherever public ownership has proven inadequate the State must step out?”
At the time of their publication, Hayek’s writings represented a significant split from Léon Walras’s theories of perfect competition and, generally, mainstream microeconomics. As Hayek explained, perfect competition is an economic model in which “we assume that state of affairs already to exist.” A certain competitive equilibrium is considered to be the goal to reach. Within this competitive equilibrium, it is assumed that individuals “are fully adjusted to each other.” The concern behind the model of perfect competition is, therefore, about how to reach a pre-defined market structure in which competition will be “perfect.”
Hayek, however, saw competition as a discovery process, and the ideal way to encourage that process is to favor dynamic competition — and thus more realistic competition — over perfect competition. Many now recognize this, but antitrust authorities and the economic literature has long encouraged the perfect competition model, and sometimes they still do.
Antitrust and InnovationModern high-tech markets have characteristics which may give Hayek’s contribution to antitrust law a new meaning. As of today, antitrust authorities do not fully consider all aspects of “innovation” because they do not give dynamic efficiencies the place they should. For instance, the fact that disruptive technologies could emerge at anytime is not integrated in most antitrust analyses, which tend to confirm that these authorities are still running, at least in part, on the model of perfect competition.
High-tech markets consistently demonstrate unstable equilibrium and this should lead antitrust authorities to give a lesser importance to the concept of “network effects” which imply that a product with a large market share may have an insurmountable advantage over competing products. The possibility of the emergence of new products and innovations that constantly reshape the marketplace show us that barriers to entering an existing market are not the main issue since new technologies often create a new market. As a consequence, and as recent history undoubtedly shows us, market shares move faster and most so-called natural monopolies — those created without public intervention — disappeared as soon as they appeared. In other words, these markets better resemble Hayek’s spontaneous order than any perfect competition model.
Antitrust authorities have already been forced by new realities to take this into consideration. For instance, in the Microsoft anti-trust case, the Department of Justice recognized the temporary nature of domination in high-tech markets. American and European courts have also done so in several cases since then. The European Commission, in its Microsoft/Skype merger decision of 2011, addressed the fact that “market shares only provide a limited indication of competitive strength in the consumer communications services markets" and other “dynamic markets.” And recently, European Commissioner for Competition Margrethe Vestager underlined that Google operates in “fast moving markets.” Yet, regulators continue to place a tremendous emphasis on the barriers to enter a market because of the existence of “network effects,” as American and European legal experts did at the time of the Microsoft case.
Practical ReformsInstead of aiming at preserving a specific structure of the market regulators should be seeking to get out of the way of new technology breakthroughs. Yet, antitrust authorities often favor “sustaining innovations” over new disruptive ones. For instance, when the European Commission ruled that Microsoft must ensure that its products were broadly compatible with other products in the market, the Commission was simply seeking to sustain the current market that exists rather than facilitating the creation of new markets and new products.
Nevertheless, the anti-trust regulators remain focused on “switching costs,” “lock-in,” and “barriers to entry,” and continue to put emphasis on the old concept of “market shares” while the market is making such concepts less relevant by constantly changing the rules of the game.
Consequences for EntrepreneursAs Hayek shows us, it is the dynamic emergence of new products and new markets that create true competition and prevent the creation of effective monopolies in an unhampered marketplace. Obviously, the perfect competition model has little to tell us about how these real-world markets work. Regulators would do well to acknowledge all of the consequences related to the relinquishment of the perfect competition model. If they did, it would shift how companies are competing with each other because regulations and court decisions have often shaped companies’ behaviors and strategies. Entrepreneurship would then be enhanced and high-tech markets would be more competitive and innovative than ever.
[This article is adapted from “Friedrich Hayek's Contribution to Antitrust Law and Its Modern Application,” ICC Global Antitrust Review (2014): 199–216.]
Michel Chevalier (1806–1879) was a very influential French economist during the second half of the nineteenth century. He is still widely known in France for being the architect of the Cobden-Chevalier Treaty of 1860 which was the free-trade agreement between France and Great Britain. Michel Chevalier is, however, less known for his major contribution to the intellectual property debate.Fritz Machlup and Edith Penrose briefly discussed Michel Chevalier in "The Patent Controversy in the Nineteenth Century," Journal of Economic History, 1950. Contrary to Jean Baptiste Say, Gustave de Molinari, and many other French economists, Chevalier fiercely opposed the patent system. As Fritz Machlup remarked: “Among French economists, Michel Chevalier was probably the most emphatic in the joint antagonism to tariffs and patents, declaring that both ‘stem from the same doctrine and result in the same abuses.’”
Taking a fresh look at Michel Chevalier’s major work, Les Brevets d’invention (1878), we find it to be not only a well-written and powerful book, but also has remained impressively relevant. The arguments advanced by Chevalier anticipate the current arguments of the present opponents of intellectual property.
Patents as Contrary to Freedom and Economic ProgressMichel Chevalier argues that patents cannot be justified if they are contrary to freedom, even if beneficial to technological change. For him “From the moment we can make effective the patent only through inquisitorial expedients, violence, and subversion of liberty of labor, it is proof that we must renounce patents.” Chevalier rejects utilitarianism as a sufficient method to justify or refute the patent system. Chevalier’s opposition to patents, however, is not just based on moral arguments but shows the disastrous effects of this system for both foreign trade and the economy in general.
According to Chevalier, patents are of the same nature as privileges and monopolies which were prevalent during the Ancien Régime. They are also comparable in their effects to protectionist policies:
In absolute terms, patents diminish the productive power of nations that recognize them: evident proposition for those who believe that freedom, free competition, is the great lever of industrial progress.
Chevalier goes on to note the conservative and anti-innovation nature of monopolies and gives many examples of monopolies during the Ancien Régime. According to him, the innovators during the Ancien Régime weren’t rewarded, not because of the absence of patents, but because of the corporation guild system which was destroying competition and freedom to entry into markets. Thus, the innovators were constantly sued by guilds and consumers rarely benefited from their inventions. This argument is still relevant today. Indeed, companies protected from competition and government-owned corporations are often less innovative and more subject to conservative measures. Sectors typically run by government such as schools experience very little technological progress. On the other hand, the competitive process of the market gives incentives for the actors to differentiate from the other producers. As Pascal Salin stated, the company which makes the highest profits on a free market is the company which is the best positioned to “invent the future.” The essential virtue of competition is that it encourages producers to innovate in order to better serve the needs of consumers.
As one of his more striking examples, Chevalier examines the case of aniline — a dye and major innovation in the chemical industry — and shows how monopoly, resulting from patents, leads to hampered innovation. His interpretation of the problems caused by patents in the chemical industry at the time is consistent with more recent studies done by Boldrin and Levine in Against Intellectual Monopoly, now the seminal work on the topic.
Innovation as a ProcessChevalier understood that innovation is, above all, a process and that giving privileges to the innovator will destroy this process, leading to less and not more inventions. He wrote:
Every industrial discovery is the product of the general ferment of ideas, the result of an internal work which was accomplished with the support of a large number of successive or simultaneous collaborators in society, often for centuries.
This argument regarding the cumulative nature of innovation is still the most powerful argument against intellectual monopoly today and has also been the theme of several recent studies.See Alberto Galasso et Mark Schankerman, “Patents and Cumulative Innovation: Causal Evidence from the Courts”, NBER working paper, 21 June 2014 ; and also, Alessandro Nuvolari, "Collective Invention during the British Industrial Revolution: The Case of the Cornish Pumping Engine," Cambridge Journal of Economics 28, No. 3 (2004). Similar to Chevalier, Hayek saw innovation as a process and stated that “it is not obvious that such forced scarcity [intellectual property] is the most effective way to stimulate the human creative process.”
In an 1862 debate in the Académe des Sciences Morales et Politiques, Chevalier gave the example of Louis Daguerre, one of the inventors of photography, who didn’t seek a patent for his system of photography. According to Chevalier, the absence of a patent led to necessary improvements of the daguerreotype and fostered its widespread use. His conclusion is the following:
The spirit of man proceeds only by successive trials and repeated attempts. Discoveries do not arrive with a single bound to the degree of perfection or completion, which is reserved for them; there must be renewed, persevering efforts, cut by breaks that allow, so to speak, to breath. … If it is true that the invention must pass through the hands of twenty people before reaching its final state, it follows that the exclusive privilege granted to the first patented, and to each of his followers, prevents this practical result rather than facilitate it.
The Increasing Number of Patents and Negative ConsequencesAlready during the nineteenth century, legal instability and uncertainty challenged the actual efficiency of the patent system and the economists were very much aware of this problem. Chevalier warned that the patent system would lead to legal uncertainty for the companies and would lead the industry back to a guild system where no entrepreneur would dare to enter a market for fear of being sued by patent holders. Chevalier was ahead of his time by denouncing what can be considered the ancestors of today’s patent trolls.
Chevalier concluded his 1862 article by stating: “I think I have said enough to show that the patent legislation has been an eccentricity of the legislator.” He went further in 1863 and added that “[a]ll friends of industrial and social progress must work together to rescue the industry of obstacles, obsolete remains of the past. Patents must disappear first.”Quoted in Eugène Pouillet, "Traité théorique et pratique des brevets d’invention et de la contrefaçon," 1909, pp. x–xi.
Image source: StockMonkeys.com
For a century and a half, the idea of secession has been systematically demonized among the American public. The government’s schools spin fairy tales about the “indivisible Union” and the wise statesmen who fought to preserve it. Decentralization is portrayed as unsophisticated and backward, while nationalism and centralization are made to seem progressive and inevitable. When a smaller political unit wishes to withdraw from a larger one, its motives must be disreputable and base, while the motivations of the central power seeking to keep that unit in an arrangement it does not want are portrayed as selfless and patriotic, if they are considered at all.
As usual, disinformation campaigns are meant to make potentially liberating ideas appear toxic and dangerous, and conveying the message that anyone who seeks acceptance and popularity ought to steer clear of whatever it is — in this case, secession — the regime has condemned. But when we set the propaganda aside, we discover that support for secession means simply this: it is morally illegitimate to employ state violence against individuals who choose to group themselves differently from how the existing regime chooses to group them. They prefer to live under a different jurisdiction. Libertarians consider it unacceptable to aggress against them for this.
The libertarian principle of secession is not exactly embraced with enthusiasm by the people and institutions I call “regime libertarians.” Although these people tend to be located in and around the Beltway, regime libertarianism transcends geographical location, which is why I coined this special term to describe it.
The regime libertarian believes in the market economy, more or less. But talk about the Federal Reserve or Austrian business cycle theory and he gets fidgety. His institute would rather invite Janet Yellen for an exclusive cocktail event than Ron Paul for a lecture.
He loves the idea of reform — whether it’s the Fed, the tax code, government schools, whatever. He flees from the idea of abolition. Why, that just isn’t respectable! He spends his time advocating this or that “tax reform” effort, instead of simply pushing for a lowering or repeal of existing taxes. It’s too tough to be a libertarian when it comes to antidiscrimination law, given how much flak he’s liable to get, so he’ll side with left-liberals on that, even though it’s completely incompatible with his stated principles.
He is antiwar — sometimes, but certainly not as a general principle. He can be counted on to support the wars that have practically defined the American regime, and which remain popular among the general public. He sups in happy concord with supporters of the most egregiously unjust wars, but his blood boils in moral outrage at someone who told an off-color joke twenty-five years ago.
I suppose you can guess where our regime libertarian stands on secession. Since the modern American regime emerged out of the violent suppression of the attempted secession of eleven states, he, too, is an opponent of secession. If cornered, he may grudgingly endorse secession at a theoretical level, but in practice he generally seems to support only those acts of secession that have the approval or connivance of the CIA.
Mention secession, and the subject immediately turns to the southern Confederacy, whose moral enormities the regime libertarian proceeds to denounce, insinuating that supporters of secession must be turning a blind eye to those enormities. But every libertarian worthy of the name opposes any government’s support for slavery, centralization, conscription, taxation, or the suppression of speech and press. That goes without saying.
As Tom Woods has pointed out, the classical liberal, or libertarian, tradition of support for secession can boast such luminaries as Alexis de Tocqueville, Richard Cobden, and Lord Acton, among many others. I’d like to add two more figures: in the nineteenth century, Lysander Spooner, and in the twentieth, Frank Chodorov.
Spooner presents a real problem for the regime libertarians. Every libertarian acknowledges the greatness and importance of Spooner. The trouble is, he was an avowed secessionist.
Lysander Spooner was born in Massachusetts in January 1808, and would go on to become a lawyer, an entrepreneur, and a political theorist. He believed that true justice was not so much a matter of compliance with man-made law, but a refusal to engage in aggression against peaceful individuals. His American Letter Mail Company competed successfully against the US Post Office, offering better service at lower prices, until the government forced him out of business in 1851. His work No Treason (1867), a collection of three essays, took the position that the Constitution, not having been agreed to by any living person and only ever expressly consented to by a small handful, cannot be binding on anyone.
In a work called The Unconstitutionality of Slavery, Spooner had argued that the primary interpretive key in understanding the Constitution was what we now call “original meaning.” This is different from “original understanding,” the concept referred to by figures like Robert Bork and Antonin Scalia. According to that view, we should interpret the Constitution according to the original intent of those who drafted and ratified that document. Spooner rejected this.
What mattered, according to Spooner, was not the inscrutable “intention” behind this or that word or passage, but rather the plain meaning of the word or passage itself. Furthermore, given that human liberty was a mandate of the natural law, any time constitutional language might appear to run contrary to the principle of liberty, we ought to prefer some other meaning of the words in question, even if we have to strain a bit to do so, and even if the anti-liberty interpretation is the more natural reading.
Thus Spooner could claim, contrary to the majority of abolitionists, that the Constitution was in fact an antislavery document, and that its oblique and fleeting references to slavery — a word never used in the Constitution — did not have to carry the meanings commonly attributed to them. Frederick Douglass, the celebrated former slave turned abolitionist writer and speaker, adopted Spooner’s approach in his own work.
Spooner’s anti-slavery work went well beyond this exercise in constitutional exegesis. He provided legal services, sometimes pro bono, for fugitive slaves, and advocated jury nullification as a means of defending escaped slaves in court. His 1858 “Plan for the Abolition of Slavery,” called for northern-backed insurrection in the South, as well as such lesser measures as flogging slaveholders who themselves used the whip, and encouraging slaves to confiscate their masters’ property.
Spooner was also a supporter of John Brown, and in fact raised money and formulated a plan to kidnap the governor of Virginia until Brown was released.
In other words, it would be difficult to deny Spooner’s dedication to the anti-slavery cause.
And yet here is Spooner on the so-called Civil War.
On the part of the North, the war was carried on, not to liberate slaves, but by a government that had always perverted and violated the Constitution, to keep the slaves in bondage; and was still willing to do so, if the slaveholders could be thereby induced to stay in the Union.
According to Spooner, the US regime waged the war on behalf of the opposite principle. “The principle, on which the war was waged by the North, was simply this: That men may rightfully be compelled to submit to, and support, a government that they do not want; and that resistance, on their part, makes them traitors and criminals.”
Spooner continued:
No principle, that is possible to be named, can be more self-evidently false than this; or more self-evidently fatal to all political freedom. Yet it triumphed in the field, and is now assumed to be established. If it really be established, the number of slaves, instead of having been diminished by the war, has been greatly increased; for a man, thus subjected to a government that he does not want, is a slave. And there is no difference, in principle — but only in degree — between political and chattel slavery. The former, no less than the latter, denies a man’s ownership of himself and the products of his labor; and asserts that other men may own him, and dispose of him and his property, for their uses, and at their pleasure.
By the logic of the regime libertarian, Spooner was a “neo-Confederate” defender of slavery — after all, he asserted the southern states’ right to withdraw from the Union! What other motivation could he have? But this is too preposterous even for them.
Spooner was correct about all of this, needless to say. The war was in fact launched not to free the slaves, as any historian must concede, but for purposes of mysticism — why, the sacred “Union” must be preserved! — and on behalf of economic interests. The regime libertarian expects us to believe that the analysis we apply to all other wars, in which we look beneath the official rationales to the true motivations, does not apply to this single, glorious exception to the catalogue of crimes that constitute the story of mankind’s experiences with military aggression.
Let’s turn now to the second libertarian figure. Frank Chodorov, by all accounts, was one of the great writers of the Old Right. Liberty Fund published a collection of his writings called Fugitive Essays. Chodorov founded what was then called the Intercollegiate Society of Individualists, and served as an editor of Human Events, where the early presence of Felix Morley ensured that noninterventionist voices, at least at the beginning, would get a hearing. Murray N. Rothbard considered Chodorov’s monthly publication analysis to be one of the greatest independent publications in American history.
Naturally, Chodorov supported both secession and “states’ rights.” In fact, he thought every schoolchild should “become familiar with the history and theory of what we call states’ rights, but which is really the doctrine of home rule.”
Ralph Raico, the great libertarian historian and Senior Fellow of the Mises Institute, has documented how the decentralized political order of Europe made possible the emergence of liberty. The lack of a single political authority uniting Europe, and to the contrary a vast multiplicity of small jurisdictions, placed a strict limit on the ambitions of any particular prince. The ability to move from one place to another meant that a prince would lose his tax base should his oppressions grow intolerable.
Chodorov made the same observation:
When the individual is free to move from one jurisdiction to another, a limit is put on the extent to which the government may use its monopoly power. Government is held in restraint by the fear of losing its taxpaying citizens, just as loss of customers tends to keep other monopolies from getting too arrogant.
No tyrant ever supports divided or decentralized power, which is why twentieth-century totalitarians were such opponents of federalism. The US regime, too, has devoted over two centuries to dismantling the barriers that the states once imposed to their untrammeled exercise of power. As Chodorov put it, “The unlikelihood of getting the states to vote themselves out of existence turned the centralizers to other means, such as bribing the state authorities with patronage, alienating the loyalty of the citizenry with federal subsidies, establishing within the states independent administrative bodies for the management of federal works programs.”
Here’s how Chodorov concluded:
There is no end of trouble the states can give the centralizers by merely refusing to cooperate. Such refusal would meet with popular acclaim if it were supplemented with a campaign of education on the meaning of states’ rights, in terms of human freedom. In fact, the educational part of such a secessionist movement should be given first importance. And those who are plumping for a “third party,” because both existing parties are centralist in character, would do well to nail to their masthead this banner: Secession of the 48 states from Washington.
Now that is a libertarian speaking.
Secession is not a popular idea among the political and media classes in America, to be sure, and regime libertarians may roll their eyes at it, but a recent poll found about a quarter of Americans sympathetic to the idea, despite the ceaseless barrage of nationalist propaganda emitted from all sides. A result like this confirms what we already suspected: that a substantial chunk of the public is willing to entertain unconventional thoughts. And that’s all to the good. Conventional American thoughts are war, centralization, redistribution, and inflation. The most unconventional thought in America today is liberty.
Jeff Deist and Peter G. Klein discuss the "Net Neutrality" scam, the debunked monopoly and antitrust arguments, and how the internet would work in a world of truly unregulated entrepreneurship.
States wish to gain monopolies and maintain them in all facets of life, while entrepreneurs strive to offer alternatives to the state. It's our job to prevent the state from simply declaring the competition illegal, writes Julian Adorney.
This audio Mises Daily is narrated by Dianna Keiler.
As governments expand their control over society, it can be easy for liberty advocates to get discouraged. As Obamacare imposes mandates and price controls on private health care, as the Federal Reserve manipulates currency, and as stories of police abuse become more common, one can be forgiven for thinking that freedom is on the decline.
But in many ways, freedom is on the rise. Laws pile up, but entrepreneurs increasingly innovate around them. The evolution of the Internet — and the entrepreneurs who have capitalized on this platform to develop new technologies — are enabling users to do an end-run around government and offer competition to the State. In many areas where the State once held a monopoly, new technologies are offering people choices.
Technology itself (in the hands of the private sector) is necessary but not sufficient to challenge State monopolies, because governments can ultimately outlaw whatever they wish. Advocates for liberty must also oppose state monopolies wherever they are enforced. Libertarians should be vocal — in person and in print — about the problems of government and the virtues of competition. Ideological support can reinforce market alternatives to government services, and the two combined can create a freer world.
Cryptocurrencies are a prime example of the challenges technology represents to government monopolies. For the past several hundred years, governments have had a near-total monopoly on currency. They could devalue, hyperinflate, and wreck currencies; and ordinary people had little choice but to continue using government money. The only alternative was barter, which raised a host of problems.
With cryptocurrencies, the monopoly has been challenged. For some, it is now practical to use such currencies to buy and sell a host of products and services. These currencies have value independent of the dollar, and they enable users to make the conscious choice to eschew government-backed money in favor of private currency. By doing so, they have challenged the government monopoly on money. While many people still rely on the Federal Reserve’s dollars, everyone with a computer — at least in theory — now has the option to conduct his business outside of the State’s currency.
Products like the “Peacekeeper” app do the same thing in the emergency response industry. For decades, peoples’ only option in an emergency was either self-reliance or a call to 911. Either James could fight a burglar off with a Colt .45, or he could rely on the police. Even as stories of bad cops multiplied, and as the government bureaucracy created long wait times, people had no other options. Those who could not defend themselves against armed criminals had to rely on 911.
Peacekeeper does an end-run around 911 by enabling users to rely on a voluntary network of their friends, neighbors, and family for help in an emergency. It has the potential to offer better, faster, more personal service than 911. More importantly, it gives users who are discontented with 911 an outlet by enabling them to switch to a private-sector competitor.
States Seek to Strengthen Their MonopoliesCompetition to government monopolies are emerging in every industry. The United States government relentlessly tries to expand its sphere. Onerous rules on gun ownership attempt to make citizens reliant on the government for defense. Common Core strengthens the federal hold on education. The FDA bans alternative medicine, attempting to make users reliant on state-approved treatments.
But even as governments try to bring more and more economic activity under their control, entrepreneurs are enabling people to go around the State.
Want to avoid Obamacare? Oscar Salazar is planning to launch a new health care model he describes as “Like Uber, but with doctors.” Want your children to learn outside of Common Core? New resources like Khan Academy make it easy. Want non-FDA approved medications and treatments? The Internet and a globally connected world make acquiring these from less repressive countries easy. 3D printing has the potential to make a mockery of gun control laws, and in the future we may be 3D printing medications at home.
The United States government is, for the foreseeable future at least, here to stay. But central to government power is the idea of monopoly: a person must use government services to do X, or else not do X. Sally must use government-licensed taxis, or else not engage in ride-sharing at all. She must rely on 911 for emergency response, or rely on no-one.
This monopoly is at the heart of State power. Governments are by nature bloated and inefficient. They run over budget and fail to focus on the consumer. Given a choice between a government service and a private service, few people will choose the former. One doesn’t choose the Post Office when one has FedEx as an option (ceteris paribus). In order to maintain control, governments need to maintain their monopoly.
But this very monopoly is being challenged by dozens of entrepreneurs, innovating around and beyond the State. It’s not necessary that the state die off completely for other options to emerge. The Post Office still exists, but FedEx enhances peoples’ freedom by offering a private alternative. That same competition is now being applied to currency, emergency response, education, and a host of other industries.
As private enterprises give people options outside of the State, freedom expands in new and unexpected ways.
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Economics Nobel Prize winner Jean Tirole still clings to the old neoclassical model "perfect competition" and monopoly, writes Frank Shostak. This audio Mises Daily is narrated by Robert Hale.
Frenchman Jean Tirole of the University of Toulouse won the 2014 Nobel Prize in Economic Sciences for devising methods to improve regulation of industries dominated by a few large firms. According to Tirole, large firms undermine the efficient functioning of the market economy by being able to influence the prices and the quantity of products.
Consequently, this undermines the well being of individuals in the economy. On this way of thinking the inefficiency emerges as a result of the deviation from the ideal state of the market as depicted by the “perfect competition” framework.
The “Perfect Competition” ModelIn the world of perfect competition a market is characterized by the following features:
There are many buyers and sellers in the marketHomogeneous products are tradedBuyers and sellers are perfectly informedNo obstacles or barriers to enter the marketIn the world of perfect competition, buyers and sellers have no control over the price of the product. They are price takers.
The assumption of perfect information and thus absolute certainty implies that there is no room left for entrepreneurial activity. For in the world of certainty there are no risks and therefore no need for entrepreneurs.
If this is so, who then introduces new products and how? According to the proponents of the perfect competition model any real situation in a market that deviates from this model is regarded as sub-optimal to consumers' well being. It is then recommended that the government intervene whenever such deviation occurs.
Contrary to this way of thinking, competition is not on account of a large number of participants as such, but as a result of a large variety of products.
Competition in Products, Not FirmsThe greater the variety is, the greater the competition will be and therefore more benefits for the consumer.
Once an entrepreneur introduces a product — the outcome of his intellectual effort — he acquires 100 per cent of the newly-established market.
Following the logic of the popular way of thinking, however, this situation must not be allowed for it will undermine consumers' well being. If this way of thinking (i.e., the perfect competition model) were to be strictly adhered to, no new products would ever emerge. In such an environment, people would struggle to stay alive.
Once an entrepreneur successfully introduces a product and makes a profit, he attracts competition. Notice that what gives rise to the competition is that consumers have endorsed the new product. Now the producers of older products must come with new ideas and new products to catch the attention of consumers.
The popular view that a producer that dominates a market could exploit his position by raising the price above the truly competitive level is erroneous.
The goal of every business is to make profits. This, however, cannot be achieved without offering consumers a suitable price.
It is in the interest of every businessman to secure a price where the quantity that is produced can be sold at a profit.
In setting this price the producer-entrepreneur will have to consider how much money consumers are likely to spend on the product. He will have to consider the prices of various competitive products. He will also have to consider his production costs.
Any attempt on behalf of the alleged dominant producer to disregard these facts will cause him to suffer losses.
Further to this, how can government officials establish whether the price of a product charged by a dominant producer is above the so-called competitive price level? How can they know what the competitive price is supposed to be?
If government officials attempt to enforce a lower price this price could wipe out the incentive to produce the product.
So rather than improving consumers’ well-being, government policies will only make things much worse. (On this, no mathematical methods, no matter how sophisticated, could tell us what the competitive price level is. Those who hold that game theories could do the trick are on the wrong path.)
Again, contrary to the perfect competition model, what gives rise to a greater competitive environment is not a large number of participants in a particular market but rather a large variety of competitive products. Government policies, in the spirit of the perfect competition model, however, are destroying product differentiation and therefore competition.
Products are HeterogeneousThe whole idea that various suppliers can offer a homogeneous product is not tenable. For if this was the case why would a buyer prefer one seller to another? (The whole idea to enforce product homogeneity in order to emulate the perfect competition model will lead to no competition at all.)
Since product differentiation is what free market competition is all about, it means that every supplier of a product has 100 percent control as far as the product is concerned. In other words, he is a monopolist.
What gives rise to product differentiation is that every entrepreneur has different ideas and talents. This difference in ideas and talents is manifested in the way the product is made, the way it is packaged, the place in which it is sold, the way it is offered to the client, etc.
For instance, a hamburger that is sold in a beautiful restaurant is a different product from a hamburger sold in a takeaway shop. So if the owner of a restaurant gains dominance in the sales of hamburgers should he then be restrained for this? Should he then alter his mode of operation and convert his restaurant into a takeaway shop in order to comply with the perfect competition model?
All that has happened here is that consumers have expressed a greater preference to dine in the restaurant rather than buying from the takeaway shop. So what is wrong with this?
Let us now assume that consumers have completely abandoned takeaway shops and buying hamburgers only from the restaurant, does this mean that the government must step in and intervene?
The whole issue of a harmful monopoly has no relevancy in the free-market environment. A harmful monopolist is likely to emerge when the government, by means of licenses, restricts the variety of products in a particular market. (The government bureaucrats decide what products should be supplied in the market.)
By imposing restrictions and thus limiting the variety of goods and services offered to consumers, government curtails consumers' choices thereby lowering their well-being.
Summary and conclusionWe suggest that the whole idea of government regulating large firms in order to promote competition and defend people’s well-being is a fallacy. If anything, such intervention only stifles market competition and lowers living standards. Alfred Nobel’s goal was to reward scientists whose inventions and discoveries bettered people’s lives and well-being. However, enhancing government controls of markets runs contrary to the spirit of Nobel.
Image source: https://www.flickr.com/photos/9731367@N02/6988181354/sizes/l
Tom Woods explains the “unacceptable“ opinions behind freedom and free markets.
This audio Mises Daily is narrated by Keith Hocker.
I think most people know what I mean when I speak of the gatekeepers of permissible discussion. On the left, sites like ThinkProgress and Media Matters smear and attack those uppity peons who stray from the ideological plantation that the Washington Post and the New York Times oversee. On the right it’s neoconservative sites like the Free Beacon, who have built a nice little cabin on that plantation, and who rat out anyone who tries to run away. Why, we don’t hold any of the dangerous views of those libertarians, good Mr. New York Times reporter, sir! We are nice and respectable, and we’ll be sure to keep a close eye on those awful subversives who, probably because of some mental defect, are unsatisfied with the Hillary-to-Romney spectrum to which we have been urged to confine ourselves.
The respectables of left and right do not deign to show where we’re wrong, of course. The very fact that we’ve strayed from the approved spectrum is refutation enough. That’s why I’ve called these people the thought controllers, the commissars, or the enforcers of approved opinion.
Let me modify that: once in a while they do try to show where we’re wrong, but they can almost never manage even to state our position correctly, much less muster an effective argument against it. The purpose of these alleged replies is not to shed light, but to demonize libertarians in the public mind.
In Real Dissent: A Libertarian Sets Fire to the Index Card of Allowable Opinion — my first book in nearly four years — I take aim at these critics and their arguments.
Part I covers foreign policy and war. The regime has fostered more confusion among the public over these issues than any other. Conservatives, of all people, wind up supporting courses of action that (1) expand the power of the state over civil society; (2) are justified on the basis of propaganda they’d laugh at if it came from the mouths of Saddam Hussein or Nikita Khrushchev; and (3) violate the absolute standards of morality that conservatives never tire of telling us are under assault. The antiwar reputation of left-liberals, meanwhile, is almost entirely undeserved; the mainstream left supported every major US war of the twentieth century.
Conservatives no doubt consider themselves cheeky and anti-establishment for supporting US military interventions, yet virtually all major US newspapers supported the two wars in Iraq and have called for a belligerent posture against Iran. If conservatives think they’re sticking it to the New York Times by supporting the federal government’s wars, they are deceiving themselves. It was the New York Times’s Judith Miller, for instance, who later became notorious for her uncritical acceptance of war propaganda. Hillary Clinton and John Kerry were every bit as belligerent as George W. Bush — Kerry even said in 2004 that he would be less likely than Bush to withdraw troops from Iraq, and proposed sending an additional 40,000.
Against this bipartisan consensus, anyone advocating a consistent policy of nonintervention abroad — the correct libertarian and conservative position, if you ask me — can expect to be marginalized and ignored. Meanwhile, the interventions of the past dozen years have backfired spectacularly, as Ron Paul and other noninterventionists predicted they would.
I put this part of the book front and center because I myself have so much penance to do. As a younger man I was a Rush Limbaugh listener and a garden-variety neoconservative. I cheered on every government intervention abroad, I accepted all the official rationales, and I demonized opponents and skeptics as America haters. I then realized I was just the flipside of a typical left-liberal, who cheered on every government intervention at home, accepted all the official rationales, and demonized opponents and skeptics as haters of the poor.
With both left and right cheering on the state in one capacity or another, the prospects for scaling it back are dim. The whole package, the whole tissue of lies, needs to be confronted.
Part II is a defense of the free-market economy against some of the most common arguments. Here my opponents don’t necessarily fall into the thought-control category. But many of the arguments I’m replying to are of the only-an-ideologue-could-disagree-with-me variety. Why, “monopolies” would dominate if you libertarians had your way! Everyone would earn ten cents an hour! Advertisers would manipulate consumers!
Those arguments and many others are the first to go.
Part III takes on some of the attacks on libertarianism launched by mainstream outlets over the past several years. It seems a week hardly goes by without one. I never get more feedback than when I take on critics like these and send them home crying to their mothers. This part of the book collects a bunch of these replies.
In Part IV I assess the significance of the Ron Paul phenomenon. Ron was everything the establishment fears: a plain-spoken truth-teller, a man without pretense, a fearless slayer of sacred cows. He refused to fit into any of the stultifying categories into which our opinion-molders try to pigeonhole anyone and everything. He was anti-state and anti-war — the very epitome of consistency, though most conservatives (and liberals, for that matter) found this an inexplicable contradiction.
(Ron himself contributed a generous foreword to Real Dissent, I’m happy to note.)
The Federal Reserve is the subject of Part V. Talk about outside allowable opinion: opposition to the Fed was nowhere to be found within mainstream American political life for nearly one hundred years after the central bank’s creation at the end of 1913. Today, enlightened opinion is appalled at having to acknowledge the existence of critics who question the wisdom of the wise custodians of their monetary system. But given the Fed’s track record, the naïve confidence that mainstream left and right expect us to repose in the Federal Reserve would be misplaced.
Part VI corrects the historical record on topics ranging from labor unions to presidential war powers to state nullification. Here you’ll find my much-discussed confrontation with radio host Mark Levin, whose idea of a debate is to call his opponent an idiot and not let his supporters read for themselves what that person has written. By contrast, I was more than happy to link my readers to Levin’s responses, especially since I was certain I had won our debate.
In Part VII, a short section, I gently correct certain libertarians who spend their time assuring respectable opinion that they are altogether different from those extreme libertarians like Woods, and that they’re really quite obedient and observant when it comes to issues Americans have been instructed not to discuss.
There are three more parts, but you get the idea. Of my twelve books, I think this one is the most enjoyable to read, and I’ve filled it with arguments you can use in debates of your own.
The appropriate response to the index card of allowable opinion to which the political and media classes expect us to confine ourselves is to set it on fire. This book is a match.
This article first appeared at LewRockwell.com.
Image source: iStockphoto.
Amidst news of the prolonged worldwide recession, new air strikes, secession attempts, and climate change, international trade — which in 2008 went through its largest crisis in history — has been mostly out of the public eye. Yet we’ve been told not to fear: the World Trade Organization, the foremost global body for promoting multilateral trade, remains watchful, and is optimistic that efforts for liberalization will bear fruit in the near future.
Sadly, the WTO’s hopes aren’t justified: the Doha Round of trade negotiations began in 2001, and even after thirteen years, success is nowhere in sight.
Seeking to address the liberalization concerns of WTO’s less-developed members, the Doha Development Round was supposed to culminate in 2005 with a new trade agreement. The envisioned deal concerned the reduction of trade barriers in commodities and services, as well as a new international framework for intellectual property rights. But soon after negotiations began, governments from developing countries — India, Brazil, China, and South Africa — and NGOs (non-governmental organization) began to worry that international negotiations were an obstacle to the governmental protection of developing sectors and regulation of financial services. After the failure of the Cancún proceedings in 2004, trade scholars worried that Doha might not be completed by its original deadline, but kept the hope that negotiations would continue. However, trade talks came to a deadlock in 2006, 2009, and 2011, mainly due to differences in agricultural policies. The US and the EU even backed out of previous agreements to reduce export support and agricultural subsidies, arguing that they did not want to weaken their bargaining positions too early in the Round.
Attempts to reconcile disagreements among countries since then have been largely in vain. But in December 2013, new tailwinds seemed to push the Doha Round to more favorable shores. The Bali Ministerial Conference, which concluded with the signing of a package deal on trade customs collection and a post-Bali development agenda, was touted to have “achieved what many believed was impossible”: bringing together the 160 WTO members for the first time in twelve years. But even though the Bali package does not have much to do with free trade — it facilitates the collection, but not the reduction, of custom duties — the agreement still wasn’t signed by all members in July 2014. This time, India vetoed the ratification to gain more bargaining power for Prime Minister Modi’s program of domestic food subsidies. Reuters reported that “trade diplomats in Geneva have said they are ‘flabbergasted,’ ‘astonished,’ and ‘dismayed,’ and described India’s position as ‘hostage-taking’ and ‘suicidal’.”
Perhaps commentators would have been less surprised if they had identified the negotiation deadlock as only the symptom of a more pervasive underlying cause: the national — read: political — interest of all countries at the negotiations table. The bread and butter of WTO member states is the extent to which they can encroach upon private enterprise, and control both product and financial markets. Under these circumstances, committing to open one’s borders to international trade is simply idle talk. Free exchange and competition would undermine the leverage of domestic interest groups, and cut through the structure of government intervention.
As Ludwig von Mises wrote to Friedrich Hoenig, one of his correspondents, in 1951:
U.S. representatives occasionally indulge in talk of free trade. This is pure illusion. American agricultural policies — parity prices, subsidies, limitation of crop surfaces … would collapse overnight if foreign imports were freely allowed into the country. Can you imagine a present-day England or present-day France with a regime of free trade? The more a country proceeds toward comprehensive control of all business activities, the more it must close itself to foreign countries.
Anyone reading modern day trade agreements would not be surprised to discover that they focus less and less on reducing import duties, and more on developing national industries, promoting exports, and ensuring domestic policy space. Their true purpose, a position of middle-of-the-road protectionism, is concealed under vague terms such as ‘freer, fair trade’, ‘gradual liberalization,’ ‘reciprocal concessions,’ or ‘development packages.’ However, the benefits of international trade do not lie in moderation and degree of reciprocity. True free trade is a policy of no trade barriers, to be pursued unilaterally by each and every country. If markets were released from the heavy hand of governments, international free trade would follow at one stroke.
The inherent incompatibility between free trade and increasing domestic government control will thus continue to hinder the dreams of WTO supporters, and the more distant ideal of free trade. Sadly, the golden days of Richard Cobden — who together with Michel Chevalier managed to sway the British Parliament and the French Emperor away from spending money on armaments and toward a free trade agreement — are long lost. All that is needed for flourishing international trade is a sound monetary system and the freedom of private enterprise. However, in a world where states have open-ended budgets for military campaigns and total control over the money supply, the bureaucratic structure in Geneva will only serve political interests.
Image source: iStockphoto.
The NCAA ensures there is no functioning job market for athletes and no competition to which students might go seeking higher pay, writes Andrew Syrios. This audio Mises Daily is narrated by Keith Hocker.
We live at a time when politicians and bureaucrats only know one public policy: more and bigger government. Yet, there was a time when even those who served in government defended limited and smaller government. One of the greatest of these died one hundred years ago on August 27, 1914, the Austrian economist Eugen von Böhm-Bawerk.
Böhm-Bawerk is most famous as one of the leading critics of Marxism and socialism in the years before the First World War. He is equally famous as one of the developers of “marginal utility” theory as the basis of showing the logic and workings of the competitive market price system.
But he also served three times as the finance minister of the old Austro-Hungarian Empire, during which he staunchly fought for lower government spending and taxing, balanced budgets, and a sound monetary system based on the gold standard.
Danger of Out-of-Control Government Spending Even after Böhm-Bawerk had left public office he continued to warn of the dangers of uncontrolled government spending and borrowing as the road to ruin in his native Austria-Hungary, and in words that ring as true today as when he wrote them a century ago.
In January 1914, just a little more than a half a year before the start of the First World War, Böhm-Bawerk said in a series of articles in one of the most prominent Vienna newspapers that the Austrian government was following a policy of fiscal irresponsibility. During the preceding three years, government expenditures had increased by 60 percent, and for each of these years the government’s deficit had equaled approximately 15 percent of total spending.
The reason, Böhm-Bawerk said, was that the Austrian parliament and government were enveloped in a spider’s web of special-interest politics. Made up of a large number of different linguistic and national groups, the Austro-Hungarian Empire was being corrupted through abuse of the democratic process, with each interest group using the political system to gain privileges and favors at the expense of others.
Böhm-Bawerk explained:
We have seen innumerable variations of the vexing game of trying to generate political contentment through material concessions. If formerly the Parliaments were the guardians of thrift, they are today far more like its sworn enemies.
Nowadays the political and nationalist parties … are in the habit of cultivating a greed of all kinds of benefits for their co-nationals or constituencies that they regard as a veritable duty, and should the political situation be correspondingly favorable, that is to say correspondingly unfavorable for the Government, then political pressure will produce what is wanted. Often enough, though, because of the carefully calculated rivalry and jealousy between parties, what has been granted to one [group] has also to be conceded to others—from a single costly concession springs a whole bundle of costly concessions.
He accused the Austrian government of having “squandered amidst our good fortune [of economic prosperity] everything, but everything, down to the last penny, that could be grabbed by tightening the tax-screw and anticipating future sources of income to the upper limit” by borrowing in the present at the expense of the future.
For some time, he said, “a very large number of our public authorities have been living beyond their means.” Such a fiscal policy, Böhm-Bawerk feared, was threatening the long-run financial stability and soundness of the entire country.
Eight months later, in August 1914, Austria-Hungary and the rest of Europe stumbled into the cataclysm that became World War I. And far more than merely the finances of the Austro-Hungarian Empire were in ruins when that war ended four years later, since the Empire itself disappeared from the map of Europe.
A Man of Honesty and Integrity Eugen von Böhm-Bawerk was born on February 12, 1851 in Brno, capital of the Austrian province of Moravia (now the eastern portion of the Czech Republic). He died on August 27, 1914, at the age of 63, just as the First World War was beginning.
Ten years after Böhm-Bawerk’s death, one of his students, the Austrian economist Ludwig von Mises, wrote a memorial essay about his teacher. Mises said:
Eugen von Böhm-Bawerk will remain unforgettable to all who have known him. The students who were fortunate enough to be members of his seminar [at the University of Vienna] will never lose what they have gained from the contact with this great mind. To the politicians who have come into contact with the statesman, his extreme honesty, selflessness and dedication to duty will forever remain a shining example.
And no citizen of this country [Austria] should ever forget the last Austrian minister offinance who, in spite of all obstacles, was seriously trying to maintain order of the public finances and to prevent the approaching financial catastrophe. Even when all those who have been personally close to Böhm-Bawerk will have left this life, his scientific work will continue to live and bear fruit.
Another of Böhm-Bawerk’s students, Joseph A. Schumpeter, spoke in the same glowing terms of his teacher, saying, “he was not only one of the most brilliant figures in the scientific life of his time, but also an example of that rarest of statesmen, a great minister of finance…. As a public servant, he stood up to the most difficult and thankless task of politics, the task of defending sound financial principles.”
The scientific contributions to which both Mises and Schumpeter referred were Böhm-Bawerk’s writings on what has become known as the Austrian theory of capital and interest, and his equally insightful formulation of the Austrian theory of value and price.
The Austrian Theory of Subjective Value The Austrian school of economics began 1871 with the publication of Carl Menger’s Principles of Economics. In this work, Menger challenged the fundamental premises of the classical economists, from Adam Smith through David Ricardo to John Stuart Mill. Menger argued that the labor theory of value was flawed in presuming that the value of goods was determined by the relative quantities of labor that had been expended in their manufacture.
Instead, Menger formulated a subjective theory of value, reasoning that value originates in the mind of an evaluator. The value of means reflects the value of the ends they might enable the evaluator to obtain. Labor, therefore, like raw materials and other resources, derives value from the value of the goods it can produce. From this starting point Menger outlined a theory of the value of goods and factors of production, and a theory of the limits of exchange and the formation of prices.
Böhm-Bawerk and his future brother-in-law and also later-to-be-famous contributor to the Austrian school, Friedrich von Wieser, came across Menger’s book shortly after its publication. Both immediately saw the significance of the new subjective approach for the development of economic theory.
In the mid-1870s, Böhm-Bawerk entered the Austrian civil service, soon rising in rank in the Ministry of Finance working on reforming the Austrian tax system. But in 1880, with Menger’s assistance, Böhm-Bawerk was appointed a professor at the University of Innsbruck, a position he held until 1889.
Böhm-Bawerk’s Writings on Value and Price During this period he wrote the two books that were to establish his reputation as one of the leading economists of his time, Capital and Interest, vol. I, History and Critique of Interest Theories (1884), and vol. II, Positive Theory of Capital (1889). A third volume, Further Essays on Capital and Interest, appeared in 1914 shortly before his death.
In the first volume of Capital and Interest, Böhm-Bawerk presented a wide and detailed critical study of theories of the origin of and basis for interest from the ancient world to his own time. But it was in the second work, in which he offered a Positive Theory of Capital, that Böhm-Bawerk’s major contribution to the body of Austrian economics may be found. In the middle of the volume is a 135-page digression in which he presents a refined statement of the Austrian subjective theory of value and price. He develops in meticulous detail the theory of marginal utility, showing the logic of how individuals come to evaluate and weigh alternatives among which they may choose and the process that leads to decisions to select certain preferred combinations guided by the marginal principle. And he shows how the same concept of marginal utility explains the origin and significance of cost and the assigned valuations to the factors of production.
In the section on price formation, Böhm-Bawerk develops a theory of how the subjective valuations of buyers and sellers create incentives for the parties on both sides of the market to initiate pricing bids and offers. He explains how the logic of price creation by the market participants also determines the range in which any market-clearing, or equilibrium, price must finally settle, given the maximum demand prices and the minimum supply prices, respectively, of the competing buyers and sellers.
Capital and Time Investment as the Sources of Prosperity It is impossible to do full justice to Böhm-Bawerk’s theory of capital and interest. But in the barest of outlines, he argued that for man to attain his various desired ends he must discover the causal processes through which labor and resources at his disposal may be used for his purposes. Central to this discovery process is the insight that often the most effective path to a desired goal is through “roundabout” methods of production. A man will be able to catch more fish in a shorter amount of time if he first devotes the time to constructing a fishing net out of vines, hollowing out a tree trunk as a canoe, and carving a tree branch into a paddle.
Greater productivity will often be forthcoming in the future if the individual is willing to undertake, therefore, a certain “period of production,” during which resources and labor are set to work to manufacture the capital—the fishing net, canoe, and paddle—that is then employed to paddle out into the lagoon where larger and more fish may be available.
But the time involved to undertake and implement these more roundabout methods of production involve a cost. The individual must be willing to forgo (often less productive) production activities in the more immediate future (wading into the lagoon using a tree branch as a spear) because that labor and those resources are tied up in a more time-consuming method of production, the more productive results from which will only be forthcoming later.
Interest on a Loan Reflects the Value of Time This led Böhm-Bawerk to his theory of interest. Obviously, individuals evaluating the production possibilities just discussed must weigh ends available sooner versus other (perhaps more productive) ends that might be obtainable later. As a rule, Böhm-Bawerk argued, individuals prefer goods sooner rather than later.
Each individual places a premium on goods available in the present and discounts to some degree goods that can only be achieved further in the future. Since individuals have different premiums and discounts (time-preferences), there are potential mutual gains from trade. That is the source of the rate of interest: it is the price of trading consumption and production goods across time.
Böhm-Bawerk Refutes Marx’s Critique of Capitalism One of Böhm-Bawerk’s most important applications of his theory was the refutation of the Marxian exploitation theory that employers make profits by depriving workers of the full value of what their labor produces. He presented his critique of Marx’s theory in the first volume of Capital and Interest and in a long essay originally published in 1896 on the “Unresolved Contradictions in the Marxian Economic System.” In essence, Böhm-Bawerk argued that Marx had confused interest with profit. In the long run no profits can continue to be earned in a competitive market because entrepreneurs will bid up the prices of factors of production and compete down the prices of consumer goods.
But all production takes time. If that period is of any significant length, the workers must be able to sustain themselves until the product is ready for sale. If they are unwilling or unable to sustain themselves, someone else must advance the money (wages) to enable them to consume in the meantime.
This, Böhm-Bawerk explained, is what the capitalist does. He saves, forgoing consumption or other uses of his wealth, and those savings are the source of the workers’ wages during the production process. What Marx called the capitalists’ “exploitative profits” Böhm-Bawerk showed to be the implicit interest payment for advancing money to workers during the time-consuming, roundabout processes of production.
Defending Fiscal Restraint in the Austrian Finance Ministry In 1889, Böhm-Bawerk was called back from the academic world to the Austrian Ministry of Finance, where he worked on reforming the systems of direct and indirect taxation. He was promoted to head of the tax department in 1891. A year later he was vice president of the national commission that proposed putting Austria-Hungary on a gold standard as a means of establishing a sound monetary system free from direct government manipulation of the monetary printing press.
Three times he served as minister of finance, briefly in 1895, again in 1896–1897, and then from 1900 to 1904. During the last four-year term Böhm-Bawerk demonstrated his commitment to fiscal conservatism, with government spending and taxing kept strictly under control.
However, Ernest von Koerber, the Austrian prime minister in whose government Böhm-Bawerk served, devised a grandiose and vastly expensive public works scheme in the name of economic development. An extensive network of railway lines and canals were to be constructed to connect various parts of the Austro-Hungarian Empire—subsidizing in the process a wide variety of special-interest groups in what today would be described as a “stimulus” program for supposed “jobs-creation.”
Böhm-Bawerk tirelessly fought against what he considered fiscal extravagance that would require higher taxes and greater debt when there was no persuasive evidence that the industrial benefits would justify the expense. At Council of Ministers meetings Böhm-Bawerk even boldly argued against spending proposals presented by the Austrian Emperor, Franz Josef, who presided over the sessions.
When finally he resigned from the Ministry of Finance in October 1904, Böhm-Bawerk had succeeded in preventing most of Prime Minister Koerber’s giant spending project. But he chose to step down because of what he considered to be corrupt financial “irregularities” in the defense budget of the Austrian military.
However, Böhm-Bawerk’s 1914 articles on government finance indicate that the wave of government spending he had battled so hard against broke through once he was no longer there to fight it.
Political Control or Economic Law A few months after his passing, in December 1914, his last essay appeared in print, a lengthy piece on “Control or Economic Law?” He explained that various interest groups in society, most especially trade unions, suffer from a false conception that through their use or the threat of force, they are able to raise wages permanently above the market’s estimate of the value of various types of labor.
Arbitrarily setting wages and prices higher than what employers and buyers think labor and goods are worth—such as with a government-mandated minimum wage law—merely prices some labor and goods out of the market.
Furthermore, when unions impose high nonmarket wages on the employers in an industry, the unions succeed only in temporarily eating into the employers’ profit margins and creating the incentive for those employers to leave that sector of the economy and take with them those workers’ jobs.
What makes the real wages of workers rise in the long run, Böhm-Bawerk argued, was capital formation and investment in those more roundabout methods of production that increase the productivity of workers and therefore make their labor services more valuable in the long run, while also increasing the quantity of goods and services they can buy with their market wages.
To his last, Eugen von Böhm-Bawerk defended reason and the logic of the market against the emotional appeals and faulty reasoning of those who wished to use power and the government to acquire from others what they could not obtain through free competition. His contributions to economic theory and economic policy show him as one of the greatest economists of all time, as well as his example as a principled man of uncompromising integrity who in the political arena unswervingly fought for the free market and limited government.
Originally published September 6, 2014.
Volume 4, No. 4 (Winter 2001)Elliot Sclar's book You Don't Always Get What You Pay For: The Economics of Privatization presents an empirical analysis of privatization that he thinks has been lacking. He uses several case studies to explain the merits and downfalls of trying to privatize "public services." After examining several case studies he concludes the privately producing "publicly provided goods" is not always beneficial to society.
The Free Market 32, no. 3 (March 2014)A Libertarian Critique of Intellectual Propertyby Butler ShafferMises Institute, 2014, 62 pgs.
Few topics in recent years have aroused as much interest among libertarians as intellectual property. What place, if any, would IP — patents, copyrights, trademarks and the like — have in a libertarian society? Ayn Rand and her Objectivist followers view IP as the most basic of all property rights. Diametrically opposed are those who say, “You cannot own an idea”: ideas are not in the economic sense scarce goods and thus property rights in them are at odds with the purpose of property rights, avoiding conflict over the use of such goods. Still others shift the argument from rights to the benefits and costs of IP. Does IP promote valuable inventions and creativity, or does it impede them?
Faced with a welter of arguments in conflict, what is the perplexed libertarian to do? Butler Shaffer’s superb new monograph offers an easy way to unravel the IP puzzles. He starts from a fundamental principle basic to libertarianism and explains how the implications of this principle shed light on IP issues. What is this principle? It is that rights stem from “the informal processes by which men and women accord to each other a respect for the inviolability of their lives — along with claims to external resources (e.g., land, food, water, etc.) necessary to sustain their lives.” (p. 18) The “informal processes” that Shaffer mentions proceed without coercion. In particular, law and rights do not depend on the dictates of the state, an organization that claims a monopoly over the legitimate use of force in a territory.
In adopting this stance, Shaffer puts himself at odds with much that passes in our day for wisdom among professors of law. “In a world grounded in institutional structuring, it is often difficult to find people willing to consider the possibility that property interests could derive from any source other than an acknowledged legal authority. There is an apparent acceptance of Jeremy Bentham’s dictum that ‘property is entirely the creature of law.’” (pp. 18–19)
What follows for IP if one accepts Shaffer’s libertarian starting point? Then, we must ask the further question, would people who respect each other’s life and property recognize IP rights? To ask this question, though, raises a further issue. How are we to find out what people in this imagined situation would do? We live, after all, in “a world grounded in institutional structuring.” In our world, IP exists: how do we know what would exist in a stateless world?
Shaffer solves this difficulty by moving to a question that we can answer: How in fact has IP arisen? Was it recognized by the common law or has it been imposed by the state? Shaffer has no doubt about the answer: “The common law system got it right: because the essence of ownership is found in the capacity to control some resource in furtherance of one’s purposes, such a claim [of common law copyright] is lost once a product is released to the public. The situation is similar to that of a person owning oxygen that is contained in a tank, but loses a claim to any quantity that might be released — by a leaky valve — into the air.” (pp. 25–26)
IP today goes far beyond the limited protection afforded by common law copyright. In the modern IP system, the state grants monopoly privileges, and this is inconsistent with libertarian principles: “If copyrights, patents, or trademark protections are not recognized among free people — unless specifically contracted for between two parties — by what reasoning can the state create and enforce such interests upon persons who have not agreed to be so bound? ... Among men and women of libertarian sentiments, one would expect to find a presumption of opposition to the idea that a monopolist of legal violence could create property interests that others would be bound in principle to respect.” (p. 22)
One might raise an objection to Shaffer’s argument. Even if people have not in fact voluntarily agreed to laws protecting IP, does this suffice to show that they could not do so? Shaffer allows contracts in which two people agree to limits on the right to reproduce an item that is purchased, but can one not imagine such contracts extended further? Could one not devise a complicated contract in which everyone agrees to IP protection? A contract of this sort would resemble agreements that some have proposed to supply public goods in an anarchist society.
I do not know how Shaffer would respond, but the imagined contract creates little trouble for the thesis he wishes to defend. He need not deny the bare possibility of a contract of this sort. He has only to insist once more that this contract would bind only those who had agreed to it, and it in that way does not resemble our present IP arrangements.
If Shaffer is right that a libertarian society would not recognize IP, we must now ask another question. Is this an unfortunate feature of a libertarian society as Shaffer conceives of it? Some have thought so, fearing that IP protection is needed to stimulate inventions and to promote creativity in the arts.
Shaffer finds no reason to accept this contention. After mentioning a large number of tools and inventions from prehistoric times, he says, “All of these early inventions and creations were accomplished, as far as is known, without a violence-backed monopoly to prevent others from copying them.” (pp. 35–36)
In his discussion of innovation, Shaffer avoids a bad argument that, I regret to say, has beguiled several opponents of IP. It is correctly pointed out that ideas are not scarce, in one meaning of that term. Any number of people can make use of an idea at the same time. By contrast, economic goods are scarce: one’s use of economic goods excludes others from using them. In brief, ideas are non-rivalrous. From this, it is wrongly concluded that the creation of new and valuable ideas poses no problem: If ideas are not scarce, then they are abundant. Obviously, then, IP protection for them is absurd. It makes no more sense than property rights in air, a good which in normal circumstances anyone can have as much as he wants.
A parallel argument will serve to expose the fallacy. A common criticism of the free market is that it cannot supply public goods, such as national defense, in the economically optimal quantity. A public good is non-rivalrous: my consumption of defense, e.g., does not impede your consumption of it. It is alleged that this leads to undersupply of the good.
It would be a very poor answer to this complaint against the market to say, “This is not a problem! Just as the opponent of the free market has said, defense is a public, non-rivalrous good. If so, it is abundant — we need not then worry about its supply.” The error here is apparent: the fact that an indefinite number of people can consume a good at the same time does not show that there is as much of the good as people want. The application of this to the IP argument canvassed above is, I hope, sufficiently obvious.
Shaffer’s monograph contains much else of great value. He points out that “the patenting process, as with government regulation generally, is an expensive and time consuming undertaking that tends to increase industrial concentration.” (p. 42) This, he holds, is a development much to be deplored. In his fear of the malign effects of undue organizational size, Shaffer has been influenced by Leopold Kohr, an original but neglected thinker.
Shaffer aptly concludes his monograph in this way: “Can one, consistent with a libertarian philosophy, respect any ‘property’ interest that is both created and enforced by the state, a system defined by its monopoly on the use of violence? I regard the proposition as indefensible as would be the question of a libertarian defense of war.” (p. 54)
Volume 5, No. 3 (Fall 2002)
Although bits and pieces of "Competition as a Discovery Procedure" began to appear in English as early a the 1970s, the translator discovered that, by the time he assumed emeritus status in 1998, no full translation of the original 1968 Kiel version was yet extant. Translating such a document into English would make it much more widely accessible. It was this conviction, along with the flexible workload of a retired academic, that resulted in the present translation.
Volume 7, No. 3 (Fall 2004)Contestability theory makes a case that the pricing behavior of a multi-product natural monopolist is disciplined by the threat of entrepreneurial entry. The contestability model employs three major concepts. These include (1) economies of scope in which joint production of a slate of products is less costly than if each product were to be produced by separate firms; (2) subadditivity, a formal demonstration that the single firm is the least costly means of satisfying a specific demand for a specific slate of products. But even in such a case, “benefits of competitive pricing” are thought to be achievable if: (a) prospective entrants are assured of the ability to recoup entry costs; and (b) the incumbent firm is induced by threat of entry to charge sustainable prices such that no profitable entry is possible. (3) Sustainability is attained if market demand is being fully satisfied and the monopolist is able to charge prices that fully cover the cost of production and offer no prospects of profitable entry.
Volume 10, No. 2 (Summer 2007)
The standard theory of monopsony originated with Joan Robinson in her The Economics of Imperfect Competition (1933). This standard theory describes employers as facing upward-sloping supply curves of labor, in contrast to the model of perfect competition wherein individual employers face perfectly elastic supply curves. In perfect competition, the labor market as a whole is characterized by an upward-sloping supply curve, but in monopsony the individual employer is the entire market. Hence the employer’s marginal cost of labor is greater than the supply price. The employer hires labor up to the quantity for which the marginal cost of labor equals the marginal revenue product of labor. Consequently, both the wage and employment levels are less than they would be under the model of perfect competition. The wage rate is less than the marginal product of labor, a situation Robinson viewed as the exploitation of labor, in contrast to the Marxist definition of labor exploitation as the payment to labor of less than the total product.
Volume 12, No. 1 (2009)
In neoclassical theory, product differentiation provides consumers with a variety of different products within a particular industry, rather than a homogeneous product that characterizes purely competitive markets. The welfare-enhancing benefit of product differentiation is the greater variety of products available to consumers, which comes at the cost of a higher average total cost of production. In reality, firms do not differentiate their products to make them different, or to give consumers variety, but to make them better, so consumers would rather buy that firm’s product rather than the product of a competitor. When product differentiation is seen as a strategy to improve products rather than just to make them different, product differentiation emerges as the engine of economic progress. In contrast to the neoclassical framework, where product differentiation imposes a cost on the economy in exchange for more product variety, in reality product differentiation lowers costs, creates better products for consumers, and generates economic progress.
Volume 12, Number 1 (Spring 2009)
Cartels, characterized by activities such as simultaneous price increases or decreases, or virtual price identity at almost the same time, without explicit communications or agreements, have long been discussed. For the first time, in this article, the price leadership model is suggested as an explanation.
Volume 13, Number 1 (Spring 2010)ABSTRACT: This paper explains how grants of monopolistic privileges to capitalists can lower labor and land factors’ prices compared to what would prevail in a free market environment. Monopoly gains of privileged business owners are not only “extracted” from their clients but also from factor owners. We revisit Rothbardian monopoly price theory and extend it to the realm of factor pricing. Monopolistic grants to capitalists make for market situations where both monopoly of demand for factors and monopoly of supply for their product are present and inextricably inter twined. We conclude that grants of privileges to capitalists can trigger an overall downward pressure on original factor prices.[1]Xavier Méra (xavier.mera@etud.univ-angers.fr) is a Ph.D. candidate at the University of Angers, France.,The Ludwig von Mises Institute, its president Douglas French and its staff were indispensable in providing logistical support and a suitable environment for the preparation of this study. The author would also like to thank Joseph T. Salerno, Mark Thornton, Philipp Bagus, Per Bylund, Mateusz Machaj, Marian Eabrasu, Guido Hülsmann, Nikolay Gertchev, G.P. Manish, and participants at the Paris Austrian Research Seminar for their helpful advice and comments, but takes responsibility for all remaining errors.
INTRODUCTIONIn his chapter in Human Action on work and wages, Ludwig von Mises claims that no theory of a “monopoly of demand” can successfully prove that workers could be permanently paid below their marginal value productivity (discounted by originary interest) in the free market. Since he focuses mainly on a defense of the free market, he does not go into much detail regarding this possibility in a hampered market economy. However, in the course of refuting the free market monopoly of demand theory, Mises (1998, pp. 591–92) writes:
[Entrepreneurs] are under the necessity of acquiring all factors of production at the cheapest price. But if in the pursuit of this endeavor some entrepreneurs, certain groups of entrepreneurs, or all entrepreneurs offer prices or wage rates which are too low, i.e., do not agree with the state of the unhampered market, they will succeed in acquiring what they want to acquire only if entrance into the ranks of entrepreneurship is blocked through institutional barriers. If the emergence of new entrepreneurs or the expansion of the activities of already operating entrepreneurs is not prevented, any drop in the prices of factors of production not consonant with the structure of the market must open new chances for the earning of profits. There will be people eager to take advantage of the margin between the prevailing wage rate and the marginal productivity of labor. Their demand for labor will bring wage rates back to the height conditioned by labor’s marginal productivity. The tacit combination among the employers to which Adam Smith referred, even if it existed, could not lower wages below the competitive market rate unless access to entrepreneurship required not only brains and capital (the latter always available to enterprises promising the highest returns), but in addition also an institutional title, a patent, or a license, reserved to a class of privileged people. (emphasis added)
Only privileges can hamper the bidding process that tends to equate discounted marginal productivity of factors with their prices. One can certainly say that this is what Mises considers as a necessary condition. But what other contingencies could bring such an outcome? What are the sufficient conditions? For Mises, (1998, p. 593)
The employers would be in a position enabling them to lower wage rates by concerted action only if they were to monopolize a factor indispensable for every kind of production and to restrict the employment of this factor in a monopolistic way. As there is no single material factor indispensable for every kind of production, they would have to monopolize all material factors of production. This condition would be present only in a socialist community, in which there is neither a market nor prices and wage rates.See also Rothbard (2004, pp. 717–18). (emphasis added)
However, Mises does not further explore the conceivable intermediate situations between a pure free market and pure socialism“Socialism” is to be understood here in the sense Mises uses, as a society in which means of production are state-owned, and does not necessarily imply any kind of egalitarianism. regarding the possibility of an overall downward pressure on labor factors’ prices (or land factors prices for that matter) under their free market levels. In Mises’s and Murray Rothbard’s analysis of interventionism, land and labor factors typically find themselves on both sides of the distributive process implied in interventions, among the winners and the losers.This is obviously true for the taxation and public spending process. Cf. Rothbard (2004 pp. 1152–53) for example. One could also consider the classic case of a maximum price control for a product. If it is effective, would-be buyers at the control price will have to face a shortage. What does this imply regarding factor pricing? The profitable production level is lower than without price control. If entrepreneurs correctly anticipate this, their demand schedules for factors will be lower in this industry. However, this does not automatically translate into lower prices for these factors. The frustrated demand for the product will be reshuffled elsewhere. Specific factors in the expanding sectors will certainly see their prices rise as a consequence, as well as some non-specific factors. Furthermore, depending on the cases, the factors displaced from the controlled sector may not earn less elsewhere if they can be employed in the industries where demand is reshuffled since their discounted marginal value productivity schedules will increase there. Notwithstanding, I want to show in this paper that at least one kind of intervention can make workers and landowners gather on the side of losers while (some of) their employers would be beneficiaries of the distributive effect involved. I want to show that monopolistic grants of privileges to capitalists, insofar as they allow monopoly prices to emerge for their products, also bring about an overall relative lowering of prices for original factors, in particular labor factors (in other words, that there is no need for employers to “monopolize all factors of production” to bring about such an outcome). And I want to explain how this conclusion can be viewed as an implication of Rothbard’s own work on monopoly price theory, an implication that Mises touches upon in the quote above when he stresses that the bidding process for factors can be hampered because of monopolistic grants of privilege.
In order to do so, I will first recall the basic tenets of Rothbardian monopoly theory. They will be taken for granted for the purpose of this paper. Then I will draw the implications regarding the impact of monopolistic grants on factor prices.
ROTHBARD’S THEORY OF MONOPOLY PRICEThe basic features of Rothbard’s monopoly price theorySee Rothbard (2004, pp. 661–704 and pp. 1089–93). This theory is a modified version of Mises’s views on the topic. See Mises (1998a, pp. 354–85) and Mises (1998b). Whatever the versions considered, they must not be confused with the view on monopoly that one can find in most textbooks these days. The standard textbook view on monopoly is actually a special case of a different and more general theory, namely the so-called theory of “monopolistic competition.” can be summarized as follows. First, one or more persons must of course hold a “monopoly.” A monopoly is here understood as an “institution or allowance by the king, by his grant, commission, or otherwise … to any person or persons, bodies politic or corporate, for the sole buying, selling, making, working, or using of anything, whereby any person or persons, bodies politic or corporate, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade,” in the words of seventeenth century lawyer Lord Coke.Quoted in Rothbard (2004, pp. 668–69). However, in Rothbard’s view, a monopoly simply implies that competition is hampered through violence or the threat thereof. It does not necessarily have to be an outright grant of monopoly to one firm by the state. Therefore, private Mafia-like threats of aggressionAggression is understood here as uninvited border-crossing on someone’s property acquired through the first user-first owner rule and subsequent voluntary exchanges and gifts. On the nature of property and aggression, see Rothbard (2004, pp. 84–102 and pp. 169–75). against any would-be competitor as well as governmentally enforced cartels, licenses, compulsory quality standards, tariffs, patents, environmental regulations or any law, decree or tax penalizing any form of market organization will do.See Rothbard (2004, pp. 1092–93).
Though Rothbard refers to a definition of monopoly that includes monopoly of buying, his focus is on monopoly of selling, which brings us to the second requirement. Preferences of people have to be such that at one or several prices higher than the free market price for a good, the market demand for this good brings more monetary income to its sellers, even if the quantity that buyers are eager to get is reduced because of the law of marginal utility.
Third, if there is only one seller or if sellers can find an agreement to centralize their decision process and act as one, they are in a position to profit from this so-called “inelasticity” of demand above the free market price by restricting their supply of the product and sell it at a higher price called a “monopoly price.”Mises (1998a, p. 359) explains that this can be the case even when all the sellers do not act as one, provided the entente owns a significant enough part of the supply. This is the “incomplete monopoly.” Another condition is that the monopolist is not in a position or not willing to discriminate among the buyers. One could add that an explicit agreement may not be necessary. All that is really indispensable once the stock has been produced is that the demand schedules to individual sellers become inelastic as a consequence of monopolistic restrictions. Their interest is of course to sell it at the price which maximizes their monetary income.For Mises, as for almost all authors who wrote on this topic, one can conceive of a monopoly price that would be distinct from a “competitive” price in the free market. In other words, the first requirement we mentioned above would not be necessary and the monopoly price theory would not be a theory of interventionism. Only inelasticity of demand and collusion would be required. The reason why Rothbard (2004, pp. 687–98) thinks the theory can be valid only in the context of a market hampered by state intervention or private coercion can be summarized as follows. Let us postulate a purely free market society unhampered by coercion. An investor considers where to invest his money. Let us assume he finds himself as the sole seller of the kind of good he decides to produce. We are in the presence of a monopoly in the sense of a unique seller of a good but we know from Mises’s theory that this is not a sufficient condition to have a monopoly price. The question is then: does he get a monopoly price or a competitive price? Rothbard’s answer is definitive: whatever possibility we consider, competitive or monopoly price, the seller chooses to offer the quantity that he can sell at a point above which the demand is “elastic.” There is no higher price allowing further total revenue, which means that both situations are impossible to differentiate as the seller is in the same position vis-à-vis demand. If no difference is identifiable between two things, not only practically but even in principle, no conceptual distinction holds between the two. Therefore, in a free market there cannot be any competitive or monopoly prices. There are only free market prices. For a defense and elaboration of Mises’s view, see Kirzner (1973, pp. 19–23, and pp. 88–134). For a defense and elaborations of Rothbard’s views, see Armentano (1988), Armentano (1999, pp. 47–50), Block (1977), Costea (2003), and Hoppe (1989, pp. 167–86).
One can immediately notice here that there is no consideration of monetary expenses involved for the seller, no factor prices to worry about. This is perfectly legitimate of course. Since Carl Menger, Austrians are known to put some particular emphasis on the everyday real world pricing process, while the long run equilibrium constructs are thought of as an auxiliary tool of analysis.See on this Salerno (2003) with particular application to monopoly price theory and its development. Therefore, the theory can focus on the price of an already produced stock. Since past costs involved in the production decisions are forever gone, they are not relevant to the determination of price for this existing stock.Monopoly price theory can conceivably apply to labor factors too. In that case, there would be no question of past costs in their production. However, we focus here on goods produced with the help of previously produced production factors and original factors, in a traditional capitalist firm. Capitalists rent labor and other factors (or buy other factors) in advance of the sale of the product, in exchange for their productive services in the meantime. However, we are interested here in what happens at the production decision point, when entrepreneurs strive for the maximum net returns on their investments. This does not make a big difference for the theory of monopoly price, as far as Rothbard is concerned. The demand for the product must be anticipated and production adjusted accordingly.There is no reason why the expectations of entrepreneurs should necessarily be successful or erroneous. However, this is always true, with or without monopoly, since success and errors are ever-present possibilities of action. See on equilibration and arbitrage Hülsmann (2000, pp. 16–17). This is why we do not mention as a special requirement for the emergence of monopoly price Mises’s idea of a “monopolist’s ability to discover such prices,” and Rothbard does not mention it anyway. There is nothing special about the monopolist trying to figure out what will be the demand for its product. Every producer-future seller has to do that, can succeed or fail and accordingly reaps profits or suffers losses. And a higher income for a lower supply sold must be produced with lower use of factors, with lower expenses that is, so that one can be sure net returns are higher thanks to the restriction.According to Rothbard (2004, p. 674, footnote 39) this holds true unless average expenses decrease enough in the relevant range of the scale of production to make the free market level of production and free market price more attractive. This proviso is highly problematic. If it were true, it would mean that the producer would deliberately sell at a price above which the demand is inelastic, a point at which total income from the sale would be lower. Therefore, in order for this point to be the most remunerative, average expenses would have to fall so much as to make total expenses diminish even more than total income. Now no actor would deliberately operate in such a region. Furthermore, even if he was choosing to produce the free market quantity, it would still not make sense to sell the entire stock while he can have a higher total income with a higher than competitive price by restricting sales., Both Rothbard and Mises have repeatedly insisted on inelasticity of demand as a necessary requirement for a monopoly price to emerge. However, it is clear from the section on the role of increasing and decreasing average spending in Mises (1998b, pp. 6–7), that inelasticity of demand is not a necessary criterion. Mises draws a table with hypothetical figures showing increasing average expenses. There are four prices considered, 5, 6, 7 and 8 monetary units per unit of product and a higher price always implies lower proceeds: the demand is elastic on whatever range we consider. Mises decides 5 is the competitive price. According to the inelasticity criterion, there is therefore no room for a monopoly price. But Mises writes that “the monopoly price most favorable to the monopolist is 7” (6, 7 and 8 are monopoly prices)! The reason of course is that, given the figures he chooses, the expenses required diminish more than the proceeds when one reduces the scale of production. See also Vernon Mund (1933, pp. 130–32) on the role of increasing and decreasing average expenses for production. Rothbard claimed in Power and Market that “The monopolist, as a receiver of a monopoly privilege, will be able to achieve a monopoly price for the product if his demand curve is inelastic, or sufficiently less elastic, above the free-market price” (Rothbard 2004, p. 1090), while he omitted the “sufficiently less elastic” condition in an otherwise similarly worded passage in his previously published Man, Economy, and State Rothbard 2004, p. 904). He did not explain the addition in Power and Market but one can certainly see that it makes perfect sense, and why, in light of Mises’s example above. It should be noticed too that in the original exposition of monopoly price theory, Menger does not claim that demand should necessarily be inelastic above the competitive price for a monopoly price to emerge though the numerical example he gives focuses only on demand for the product and therefore requires inelasticity of demand. Instead, he briefly mentions production as a part of the general problem and states in this context that the relevant consideration is the “maximum profit” for the monopolist, not the highest proceeds, and that the monopolist restricts the supply produced and sold in so far as his “profits” are positively affected by such a restriction (Menger 1994, pp. 211–16). This is perfectly compatible with elasticity of demand provided average expenses fall enough when production is restricted. Confusion can be easily avoided with the help of Frank Fetter’s distinction between a “crude monopoly price” and a “monopoly price.” See Fetter (1915, pp. 80–84). The crude monopoly price yields the maximum gross receipts given an already produced stock and therefore requires an inelastic demand. The monopoly price yields the maximum net benefit and therefore does not require inelasticity.
Rothbard is not very explicit regarding factor pricing under monopolistic conditions. True, he stresses that monopoly price must be understood as a catallactic phenomenon and, as such, a phenomenon which is not independent from the general pricing and resource allocation process. However, though he explains as well that the implied restriction of production releases factors for other uses and allows an expansion in other fields of production, he does not provide us with a thorough explanation of the impact on prices for factors and, as a consequence, on net income distribution among original production factors and capitalists. The only clear-cut welfare implications he stresses are centered on people as consumers. Monopoly price implies that consumers are hurt because of the higher price they have to pay for a lower available supply of the monopolized good and because of the corresponding misallocation of factors in the economy. As far as distributive effects on incomes are concerned, Rothbard only stresses the monopoly gain accruing to the holder of the privilege. And this additional net income seems to be entirely “extracted” from people as consumers, so to speak.
IMPLICATIONS FOR FACTOR PRICINGThe key elements to understanding the factors’ side of the monopolistic price issue are the following. First, when coercion bars some existing or would-be capitalists to sell a product, this ipso facto bars them from renting or buying the factors required in its production, and vice versa. In other words, we do not only have here a “monopoly of supply” for the product, but also a “monopoly of demand” for its factors such as the one suggested by Mises above.See Mises’s first quote on page 52. These are the two sides of the same coin. Friedrich von Wieser (1927, p. 219) hinted at this when he wrote that
The demand-monopoly is at all times accompanied by a monopoly of supply. Thus, for example, the state in its tobacco-monopoly combines the two institutions. The administration of the monopoly does not admit in the home-market, other purchasers of raw tobacco; it combines with a monopoly of the supply of tobacco-products, which affects the consumers, a demand-monopoly, affecting the domestic tobacco growers. A further illustration is found in the actual demand-monopoly of a sugar-combine by virtue of its monopoly of supply. In this case, no other concern can make use of the sugar beets, and hence no other concern is likely to demand them.Wieser does not draw on this to build the integrated and unified theory of monopoly with demand-monopoly and supply-monopoly as two sides of the same coin that we propose, but he certainly enters the path toward this integration. One must realize that Wieser’s point is praxeological and can therefore be considered as a part of pure economic theory, provided that one keeps in mind Rothbard’s caveat that it applies only to coercive interventions in the market. (emphasis added)
That monopoly of demand for factors is a counterpart of monopoly of supply for its product implies a downward pressure on factor prices in the monopolized sector, as we will see. Second, when a monopolist takes advantage of an inelastic demand for the good it sells, this implies lower spending from its buyers on other goods (Rothbard 2004, pp. 280–88) and a downward pressure on prices for their factors. Overall, the pressure on factor prices coming from inside and outside of the monopolized sector should therefore be downward. Let us go back then to the monopoly price theory as held by Rothbard and elaborate its mirror-image in the markets for factors of production with the help of theses two insights. The first sheds some light on the “microeconomic” picture of the monopolized sector, the second on the “macroeconomic” picture with all sectors considered.
The Microeconomic Picture:
Focus on the Monopolized Sector
In the free market world, original factors earn their full discounted marginal productivity (DMVP) when entrepreneurs make no mistakes. They earn more or less than their DMVP when entrepreneurs make erroneous forecasts, more or less depending on how “overpriced” or “underpriced” factors are. In any case, they command a free market price resulting from peaceful association. What happens when a grant of privilege to an entrepreneur-capitalist (or group of capitalists) is introduced? In a position to profit from a coercion-distorted demand schedule for his (or their) product, he (or they) will require and want fewer units of divisible factors than the total amount hired under free market conditions. Entrepreneurs who would otherwise rent the other units in this industry are not allowed to do so and they will have to go elsewhere. So what about the price of the remaining units of a divisible factor?
Granted, since the monopolists will employ fewer units, the discounted marginal value productivity of the factor will accordingly be higher in this use. The remaining units could then be employed profitably at an even higher price than the free market price. But the monopolist is certainly able to pay less than his maximum buying price for the restricted quantity of factors. Would he still have to pay the free market price? Each remaining unit of these lower supplies would be rented at the free market price if the supply schedules for these factors in this use were purely elastic and were not shifting. But they can only be purely elastic if they are non-specific to this process and if we are in the neoclassical land of “pure and perfect competition.”
But as Rothbard (2004, p. 721) explained in regard to the elasticity of demand for the products of a seller, the total supply offered to the market is the addition of each seller’s contribution. As a consequence, a seller adding to the supply, even a very small quantity, implies that the new total cannot be sold at the same price but at a lower price because of the law of marginal utility. There is no question that an individual firm could push or restrict its production without any impact on its price. The pure and perfect competition situation is not even a possibility among several cases. It is strictly impossible. No demand for the product of an individual seller can ever be perfectly elastic. The same goes for the supply of factors as well.See Rothbard (2004, p. 718). Supply schedules are subject to the law of marginal utility too. Therefore no individual or market supply schedule can ever be perfectly elastic.
Since the supply of factors in each of their uses will necessarily be less than purely elastic, the monopolist may be able to pay the factors he uses at a lower price than the free market price in the absence of entrepreneurs who could otherwise bid them away in this industry up to the free market level.One could object, with Fritz Machlup, (1967, p. 40) to the idea of monopoly of supply for products implying monopoly of demand or “monopsony” for their factors that someone might be the sole seller of a good and be one among many buyers of the factors required in its production. However, Machlup’s stricture that “there is nothing in the logic of things or in the reality of economic conditions that necessarily makes a monopolist also a monopsonist” would not follow. Machlup’s point is explicitly dependent on the neo-classical framework of “pure and perfect competition.” Starting from there, imperfect competition in the product’s market can conceivably be introduced while pure and perfect competition would still prevail in the factors’ markets. Being a monopolist in the market for the product would not alter one’s position as a “price-taker” as far as factor prices are concerned. However, once we recognize with Rothbard that pure and perfect competition and the “logic of things” are incompatible—in other words, that pure and perfect competition cannot exist and that there can never be any pure price-taker in the real world—the idea of an independence of a capitalist’s position as a seller and his position as a buyer vanishes. Furthermore, even in the neo-classical framework, the situation is not as clear as Machlup suggests. Since the monopolist’s demand for a factor is supposed to diminish, the total demand for the factor is lowered and its market price lowered as the new total demand meets the total supply schedule at a lower price. Then each firm competing for the use of this factor in different uses must still face a perfectly elastic supply schedule but this schedule has shifted. See on this Bellante and Jackson (1983, p. 189)., Saying that the restriction on buying allows the price to fall does not imply that this lower price is a monopoly or “monopsony” price. In the market for the product, price could rise because of a restriction on sales (a “monopoly” according to Lord Coke’s definition above) without the new price being a monopoly price. Prohibition of imports in a certain area for example could bring about such an outcome, not because sellers would then be able to find an agreement and exploit an inelastic market demand but because some efficient firms would have been excluded and only “high-costs” firms would remain. We would not call such a higher price a monopoly price. In other words, even if monopoly has an impact on price, be it a monopoly of supply or demand, monopoly is not sufficient for a monopoly/monopsony price to emerge. And the monopolist can pay them less because there is nothing implied in the monopolistic pattern of actions we analyze that would make entrepreneurs bid away these factors in other industries (that would shift factors’ supply schedules in the monopolized sector in a way that counteracts the downward pressure). No tendency involved can trigger a higher demand for the factor in non-restricted industriesThis is not strictly correct. As we will see below, in some unlikely cases, the monopolist will not be able to pay lower prices for factors he uses. that would counteract the downward pressure in the monopolized sector, as we will see detailed below.In the case of a “monopoly price” reached without an inelastic demand, this would of course not be true anymore and one would find here a result similar to what happens in the case of the maximum price control, except that the higher demands triggered in other sectors would not be high enough to entirely counteract the downward pressure. See below why this must be the case.
In other words, the monopoly gain of the holder of privilege does not only come from the consumers but also from the factors he employs, including capital goods. However, capitalists’ net returns in earlier stages of production do not have to decrease. As with a sales tax shifted backward (Rothbard 2004, pp. 1156–62), the burden must be borne by original factors to the extent that lower prices for capital goods were anticipated by the capitalists who invested in their production. The lower prices for capital goods will translate into lower demands and prices for original factors involved in their production and the margins could stay the same. Lower prices for capital goods are imputed backward to original factors of production, land and labor factors.[24]For this reason, from now on, we will focus exclusively on original factors’ prices. However, one must keep in mind that to the extent that lower prices for capital goods were not anticipated by the capitalists who invested in their production, original factors do not suffer. Their employers make losses instead, at least in the “short run,” a short run that may conceivably last for years, until they are entirely imputed backward to the original factors. On the other hand, the shift is immediate and complete when no one errs in anticipating the prices for capital goods.
This should not be surprising. As previously noted, for example by Salin (1996, pp. 152–55), taxation and regulation are to a large extent equivalent. At the very least, both imply uninvited border crossing on some people’s peacefully obtained properties. As a consequence, the same set of disincentives to acquire them through production and voluntary exchange must come into play, hence the lower demands for factors required in their production. As with taxes, monopolistic grants of privilege make entrance into the market more costly than otherwise and excluded investors retire from the bidding process on factors that they do not rent anymore on the margin.
The Macroeconomic Picture:
All Sectors and Degrees of Specificity of Factors Considered
Now it is true that the effect on factor prices employed in the monopolized sector may be spectacular or almost insignificant depending on their degree of specificity. And as we have already hinted, the demand schedules for substitutes to the monopolized goods and the demand for their factors will be altered. Therefore, the pricing of factors used in both the production of these substitutes and the monopolized industry will accordingly be affected. And even the pricing of factors that have nothing to do with the production of the monopolized good will be altered somehow. To expand on our analysis and get the complete macroeconomic picture, let’s consider a hypothetical scenario where each possible case is covered and considered in turn. Say that A is the monopolized product. Their producers face an inelastic demand above its free market price.
First, the fate of factor 1 engaged in the production of A is clear. Factor 1 is purely specific to the production of A. Some units of it that would be employed in the free market will remain idle in this world since they have nowhere else to go. The other units will be paid at a somewhat lower price, depending on how high the reservation demand is, but lower in any case than the free market price. By definition of its specificity, the reservation demand has nothing to do with what units of this factor could earn elsewhere since they cannot be employed elsewhere. The price will then generally be lower than if it were non-specific. There may even be a bargaining situation between the monopolist and the most eager seller if the net revenue-maximizing level of production requires so few units of this factor that only one seller could make a deal with the buyer. In the most extreme conceivable case, the factor is made artificially superabundant and commands no price at all. For example, one can think of an existing large supply of diamond mines. Suppose that they are normally scarce relative to needs. As a consequence, they command a price on the free market. With a monopoly in the sale of the finished product, the optimal level of production for the monopolist could be low enough that there would always be a diamond mine available for free somewhere. This would bar anybody from trying to sell the use of a similar mine to him. Then diamond mines would no longer be scarce.I am indebted to Joseph Salerno for this point.
Second, factor 2 is not specific to the production of A. It can be employed in the production of good B. Accordingly, its reservation demand in use A will reflect this. Under monopoly in sector A, more units will go into use B than under free market conditions. Their supply is then higher in this industry and their price everywhere is then lower. However, this is not all that can be said regarding factor 2. Rothbard’s discussion on the interdependence of prices for consumers’ goods comes into play. The higher spending on the monopolized good (compared to its free market level) implies lower spending elsewhere.We assume here that overall consumption stays the same. The only thing that is different between the two situations compared is free entry or hampered entry in producing and selling good A. No preferences need to be different and accordingly, neither the ratio of consumption vs. investment spending nor the relation between the money supply and the money demand need to be affected, at least to begin with. Demand schedules for goods other than A will in general tend to shift toward a lower level. Suppose that the demand for B is lower. The DMVP schedule of factor 2 in this use as well as its general DMVP will be lower than on the free market. Accordingly, the downward pressure on its price is reinforced compared to the situation where factor 2 would simply have to suffer its exclusion from the production of A, while the monopolist may obtain a higher monopoly gain than otherwise.It should be noticed that the downward pressure in sector B translates into a higher factor supply schedule in sector A. Actually, it should be clear that in both sectors, the restrictive pressure pushes away the factor so that there might not be a transfer of units from A to B but from A and B to nowhere, unemployment that is. This is accounted for in the forward sloping nature of the general supply schedule of the factor for all its uses., However, if every future development were anticipated from the start, only the first owner of the grant would benefit since the monopoly gains would be capitalized into the price of the company’s shares afterward. We then see that the non-specificity of a factor does not necessarily mitigate the impact of monopoly on its price. In this case, it amounts to a double burden.
Owners of factor 3 will only suffer a single burden because like factor 2, it is nonspecific to the production of A but cannot be employed in industry B which suffers a lower demand for its product. It is employed in the production of good C for which the demand schedule stays the same.
Factor 4 is employed in industry C too but cannot be employed in A or anywhere where the demands for the products are lower. And it is a complementary good to factor 3 in this process. Then since production is higher than in the free market here because of the extra use of factor 3 displaced from A, its demand and price may be somewhat higher.
Owners of factor 5 will suffer though it is not employed in the production of A. It is employed in the production of B or in whatever production of goods for which the demand is lower than in the free market. As a consequence, its DMVP there and in general are lower than in the free market. No employer is able to directly extract a monopoly rent from its use however.
Factor 6 will neither suffer nor benefit. Wherever its DMVP becomes lower, a higher demand in another use guarantees that the general DMVP schedule and the price stay the same than in the free market.
The owners of factor 7 are lucky. It is employed in industry E that sees its demand increased. It is either specific to this sector or it is not, but if not, its higher DMVP schedule here more than compensates for the lower maximum buying prices in other sectors where it could be employed. Its general DMVP schedule is then higher and it receives a higher price than in the free market. How could the demand for a product increase, especially since we established that the general trend is for demands for substitutes to A to decrease and that all goods but A, strictly speaking, are substitutes for A? There are two possibilities. First, one must realize that some people may have elastic demand schedules for the monopolized product above the free market price.I am indebted to G.P. Manish for bringing my attention to this insight. The market demand for the monopolized good is the sum of its components, the individual demand schedules. That the market demand would be inelastic above the free market price does not require that each and every individual schedule should be. These people will spend more outside of the monopolized sector and may conceivably make some market demand schedules in other sectors higher. Second, the monopolist too spends, not only part of what he earns as a capitalist, but also its monopoly gain.I am indebted to Philipp Bagus for bringing to my attention this consideration. If his additional demands for different goods come as a substitute to the lower demands for these goods by the buyers of his product and the factor owners who have a lower income to spend as a consequence of the monopolist’s actions, then no higher market demand will appear. But since people from each side of the distribution effect may have different preferences regarding the composition of their spending, the monopolist as an income spender can conceivably push the demand up for one or several goods. Therefore, some factors employed there can gain from it, while demand schedules in other sectors will be lower.Again, we assume here that the overall proportion of consumption in total spending is not affected.
The owners of factor 8 are very fortunate. They are a possible—almost miraculous—anomaly and are represented here just for the sake of completeness. The price of factor 8 is not reduced in the monopoly situation and the monopolist cannot extract from them a monopoly gain though he uses the factor. The reason is the following. It is not specific to the production of A but can be employed in the production of good E, the demand for which is higher than in the free market because of the monopolist or the people who have elastic demand schedules for the monopolized good above its free market price. Its DMVP there, and its general DMVP schedule as well, then compensates for the downward pressure related to the monopolist’s restriction. He rents fewer units of them and earns his monopoly gain from the consumers and other factors, but these units of factor 8 are employed at the free market price because of the additional spending on goods E that they produce. Conceivably, in an even more extreme case, factor 8 could even command a higher price than in the free market if its DMVP schedule in the expanded industry were even higher (e.g., because the monopolist spends all his monopoly income there), and if the monopolist would still have an incentive to pay him such a high price. He would have the incentive if this higher price were more than compensated by some sharp reduction in his expenses on other factors (e.g., if many of them are purely specific and without reservation demand).
The table below recapitulates for each and every factor with the “+”, “-” and “0” signs when factors’ DMVP schedules and prices are higher, lower or the same under monopoly than under free market conditions.
Table 1
To summarize, the mirror image in original factors’ markets of a monopoly price for a product with an inelastic demand schedule above the free market price is the following. Some factors will command lower prices for their services than in the free market if
-
they are specific to the monopolized industry
-
their general DMVP schedule is lower as a result of the overall lower position of demand schedules for the goods they help to produce
-
their general DMVP schedule is unchanged, but the factor is under monopolistic pressure.One must realize, as shown in the table above with factor 1 and factor 3 that a lower general DMVP schedule is not necessary to have a lower price. In the monopolized sector, the DMVP schedule for the factor—the maximum buying prices schedule for each hypothetical quantity that is—remains unaffected. The point is, absent competition, the capitalist does not have to pay his maximum buying price for the marginal unit. Conceivably, price could be lower even with a higher DMVP schedule provided it is not high enough to compensate for the downward pressure coming from the monopolized sector.
Some factors will command their free market prices if a downward pressure in some sectors is paralleled by an upward pressure somewhere else. Finally, some factors may command higher prices thanks to the monopolist’s additional spending, thanks to additional spending of buyers who have an elastic demand schedule for the monopolized good, or if they are complementary to displaced factors in industries consequently expanding.
The Macroeconomic Picture:
Aggregate Impact on Original Factors’ Incomes and Prices
Since some factors may command a higher price for their services while others will command the same or lower prices, it would then seem there is no systematic impact of monopoly on original factors’ prices. As in any usual other case of intervention covered by Mises and Rothbard, some laborers and landowners lose while others win. However, such a conclusion would overlook decisive facts. First, it should be clear that most cases above of higher prices, though conceivable, require some empirically heroic hypothesis. Second, there can hardly be any doubt about the aggregate impact on factor prices. We know that net income in the economy over a period of time equals consumption spending for this period.See Rothbard (2004) for discussions of these aggregates and the description of the structure of production, in particular chaps. 5, 6 and 8 of Man, Economy, and State. Given time preferences and unchanged demand and supply schedules for money, aggregate consumption spending stays the same. But then, for the monopolist to gain additional monetary revenue compared to what he would earn on the free market, other incomes have to be curtailed in the same process of production and/or elsewhere.
As we have seen, the originary interest rate and investment spending do not need to be altered.Admittedly, they could be altered because of the redistribution implied. The beneficiaries may be more or less present-oriented than the losers. But since no systematic impact can be predicted in either way, we assume that this remains unchanged to concentrate on consequences that can be unambiguously displayed. We assume that the altered pattern of spending on investment and consumption by the monopolist is counterbalanced by a symmetric alteration in the spending pattern of the losers so that aggregate consumption and investment, as well as the originary interest rate, are the same in both worlds. And in any case, even if interest is changed, factors’ incomes are still reduced compared to what they would be with an identical change in intertemporal spending that would have occurred for other reasons than monopolistic restrictions. Therefore interest income is not altered and land and labor factors must bear the brunt. Though some of them may gain in the process, aggregate land and labor income must be reduced as a counterpart to the existence of a monopoly gain somewhere. And since the stock of labor and land factors are the same, this implies an overall tendency toward lower prices for these factors.Actually, this is true even in the case of a monopoly price reached with an elastic demand schedule above the free market price. Granted, the tendency will not be as obvious because higher demands in other sectors will trigger higher factor prices there. But they cannot rise enough to cancel a fall in aggregate land and labor income because it remains true that if a monopoly gain emerges somewhere, aggregate land and labor income have to fall, with a given net social income., Another related consequence is the following. Insofar as some units of factors will leave production as they become submarginal, overall physical production will be reduced and individuals will have to suffer such an impact as consumers. This is again an illustration of equivalence between taxation and regulation. As taxes reduce the owners of factors’ incentives to put them into productive use for a market or to get them in the first place, production for the market is reduced and a mutually beneficial division of labor between members of society is forced out of existence. Taxation and monopolistic grants of privilege ultimately carry the same destructive power.
General Impact on Labor Factors As Compared to Land Factors
Finally, it is important to stress that the downward pressure on the original factors’ prices is distributed throughout the economy and not limited to what happens in the monopolized sector since, as we have seen, one must take into account the interrelations between markets involved in the monopoly pattern of action. It may even be more widespread for labor factors than for land. Empirically, human beings embody the capacity of selling their services as different labor factors, of different quantities and qualities depending on the abilities of each. As Rothbard showed, such an empirical fact implies a particular connection between all labor markets:
Labor, though hardly homogeneous, is a peculiarly nonspecific factor. Therefore, higher wage rates for one set of factors will tend to stimulate other laborers to train themselves or bestir themselves to enter this particular “market.” Since skills differ, this does not mean that all wages will be equalized. It does mean, however, that general supply curves for a labor factor will also be forward sloping.” (Rothbard 2004, p. 573, emphasis in the original)
Because of this connection and taking due account of substitution effects between factors, the downward pressure on labor prices implied in the monopolist policy framework, though consequently mitigated,The higher the elasticity of the supply curves, the less room there is for the employer to lower the price paid. Most economists would put it this way: in the “long run,” supply curves are more elastic than in the “short run,” so that the monopoly gain extracted from each unit of the factor is lower. will be even more widespread in the economy than we have suggested it to be.
CONCLUSIONThe aim of this paper was to show that and explain how grants of monopolistic privileges to capitalists can lower labor and land factors’ prices compared to what would prevail in a free market environment. We explain how monopoly gains of privileged business owners are not only “extracted” from their clients but also from factor owners. In so doing, we revisit Rothbardian monopoly price theory and extend it to the realm of factor pricing to obtain a more integrated understanding of monopoly theory. Monopolistic grants to capitalists make for market situations where both monopoly of demand for factors and monopoly of supply for their product are present and inextricably intertwined. As a consequence, we conclude that monopoly price for a product implies lower prices for its factors. Combined with established considerations regarding inelasticity of demand for the monopolized product, its impact on markets for substitutes and the interdependence of factor markets (in particular labor markets), we show how grants of privileges to capitalists can trigger an overall downward pressure on original factor prices.
The implications might be numerous and point out toward further researches in pure theory and history. First, it is clear that the widespread impact of monopoly would barely be existent if we only had a small monopoly island in the middle of a free market ocean. More privileges granted to capitalists in different sectors imply a greater tendency for monopoly prices to prevail and a more drastic downward pressure on factor prices. But how far can it go? Undoubtedly, the whole array of prices could not become a monopoly price structure. As Mises explains, under a system of all-around monopolistic privileges (under corporativism or the guild system), there is nothing left of a market economy. There are no prices in the catallactic sense. Therefore, there are neither free market prices (obviously) nor monopoly prices in such a world.See Mises (1998a, p. 816). But some questions remain: how far can the monopoly price scheme and the related downward pressure on factor prices conceivably be pushed before we enter the world of corporativism? And can we establish in more detail what fate is reserved for original factors beyond this limit and under corporativism or socialism?
Second, our study should make clear that insofar as Austrian criticisms of the Marxist theory of surplus value are correct, it does not follow that one should throw out the “exploitation of labor” baby with the Marxist bathwater.See Marx (1969), Marx (1990, chap. 1) and Austrian answers in Böhm-Bawerk (1959, chap. XII) and Hoppe (2006, p. 122). Under monopoly, land and especially labor can indeed be “exploited” in the sense that they can be paid under their free market level as a consequence of coercion. They can be “underpaid” either because their employers are able to underbid factors below their discounted marginal productivity levelFactors could be paid under their DMVP in a free market but this would be the consequence of entrepreneurial errors. The point here is that even without such errors, factors would not get their full DMVP under monopoly. and/or because their marginal productivity schedules are lowered as a by-product of coercion, as we have seen above. The corresponding redistribution in favor of some capitalists implies in turn a relative “proletarianization” of some workers. These are all the laborers whose lower wages are not compensated by higher incomes coming from some investments in the privileged sectors, either because their monopoly gains are not high enough, because they have no money invested in these sectors, because the gains have already been capitalized before they came, or because they are not investors at all (usually the lowest-paid workers). With a lower total monetary income, they are less likely to present themselves as investors on the time market and the distribution of catallactic functions among people tends to become more rigid. These insights may provide for a “missing link” in previous Austrian-informed political economy essays such as Hoppe (2006) and Grinder & Hagel III (1977), which intended, among other things, to outline a general theory of who benefits and who suffers from “State Capitalism.”
Third, a thorough analysis of interactions between these monopolistic grants and other interventions in the market that may conceivably compound their effects or counteract each other to some extent would be required. Finally, based on such a big theoretical picture, one would then be able to make an empirical assessment of how far monopoly and exploitation of original factors went in the real world, past and present, here, there and everywhere.
Volume 7, No.1 (Spring 2004)Using Mises’s concept of economic calculation, this paper explains why conglomerates are frequently observed in emerging economies across the world. It also addresses the issue of why conglomerates take the form of either the multidivisional diversified single firm or the diversified business group.
Quarterly Journal of Austrian Economics, Volume 5, No. 3 (Fall 2002)[This is a translation from German of F.A. Hayek’s “Der Wettbewerb als Entdeckungsverfahren,” a 1968 lecture sponsored by the Institut für Weltwirtschaft at the University of Kiel. Translated by Marcellus S. Snow.]
I.It would not be easy to defend macroeconomists against the charge that for 40 or 50 years they have investigated competition primarily under assumptions which, if they were actually true, would make competition completely useless and uninteresting. If anyone actually knew everything that economic theory designated as “data,” competition would indeed be a highly wasteful method of securing adjustment to these facts. Hence it is also not surprising that some authors have concluded that we can either completely renounce the market, or that its outcomes are to be considered at most a first step toward creating a social product that we can then manipulate, correct, or redistribute in any way we please. Others, who apparently have taken their notion of competition exclusively from modern textbooks, have concluded that such competition does not exist at all.
By contrast, it is useful to recall that wherever we make use of competition, this can only be justified by our not knowing the essential circumstances that determine the behavior of the competitors. In sporting events, examinations, the awarding of government contracts, or the bestowal of prizes for poems, not to mention science, it would be patently absurd to sponsor a contest if we knew in advance who the winner would be. Therefore, as the title of this lecture suggests, I wish now to consider competition systematically as a procedure for discovering facts which, if the procedure did not exist, would remain unknown or at least would not be used.
It might at first appear so obvious that competition always involves such a discovery procedure that this is hardly worth emphasizing. When this is explicitly underscored, however, conclusions are immediately obtained that are in no way so obvious. The first is that competition is important only because and insofar as its outcomes are unpredictable and on the whole different from those that anyone would have been able to consciously strive for; and that its salutary effects must manifest themselves by frustrating certain intentions and disappointing certain expectations.
The second conclusion, closely associated with the first, is methodological in nature. It is of particular interest in that it has reference to the principal reason why, during the last 20 or 30 years, microeconomic theory—the analysis of the fine details of the economy’s structure which alone can teach us to understand the role of competition—has lost so much of its reputation, and indeed as a result appears not at all to be understood anymore by those calling themselves economic theorists. For this reason I would like to begin here with a few words about the methodological particularity of every theory of competition that makes the conclusions drawn from it appear suspicious to all those who habitually decide, on the basis of an excessively simplified criterion, what they are prepared to recognize as scientific.
The only reason we use competition at all has as its necessary consequence the fact that the validity of the theory of competition can never be empirically verified for those cases in which it is of interest. It is of course possible to verify the theory on preconceived theoretical models; and in principle we could also conceivably verify the theory in artificially created situations in which all the facts that competition is to discover are known to the observer in advance. In such a situation, however, the outcome of the experiment would be of little interest, and it would probably not be worth the cost of conducting it. When, however, we do not know in advance the facts we wish to discover with the help of competition, we are also unable to determine how effectively competition leads to the discovery of all the relevant circumstances that could have been discovered. All that can be empirically verified is that societies making use of competition for this purpose realize this outcome to a greater extent than do others—a question which, it seems to me, the history of civilization answers emphatically in the affirmative.
The curious fact that the merits of competition cannot be empirically verified in precisely those cases in which it is of interest is also shared by the discovery procedures of science in general. The advantages of established scientific procedures cannot themselves be scientifically demonstrated; they are recognized only because they have actually provided better results than alternative procedures.See the interesting discussion of these problems in M. Polyani, The Logic of Liberty (London, 1951), in which the author is led from a study of the methods of scientific research to that of economic competition. See also K.R. Popper, Logik der Forschung, 2d. ed. (Tübingen, 1966), p. 16.
The difference between economic competition and the successful procedure of science is that the former exhibits a method of discovering particular temporary circumstances, while science seeks to discover something often known as “general facts,” i.e., regularities in events, and is concerned with unique, particular facts only to the extent that they tend to refute or confirm its theories. Since this is a matter of general and permanent features of our world, scientific discoveries have ample time to demonstrate their value, whereas the usefulness of particular circumstances disclosed by economic competition is to a considerable extent transitory. It would be as easy to discredit the theory of scientific method by noting that it does not lead to verifiable predictions regarding what science will discover, as it has been to discredit the theory of the market by noting that it does not lead to predictions about particular outcomes of the market process. By the nature of things, however, the theory of the market is unable to accomplish this in all those cases in which it is reasonable to make use of competition. As we shall see, the predictive power of this theory is necessarily constrained to a prediction of the type of structure or abstract order that will result; it does not, however, extend to a prediction of particular events.See my essay “The Theory of Complex Phenomena” in The Critical Approach in Science and Philosophy, M. Bunge, ed. (London and New York, 1964). Reprinted in my Studies in Philosophy, Politics, and Economics (Chicago and London, 1967).
II.Although this will lead me even further from my main topic, I should like to add a few words about the consequences of the disappointment in microeconomic theory caused by using fallacious methodological criteria of scientism. Most of all, this disappointment was probably the major reason why a great number of economists rejected it in favor of so-called macroeconomic theory, which, since it aims to predict concrete events, appears to correspond better with the criteria of scientism. In reality, however, it seems to me much less scientific—indeed, in the strictest sense, it can make no claim to the name of a theoretical science.
The basis for this point of view is the conviction that the coarse structure of the economy can exhibit no regularities that are not results of the fine structure, and that those aggregates or mean values, which alone can be grasped statistically, give us no information about what takes place in the fine structure. The notion that we must formulate our theories so that they can be immediately applied to observable statistical or other measurable quantities seems to me to be a methodological error which, had the natural sciences followed it, would have greatly obstructed their progress. All we can require of theories is that, after an input of relevant data, conclusions can be derived from them that can be checked against reality. The fact that these concrete data are so diverse and complex in our area of inquiry that we can never take them all into account is an unchangeable fact, but not a shortcoming of the theory. A result of this fact is that we can derive from our theories only very general statements, or “pattern predictions,” as I have called them elsewhere;See my above-cited essay, “The Theory of Complex Phenomena.” we cannot, however, derive any specific predictions of individual events from them. Certainly, however, this does not justify insisting that we derive unambiguous relationships among the immediately observable variables, or that this is the only way of obtaining scientific knowledge—particularly not if we know that, in that obscure image of reality we call statistics, in aggregates and averages we unavoidably summarize many things whose causal meaning is very diverse. It is a false epistemological principle to adapt the theory to the available information, so that the observed variables appear directly in the theory.
Statistical variables such as national income, investment, price levels, and production are variables that play no role in the process of their determination itself. We might be able to notice certain regularities (“empirical laws” in the specific sense in which Carl Menger contrasted them to theoretical laws) in the observed behavior of these variables. Often these regularities apply, but sometimes they do not. Yet using the means of macrotheory, we can never formulate the conditions under which they apply.
This should not mean that I regard so-called macrotheory as completely useless. About many important conditions we have only statistical information rather than data regarding changes in the fine structure. Macrotheory then often affords approximate values or, probably, predictions that we are unable to obtain in any other way. It might often be worthwhile, for example, to base our reasoning on the assumption that an increase of aggregate demand will in general lead to a greater increase in investment, although we know that under certain circumstances the opposite will be the case. These theorems of macrotheory are certainly valuable as rules of thumb for generating predictions in the presence of insufficient information. But they are not only not more scientific than is microtheory; in a strict sense they do not have the character of scientific theories at all.
In this regard I must confess that I still sympathize more with the views of the young Schumpeter than with those of the elder, the latter being responsible to so great an extent for the rise of macrotheory. Exactly 60 years ago, in his brilliant first publication,J. Schumpeter, Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie (Leipzig, 1908), p. 97. a few pages after having introduced the concept of “methodological individualism” to designate the method of economic theory, he wrote:
If one erects the edifice of our theory uninfluenced by prejudices and outside demands, one does not encounter these concepts [namely “national income,” “national wealth,” “social capital”] at all. Thus we will not be further concerned with them. If we wanted to do so, however, we would see how greatly they are afflicted with obscurities and difficulties, and how closely they are associated with numerous false notions, without yielding a single truly valuable theorem.
III.Returning now to my actual topic after having shared my concerns with you on this matter, I should like to begin with the observation that market theory often prevents access to a true understanding of competition by proceeding from the assumption of a “given” quantity of scarce goods. Which goods are scarce, however, or which things are goods, or how scarce or valuable they are, is precisely one of the conditions that competition should discover: in each case it is the preliminary outcomes of the market process that inform individuals where it is worthwhile to search. Utilizing the widely diffused knowledge in a society with an advanced division of labor cannot be based on the condition that individuals know all the concrete uses that can be made of the objects in their environment. Their attention will be directed by the prices the market offers for various goods and services. This means, among other things, that each individual’s particular combination of skills and abilities—which in many regards is always unique—will not only (and not even primarily) be skills that the person in question can recite in detail or report to a government agency. Rather, the knowledge of which I am speaking consists to a great extent of the ability to detect certain conditions—an ability that individuals can use effectively only when the market tells them what kinds of goods and services are demanded, and how urgently.
This suggestion must suffice here to clarify the kind of knowledge I am speaking of when I call competition a discovery procedure. Much more would have to be added if I wanted to formulate this outline so concretely that the meaning of this process emerged clearly. What I have said, however, should be sufficient to point out the absurdity of the conventional approach proceeding from a state in which all essential conditions are assumed to be known—a state that theory curiously designates as perfect competition, even though the opportunity for the activity we call competition no longer exists. Indeed, it is assumed that such activity has already performed its function. Nonetheless, I must now turn to another question about which even more confusion still exists, namely the meaning of the claim that the market spontaneously adjusts the plans of individuals to the facts thus discovered; in other words, the question of the purpose for which the information thus discovered is used.
The confusion that prevails here can be ascribed above all to the false idea that the order which the market brings about can be regarded as an economy in the strict sense of the word, and that the outcome must therefore be judged according to criteria that in reality are appropriate only for such an individual economy. But these criteria, which hold for a true economy in which all effort is directed toward a uniform order of objectives, are to an extent completely irrelevant for the complex structure consisting of the many individual economies that we unfortunately designate with the same word “economy.” An economy in the strong sense of the word is an organization or an arrangement in which someone consciously uses means in the service of a uniform hierarchy of ends. The spontaneous order brought about by the market is something entirely different. But the fact that this market order does not in many ways behave like an economy in the proper sense of the word—in particular, the fact that it does not in general ensure that what most people regard as more important ends are always satisfied before less important ones—is one of the major reasons people rebel against it. It can be said, indeed, that all socialism has no other aim than to transform catallaxy (as I am pleased to call market order, to avoid using the expression “economy”) into a true economy in which a uniform scale of values determines which needs are satisfied and which are not.
This widely shared wish raises two problems, though. First, as far as the management decisions of a genuine economy or of any other organization are concerned, it is only the knowledge of the organizers or managers alone that can have any impact. Second, all members of such a genuine economy—conceived of as a consciously managed organization—must serve the uniform hierarchy of objectives in all their actions. Contrast this with the two advantages of a spontaneous market order or catallaxy: it can use the knowledge of all participants, and the objectives it serves are the particular objectives of all its participants in all their diversity and polarity.
The fact that catallaxy serves no uniform system of objectives gives rise to all the familiar difficulties that disturb not only socialists, but all economists endeavoring to evaluate the performance of the market order. For if the market order does not serve a particular rank ordering of objectives, and indeed if, like any spontaneously created order, it cannot legitimately be said to have definite objectives, neither is it then possible to represent the value of its outcome as a sum of individual outputs. What do we mean, then, when we claim that the market order in some sense produces a maximum or an optimum?
The point of departure for an answer must be the insight that, although the spontaneous order was not created for any particular individual objective, and in this sense cannot be said to serve a particular concrete objective, it can nonetheless contribute to the realization of a number of individual objectives which no one knows in their totality. Rational, successful action by an individual is possible only in a world that is to some extent orderly; and it obviously makes sense to try to create conditions under which any randomly selected individual has prospects of pursuing his goals as effectively as possible, even if we cannot predict which particular individuals will benefit thereby and which will not. As we have seen, the results of a discovery procedure are necessarily unpredictable, and all we can expect by employing an appropriate discovery procedure is that it will increase the prospects of unspecified persons, but not the prospects of any particular outcome for any particular persons. The only common objective we can pursue in choosing this technique for the ordering of social reality is the abstract structure or order that will be created as a consequence.
IV.We are accustomed to calling the order brought about by competition an equilibrium—a none-too-felicitous expression, since a true equilibrium presupposes that the relevant facts have already been discovered and that the process of competition has thus come to an end. The concept of order, which I prefer to that of equilibrium, at least in discussions of economic policy, has the advantage of allowing us to speak meaningfully about the fact that order can be realized to a greater or lesser degree, and that order can also be preserved as things change. Whereas an equilibrium never really exists, one can nonetheless justifiably claim that the kind of order of which the “equilibrium” of theory represents a sort of ideal type is realized to a great extent.
This order manifests itself first of all by virtue of the fact that the expectations of particular transactions with other persons, upon which the plans of all the economy’s participants are based, are to a considerable extent realized. This mutual adjustment of individual plans is brought about by a process that we have learned to call negative feedback ever since the natural sciences have also begun to concern themselves with spontaneous orders or “self-organizing systems.” Indeed, as even well-informed biologists are now aware,
long before Claude Bernard, Clark Maxwell, Walter B. Cannon or Norbert Wiener developed cybernetics, Adam Smith perceived the idea just as clearly in his Wealth of Nations. The “invisible hand” that regulates prices appears to express this idea. Smith says in essence that in a free market, prices are determined by negative feedback.G. Hardin, Nature and Man’s Fate (New York and London, 1959). Mentor Edition, 1961, p. 54.
It is precisely through the disappointment of expectations that a high degree of agreement of expectations is brought about. This fact, as we shall see later, is of fundamental importance in understanding the functioning of the market order. But the market’s accomplishments are not exhausted in bringing about a mutual adjustment of individual plans. It also provides that every product is produced by those who can produce it more cheaply (or at least as cheaply) as anyone who does not in fact produce it, and that goods are sold at prices that are lower than those at which anyone could offer the goods who does not offer them. This does not of course prevent some people from extracting large profits above their costs, as long as these costs are considerably lower than those of the next best potential producer of the good. It means, however, that of the combination of different goods that is actually being produced, as much is produced as we can manufacture by any method that is known to us. That is of course not as much as we could produce if in fact all the knowledge that anyone possessed or could acquire were available at a central point and from there could be entered into a computer. The cost of the discovery procedure that we use is considerable. But it is unfair to judge the performance of the market in a certain sense “from the top down,” namely by comparing it with an ideal standard that we are unable to attain in any known way. If we judge the market’s performance “from the bottom up” (which seems to be the only permissible way), i.e., by comparison with what we could attain by means of any other method available to us, and in particular by comparison with what would be produced if competition were prevented—for example, if a good could be produced only by those the authorities allowed to do so—the market’s performance must be judged as most considerable. We need only recall how difficult it is in an economy with effective competition to discover ways of providing consumers with better or cheaper goods than is presently the case. If, for a moment, we believe we have discovered such unrealized opportunities, we generally find that government authority or a highly undesirable exercise of private power have hitherto prevented their exploitation.
Of course, we must also not forget that the market can provide no more than an approximation of any point on the n-dimensional surface by which pure theory describes the range of possibilities that could conceivably be attained in the production of any combination of goods and services; but the market allows the particular combination of various goods and their distribution among individuals to be decided essentially by unforeseeable circumstances and in this sense by chance. As Adam Smith realized,See A. Smith, Theorie der ethischen Gefühle, W. Eckstein, trans. (Leipzig,, 1926), vol. 2, pp. 396, 467. the situation is somewhat like agreeing to play a game based partly on skill and partly on luck. The rules of the game ensure that at the price such that each individual’s share is left more or less to chance, the real equivalent of each individual’s share, depending partly on chance, becomes as large as possible. In modern terminology we can say that we are playing a non-zero-sum game whose rules have the objective of increasing the payoff but leave the share of the individuals partly to chance. A mind endowed with full information could of course choose every point on the n-dimensional surface that appeared desirable to him and then distribute as he saw fit the product of the combination he chose. But the only point on (or at least somewhere near) that surface we can reach using a procedure known to us is the one we reach when we leave its determination up to the market. The so-called “maximum” we achieve in this manner cannot of course be defined as a sum of certain quantities of goods, but only by the opportunity it affords unspecified persons to receive as large an equivalent as possible for a share determined partly by chance. The fact that this outcome cannot be evaluated on the basis of a uniform value scale of desired concrete objectives is one of the main reasons it seems so misleading to me to consider the outcome of the market order or catallaxy as if it had anything to do with an economy in the proper sense.
V.The consequences of this erroneous interpretation of the market order as an economy whose task is to satisfy the various needs according to a given rank ordering are reflected in political efforts to correct prices and income in the service of so-called “social justice.” Notwithstanding the various meanings with which social philosophers attempted to invest this concept, in practice it has had virtually only one: protecting some groups of people from having to descend from the absolute or relative lifestyle they have heretofore enjoyed. Yet this is a principle that cannot be implemented in general without destroying the foundations of the market order. Not only continuous growth, but under certain circumstances even the preservation of the average income level attained depends on processes of adjustment that require a change not only of the relative shares but also of the absolute shares of individual persons and groups, even though such persons and groups are not responsible for the necessity of that change.
It is useful to recall at this point that all economic decisions are made necessary by unanticipated changes, and that the justification for using the price mechanism is solely that it shows individuals that what they have previously done, or can do now, has become more or less important, for reasons with which they have nothing to do. The adaptation of the total order of human action to changing circumstances is based on the fact that the compensation of the various services changes without taking into account of the merits or defects of those involved.
In this connection the term “incentives” is often used in a way that easily lends itself to misunderstanding, namely as though their primary purpose were to induce individuals to exert themselves sufficiently. The most important function of prices, however, is that they tell us what we should accomplish, not how much. In a constantly changing world, merely maintaining a given level of welfare requires constant adjustments in how the efforts of many individuals are directed; and these will only occur when the relative compensation of these activities changes. Under relatively stationary conditions, however, these adjustments—which are needed simply to maintain the income stream at its previous level—will not generate a surplus that could be used to compensate those who are disadvantaged by the price changes. Only in a rapidly growing economy can we hope to prevent an absolute decline in the material level of particular groups.
Today, customary treatments of these problems often overlook the fact that even the relative stability of the various aggregates that macroeconomics treats as data is the result of microeconomic processes in which relative price changes play a decisive role. It is an outcome of the market mechanism that someone is induced to fill the gap that arises when someone else does not fulfill the expectations on the basis of which a third party has made plans. In this sense all the collective supply and demand curves that we use so happily are not really data, but rather outcomes of the constantly ongoing process of competition. Thus, statistical information can never disclose to us what price or income changes will be needed to bring about the necessary adjustment to an unavoidable change of the data.
The decisive point, however, is that in a democratic society it would be completely impossible, using commands that could not be regarded as just, to bring about those changes that are undoubtedly necessary, but the necessity of which could not be strictly demonstrated in a particular case. In such a system, a conscious direction of the economy would always have to aim for prices that are considered fair, and in practice that can only mean preservation of the existing price and income structure. An economic system in which everyone received what others felt he deserved could not help but be a highly inefficient system, quite apart from the fact that it would also be an unbearably tyrannical one. For the same reason, it is also to be feared that any “incomes policy” would tend more to prevent than to facilitate those adjustments in the price and income structure required by the adaptation to unanticipated changes in conditions.
It is one of the paradoxes of our age that the communist countries, in this regard, are probably less burdened by ideas of “social justice” than are the “capitalistic” and democratic countries, and are thereby more prone to allow those who are disadvantaged by development to suffer. In at least some of the Western countries the situation is as hopeless as it is precisely because the ideology that determines policy renders impossible those changes that would be necessary to improve the situation of the working class quickly enough to make that ideology disappear.
VI.If even in highly developed economies competition is important primarily as a discovery procedure whereby entrepreneurs constantly search for unexploited opportunities that can also be taken advantage of by others, then this is true of course to an even greater extent as far as underdeveloped societies are concerned. I have intentionally begun by considering the problems of maintaining an order in societies in which most techniques and productive forces are generally known, but also an order that requires continuous adjustment of activities to unavoidable small changes simply to maintain the previously attained level. At this point I do not wish to inquire into the role played by competition in the progress of available technology. I would like to emphasize, however, how much more important competition must be wherever the primary objective is to discover the still unknown possibilities in a society where competition was previously limited. While for the most part false, it might not be completely absurd to expect that we can predict and control the development of the structure of a society that is already highly developed. But it seems incredible to me to hold that we can determine in advance the future structure of a society in which the major problem is still to find out what kinds of material and human productive forces are present, or that we should be in a position, in such a country, to predict the particular consequences of a given measure.
Quite apart from the fact that there is still so much more to discover in such a country, it seems to me that there is another consideration making the greatest possible freedom of competition much more important here than in more highly developed countries. The fact I have in mind is that the necessary changes in habits and customs will occur only when those who are ready and able to experiment with new procedures can make it necessary for the others to imitate them, with the former thereby showing the way; but if the majority is in a position to prevent the few from conducting experiments, the necessary discovery procedure will be frustrated. The fact that competition not only shows how things can be improved, but also forces all those whose income depends on the market to imitate the improvements, is of course one of the major reasons for the disinclination to compete. Competition represents a kind of impersonal coercion that will cause many individuals to change their behavior in a way that could not be brought about by any kind of instructions or commands. Central planning in the service of any some “social justice” may be a luxury that rich countries can afford, but it is certainly no method for poor countries to bring about the adjustment to rapidly changing circumstances on which growth depends.
It might also be worth mentioning in this connection that the more the available opportunities of a country remain unexploited, the greater its opportunities for growth; this often means that a high growth rate is more a sign of bad policies in the past than of good policies in the present. It also seems that one cannot in general expect a country that is already highly developed to have as high a growth rate as a country whose full use of its resources has long been rendered impossible by legal and institutional barriers.
Having seen what I have of the world, it appears to me that the proportion of people who are prepared to try out new possibilities that promise to improve their situation—as long as others do not prevent them from doing so—is more or less the same everywhere. It seems to me that the much-lamented lack of entrepreneurial spirit in many young countries is not an unchangeable attribute of individuals, but the consequence of limitations placed on individuals by the prevailing point of view. For precisely this reason, the effect would be fatal if, in such countries, the collective will of the majority were to control the efforts of individuals, rather than that public power limits itself to protecting the individual from the pressure of society—and only the institution of private property, and all the liberal institutions of the rule of law associated with it, can bring about the latter.
VII.Although competition is by and large a quite resilient specimen as far as private firms are concerned—one that continues to resurface in the most unexpected manner after efforts to suppress it—its usefulness with respect to the one omnipresent factor of production, namely human labor, has been rendered more or less ineffective throughout the entire Western world. It is a generally known fact that the most difficult and indeed the apparently insoluble problems of present-day economic policy, which have occupied economists more than all other problems, are the result of the so-called rigidity of wages. This means in essence that the wage structure as well as the wage level has become increasingly independent of market conditions. Most economists consider this situation as an irrevocable development that we cannot change and to which we must adapt our policies. It is hardly an exaggeration to say that for the past 30 years, discussions of monetary policy in particular have dealt almost exclusively with problems of circumventing the difficulties created by inflexible wages. I have long since had the impression that this was a mere treatment of symptoms. For the moment, we might thereby cover up the fundamental difficulties, but this is not only a mere postponement of the moment at which we must directly confront the primary problem, but it also makes the eventual solution of the latter increasingly difficult. This is because accepting these rigidities as unavoidable facts not only results in increasing them, but also confers an aura of legitimacy on the antisocial and destructive practices that they cause. I must confess that as a result, I myself have lost all interest in the ongoing discussions of monetary policy, which was once one of my major areas of research, because this avoidance of the central issue seems to me to load the burden onto the shoulders of our successors in a most irresponsible manner. In a certain sense, of course, we are harvesting here only what the founder of this fashion has sown, since we are naturally already in that “long run” in which he knew he would be dead.
It was a great misfortune for the world that these theories arose from the very unusual and, indeed, perhaps unique situation of Great Britain in the 1920s—a situation in which it appeared obvious that unemployment was the result of too high a real wage level, and that the problem of rigidity of the wage structure thus had limited significance. As a result of Great Britain’s return to the gold standard after years of war inflation at the parity of 1914, it could be claimed with some justification that all real wages in that country were too high relative to the rest of the world to achieve the necessary volume of exports. I am not convinced that this was really true even then. Even at that time, to be sure, Great Britain had the oldest, most deeply rooted, and most all-encompassing trade union movement, which through its wage policy had succeeded in conserving a wage structure that was determined much more by considerations of “justice” than of economic appropriateness. This meant by and large that the time-honored relationships between the different wages were maintained, and that any such change in the relative wages of the various groups as was required by changed circumstances had become effectively impossible. As things stood then, full employment could doubtless have been attained only by bringing some real wages—possibly those of numerous groups of workers—down from the level they had reached as a result of deflation. It is not certain, however, that this would necessarily have meant a decrease in the average level of real wages. Perhaps the adjustment of the structure of the entire economy brought about by the wage changes would have made this unnecessary. In any event, the emphasis that was customary, then as now, on the average real wage level of all a country’s workers prevented this possibility from even being considered seriously.
It is perhaps useful to consider the problem from a broader perspective. It seems to me impossible to doubt that the productivity of a country’s labor, and thereby the wage level at which full employment is possible, depend on the distribution of workers among the various branches of industry, and that this distribution is in turn determined by the wage structure. But if this wage structure has become more or less rigid, this will prevent or delay the economy’s adjustment to altered circumstances. It is thus to be assumed that, in a country where the relationships between the various wages have been kept rigid for a long period of time, the real wage level at which full employment can be attained will be considerably below what it would be if wages were flexible.
It appears to me that a completely rigid wage structure would prevent adjustment to changes in other conditions, particularly without the rapid technological progress we are used to today. This also concerns especially the adjustment to those changes that must occur simply in order to keep the income level constant. A completely rigid wage structure is therefore liable to lead to a gradual decrease in the level of real wages at which full employment can be realized. Unfortunately, I am not familiar with any empirical investigations of the relationship between wage flexibility and growth. I would expect such investigations to disclose a high positive correlation between these two variables—not so much because growth leads to changes in relative wages, but above all because such changes are the necessary preconditions for that adjustment to changed conditions that is required by growth.
But the main point, I believe, is that if it is correct that the real wage level at which full employment is possible depends on the wage structure, and if the ratios among the various wages remain unchanged as conditions change, then the real wage level at which full employment comes into existence will either fall continuously or will not rise as rapidly as would otherwise be possible. This means that manipulating the real wage level by monetary policy offers no way out of the difficulties caused by the rigidity of the wage structure. Nor can a way out be offered by any practically possible “incomes policy.” Rather, as things turn out, it is precisely the rigidity of the wage structure brought about by the wage policy of the trade unions in the supposed interest of their members (or of any notion of “social justice”) that has become one of the greatest obstacles to an increase in the real income of workers as a whole; in other words, if the real wages of individuals are prevented from falling absolutely or at least relatively, the real wage level of workers as a whole will not rise as quickly as would otherwise be possible.
The classical ideal that John Stuart Mill described in his autobiography as “full employment at high wages to the whole labouring population” can be realized only by an economic use of labor, which in turn presupposes freely fluctuating relative wages. In the place of this ideal, the great man whose name will probably go down in history as the gravedigger of the British economy has popularized decreasing the level of real wages through a decrease of the value of money as a method of attaining full employment while recognizing the rigidity of the nominal wage structure. In my view, however, the experience of recent years clearly shows that this method offers only temporary relief. I believe we should no longer delay attacking the root cause of the problem. We cannot go on much longer closing our eyes to the fact that the interest of labor as a whole demands that the power of individual trade unions tomaintain the relative position of their members against other workers be removed. The most important task at present appears to be convincing labor as a whole that removing the protection of the relative position of individual groups not only does not threaten the prospects for a rapid increase in the real wages of labor as a whole, but in fact enhances those prospects.
I will certainly not dispute here that for the foreseeable future it will remain politically impossible to restore a truly free labor market. Any such attempt would probably lead to such great conflicts that it could not be seriously considered—at least as long as employers do not collectively guarantee to maintain their employees’ average real income. But precisely such a guarantee, I believe, is the only way of restoring the market to its function of determining the relative wages of the various groups. Only in this way, it seems to me, could we hope to induce individual groups of workers to give up the security of their particular wage rates, which has become the main obstacle to a flexible wage structure. Such a collective agreement between employers as a whole and employees as a whole seems to me a transitional measure deserving serious consideration, because the outcome would probably show workers how much they could gain from a truly functioning labor market. This would in turn create the prospect of subsequently eliminating the tedious and complicated apparatus that would initially have to be created.
What I have in mind is a general contract in which employers as a whole would promise workers as a whole, initially for a year, their previous real wage total plus a share of increased profits. Each individual group or individual worker, however, would receive in his monthly paycheck only a certain part, say five-sixths, of his previous wage. The rest (together with the agreed-upon share of the increased total profits of all enterprises) would be distributed in two additional monthly payments—at the end of the year and after the books are closed—to the employees of the various firms and branches of the economy, in proportion to the change in profits that results on the basis on the five-sixths of wages distributed. I have proposed five-sixths as the share of continuous payments, since this would make possible the payment of a Christmas bonus at the average level of a month’s income on the basis of a preliminary estimate of profits, and of a second vacation bonus of approximately the same amount when the books are closed for the calendar year. For the subsequent year the average wages of the first year would again be guaranteed, but by the end of the year every group would be paid only five-sixths of the total amount paid in the previous year, plus a supplement at the end of the year for each group based on profits realized in the corresponding industry or firm, and so on.
Such a procedure would have somewhat the same effect as a restoration of the free labor market, except that labor would know that its average real wages could not decrease, but only increase. I would expect that such an indirect re-introduction of the market mechanism for determining the distribution of workers among industries and firms would bring with it a considerable acceleration of the increase of the level of average real wages, along with a stepwise decrease in the real wages of individual groups.
You will believe me when I say that I do not make so unusual a proposal lightly. But some measure of this kind, I believe, is today the only remaining way out of the increasing rigidity of the wage structure. This rigidity seems to me not only the major cause of the increasing economic difficulties of countries like Great Britain. It also drives such countries deeper and deeper into a planned and thereby still more rigid economic structure by misleading them into dabbling with the symptoms through “incomes policies” and the like. It seems that labor can only gain from such a solution, but I realize of course that trade union officials would lose through it a large part of their power and would therefore reject it completely.
Volume 6, No. 1 (Spring 2003)This article provides a new synthesis between the strategic management literature and Austrian capital theory. The resource allocation process plays out in the context of differing subunit preferences, potentially resulting in tension and periodic conflict that may lead to dysfunctional relationships over time. Absent clearly understood and effective operational rules, the potential for heightened dysfunctional internal relationships will leada conglomerate organization to have a diminished resource base for achieving its future strategic goals. This article presents a set of resource-allocation rules based on the Hayekian theory of production. By developing an effective resource-allocation paradigm based on economic theory, the organization can gain market share resulting in increased profitability and continued success in the marketplace. The Hayekian traingle offers firms an objective mearsure reflecting environmental shifts by tracking interest-rate changes that affect consumer and production demand. Organizations can gain "first-more advantages" essential provide the competitive advantage vis-à-vis their rivals while maintaining harmonious relationship among subunits. Entrepreneurial innovation can also be exercised by "second movers" who imitate the "first movers," perhaps taking advantage of lessons learned. This kind of innovative imitation may well provide the greatest scope for entrepreneurial activity.
Volume 6, No. 1 (Spring 2003)One is not intellectually free to use the neoclassical theory of the firm at one time to explain economic action, and to discard it at another. If the theory of the firm does not apply in all explanations of firm behavior, then it cannot apply at all. If economists cannot explain the theory of predatory pricing consistently with their models a priori, and if they are unable to conclusively observe a posteriori that successful predatory pricing has, indeed, occurred, then perhaps it is time to cast this particular theory onto the ash heap of intellectual history.
Volume 5, No. 2 (Summer 2002) Austrianism is far more receptive to business and private enterprise than Marxism, and it certainly exceeds neoclassical economics in this regard. In terms of the phenomenon with which we have been concerned—the assumption of full information—Austrianism is far superior to mainstream economics. For one thing, the concept of perfect competition is entirely absent from it, indeed, alien to it. Praxeologists have specifically criticized the distinction between perfect and imperfect competition. For another, Austrians have written supportively and analytically about advertising, marketing, entrepreneurship, and a whole host of concepts integral to a proper business-school education. A more moderate suggestion would be not to replace all neoclassical economists in business schools with Austrians, but instead to adopt an “affirmative action” program with regard to the latter. In this way, at least there would be some increased representation in our nation’s business colleges of a school of thought that is conducive to their overall mission. Finally, because the model is so unrealistic, both economists and the discipline of economics lose credibility with businessmen and the public. It seems, then, that taking into account these problems, as well as those of unrealistic assumptions and a harmful standard, the costs far outweigh any benefits to be had from the perfect competition model that could not be had from supply-and-demand analysis without the detritus of the perfect-competition assumptions.
Volume 2, No. 3 (Fall 1999)Most economists would, given the opportunity, offer some proposal to reform antitrust policy. Some would contend that this or that aspect of antitrust law should be eliminated or more weakly enforced. Only a brave few, however, deliver a deadly blow to the antitrust beast. In the revised second edition of his book Antitrust: The Case for Repeal, Dominick T. Armentano is not content to attack only one aspect of antitrust policy. Professor Armentano proceeds to demolish the very foundations of antitrust policy. No excuse for antitrust intervention remains standing— not predatory pricing, not tying agreements, not even price fixing. Lighter fare than his excellent book Antitrust and Monopoly (1990), Armentano's Case for Repeal provides a coherent, accessible Austrian perspective on senseless and unjust antitrust law.
Volume 2, No. 4 (Winter 1999)Solow seems to have no conception of human action as a process of plan coordination, although he uses Austrian-sounding language at one point in discussing "coordination failure" in the marketplace. He sees the job of the economist as the construction of obtuse mathematical theories to ostensibly explain this alleged "failure," but not to inquire how market participants act to overcome coordination problems. He doesn't appear to be the least bit interested in how markets actually work; only to "model" them as inherently "flawed" in order to stroke his own ideological predilections.
Volume 15, Number 4 (Winter 2012)
Rothbard realizes that the economy is not competitive, that it is shot through with elements of monopoly. The left-wing Chamberlinians (which partially included Chamberlin himself) used this as a beautiful handle to combine with the Marxists and other critics of business to denounce the whole capitalist system as “monopolistic,” and therefore no longer explainable by economic theory. Henry Simons and the other students of Frank Knight during the 1930's advocated breaking up big business into atomized units that would be more nearly “perfect".
Volume 2, No. 3 (Fall 1999)The resourceful antitrust community has simply gone ahead and reinvented itself by developing several new theories and an entirely new approach to evidence. (Unfortunately, the new approach is that favorable evidence no longer matters.) All of this is important since the antitrust enthusiasts and regulators intend to apply their newer theories to the current high-tech industry cases, most importantly U.S. v. Microsoft, where their application threatens substantial economic havoc. It is in this context that Winners, Losers, and Microsoft by Stan Liebowitz and Stephen Margolis, appears at a most opportune moment, indeed. This carefully written and thoughtful book is devoted to a critical examination of these new theories and to a search for evidence, any evidence, that these new theories can support antitrust.
Volume 16, No. 1 (Spring 2013)
The author explores during a lecture that all antitrust regulation is economically inefficient and morally wrong and all of it—the laws and the enforcement agencies—should be thrown out. He states this because it’s right and because it’s true and because it’s always our obligation, regardless of the consequences, to speak truth to power .
I was born in the North End of Hartford, Connecticut, in late 1940. The North End is not the good end. The good end is the South End, or at least it was back then, with several exquisite Italian bakeries and paper cups of Galati-Ice sold on street corners. My closest well-off relatives lived in the South End.
I call them “well-off” because my uncle always drove a Cadillac and my cousin had a piano and a train set that covered the living room floor. But my parents, my sister, and I lived in the North End of Hartford, in a two bedroom third floor tenement apartment. When my sister and I brought the garbage down to the outdoor-shed every night, we would see the rats scrambling around rattling the garbage can covers. The neighborhood that we lived in was poor Italian, poor Jewish, and poor Polish, with a sprinkling of blacks. Today, to go into the North End of Hartford, to Martin and Barber Street and to Keeny Park where I grew up, would require a flak jacket and a total absence of any common sense.
When I was 11 years old, my father had a serious fight with our landlord and we had to move out. We eventually moved out of the city to the country, where my dad was in the process of building a house. He was not a professional builder; his regular job was as a salesman for a plumbing supply company. But he went to the public library and took out books on building houses and decided that he could do it… and he did. I have photographs of my mother and me on the roof of our first house in the country, holding roofers in place and nailing shingles. Like most kids, I would rather have been playing baseball somewhere, but most weekends back then were for manual work so that we could all get the hell out of Hartford.
I grew up in the 1950’s with a strong sense of optimism and romanticism about life. Sports and cool cars were important. Acting in school plays was important. Frank Sinatra singing on Capital Records was important. Ayn Rand was always important. Gene Kelly dancing with Leslie Caron in “An American in Paris” was very important; still is. That cultural “sense of life”—that really good things were possible with common sense and hard work—infused my own sense of life and helped shape my world-view and my goals.
In grammar school and in high school I was fortunate enough to have had two extraordinary teachers who encouraged me to write stories, to put words on paper. I admit that I did not need much encouragement; writing always came naturally to me. In almost 50 years of writing, I honestly can’t ever recall having writer’s block or being late with a promised writing assignment. I have, of course, worked hard at my writing over the years; it’s almost second-nature now to write an op-ed piece for LewRockwell.com on, say, the insane policies of the Federal Reserve. But where that initial writing desire and proficiency came from is, frankly, a total mystery. I simply have no idea.
My serious interest in Austrian economics started in college and in graduate school where, outside the classroom, I first read Henry Hazlitt and Mises and Hayek and Schumpeter and especially Murray Rothbard. I also read an antitrust essay written by someone named Alan Greenspan in Ayn Rand’s “Capitalism: The Unknown Ideal.” As an undergraduate at the University of Connecticut, I remember arguing with one of my economics professors, Dr. Paul Weiner, over the textbook he had assigned in my first antitrust course. The textbook was Clair Wilcox’s infamous Public Policies Toward Business (Irwin Publishers) and Professor Weiner believed every word of it, and expected his students to do the same. The Wilcox text was certainly the conventional economic wisdom at the time. The orthodox antitrust mantra went something like this: “Pure competition was the ideal in terms of efficient resource allocation, big firms colluded or exercised monopoly power, and the government’s antitrust laws were there to protect consumers…and they did protect them.” End of any serious discussion.
When I raised objections to all of this, Professor Weiner dismissed Henry Hazlitt as a mere journalist and he dismissed Alan Greenspan as an Ayn Rand devotee without a Ph.D. And Murray Rothbard? Well, he had never even heard of Murray Rothbard! One episode with Professor Weiner sticks out in my mind sometime around the spring of 1960. Weiner would often dare some of his students to come back to his office and argue public policy questions with him. He had a blackboard in his office and once, in the heat of discussion with some of us, he allowed me to write something on it that I thought was quite profound at the time: I wrote: “There is no competition in pure competition.” When I finished writing Weiner just looked at me like I was from another planet and he shook his head. He didn’t get it… and he told me to go study harder. That’s pretty much the way it was in 1960.
Things were slightly better in grad school. Professor Bill Snavely nurtured my budding interest in Austrian economics by assigning me a term paper on the so-called “calculation debate” between Mises, Hayek and the socialists. Shortly after I graduated, I would contribute an article on that intellectual debate (decisively won by the Austrians I might add) in a book that Bill published called Theory of Economic Systems. That article was my first professional contribution along purely Austrian lines.
My passion for antitrust theory and law was expanded enormously in grad school. I studied under Professor Joel Dirlam who was well-published in the antitrust area. Dirlam was a crusty, old-school “progressive” and we could not have disagreed more on antitrust theory and public policy. Yet Professor Dirlam challenged me to prove him wrong by arguing with him in class. He also challenged me to go beyond textbooks and even journal articles and actually read the original court documents and testimony in antitrust cases to discover what really happened. Professor Dirlam, of course, would eventually cook his own goose with that suggestion because that’s when I first began to realize how distorted the orthodox understanding of antitrust history actually was. But even more importantly, I also discovered that Dirlam and most economists and law professors at the time had gotten most of their antitrust policy conclusions dead wrong because of fundamentally incorrect theories of competition and monopoly. But more on that later.
My first book Myths of Antitrust: Economic Theory and Legal Cases, was published by Arlington House in 1972. How did it come to be written? The answer is that when I first went to the University of Hartford to teach in 1967, I was asked to teach a senior-level course called “Government and Business.” The Wilcox text already discussed had been ordered by my department head before I arrived on campus, and the students and I both struggled with its poor reasoning and total absence of empirical information about alleged monopolistic behavior. It was at the end of my first year of teaching that I decided that I would eventually write a textbook consistent with some of the research that I was doing and with the lectures that I was giving. Little did I realize then how wildly inaccurate conventional antitrust theory and history really were; and little did I realize that writing a case book in this area would be a substantial undertaking requiring several years of research and writing. Besides, I had a new wife, no external funding, no research assistants and, needless to say, no word processor. I did have a portable Smith-Corona typewriter to pound away on… and so I began to pound away.
The Myths book was an attempt to do a major “revisionist” history of antitrust theory and policy. The State of Connecticut had an excellent law library in Hartford and so I buried myself in legal decisions and trial-record material for almost 4 years. My primary intention was to discover and report what actually happened in the classic antitrust cases from an economic perspective.
To my knowledge, no economist had as yet written a book-length criticism of antitrust enforcement. As an aside, Robert Bork’s book, The Antitrust Paradox was published in 1978, six years after Myths appeared in print. That book was also highly critical of conventional antitrust theory and policy. But Bork, of course, was not an economist and certainly not an Austrian; he also thought antitrust policy could be reformed, not abolished. Bork was a lawyer by training and, indeed, the subject had been generally left to the lawyers and to the law professors who (mostly) were blissfully unaware that the economic evidence in the cases often contradicted their public interest legal analysis. Unlike the lawyers, however, I was interested primarily in two major issues: one, what economic theory of competition and monopoly was the government and the courts accepting as legitimate in these antitrust cases; and two, did the business firms accused of antitrust violations actually abuse consumers and, therefore, was antitrust a legitimate response to so-called free market monopolization?
I made an early decision to tell the story of the classic monopoly cases in the context of the actual historical development of the industry. How, for example, did the market structure in the petroleum and tobacco industries actually arise? Why did firms merge and were there so-called “barriers to entry” that unfairly kept profits up and new competitors out? Absent some historical discussion, the monopoly and price-fixing antitrust cases made little sense and the actual intent and effect of antitrust regulation remained obscure. Thus, examining (say) the classic antitrust decision against Standard Oil of New Jersey (1911) in the context of the history of the petroleum industry would give a unique understanding to my competition and monopoly analysis and sharply separate my book from any competitors. And after more than 40 years in print in various editions, I still think that the perspective that I adopted and the analysis that I attempted in that first book still holds up reasonably well.
Myths attempted to break several areas of new ground. It systematically attacked the dominant “structure/conduct/performance” paradigm that dominated industrial organization theory and public policy back in the 1960s. It presented an alternative quasi-Schumpeterian theory of open market competition to replace the orthodox, perfectly competitive equilibrium model. In addition, the book exposed the soft underbelly of the “public interest” theory of antitrust by demonstrating that the firms indicted and convicted in the classic monopoly cases had actually been increasing outputs, lowering prices and innovating. Where available, I stuck the actual consumer prices and industry data right in the text.
And in its most radical chapter, the one on price-fixing, Myths argued that the effectiveness of business collusion was also an antitrust myth since high fixed costs and legally open markets always encouraged price cheating and secret discounts to customers. It even showed that the “electrical equipment conspiracy” of the early 1960’s, perhaps the most infamous price-fixing case in antitrust history, had not really worked. The companies cheated, broke their agreements, and prices were never “fixed.“ Thus, Myths concluded that the entire body of antitrust policy—even including the price-fixing cases--was a complete public policy hoax and that absent any legitimate economic rationale, the entire legal framework hurt consumers and should be abolished.
Getting Myths published with that analysis and those conclusions proved difficult. My recollection is that at least 6 mainstream academic publishers rejected the book on the advice of reviewers. I remember that Norton Publishers actually sent me (at my request) several referee comments on my early chapters. Reading the comments was very, very depressing. Several of the reviewers claimed that I simply had no idea what the hell I was talking about and that my policy conclusions were, well, outrageous. Now, I will admit that to argue that the antitrust laws actually hurt competition and consumer welfare and that the only rational solution was to repeal the laws was far, far outside the mainstream in 1970. Yet, naïve as I was in the early days, I expected my theoretical arguments and case facts to be treated seriously. I was wrong; the mainstream academic publishers and their reviewers wanted no part of Myths of Antitrust. So eventually I sent the mostly completed manuscript to David Franke at Arlington House, and the book was completed and then published in 1972.
The immediate reaction to my book in the business and academic world was far less than I hoped, but about what I expected. Despite some important favorable reviews (especially one by economist Donald Dewey at Columbia), book sales were modest and the antitrust intellectual establishment did not come crumbling down or even tremble noticeably. Indeed, most economists and law professors in the 1970s simply chose to ignore what I had written and called, instead, for more “vigorous” enforcement of antitrust law; indeed, back then there was even strong support for new antitrust laws to limit so-called industrial concentration. Which only goes to show that the academic investment in old intellectual capital can run very deep, indeed.
But, alas, there were at least two general exceptions to the academic indifference to what I had written. At Chicago and at UCLA in particular, various scholars (such as Yale Brozen and Jim Liebeler) were reasonably sympathetic to my arguments and both published their own important criticisms of antitrust policy. However, the Chicago/UCLA crowd was always lukewarm to me and my arguments since I had attacked the “perfect competition equilibrium” model and had argued that even prosecuting price-fixing was a mistake. Besides, I had called for repeal of the antitrust laws and not reform which made me an extremist and a non-player in the academic/government merry-go-round. But a second group of supporters, the Austrians, led by Murray Rothbard, were very enthusiastic about my work and I was soon drawn into their intellectual world in a more systematic way. But that’s a story for another day.
By the early 1980s, the antitrust landscape had changed somewhat and I was encouraged enough to send a revised edition of Myths to John Wiley and Sons, a legitimate academic publisher in New York. Some weeks later, I still remember the phone call: I was in my office preparing for an evening class when an editor from Wiley named John Mahaney called. He said that he had my manuscript in front of him, was reading it, and wanted Wiley to publish it. At one point I said: “You know, it calls for the complete repeal of the antitrust laws.” He said, “yes” that’s what he understood, but that John Wiley still wanted to publish it. Bingo.
Eventually I went to New York and we settled on some revisions and a more academic but still provocative title: Antitrust & Monopoly: Anatomy of a Policy Failure. That book was published in 1982 and sold reasonably well with many positive reviews; it is still in print today with the Independent Institute in Oakland, Ca. and I still get small royalty checks. Interestingly, the guts of that book is still Myths of Antitrust, yet the antitrust world had changed just enough in ten years to get Antitrust & Monopoly treated far more reasonably by reviewers this time around.
Actually, the only blatantly unfair review of Antitrust & Monopoly that I ever got came years later in 1991 from the “dean” of the old-school antitrust establishment, F. M. Scherer. Frederic Scherer was a Harvard trained economist, had been Chief Economist with the Federal Trade Commission, and was the author of the best-selling antitrust textbook Industrial Organization and Public Policy, which had instructed generations of antitrust economists and had been through umpteen editions. Professor Scherer and I had actually met years before while we were giving opposing lectures on antitrust policy at Hillsdale College. Our luncheon discussion on antitrust, especially on price fixing, had not been pleasant, and Scherer’s shrill and inaccurate review of my book in the journal Critical Review in 1991 was payback, apparently, for having the audacity to challenge his entire antitrust world view.
The Critical Review editor, bless his heart, allowed me to write a detailed point-by-point rebuttal to Scherer‘s hatchet-job attack on my book—a rebuttal which we cannot detail here—but which must be read by anyone seriously interested in the theory and practice of antitrust policy. I regard my rejoinder to Frederic Scherer as one of my finest and most persuasive pieces of professional writing. My guess is that Professor Scherer never let his own students read my point-by-point dismantling of their professor’s antitrust views.
What’s going on in the antitrust world today? All of the antitrust laws are still on the books; even the blatantly anti-consumer Robinson-Patman Act has not been repealed. The Antitrust Division of the Department of Justice still brings antitrust cases and the Federal Trade Commission has not gone out of business. And while neo-Austrian theories of competition and the market process are taken far more seriously now than 30 years ago, the structure/conduct/performance paradigm, though amended and modified, still dominates discussions of so-called “monopoly power” and is still legally relevant in tying, merger and all price-fixing cases. One has only to look back a few years at the Microsoft prosecutions or look forward at the current antitrust case against Apple Computer and several book publishers, to realize that the general antitrust myth and hoax still survives. The antitrust establishment—the lawyers, the bureaucrats, the academics and the corporations who benefit from antitrust regulation—still hold the high ground in this struggle between economic liberty and governmental power.
I’m sometimes asked whether calling for the repeal of antitrust laws was a strategic mistake on my part. Didn’t I hurt my career and even hurt the cause (for more rational antitrust policy) by taking such extreme theoretical and policy positions? It’s certainly an important and fair question. Jim Liebeler, a now deceased UCLA law professor and an old friend, once told me that I had probably made two strategic mistakes. The first was that I had not graduated from Yale or Harvard University; he said that my arguments would have been taken far more seriously if I had. Jim was probably right about that. The second was that I had called for repeal and not reform of antitrust policy. Jim assured me that that sort of extremism just never goes over well in the legal and intellectual establishment. Again, Jim was probably right about that, too.
Yet in rebuttal to that line of argument, I wouldn’t be at peace with myself or be presenting the Ludwig Von Mises Lecture here today in Auburn if I had gone only “half way” with my theoretical arguments or policy recommendations. The fact remains that all antitrust regulation is economically inefficient and morally wrong and all of it—the laws and the enforcement agencies—should be thrown out. I say this because it’s right and because it’s true and because it’s always our obligation, regardless of the consequences, to speak truth to power. That’s a tradition I’m told that has been followed quite rigorously here at the Mises Institute under Lew Rockwell.
Thank you all very much.
Volume 3, No. 4 (Winter 2000)Butler Shaffer's well-written monograph, In Restraint of Trade, describes in extensive detail why and how most businessmen pleaded for the government to tame them between the end of World War I and the eve of World War II. Other scholars have plowed this field before; most notably John T. Flynn (to whose memory and spirit Shaffer dedicates his book), writing from the 1920s to the 1950s; Gabriel Kolko, Robert H. Wiebe, and Murray N. Rothbard, writing in the 1960; and many others since. Shaffer's contribution is simultaneously to ground his analysis in sound economic theory and to document his historical claims by citing an abundance of primary sources. He goes into special detail in three chapters devoted to particular industries or sectors of the economy—steel, petroleum and coal, and retailing and textiles—but the entire book is scrupulously documented.
Volume 18, Number 3 (Fall 1998)An Interview With Dominick T. ArmentanoDominick T. Armentano is professor emeritus at the University of Hartford, an adjunct scholar of the Mises Institute, a member of the editorial board of the Quarterly Journal of Austrian Economics, and author of Antitrust and Monopoly: Anatomy of a Policy Failure and Antitrust: The Case for Repeal
AEN: Has the Microsoft case revived the debate over antitrust?
ARMENTANO: Actually, the debate never went away. It was just out of the media for a while. But the Microsoft case does provide an opening for us to revisit some crucial theoretical and policy issues. The case illustrates how absurd it is to attempt to apply antique, unworkable, special-interest law to the new computer and telecommunications marketplace. Whats at stake is whether the pace and scope of technological change will be determined in the market or by government.
AEN: How significant is the appellate court's decision in favor of Microsoft?
ARMENTANO: It's a good decision, but a narrowly based one. It ruled on a dispute between Microsoft and the Justice Department on a 1995 consent decree. The Justice Department allowed Microsoft to "integrate" its software. The debate is about whether Microsoft's packaging of its browser with its operating system constitutes legal integration and not illegal tying. The appellate court ruled in agreement with Microsoft, that it was integration.
The court also had some sweeping statements about the inadvisability of courts determining the course of software innovation. That's helpful. The rhetoric in the decision goes beyond rationalizing the wording of the consent decree. The court is giving an opinion that approximates a free-market view. But I don't know how important in law those statements are.
AEN: Why is the government so focused on whether the operating system and the browser go together?
ARMENTANO: The stated reason is Section 3 of the Clayton Act, which forbids tying agreements. It is illegal for a firm that sells a product to tie into another product. If a firm makes buying product B a condition of buying product A, and if that condition "substantially lessens competition," that's tying and that's illegal.
Now, court precedent suggests that illegality is conditioned on a firm exercising monopoly power in the tying good. This power is supposedly what allows the company to force suboptimal products on the market. The law doesn't read that way, but that's what precedent suggests.
But there's a problem here. If the company does indeed have a monopoly on product A, we can bypass the question of tying altogether. The monopoly itself should be regarded as a Sherman Antitrust Act violation. But there is circular reasoning going on here, since courts have used the existence of tying as the evidence of monopoly power.
For example, in the Standard Stations Case in 1949, the court ruled on Standard Oil of California's practice of marketing petroleum products to independent stations that were under exclusive supply contracts. The court admitted that independent dealers voluntarily chose to tie themselves to Standard Stations and that Standard assisted the dealers financially.
Even though Standard's share of the gas market was only 6.7 percent, and that share had been falling for years, the court presumed a monopoly in the tying good in order to reach the decision it wanted to reach. The obvious economic benefits to everyone of the tying agreements, which would not exist were they not economically beneficial, were simply shunted aside.
AEN: It's your view that tying should never be illegal.
ARMENTANO: Yes. After all, tying can be a helpful way to economize on resources. Sellers may like tying agreements because they enhance goodwill with suppliers, limit free riding, and encourage distributors to invest in promotion and service. They can be good for consumers because they help save search costs. There is no reason to assume consumers voluntarily injure themselves by purchasing tied goods. In the Microsoft case, the good that the Justice Department says is illegally tied (Explorer) is actually free.
Now, some firms may think that tying is a good way to optimize net income. They try it, and it doesn't turn out to be the case. Why? Because the package is not what the consumers want. Consumers might rather shop around and buy goods separately from other manufacturers. In that case, the firm will drop the tying agreement, or at least the terms of the agreement. This can happen at the retail level or the wholesale level. The fact that not all goods are tied suggests that tying is not always the most efficient marketing tactic.
AEN: What about the court case that Robert Bork cites against Microsoft?
ARMENTANO: That would be the case of the Lorrain Journal, which involved the only newspaper in Lorrain, Ohio, and the advertisers that were using the paper to advertise their products locally. A radio station in a nearby town was granted a license, and came on the air and solicited for advertisers. Some of the paper's advertisers wanted also to use the radio station.
When the Lorrain Journal heard about that, the paper gave its advertisers an option. They could use the radio station to advertise, but then they couldn't also advertise in the paper. If they ran ads in the paper, they must do so exclusively. Clearly, the paper was attempting to get its customers (advertisers) to boycott a potential competitor. And it worked in the short run: many advertisers dropped the radio station.
The government learned about this and brought a civil suit against the paper in 1948. It tried to get a preliminary injunction to stop the exclusive dealing agreement. The government did not get its injunction, and instead held a trial. The judge ruled that the Lorrain Journal was a near monopoly and used "coercion" to try to get the advertisers to boycott the radio station as an ultimate attempt to destroy it.
The paper appealed to the Supreme Court, arguing that the federal government had no jurisdiction and that it was an interference with the freedom of the press. The Court rejected both ideas, citing precedent in both cases, and orders that the lower court's injunction should go into effect. And that was the end of the case.
AEN: Where are the parallels with Microsoft?
ARMENTANO: That's the odd part. There are almost none. Microsoft competes in the market where its competitors do not have franchise monopolies from the government and where there is not just one competitor.
There was only one radio station in the Lorrain area. And in fact, from reading the case history, it appears that the paper's real goal was not to monopolize advertising but to get the license away from the radio station so it could have its own radio station. The paper's owners had even tried to get an FCC radio license about five years before this case. They were denied it and were very angry, and so set their sights on the station.
In the computer industry, there are hundreds of competitors and no legal restrictions on entry (as there were in the case of the radio station). There is no way to prevent people who have computers from downloading competitive browsers. Computer makers can load the Netscape Navigator into their computers, and Microsoft does not and could not stop that. It does not have an exclusive arrangement with them. So why Bork would cite this case is beyond me.
AEN: Let's say that Microsoft did have an exclusive agreement. Would you rise to its defense?
ARMENTANO: We must realize that every agreement is a compromise. Sure, companies that accept exclusive deals might want it some other way. Ultimately, we all want the freedom to do whatever we want whenever we want. But that's not what contracts are about. In a contract, you always give up something, but what you give up is less valuable than what you get.
If Dell or Compaq wanted to sign an exclusive deal with Microsoft because they thought it was in their interest, and in the interest of their consumers, then that would be absolutely fine. Now there might be some manufacturers that would rebel against that kind of deal. And rival software firms might see an opportunity to create competitive operating systems and software and offer them on terms more favorable to the manufacturers.
The economic disadvantage of tie-ins is that they might put buyers in a position where they offer the consumer second-best deals, which only invites competitors into the market. Microsoft is keenly aware of this. It wants to push, but it doesn't want to push so hard that it jeopardizes its market position and creates an opportunity for competitors to exploit. Stringently enforced exclusive dealing agreements might in fact do that. Anything that is to the disadvantage of consumers eventually brings into question the market position of the producers.
AEN: The Justice Department claims it has consumers' interests in mind.
ARMENTANO: But why would anyone assume Microsoft does not? Microsoft is selling to the final consumer, and only doing so through the conduit of computer manufacturers. Microsoft will not do something to Dell or to Compaq that would harm consumers. Why would it want to? Why would Microsoft want to offer a bad deal to the consumers who buy their software? In the market economy, there is an alignment between the interests of the consumers and the manufacturers. Anything that a company does that is contrary to those interests works against its own interests.
Microsoft is in a dominant position today, but in an expanding industry, whether it retains that position depends on whether it can offer the best products at the best price, and anticipate changes in the market. If it does not, it will lose market position, as it should. Either way, there is no need for any regulation.
AEN: Has the Microsoft case called forth new arguments for antitrust?
ARMENTANO: No, they are pretty much the same. The old predatory pricing accusation comes up with the claim that Microsoft is charging prices that are too low or even giving its products away. That accusation first came up in 1911, in the Standard Oil case. Well, consumers don't seem to be complaining about this supposed predation.
Other arguments are that dominant firms enjoy economies of scale and this necessarily leads to a monopoly position. And of course it's true that if you are the most efficient company, you are going to survive and perhaps your rivals won't. That's just a truism.
If we look back to the United Shoe case of 1953, finally decided in 1967, and we change the names of the players, we might as well be talking about the software industry today. Here was a dominant firm that had tying agreements with some of its clients. Its prices were low and it innovated all the time. Its efficiencies made life very hard with some of its competitive rivals, who complained like hell about it. The government intervened to hamper United Shoe and ultimately broke the company up at the behest of these rivals.
AEN: Wasn't progress against these interventions being made in the 1980s?
ARMENTANO: Yes, we were making progress. The number of private cases went down. The number of big, blockbuster cases brought by the Justice Department went down too. The FTC was fairly quiet. Austrian School and Chicago School criticism of antitrust had some effect on other academics, on the legal community, and even on the judicial community.
But I remember writing in 1986 that if we think antitrust is dead, we will be sadly disappointed in the future. We had a golden opportunity to abolish the antitrust laws. I argued that if we didn't abolish them, we would eventually get new administrators and a new slew of cases.
At an even deeper level, we will never get rid of antitrust until we get rid of the incorrect theories of monopoly and competition that drive the antitrust establishment. What we've got out there are bad theories of competition and terrible theories of monopoly power. So long as these wrong theories are out there, we will have the wrong policy.
AEN: Where do the Austrian and Chicago approaches diverge?
ARMENTANO: Many of the Chicago people have been helpful in the empirical research they've done on some of these cases. Scholars like Robert Bork, Yale Brozen, William Bowman, Harold Demsetz and others, have performed valuable services by showing, for example, that just because markets are concentrated doesn't mean the leading companies earn exorbitant rates of return. They've shown what big business has really done: innovated and kept prices low. They've shown that mergers make economic sense.
Where you get a dramatic divergence is on the theoretical level, and that plays itself out in some aspects of policy. The Chicago School is still married to neoclassical price theory. It is still married to equilibrium theory and to a version of the perfect competition as a model, or a benchmark against which you compare performance in the real world. And Chicago School economists still hold an incorrect theory of monopoly power. They still want to talk about market share and concentration ratios. They still haven't adopted the view that so long as markets are legally open, they are necessarily competitive and rivalrous, and they ought not to be regulated.
The consequence is this: Chicago School economists will not argue that we should abolish the antitrust laws. I remember spending hours upon hours trying to persuade Yale Brozen that we should get rid of the antitrust laws. He would go 99 percent of the way, and suddenly say: "well, Dominick, what about price fixing?"
For the Chicago School, nothing is more offensive and anticompetitive than firms getting together to fix prices. Even if you review the literature showing that price fixing usually doesn't work (and even George Stigler recognizes that), they still argue that it is unproductive activity and that it doesn't accomplish a social purpose.
The Chicago School does not have an Austrian-style coordination theory of efficiency that recognizes that markets are in a continual process of development. These economists do not recognize that it is impossible to freeze the market in place and declare this arrangement or that arrangement to be efficient according to some extra-market criteria.
Therefore, they will never go all the way and support abolition. Instead, they adopt what appears to be an ad hoc approach to antitrust. It is important to somehow convince the Chicago people that they should give up their equilibrium models and adopt the Austrian theory. I somehow doubt that will ever happen.
AEN: And Bork would be a good example of that.
ARMENTANO: If you read The Antitrust Paradox, Bork's classic book on why the antitrust laws don't make any sense, you come away saying, this guy is really right! There is no good case for the application of antitrust law. It's true that he does allow some room in the book for intervention, but not much room.
Then you suddenly wake up in 1998, and you find out that Bork thinks that Microsoft is a predator that ought to be battered by antitrust law. And it turns out this is not really inconsistent with remarks he makes in his book. He says that if a firm has an absolutely dominant position, and it attempts to expand that position, the law should be employed. It's right there in the book. In some sense, then, he is not being inconsistent.
It is a bit of a shock to see him supporting Netscape against Microsoft. And it looks like he is merely supporting a firm that is losing in a battle with a more efficient competitor. But on the other hand, that's not the way he sees it. There's also the more cynical explanation: as a paid legal consultant to Netscape, he may just be willing to put personal financial interests above all else.
AEN: Are there other reasons why antitrust continues to receive support?
ARMENTANO:. I just finished reading Titan, a new book about John D. Rockefeller by Ron Chernow. It's a super book. It brings the point home that there will always be people who fear large firms that have achieved a great deal of success in a short period of time. Some people just get concerned when a firm has 80 percent and 90 percent of the market, regardless of the job it's doing for the consumers. And there will always be other smaller firms in the industry who seek to use government's antitrust power as a means of beating up on the more-successful competition.
There are also noneconomic considerations. From a factual standpoint, much of the criticism of Rockefeller was just wrong. The economic facts pointed out that consumers were benefitting from Standard Oil's dominant position. But the critics also launched personal attacks on Rockefeller himself and on how the wealthy lived.
Those attacks probably had a bigger impact on how legislators and the public felt than any of the economic facts about the case. In the end, Rockefeller's personal wealth, and the envy that it generated, was the determining factor. Today, the public has a better understanding of entrepreneurship, and the justice of wealth accumulation, but still we haven't shaken those old attitudes.
AEN: But why isn't the wealth and power of government similarly criticized?
ARMENTANO: I suppose the explanation is psychological. Government is always put in a separate category, and somehow not subjected to the same strictures it imposes on everyone else. Government-created monopolies are not made the target of antitrust investigations, for example.
When I talk to average people, I expect them to exempt government and government monopolies from the criticisms they make of big business. But even when you talk to intellectuals, they make the same mistake. I'm not just talking about economists, but also intellectuals in other disciplines and in the media.
I don't know how to overcome that, except to keep showing how repressive government imposition is, and how government regulation harms economic welfare for everyone. Austrian theory suggests that if there really is a dangerous monopoly in the economy, the government is probably the reason it exists. The answer then is to deregulate. Antitrust is a form of regulation that takes us exactly in the wrong direction.
AEN: Your book Antitrust and Monopoly has been continually in print for 26 years . How do you account for that?
ARMENTANO: I think it tells a story that no other book tells. I remember when I began to teach in the late 1960s, the dean in the business school asked me to teach an antitrust course. I went out and looked for books, but I didn't find books that made much sense.
At the time, the book that everyone used was Clair Wilcox's Public Policy Toward Business, and I adopted it. I began to notice that there were all kinds of errors in it, historical and theoretical. He really wasn't telling the truth about what big business had done in the 19th century. I then decided that someday I would write a book that would really tell the story of big business. That's how my book on antitrust came about.
One of the innovations of the book is to present the business history before you get to the court case. That's not usually the way it's done. I worked to pack my book with economic history. I give the reader the facts about prices, profits, and outputs. Even Bork doesn't do that.
With the history in mind, students and readers look a bit more critically at what the government claims and what judges have done. Incidentally, that's also why I like Titan. Chernow explains where Standard Oil came from, how it grew, how it maintained its dominant position, and how it lost that position well before the antitrust case.
AEN: What about the theoretical side of your book? Still controversial?
ARMENTANO: We've made a lot of progress in antitrust theory since those chapters were first written. No one believes in the older and more simplistic perfect competition models anymore. The rivalrous theory of competition has made huge inroads within the profession. However, in monopoly theory, the profession is still far behind. We still talk about Herfindahl indexes, concentration ratios, and market shares as being determinative of something called monopoly power.
Part of this is driven by the need for shorthand ways to tell if companies are in violation of the law. But that's not all of it. There is also a drive to run everything through a model that is seemingly scientific. Industrial organization classes still spend inordinate amounts of time doing statistical work. That turns students off, and doesn't really give them any insights into how American industry came to develop and create this tremendous amount of wealth that's all around us. An industrial organization class without real business history is a criminal offense.
AEN: You also deal with how smaller rivals use antitrust to go after larger companies.
ARMENTANO: This is an area where Public Choice theorists are better than Chicago theorists. Fred McChesney, Robert Tollison, and others, deal with the interest groups behind antitrust. But I get almost no feeling of this reality with George Stigler or Robert Bork. They seem uninterested in the dynamics of how these laws are used.
The fact is that antitrust is special-interest law. Indeed, this was the intent of the law. The antitrust laws were created precisely to be used by smaller rivals to clobber more efficient competitors. Even today, ninety percent of the cases are one firm suing another. One aspect of the Microsoft case that pleases me is that the interest-group angle has been obvious to one and all. Even the newspapers talk openly of this fact, and I think this is healthy.
AEN: Can you elaborate on the origins of antitrust?
ARMENTANO: Most economists recognize that most regulation has a special-interest origin. Economists used to argue that antitrust was the exception. Most of the Chicago people have argued in the past that antitrust was public-interest regulation. But it turns out the evidence runs the other way.
Research has shown that it began with business interests wanting their competitors regulated. That's true for state-level antitrust. And if you go back into the origins of the Sherman Act, it's clear that less efficient petroleum competitors wanted to get a federal law to regulate the activities of the supposed petroleum trust.
There is very little controversy about the Federal Trade Act of 1914: small business interests wanted a law that would come down on large businesses. That's why the law was written. The Robinson-Patman Act that came out of the Great Depression grew out of special-interest pleading. The U.S. Wholesale Grocers Association ended up writing the Act itself, and simply got Robinson and Patman to sponsor a law aimed specifically at A&P.
In short, there was no golden age of antitrust when monopolistic abuse was running rampant in a free market, and when government stepped in to guard the public interest. Antitrust law has always been legally ambiguous, theoretically untenable, and empirically unwarranted. And let's say we can't establish that antitrust originated as special-interest law. The point is that it has been used as special-interest law. That's the way the law works in practice.
AEN: Murray Rothbard puts a great deal of emphasis on this angle.
ARMENTANO: That's why Rothbard is so great to read. He had a tremendous influence on me. He always tried to bring out the real story of a particular case of government intervention. His history was never contrived the way mainstream economic history can sometimes be. Reading Rothbard was a mind-changing event for me that change my entire academic perspective on economics. In fact, it changed my whole life.
Not that I didn't always believe in the virtues of free markets; I had been convinced since high school. But I had no idea that there were economists like Rothbard around. I remember reading Henry Hazlitt and thinking, that's about as close as I'll ever get to someone who really believes in markets.
I read Ayn Rand, and she would frequently mention Mises, but she didn't mention Rothbard. I think I ran across his name in a footnote somewhere. So when I first read Rothbard, it was a tremendous, tremendous discovery. I'll never forget meeting him 1972 at a conference in Philadelphia. What an honor it was to meet that great man.
AEN: Would your case against antitrust apply in heavily regulated industries, like banking, for example?
ARMENTANO: That's always been a tough one. Banks are heavily regulated in some ways and
privileged in others. I would like to see those interventions repealed. But this is a different problem from that of antitrust. In banking, entry is not completely free. There are minimum capital requirements. But these are modest restrictions.
So the analysis I would use on bank mergers would be the same as for any industry. Mergers take place because there are efficiency gains to be realized, and these mergers ultimately benefit consumers.
The same type of analysis applies to other regulated industries, like telecommunications. What they need is not antitrust but deregulation. The Telecommunications Act of 1996 was positive, but there are so many special interests involved. Congress has yet to write a telecommunications bill that really removes all the restrictions on entry, particularly for the local telephone companies.
When industries are only partially deregulated, it tends to produce pressure for re-regulation. That is what happened in air carriers, for example. Some monopoly privileges remain in the industry, and have brought about real problems. Alfred Kahn, the father of deregulation in air carriers, has said there are predatory practices in airlines. He gives you the feeling that if he could re-regulate the industry he might do it.
AEN: What kind of policy changes help deter the urge to re-regulate?
ARMENTANO: Free trade, for one thing. It tends to make markets more rivalrous. Globalization and international competition means that consumers have more options and that firms are selling in more markets. This creates less of a reason in regulators' minds for the use of antitrust.
Incidently, there's been a lot of talk recently about the rise of protectionist ideology. I frankly don't see any signs of that coming back. But in the long run, the only way to prevent re-regulation will be to dismantle the regulatory apparatus completely. Only the Austrians have been consistent in that demand.
AEN: Do you think Mises, in dealing with the issue of monopoly price, left an opening for antitrust?
ARMENTANO: Mises isn't always as consistent on this topic as we might want him to be. Even when he's talking about a competitive market, he occasionally slips into a kind of pure competition analysis. There's a statement in Human Action where he says on a competitive market, there's no such thing as a price policy for the sellers. They have no alternative but to sell as much as they can at the highest price. That's really what the perfect competition model says. Mises seems to be equating that with a real market competition, though I don't think he intended to.
Mises also discusses monopoly and even a monopoly price problem without all the distinctions Austrians make today. It doesn't come up very often in Mises, but it is there. He leaves a slight opening that would seem to call for regulation. However, he did not actually recommend antitrust laws.
AEN: Was the problem of "resource monopoly" the issue for Mises?
ARMENTANO: When Mises talks about monopoly, he says it occurs when the whole supply of a commodity is controlled by a single seller. Israel Kirzner uses the same language. So they seem to have the same position with respect to monopoly. And that's a reasonable definition of monopoly: the whole supply of something is controlled by a seller or a group of sellers acting in concert. But the question is: does that create monopoly prices? Is there such a thing as a monopoly price? And do you use regulation to control it?
Mises and Kirzner seem to be saying, yes, you can get monopoly prices but nonetheless you should not regulate. So how are monopolies controlled? Kirzner talks about entrepreneurs coming up with substitutes for the monopolized good. Mises talks about the rise of alternative production processes. In both cases, you get market activity that works around the monopoly and ultimately impinges on the monopoly. There is some commonality here with Joseph Schumpeter's process of creative destruction. In the long run, they argue, the monopoly will be benign.
And yet, someone might just respond: why wait for the long run to destroy the monopoly? Why not just use regulation to do that right now? Kirzner has answered that objection by arguing that regulation short-circuits the discovery process. I'm still not sure that would persuade someone who wrongly fears the power of resource monopolies.
AEN: Do you reject the idea that there might be a resource monopoly?
ARMENTANO: Well, Kirzner gives the example of oranges. One firm owns all the orange trees and therefore monopolizes all the orange juice. I know this is intended as a hypothetical example. But I too used to believe in homogenous products like oranges--until I came to Florida. It turns out the orange market is extremely complicated. There is no such thing as an orange. There are all kinds of oranges. They are grown in different climates and have different uses and different markets.
If you had a monopoly over oranges grown in Indian River County, which is one of the great orange growing areas in the U.S., in some sense it wouldn't really mean anything. You could call it a monopoly, but only in the same sense that Pepsi has a monopoly over Pepsi. Depending on how you define the commodity, you can come up with as many monopolies as you want. I don't think that is a useful approach.
So there are inherent difficulties with the Mises-Kirzner approach. I think a better approach is the Rothbardian approach. Monopoly power should be seen as something that comes from outside the market, not inside the market. A legal restriction to enter a market is an example of monopoly power, but that can only be granted by the state.
Once you consider legal restrictions, it becomes meaningful to talk about monopoly. You can talk about monopoly power and monopoly prices. You can talk about restriction of output and even consumer injury. If there are legal restrictions into the market, it is more reasonable to engage in predatory practices. These terms begin to make sense within a framework of the interventionist state.
AEN: Have you ever discussed these ideas with antitrust regulators?
ARMENTANO: Yes, and I get a variety of responses. In the eighties, there were people in the Federal Trade Commission who liked my work. James Miller, for example. On the other hand, Frederick Shearer, who has worked there for many years, has criticized my work severely. So it depends on the persuasion of the person.
AEN: You have also talked about the ethics of antitrust.
ARMENTANO: If you adopt a strict natural rights position on property, economic relations must be governed by contract. So long as we are not interfering with anyone else, we can choose to trade or not to trade. That would include the right to merge our property. From an economic perspective, any interference with this right is inefficient. From an ethical point of view, it also violates property rights. It is therefore unethical. This not only applies to mergers. You can extend that kind of analysis to price fixing agreements, tying agreements, or any cooperative behavior in a free market. Any interference in the freedom to contract is a violation of people's rights.
AEN: What about other rights, like the right to a wide variety of goods to purchase?
ARMENTANO: The problem is that there is no property right in a range of goods you do not already own. Rights only pertain to your own property and not anyone else's. A consumer doesn't have a right to a seller's property. A consumer has no right to a low price on a seller's property. In a free market, a seller may choose to boycott potential buyers and not sell them anything. There would be no violation of property rights in this case. Similarly, sellers do not have a right to consumer's income. In a free market, you must deal with on the basis of voluntary exchange.
AEN: What about the ethical implications of Rothbardian monopolies, i.e. those created by the state?
ARMENTANO: In that case, the government is violating rights by restricting the uses of justly owned property. By creating the monopoly through restricted entry, there is a seller who cannot use his property in a peaceful manner or a consumer who is restricted from buying. You get a monopoly as a result of such restriction. Even aside from questions of efficiency, I think we can also say this kind of regulation is unethical and contrary to the norms of free enterprise.
Not everyone accepts the natural rights approach to property. But as soon as you slip into the utilitarian framework, you start to introduce all kinds of confusions. Suddenly, consumers have additional rights beyond their property rights. They have a right to maximized welfare, for example. I think all this is misguided.
AEN: How would you characterize the interaction between economics and ethics.
ARMENTANO: It's important to keep ethics in the ethics box and economics in the economic box, and not get them mixed up. Economics as a science, Mises rightly insisted, is value free. But that does not mean that economists must never make value judgements. In fact, I see the moral arguments as a final case-clinching way to argue for free markets.
At the same time, my ethical arguments against antitrust have caused me a tremendous amount of trouble. In my book, I only have four or five pages in which I discuss contracts, rights, and the moral argument. But when economists review the book, they will zero in on those few pages, and attack me for even bringing the issue up. I think that's totally off-base. I think you can bring it up, but you must do so within its own context.
Also, the advocates of antitrust make all sorts of ethical arguments, but they are implicit in their models. When such arguments are implicit, it's pretty hard to criticize the ethical assumptions because the person can always claim he or she is not actually saying that at all. I far prefer those who make their arguments explicit. For example, when I was defending price fixing, Judge Ginsberg once wrote that price fixing is a form of theft. I don't agree, but at least he put his argument out front so it can be dealt with.
AEN: Any thoughts on how popular culture treats business?
ARMENTANO: I've been doing economics for 35 years. When I started teaching in the 1960s, the feelings toward business were extremely poor. The defenders of business were very few and their arguments were not very powerful. We are much better off today, both in terms of the quality of arguments for the contribution of business to society and the quality of the defenders of economic liberty. If you look at public policy today, interventions like antitrust are much less pernicious than in the 1960s and the 1970s. We've deregulated some industries.
I'm not sure free-market arguments are an entrenched part of the popular culture. In fact, popular culture can be brutal in its treatment of business. But good books are being published, excellent opinion pieces appear in even the large newspapers, more students are being recruited into our ranks, and more teachers are presenting the Austrian perspective. That's why I'm optimistic about the future.
Volume 6, No. 3 (Fall 2003)The goal of our inquiry here is to add weight to the Rothbardian critique of Mises’s theory of monopoly prices. We do so by highlighting the inconsistencies of the latter’s treatment of monopoly prices and by arguing that it is incompatible with his own general framework of praxeological analysis. In the first part, “Welfare Arguments Based on Value Theory,” we discuss the implicit interpersonal comparisons of utility Mises uses in order to claim that consumers are hurt by monopolistic restriction of production. We argue in the second part, “Propertarian Monopoly Theory,” that monetary revenues can not convey information about comparative consumers’ welfare and that the correct approach to deal with welfare statements is to point out the framework of property rights under which actions are undertaken. Section three, "Monopoly Prices and Information,” is devoted to the proper context of a possible identification of monopoly prices. We focus on this goal by questioning the compatibility between two of the Misesian conditions for the emergence of monopoly price. The final section, “Restriction of Production and Reservation Demand,” examines in what sense the restriction of production allegedly used by the monopolist to extract more money than otherwise from consumers could be the element which allows us to differentiate between competitive prices and monopoly prices. We will argue there that Mises changes the framework of discussion from the real market to an equilibrium construct in order to arrive at a meaningful distinction between market prices and “monopoly” prices.
Volume 1, No. 2 (Summer 1998)Terminological Remarks
It is customary to distinguish between competition and monopoly. This distinction suggests the idea that in the case of monopoly there is no competition at all. However, this is not true with regard to the monopolies we have to deal with in a study devoted to the problems of a market economy.
In a perfect socialist system, the state would enjoy the absolute all-round monopoly. The state, as the only owner of all means of production, would be in a position to face every individual with the alternative of either yielding to all the wishes of those in power, or starving. In the same position would be an enterprise owning all of the supply of potable water and all the supply of one of the factors of production required for rendering other water potable.
The monopolies we have to deal with are not absolute monopolies, but relative monopolies. Ultimately, all these commodities compete with one another. Every market commodity has its substitutes. No such commodity is necessary and indispensable in the strict sense of these terms. Competition is a factor in the determination of monopoly prices also.
It is only under this reservation that we are allowed to use the terms competitive price and monopoly price, competitive market and monopolized market.
Furthermore, it is important to realize that we have to deal with monopoly prices, not with monopolies as such. The mere existence of monopoly is irrelevant. Under copyright law, every author or publisher of a book has a monopoly. However, this fact alone does not give the author or publisher any advantage if other conditions do not supervene. It may even happen that they will not find any buyer for their book, no matter how low may be the price they are asking for it.
The Nature of Monopoly Prices
The Greek word monopoly means that there is only one seller of a certain commodity on the market. The usual definition of monopoly is: Control of the supply of a certain commodity on the part of one seller or of a group of sellers operating in concert.
However, not every seller enjoying a monopoly finds it advantageous to deviate from the potential competitive price. If a rise of the price above the potential competitive price results in a more-than-proportional restriction of the quantity bought by the public, the total proceeds of the seller would drop. He would hurt his own selfish interests by deviating from the competitive price. If at the competitive price of 5 per unit 100 units can be sold, the total proceeds are 500. If a rise in the price to 6 per unit reduces the quantity sold to 80, the total proceeds drop to 480; no “monopoly price” in the technical meaning of this term is more advantageous to the seller than the competitive price. But if at the price of 6 per unit it is possible to sell 90 units, the substitution of the monopoly price of 6 for the competitive price of 5 increases the total proceeds of the seller from 500 to 540.
Under free competition, there prevails a tendency to adjust the quantities of various commodities to be produced and the allocation of the factors of production to the various branches of industry to the wishes of the consumers. What prevents a further expansion of the production of copper or of shoes is the fact that such an expansion would not pay. It would be unprofitable because the prices which could be obtained for the products would not cover the costs of the factors of production required. While the consumers in buying a greater quantity of copper or of shoes are not prepared to recompense the seller for the prices of the required non-specific factors of production, they are ready to make up for the same factors of production, in buying some other commodities. The profit motive pushes the enterprisers toward the production of those commodities for which the demand of the consumers is most urgent. Under the profit motive, the consumers, on a competitive market, decide how much raw material and labor should be used for the production of copper or shoes and how much for the production of some other merchandise.
But it is different under a monopoly price. If some special barriers prevent other people from competing with the monopolistic sellers, a restriction of the production of copper or of shoes that does not comply with the demands of the consumers becomes possible. Although the consumers are ready to pay for additional quantities of copper or shoes at prices which would render an expansion of production profitable on a competitive market, the sellers, sheltered by monopoly, do not expand production if they are better off under a state of affairs which results in a higher income for them with curtailment of production.
Control of supply means that no outsider is in a position to counteract the monopolist’s deliberate restriction of supply by offering on the market an increased quantity of the commodity concerned.
There is no need to enter into sophisticated hair-splitting with regard to the question of what should be regarded as the “same” commodity and how the various commodities should be distinguished from one another. It would be useless to discuss whether all silk neckties are to be considered as specimens of the commodity class “silk neckties” or whether we have to consider every pattern as forming a commodity class of its own. The practical problem that matters is the reaction of the consumer to a rise in the price. If any rise in the price of one special pattern above the competitive price results in such a restriction of demand that the total proceeds drop, such a rise would hurt the interests of the seller. Whether or not we consider his commodity as unique, and his position as a monopolistic one, is immaterial for the market, for the consumers, and for the allocation of factors of production.
The Plurality of Monopoly Prices
On a competitive market there prevails a tendency to make differences in the prices of a commodity disappear. In the long run every unit is bought and sold at the same price. At this price total demand and total supply are momentarily equal. The temporary coexistence of a plurality of prices for the same commodity is the outcome of the fact that the forces making for change are still operating and that a state of equilibrium has not yet been attained.
In the case of monopoly prices the monopolist has generally the choice between different monopoly prices.
Let us consider this example.
Here we have three possible monopoly prices: 7, 9, and 10. The prices of 7 and 10 are more favorable for the monopolist than the price of 9. He will choose between the prices of either 7 or 10. But if the amount that can be sold at the price of 10 is only 50 and the total proceeds consequently only 500, there is only one monopoly price most favorable to him, namely 7.
In sketching a scheme like the one above, the economist is omniscient. He pretends to know beforehand what the reaction of the public to any price changes will be. In reality, monopolists lack such omniscience. They must discover by speculative anticipation and by trial and error whether there is any monopoly price possible at all, and sometimes, if so, which of the various possible monopoly prices is the most advantageous for them.
It is this uncertainty about future reactions of the public that makes it often practically difficult to draw a sharp line between monopoly prices and competitive prices. The line is, however, sharp indeed. But the only means for a monopolist to find out whether a policy of restraint will be more favorable to him than selling at the competitive price is to try it. We see therefore many abortive attempts to embark upon a monopolistic price policy which the reaction of the public frustrates.
The Imperfect Monopoly
Let us consider this example:
If one man, A, owns 80 units, and other people 20 units, A is in a position to embark upon a monopolistic price policy, no matter what the behavior of the outsiders is. He sells 70 units at a price of 6 and gets 420, instead of 400 which he would have received in selling 80, his total supply, at a price of 5. It does not matter for him what the outsiders do. They may continue to sell at a price of 5 or raise the price to 6.
But if A owns only 55 units and the outsiders 45 units, it is impossible for A to adopt a monopolistic policy. If he sells 45 units at a price of 6 (instead of 55 at a price of 5) he makes 270 only (instead of 275). In this case, a monopolistic policy requires a cooperation of A with a sufficiently large group of outsiders.
Duopoly and Oligopoly
The assumptions on which the discussion of the problems of duopoly and oligopoly is built are these: there are two or more sellers on the market. The public’s reaction to a restriction of supply would enable the sellers to engage in a monopolistic policy of restraint and price raising. They are all eager to engage in such a policy. But for some mysterious reasons—pride, mutual distrust, or simply spleen—they are not prepared to combine and to adopt a uniform policy. There is no agreement, either open or tacit, between them. Each of them acts on his own. But as the conditions for the establishment of an imperfect monopoly are absent, each is forced in his pursuit of a policy of monopoly prices to take into account the policies of his rivals. Each seller must consider each move in view of the possible counter-moves of his rivals.
The aim of all sellers concerned is the substitution of a monopoly price for the competitive price. Duopoly and oligopoly are therefore not special classes of monopoly prices. They are special classes of the policies adopted on the part of the sellers for the establishment of a monopoly price.
The monopoly price established as a result of duopolistic and oligopolistic rivalries may differ from that which would have been established by a combine between them. Each rival’s share in the monopolistic gain may differ from what it would have been under a concerted action. But the outcome is necessarily always either the establishment of a monopoly price or the failure of the attempts to establish any monopoly price.
Some economists devoted great intellectual effort to the study of duopoly and oligopoly. However, we may wonder whether these problems are of any practical importance. It is probable that the sellers concerned will always come at least to a tacit agreement.
The Monopolized Commodity
The commodity the price of which can be made a monopoly price can be:
(1) a consumers’ good,(2) a material factor of production,(3) a special kind of skilled labor,(4) a license required for a special kind of production or marketing,(5) a technological recipe which is secret or the utilization of which is only free to especially privileged persons or firms (e.g., patents, copyrights),(6) a name or a trade-mark the use of which is reserved to certain people.
Under competitive conditions, the specific factors of production are in the long run used to the extent permitted by the opportunities of alternative uses for the non-specific complementary factors. The poorest soil tilled and the poorest mine exploited do not yield any rent. A further expansion of production in such a way as to exploit poorer soil and poorer mines would not cover the costs of operation.
Under monopoly, a greater part of the specific factors of production concerned will remain unused. The common feature of all instances of monopoly prices is that part of the supply, which under competitive conditions would have been offered on the market, is withheld from the market. The most spectacular and objectionable instance of this withholding is the purposeful destruction of the commodities concerned. It happened mostly with consumers’ goods (e.g., coffee) but sometimes also with factors of production.
As a rule, however, the monopolists do not destroy the commodity concerned. Their restraint of trade consists in producing a smaller amount and consequently in not using a greater part of the resources than would have remained unused under competitive conditions.
It is necessary to realize that this restriction of the production of a certain commodity makes an amount of capital and labor available for other lines of production. We will later deal with the consequences of this outcome.
Profit and Monopoly Gain
Profit is a surplus of the price realized in selling a commodity over its cost, i.e., over the amount of money which the seller had to spend for acquiring or manufacturing it.
The price of every commodity is the result of an interplay of supply and demand. If—other things being equal—the quantity offered for sale were greater, the price would be lower. It is therefore permissible to say that profit is an outcome of the relative insufficiency of the supply, i.e., the insufficiency when compared with the supply of other commodities. But this is tantamount to the establishment of the fact that there is no equilibrium in the distribution of the various factors of production between the various branches of industry. It is, of course, a truism to assert that a state of perfect equilibrium can never be attained in a continuously changing world. In such a world, there can never be stability and equilibrium, although there prevails permanently a tendency toward the establishment of both. However, every change of data disturbs anew the processes tending toward stability and equilibrium. In a progressing society, there can never be stability.
Under special conditions, it is possible for an entrepreneur to add a monopoly gain to his profit. If one entrepreneur or a group of entrepreneurs owns a supply large enough for the establishment of at least an imperfect monopoly, and if the competition of firms newly entering this special field of production is not to be feared for the moment because some time is needed for the production, the establishment of a temporary monopoly price is feasible, by withholding a part of the supply available from the market.
Again and again, people have confused the two things, profit and monopoly gain. It is true that the fact that the supply available at any moment is not larger than it really is, is the outcome of the conduct of entrepreneurs. But no individual entrepreneur is in a position to prevent anybody else from counteracting his restraint by an expansion of production.
The mere fact that an entrepreneur did not produce more of the commodity in question is not indicative of a monopolistic restraint, even if his plant has a capacity for a larger output. The reasons for his not producing more can be twofold: either he lacked the funds for a larger production, or he believed that employment of the rest of his available funds in other lines of business would be more advantageous, i.e., would satisfy more urgent needs of the customers.
The question is always: Can an individual gain by restricting production? If someone else is free to increase output, an individual can increase his profits only by increasing output, not by restricting it.
The main fault of many current doctrines dealing with monopoly and competition is that they shut their eyes to the fundamental fact of economic activity. They do not realize that the factors of production are scarce and that one branch of industry cannot expand other than by withdrawing scarce factors from other branches.
The Role of Increasing or Decreasing Costs
A monopoly price is always a price of a consumers’ good or of a factor of production needed—either on account of physical and natural conditions, or on account of institutional and legal conditions—for the production or the marketing of a commodity. If a production aggregate or a whole branch of industry enjoys a monopolistic position, it always owes it to the fact that it has a monopoly with regard to one of the factors of production needed. The specific monopoly gain must always be imputed to the fact that the monopolist owns such a commodity or privilege.
Average cost of production, i.e., cost of production per unit produced, changes as a rule with the amount produced. It may either increase or decrease with the restriction of output. It is easy to understand how this fact influences the monopolist’s attitude.
Increasing costs:
The monopoly price most favorable to the monopolist is 7.
Decreasing costs:
The monopoly price most favorable to the monopolist is 7.
The Role of Difference in Production Costs
Even if entrance into an industry is free to anybody, a monopoly could develop if the differences in production costs are large enough.
Let us consider the case of local monopolies of bulky goods, e.g., building materials or coal. A firm which owns all of the stores of clay needed for the production of bricks in the neighborhood of a city can obtain monopoly prices (1) if and as far as there is no competition of other building materials, and (2) if the freight rates for the shipping of bricks from more distant places are such that a monopoly price can be found within the margin of the competitive local price and the price which would allow competition of those tile-works situated in other places.
If the transportation costs are more than one per unit, a local monopoly price of 6 can be established. But if the transportation costs are less than one per unit, a local monopoly would be out of the question.
The same is true with regard to national monopoly prices. The establishment of a national monopoly (mostly through cartelization) is possible if the costs of importation from abroad plus import duties are high enough. A national monopoly is unfeasible if foreign producers are in a position to underbid on the domestic market any possible monopoly price.
Moreover, analogous conditions make it possible to attain monopoly prices for an industry the future prospects of which are at the time deemed unfavorable.
There may exist one plant for the production of the commodity A. Using its full capacity it could turn out 100 units. But 100 units could only be sold at a price of 5; this price would not cover the cost of operation, it would involve a loss and still less would it leave any room for a return of the capital invested in the buildings and the machinery. Conditions being such, there is no need to be afraid of a newcomer’s entrance into the industry. The existing plant can restrict its output and sell the quantity produced at a price that not only covers the cost of current production, but may also allow a return of the capital invested in the plant. In some cases, it may happen that the entrepreneur nets above this return a net monopoly gain. If, notwithstanding this fact, no outsiders enter this field of industry, the reason is that they consider the further prospects as unfavorable. They believe that too much capital has been invested in this branch, and that market conditions make investment in other branches more advisable.
It is necessary to realize that this particular case of monopoly prices is unlikely to play an important role within a progressing society. In such a society, there prevails a tendency toward both progressive accumulation of capital and technical improvements. If a newly established plant is in a position to produce at lower costs or to turn out a better product, the advantage of the older plant disappears.
Price Discrimination
In any case in which monopoly prices are advantageous for the monopolist, it would be still more advantageous for him to discriminate among the buyers and to charge every customer the full value of the service. (Moreover, price discrimination can also be favorable to the seller in cases in which any monopoly price would involve a loss.)
There are two facts with regard to price discrimination: (1) it does not result in any restriction of the amount sold; and (2) it brings about a drop in the price of a part of the units sold, and thus makes the commodity or the service in question accessible to customers in reach of whom it would not be in the case of the competitive price.
A doctor is in a position to sell forty units of service in the week. If he were to ask $6 per unit, he could sell ten units; at $2, forty units; at $1, fifty units. The competitive price is $2. At that price people who cannot afford to pay more than $1 must forego his services.
But if out of the forty units twenty are bought by people who would be ready to buy ten units at a price of $6 per unit, price discrimination would mean: ten units are bought at $6 per unit, and twenty units at $2; there remain ten units which can be bought by people who cannot afford to pay more than $1. The doctor makes $90 (instead of $80). The wealthiest of his patients pay more and are forced to restrict their consumption. A class of less-wealthy customers is in a position to be served.
It is important to realize that price discrimination is applicable not only on the part of sellers who are in a monopolistic position, i.e., sheltered against the entrance of outsiders into their field, but also in the field of competitive business. A hotel, for instance, may charge lower rates than those generally charged, to special classes of patrons, e.g., ministers, members of special clubs, or special groups of business. The above mentioned doctor, too, will not be in a monopolistic position.
The Regulation of Competition
The history of economic progress is a record of the substitution of cheaper and better methods of production and of marketing for more expensive methods resulting in less satisfactory achievements. It is a record of free competition.
It is a fact that competition is not always fair. Ruthless people often resort to lies, slander, and calumnies in order to bring competitors and their products into bad repute. They take recourse to blackmail and to sabotage. They procure for this purpose the services of gangsters and libelists. It is one of the tasks of the penal code and the courts to wipe out these pests.
It happens time and again that such criminal methods are applied with the deliberate intention of establishing a monopoly for whose establishment the necessary institutional and economic conditions would otherwise be lacking. There is, however, no need for special anti-monopoly laws to suppress the resort to procedures which are in themselves defined by the penal code as criminal offenses without any regard to the purpose they serve in the individual case.
Meddling with the conditions of competition is an authoritarian policy aiming at counteracting the democracy of the market, the vote of the consumers. If a government interferes for the protection of the railroads against the competition of motor-buses, it curtails the freedom of the individual to use his income in a way that he himself considers the most appropriate. It forces people to subsidize the railroads and to get less for the money spent.
What is euphemistically called government regulation of competition is necessarily always a restriction of the freedom of the consumers to choose the commodity or the service they would choose in the absence of such regulation. The government hinders some enterprises or groups of enterprises from competing as efficiently as they could. Some countries of continental Europe have developed these methods to great perfection, protecting the arts and crafts against the mechanical factory, the small shopkeeper against the big stores and chain stores, the local dealer against the mail order houses, and soon. But such methods are not totally unknown to America, either.
Restriction of competition does not always result in monopoly prices. But its effects are nevertheless detrimental both for the buying public and for the potential competitors excluded.
Are Wage-rates, under Labor-Union Pressure and Compulsion, Monopoly Prices?
All that is valid with regard to monopoly prices of commodities is no less valid for wage-rates, provided the conditions required for the establishment of monopoly prices are present.
If access to a special segment of the labor market is not free, and the demand for this kind of labor is such as to make monopoly wage rates advantageous from the viewpoint of the workers, a monopoly wage rate can be established
Let us assume that a union has 500 members and that no outsider is allowed to work in the field concerned. At a wage rate of $5, all 500 members can find jobs. At a wage rate of $8, only 400 members can get jobs, while 100 remain unemployed. At the rate of $5, the total payroll would amount to $2,500; at the rate of $8, it would be $3,200. If the union charges all 400 employed members a fee of $1.60, it collects $640, and is in a position to grant to every unemployed member $6.40. Every union member, whether employed or unemployed, makes $6.40.
But if, on the other hand, at a rate of 8 dollars only 300 members could find jobs while 200 remain unemployed, the total payroll would drop from $2,500 to $2,400. The establishment of a monopoly wage of $8 would harm the interests of the union membership
However, as a rule, labor unions espouse another policy. They do not bother at all about the well-being of those who cannot find jobs on account of the height of the minimum wage rate fixed by their policy. They do not indemnify those who suffer a loss. Thus, every restriction of access to their section of the labor market and every rise in wage rates is an advantage for those who still get jobs at the higher rate enforced by labor-union pressure and compulsion.
In the early stages of unionism, only comparatively small groups of skilled labor were unionized. At that time, the effect of unionism was not mass unemployment prolonged year after year, but an increase of the supply of labor in the non-unionized branches of industry. The counterpart of the rise in wage rates for union members was an increased pressure on the market of non-unionized labor. With the progress of unionization mass unemployment became inevitable.
Thus, labor-union policies, although restrictive, as a rule do not result in wage rates which are technically to be called monopoly rates. But the establishment of this fact does not mean that they are not open to objections on other grounds. Everything which was said above about government regulation that does not result in monopoly prices applies to unions too, as far as they hinder the entrance of people into a special segment of the labor market.
Furthermore, such restrictive union policies sometimes result in the establishment of monopoly prices in a field of business in which competition would otherwise prevail. It may suffice to quote a few lines from a publication which nobody would reproach with “union-baiting.” Says T.N.E.C. Monograph No. 21: “The Chicago Master Cleaners and Dyers Association controlled the trade from 1910 to 1930; its power derived largely from the economic strength of four friendly unions—the Laundry and Dye House Drivers and Chauffeurs Union, Local 712 of the International Brotherhood of Teamsters, known as the truck drivers’ union; the Cleaners, Dyers, and Pressers Union, Federal Local No. 17742 of the A.F. of L., known as the inside workers’ union; and the Retail Cleaners and Dyers Union, Federal Local No. 17792 of the A.F. of L., known as the tailors’ union” (p. 296).
The Social Consequences of Monopoly PricesThe Mythology of Perfect Competition
The advocates of socialism criticize the system of free enterprise from various positions, and contradict themselves in their criticism.
On the one hand, they scorn the “madness” of the competitive system and complain about “cut-throat” competition. But at the same time the same people contend that in fact competition under capitalism is never “free” and “perfect” and that there are monopolistic elements in all so-called competitive prices.
The same contradictions appear in economic policies. On the one hand, governments are fighting monopolistic restraints of trade by various measures, the best known of which are the anti-trust laws. But at the same time, the same governments are eager to restrict the output of various branches of production or to withhold goods already produced from the market in order to raise prices. Moreover, they are intent upon contracting international agreements for the establishment of world monopolies.
It is an old practice of the foes of civil liberties to attack the concept of freedom from a metaphysical viewpoint. It was long the cherished method of the German advocates of despotism to cavil at the “negativism,” “illusiveness,” and “emptiness” of the notions of liberty and freedom. It is on their syllogisms that the present-day critics of “free” competition base their statements.
However, the liberal economist’s plea for free competition has nothing at all to do with any metaphysical notions, and does not refer to any philosophical explanation of liberty. The old liberals advocated the abolition of laws preventing a man from competing on the market with privileged groups. They wanted to do away with the privileges of guilds and inns, monopolistic companies, and so on. They wanted to give everybody the right to choose his own way of life, his field of activity, and the methods of his work. This was what they had in mind in saying that competition should be “free.”
The economists’ plea for freedom of competition was exclusively motivated by their concern about the best possible satisfaction of human needs. (Applying a nowadays fashionable slogan, we would have to say: by their concern to attain freedom from want.) A law preventing a man from competing can never improve or increase or cheapen the supply of commodities. What it can achieve is always only protection of less efficient producers against the competition of more efficient ones. The efficient man can do without privileges.
The economists attacked the privileges granted to a less efficient producer in order to protect him against the competition of a more efficient rival. Such privileges, they pointed out, may be beneficial to the privileged. But their gain is the consumers’ loss. The opportunities of the consumers to satisfy their needs as well and as cheaply as the state of technological knowledge and of the supply of material resources and of manpower allows are curtailed. If such privileges are granted only to one producer or to small groups of producers, they injure the interests of the great majority to the sole benefit of a minority. But if everybody were to be protected in this way, all are harmed. What a man may profit in his capacity as producer (whether entrepreneur, farmer, or wage-earner) is on the other hand absorbed by the loss he suffers in his capacity as consumer. Moreover, all are damaged by the fact that the privileges prevent the most efficient utilization of the factors of production available.
The economists’ concept of competition does not refer to anything that could be called “perfection.” Only people who never grasped the meaning of modern value and price theory can fall prey to such a crude misunderstanding.
It is fundamental for any treatment of competition that competition exists not only among the sellers of the “same” commodity, but among the sellers of many different articles competing with one another for the buyers’ money. A firm supplants its rivals not only by selling the “same” commodity at a lower price, but no less by selling “better” commodities of any kind, i.e., commodities which the buyers prefer to those offered by other firms. It is futile to introduce into economic reasoning the concept of a “perfect” competition which assumes that the only means of competition is underselling the “same” commodity.
There is certainly full and real competition on the “market” for actors and singers. However, every high class performer is an individual. He does not compete on account of what he has in common with his competitors, but precisely on account of what distinguishes him from them. And he competes not only with other performers, but no less with a variety of other services and commodities. His success consists not only in attracting people who would have otherwise attended the performance of other actors or singers, but also in attracting people who would have otherwise spent their dollars for drinks, for a new hat, for a book, or for anything else.
Two specimens of the “same” commodity offered for sale may differ with regard to the place at which they are available. A grocer in a distant suburb can charge higher prices for the “same” article if the buyers find the extra cost not too high a price for the advantage of getting it in their neighborhood. In buying, a customer not only looks at the chemical and physical properties of the article, but also at many other things. He may prefer to buy in a cleaner shop or in a store in which service is quicker or more “smiling” than in other shops.
Only in the purchase of commodities the sameness of which can be established in an unquestionable way is underselling the only method of outstripping a competitor offering the same commodity. However, competition is on the wholesale markets of such staple commodities (for instance, metals, chemical compounds, fibers) not more “perfect” than on the retail markets of food, clothes, or shoes.
What counts is always whether a seller is or is not in a position to increase his total net proceeds by restricting the quantity of units sold. This question is not answered in the affirmative by pointing out that every seller could increase his sales by lowering the price asked. If we were to call every price which excludes some potential buyers from buying a monopoly price, all prices would have to be called monopoly prices. An unskilled worker asking 10 cents for a day’s work would be a monopolist because the demand for his work would further increase if he were to ask 9 cents only. The distinction between monopoly prices and competitive prices would disappear altogether.
Yet, the distinction between monopoly prices and competitive prices as developed above makes good sense. It is indispensable for a theory of prices because it would be otherwise impossible to explain the value imputed to patents and copyrights, the essential features of cartel policy, and many other phenomena.
The conduct of every seller can be called a “policy.” A job seeker refusing a job offered with a monthly pay of $200 and looking for one more remunerative adheres to a definite policy. So does every other seller reluctant to throw goods away. It is therefore a mistake to see in a “price policy” the indication of a monopolistic position.
Neither is price discrimination necessarily the outcome of monopoly.
It is a fundamental mistake to assume that in every case in which an enterprise does not expand its production and its sales to the limit in which increment costs would exceed the sales price, the latter is monopoly price. This would be true only for the state of equilibrium. But we must emphasize again and again that the state of equilibrium is a hypothetical concept only, although a concept indispensable for every economic analysis. In order to conceive the meaning of economic change, we are under the necessity of constructing the image of a society in which no changes at all occur. But we must never forget that such a state of static equilibrium is purely hypothetical and can never find any counterpart in reality.
In this imaginary state of perfect equilibrium, everything is stable. No changes at all occur. All relevant economic data remain permanently the same. In this stationary world, the total sum that a manufacturer must spend for the purchase of the factors of production required (including the adequate reward for his own labor, i.e., the reward corresponding to the state of the labor market) and for interest of the capital employed would be equal to the price he gets for the product. Nothing would be left for profit. Of course, such a world would not have any need for entrepreneurs and no economic function for profits. As only those things are produced every day which were produced yesterday, the day before yesterday, the last year, and ten years ago, and as the same routine will go on forever, as no changes in the supply or demand either of consumers’ or of producers’ goods or in technical methods happen, as all prices, wages, and interest rates are stable, there is no room left for any entrepreneurial activity.
The economists who constructed and used this imaginary scheme were fully aware of its fictitiousness and its unreality. They did not fail to recognize that in such a hypothetical world, man would no longer be human, but a soulless vegetative being. He would not be in a position to make use of his most human faculty, reason; he would live like an ant in its hill. The economists were not so foolish as to hold up this hypothetical state of perfect equilibrium as a pattern for a better social order or to criticize existing conditions from the viewpoint of their deviation from this pattern.
The actual world is a world of perpetual change. Population figures, tastes, and wants, the supply of factors of production, technological knowledge, and many other things are in a ceaseless flux. In such a state of affairs, there is a need for a continual adjustment of production to the change in conditions. This is where the entrepreneur and profits come in.
Those eager to make profits are always looking for an opportunity. As soon as they discover that the relation of the prices of the factors of production to the anticipated prices of the products seems to offer such an opportunity, they step in. If their appraisal of all the elements involved was correct, they make a profit. But immediately the tendency toward a disappearance of such profits begins to take effect. The booming branch of business, i.e., the branch in which profits are high, attracts other entrepreneurs. The booming branch tends to expand until competition makes profits disappear. Profits are a permanent phenomenon only because there are always changes in market conditions and in methods of production. The state of equilibrium can never be attained because nothing else is permanent in human condition but change. He who wants always to make profits must be always on the watch for new opportunities.
While profits do not turn up in the image of a static state, monopoly prices and monopoly gains are compatible with this image. An everlasting patent right fits very well with the other hypothetical assumptions of the static state and the equilibrium preserved in it. Neither is the existence of unused capacity of plants an element preventing the establishment of a static equilibrium. Of course, we must assume that the unused plants are only fit for the production of commodities for which there does not exist any demand and that their use as scrap material is out of the question. Otherwise, the equilibrium could only be reached when the unused plants or machinery have been completely absorbed either for the replacement of other plants and equipment used up or for a use as scrap material.
Thus, it becomes evident that profits and monopoly gains are two entirely different sources of revenue. The two must not be confused.
The fact that an enterprise does not use the full capacity of its equipment, although it would reduce average cost of production per unit by doing so, is, as has been pointed out above, not necessarily an outcome of a monopolistic policy. It does not render competition “imperfect.” As long as there is a more profitable employment available for the capital required for the expansion of production, it is reasonable for the entrepreneur to abstain from such a further expansion. It is at the same time reasonable from the viewpoint of the consumer.
Let us assume that the constant costs of production of a plant with a capacity to produce 200 units is $100, and the variable cost per unit is $2. The plant uses only 50 percent of its capacity and produces 100 units at a total cost of $300, and consequently at an average cost per unit of $3. Production at full capacity would require a total cost of $500 and would reduce the average cost per unit to $2.50. If the additional capital required for this full capacity production can yield a higher return when used for another kind of production, it would be wasteful—both from the viewpoint of the entrepreneur and from that of the consumer as a totality—to use the plant’s full capacity. This would withdraw capital and labor from other lines of production for the products of which the demand is more intense.
This reasoning applies, of course, only to the cases in which there is only one plant in the field concerned, or in which all plants operate with the same structure of the cost schedule. If there are several plants with different costs, those with the highest cost would have to go out of business, and the remaining, but for that with the marginal costs, could go on producing at full capacity.
Monopolistic restraint of trade always requires that the monopolist has the assurance that no competitor could frustrate his own restriction by an expansion of his sales. With every case of monopoly prices, we must be in a position to answer the question: what prevents other people from counteracting the monopolist’s restriction? The answer may be the law (e.g., in the case of a patent or an intergovernmental agreement), an agreement (e.g., in the case of a cartel), their geographical remoteness (e.g., in the case of bulky goods), their exclusive ownership of one of the factors of production required (e.g., in the case of natural resources), a sufficient difference in the height of production costs (e.g., in the case above on p. 4), or the time required for the finishing of the process of production (e.g., the case described above on page 5). This is what people have in mind when defining monopoly as a state in which one seller or a group of sellers acting as a unit have the power “to control” supply. This term “control” becomes inadequate for the description of monopoly if we were to interpret it in another way.
The issue becomes still more manifest if we consider the fact that most enterprises do not produce one commodity only, but a variety of different articles. A textile plant, for instance, does not turn out one or a few patterns, but a multitude of various patterns. From the viewpoint of the “perfect” competition fallacy, competition would be “perfect” only if the entrepreneur were to expand the manufacture of each pattern up to the point in which the increment cost of production equals the marginal price that would be obtained on the market. Only then should he embark upon the production of a second pattern.
In reality, the entrepreneur finds it more profitable to stop producing a certain pattern before this point is reached and embarks upon the production of a second, a third, and many other patterns. He acts in this way because he wants to maximize his profits. But it is precisely the attitudes of the consumers that make the production of various patterns more profitable than restriction to the production of one or a few patterns only. In not pushing the production of a certain pattern to the point at which profits would disappear, the manufacturer adjusts production to the wishes and wants of the consumers. It is the consumer who orders him not to use the “full capacity” of one design up to the limit at which the profit must disappear.
The same is true for every branch of industry. It would reduce production costs for every plant if it were to restrict the variety of products turned out. A tool factory would reduce its costs of production if it were to produce only one standard type of hammer. It is the buying public that forces it to produce various types and sizes of hammer and many other tools besides.
Standardization of products can go as far as the public is ready to buy the cheaper article rather than a more expensive article of another pattern. It was the buying public that forced the Ford plant to substitute cars with various paints for the uniform black painted standard type.
The doctrine of imperfect competition is fabulous not only on account of its misconstruction of the concept of static equilibrium. It is also mistaken in its assumption that the structure of the schedule of physical costs alone directs production or should direct it in a perfect world. From the viewpoint of this fallacy, it would be impossible to explain why there exists a variety of manufacturing plants turning out different products from the same raw materials.
The doctrine of “imperfect” competition was a desperate attempt of fanatical foes of free enterprise to refute the economists’ demonstration that in a competitive market, i.e., in a market where there are no monopoly prices, a surplus of sales proceeds over production costs is always the result of the entrepreneur’s success in providing the consumers with those commodities for which their demand is most intense. The champions of the doctrine of “imperfect” competition were deluded by their fanaticism and their zeal to disparage free enterprise. Their pro-socialist bias made them blind to the fundamental facts of economic activity and the characteristic features of any production under the division of labor.
The ideas that motivated their critique were these: modern economics had demonstrated that, under an unhampered market economy, the consumers, by their buying and their abstention from buying, direct the activities of the entrepreneurs. The market is a democracy of the consumers; the entrepreneur, eager to make as much profit as possible, is a mandatory of the consumers intent upon the most efficient satisfaction of their wants. Thus, one of the main slogans of the socialists, the famous demand for a substitution of “production for use for the production for profit” is exploded.
The socialists first attempted to refute this unassailable demonstration by pointing out that there is, in the evolution of unhampered capitalism, an inherent tendency toward the emergence of all-round monopoly. This trend toward monopoly was depicted as inexorable. It puts in the place of the democracy of the consumers, characteristic of the early stage of capitalism, long since passed forever, the arbitrariness of monopoly capitalism. Whatever may be said in favor of capitalism at its earlier stages does not apply to the conditions of monopoly capitalism. Monopoly capitalism is a system of ruthless exploitation of the masses for the sole benefit of big business.
But very soon the economists unmasked the fallacies of this doctrine. They proved that national monopolies are only possible in a world in which economic nationalism insulates the national economies from the world market through trade barriers, and in which patent rights are granted. International cartels are either the outcome of agreements of national cartels or the achievement of government interference. The trend toward monopoly is not inherent in the “natural” evolution of capitalism, but is the effect of institutions purposely aiming at the elimination of competition.
Now the socialists took recourse to a new ruse. There has never been, they asserted, such a thing as “perfect” competition. Practically every businessman is in a position to control output and therefore to restrict supply in a monopolistic way. Profits are always the fruit of monopolistic restraint of trade. Such is the doctrine of “imperfect” competition as developed by Mrs. Joan Robinson of Cambridge University. Mrs. Robinson is probably in her subconscious fully aware of the fallacies of her arguments. Otherwise she would not advocate the German and Russian methods for the suppression of all criticism. No independent universities, learned societies, and publishing houses should be allowed to exist. One can agree with the lady that her doctrine could not survive except under these conditions.Mrs. Robinson wants, moreover, in the same way to prevent the existence of independent churches, theaters, and philharmonic societies.
The Individual Consumer under Monopoly Prices
Under competitive prices, the consumers are supreme in directing the use of the available resources. The entrepreneurs, the capitalists, and the farmers must aim at supplying the market with the commodities most urgently asked for by the consumers. They must try to turn out, as cheaply and as well as possible, those quantities of every commodity for which the consumers are ready to pay at least the cost of production. There prevails a tendency to bring the price of every commodity down to the point where the price is equal to the cost of production.The substitution of monopoly prices for competitive prices results in a deviation of production from the lines entirely determined by the attitudes of the buying public. Along with the consumers, the monopolists too have a voice in the direction of production and consumption.
The reaction of the individual consumer to a monopoly price may be different:
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In spite of the price rise, the individual does not restrict his consumption of the commodity concerned; he is therefore under the necessity to restrict his purchases of other commodities which he deems less indispensable. (If all individuals were to behave thus, the competitive price would have already risen to the height of the monopoly price.
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The consumer restricts his purchase of the monopolized commodity to such an extent that he does not spend for it more than he would have spent—for the purchase of a larger quantity—under the competitive price. (If all people were to act in this way, the seller would not get more under the monopoly price than he did under the competitive price; he would not derive any advantage from deviating from the competitive price.)
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The consumer restricts his purchase of the monopolized commodity to such an extent that he spends less for it than he would have spent under the competitive price; he buys with the money thus saved goods which he would not have bought otherwise. (If all people were to act in this way, the seller would harm his interests by substituting a monopoly price for the competitive price. Only a benefactor who wants to wean his fellow-citizens from bad habits would in this case raise the price of the commodity concerned above the competitive level.)
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The consumer spends more for the monopolized commodity than he would have spent under the competitive price and acquires only a smaller quantity of it.
However the individual reacts, his satisfaction appears to be impaired from the viewpoint of his own valuations. He is, from the viewpoint of his own valuations, under monopoly prices not so well served as under competitive prices.
Free Enterprise and Monopoly
Monopolistic restraint of trade restricts the individual’s opportunity to enter those fields of economic activity in which he could succeed best and render the most useful services to his fellow-citizens. It thus curtails the chances of the rising generation. It prevents a businessman operating in other branches of business from adjusting his outfit in the best possible way to existing market conditions by expanding it into a monopolized field.
The idea of excluding competitors by the aid of government interference is very popular nowadays. It permeates the policies of influential labor unions. It is at the bottom of all plans to organize industry in compulsory bodies, whether they are labeled “self-government in industry” or corporativism, and whether they are promoted by governments calling themselves progressive or fascist. The purpose of all such endeavors is to return to the privileged inns and guilds and to the chartered companies which in the centuries preceding the evolution of modern industry hindered economic improvement and technological progress.
A characteristic outcome of this anti-competition spirit was the endeavors of various local interests to erect, by means of state legislation and measures of local administration, a substitute for inter-state trade barriers. It is one of the most beneficial provisions of the Constitution that it bars the way to all such “reforms.” One needs only compare American conditions with those of Europe in order to appreciate what this absence of inter-state barriers means. The United States is the world’s largest uniform market. Its people enjoy the advantages of big-scale production because there is free mobility of capital, men, commodities, and services within the whole country.
Free enterprise is the antithesis of all plans to protect by privilege a less efficient business against a more efficient. The only method of outstripping a competitor of which it approves is to produce and to sell better and cheaper products.
If American business wants to compete on foreign markets, it is under the necessity of adjusting its operations to the laws and usages of the countries concerned and to the economic conditions of these countries. It is therefore contrary to purpose to restrict the bargaining power of American export trade by imposing upon it restrictions to which its foreign competitors are not subject at all or not to the same extent.
The Economies of a Monopolistic Conduct of Affairs
By and large we must realize that the socialists are more sympathetic to monopoly than to competition. They disparage the competitive system unswervingly and aim at the establishment of an all-round government monopoly. The tears they weep over the vanishing of competition are crocodile tears. The only fault they find in monopoly is that it is private monopoly and not government monopoly.
One of the faults the socialists find with the competitive system is that in exploiting the natural deposits of ores, minerals, and oil, it does not care for the needs of future generations. Sooner or later, these deposits will be exhausted, and the coming generations will lack the most precious resources.
It is very difficult to enter into an examination of these arguments. We do not know what kind of natural resources men will need in the future. We are using today resources considered as useless and not utilized by our ancestors. Nobody, a hundred years ago, could have anticipated the role which oil and electricity are playing in our present economic system. Aluminum, today one of the basic metals, was sixty years ago merely a material for toys and other trifles. Every day brings us unheard of technological progress. If we were to restrict the utilization of some resources in order to leave them to later generations, we would not know whether we would not simply rob ourselves without rendering any service to them.
But however that may be, a man who thinks that we should be more economical in the exploitation of mines and oil fields cannot blame the monopolistic policies of the respective cartels. If he is consistent, he must, on the contrary, consider the restriction of output in the extractive industries as a beneficial measure.
Apart from the case of the extractive industries, the socialists blame the competitive system for its wastefulness. It is wasteful because the rivalry between competing firms necessitates advertising and other useless selling costs and prevents the full utilization of the advantages of big-scale production.
However, it is not true that a monopolistic combine can always save the costs of advertising. Some monopolies can do without advertising. The U.S. Post Office does not need to attract customers by advertising. As correspondence is a general habit among our contemporaries, the customers pour in even in the absence of any expensive propaganda. But it is different with other monopolized branches of production. Although selling at monopoly prices, they are not safeguarded against losing their patrons to other branches of industry.
The proof that the monopolistic position as such does not free an entrepreneur from the necessity of advertising is given by the fact that books under copyright, patented articles, and brands under trademark protection do advertise.
Nor is it more true that the monopolization of an industry brings about technical economies in offering better opportunities for the utilization of the technical advantages of large-scale production. Insofar as production on a bigger scale is more economical than that on a smaller scale, it is precisely this difference in production costs that under competition eliminates the plants that did not succeed in adopting the most efficient methods of production.
The survival of smaller plants and their ability to stand the competition of larger plants is due to the fact that there is always a point beyond which increases in the scale of output are not attended by further gains in efficiency, and may sometimes even be attended by increased costs per unit of output. As far as large-scale production in manufacturing is technically superior to small-scale production, smaller plants are doomed to disappear. It is a mistake to believe that monopolization either through cartelization or through a merger is necessary in order to secure to the public the advantages derived from big scale production.
On the contrary, it is a fact that the monopolization of an industry sometimes aims deliberately at an artificial preservation of plants and farms that would not be in a position to stand the competition of plants and farms operating at lower costs.
The most conspicuous example is provided by government interference with the conditions of agricultural production. Changes in demand and supply and the emergence of new competitors operating under more favorable physical conditions force again and again the farmers and planters producing with the highest costs to discontinue production. This would have been the case in the last fifteen years with Latin-American coffee plantations, with American cotton and wheat growing, and with rubber plantations. The protectionist policies of the importing countries, the development of new synthetic products (e.g., rayon), and the general over-expansion of production in the boom period and the establishment of new competition on more fertile soil would have forced the submarginal producers to go out of business. Only those producers would have remained with whom the costs of production were lower than the market price of the product. However, the farmers and planters affected did not accept this solution. They succeeded in convincing their governments that the establishment of a monopoly would solve the problem in a more satisfactory way.
While the results of competition would have been the elimination of those producing with highest costs, the governments made all producers submit to a proportional restriction of output. The establishment of the monopoly price was a means to preserve production artificially at costs which would have rendered production unprofitable under the competitive price. Production on lower-cost farms and plantations was restricted in order to make production at higher costs profitable. And, of course, the public had to foot the bill.
Similar conditions sometimes turn up in the processing industries.
Up to the eighteenth century, every handicraftsman whose routine was threatened by the competition of a more efficient rival had a claim to protection on the part of the authorities. Technological innovations, improvements in the methods of production, were deemed unfair. The preservation of the traditional business practices was considered one of the tasks of good government. The abolition of this anti-progressive policy, an achievement of the laissez-faire doctrines of British and French eighteenth-century economic philosophy, paved—late indeed—the way to the stupendous technological evolution of modern capitalism.
The colonists who founded the British settlements on the Atlantic Coast of America left behind them in the old country many bad usages and institutions. It never occurred to them to transplant the guilds and inns and their restrictive methods into their new communities. They did not believe in the expediency of a policy of putting obstacles in the way of the efficient and industrious and in fostering inefficiency, indolence, and backwardness. They did not assign to the authorities the task of perpetuating old-fashioned methods of doing things. Thus, they made America foremost in the field of technology. Today all non-Americans spontaneously associate the word “America” with the ideas of high efficiency and continual progress in industrial technique.
The victory of the laissez-faire idea in continental Europe was only temporary. Very soon the inveterate illusion that a country’s well-being can be promoted by the preservation of plants unable to stand on their own the competition of more efficient plants triumphed again. One of the reasons why many governments of continental Europe encouraged the formation of cartels, and, if encouragement did not result in cartelization, directly forced the firms and corporations to combine, was precisely that they were anxious to secure the survival of the inefficient plants which would have been doomed on a competitive market. Under the monopoly price, brought about by cartelization, the inefficient plant can continue production. Cartelization was considered as a means to protect the producer against the superior efficiency of other plants.
American public opinion is entirely mistaken in believing that American big business has some reasons to sympathize with the European evolution toward cartelization, and that agreements concluded between American producers and foreign cartels are proof of an identity of interests. It is a fact that the European cartels are mostly weapons of economic nationalism built with the deliberate intention of fighting American economic expansion.
In the chemical industries, Germany—thanks to the natural resources of her soil and to the achievements of her scientists—is equal or even superior to all foreign enterprises. But in almost all other branches of production, natural conditions are less favorable than in other countries. As Germany can neither feed nor clothe its population properly out of domestic resources, it must export manufactures in order to pay for the badly needed imports of foodstuffs and raw materials. The German governments—for more than sixty years—have aimed at the encouragement of export trade by cartelization. The cartels sell on the domestic market at monopoly prices. They sell abroad at lower prices. The prices they charge to foreign buyers in many cases do not cover the costs of production. But the losses thus incurred are financed out of the monopoly gains on the domestic market. The native consumers subsidize, as it were, the dumping on the foreign markets.
If Germany had not adopted such a policy, American business groups would not have considered it as expedient to enter with German cartels into agreements concerning the partition of foreign markets. Such agreements became advantageous for America only in the face of German dumping as a means of parrying the blows of German economic nationalism.
The illusiveness of the belief that cartelization furthers technological improvement and the concentration of production in the places offering the most propitious opportunities can easily be proved by referring to Germany, the country most advanced in matters of cartelization. It is, for instance, one of the main objectives of the German steel combine to make the use of low-grade iron ore deposits profitable.
The operation of the market mechanism on a competitive market tends to eliminate technological backwardness, as the main tool of competition is either underselling or offering a better commodity for the same price. It is a mistake to believe that the incentive for technical improvement is stronger with a monopolistic organization than with enterprises competing on a free market. Moreover, it is a fact that monopolistic organizations were fostered by the governments with the manifest intention of preserving plants and farms producing at costs which would have prevented their survival on a competitive market.
Is There, in the “Natural” Evolution of Free Enterprise, a Tendency Toward a Progressive Substitution of Monopoly Prices for Competitive Prices?The Socialist Dogma
The socialist dogma, widely accepted today by people who would be indignant if somebody were to call them socialists, contends that the trend toward monopoly is inevitable in the “natural” evolution of capitalism. Our age is called the “age of monopoly capitalism,” and all evils—economic depression, unemployment, and war—are charged to the sinister machinations of “monopoly capital.” All governments emphatically declare that the foremost duty of good government is to protect the people against exploitation and depredation on the part of monopolies. Government all-round control of business, i.e., socialism, is advocated as the most efficacious means to free the world from the curse of monopoly.
If we want to inquire whether or how far this dogma is justified, we have first of all to emphasize that what people have in mind in indicting monopoly is not monopoly as such, but the substitution of monopoly prices for competitive prices. We do not have to enter into over-sophisticated hairsplitting concerning the “monopolistic” position of a man selling a commodity different from those offered by other sellers. What counts alone is whether or not a seller is in a position to increase his net revenue by restricting the quantity sold. The problem of monopoly is essentially a problem of monopoly prices, i.e., of monopolistic restraint of trade. Everybody understands it in this way. The question, therefore, is not: is there a “natural” tendency toward the emergence of monopoly? But: is there a “natural” tendency toward a progressive substitution of monopoly prices for competitive prices?
There is no doubt that the last decades have witnessed a progressing tendency toward the replacement of competitive prices by monopoly prices. But it is an undisputed fact that the vast extension of the sphere of monopoly prices was the result of government policies deliberately aiming at the establishment of monopolistic restraint of trade. The governments have either directly forced business to monopolistic pricing methods or have provided the conditions required for such policies, confident that the enterprises concerned would profit from the opportunity offered.
The mere fact that governments have acted in this way is the clearest evidence that with regard to the branches of production affected by this government policy such a “natural” tendency toward monopolistic restraint does not prevail. If such a tendency were to exist, it would be quite superfluous to adopt measures of this kind. The fact that a law makes it possible for an inventor to apply for a patent and thus to acquire a monopolistic privilege does not indicate that an inventor is—in the absence of patent legislation—in a position to embark upon a monopoly price policy with regard to his invention. On the contrary, it is the proof of the fact that but for the government’s interference, such a policy would be out of the question.
The problem we have to deal with is: is it true or not that there prevails in the “natural” evolution of modern business, i.e., in the evolution not hampered by government interference deliberately aiming at the establishment of monopolistic restraint, a tendency toward the progressive substitution of monopoly prices for competitive prices? It is obvious that this question is answered in the negative for all those fields of business activity in which there is government interference aiming either at compulsory establishment of monopoly prices or at the establishment of the institutional conditions required for the building of monopolistic price policies.
It is not the aim of our investigation to question the expediency of those governmental policies deliberately encouraging the emergence of monopoly prices. This is a separate problem. What we have in mind is to unmask the utterly mendacious and dishonest attitude of those demagogues who describe the trend toward monopoly prices as the outcome of an evolution inherent in the conditions of an economy of free enterprise. It is, furthermore, necessary to expose the double-dealing of governments which proclaim anti-monopoly policies as their foremost aim and at the same time eagerly work for the establishment of monopoly prices in many lines of business.
Government-Made Monopolies
The main source of monopolization is the deliberate creation of monopolies on the part of governments. There are two classes of such monopolies: those which are established with the manifest intention of substituting unlimited monopoly prices for competitive prices, and those which aim at the restriction of competition without the intention of bringing about unlimited monopoly prices. Let us first consider the second class.
Monopolies with Limited Price Rises
In many countries, the governments have restricted access to some branches of production and distribution in order to secure to special groups a higher revenue than what they could earn on a free market and under competitive prices.
This policy must not be confused with the laws requiring the fulfillment of special conditions on the part of those eager to exercise a certain profession or business activity. In this country, for instance, the exercise of the medical profession is free only to men and women who have passed certain examinations. However, everybody who has passed these examinations is free to practice medicine. Neither the authorities nor the already practicing doctors have the right to prevent a newcomer who has complied with all requirements from entering the field. The aim of the laws concerned is not to shelter the old doctors against the competition of newcomers, and to restrict competition, but to protect the public against quacks.
It is different with the laws which in many European countries restrict access to the business of pharmacists, chimney-sweepers, taxi-cab enterprises, and so on. These laws order the authorities to grant new licenses only if the interests of the already practicing licensees are not too much prejudiced. It is the manifest and undisguised intention of the laws to secure a certain minimum income to the licensees.
On the other hand, these laws are not intended to give to the licensees the power to charge ad libitum monopoly prices. They, therefore, order the authorities to fix price ceilings for the commodities sold and the services rendered. These price ceilings, as a rule, fix the maximum prices at rates above the height which would have been established on a free market. They are monopoly prices. But the seller is prevented from choosing that monopoly price which would bring him the highest monopoly gain.
Monopolies with Unlimited Monopoly Prices
Patents: The laws of all civilized nations grant patents to new inventions. It is the intention of these laws to encourage the inventive spirit by creating temporary monopolies.
The question whether the patent system really contributes to progress in technological methods is controversial. It is true that most of the attacks directed against patent protection have come from people biased by fanatical anti-capitalism. But there are also other critics of the system whose arguments cannot be easily disregarded.
However, the experience of the last hundred years proves that the patent system has at least not obstructed the utilization of new inventions. It has encouraged the inventive spirit by providing ingenious men with the incentive to spend the best years of their lives in the task of inventing, and has given business the incentive to spend huge sums for research. Public opinion does not find any fault with an institution which makes it possible for an inventor to get a reward for the benefits which his fellow-citizens derive from his contribution to mankind’s progress. It would consider the abolition of the patent laws as a grave injustice.
Copyright: Hardly anyone attacks the copyright laws. Thanks to the monopolistic position that these laws secure to authors, it is possible for successful writers of fiction, and likewise of non-fiction, books and articles destined for the general reader to make a living from their writing. The author no longer depends on the munificence of some Maecenas as in older days. He depends on the buying public.
Trademarks: The way in which many authors have discussed the question of whether trademarks are monopolistic clearly exposes the shallowness of substituting the alternative monopoly or competition for the alternative monopoly price or competitive price.
There cannot be any doubt about the monopolistic nature of a trademark. Under the law, the use of a certain name, sign, or mark to distinguish one’s own products is a monopoly right. But this fact alone does not mean anything at all for the formation of the prices of the article marked with this name. A name in itself is an arbitrary combination of letters. An indefinite number of other such combinations can be made and registered as trademarks. Each person is free to choose as many trademarks as he wants.
The commercial meaning of trademarks is that they enable a businessman to build up goodwill. By virtue of a trademark or brand name, the producer can enter into direct business relations with the buying public. The buyer knows whose product he is buying, and is in a position to distinguish in his purchase between products he likes more and those he likes less. He can profit from the experience which he had in the past in trying various products. He becomes a permanent patron of those manufacturers whose products did satisfy him. He can recommend the product he likes to friends who have not yet found out what brand suits them best. Thus, a manufacturer—by serving the public well—is in a position to acquire a prestige in the same way in which every shopkeeper, hotel owner, or doctor acquires it. Trademarks thus play an important role in the conduct of present-day business. If no legal protection were accorded to the use of trademarks, the buying public would lack any orientation.
It is one of the functions of trademarks to enable the customer to distinguish the various brands with regard to their chemical and technological qualities and to choose that which best complies with his wants and tastes. But this is not the only function of trademarks.
What the use of a trademark gives to the manufacturer is the opportunity to deserve goodwill. Goodwill is the renown a man or a firm acquires on account of past achievements. It implies the expectation that the bearer of the goodwill, in the future, will live up to his past standards. Goodwill is not a phenomenon only in business relations. It is a feature present in all human and social relations. It determines a person’s choice of his wife and his friends and his voting for a candidate in elections.
It can sometimes happen that the goodwill of a trademark gives to a manufacturer the opportunity to substitute monopoly prices for competitive prices. However, as a rule, the advantage derived from the use of a well-known trademark is not so great as to make a purposeful restriction of the quantity offered for sale profitable.
But even if a branded article is sold at monopoly prices, nobody suffers any detriment. If a dental cream marked as Cleopatra can be obtained only at monopoly prices, no manufacturer is prevented from selling the same cream under another name. Nobody can say that his interests are harmed by the monopolist’s restriction of output.
The mere fact that two products, which are the same with regard to their chemical and physical properties, can be sold at different prices on account of the difference in the appraisal of the brand name on the part of the public is not in itself proof of a monopolistic restriction of output. It is only the effect of the goodwill.
The marketing of a commodity requires a certain degree of publicity. The potential buyers must know that such a commodity exists and who the potential sellers are. To be publicly known to some extent is thus an indispensable requirement of every commodity to be sold.
In the wholesale trade of staple commodities, the exchanges and similar institutions provide buyers and sellers with the opportunity to meet one another for the transaction of business. In the producers’ goods industries, agents, commission-merchants, middle-men, and go-betweens bring both parties together. In the consumer-goods industries, publicity must be acquired through advertising, and, as the average man has a weak memory, advertising must be continued. An article which the buying public does not know or has forgotten will not be bought. Its manufacturer will either not get the opportunity to deserve goodwill or will lose it very soon.
The degree of publicity is an important element in the determination of the quantity that can be sold. The better known a brand is, the more easily can it be marketed, provided that it suits the tastes and wants of the consumers. But this is not tantamount to a monopolistic position of the seller enabling him to fare better by restricting sales instead of increasing them.
National Cartels: With the exception of some bulky goods in the marketing of which transportation costs play an important role, the establishment of national cartels is only possible if an import duty insulates the world market. A national combine would not be in a position to establish monopoly prices on the domestic market if foreign competitors were free to sell at a lower price.
Now, tariffs are not an outcome of the “natural” evolution of free enterprise. They are always the result of a deliberate policy. As far as cartels and monopoly prices are conditioned by the existence of tariffs, they are not the result of a spontaneous evolution, but of government interference with business.
Prior to the intervention of various governments, both state and municipal, there were even in the field of public utilities competing gas and electric companies. Competitive development was the rule rather than the exception. It has been the policy of exclusive franchise that has locally prevented the competition of coterminous utilities.
It was the Federal Communications Commission that recommended the combination of Western Union and Postal Telegraph and the establishment of a similar monopoly in the field of international communications.
International Agreements of National Cartels: If there exist national cartels in a good many of the great industrial nations, the free world market shrinks to a comparatively unimportant part of the whole world market. The much greater part of the total consumption of the commodity concerned is sold and bought at monopoly prices. The consumption of the rest of the world—most of them backward countries with a low standard of living—is comparatively insignificant. Then it is not too difficult for the national cartels to come to an amicable arrangement concerning the open market. An international cartel becomes practicable.
Compulsory International Cartels: The most conspicuous instance of government-made cartels are those international treaties which the International Labor Office euphemistically calls “Inter-Governmental Commodity Control Agreements.”
The preamble of the rubber agreement, signed in London, May 7, 1934, by Great Britain, France, India, the Netherlands, and Siam, reads as follows:
Considering that it is necessary and advisable that steps should be taken to regulate the production and export of rubber in and from producing countries with the object of reducing existing world stocks to a normal figure and adjusting in an orderly manner supply and demand and maintaining a fair and equitable price level which will be reasonably remunerative to efficient producers, and being desirous of concluding an agreement for this purpose.
What an amazing circumlocution for the simple fact that the agreement aimed at a restriction of output in order to substitute a monopoly price for the competitive price.
Similar intergovernmental agreements were entered into with regard to many other commodities, e.g., sugar, tea, beef, coffee, timber, tin. International commodity agreements with varying degrees of governmental sanction or participation concern, moreover, aluminum, lead, nickel, zinc, mercury, nitrates, petroleum, potash, sulphur, quinine, and raw silk. It is worthwhile mentioning that Soviet Russia does not refuse to cooperate in such agreements with the “capitalist” nations.
Monopolization Without Direct or Indirect Government Support
It is probable that even in the absence of any government support, incentive, or compulsion, some monopolies could develop and substitute monopoly prices for competitive prices. This could happen under special conditions:
- With regard to public utilities;2. With regard to some bulky goods;3. With regard to those mineral resources which are concentrated in one place or in a small number of places.
The two first named cases could bring about local monopolies. The third case could result in a world monopoly.
The problem of public utility regulation is essentially a problem of administration. As the public utilities are under the necessity of coming to an agreement with the federal government, the states, or the municipalities, with regard to the use of publicly owned roads, streets, and water supply, there is ample opportunity for arrangements safeguarding the interests of the consumers.
Local monopolies of bricks and coal are unlikely to play an important role in this age of steel and cement, prefabricated houses, oil, and electricity.
The economist would be at a loss for an answer if somebody were to ask him for another instance of a world monopoly fostered without any aid, compulsion, or participation on the part of governments than that of the diamond monopoly.
It is not incorrect, although an overstatement, to call our age the age of monopoly. But that it is so is the outcome of government policies, not of a tendency inherent in the free enterprise system.
ConclusionThe substitution of a monopoly price for a competitive price is tantamount to a serious restriction of the working of the most characteristic principle of the free enterprise system, i.e., of the sovereignty of the consumers. It restricts output although such a restriction does not suit the wishes of the public. It secures to the monopolist an extra gain which is not derived from the best possible satisfaction of the needs of the consumers. With regard to these facts, we may say that monopoly prices are abnormal in the framework of a market society.
So far public opinion is right in criticizing monopoly prices. However, public opinion is entirely mistaken in assuming that there prevails in a market economy not hampered by government interference with business a natural tendency toward a progressive substitution of monopoly prices for competitive prices. There is no such tendency. Most instances of monopoly prices are either directly or indirectly government-made. But for the policies of various governments there would exist local monopolies, but only rare cases of national and still less of international monopolies.
If a government aims at establishing the conditions required for the appearance of a monopoly price, it is driven by the opinion that such a monopoly price is, under the given situation, the most appropriate solution of an economic problem. This opinion may be questioned. But it is nonsensical to attack the monopoly as such and not the policy which results in the creation of a monopoly.
The case is obvious with patent and copyright legislation. It is the clear intention of these laws to grant to inventors and authors the opportunity to get monopoly prices. Whether this is a good or bad policy is a question of its own. But it is contradictory to criticize the monopoly price and not the policy which made its appearance possible.
The aim of a protectionist tariff is to improve the nation’s balance of trade, and to maintain a high domestic standard of wage rates. The expediency of protection of import duties insulates the domestic market.
The attitude of the governments and of public opinion with regard to monopoly prices is utterly inconsistent. The governments are eager to build international cartels and provide the conditions required for the creation of national monopolies. Public opinion approves these policies. But on the other hand, the same governments and the same public opinion passionately indict the Moloch of monopoly.
This country has promulgated laws which are intended to prevent the formation of monopolies and trusts. The authorities are eager to enforce these laws. But on the other hand, the U.S. is a party in international agreements the ostensible purpose of which is monopolistic restraint of output and trade in essential raw materials and food stuffs. Moreover, the agricultural policies of the New Deal were unambiguously directed at the same goal.
The outstanding fact which we must keep in mind is: there is no tendency toward a general substitution of monopoly prices and monopolistic restraint of trade for competitive prices.
A Libertarian Critique of Intellectual Property. By Butler Shaffer. Mises Institute, 2013. 62 pages.
Few topics in recent years have aroused as much interest among libertarians as intellectual property. What place, if any, would IP — patents, copyrights, trademarks and the like — have in a libertarian society? Ayn Rand and her Objectivist followers view IP as the most basic of all property rights. Diametrically opposed are those who say, “You cannot own an idea”: ideas are not in the economic sense scarce goods and thus property rights in them are at odds with the purpose of property rights, avoiding conflict over the use of such goods. Still others shift the argument from rights to the benefits and costs of IP. Does IP promote valuable inventions and creativity, or does it impede them?
Faced with a welter of arguments in conflict, what is the perplexed libertarian to do? Butler Shaffer’s superb monograph offers an easy way to unravel the IP puzzles. He starts from a fundamental principle basic to libertarianism and explains how the implications of this principle shed light on IP issues.
What is this principle? It is that rights stem from “the informal processes by which men and women accord to each other a respect for the inviolability of their lives — along with claims to external resources (e.g., land, food, water, etc.) necessary to sustain their lives.” (p.18) The “informal processes” that Shaffer mentions proceed without coercion. In particular, law and rights do not depend on the dictates of the state, an organization that claims a monopoly over the legitimate use of force in a territory.
In adopting this stance, Shaffer puts himself at odds with much that passes in our day for wisdom among professors of law. “In a world grounded in institutional structuring, it is often difficult to find people willing to consider the possibility that property interests could derive from any source other than an acknowledged legal authority. There is an apparent acceptance of Jeremy Bentham’s dictum that ‘property is entirely the creature of law.’” (pp. 18–19)
What follows for IP if one accepts Shaffer’s libertarian staring point? Then, we must ask the further question, would people who respect each other’s life and property recognize IP rights? To ask this question, though, raises a further issue. How are we to find out what people in this imagined situation would do? We live, after all, in “a world grounded in institutional structuring.” In our world, IP exists: how do we know what would exist in a stateless world?
Shaffer solves this difficulty by moving to a question that we can answer: How in fact has IP arisen? Was it recognized by the common law or has it been imposed by the state? Shaffer has no doubt about the answer:
The common law system got it right: because the essence of ownership is found in the capacity to control some resource in furtherance of one’s purposes, such a claim [of common law copyright] is lost once a product is released to the public. The situation is similar to that of a person owning oxygen that is contained in a tank, but loses a claim to any quantity that might be released — by a leaky valve — into the air. (pp. 25–26)
IP today goes far beyond the limited protection afforded by common law copyright. In the modern IP system, the state grants monopoly privileges, and this is inconsistent with libertarian principles:
If copyrights, patents, or trademark protections are not recognized among free people — unless specifically contracted for between two parties — by what reasoning can the state create and enforce such interests upon persons have not agreed to be so bound? ... Among men and women of libertarian sentiments, one would expect to find a presumption of opposition to the idea that a monopolist of legal violence could create property interests that others would be bound in principle to respect. (p. 22)
One might raise an objection to Shaffer’s argument. Even if people have not in fact voluntarily agreed to laws protecting IP, does this suffice to show that they could not do so? Shaffer allows contracts in which two people agree to limits on the right to reproduce an item that is purchased, but can one not imagine such contracts extended further? Could one not devise a complicated contract in which everyone agrees to IP protection? A contract of this sort would resemble agreements that some have proposed to supply public goods in an anarchist society.
I do not know how Shaffer would respond, but the imagined contract creates little trouble for the thesis he wishes to defend. He need not deny the bare possibility of a contract of this sort. He has only to insist once more that this contract would bind only those who had agreed to it, and it in that way does not resemble our present IP arrangements.
If Shaffer is right that a libertarian society would not recognize IP, we must now ask another question. Is this an unfortunate feature of a libertarian society as Shaffer conceives of it? Some have thought so, fearing that IP protection is needed to stimulate inventions and to promote creativity in the arts.
Shaffer finds no reason to accept this contention. After mentioning a large number of tools and inventions from prehistoric times, he says, “All of these early inventions and creations were accomplished, as far as is known, without a violence-backed monopoly to prevent others from copying them.” (pp. 35–36)
In his discussion of innovation, Shaffer avoids a bad argument that, I regret to say, has beguiled several opponents of IP. It is correctly pointed out that ideas are not scarce, in one meaning of that term. Any number of people can make use of an idea at the same time. By contrast, economic goods are scarce: one’s use of economic goods excludes others from using them. In brief, ideas are non-rivalrous. From this, it is wrongly concluded that the creation of new and valuable ideas poses no problem: If ideas are not scarce, then they are abundant. Obviously, then, IP protection for them is absurd. It makes no more sense than property rights in air, a good which in normal circumstances anyone can have as much as he wants.
A parallel argument will serve to expose the fallacy. A common criticism of the free market is that it cannot supply public goods, such as national defense, in the economically optimal quantity. A public good is non-rivalrous: my consumption of defense, e.g., does not impede your consumption of it. It is alleged that this leads to undersupply of the good.
It would be a very poor answer to this complaint against the market to say, “This is not a problem! Just as the opponent of the free market has said, defense is a public, non-rivalrous good. If so, it is abundant — we need not then worry about its supply.” The error here is apparent: the fact that an indefinite number of people can consume a good at the same time does not show that there is as much of the good as people want. The application of this to the IP argument canvassed above is, I hope, sufficiently obvious.
Shaffer’s book contains much else of great value. He points out that “the patenting process, as with government regulation generally, is an expensive and time-consuming undertaking that tends to increase industrial concentration.” (p. 42) This, he holds, is a development much to be deplored. In his fear of the malign effects of undue organizational size, Shaffer has been influenced by Leopold Kohr, an original but neglected thinker.
Shaffer aptly concludes his monograph in this way:
Can one, consistent, with a libertarian philosophy, respect any ‘property’ interest that is both created and enforced by the state, a system defined by its monopoly on the use of violence? I regard the proposition as indefensible as would be the question of a libertarian defense of war. (p. 54)
Image source: iStockphoto
Mandatory union membership and mandatory dues imposed on those who do not want to join are again at issue. On the heels of contentious “right to work” disputes in several states, the Supreme Court has recently heard arguments challenging an Illinois mandate requiring home health care workers to pay representation fees to a union they did not want. That case, Harris v. Quinn, has the potential to even challenge the Court’s 1977 Aboud precedent upholding mandatory union dues for public sector workers. Such a result would be a victory for liberty.
Unions and their allies in Harris v. Quinn reiterate the claim, accepted in Aboud, that “union security” rules are needed to prevent workers from unfairly opting out of paying for union services. But that claim, which portrays the issue as defending the property, contract, and freedom of association rights of unions (to be paid for services rendered to workers they represent), intentionally misrepresents the core issue, which is the liberty of workers and employers.
“Union security” rules are clear violations of the liberty of workers’ and employers’ freedom to not be forced to associate with certain groups against their will, a freedom unions ironically steamroll in the name of freedom of association, asserted only for themselves, despite its inconsistency with freedom of association for all. Consequently, unions must find a legitimate sounding way of defending the coercion involved. That is where the free-rider argument comes in, which frames the issue as protecting legitimate rights, rather than the illegitimate use of government-granted coercive powers to impose employment terms violating government’s primary role: protecting individual rights.
Labor laws have made unions exclusive representatives for groups of workers. Therefore, unions assert that every worker must be forced to pay for his or her representation, or he or she will be able to “free ride” on those services. That is, workers’ rights must be abrogated to prevent non-members’ unethical behavior.
But free-riding on unions is not the fundamental problem. Mandatory exclusive representation in the form of monopoly unions imposed to the detriment of those who disagree (pro-union legislation exempted unions from antitrust laws) is the fundamental problem.
Given majority approval in a union certification election, current labor law interpretation requires all affected workers to submit to union representation and pay the union’s price for it. Those terms are imposed not only on workers who voted for the union, but for those who supported another union, those who preferred remaining union-free, and those who did not vote (including those hired after the union is certified, who never get an effective chance to vote). Workers (or the agents they select voluntarily) and employers are prohibited from negotiating their own arrangements, including labor-management cooperation not controlled by the union and “yellow-dog” agreements requiring abstention from union involvement (which, before labor laws eliminated such rights, the Supreme Court called “part of the constitutional rights of personal liberty and private property”).
The supposed “free-riding” workers are those who would refuse union representation, but are not allowed to. They are harmed by the imposition, revealed by their unwillingness to pay the “price” for those services. They are not free-riding on the union. They are “forced riders,” required to abide by, and pay for, violations of their rights and interests, to benefit unions. That violation of workers’ (and employers’) rights, not their attempts to escape the harm unwanted representation imposes on them, is the central issue.
Despite union rhetoric, they don’t really want to solve the “free rider” problem they hang their argument on, because it is easily fixable. But unions stop at nothing to prevent the solution. All a fix would require is ending mandatory exclusive union representation. If workers were allowed to choose representation by different unions or other agents or to negotiate for themselves, the problem would disappear. Each union would only negotiate for its voluntary members, eliminating so-called free riders. But unions have fought with tooth, nail, and their members’ wallets to impose and maintain exclusive representation, knowingly harming all dissenters and thereby creating the “free rider” problem. And their recent behavior, as in Michigan, reveals how far they will go to maintain that power to circumvent competition in the labor markets they control, now largely in the public sector.
Despite unions’ deceptive arguments for their government-granted exclusive, abusive powers in terms of freedom of association, real, general freedom of association does not invalidate the potential of workers forming unions. Scholars who are part of the Austrian School have been at the forefront of making that clear.
As Walter Block put it in “Labor Relations, Unions, and Collective Bargaining: A Political Economic Analysis,” “unionism ... admits of a voluntary and a coercive aspect. The philosophy of free enterprise is fully consistent with voluntary unionism, but is diametrically opposed to coercive unionism.” Voluntary unions are consistent with liberty because “if it is proper for one worker to quit his job, then all workers, together, have every right to do so, en masse.” And in his “The Yellow Dog Contract: Bring It Back!” he addressed this issue directly:
Are unions per se illegitimate? No. If all they do is threaten mass quits unless their demands are met, they should not be banned by law. But as a matter of fact, not a one of them limits itself in this manner. Instead, in addition, they threaten the person and property not only of the owner, but also of any workers who attempt to take up the wages and working conditions spurned by the union. They also favor labor legislation that compels the owner to deal with the union, when he wishes to ignore these workers and hire the “scabs” instead.
Ludwig von Mises, in his 1966 magnum opus, Human Action, also made the distinction between voluntary and coercive unions clear:
The issue is not the right to form associations. It is whether or not any association of private citizens should be granted the privilege of resorting with impunity to violent action. ... The problem is not the right to strike, but the right — by intimidation or violence — to force other people to strike, and the further right to prevent anybody from working in a shop in which a union has called a strike.
Requiring union representation and endowing those unions with monopoly powers violates the liberty and freedom of association of dissenting workers, employers, non-union workers, and consumers. Undoing that abuse would fix every union free-riding and forced-riding problem. And it would be easy to do. As Murray Rothbard put it, in his 1973 For a New Liberty, “All that is needed, both for libertarian principle and for a healthy economy, is to remove and abolish these special privileges.” That is why Harris v. Quinn, which offers the Court another chance to see through the “free-rider” smokescreen to the central issue, presents an opportunity for a reform that would benefit the vast majority of Americans.
It’s hard to maintain monopoly status in a free market when you have to deal with all that competition and whatnot.
Between other companies’ low prices and new, updated products entering the market each day, it’s almost like Rich Uncle Pennybags is a thing of the past. But fret not!
The politicians of the world would like to offer anyone dead set on controlling an entire industry the chance to shine. So come one, come all — government agencies, cronies, and all their friends — as we present the five best ways to create a monopoly and to ensure you never have to compete again.
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Regulations. When the cost of doing business is high, make it higher. Small firms can’t survive government imposed regulations while bigger firms can certainly bear the burden, at least temporarily. Taxes, mandates, and especially “safety regulations” (e.g., clinical trials at the Food and Drug Administration) will wipe out your competition before they even have time to ask what the new rules mean. Then hire a lobbyist in Washington. I’m sure he or she will come up with a good reason that the industry should adhere to stricter and more expensive guidelines.
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Subsidies. There’s no such thing as a free lunch. But, when the government is paying for it, the lunch sure does taste free. Subsidies offer an alternative, consumer-driven focus to acquiring monopoly status. Arbitrary revenue-boosts from the government will allow you to reduce prices to essentially nothing, all while maintaining profitability. You can give away (what used to be) a $10.00 item for free and, with the help of $1 million in subsidies from our nation’s capital, you can stay afloat. Your competitors, however, will have to make do with reality. Even if they somehow manage to slash prices to $1.00 per unit, what kind of customer will pass up free? The subsidy doesn’t have to last permanently, either. It will only take a few weeks before your competitors begin to default on paychecks and other loans without transaction revenue.
You can also take this route without the government revenue injections if you have a contingency plan in the form of a bailout. Both you and your competitors will go bankrupt, but only one (fingers crossed it’s you) will receive CPR.
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Nationalization. Shout out to government officials! This one’s for you. The easiest and most straightforward way to create a monopoly is to simply write the monopoly into law. Federal control over an entire industry — much like we’ve done with the United States Postal Service — is effectively the prohibition of competition from the private sector. But don’t ever reference the USPS. It’s a terrible (albeit realistic) example of a government monopoly, what with its inefficiency, perpetual deficits, and general lack of regard for any sense of advancement in mail delivery. Rather, tell everyone you want to monopolize “for the good of the people” and then talk about the Department of Education or some other public sector operation people don’t like to criticize in front of company.
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Tariffs. Neighbors can be annoying. Some are loud and others are strange, but the absolute worst neighbors are the ones who compete with you in the marketplace (and then win). In the beautiful Southwest, this neighbor is Mexico. Companies south of the border produce certain commodities much more cheaply than American companies do, and they have the nerve to think that they can export their inexpensive products to the United States on a whim. We don’t think so. If Mexican companies sell sugar for $2.00 per pound and you charge $3.00, don’t let them satisfy customers like they own the place. Make sure they pay an import fee of $1.01 and it’s guaranteed you’ll win new business one cent at a time. Better yet, propose a complete ban on the sale of foreign goods in your state, city, and town until you’re so isolated from the rest of the world that no one has a choice to buy from anyone except you.
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Intellectual property. If you have a good idea, why let anyone else have the same one? Take that idea, write it down in the broadest words possible, and send it straight to the United States Patent and Trademark Office, where public officials will (hopefully) grant you the exclusive right to use it. And don’t worry, if someone else thinks of the idea one day later ... too bad. You filed first. Even if someone halfway across the globe comes up with the same idea independently ... too bad. You filed first. Milk your monopoly for all it’s worth. Put a huge price tag on that beast and feel free to ignore quality. What are consumers going to do: purchase your exclusive product elsewhere?
We wish you the best of luck in your venture. You deserve it.
Archived from the live Mises.tv broadcast, this lecture was presented by Tom DiLorenzo at the 2013 Mises University, hosted by the Mises Institute in Auburn, Alabama, on 23 July 2013.
A recent 60 Minutes piece by Lesley Stahl cut into an extremely urgent problem of our day: expensive sunglasses. The report identified a possible monopoly in the market for glasses, a firm called Luxottica, which owns almost all the leading brands of eyewear, four large retailers of glasses, and even a popular vision insurance provider.
Stahl interviewed the CEO of Luxottica, Andrea Guerra, and questioned his business practices, the prices of his products, and Luxottica’s growth over the years. At times, she almost seemed to scold the successful CEO for, well, being so successful.
In her interview, Stahl complained about the prices of Guerra’s products, saying, “they're very expensive. They can be very expensive.” Guerra, with a heavy Italian accent, responded with “They can. This is one of the very few objects that are 100-percent functional, 100-percent aesthetical, and they need to fit your face for 15 hours a day. Not easy, and there is a lot of work behind them.”
Other hard-hitting remarks like “How does the consumer benefit from all of this?” and “Your prices are still high,” were met with nonchalant (yet true) answers like, “Everything is worth what people are ready to pay.”
Do Guerra’s profits indicate that he is a consumer-harming monopolist? What light does Austrian economics shed on this question?
We Are All MonopolistsThe standard neoclassical treatment of monopolies is a neat and tidy graph that shows the differences in price, quantity, and consumer and producer surplus as well as a nifty triangle depicting “dead weight loss,” or loss in total social welfare. These differences and consequences are compared to the “perfectly competitive” X-marks-the-spot standard.
Source: Wikipedia.
The Austrian (or “causal realist”) treatment, as you might expect, provides deeper insights into the concepts and implications of monopolies than mere points on a graph, and has a rich understanding of prices and their meaning. You might also expect that, for causal realists, the analysis starts with individual preferences and proceeds deductively from there.
Let us begin with Lesley Stahl herself, as a producer of news, reports, exposés, and the like, her labor is primarily as a journalist. Stahl sells her labor to CBS—the two have an agreement on work load (either by time or by output) and have settled on a price, or a salary in this case. When she accepted her salary offer, she weighed it against alternatives, specifically the next highest valued alternative in her preference ranking. As Rothbard points out:
“In judging how much of [her] labor to sell and at what price, the producer [Lesley Stahl] will take into consideration the monetary income to be gained, the psychic return from the type of work and the ‘working conditions,’ and the leisure forgone, balancing them in accordance with the operation of [her] various marginal utilities. Certainly, if [she] can earn a higher income by working less, [she] will do so, since [she] also gains leisure thereby.”Man, Economy, and State, p. 633.
Stahl made a conscious decision to work a certain amount of time, which means she also consciously set aside a certain amount of time for leisure, weighing both in tandem with potential and actual salary offers from CBS and other demanders of journalists’ labor. She agreed to work only a certain amount, based on her own preferences.
Is Stahl therefore a greedy monopolist, restricting output and increasing the price of her labor to maximize monetary and psychic gain? In short, no. The only reason she can do this is because CBS’s demand for her labor as a journalist is partially inelastic, i.e., a higher price/salary results in fewer labor hours demanded, but still greater total expenditure on Stahl’s labor. The important takeaway from this is that both sides of the labor/salary negotiation are based on voluntary, individual preferences for labor, leisure, and monetary income.
At this step, we realize that we are all monopolists because we all charge a positive price for our own labor as its sole “producer.” Either that or none of us are monopolists and prices in the unhampered market are fairly determined by consensual, peaceful negotiation based on individuals’ preferences.
Restricting OutputThen what about Luxottica’s alleged decision to restrict output? Let us trace through the implications of their production decisions through an example adapted from Rothbard:
Suppose that, before Luxottica’s tyrannical reign over the market for sunglasses and other eyewear, it took 1,000 laborers, six factories, and five tons each of plastic, metal, and glass to produce five million sunglasses in a year. An entrepreneur, under the name of a new firm, “Luxottica,” steps onto the scene, buys out the existing firms, and sees an opportunity for profit by producing three million sunglasses in a year and only employing 700 laborers and two factories. The entrepreneur also uses fewer raw materials to make the three million sunglasses. What can we say thus far? Now 300 laborers, four factories, and tons of raw materials are relinquished to other productive efforts by other entrepreneurs! Supposing Luxottica and the other entrepreneurs successfully gauged consumer demand for their products, this second allocation of factors of production provides more value to the consumers as a whole. How then could we say that the production decision by the new entrepreneur is “unjust”?Man, Economy, and State, p. 638.
Restricting output, therefore, only frees up factors of production to be used elsewhere. We cannot claim with certainty that restricting output of one product results in less production of goods overall. And, even in the case of entrepreneurial error, either by the new “monopolist” or by the users of the newly relinquished factors of production, other entrepreneurs will see the mishap; new iterations of production structures will be employed to make better, more efficient, and more successful tries at meeting consumers’ demands. This is the type of “unseen” counterfactual we have been warned not to ignore by Frédéric Bastiat and Henry Hazlitt.
Further, there is an inherent fallacy in “grumbling,” as Mises would say, about so-called restricted output. Luxottica, in their production decisions, have decided to produce billions of glasses and sunglasses, but have also decided to produce zero tablet computers. This is certainly restricted output, but can we blame Luxottica for withholding this potential benefit to consumers of tablet computers? Assuming that you also do not produce tablet computers, we are guilty of this crime too. Complaints about restricted output, therefore, reduce to complaints about the ubiquitous scarcity of means to satisfy ends.
Factor PricingIn her investigation, Stahl also interviewed Brett Arends, a columnist for Smart Money and MarketWatch.com. Arends noted that, “the whole point of a luxury brand is to persuade people to pay $200 for a product that cost $30 to make.” Although the intent was to make the listener cringe, this is a noteworthy achievement, setting aside the vague but fiery “persuade” semantics. If an entrepreneur can take a lump of raw materials of relatively low value and employ labor and capital to transform it into something of high value to consumers, is this not a service to mankind?
But how do we account for the dramatic difference in prices of the final product and the factors of production? Put another way, why is it so cheap to make expensive sunglasses?
We know from the founders of Austrian economics, Carl Menger and Eugen von Böhm-Bawerk, that the value of tools, machines, factories, raw materials, and labor are derived from the value of the final goods they help produce. In other words, the value of factors of production are “imputed” retrospectively, with the value of the final good in mind. Luxottica is one player among other producers of eyewear in the market for factors that can be used to make sunglasses. Further, the plastic, metal, glass, factories, machines, and laborers are similarly suited to produce other goods like scissors, watches, pens, earphones, calculators, and countless other goods. In other words, these factors are relatively “non-specific.” Those factors were employed by Luxottica at a cost of about $30 per piece of eyewear (according to Brett Arends) because Luxottica was able to bid those factors away from other lines of production at their respective prices.
But we can go even further, like a child repeatedly inquiring, “Why?” Luxottica outbid the other players in the market because the entrepreneur expected profits from employing those factors at that price. If another entrepreneur aspired to produce the same luxury sunglasses at the same price, the two firms would compete for the same factors, driving the price of the factors up to their discounted marginal value product (DMVP), i.e., the factors’ specific contributions to increasing revenue to the producer, discounted by the pure rate of interest. (This is, of course, putting aside intellectual property considerations.)
Therefore, we can put an upper and lower bound on factor prices. They will not exceed their DMVP, or else the entrepreneur wouldn’t find it profitable to employ that factor. They will also be no less than the value to the next highest bidder of the factor, which is simply informed by that entrepreneur’s DMVP from using the same factor. Here we see that all prices of all goods and the factors used to produce them are derived from consumer preferences.
Social Function of ProfitsSo, consumer preferences hold sway over prices, revenues, and costs of production. Since they determine revenues and costs, they also determine entrepreneurial profits, which are simply revenues minus costs. The producer-entrepreneur takes on considerable risk, then, because consumer preferences are dynamic, complex, and subjective.
We say they are dynamic because individuals’ value scales (including time preferences) are constantly changing, just like the ideas about how to physically transform raw materials and goods into other goods. One day, Jones prefers Ray-Bans to Oakleys; the next he may prefer Oakleys to Ray-Bans.
The changes involve remarkable complexity, too. As soon as Jones decides he likes glasses with thick frames, Andrea Guerra is formulating more efficient ways to meet Jones’s desires. Jones’s preferences ripple through the structure of production, introducing changes at possibly every stage.
Finally, these valuations are entirely subjective in two ways: Jones’s utility or satisfaction from wearing a pair of Oakleys cannot be compared quantifiably to his satisfaction from wearing a pair of Ray-Bans, even by his own introspection. Similarly, Jones’s satisfaction from wearing a pair of Oakleys cannot be compared to Smith’s satisfaction from wearing an identical pair of Oakleys. Interpersonal utility comparisons are impossible, and even intrapersonal preferences are only ordinally ranked.
Profits, therefore, are a critical measuring stick that tell entrepreneurs they are meeting consumers’ wishes. Losses provide similarly critical information to entrepreneurs that they aren’t meeting consumers’ wishes and are wasting resources that should be used elsewhere. Profits may also be considered as compensation to the entrepreneur for taking on such incredible risks. Luxottica’s considerable profits, insofar as they are not attributed to state intervention, simply represent Guerra’s knack for predicting future consumer demands for his products successfully, a risky task subject to dynamic, complex, and subjective valuations. Guerra should be commended, not condemned, for making profits, as they are a sign of his company’s contribution to consumer satisfaction.
ConclusionOf course, the state is the elephant in the room. Where is the state in this story? According to many of the comments from 60 Minutes’s internet subscribers, the state is just twiddling its thumbs in the background, ignorantly not enforcing U.S. antitrust law on Italian companies. A quick internet search of U.S. regulations on non-prescription sunglasses led me to an almost 5,000 word document from the FDA replete with manufacturing requirements for impact resistance, flammability, biocompatibility, and optical properties, as well as labeling information, branding guidelines, adulteration laws, and a slew of other legal requirements. Before concluding that this would only diminish Luxottica’s dominion in the U.S. eyewear market, consider this: older, larger companies tend to be able to meet such legal requirements with more ease than newer, smaller companies trying to stake their own claim in the market. This is usually because the older, larger companies make friends with, bribe, or send their own people to the state to write the regulations to standards they already meet or could easily meet. We can’t say for sure that Luxottica has done this, but would it surprise you?
Only the state can enforce monopolies that truly make society worse off. Only the state can put in place “unfair” or “unjust” prices that are not derived from individuals peacefully interacting in markets, but by the whims of state officials hungry for more loot. Only the state can print its own money, driving prices of all goods up and creating a chaotic environment for entrepreneurs trying to decipher consumer wants and allocate land, labor, and capital accordingly. Indeed, the state may have been a more intriguing subject for an exposé than Luxottica’s production of luxury eyewear.
Luxottica is the sole producer of many brands of sunglasses, including some of the most popular today, just like Lesley Stahl is the sole producer of her own labor or how I am the sole producer of this article. Defining monopolies this way is fruitless. Even demonizing “monopoly prices” falls on its face, because as Andrea Guerra pointed out, “Everything is worth what people are ready to pay.” The CEO could have just as easily said, “My prices are based on voluntary individual preferences for goods from my entrepreneurial efforts to combine lesser valued factors toward producing higher valued goods.” Well, the homegrown Italian may have struggled with a few of those words.
There are two kinds of people in the world: those who respect coercive authority and consider it legitimate, and those who do not. The former group is likewise split into two factions: a relatively small group that, for whatever reason, essentially worships power, and a much larger one whose members merely tolerate authoritarianism, either as a matter of expedience or habit. In the wake of the recent bombing at the Boston Marathon and subsequent military-style manhunt, it seems clear that the great majority of Americans may be categorized as either power-worshiping or power-tolerant.
To be sure, the police came in for a fair share of vehement criticism from a number of established commentators. Ron Paul, for example, stated flatly that the people of Boston had been given “a taste of martial law” and likened the situation to “a military coup in a far off banana republic,” while at the other end of the spectrum, the World Socialist Website denounced the tactics of the police as having “no precedent in American history,” compared Boston to “a city under occupation or in civil war,” and claimed that the news media had “fomented fear and hysteria, spread ungrounded rumors and justified the police state measures of the Obama administration.”My own cursory perusal of mainstream media reports suggests that they tended primarily to trivialize rather than glorify the use of force as such, while portraying the officers personally as heroes. Time Magazine, for example, describes SWAT teams as innocuously going “block by block, knocking on doors and asking people if they had seen anything suspicious,” whereas this video shot from the window of a private home clearly shows police with weapons drawn, forcing the occupants of a neighboring house to come out with their hands in the air while officers search the premises. This article from the New York Times sports a picture showing local celebrities (Boston Red Sox players) lined up and applauding as uniformed police offers walk past them, in an image that clearly calls to mind the patriotic fervor of a military parade.
Yet to the great majority of Americans, as well as to most Bostonians, the authoritarianism of the police was fully justified by the extraordinary circumstances. The aim of the “lockdown”Boston officials have denied the imposition of a “lockdown,” claiming that it was rather a request to “shelter in place.” It is not my intention to settle this question here. Those interested can find more here. was to protect the public from a fugitive and presumably armed terrorist. Any means to achieve this goal were therefore a priori acceptable, the fact that US citizens are about eight times more likely to be killed by a police officer than by a terrorist notwithstanding.
Can the two parties of this debate both be satisfied? Can the Ron Pauls of the world be free of tyranny and the “Boston Proud” set feel safe at the same time? Yes, but not so long as the provision of security services remains monopolized.
Market Law vs. Martial LawIn law enforcement as in any other hampered or fully centralized market sector, the real problem is never the visible, concrete symptom, but rather the underlying condition that has brought it about. Whatever the particular type of problem may be in any given case, the catalyzing condition, almost invariably, is monopoly.
Being the sole legal provider of any service allows for greater flexibility in customer relations (to put it politely) than would otherwise be practicable, and when the service involves sending men with guns to people’s homes, this is not a trivial consideration. Over time, monopoly policing will tend to become increasingly autocratic, even in circumstances far less extreme than a full-scale manhunt.
We need look no further for evidence of this than Boston, which in a very real sense was already under quasi-lockdown even before the marathon began. In this video released by the Massachusetts Bay Transportation Authority Police a few days before the event, the Authority made clear the types of conduct by citizens that it would tolerate. Residents were lectured on the need to be “respectful to one another,” warned that any public drinking or “rowdy behavior” would be met with “zero tolerance,” and were even expressly prohibited from gathering on their own rooftops and porches.
Yet all this, it seems, raised nary a Bostonian eyebrow. Is it any wonder they acquiesced so readily in the manhunt as well?
We may protest the unconstitutional invasiveness of these things all we like, but they are merely effects that, without some form of monopoly protection, could never arise. Under free competition, any private security firm that resorted to draconian tactics would be swiftly abandoned by its subscribers in favor of its less intrusive competitors, thus marginalizing or driving it out of business altogether.
This is another way of saying that in the market law society it is the citizens who would tell the police which types of conduct would be tolerated, and the latter could not place the former under anything resembling “lockdown.” Nor would this situation be in any way analogous to a political system of direct democracy in which the majority could use the police as a tool for imposing its own arbitrary behavioral standards on the minority. For a private firm with multiple competitors, the alienation of any segment of its customer base, however minute relative to the whole, could easily mean bankruptcy. A private police company in a free security market could no more subjugate its own customers than a restaurant can force-feed its patrons. And tyrannizing non-subscribers would bring it into violent conflictFor a detailed discussion of why private police companies would not and really could not attempt to dominate each other or settle inter-agency disputes by violence, see Murray Rothbard’s For a New Liberty, pages 224-26. with its competitors and society as a whole — something no private business could afford.
All this has been pointed out many times. However, a competitive law enforcement market offers other less apparent but equally valuable mechanisms for the avoidance of conflict and the promotion of efficiency, goodwill, and cooperation between the police and public.
Consider a high-priority manhunt along the lines of the one in Boston. Under state monopoly policing, the government dispatches SWAT teams riding in “armored personnel carriers,” which, coincidentally, happen to look a lot like tanks. Upon reaching their target neighborhoods the officers disembark, fan out across the area and show up unannounced on people's doorsteps, armed to the teeth and looking like the Imperial Storm Troopers in Star Wars. Confusion ensues. Babies cry, children gawk, cats scurry up trees, and millennialists think it’s the Second Coming. Residents are told to come out with their hands up and wait outside while strangers with assault rifles search their homes. Enough marijuana gets flushed into the municipal sewage system to stone the city’s entire rat population.
Market-based policing could not be conducted in this way. However odd it may sound at first, in a private law society, individual firms might differ significantly in the sorts of “manhunt services” they offered. Depending on consumer preferences, they might even offer individualized contracts. Much as insurers can customize policies to suit individual needs, and medical patients can sign a “do not resuscitate” order in the event of catastrophic illness or accident, clients of private police companies could stipulate in advance the sorts of invasive actions they would accept and under what circumstances.
Some might be perfectly comfortable letting officers enter their homes without notice and for almost any reason; others might insist on prior notification and/or third-party verification of emergency conditions or probable cause. Modern data management and communications technologies would make it a simple matter for officers in the field to know instantly which houses could be searched right away, while an automated phone system could call hundreds or even thousands of other homeowners simultaneously, inform them of the situation using a digital voice recording, and allow them to instantly grant or refuse permission to enter simply by pushing a button or saying the words “yes” or “no.”
This idea is easy to ridicule (just imagine picking up the phone and getting a recorded message that said “To allow officers to search your home for a deranged fugitive terrorist, please press 3.”). But hyperbole aside, something along these lines would easily be feasible, as would many other possibilities as yet undreamed of. It would certainly represent an immense improvement in any case over the present system of tax-funded monopoly policing in which officers may enter anyone’s home at the discretion of their superiors, and even order residents off their own porches and roofs.
Many people will reflexively dismiss these unfamiliar ideas as “utopian,” and may raise numerous objections to them. They may counter, for example, that any system of pre-existing contractual arrangements would allow armed and dangerous criminals to evade capture simply by taking refuge on property where police are bound by “no search” clauses. Moreover, a small group of, say, terrorist bombers could even purchase their own house in advance, insist on a strict “no search” provision in their security contract, and then simply go home after committing their crimes and enjoy full immunity from prosecution!
Such objections are, however, plainly groundless. The first fails because it overlooks the obvious fact that the terms of contracts between security firms and their subscribers would be strictly confidential; criminals would have no way of knowing which houses were “safe” and which were not.
The second objection is untenable because, absurdly, it transforms the “no search” provision into de facto immunity from prosecution — an entirely different thing and an arrangement to which no police company could possibly consent.The modern state does offer a few select individuals what amounts to a "no arrest" clause. It's called "diplomatic immunity."
A “no search” clause in a police contract would and could be valid only for cases involving more or less random searches. If the police, whether public or private, had strong reasonThe question might reasonably arise as to who gets to decide what is and is not "strong reason." Different societies might answer this question in different ways, of course, but there seems to be no reason why procedures very similar to the state's currently-existing bench warrant system could not be used, with the difference that instead of a government employee (judge) issuing a search warrant, each police company would turn for authorization to a committee of private citizens, all of whom would be subscribers to the company's services. to believe that a wanted criminal was hiding on X’s property, X would then have to allow his property to be searched because a refusal to do so would be tantamount to an assertion that his right to privacy superseded the rights, not only of the criminal’s victims to justice, but also of the community at large to protection from a known victimizer.
If we furthermore assume that the suspect really has taken refuge on X’s property, then by refusing a search request, X would also be precariously close to aiding and abetting, which is a crime in itself and cannot be protected by any sort of legal contract whatever.
Finally, some people may fear that giving homeowners such a large measure of control over access to their property would result in almost everyone opting for “no search” contracts. Although it is not immediately clear why this should be considered problematic, the conclusion itself, at least, seems prima facie defensible. However, it suffers from two problems. First, even under the present system, citizens supposedly already have a “no search clause” in their “contract” with the government. It’s called the Fourth Amendment. The only difference is that the state, being a monopoly service provider, can breach the contract with virtual impunity.
More importantly, however, this final objection overlooks what may be the single greatest virtue of market law. In simplest terms, coercion provokes conflict. In fact, coercion is conflict. In all coercive relationships one party — the coercer — must necessarily assume a superior role vis-à-vis the other.
Such relationships therefore naturally foster antagonism, defiance, and a sense of victimhood that makes peaceful cooperation impossible. Voluntary association, on the other hand, simply by respecting individual preferences, communicates genuine respect for the person as an autonomous individual, thereby promoting trust and goodwill between and among contracting parties.
It follows that if law enforcement were to be governed by this principle, fear and/or resentment of the police would be much less intense and far less common, leading property owners to be more amenable to on-the-spot searches. Indeed, many otherwise recalcitrant people might well abandon all reluctance and cooperate fully with the police, simply because the latter had the common courtesy to ask for permission in advance. And since officers, as representatives of their companies, would be fully constrained in their behavior by the freedom of each and every citizen to take his business elsewhere, no one would need to fear that they were letting bulls into a china shop.
Since the catastrophe in Boston, a few other advantageous aspects of market law have been obliquely touched on in the media as well. These include the fact that despite what was surely one of the most intensive manhunts in US history, it was not the police, but a private citizen who discovered the suspect hiding in his back yard and notified the authorities; that the sequestration of people in their homes, whether voluntary or not, probably prevented the suspect from being discovered sooner; and that it was a private and not a municipal security camera that allowed him and his fraternal accomplice to be identified in the first place.
To this list we might add the perverse misallocation of police manpower before the bombing, as officers were focused on deterring such “crimes” as the quaffing of a few beers on the sidewalk, “rowdy” celebrations, and unlawful socializing on porches.
In a private law society, security officers would be freed from the ludicrous burden of fun-prevention so they could concentrate on spotting real criminals before they commit their crimes. There would also be much greater incentives for prevention, since all public events (i.e., private events open to the public) would be taking place on someone’s property, giving the owners of such property a very compelling reason to carry liability insurance to compensate the victims of any crimes that might occur there.
This means that even those with no individual insurance of their own would be indemnified against any injuries caused by the actions of others at public events, even if the perpetrators could not be located. Looking to minimize payouts, the insurance companies would in turn offer incentives to owners to invest heavily in preventive measures, such as the installation of security cameras, better lighting, controlled entrance, the use of bomb-sniffing dogs, or simply the hiring of lay personnel to walk around with walkie-talkies and serve as “extra eyes.”
Final Thoughts: The Structure of Social RevolutionsBy now I have had enough conversations with assorted statists on both the “left” and the “right” to know that most people with an established, mainstream view of society and the law will not be persuaded by what is written here, nor probably by any other criticisms, however valid, or visions, however vivid.
All attempts at conversion of the entrenched are likely to fail, and almost everyone these days appears entrenched to some degree. At times it may seem futile even to begin the discussion. Yet, I believe there is reason to be hopeful.
In The Structure of Scientific Revolutions, Thomas Kuhn famously showed how new paradigms in science become accepted. Truly revolutionary ideas, he said, do not suddenly triumph when the scientific establishment becomes convinced of their superiority over existing doctrine, but rather take root slowly as the old guard retires and the torch is passed to the new generation of scientists. “Almost always,” Kuhn wrote, “the men who achieve these fundamental inventions of a new paradigm have been either very young or very new to the field whose paradigms they change.” He also offered an explanation as to what it is that induces the emerging generation to embrace fundamental cognitive shift: “The usual prelude to changes of this sort is … the awareness of anomaly, of an occurrence or set of occurrences that does not fit the existing ways of ordering phenomena.”
We live in anomalous times, and not just with regard to science. Today’s young people know this. They recognize all too clearly that something about the society they live in doesn’t fit the standard explanations their elders have accepted so uncritically for so long, and they are willing to approach the essential questions with an open mind and tremendous energy. In keeping with Kuhn’s thesis, it is they who must come to appreciate the full potential of the market law society, since they are the only ones who can bring it about anytime soon. It is therefore this group to whom we need to speak.
Like the good people of Boston, we libertarians — especially those of us in the anarchist tradition — have our own marathon to run. Thomas Kuhn has supplied us with a map of the territory, and Ron Paul has given us a far more auspicious start than we had any reason to hope for. It’s up to us to keep running, no matter how many bombs go off before we reach the finish line.
This lecture by Mark Thornton was presented at the 2012 Mises University in Auburn, Alabama.
This lecture by Tom DiLorenzo was presented at the 2012 Mises University in Auburn, Alabama. Includes an introduction by Llewellyn H. Rockwell, Jr., and the presentation of the 2012 George F. Koether Free Market Writing Award.
Instead of solving the initial problem, the intervention creates two or three further problems, which the government feels it must intervene to heal, writes Murray N. Rothbard (1926–1995).
This audio Mises Daily is narrated by Harold Fritsche.
[The Rise and Fall of Society (1959)]
The techniques of the market place evolve from man's unceasing drive toward a richer and fuller life. One technique that plays a most important part in this general purpose is competition, or the vying among the specialists for the favor of the community. Although the competitors are motivated by self-interest, each one seeking the custom of his fellow men, the effect of the rivalry is to bring an abundance into the market place, to the greater benefit of Society. To win favor for his offerings, as against the offerings of others in the same line, each competitor tries to improve his capacity for production, as to quantity or quality; each seeks to better his competence.
But, what is competence, and how is it determined by those whose trade is sought? Getting down to the bedrock of definitions, competence is a grade of performance, and as the word is generally used it designates a high grade. Its opposite is incompetence, a low grade, and in between there must be a number of gradations. A performance is good or bad, competent or incompetent, only in comparison with other performances.
If Smith is the only cobbler in town, and we are unacquainted with the workmanship of cobblers in other towns, how can we judge his skill? The best we can do under the circumstances is to compare his performance with what we could do for ourselves as amateur cobblers; before he came, that was the best service we had. Let us concede that our monopoly cobbler is a decent fellow and that he does the best he can for our footwear. But he is under no compulsion to do better, and his best may be determined by his conscience or the state of his health. Like the rest of us, he dislikes the irksomeness and weariness of toil and tries to get by with the minimum of effort. Since we cannot take our trade elsewhere, and Smith is aware of this, his natural inclination is to take a let-well-enough-alone attitude toward his workmanship, and in fixing his prices he follows the rule of "all the traffic will bear." The only restraint on his monopoly impulse is the possibility of driving his customers to self-help cobbling and losing their trade.
Only when Brown opens a rival shop in town is Smith compelled to look to and prove his competence. To attract trade the newcomer either undercuts the erstwhile monopolist or improves on the quality of his work; the latter retaliates by offering to sole shoes "while you wait"; Brown invents, or buys from an inventor, a machine enabling him to cut his labor costs, turn out more jobs in a given time, and therefore to charge less than Brown; and so it goes. Each improves his performance in some way, not out of compassion for his customers but out of regard for his own well-being. Nevertheless, it is the community that profits by the rising standard and shows its appreciation by patronizing the specialist who, all things considered, serves their interests best. They applaud the performance, not the performer.
The practical measurement of competence is the profit-and-loss statement of the competitor, for in it are recorded the favorable or unfavorable votes of the Society he serves. Thus, the income of the auto mechanic reflects the repairs he has effected, the profits of the manufacturer prove his ability to produce what is wanted, the salary of the managerial genius comes off the production line. Each has been rewarded by Society for his performance, as compared with the performances of his competitors, and his gain is proof enough that Society has gained. It follows then that a Society of affluent competitors is one in which the wage level, or the general fund of satisfactions, is high.
The coming of Brown may be a benefit to the community, but to Smith it is a discomfit. Heretofore, his craftsmanship and the price he charged for his service were fixed by his own convenience, but now he is compelled to meet standards set by another. The monopoly impulse in him, which he shares with all human beings, is disturbed. Therefore, Smith is inclined to prevent Brown from offering his competitive service to his trade and under primitive conditions might resort to arms. Since a growing Society frowns upon such crude methods, he turns to a more sophisticated use of force, that of convincing his neighbors that scarcity in some way improves their lot; that "home industry" should be encouraged; that Brown is an inferior human being and therefore a detriment to the community; that lower prices endanger the "general economy." Perhaps his argument is convincing because each of his neighbors entertains the hope of a monopoly position of his own, of getting something for nothing; at any rate, he succeeds in using collective force to achieve his private purpose. And thus come scarcity-producing laws, such as protective tariffs, exclusion acts, prohibitions on labor-saving devices, restraints on trade, or a tax on enterprise. Either Brown is prevented from offering his services to the community, or his goods are kept out of the market place, or a tax is levied on his improved machinery — or maybe a labor union prevents him from using it. It is by force that Smith retains his comfortable monopoly position; it is by force that competition is prevented from enriching the market place.
It is an odd circumstance that such scarcity-producing measures are not self-enforcing, simply because the monopoly impulse is counterbalanced by the stronger urge of the human for abundance, and the conflict results in lawbreaking by the very law passers. Thus comes the practice of smuggling, of tax evasion, of bootlegging, as well as the resort to substitutes for the product made scarce by monopoly. It is not surprising that Smith's neighbors, who helped him avoid competition, avail themselves by devious methods of Brown's services.
When a monopoly position is achieved, when competition is eliminated or restrained, competence has a new meaning. It no longer designates a standard of performance fixed in the market place. The monopolist, the one who controls the supply of a desirable commodity or service, regulates his performance by a neat formula: the highest price which will yield him the highest net profit. If he increases the output beyond a predetermined point, he must lower the price so as to induce greater consumption, and nothing is gained. If he increases the price, consumption will fall and so will his net profit. Competence in a monopoly therefore consists in finding (by the trial-and-error method) the exact profit-yielding ratio between price and performance. The profit-and-loss statement of a monopoly business reflects only in part the service it has rendered Society; it also includes an exaction price made possible by the scarcity it is able to cause.The competitor, like the monopolist, seeks the highest price which will yield him the highest net profit. But, because he is unable to control supply, and thus induce a scarcity, his highest price is what competition will allow him to charge, which is always lower than what he would like. In a competitive business, the net profit breaks down to interest on investment, replacement of capital, and the wages of superintendence. Only in a monopoly business is there a "little extra.
The key to monopoly is scarcity. Some scarcities are natural, such as mineral deposits and land sites; there is no way for humans to duplicate them. The ownership or control of these limited opportunities to produce enables the monopolist to exact a rent price for the use of them. The rent price is fixed by their relative scarcity — or by the yield of any given site over that of any other site available to use. In point of fact, the rent price is fixed by competition among users or producers for exclusive possession of these locations.
Other scarcities are made by law, and the mechanism by which these scarcities are effected is always a coercive restriction on competition. Although the restrictive measures are sometimes concocted by individuals or groups in search of a monopoly price, these are of little effect unless and until they are implemented with the strong arm of the law, as when it imposes trade regulations, tries to fix prices, subsidizes inefficient producers at the expense of efficient ones, enables labor organizations to put limits on enterprise, or grants special privileges to favored individuals. This brings us to a consideration of the part played by the political organization of Society in its economy, which we must leave to a later chapter. For the present, we leave the matter with this observation: there cannot be an effective blocking of man's urge for abundance through competition without the aid of the law. That is, every scarcity-making device rests on political coercion.
Indeed, those who decry competition on pseudohumanitarian grounds look to the law to restrain competition, even as they call upon the law to prevent the monopoly exactions made possible by such restraint. Their argument is that those who are possessed of less ability are handicapped in the competitive struggle and will be hurt unless the more competent are shackled. (Sometimes they urge the discouragement of initiative by proposing that the profits which bring out initiative be taxed away, sometimes they contemplate the impossible task of rooting out the profit motive altogether.) But how can any member of Society be hurt by an abundance in the market place? If Brown, because of his greater skill or industry, takes shoe business away from Smith, his success is proof that he has rendered a greater service to the members of the community; they are the better off because of his efficiency. He has produced better shoes, or a greater variety of styles and sizes, or through improved methods has lowered his costs and reduced prices. But his efficiency is meaningless unless they buy his shoes; buying his shoes means that they have produced something he wants. That is to say, any increase in the production of one desirable thing calls for the production of other desirable things. In the case of Brown, his burgeoning shoe business necessitates the production of more shoe findings, shoe boxes, and other incidentals, to say nothing of stimulating such services as transportation, book-keeping, selling; furthermore, he must employ more people in his operation. In this profusion of activity, Smith is sure to find a remunerative occupation of some kind, and though his pride may suffer because he had not been able to keep up with the standard set by Brown, his well-being may have been improved. The old adage has it that "competition is good for business," and when business is "good" all Society prospers.
The anticompetition advocates like to stress the point that large aggregations of capital put the "little fellow" at a disadvantage; because of the means at his disposal the "big fellow" is able to buy raw materials in large quantities and therefore at a lower price, to put in the most advanced machinery, to invest in expensive selling campaigns. Quite true. Putting aside the fact that all this merely means greater production for the benefit of Society, the record shows that bigness in itself imposes restrictions on production; the ponderous plant lacks the flexibility necessary to meet the vagaries of human desire. Brown, the large shoe manufacturer, cannot cater to the foot that does not conform to some norm or to the whims of the fastidious wearer. His plant is geared to mass production. It is Smith, who either did not choose to become a manufacturer or was not adapted for the role, who must serve this clientele, which always grows in proportion to the increase of wealth in the community; the number of small plants or "specialty shops" keeps pace with the number and size of large industrial units. In fact, the large plant admits its limitations when it turns over to its smaller competitor the jobs it cannot do as efficiently.
There is nothing wrong with competition that competition cannot cure. The faults of competition are in the impediments that are put in its way by force — the restraints, taxes, and regulations that handicap some competitors and give others a monopoly or quasi-monopoly position. Competition serves Society best when it is free. In the field of cultural satisfactions no one would propose that competition be shackled, that the better singer be compelled to perform under poorer acoustic conditions than those afforded the second-rater, or that the discrepancies in artistic ability be equalized by law. There is common agreement that in those occupations the impartial verdict of the market place is final, even if it decides that the inferior ballplayer would better serve Society, and himself, by driving a truck. Since the expectation of material rewards (the profit motive) plays a big part in stimulating desirable competition among these cultural specialists, it should follow that competition among those engaged in the production of material things is equally desirable. The artist also seeks to satisfy his desires with the minimum of effort.
On the score of humanitarianism, free competition commends itself on the ground that those who are necessarily outside the field of production, or partly so, are in better case in an economy of plenty than in an economy of scarcity. The physically handicapped, the children, and the aged must in any event be taken care of, and their lot is better in a household where the pantry is full.
To repeat, this does not pretend to be a book on economics. It is rather an attempt to show that economics plays a big, if not major, part in the formation and development of social integrations and institutions, and toward that end it was necessary to outline, broadly, the economic principles which bear upon the thesis.
Any inquiry into the nature of or reason for Society (and its attendant political institutions) must begin with an examination of its integer, the individual. Any other approach would be like starting in mid-air. But the individual proves to be a rather complicated phenomenon, with variable and elusive characteristics, casting a variegated light on his social habits. We must put these aside and seek in the evidence of his behavior, throughout history and wherever we find him, a constant pattern. This, and there can be no question about it, is his life-long preoccupation with the making of a living. His will to live compels him to be the "economic man." Even the nonmaterial facets of his makeup — metaphysical, cultural, and spiritual — are in one manner or another tied in with the way he goes about making his living. The constancy of his concern with economics indicates that it must be the foundation on which he builds his social environment; all else is superstructure.
Society, then, is basically an economic phenomenon. It is an aggregation of individuals who, by means of the techniques emerging from cooperation, better their circumstances. It is a means of raising the general wage level; if it did not effect that result it would tend to disintegrate. The social integrations we call primitive are those in which the economic techniques have not been developed, for one reason or another, while the advanced Society is one that exploits them as fully as the cooperators know how. A perfect Society, or one as perfect as human knowledge can make it, would be one where these techniques, collectively called the market place, operated without friction; this, the world has not yet seen, for reasons that will be explored in the following chapters.
In his magnum opus, Human Action, Ludwig von Mises wrote on the type of outcome governmental occupational licensing invariably leads to:
Where the government directly fosters monopoly prices we are faced with instances of license monopoly. The factor of production by the restriction of the use of which the monopoly price is brought about is the license which the laws make a requisite for supplying the consumers. Such licenses may be granted in different ways.… Licenses are granted to only select applicants. Competition is restricted. However, monopoly prices can emerge only if the licenses act in concert and the configuration of demand is propitious.
According to a recent article in Governing, many states are considering proposals to expand the limits of medical licensing and allow the emergence of "mid-level dental providers." These dental providers would play a role similar to nurse practitioners and physician assistants by providing routine dental procedures while under the guidance of a fully trained and licensed dentist. States such as New Mexico, Oregon, and Washington are looking into this reform in order to increase the supply of dental practitioners in rural areas. The American Dental Association, which represents 156,000 members, has since come out against this proposed measure.
To get a good idea of how state occupational licensing works, consider the following example. Imagine Bill runs a lemonade stand in the middle of a bustling city. Instead of facing competition from other street vendors and surrounding eateries and grocery stores, Bill had the foresight to lobby the local city council to outlaw all sellers of lemonade who don't at first obtain a license from the city. Due to his influence and close ties to select city council members, Bill fast tracked through the application process and was able to secure a license to sell lemonade before anyone else. Little competition stands in his way now. Bill is then able to keep his sale price above the established level of a real free market and reap profits as consumers are still willing to take the extra hit on their wallet for his delicious lemonade. Profits are up, times are good, and Mrs. Bill is happy. But now the city council is beginning to change its tune on lemonade licensing and is considering an increase in licensing allotments. The free ride is coming to an end, so Bill, worried the good life will soon be over, launches a countering lobbying effort on the basis that product quality will decrease if more licenses are given out.
Now apply this simple example en masse to the American Dental Association, which, like Bill the lemonade salesman, is lobbying hard against expansions in licensing by decrying over a potential decline in public safety.
For anyone familiar with the workings of an uninhibited market, government licensing schemes reek of legislative cronyism. In a true free market, consumer demand is fulfilled by entrepreneurs whenever supply and demand are met at the margin and artificial barriers of entry aren't legislatively established. Where demand and a willingness on the part of consumers to pay necessary costs exists, investment with capital and personnel are devoted toward those industries. In that sense, there should be no predicament over a lack of dental care in rural areas as an open market would ensure that such a service is provided; albeit likely at a higher price than that of prevailing areas with greater access to care.
But like much of the medical industry in the United States, access to care is stifled due precisely to the same type of solution being floated — that is, occupational licensing. As Mises showed, such licensing must lead to a decrease in supply, monopolistic conditions, and thus a lessening of competition.
Looking back at the mid-19th century before the advent of medical licensing, we see that the United States had one of the highest per capita numbers of practicing doctors in the world. As Ronald Hamowy shows, medical schools were numerous and cost of attendance was inexpensive. Many physicians at this time practiced homeopathy; a sort of natural, laissez-faire approach to healing where the body was to reduce its exposure to negative environmental conditions such as stress and maintain a healthy diet. Those who practiced what was known as mainstream medicine sought to negate this competition by lobbying for medical occupational licensing via the states. This included joining forces with the American Medical Association to campaign for a broad enactment of licensing. By cooperating with the Carnegie Foundation and Abraham Flexner, a virtual nobody in the medical profession whose brother was the director of the Rockefeller Institute for Medical Research, the campaign met success upon the release of the infamous Flexner Report. In Making Economic Sense, Murray Rothbard writes on the Flexner Report and its disastrous effects:
Flexner's report was virtually written in advance by high officials of the American Medical Association, and its advice was quickly taken by every state in the Union.
The result: every medical school and hospital was subjected to licensing by the state, which would turn the power to appoint licensing boards over to the state AMA. The state was supposed to, and did, put out of business all medical schools that were proprietary and profit-making, that admitted blacks and women, and that did not specialize in orthodox, "allopathic" medicine: particularly homeopaths, who were then a substantial part of the medical profession, and a respectable alternative to orthodox allopathy.
Thus through the Flexner Report, the AMA was able to use government to cartelize the medical profession: to push the supply curve drastically to the left (literally half the medical schools in the country were put out of business by post-Flexner state governments), and thereby to raise medical and hospital prices and doctors' incomes.
And so began the downward trend in America's free market in medicine. With fewer medical schools — and thus fewer doctors — wages can be kept higher than would exist in a market dominated by free enterprise and the unobstructed entry into practice. Consumers, who ordinarily determine the success of producers, have lost out as they face higher costs on top of being deemed too ignorant to choose an adequate doctor without the aid of the state. Rent seeking becomes ingrained in an industry that must devote increasing amounts of financial resources to appease public officials.
The American Dental Association's opposition to expanded licensing has more to do with preserving the status quo than looking out for consumer safety. If freedom of entry were maintained in the dental industry, there is little doubt that mid-level dental practitioners, or some cost-efficient form of such, would have emerged as a viable occupation by now.
[product:0] It must be stressed, however, that the advent of an increase in licensing for a type of mid-level dentist is by no means a comprehensive solution for the problems that plague the industry. Previous governmental intervention was the cause of a shortage in dentists and an increase in the price of dental care. Further micromanagement of an already overly managed problem will only bring about more unintended consequences. Such is the nature of the state: intervention begets intervention, and we forge ahead on the path to socialism. As Mises wrote,
All varieties of [government] interference with the market phenomena not only fail to achieve the ends aimed at by their authors and supporters, but bring about a state of affairs which — from the point of view of the authors' and advocates' valuations — is less desirable than the previous state of affairs which they were designed to alter. If one wants to correct their manifest unsuitableness and preposterousness by supplementing the first acts of intervention with more and more of such acts, one must go farther and farther until the market economy has been entirely destroyed and socialism has been substituted for it.
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From the original conception of the United States Postal Service in the 1700s to the technologically advanced market of today, the words that enumerated to Congress the power to "establish Post Offices and post Roads" have never been more than a waste of ink.
In Uncle Sam, the Monopoly Man, William C. Wooldridge explains well the historical patterns of failure within the United States Postal Service (USPS):
More than a decade before Parson Weems immortalized the cherry tree, the United States Post Office was losing money. For most of the years since Postmaster General Thomas Osborne reported the first deficit to President George Washington, it has continued to lose money, receiving all the while less critical attention than the cherry tree it antedates. Yet the stars in their courses do not ineluctably dictate a government postal monopoly.
Early Americans saw these failures each day, so they became actors working for a change.
The United States has a long and healthy history of entrepreneurial disobedience. You can easily say that the individualistic rejection of force in the marketplace was one of the only real mechanisms of "checks and balances" that actually worked against government.
So opposed were people to these government-run postal services in the 1800s that a natural order kicked in where no jury would even think of convicting the private agencies — an "underground nullification," if you will. One of the first private American express firms was founded by William F. Harnden in 1839.
His business became very successful in the public eye, and the postmaster general, realizing that the competition hurt government revenue, began an investigation into its workings. Harnden wrote, in a letter to a Philadelphian business partner,
Receive nothing mailable. You will have no small number of Post Office spies at your heels. They will watch you very close. See that they have their trouble for their pains.
Since the service provided by Harnden's firm was classified more as "package protection" and less as "package shipment," however, there wasn't too much the government could do.
Eventually Harnden contacted Henry Wells, whose connection with Daniel Drew, a well-known steamboat magnate and competitor to Cornelius Vanderbilt, allowed for a network expansion between shippers. Henry Wells — with George E. Pomeroy and Crawford Livingston — hoped to be acknowledged as a legal alternative to the USPS, and offered to carry mail for a mere 20 percent of the government's then-current rate. The bureaucrats rejected the proposal but were subsequently forced to lower their own prices in fear of backlash from the general population in response to the detrimental protectionism.
Three years after the meeting between Harnden and Wells, individualist anarchist Lysander Spooner came up with his own plan to compete against the USPS through the creation of the American Letter Mail Company. Unlike his predecessors, Spooner didn't pretend to be in compliance with the government's postal monopoly. He made two arguments:
the Constitution didn't openly ban private carriers from voluntarily serving customers, andhe'd keep delivering the mail even if it was deemed illegal.Spooner elaborated on the first point through his fervent pamphlet entitled The Unconstitutionality of the Laws of Congress, Prohibiting Private Mails. He writes,
If Congress cannot carry the letters of individuals as cheaply as individuals would do it, there is no propriety in their carrying them at all.…
By the old articles of Confederation, it was declared that "the United States, in Congress assembled, shall have the sole and exclusive right and power of establishing and regulating post-offices from one State to another throughout all the United States."
When the constitution came to be adopted, this phraseology was altered, and the words "sole and exclusive" were omitted. This alteration … must certainly have been intentional — and it clearly indicates that the framers of the constitution did not intend to give to Congress, under the constitution, the same "exclusive" power, that had been possessed by the Congress of the Confederation.
But this obviously purposeful alteration in wording didn't work well enough to convince the court system that his voluntary, high-quality business provided a legitimate service in the economy. In the words of Peter Schiff, "The government's going to do what it wants to do, and the courts are going to support that. The courts don't care."
Luckily for us, Spooner continued to successfully and cheaply deliver mail for seven years before the US government shut down his operation. The 12¢ stamps sold by the USPS were no match for Spooner's 3¢ stamps, so the US government, in order to oppose the inevitable, officially declared that all city streets were to be deemed post roads, available only to the USPS in letter delivery. (The disobedience led to Spooner's more radical work 23 years later, No Treason: the Constitution of No Authority, which argued for the Constitution's invalidity as a legal contract.)
Skip ahead to the 1900s and we see that the price of a first-class stamp increased 633 percent in only 27 years, and this number is supplemented by a 10 percent speed decrease in 15 years. One would assume that, with the invention of basic email in the late 20th century, carriers would feel a stronger need to reflect the quick pace allowed by technology; the government didn't. In a policy analysis for the Cato Institute, James Bovard finds,
In 1969 it required 1.5 days on average to deliver a first-class letter. By 1982 the average first-class letter required 1.65 days for delivery, and by 1987, 1.72 days. In the quarter of 1990 before the new standards were implemented, the average had increased to l.80 days. In the quarter after the new standards began to be implemented, the average rose to l.83 days — a 1.7 percent increase that makes current average delivery 22 percent slower than 1969 delivery.
And now we see the USPS in its saddest state yet. The 2000s have wrecked its only recognizable foundations. Nearly universal access is available to various kinds of communication, so it isn't surprising that letter carrying is becoming obsolete. I don't expect many carriers to continue business as usual, but it seems to me as if the government hasn't even realized that we're living in a new age.
For the past five years in a row, the USPS has had a negative net income in the billions with a record loss of $8.5 billion in 2010, up an entire $4.7 billion from the 2009 alone. These failings easily led to the organization's recent placement on the Government Accountability Office's list of high-risk institutions. Meanwhile, private agencies like FedEx and United Parcel Service are growing fantastically each year, even with the current restrictions set against them.
Earlier last year the USPS announced the closure of nearly 3,700 post offices across the United States in one last attempt to salvage its reputation, but the $200 million it will save stands insignificant next to its deficits. Not surprisingly, the postal-workers union isn't making it easy. While labor costs represent only 32 percent and 53 percent of expenses for FedEx and United Parcel Service, respectively, they represent an astounding 80 percent for the USPS. So why isn't this negative mechanism taken into consideration?
Murray Rothbard writes in Man, Economy, and State:
The inefficiencies of government operation are compounded by several other factors. As we have seen, a government enterprise competing in an industry can usually drive out private owners, since the government can subsidize itself in many ways and supply itself with unlimited funds when desired. Thus, it has little incentive to be efficient. In cases where it cannot compete even under these conditions, it can arrogate to itself a compulsory monopoly, driving out competitors by force.
And we clearly see this phenomenon in the case of the post office. Instead of facing the real issue at hand, executives at the USPS are focusing on $50 million in "stolen items" (a mere 0.5 percent of the 2010 annual deficit) that they'd like thieves to please return. We can only hope that the post office's decision to eliminate next-day delivery for first-class mail will infuriate people to the point of paying attention to the root conflict.
It's pathetic that a government-enforced monopoly continues to lose money.
In every facet of its business, the USPS has either been a failure from the get-go or its value has now been swept under the rug by newer and quicker streamlines in communication. In either case, to echo Spooner, it is unfit to exist. Congressional action needs to strip down and cease the enforcement of every last private-express statute in the legal code.
Neither snow nor rain nor heat nor gloom, only privatization can keep these couriers from being replaced by real choices in the free market.
As happens on every new continent, the vast majority of Americans were engaged in transforming natural resources into use; in the case of New England, farming, fish, timber, and furs purchased from Indians located deep in the interior. Merchants and shippers largely exported this produce and in return imported other desired goods from abroad. It should be noted that, in contrast to the glib assumptions of many critics, there is no inherent "class conflict" between farmers and merchants in the market economy. There is no "agrarian interest" in a per se clash with a "commercial" or "mercantile" interest. Both groups play an intermeshing and complementary role in the processes of production and exchange. How, indeed, could "agrarians" find a market for their produce without merchants, and without farmers, in what goods would the merchants trade and to whom would they sell?
New England, indeed all of America north of the Potomac, had not the monoculture of the South (tobacco in the Chesapeake area and, later, rice in South Carolina), but a variety of products. The first products of New England were fish and furs, and the bulk of the earlier settlements began as fishing stations or fur trading posts. From the Indians, the whites soon learned two techniques indispensable to carving a living out of the new land: how to clear these unfamiliar woods, and how to grow that new product, Indian corn (maize), which soon became the North's leading agricultural product. Other important agricultural commodities in the North were wheat, rye, and barley.
To the first generation of devout Puritans migrating en masse to Massachusetts, intent on founding their "Bible Commonwealth," trade was more than slightly suspect. Trade was something to be watched, regulated, controlled — a standing distraction from "godly" concerns. There was little conception that the market has laws and workings of its own.
And yet, economic reality had, as always, to be dealt with — and even in the godliest of commonwealths there was often chicanery afoot. When the Puritans began to arrive in the late 1620s, the most highly developed enterprise in New England was the Plymouth fur trade with the Indians. But within a decade the Plymouth fur trade had virtually disappeared, and the economically declining Pilgrims had to content themselves with sending their agricultural produce to Boston to sell. How did this happen? How did Plymouth so swiftly become a sleepy backwater of Massachusetts Bay?
It is misleading to say that Massachusetts, with its influx of Puritans, was larger and wealthier. For this would not automatically have effected such a drastic revolution in fortunes. Moreover, Massachusetts supplanted Plymouth in the fur trade even though very few furs were native to the Massachusetts area.
The swiftness of this turnover is explicable only by contrasting the workings of governmental monopoly privilege with free private enterprise. In 1627 Plymouth owed £1,800 to its English financiers. Taking advantage of this opportunity, a group of eight leading rulers of the colony — as key members of the ruling oligarchy — in effect granted themselves a monopoly of the Plymouth fur trade in exchange for assuming the Plymouth debt. Also drawn into the monopoly scheme were four of the English merchant-creditors. The monopoly was to run for six years, but was annually renewed for several years afterward. Monopoly never spurs enterprise or initiative, and this was undoubtedly a major factor in the swift decline of the trade in the late 1630s, when competition from Massachusetts had to be faced. Plymouth could not, after all, deal with Massachusetts Bay as it had dealt with the competition of the highly efficient fur trader Thomas Morton, that is, by wiping out his settlement and deporting him back to England. Furthermore, the London creditors, while ingesting monopoly profits, fraudulently failed to reduce the Plymouth debt by that amount; the debt thus remained a heavy burden on the colony. So swiftly did the Plymouth fur trade collapse that virtually no one remained in it by 1640 and the monopoly was allowed to lapse.
It is true that the Massachusetts settlers helped this process along by such acts as seizing the Windsor trading post on the Connecticut River in 1635, but these were scarcely decisive. Instead, it was private, independent settlers, building trading posts in the interior — especially on the Connecticut River — building at their own risk and on their own initiative, who developed the New England fur trade. The most important fur trader was William Pynchon, who founded Springfield, the strategic northernmost settlement on the Connecticut River. Pynchon became a virtual manorial lord of Springfield, functioning as landed gentry and chief magistrate.
While the fur trade in Massachusetts and Connecticut was relatively free in contrast to Plymouth's, it was hardly a pure free enterprise. The governments regulated the prices of furs, taxed income from the trade, and moreover, insisted on licensing each entry into the trade. Indeed, entrance into the vital fur trade became a lucrative monopolistic privilege restricted to influential men with connections in the government of the colony. William Pynchon was granted the exclusive monopoly of the entire fur trade in the crucial Springfield region. As a result, he was able to expand greatly and establish branch trading posts of Springfield in the new settlements at Hadley and Westfield. In 1644 Massachusetts granted a 21-year fur monopoly to one company that included Boston importers William Tyng and Robert Sedgwick. The monopoly quickly went bankrupt, as did another attempt at a fur monopoly the following year.
In Rhode Island, meanwhile, Roger Williams was the first leading fur trader. One of the secrets of his success was that his social philosophy of peace and friendship with the Indians was complemented by concrete peaceful trading relations.
But New England, in the final analysis, was fur-poor, and by the late 1650s even the Massachusetts fur trade was beginning to decline rapidly. In New Haven it was a drive for scarce furs that lay at the root of New Haven's desperate attempts to colonize the Delaware Valley. As New England furs became scarcer, Indian trade concentrated deeper into the interior, and was increasingly centered around the Dutch post of Fort Orange at the current site of Albany. New England fur interests gave way to interests in land, agriculture, and other types of trade.
This article is excerpted from Conceived in Liberty (1975), chapter 30: "Economics Begins to Dissolve the Theocracy: Disintegration of the Fur Monopoly."
[May 1961]
To Adam Smith and to his successors, "competition" was not a term defined with mathematical precision; it meant, generally, "free competition," i.e., competition unhampered by governmental grants of exclusive privilege. And "monopoly" tended to mean such grants of governmental privilege.
To Adam Smith, for example, "competition" was used in the common-sense way that businessmen use it: to mean rivalry between two or more independent persons or firms. "Free competition" meant absence of grants of exclusive privilege, freedom of trade and freedom of entry into occupations; "monopolies" meant grants of exclusive privilege.
When Smith used the term "competition," for example, he used it to describe the competition among buyers, which bids prices up when demand exceeds supply, or the competition of sellers, which bids prices down when supply is greater than demand.Smith, Wealth of Nations, Modern Library, pp. 56–57.
When Smith referred to the evils of restraining competition, he referred to "the exclusive privileges of corporations … [and] an incorporated trade." Smith was describing the guild and licensing regulations of European towns.Smith, ibid., pp. 118 ff. That by "monopoly" Smith meant governmental grants of exclusive privilege may be seen in the following passage:
A monopoly granted either to an individual or to a trading company has the same effect as a secret.… The monopolists, by keeping the market constantly under-stocked … sell their commodities much above the natural price … the price of free competition.…
The exclusive privilege of corporations, statutes of and apprenticeship, and all those laws which restrain, in particular employments, the competition to a smaller number than might go into them, have the same tendency, though in a less degree. They are a sort of enlarged monopolies, and may frequently … in whole classes of employments keep up the market price of particular commodities above the natural price.… Such enhancements of the market price may last as long as the regulations of police which give occasion to them.Smith, ibid., pp. 61–62.
Smith's one important — and unfortunate — deviation from this view is his tendency to view land as a "monopoly" because the total supply of land in the society is more or less fixed.
Ricardo had virtually nothing to add to Smith's treatment. He said nothing at all explicitly about competition; and his reference to monopoly was only in two or three places, and there closely followed the Smith position. There are several pages of attack on the British colonial monopolies — grants of exclusive privilege such as the British East India Company, which Smith had attacked vigorously;Ricardo, Principles, Everyman ed., pp. 229 ff. also continued, and unfortunately sharpened, the other tendency of Smith to dub as "monopoly" a fixed supply, also indicating land: "Commodities are only at a monopoly price when by no possible device their quantity can be augmented."Ricardo, ibid., p. 165.
Of the role of free competition among the classical economists, Gide and Rist write,
their program includes liberty to choose one's employment, free competition, free trade beyond as well as within the frontiers of a single country, free banks, and a competitive rate of interest; and on the negative side it implies resistance to all State intervention wherever the necessity for it cannot be clearly demonstrated.… In the opinion of Classical writers, free competition was the sovereign natural law.… It secured cheapness for the consumer, and stimulated progress generally because of the rivalry it aroused among producers. Justice was assured for all, and equality attained, for the constant pursuit of profits merely resulted in reducing them to the level of cost of production. The Dictionnaire d'Economie Politique of 1852, which may perhaps be considered the code of Classic political economy, expressed the opinion that competition is to the industrial world what the sun is to the physical.Charles Gide and Charles Rist, A History of Economic Doctrines From the Time of the Physiocrats to the Present Day, Heath, 1930, pp. 357–58
John Stuart Mill continued in the same tradition. To him, too, "monopoly" — the opposite of competition — was artificial grants of exclusive privilege:
The usual instrument for producing artificial dearness [by government] is monopoly. To confer a monopoly upon a producer or dealer, or upon a set of producers or dealers not too numerous to combine, is to give them the power of levying any amount of taxation on the public, for their individual benefit, which will not make the public forgo the use of the commodity. When the sharers in the monopoly are so numerous and so widely scattered that they are prevented from combining, the evil is considerably less: but even then the competition is not so active among a limited as among an unlimited number.… The mere exclusion of foreigners, from a branch of industry open to the free competition of every native, has been known, even in England, to render that branch a conspicuous exception to the general industrial energy of the country.… In addition to the tax levied for the profit, real or imaginary, of the monopolists, the consumer thus pays an additional tax for their laziness and incapacity.John Stuart Mill, Principles of Political Economy, Appleton, 1901, II, p. 547.
Mill, however, extended the discussion of monopoly beyond such "artificial" monopoly, to what he called "natural monopoly," which consisted of two categories: the familiar "land monopoly" caused by the fixed supply of land; and the "natural monopoly" of especially unique ability or skill of a laborer. In both cases, the "monopoly" gave rise to a "rent" income.
Amidst this general posture of classical economics, two classical economists deviated — in unfortunate ways — from this tradition, broadening the view of the pervasiveness of monopoly in the economic system. One was Nassau W. Senior. Senior anticipated the much later "monopolistic competition" theorists by seeing monopoly and monopoly elements everywhere. To Senior, if a commodity was not produced under strictly "equal conditions," monopoly, or elements of monopoly, appeared. Senior recognized that such "equal conditions" appeared vary rarely. Senior was particularly ardent in pressing for the idea of a "land monopoly"; not only was land a monopoly, but every product into which land entered as a factor of production partook of a "monopoly" element — and this, of course, meant virtually every product.
Nassau Senior divided his concepts of monopolies into four classes: where one product is more efficient than another, and can thus produce at lower costs and sell at lower prices; fixed natural products (rare wines); patents and copyrights; and the "great monopoly of land."
Haney comments on Senior's theory:
The weakness of defining monopoly in negative terms, as being the absence of equal competition, is apparent. Perfectly equal competition is rare, and elements of differential advantage abound on all hands, so that such a definition would make monopoly the rule. The essential error of Senior's position, however, lies in the confusion of differential advantage with control over supply. The one is price-determined; the other price-determining.Lewis H. Haney, History of Economic Thought, Macmillan, 1949, pp. 347–48.
The other classical economist who widened the definition of monopoly was the last of the classicists: John E. Cairnes. In the first place, while the other classicists tended to define free competition as the system that, in the long run, leads to prices being equal to the costs of production, Cairnes defined the result — prices equaling costs of production — as free competition. Hence, Cairnes began the fatal modern propensity for defining the ideal of competition, not as the process that, in the long run, tends toward a certain equilibrium position, but as the equilibrium condition itself. Since the equilibrium position is never really reached, then a position such as Cairnes's, regarding all deviations from that equilibrium position as having elements of "monopoly," tends to brand the whole market economy as having elements of monopoly, as falling short of the ideal, etc.
The other unfortunate widening by Cairnes of the monopoly concept, was to expand on Mill's hint about monopoly of ability; extra skill and extra training of laborers, according to Cairnes, gave them a "monopoly," and therefore gave to higher-wage laborers a "monopoly return." (Classical economists always grouped productive factors: such as "labor," "land," etc., together, and tried to arrive at theories of pricing and distribution on this aggregate basis. Therefore the classicists had no real means of handling the pricing of individual labor or land or capital services of specific goods, or the "distribution" of income accruing to them. Cairnes's theory was an attempt praiseworthy in this sense, to break down this lumped mass factor "labor" into more realistic components. But, unfortunately, he termed the differentials in skills "monopoly.") Cairnes also dubbed the different groups of skills among laborers, "non-competing groups," i.e., that laborers only competed among themselves within each group, and not between groups.
It is important to realize that the various wings of socialists, during the 19th century, never accused the free-market capitalist system of being "monopolist" or "monopolistic." Instead, they agreed with the classical economists that the market economy was competitive; their strictures and attacks were directed elsewhere. In fact, they often attacked competition itself, as being wicked: Sismondi, the utopians, the Fabians, etc., Karl Marx not only agreed that capitalism was competitive, but the Marxian iron laws of labor, of labor theory of value, of equalization of profit rates, etc., built on classical foundations, all assumed the workings of competition. It was only much later, at the turn of the 20th century, that Lenin and other later Marxists coined the doctrines of "monopoly capitalism," of monopoly capitalism leading to imperialism, etc.
Meanwhile, unheralded and unrecognized at the time, the French mathematician Augustin Cournot, founded not only mathematical economics but also modern monopoly and perfect-competition theories, in his Principes in 1838. To make things easy for using the calculus in dealing with profits, revenues, and costs of a business firm, Cournot defined competition as that situation where price does not vary with the quantity of the good produced: i.e., where the demand curve for the firm is horizontal, or "perfectly elastic." Not only did Cournot thus found the basic axiom of perfect competition theory, he also believed that such a condition only obtains where the number of firms is large, and that when firms are fewer, "oligopoly" ensues. Cournot worked out a theory of "duopoly."
Thus, with Cournot, the seeds of modern perfect-competition and monopolistic-competition theories were already set, as well as modern mathematical economics: "competition" only occurs when the demand curve for the firm is horizontal; this takes place only when the number of firms in the industry is very large; a smaller number leads to "monopolistic" situations of "oligopoly," etc. Of course, a single firm in an industry, where the demand curve is of course falling, Cournot defined as a "monopoly."
The year 1871 marked the publication of three independent works which were to overthrow the classical era and inaugurate the neoclassical. One, by the founder of modern mathematical economics, was the Elements of the Swiss economist, Léon Walras. While Walras brought back Cournot, and Cournot's definition of monopoly as a single seller of a good, with price higher than cost of production, the emphasis in Walras was completely different.
As Walras put it,
Cournot … makes the transition from the case of a single monopolist to that of two monopolists, and, finally, from monopoly to unlimited competition. I have preferred, for my part, to start with unlimited competition as the general case, and then to work towards monopoly as a special case.Léon Walras, Elements of Pure Economics, Irwin, 1954, p. 440.
Walras, in short, saw "free competition" as the ruling case, and monopoly as isolated, special cases of single sellers. Furthermore, Walras, while politically something of a Henry Georgist in favor of land nationalization, in economic theory deplored the idea of the classicists that land is a "monopoly," simply because it had a fixed or limited quantity. As Walras noted, "all productive services are limited in quantity.… When the meaning of the term monopoly is broadened to this extent, so that it includes everything, it means nothing."Walras, ibid., p. 436.
Carl Menger, the second neoclassical pioneer, founder of the Austrian School, regarded competition and monopoly in much the same way. The economy in general was characterized by competition; "monopoly," in contrast, referred to cases of single sellers. Not being a believer in mathematical economies, Menger was even less tempted than Walras to succumb to the Cournot propositions. While Menger was imprecise in defining "single sellers," the examples he used were those of grants of exclusive privilege by government: the British East India Company, the medieval guilds. Menger's great disciple, Eugen von Böhm-Bawerk, didn't discuss problems of monopoly, and in so doing, implied that the economic system was generally competitive.
Of the neoclassicists, it was the Englishman, William Stanley Jevons, Theory of Political Economy, who propelled economic thought in the direction of "perfect competition," as compared to the plain classical and neoclassical view of "competition" or "free competition." For Jevons, "perfectly free competition" implied not only absence of price discrimination (which Walras also discussed), but also a large number of buyers and sellers in each industry.
Approaching the view of perfect competition (Jevons was also a mathematical economist, by the way), Jevons defined such a case as "a single trader … must buy and sell at the current prices, which he cannot in an appreciable degree affect." To Jevons, also, a "perfect market" implied "perfect knowledge of the conditions of supply and demand, and the consequent ratio of exchange" on the part of "all traders."William Stanley Jevons, Theory of Political Economy, Macmillan, 3rd. ed., p. 87., Jevons, while carrying on this Cournot tradition and giving it the name of "perfect," did not carry it through consistently. For he realized, in the preface to his second edition, that since all goods are, in a sense, unique, that (in this sense) "[p]roperty is only another name for monopoly." Therefore, Jevons saw that in the overall market economy "monopoly [as he defined it] is limited by competition, and no owner, whether of labour, land, or capital, can, theoretically speaking, obtain a larger share of produce for it than what other owners of exactly the same kind of property are willing to accept."Jevons, ibid., pp. xlv-xlvi.
Jevons, however, had been the first to give a rigorous definition of "perfect competition." Continuing in this path was the English mathematical economist, Francis Y. Edgeworth, Mathematical Psychics (1881). Edgeworth pressed on to more rigorous definitions, anticipating the modern position: perfect competition involved, Edgeworth maintained, an indefinitely large number of firms and complete divisibility of the product. The enormous influence of mathematics on Edgeworth's definition can be indicated from this passage:
A perfect field of competition professes in addition certain properties peculiarly favourable to mathematical calculation; namely, a certain indefinite multiplicity and dividedness, analogous to that infinity and infinitesimality which facilitate so large a portion of Mathematical Physics (consider the theory of Atoms, and all applications of the Differential Calculus).Edgeworth, ibid., p. 18.
Alfred Marshall, on this as in on so many other issues, was an eclectic tangle of confusions and inconsistencies, varying in his editions of his Principles (1st ed., 1890). There were two basic and conflicting strains in Marshall here. On the one hand, he had a position close to the classicists: considering free competition as a broad relationship holding throughout the market, and not feeling the need to make the definition of competition narrow and rigorous. In fact, he expressly attacked the doctrine of "perfect competition" in his eighth edition, and said that a negatively sloping demand curve to a firm was compatible with competition. The term "monopoly" was used but not precisely defined, but presumably referred to a single seller of a commodity.
On the "perfect knowledge" assumption in perfect competition, Marshall was properly caustic:
we do not assume that competition is perfect. Perfect competition requires a perfect knowledge of the state of the market.… [I]t would be an altogether unreasonable assumption to make.… The older economists, in constant contact as they were with the actual facts of business life, must have known this well enough; but, partly because the term "free competition" had become almost a catchword … they often seemed to imply that they did assume this perfect knowledge.Alfred Marshall, Principles of Economics, Macmillan, 1938, 8th ed., p. 540.
On the other hand, Marshall, too, was influenced by mathematical economists to some degree, and therefore by Cournot. In the third edition of his Principles, he introduced the Cournot idea that the horizontal demand curve for the firm was the ruling fact in the economy, and that the falling demand curve was the exception. Here was the disastrous concession that perfect competition, or pure competition (the horizontal demand curve), while perhaps not necessary to the whole economy or even ideal, was the ruling case in the economy. This position appeared particularly in Marshall's famous Mathematical Appendix, which was heavily influenced by Cournot.Marshall, ibid, pp. 849–50. Also, Marshall made other concessions about various alleged deviations from the optimum in the free market, due to such things as "external economies" and "external diseconomies."
In 1899, the preeminent American neoclassical economist, John Bates Clark, published his Distribution of Wealth. Clark added more restrictions and unrealities to the Edgeworth definition of perfect competition. To the other requirements he added that labor and capital must be absolutely mobile; "perfect mobility" of factors had now become another requisite of "perfect competition." The Jevons-Edgeworth tradition of "perfect competition" as competition was further developed by the mathematical economist (American) Henry Ludwell Moore, who in a journal article in 1905–06, asserted that the influence of any one producer on price must be negligible, and also declared that no competitor must have to take into account the actions of any other competitor — another condition of perfect competition.
While John Bates Clark added to the development of the model of "perfect competition," he was the reverse of an advocate of using perfect competition as a measure and yardstick for the real economy. For Clark postulated, in the tradition of the classical economists, perfect competition as the final equilibrium point of the "static state"; he did not make the mistake of believing that perfect competition is, or should be, ruling in the actual, "dynamic" economic world. In his view of the real world, in fact, Clark was squarely in the classical-neoclassical tradition: he saw monopoly as only a single seller, and therefore he saw "competition" as the predominant fact of our economic system. Clark worked out his position on these "dynamic" problems, in his The Control of Trusts,New York, Macmillan, 1901. and his Essentials of Economic Theory.New York, Macmillan, 1907. Professor Shorey Peterson notes that
Clark wrote prior to that unfortunate usage by which all that is not pure competition is labeled monopoly. By monopoly he meant unified control of a market, and by competition, in this context, "healthful rivalry in serving the public."Shorey Peterson, "Antitrust and the Classic Model" (1957), reprinted in Readings in Industrial Organization and Public Policy (Homewood Ill.: Irwin (for the American Economic Association, 1958), p. 323.
Clark saw the advantages that could come from mergers and large firms:
A vast corporation that is not a true monopoly may be eminently progressive. If it still has to fear rivals, actual or potential, it is under the same kind of pressure that acts upon the independent producer — pressure to economize labor. It may be able to make even greater progress than a smaller corporation could make Consolidation without monopoly is favorable to progress.Clark, Essentials, p. 534.
Even if an industry consists of a single company, Clark, while considering the situation dangerous, could also see definite advantages of rule by the market. For here Clark saw the enormous importance of potential competition:
The price may conceivably be a normal one. It may stand not much above the cost of production to the monopoly itself. If it does so, it is because a higher price would invite competition. The great company prefers to sell all the goods that are required at a moderate price rather than to invite rivals into its territory. This is monopoly in form but not in fact, for it is shorn of its injurious power; and the thing that holds it firmly in check is potential competition.… Since the first trusts were formed the efficiency of potential competition has been so constantly displayed that there is no danger that this regulator of prices will ever be disregarded.Ibid., pp. 380–81.
We see that Clark, building on the classical-neoclassical traditions, can be considered a founder of the modern doctrine of "workable competition," brought forth by his son John Maurice Clark in 1940, and highly influential since World War II.
Neither did Clark worry about the so-called problem of "oligopoly." He believed that "competition usually would, in fact, survive and be extremely effective" among just a few competitors, until or unless they formed a union with each other.Ibid., pp. 201–02
Alfred Marshall, in his almost totally neglected applied economics work, Industry and Trade (London, 1919) virtually anticipated all the significant developments since, by (a) first agreeing with the perfect competition people that "competition" can be defined as perfect; but then (b) saying that the real economic world is shot through with "monopoly" elements — but that this is a good thing (thus anticipating the final position of E.H. Chamberlin over thirty years later). This imprecise form of competition Marshall saw as perfectly proper. As for monopolies:
Absolute monopolies are of little importance in modern business as compared with those which are "conditional," or "provisional" … [and the latter keep their position only if] they do not put prices much above the levels necessary to cover their outlays with normal profits.
Marshall also stressed the importance of potential competition, as well as the interindustry competition of substitutes: "a man of sound judgment … will keep a watchful eye on sources of possible competition, direct and indirect."Marshall, Industry and Trade, pp. 395–98, 405–09.
In the meanwhile, while Clark and Marshall were contributing to the classical-neoclassical "workable competition"/"free competition" tradition, as well as giving some concessions to the perfect competition group, the perfect competition doctrine was moving ahead. Alfred Marshall's most famous pupil, Arthur C. Pigou, insisted on perfect mobility and divisibility as part of the "perfect competition" ideal, and attacked the real world for its immobility and indivisibility.Arthur C. Pigou, Wealth and Welfare, 1912. Pigou also elaborated greatly on a few hints of Marshall's to coin elaborate doctrines of the failures of the free market in meeting "marginal social costs" — but this is a different field of inquiry. However, even Pigou did not believe that perfect — or what he called "simple" — competition, was technically feasible and therefore really ideal.Also see Pigou, Economics of Welfare, 4th ed., 1950. Pigou was virtually the creator of "welfare economics."
We come finally to the culprit who drew all the elements together of what had previously been described as "perfect competition" and welded these elements into a fully analyzed whole. He also extended many of the most important of these elements and set forth a full-fledged theory of competition solely as "perfect competition." This culprit was Frank H. Knight, in his famous first book, Risk, Uncertainty, and Profit?Houghton Mifflin, 1921 The whole of Risk, Uncertainty, and Profit is analyzed in terms of perfect competition, and perfect competition most rigorously defined. And, particularly important, whereas J.B. Clark had believed the concept of "perfect competition" applicable only to the static world of equilibrium and did not therefore think it a gauge for the real world, Frank Knight believed that the model was applicable as a gauge for the real world — that this was the only sense in which economists could use, analyze, and justify the very concept of "competition." Knight's competition involved complete foresight, perfect mobility, costless change, all elements — products and factors — continuously variable, and infinitely divisible. Demand curves were given and known to all, and exchange instantaneous and costless. Numbers were large, with demand curves to each firm horizontal.
It was this Frank Knight-type of theory — this use of the perfect competition model to describe the real world of the American economy — that Chamberlin reacted against in 1933. Chamberlin said, in effect, Right, "competition" means perfect (or rather pure competition — all the above conditions without "perfect knowledge"). But, in that case, Chamberlin declared, it is absurd to keep using this model — as Knight and the others were doing — to describe the real world of business, which emphatically does not operate in anything like this way. Therefore, we must realize that the economy is not competitive, that it is shot through with elements of monopoly. The left-wing Chamberlinians (which partially included Chamberlin himself) used this as a beautiful handle to combine with the Marxists and other critics of business to denounce the whole capitalist system as "monopolistic," and therefore no longer explainable by economic theory. Henry Simons and the other students of Frank Knight during the 1930s advocated breaking up big business into atomized units that would be more nearly "perfect."
Finally, as I have indicated, the forgotten tradition of the neoclassical, roughly workable, free-entry concept of "competition" was revived by J.M. Clark and others after World War II. The Chicago School, while considerably mellowed since the 1930s, still uses the "perfect competition" model as the ideal and as the explanatory theory, and therefore still hankers, in many of its members, for rigorous trust busting. Chamberlin himself, realizing that perfect or pure competition is the ideal, is fighting his way toward a theory of "workable competition," but has to do so in the trap of his own terminology. As J.M. Clark once chided Chamberlin, Why call this good, workable market economy "monopolistic," when it should better — and more palatably — be called "competitive"?In addition to the references listed above, see George J. Stigler, "Perfect Competition, Historically Contemplated," Journal of Political Economy (Feb. 1957): pp. 1–17.
This article is excerpted from Strictly Confidential: The Private Volker Fund Memos of Murray Rothbard.
What I have to say may, I think, best be developed by looking at a typical instance that illustrates price determination through social control in a particularly noticeable manner: the case of the settlement of wage disputes by means of a strike.
According to the accepted formula of modern wage theory, based on the marginal-utility theory, the amount of wages in case of free and perfect competition would be determined by the "marginal productivity of labor," i.e., by the value of the product that the last, most easily dispensable laborer of a particular type produces for his employer. His wages cannot go higher, for if they did, his employer would no longer gain any advantage from employing this "last" laborer; he would lose, and consequently would prefer to reduce the number of his workers by one; nor could the wages be substantially lower, in the case of effective competition on both sides, because the employment of the last worker would still produce a substantial surplus gain. As long as this is true, there would be an incentive to the further expansion of the enterprise, and to the employment of still more workers. Under an effective competition among employers this incentive would obviously be acted upon, and could not fail to eliminate the existing margin between the value of the marginal product and the wages in two ways: by the rise of wages, caused by the demand for more workers; and by a slight diminution of the value of the additional produce, due to the increased supply of goods. If these two factors are allowed to operate without outside interference, they would not only delimit wages, but actually fix them at a definite point, owing to the nearness of these limits, let us say for instance at $5.50 for a day's labor.
But let us now assume competition to be not quite free on both sides, but that it be restricted, or eliminated, on the side of the employers; either because there exists only one enterprise of that particular branch of industry over a large territory, thus giving it natural monopoly over the workers seeking employment, or because there is a coalition of entrepreneurs within that industry, who mutually agree not to pay their workers a wage higher than, let us say, $4.50. In either case, this coming into play of "control," a superior power of the employers, will certainly suffice to lead the wages to be fixed at a point below $5.50, say at $4.50, other conditions remaining equal.
How would this correspond with the standard explanation offered by the marginal-value theory? The answer is not difficult. In fact, the solution has been repeatedly stated in the fairly well developed theory of monopoly prices. I shall merely try to restate the familiar arguments in a clear and systematic manner.
We have before us a case of "buyers' monopoly." The widest margin within which the monopoly price can be fixed is limited, from above, by the value of the labor to be purchased by the entrepreneur exercising that monopoly, and from below, by the value of unsold labor to the laborer himself. The upper limit is determined by the value of the produce of the last worker, for the reason that the entrepreneur will not assume any loss from the last worker he employs and that the same amount of labor cannot be paid for in unequal amounts. This upper limit of the possible wage would, in our illustration, be $5.50.
More is to be said in regard to the lower limit. The very lowest limit is determined by the utility that would be left to the worker if he were not to sell his labor at all. It is thus, primarily, the use-value to the worker of his own labor, provided he can make some use of his labor for himself alone.
In thinly populated new countries, with an abundance of unoccupied land, where everybody may become a farmer at will, this labor-value might represent quite a considerable amount. In the densely populated "old" countries, however, this limit is extremely low, because most of the workers lack capital, and can hardly ever profitably utilize their own labor as independent producers.
A worker who has accumulated some savings may find some compensation for not selling his labor in the escape from discomfort and hard work, or in the enjoyment of rest and leisure. Those who have any such means of subsistence will figure out just what minimum of wages would compensate them for the effort of working. To those who have nothing to fall back on, the marginal utility of a money income to be gained by working is so extremely high that even a very low wage will be preferred over the enjoyment of leisure.
In order to illustrate this with actual sums of money, let us assume this lowest limit, the use-value of labor and the enjoyment of leisure, to be very low, say $1.50. This amount may be even far below the minimum of subsistence, which, for well-known reasons, determines the lower limit of the possible permanent wages without, of course, determining temporary wages or those of each individual case.
But there may also arise other intermediate wage levels. In the foregoing illustration we have excluded all competition among the employers in that one particular branch of industry. If such competition were existing, it would inevitably force up the wages to the upper limit of $5.50; but even in its absence, there would still remain a certain amount of outside competition, namely with employers in all the other branches of industry. This means that the worker in our particular industry still has the alternative of escaping the very low wage offered to him in his own line, by switching over into other branches of production, although a number of circumstances may greatly reduce the gains to be expected from this expedient. To change from one occupation, for which one has been trained and adapted, into another, is likely to result in less productivity, and the maximum wage level attainable in the new occupation will be likely to remain far below $5.50.
The curtailment in wages will vary for each worker entering into a new branch of production according to his adaptability, or his ability to perform a different kind of skilled labor. The most painful cuts in wages will be suffered by that probably largest portion of the workers, who are not adequately trained to perform any other kind of skilled labor, and who will have to switch over from "skilled" into "unskilled" trades, and accept a poorer position in some type of common labor. Still another slight lowering of the wage level may result from the fact that the influx of new workers into that occupation may force down slightly the marginal productivity of the last worker, and thus lower the wage level for all.
Under the influence of all these circumstances we would now have to assume that the various workers set for themselves a series of individual minimum limits, below which no one would allow his wages to be reduced by the monopolistic pressure of the entrepreneurs. To illustrate these various gradations of minimum wages, let us assume the minimum of existence to be $3.00, which, as has been said, would represent not the temporary, but the permanently possible lowest wage level. The wages obtained by the most common type of labor would thus be very near to $3, say $3.10. A smaller and smaller number of workers could find employment in other occupations, as the wage rate increased in the following ascending sequence: $3.50, $3.80, $4, $4.20, $4.50, $4.80, $5. Note, however, that the upper limit of this wage scale would still remain below the marginal product of the original occupation, thus below $5.50.
What effects and limitations will result from this state of affairs in regard to the monopolistic fixation of wages within the original widest zone of $1.50 to $5.50?
Let us assume, to begin with, that the monopolistic entrepreneurs use their power in an unrestricted, purely selfish policy, unaffected by any considerations of altruism, or consideration of public opinion, uninfluenced by any apprehension that the workers might fight back through means of a labor union or strike, and convinced that they are absolutely assured of an atomized, effective competition among the individual workers. Under such premises, the rate of wages would be fixed according to the general formula applying to a purely selfish monopoly, already mentioned before in another connection: they would be fixed at that point which promises the largest returns, after a careful consideration of all circumstances, and with due regard to the inevitable fact that with changing prices, the amount of goods to be disposed of profitably will change, only that in the case of a buyers' monopoly the results are exactly opposite to that of a sellers' monopoly. Or stated concretely: the lower is the wage rate fixed by the monopolist, the smaller will be the number of workers available, and from a correspondingly smaller number of workers will the entrepreneurs be able to collect that increased return which might accrue from pushing the wage scale down below the value of the product of the marginal laborer, i.e., below $5.50; in fact, this value might even increase through a reduction in the output, which would cause a rise in the price of the finished goods.
Of course, there may again enter certain counteracting tendencies, such as increasing costs, with the restricted expansion of the enterprise, the growth of overhead expenses, etc. With an increase in wages (which, however, we always assume to remain below the marginal product of $5.50) the gain per laborer would decrease; but, to offset this, the number of workers from which that gain can be made will increase, or even be brought back to normal. From these considerations, it would be most unlikely that the monopolists could fix the wage rate at $1.80 or $2.00 or at any point below the minimum of existence of $3, both because this rate would not be likely to remain in force, and because it would be lower than the wage paid outside for common labor, and therefore would at once cause the majority of the workers to withdraw into those unskilled occupations which, in our illustration, receive $3.10. This danger will diminish gradually with each increase in the wage rate, and disappear almost entirely at some point, say at $4.50, at which only a few exceptional workers might find it possible to obtain higher wages in other skilled occupations, if such be open to them at all. Under the assumed circumstances, the danger of men withdrawing would have almost disappeared, and a successful attempt might be made by the monopolistic employers to fix the rate of wages at this point, without running the risk of any considerable restriction of output caused through a shortage of workers.
Two other considerations might influence an intelligent monopolist to exercise his power "with restraint." First, a wage rate remaining far below that of other skilled occupations may, if only in the long run, lead to a shortage of workers, for while the laborers accustomed to their occupation might hesitate to change their job owing to the difficulties of transition, the new supply would fall off. Secondly, too high a rate of profit per worker would exert too powerful a strain on the employers' union, and is likely to lead to a dissolution of the coalition by those members wishing to expand their business, or to the formation of new enterprises outside of the coalition, thus creating new competition, likely to cut down prices and to raise wages. Generally speaking, the fear of outside competition forms perhaps the greatest safeguard against too unscrupulous a use of monopolies preying on the general public.
I hardly need to re-emphasize the fact that if, under such conditions, through the "control" of the monopolists the wage level were to be reduced from $5.50 to $4.50, this would, from first to last, happen by virtue of and in conformity with the elements of the price-law, as formulated by the marginal-value theory. It is in consideration of these elements that both contending parties would fix the price at that level, by "delimiting" it from above and from below. By such action, no "fixed" price would be determined, but merely a wider price-range, as distinct from the case of perfect competition on both sides. The monopolists might just as well decide upon $4.20 or $4.80 than upon $4.50. This situation is explained by the fact that several factors entering into the calculation, such as the number of workers likely to drop out at a certain wage level, or the probability of outside competition, are not definitely known, but only to be conjectured. The monopolists would naturally try to select the most favorable point of the wage scale; but, owing to the uncertainty of so many elements entering into the fixation of this optimum point, there results a certain more or less elastic zone for its approximate location, just as in ordinary market competition for prices, when negotiations are carried on with covered cards, traders less experienced or less shrewd commit errors in sizing up inside marked situations, so that actual prices are caused to fluctuate over a wide range around the "ideal" market price.
Let us now turn to the other case, equally interesting and complicated, the influence of "control" exerted by labor unions, through the use of their instrument of power, the strike. Let us retain all previous assumptions with the same figures as above: $5.50 for the value of the product of the "last" worker, $1.50 as the personal valuation to the workingman of his unsold labor, $3 as the minimum of existence, etc., and introduce into our assumed case only one novel element, namely that the workers of the industry under discussion do not compete against each other, but that they be unionized, and thus be in a position to enforce their joint demand for higher wages by means of a strike.
Now I do not for a moment deny that this coming into play of "power" on the part of the workers may profoundly influence the price of labor. It might even raise it not only above the level of $4.50, reached in the case of reduced competition among the monopolists, but even beyond the level of $5.50, which would have been attainable under perfect competition. This last fact is particularly noteworthy and striking, for hitherto we had regarded the value of the marginal product of labor, precisely that $5.50, as the upper limit of the economically possible wage, and at first sight it might look as if "power" could actually accomplish something in contradiction to the price formula of the marginal-value theory, something that did not conform to this law, but disproved it.
Here now enters into our explanation the distinction between marginal utility and total utility, i.e., the fact that the value of a total aggregate of goods is higher than the marginal utility of each unit, multiplied by the number of units contained in the total. The fundamental question in the evaluation of a commodity or an aggregate of goods is always how much utility may be derived from the command over the good to be valued. Under the assumption of competition among all the workers, the thing to be evaluated by the employer is always the labor-unit of each worker. If the employer had in his employ, for instance, 100 workers, his negotiations with each one of the 100 workers over his wages would merely hinge upon the question of how much additional profits the employers would make by employing that one additional worker, or how much he would lose by not employing this one last worker. In that case we were fully justified in arriving at the marginal utility of each unit of labor, that is, the increase in output which the labor of the last one of the 100 workers adds to the total output of the enterprise, or $5.50.
But now this is different: in the case of a joint strike of all the 100 workers, the point in question for the employer is no longer whether he is going to run his enterprise with 100 or 99 workers, which to him would mean a difference in the output of $5.50, but whether he is to keep his enterprise going with 100 workers, or not at all. On this depends not 100 times $5.50, but obviously much more than that, if for no other reason than that labor is what is called a "complementary" good, a good which cannot be utilized by itself alone, without the necessary other "complementary" goods, such as raw materials, equipment, machinery, etc. If only one man out of a hundred withdraws from the enterprise, the utilization of the complementary factors will, as a rule, be little disturbed. One single operation — the one which can be dispensed with most easily — will be omitted, or replaced, as far as possible, through a slight change in the division of labor, so that with the deduction of one man, not more is lost than the marginal product of one day's labor, namely $5.50.
The withdrawal of ten men would cause a more serious disturbance. But a changed disposition in the use of the remaining ninety workers would probably make it possible to find some way for at least the most important functions to continue unhampered, and the loss again to be shifted to that place where it is least felt. A continued depletion of the complementary good, "labor," would make itself felt more and more severely. While the withdrawal of the first worker would have caused a decrease in the daily production of only $5.50, that of the second might amount to a diminution of the output by $5.55, that of the third by $5.60, and that of the tenth by as much as $6. If, as would be the case in a strike, all the 100 men walked out, there would be caused a loss, not only of the specific labor product of those 100 men, but additional productive goods would cease to be utilized. The machinery would have to stand still, the raw materials would lie idle and depreciate, etc. The loss in the value of the product would increase out of all proportion, far beyond a hundred times the last laborer's marginal product.
The loss, of course, would be subject to great modifications, according to the actual conditions existing in each case. If the idle machinery and capital do not suffer any other damage by being idle, the additional loss would merely consist in a postponement of the completion of the respective products from the capital goods, temporarily not utilized on account of the lack of the complementary factor of labor. Their produce will be obtained in an undiminished amount only at a later period, after the resumption of production. This loss must at least equal the interest on the dead capital for the period of idleness. It may amount to more, if the delay should involve added losses, such as the inability to take advantage of favorable business opportunities, whereby indirect depreciations may be incurred.
But the damage would be still further increased if the specific character of the idle capital goods should not only cause a temporary delay, but a definite curtailment in the profits, as for example in the case of perishable raw materials, such as beets in an idle sugar refinery, or agricultural products that cannot be harvested owing to the worker's strike, unused animal power, such as horses, or the water power of an electric power plant. The enforced shutdown may also threaten the fixed capital investments, as in mines, where ventilation and water pumps must not stop, lest the entire plant be destroyed.
How does all this affect the fixation of wages in the case of a strike?
Let us realize, first of all, that although the wage disputes are formally concerned with the per capita wages for each individual worker, to the manufacturer it is always a question of obtaining, or not obtaining, the total labor of these 100 workers. He will either get all of the workers, or none, according to whether the negotiations lead to an agreement, or to a break. The decision as to how much wages he can pay at most will thus hinge on the value that the hundred workers represent to him jointly. The per capita wage is a secondary item, and is determined by dividing the total value by the number of workers. To him, this quota represents only an arithmetical concept, not a value; to him it does not represent the value of a unit of labor.
But how high is the total value? This is explained by the theory of imputation. The value of that aggregate of labor is derived from the value of that amount of products which may be ascribed to the availability of that particular total of labor, and this again is identical with the amount of the product of labor.
Here comes into play a remarkable phase of the theory of imputation, which I recently had to defend in detail against differing opinions.Positive Theory of Capital, Book III, Chapter IX on the Theory of Value of Complementary Goods (Theory of Imputation). For if the withdrawal of that amount of labor, whose value we are trying to ascertain, not only prevented the use of that labor itself, but also stopped the use of other, complementary goods, the utility of these goods would have to be added to that of labor, regardless of the fact that under certain circumstances the use of labor might have to be imputed to its corresponding complementary good, without which the products could not be obtained.
I shall merely recapitulate here without detailed discussion the various steps of the argument leading to this conclusion. Fundamentally, the total value of a whole group of complementary goods is dependent upon the amount of the (marginal) utility which they possess jointly, and thus, in case of complementary productive goods, upon the value of their common product.Positive Theory, Book III, Chapter IX.
The distribution of this total value among the various units of the complementary group may take different directions, according to the different causation. If none of the units admits of any other use than joint use, and if, at the same time, no one member contributing toward the joint use is replaceable, then every single member has the full total value of the entire group, while the other members are valueless. Each complementary unit is equally capable of holding either one of the two valuations, and it is solely the outside circumstances that determine which one of them shall be worth "everything," by being absolutely essential in the ultimate completion of the group, or which one is worth "nothing" through its isolation.
In our case of an impending strike of all the hundred workers, the employer is threatened with the total loss of the joint gain arising from the use of the two complementary groups, labor and capital, to the extent stated above, and this is why in that case he would have to attribute to labor that total joint utility, including that part which under other conditions might have to be attributed to the complementary capital goods. His subjective valuation of labor must be based upon all these things. Naturally, I cannot, in passing, review the entire difficult and complicated theory of distribution with all its details, and have to ask the readers who are interested in the complete discussion of the foregoing conclusions to read the fuller explanation given in my Positive Theory of Capital.
Consequently, the upper limit for the highest rate of wages will advance. For all the hundred workers jointly it will rise beyond the hundred-fold amount of the single value of each day's labor, that is, beyond 100 times $5.50, at least by the amount of the interest of the capital left idle and perhaps even above this, by the amount of the actual loss from perishing or deteriorating complementary capital goods. Thus, for instance, in case there be merely a postponement or loss of interest, it would rise above $550, up to, say, $700 for each day; in case of a direct loss in the utilization of the complementary goods, it would rise in proportion to the extent to which an actual loss takes place, perhaps to $1000, perhaps even to $2000 per day. And the maximum of the economically possible wage level for each individual worker would thereby rise from $5.50 to $7 or even to $10 or $20. This means that with any wage level remaining below this maximum, the entrepreneur would, at least for the time being, fare better than if he were to cease employing all the hundred men.
This "faring better" need, however, not imply actual profits to the entrepreneur, but merely a smaller loss than he would incur in the other alternative — the "lesser evil," which is, of course, to be preferred to the greater one. This rise of the last possible per capita wage to $7 or to $20, on the other hand, does not represent the subjective valuation of one day's labor to the entrepreneur. This has already been stated in the foregoing and it can hardly be sufficiently emphasized. The employer would never pay that wage, if it were a question of employing one laborer only. It represents the hundredth part of the total value of 100 laborers, which is a very different unit from the individual value of each unit of labor.
In the wage negotiations between an employer and a labor union the range would thus be limited by the value to the laborer of his unsold labor (i.e., the amount of $1.50 as his lowest limit), and by the per capita quota of the total value of all 100 laborers at the rate of $10 as upper limit, to take one of the three figures as an illustration.
In our imagined case, direct competition being absent on both sides, entrepreneur and workers would meet each other within their limits on similar grounds, just as the two parties of buyers and sellers meet in the case of isolated exchange.Positive Theory, Book IV, Chapter II.
In theory, it would not be unthinkable nor impossible for the rates to be fixed at any single point within the wide range between $1.50 and $10. We have, of course, come to know some circumstances that make it appear rather unlikely, though not altogether economically impossible, that the wages be fixed within the lowest section of the zone lying between the absolutely lowest limit and the minimum of existence of unskilled labor; and for reasons of similar nature, it is not very likely that the wage rate would be raised up to a point near the upper limit of $10. That it could not be kept at such a point for any length of time I shall try to demonstrate in a future investigation which I consider of special theoretical import. But not even temporarily will it readily be pushed so high. For any wage level substantially exceeding the output of the "last worker" would meet with a strong and increasing opposition on the part of the employers as involving a loss to them. Before granting such a wage rate, they would probably prefer to risk the decision of the supreme trial, consisting in fighting matters out in a lockout or strike; although an intermediate wage, approximating the actual service of the last worker, might conceivably be granted by the employers, anxious to avoid the risk of the certain losses involved in a strike, and the added uncertainty of its outcome. Nor would workers find it to their advantage to push the wages up to level actually causing losses to the entrepreneur, for this again might threaten them with a restriction, or suspension, of work, and force them out of their jobs. Thus there enters the question about the permanency of wages, which will be investigated later.
On the other hand, the workers' difficulties will become all the greater by the strike, the more excessive wage demands they make. The threat from strike breakers or "scabs" from other branches of industry will increase with the more favorable terms which the entrepreneur can still grant below the refused rate of wages. If the striking workers should insist on a wage rate of $9, a wage of $7 may perhaps already contain a very tempting premium to scabs and substitutes, who in other occupations requiring similar qualifications may obtain only a wage of $5.50, corresponding to the output of the last worker. And once substitutes are employed, the cause of the strike is usually lost, whereas, in the other alternative, the outcome is by no means certain.
In a strike, that party wins, as a rule, which, popularly speaking, can "hold its breath" for the longest time. To the worker, the strike means unemployment. For the time being the worker may meet this loss by means of savings accumulated for this purpose, by subventions from strike funds, by consuming his property, by selling or pawning dispensable goods, or by incurring debts as far as his credit will permit. With the longer duration of the strike, these savings will become smaller and smaller until they are used up. During the period of gradual diminution of savings, the marginal utility of the rapidly decreasing means of subsistence goes up, more and more of essential wants go unsatisfied, and more and more of the vital necessities are neglected, with the increasing shortage of funds.
Finally the point is reached at which the very maintenance of life depends on a renewal of income through work, if only at a modest wage: at this point even the most obstinate resistance of the strikers is broken — provided, of course, that the resistance of the opposite party, the employer, is not crushed beforehand.
In the ranks of the employers there are the same phenomena. With the increasing duration of the strike, the desire for a settlement becomes more and more intense. The idle plant produces no income. Some of the costs of production and at least the personal living expenses of the manufacturer continue, and have to be met. If the entrepreneur has a large fortune, these expenses may be covered from that. If not, then the pressure of the strike will be felt much more rapidly and intensely. In any case, there are here two very distinct phases of the effects of the strikes that should be distinguished. The successive and increasing lack in the means of subsistence may first threaten the business of the entrepreneur, and then, if there are no funds left for the most urgent living expenses, his personal existence.
This latter, more intense effect of strikes, will normally arise only in the most exceptional cases. Nor is it likely, for these and similar reasons stated before, that in a strike wages will be fixed at the most extreme — neither at the very lowest nor at the very highest — marginal regions of the wide range "economically possible," at least for the time being. In our illustration this zone was assumed to extend from $1.50 to $10, and a wage rate below $3 would be just as unlikely as one above $8, although, as I want specially to emphasize, such extreme wage rates are not unthinkable, nor altogether economically out of question for a short period of time.
Most of what has been said so far is based on obvious and almost trivial facts and observations which have become sufficiently familiar through common experiences with strikes. I have merely restated these matters, so to speak, in the terms of the marginal-utility theory, in order to make plain the essential point of the theoretical principle under discussion, namely, that the "influence of power" in the case of strikes, so familiar to all engaged in industry, is not altogether distinct from, or opposed to, the forces and laws of the marginal utility theory, but wholly in conformity and in harmony with these, and that every deeper analysis of the question, through what intermediate agencies and to what marginal points "power" may control the course of events at all, must lead into the more specific exposition of marginal utility, in the theory of imputation, where the ultimate explanation is to be sought and found. I need not call the attention of those familiar with the theory to the fact that all of what I have said here is absolutely in conformity with the so-called "theory of marginal utility," even in parts where I had to deal with the concept of total utility. For this is merely a term introduced into the modern theory of value, chiefly by the Austrian School, as one of its particularly characteristic traits. This same theory, of course, covers and explains those cases in which valuation is based on total utility as well as those far more frequent cases in which valuation takes place literally from a "marginal utility." (See my Positive Theory of Capital, Book III.)
There is another far more interesting question: When will the terms of distribution, obtained through means of power, be of lasting effect?
This question is all the more interesting, in that it is by far the most important one. Even the most ephemeral fixation of prices or wages may have considerable importance to that group of individuals or for that short span of time that happens to be affected by it. On the other hand, these temporary fixations mean little or nothing for the permanent economic welfare of the various social classes; just as the classical economists have held long-trend prices to be far more important and challenging than momentary fluctuations; thus Ricardo hardly touched upon the latter, and found it worthwhile only to elaborate the theory of long-trend prices. Similarly, in the theory of distribution, paramount importance is attached to the permanent trends according to which the shares of the various factors of production tend to be distributed as distinct from all ephemeral and temporary fluctuations. Even the most ephemeral phenomena must also be understood and explained, if for no other reason than that the laws controlling them are, in the last resort, not different from those determining their permanent effects; but it goes without saying, that that phase of our theory which covers those cases outlasting the others in time and space will be far more important to us than the explanation of rapidly passing exceptions.
But there is a second reason why it seems to me that the consideration of the influences of "power" deserves greater attention from the viewpoint of their permanency, for, as far as my knowledge of economic literature goes, this most important phase of the subject has never been investigated.
While the problem of the influence of power on prices as such has hitherto been only scantily treated, and never in a systematic manner, in economic theory, fundamental investigations into the permanent effects of such influences of power seem to be totally lacking, so that here we enter, in a certain sense, upon literary virgin land.
This article originally appeared as chapter 3, "The Example of the Strike", in Control or Economic Law (1914).
[A Theory of Socialism and Capitalism (1989; 2007)]
The previous chapters have demonstrated that neither an economic nor a moral case for socialism can be made. Socialism is economically and morally inferior to capitalism. The last chapter examined why socialism is nonetheless a viable social system, and analyzed the socio-psychological characteristics of the state — the institution embodying socialism. Its existence, stability, and growth rest on aggression and on public support of this aggression which the state manages to effect.
This it does, for one thing, through a policy of popular discrimination — a policy, that is, of bribing some people into tolerating and supporting the continual exploitation of others by granting them favors — and secondly, through a policy of popular participation in the making of policy, i.e., by corrupting the public and persuading it to play the game of aggression by giving prospective power wielders the consoling opportunity to enact their particular exploitative schemes at one of the subsequent policy changes.
We shall now return to economics, and analyze the workings of a capitalist system of production — a market economy — as the alternative to socialism, thereby constructively bringing my argument against socialism full circle. While the final chapter will be devoted to the question of how capitalism solves the problem of the production of so-called "public goods," this chapter will explain what might be termed the normal functioning of capitalist production and contrast it with the normal working of a system of state or social production. We will then turn to what is generally believed to be a special problem allegedly showing a peculiar economic deficiency in a pure capitalist production system: the so-called problem of monopolistic production.
Ignoring for the moment the special problems of monopolistic and public-goods production, we will demonstrate why capitalism is economically superior as compared to its alternative for three structural reasons. First, only capitalism can rationally, i.e., in terms of consumer evaluations, allocate means of production; second, only capitalism can ensure that, with the quality of the people and the allocation of resources being given, the quality of the output produced reaches its optimal level as judged again in terms of consumer evaluations; and third, assuming a given allocation of production factors and quality of output, and judged again in terms of consumer evaluations, only a market system can guarantee that the value of production factors is efficiently conserved over time.Cf. on this also Chapter 3 above and Chapter 10 below.
As long as it produces for a market, i.e., for exchange with other people or businesses, and subject as it is to the rule of nonaggression against the property of natural owners, every ordinary business will use its resources for the production of such goods and such amounts of these goods which, in anticipation, promise a return from sales that surpasses as far as possible the costs which are involved in using these resources. If this were not so, a business would use its resources for the production of different amounts of such goods or of different goods altogether. And every such business has to decide repeatedly whether a given allocation or use of its means of production should be upheld and reproduced, or if, due to a change in demand or the anticipation of such a change, a reallocation to different uses is in order.
The question of whether or not resources have been used in the most value-productive (the most profitable) way, or if a given reallocation was the most economic one, can, of course, only be decided in a more or less distant future under any conceivable economic or social system, because invariably time is needed to produce a product and bring it onto the market. However, and this is decisive, for every business there is an objective criterion for deciding the extent to which its previous allocational decisions were right or wrong. Bookkeeping informs us — and in principle anyone who wanted to do so could check and verify this information — whether or not and to what extent a given allocation of factors of production was economically rational, not only for the business in total but for each of its subunits, insofar as market prices exist for the production factors used in it.
Since the profit-loss criterion is an ex post criterion, and must necessarily be so under any production system because of the time factor involved in production, it cannot be of any help when deciding on future ex ante allocations. Nevertheless, from the consumers' point of view it is possible to conceive of the process of resource allocation and reallocation as rational, because every allocational decision is constantly tested against the profit-loss criterion. Every business that fails to meet this criterion is in the short or long run doomed to shrink in size or be driven out of the market entirely, and only those enterprises that successfully manage to meet the profit-loss criterion can stay in operation or possibly grow and prosper.
To be sure, then, the institutionalization of this criterion does not insure (and no other criterion ever could) that all individual business decisions will always turn out to be rational in terms of consumer evaluations. However, by eliminating bad forecasters and strengthening the position of consistently successful ones, it does insure that the structural changes of the whole production system which take place overtime can be described as constant movements toward a more rational use of resources and as a never-ending process of directing and redirecting factors of production out of less value-productive lines of production into lines which are valued more highly by the consumer.On the function of profit and loss cf. L. v. Mises, Human Action, Chicago, 1966, Chapter 15; and "Profit and Loss," in: the same, Planning for Freedom, South Holland, 1974; M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, Chapter 8.
The situation is entirely different and arbitrariness from the point of view of the consumer (for whom, it should be recalled, production is undertaken) replaces rationality as soon as the state enters the picture. Because it is different from ordinary businesses in that it is allowed to acquire income by noncontractual means, the state is not forced to avoid losses if it wants to stay in business as are all other producers. Rather, since it is allowed to impose taxes and/or regulations on people, the state is in a position to determine unilaterally whether or not, to what extent, and for what length of time to subsidize its own productive operations. It can also unilaterally choose which prospective competitor is allowed to compete with the state or possibly outcompete it.
Essentially this means that the state becomes independent of cost-profit considerations. But if it is no longer forced to test continually any of its various uses of resources against this criterion, i.e., if it no longer need successfully adjust its resource allocations to the changes in demand of consumers in order to survive as a producer, then the sequence of allocational decisions as a whole must be regarded as an arbitrary, irrational process of decision making. A mechanism of selection forcing those allocational "mutations" which consistently ignore or exhibit a maladjustment to consumer demand out of operation simply no longer exists.On the economics of government cf., esp. M. N. Rothbard, Power and Market, Kansas City, 1977, Chapter 5. To say that the process of resource allocation becomes arbitrary in the absence of the effective functioning of the profit-loss criterion does not mean that the decisions which somehow have to be made are not subject to any kind of constraint and hence are pure whim. They are not, and any such decision faces certain constraints imposed on the decision maker.
If, for instance, the allocation of production factors is decided democratically, then it evidently must appeal to the majority. But if a decision is constrained in this way or if it is made autocratically, respecting the state of public opinion as seen by the autocrat, then it is still arbitrary from the point of view of voluntarily buying or not-buying consumers.Regarding democratically controlled allocations, various deficiencies have become quite evident. For instance J. Buchanan and R. Wagner write (The Consequences of Mr. Keynes, London, 1978, p. 19), "Market competition is continuous; at each purchase, a buyer is able to select among competing sellers. Political competition is intermittent; a decision is binding generally for a fixed number of years. Market competition allows several competitors to survive simultaneously…. Political competition leads to an all-or-nothing outcome…. in market competition the buyer can be reasonably certain as to just what it is that he will receive from his purchase. In political competition, the buyer is in effect purchasing the services of an agent, whom he cannot bind…. Moreover, because a politician needs to secure the cooperation of a majority of politicians, the meaning of a vote for a politician is less clear than that of a ‘vote' for a private firm." (Cf. on this also J. Buchanan, "Individual Choice in Voting and the Market," in: the same, Fiscal Theory and Political Economy, Chapel Hill, 1962; for a more general treatment of the problem J. Buchanan and G. Tullock, The Calculus of Consent, Ann Arbor, 1962.) What has commonly been overlooked, though — especially by those who try to make a virtue of the fact that a democracy gives equal voting power to everyone, whereas consumer sovereignty allows for unequal "votes" — is the most important deficiency of all: that under a system of consumer sovereignty people might cast unequal votes but, in any case, they exercise control exclusively over things which they acquired through original appropriation or contract and hence are forced to act morally. Under a democracy of production everyone is assumed to have something to say regarding things one did not so acquire, and hence one is permanently invited thereby not only to create legal instability with all its negative effects on the process of capital formation, but, moreover, to act immorally. Cf. on this also L. v. Mises, Socialism, Indianapolis, 1981, Chapter 31; also cf. Chapter 8 above. Hence, the allocation of resources, whatever it is and however it changes over time, embodies a wasteful use of scarce means. Freed from the necessity of making profits in order to survive as a consumer-serving institution, the state necessarily substitutes allocational chaos for rationality. M. Rothbard nicely summarizes the problem as follows:
How can it (i.e. the government, the state) know whether to build road A or road B, whether to invest in a road or in a school — in fact, how much to spend for all its activities? There is no rational way that it can allocate funds or even decide how much to have. When there is a shortage of teachers or schoolrooms or police or streets, the government and its supporters have only one answer: more money. Why is this answer never offered on the free market? The reason is that money must be withdrawn from some other uses in consumption or investment … and this withdrawal must be justified. This justification is provided by the test of profit and loss: the indication that the most urgent wants of the consumers are being satisfied. If an enterprise or product is earning high profits for its owners and these profits are expected to continue, more money will be forthcoming; if not, and losses are being incurred, money will flow out of the industry. The profit-and-loss-test serves as the critical guide for directing the flow of productive services. No such guide exists for the government, which has no rational way to decide how much money to spend, either in total, or in each specific line. The more money it spends, the more service it can supply — but where to stop?On the economics of government cf., esp. M. N. Rothbard, Power and Market, Kansas City, 1977, Chapter 5.
Besides the misallocation of factors of production that results from the decision to grant the state the special right to appropriate revenue in a noncontractual way, state production implies a reduction in the quality of the output of whatever it decides to produce. Again, an ordinary profit-oriented business can only maintain a given size or possibly grow if it can sell its products at a price and in such quantity that allow it to recover at least the costs involved in production and is hopefully higher. Since the demand for the goods or services produced depends either on their relative quality or on their price — this being one of many criteria of quality — as perceived by potential buyers, the producers must constantly be concerned about "perceived product quality" or "cheapness of product." A firm is dependent exclusively on voluntary consumer purchases for its continued existence, so there is no arbitrarily defined standard of quality for a capitalist enterprise (including so-called scientific or technological standards of quality) set by an alleged expert or committee of experts. For it there is only the quality as perceived and judged by the consumers.
Once again, this criterion does not guarantee that there are no low-quality or overpriced products or services offered on the market because production takes time and the sales test comes only after the products have appeared on the market. And this would have to be so under any system of goods production. Nonetheless, the fact that every capitalist enterprise must undergo this sales test and pass it to avoid being eliminated from the market guarantees a sovereign position to the consumers and their evaluations. Only if product quality is constantly improved and adjusted to consumer tastes can a business stay in operation and prosper.
The story is quite different as soon as the production of goods is undertaken by the state. Once future revenue becomes independent of cost-covering sales — as is typically the case when the state produces a good — there is no longer a reason for such a producer to be concerned about product quality in the same way that a sales-dependent institution would have to be. If the producer's future income can be secured, regardless of whether according to consumer evaluations the products or services produced are worth their money, why undertake special efforts to improve anything?
More precisely, even if one assumes that the employees of the state as a productive enterprise with the right to impose taxes and to regulate unilaterally the competitiveness of its potential rivals are, on the average, just as much interested or uninterested in work as those working in a profit-dependent enterprise,This is a very generous assumption, to be sure, as it is fairly certain that the so-called public sector of production attracts a different type of person from the very outset and boasts an unusually high number of inefficient, lazy, and incompetent people. and if one further assumes that both groups of employees and workers are on the average equally interested or uninterested in an increase or decrease in their income, then the quality of products, measured in terms of consumer demand and revealed in actual purchases, must be lower in a state enterprise than in private business, because the income of the state employees would be far less dependent on product quality. Accordingly, they would tend to devote relatively less effort to producing quality products and more of their time and effort would go into doing what they, but not necessarily the consumer, happen to like.Cf. L. v. Mises, Bureaucracy, New Haven, 1944; Rothbard, Power and Market, Kansas City, 1977, pp. 172ff; and For A New Liberty New York, 1978, Chapter 10; also M. and R. Friedman, iThe Tyranny of the Status Quoc, New York, 1984, pp. 35-51.
Only if the people working for the state were superhumans or angels, while everyone else was simply an ordinary, inferior human being, could the result be any different. Yet the same result, i.e., the inferiority of product quality of any state-produced goods, would again ensue if the human race in the aggregate would somehow improve: if they were working in a state enterprise even angels would produce a lower-quality output than their angel colleagues in private business, if work implied even the slightest disutility for them.
Finally, in addition to the facts that only a market system can ensure a rational allocation of scarce resources, and that only capitalist enterprises can guarantee an output of products that can be said to be of optimal quality, there is a third structural reason for the economic superiority, indeed unsurpassability, of a capitalist system of production. Only through the operation of market forces is it possible to utilize resources efficiently over time in any given allocation, i.e., to avoid overutilization as well as underutilization. This problem has already been addressed with reference to Russian style socialism in chapter 3.
What are the institutional constraints on an ordinary profit-oriented enterprise in its decisions about the degree of exploitation or conservation of its resources in the particular line of production in which they happen to be used? Evidently, the owner of such an enterprise would own the production factors or resources as well as the products produced with them. Thus, his income (used here in a wide sense of the term) consists of two parts: the income that is received from the sales of the products produced after various operating costs have been subtracted; and the value that is embodied in the factors of production which could be translated into current income should the owner decide to sell them.
Institutionalizing a capitalist system — a social order based on private property — thus implies establishing an incentive structure under which people would try to maximize their income in both of these dimensions. What exactly does this mean?On the following cf. L. v. Mises, Human Action, Chicago, 1966, Chapter 23.6; M.N. Rothbard, Man Economy and State, Los Angeles, 1970, Chapter 7, esp. 7.4-6; Every act of production evidently affects both mentioned income dimensions. On one hand, production is undertaken to reach an income return from sales. On the other hand, as long as the factors of production are exhaustible, i.e., as long as they are scarce and not free goods, every production act implies a deterioration of the value of the production factors. Assuming that private ownership exists, this produces a situation in which every business constantly tries not to let the marginal costs of production (i.e., the drop in value of the resources that results from their usage) to become greater than the marginal revenue product, and where with the help of bookkeeping an instrument for checking the success or failure of these attempts exists.
If a producer were not to succeed in this task and the drop in the value of capital were higher than the increase in the income returns from sales, the owner's total income (in the wider sense of the term) would be reduced. Thus, private ownership is an institutional device for safeguarding an existing stock of capital from being overexploited or if it is, for punishing an owner for letting this happen through losses in income. This helps make it possible for values produced to be higher than values destroyed during production. In particular, private ownership is an institution in which an incentive is established to efficiently adjust the degree of conserving or consuming a given stock of capital in a particular line of production to anticipated price changes.
If, for instance, the future price of oil were expected to rise above its current level, then the value of the capital bound up in oil production would immediately rise as would the marginal cost involved in producing the marginal product. Hence, the enterprise would immediately be impelled to reduce production and increase conservation accordingly, because the marginal revenue product on the present market was still at the unchanged lower level. On the other hand, if in the future oil prices were expected to fall below their present level, this would result in an immediate drop in the respective capital values and in marginal costs, and hence the enterprise would immediately begin to utilize its capital stock more intensively since prices on the present market would still be relatively higher. And to be sure, both of these reactions are exactly what is desirable from the point of view of the consumers.
If the way in which a capitalist production system works is compared with the situation that becomes institutionalized whenever the state takes care of the means of production, striking differences emerge. This is true especially when the state is a modern parliamentary democracy. In this case, the managers of an enterprise may have the right to receive the returns from sales (after subtracting operation costs), but, and this is decisive, they do not have the right to appropriate privately the receipts from a possible sale of the production factors.
Under this constellation, the incentive to use a given stock of capital economically over time is drastically reduced. Why? Because if one has the right to privately appropriate the income return from product sales but does not have the right to appropriate the gains or losses in capital value that result from a given degree of usage of this capital, then there is an incentive structure institutionalized not of maximizing total income — i.e., total social wealth in terms of consumer evaluations — but rather of maximizing income returns from sales at the expense of losses in capital value.
Why, for instance, should a government official reduce the degree of exploitation of a given stock of capital and resort to a policy of conservation when prices for the goods produced are expected to rise in the future? Evidently, the advantage of such a conservationist policy (the higher capital value resulting from it) could not be reaped privately. On the other hand, by resorting to such a policy one's income returns from sales would be reduced, whereas they would not be reduced if one forgot about conserving.
In short, to conserve would mean to have none of the advantages and all of the disadvantages. Hence, if the state managers are not superhumans but ordinary people concerned with their own advantages, one must conclude that it is an absolutely necessary consequence of any state production that a given stock of capital will be overutilized and the living standards of consumers impaired in comparison to the situation under capitalism.
Now it is fairly certain that someone will argue that while one would not doubt what has been stated so far, things would in fact be different and the deficiency of a pure market system would come to light as soon as one paid attention to the special case of monopolistic production. And by necessity, monopolistic production would have to arise under capitalism, at least in the long run. Not only Marxist critics but orthodox economic theorists as well make much of this alleged counterargument.On this and the following cf. L. v. Mises, Socialism, Indianapolis, 1981, part 3.2. In answer to this challenge four points will be made in turn.
First, available historical evidence shows that contrary to these critics' thesis, there is no tendency toward increased monopoly under an unhampered market system. In addition, there are theoretical reasons that would lead one to doubt that such a tendency could ever prevail on a free market. Third, even if such a process of increasing monopolization should come to bear, for whatever reason, it would be harmless from the point of view of consumers provided that free entry into the market were indeed ensured. And fourth, the concept of monopoly prices as distinguished from and contrasted to competitive prices is illusory in a capitalist economy.
Regarding historical evidence, if the thesis of the critics of capitalism were true, then one would have to expect a more pronounced tendency toward monopolization under relatively freer, unhampered, unregulated laissez-faire capitalism than under a relatively more heavily regulated system of "welfare" or "social" capitalism. However, history provides evidence of precisely the opposite result. There is general agreement regarding the assessment of the historical period from 1867 to World War I as being a relatively more capitalist period in history of the United States, and of the subsequent period being one of comparatively more and increasing business regulations and welfare legislation.
However, if one looks into the matter one finds that there was not only less development toward monopolization and concentration of business taking place in the first period than in the second but also that during the first period a constant trend towards more severe competition with continually falling prices for almost all goods could be observed.Thus states J. W. McGuire, Business and Society, New York, 1963, pp. 38-39: "From 1865 to 1897, declining prices year after year made it difficult for businessmen to plan for the future. In many areas new railroad links had resulted in a nationalization of the market east of the Mississippi, and even small concerns in small towns were forced to compete with other, often larger firms located at a distance. At the same time there were remarkable advances in technology and productivity. In short it was a wonderful era for the consumer and a frightful age for the producers especially as competition became more and more severe." And this tendency was only brought to a halt and reversed when in the course of time the market system became more and more obstructed and destroyed by state intervention. Increasing monopolization only set in when leading businessmen became more successful at persuading the government to interfere with this fierce system of competition and pass regulatory legislation, imposing a system of "orderly" competition to protect existing large firms from the so-called cutthroat competition continually springing up around them.Cf. on this G. Kolko, The Triumph of Conservatism, Chicago, 1967; and Railroads and Regulation, Princeton, 1965; J. Weinstein, The Corporate Ideal in the Liberal State, Boston, 1968; M. N. Rothbard and R. Radosh (eds.), A New History of Leviathan, New York, 1972. G. Kolko, a left-winger and thus certainly a trustworthy witness, at least for the critics from the Left, sums up his research into this question as follows:
There was during this [first] period a dominant trend toward growing competition. Competition was unacceptable to many key business and financial leaders, and the merger movement was to a large extent a reflection of voluntary, unsuccessful business effects to bring irresistible trends under control … As new competitors sprang up, and as economic power was diffused throughout an expanding nation, it became apparent to many important businessmen that only the national government could [control and stabilize] the economy.… Ironically, contrary to the consensus of historians, it was not the existence of monopoly which caused the government to intervene in the economy, but the lack of it.G. Kolko, The Triumph of Conservatism, Chicago, 1967, pp.4-5; cf. also the investigations of M. Olson, The Logic of Collective Action, Cambridge, 1965, to the effect that mass organizations (in particular labor unions), too, are not market phenomena but owe their existence to legislative action.
In addition, these findings, which stand in clear contradiction to much of the common wisdom on the matter, are backed by theoretical considerations.On the following cf. L. v. Mises, Socialism, Indianapolis, 1981, part 3.2; and Human Action, Chicago, 1966, Chapters 25-26; M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, pp.544ff; pp.585ff; and "Ludwig von Mises and Economic Calculation under Socialism," in: L. Moss (ed.), The Economics of Ludwig von Mises, Kansas City, 1976, pp. 75-76. Monopolization means that some specific factor of production is withdrawn from the market sphere. There is no trading of the factor, but there is only the owner of this factor engaging in restraint of trade. Now if this is so, then no market price exists for this monopolized production factor. But if there is no market price for it, then the owner of the factor can also no longer assess the monetary costs involved in withholding it from the market and in using it as he happens to use it. In other words, he can no longer calculate his profits and make sure, even if only ex post facto, that he is indeed earning the highest possible profits from his investments.
Thus, provided that the entrepreneur is really interested in making the highest possible profit (something, to be sure, which is always assumed by his critics), he would have to offer the monopolized production factors on the market continually to be sure that he was indeed using them in the most profitable way and that there was no other more lucrative way to use them, so as to make it more profitable for him to sell the factor than keep it. Hence, it seems, one would reach the paradoxical result that in order to maximize his profits, the monopolist must have a permanent interest in discontinuing his position as the owner of a production factor withheld from the market and, instead, desire its inclusion in the market sphere.
Furthermore, with every additional act of monopolization the problem for the owner of monopolized production factors — i.e., that because of the impossibility of economic calculation, he can no longer make sure that those factors are indeed used in the most profitable way — becomes ever more acute. This is so, in particular, because realistically one must assume that the monopolist is not only not omniscient but that his knowledge regarding future competing goods and services by the consumers in future markets becomes more and more limited as the process of monopolization advances. As production factors are withdrawn from the market, and as the circle of consumers served by the goods produced with these factors widens, it will be less likely that the monopolist, unable to make use of economic calculation, can remain in command of all the relevant information needed to detect the most profitable uses for his production factors.
Instead, it becomes more likely in the course of such a process of monopolization, that other people or groups of people, given their desire to make profits by engaging in production, will perceive more lucrative ways of employing the monopolized factors.Cf. F. A. Hayek, Individualism and Economic Order, Chicago, 1948, esp. Chapter 9; I. Kirzner, Competition and Entrepreneurship, Chicago, 1973. Not necessarily because they are better entrepreneurs, but simply because they <>occupy different positions in space and time and thus become increasingly aware of entrepreneurial opportunities which become more and more difficult and costly for the monopolist to detect with every new step toward monopolization. Hence, the likelihood that the monopolist will be persuaded to sell his monopolized factors to other producers — nota bene: for the purpose of thereby increasing his profits — increases with every additional step toward monopolization.Regarding large-scale ownership, in particular of land, Mises observes that it is normally only brought about and upheld by nonmarket forces: by coercive violence and a state-enforced legal system outlawing or hampering the selling of land. "Nowhere and at no time has the large scale ownership of land come into being through the working of economic forces in the market. Founded by violence, it has been upheld by violence and that alone. As soon as the latifundia are drawn into the sphere of market transactions they begin to crumble, until at last they disappear completely…. That in a market economy it is difficult even now to uphold the latifundia, is shown by the endeavors to create legislation institutions like the ‘Fideikommiss' and related legal institutions such as the English ‘entail'…. Never was the ownership of the means of production more closely concentrated than at the time of Pliny, when half the province of Africa was owned by six people, or in the day of the Merovingian, when the church possessed the greater part of all French soil. And in no part of the world is there less large-scale land ownership than in capitalist North America," Socialism, Indianapolis, 1981, pp.325–326.
Now, let us assume that what historical evidence as well as theory proves to be unlikely happens anyway, for whatever reason. And let us assume straightaway the most extreme case conceivable: there is only one single business, one supermonopolist so to speak, that provides all the goods and services available on the market, and that is the sole employer of everyone. What does this state of affairs imply regarding consumer satisfaction, provided, of course, as assumed, that the supermonopolist has acquired his position and upholds it without the use of aggression? For one thing, it evidently means that no one has any valid claims against the owner of this firm; his enterprise is indeed fully and legitimately his own. And for another thing it means that there is no infringement on anyone's right to boycott any possible exchange. No one is forced to work for the monopolist or buy anything from him, and everyone can do with his earnings from labor services whatever he wants. He can consume or save them, use them for productive or nonproductive purposes, or associate with others and combine their funds for any sort of joint venture.
But if this were so, then the existence of a monopoly would only allow one to say this: the monopolist clearly could not see any chance of improving his income by selling all or part of his means of production, otherwise he would do so. And no one else could see any chance of improving his income by bidding away factors from the monopolist or by becoming a capitalist producer himself through original saving, through transforming existing nonproductively used private wealth into productive capital, or through combining funds with others, otherwise it would be done.
But then, if no one saw any chance of improving his income without resorting to aggression, it would evidently be absurd to see anything wrong with such a supermonopoly. Should it indeed ever come into existence within the framework of a market economy, it would only prove that this self-same supermonopolist was indeed providing consumers with the most urgently wanted goods and services in the most efficient way.
Yet the question of monopoly prices remains.Cf. on the following in M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, Chapter 10, esp. pp.586ff; also W. Block, "Austrian Monopoly Theory. A Critique," in: Journal of Libertarian Studies, 1977. Doesn't a monopoly price imply a suboptimal supply of goods to consumers, and isn't there then an important exception from the generally superior economic working of capitalism to be found here? In a way this question has already been answered by the above explanation that even a supermonopolist establishing itself in the market cannot be considered harmful for consumers. But in any case, the theory that monopoly prices are (allegedly) categorically different from competitive prices has been presented in different, technical language and hence deserves special treatment. The result of this analysis, which is hardly surprising now, only reinforces what has already been discovered: monopoly does not constitute a special problem forcing anyone to make qualifying amendments to the general rule of a market economy being necessarily more efficient than any socialist or statist system. What is the definition of "monopoly price" and, in contrast to it, of "competitive price" according to economic orthodoxy (which in the matter under investigation includes the so-called Austrian school of economics as represented by L. v. Mises)? The following definition is typical:
Monopoly is a prerequisite for the emergence of monopoly prices, but it is not the only prerequisite. There is a further condition required, namely a certain shape of the demand curve. The mere existence of monopoly does not mean anything in this regard. The publisher of a copyrighted book is a monopolist. But he may not be able to sell a single copy, no matter how low the price he asks. Not every price at which a monopolist sells a monopolized commodity is a monopoly price. Monopoly prices are only prices at which it is more advantageous for the monopolist to restrict the total amount to be sold than to expand its sales to the limit which a competitive market would allow.L.v. Mises, Human Action, Chicago, 1966, p.359; cf. also any current textbook, such as P. Samuelson, Economics, New York, 1976, p.500.
However plausible this distinction might seem, it will be argued that neither the producer himself nor any neutral outside observer could ever decide if the prices actually obtained on the market were monopoly or competitive prices, based on the criterion "restricted versus unrestricted supply' as offered in the above definition. In order to understand this, suppose a monopolist producer in the sense of "a sole producer of a given good" exists. The question of whether or not a given good is different from or homogeneous to other goods produced by other firms is not one that can be decided based on a comparative analysis of such goods in physical or chemical terms ex ante, but will always have to be decided ex post facto, on future markets, by the different or equal treatment and evaluations that these goods receive from the buying public. Thus every producer, no matter what his product is, can be considered a potential monopolist in this sense of the term, at the point of decision making.
What, then, is the decision with which he and every producer is faced? He must decide how much of the good in question to produce in order to maximize his monetary income (with other, nonmonetary income considerations assumed to be given). To be able to do this he must decide how the demand curve for the product concerned will be shaped when the products reach the market, and he must take into consideration the various production costs of producing various amounts of the good to be produced. This done, he will establish the amount to be produced at that point where returns from sales, i.e., the amount of goods sold times price, minus production costs involved in producing that amount, will reach a maximum. Let us assume this happens and the monopolist also happens to be correct in his evaluation of the future demand curve in that the price he seeks for his products indeed clears the market.
Now the question is, is this market price a monopoly or a competitive price? As M. Rothbard realized in his pathbreaking but much-neglected analysis of the monopoly problem, there is no way of knowing. Was the amount of the good produced "restricted" in order to take advantage of inelastic demand and was a monopoly price thus reaped, or was the price reached a competitive one established in order to sell an amount of goods that was expanded "to the limit that a competitive market would allow"? There is no way to decide the matter.Cf. M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, Chapter 10, esp. pp.604-614. Clearly, every producer will always try to set the quantity produced at a level above which demand would become elastic and would hence yield lower total returns to him because of reduced prices paid. He thus engages in restrictive practices.
At the same time, based on his estimate of the shape of future demand curves, every producer will always try to expand his production of any good up to the point at which the marginal cost of production (that is, the opportunity cost of not producing a unit of an alternative good with the help of scarce production factors now bound up in the process of producing another unit of x) equals the price per unit of x that one expects to be able to charge at the respective level of supply. Both restriction and expansion are part of profit maximizing and market-price formation, and neither of these two aspects can be separated from the other to make a valid distinction between monopolistic and competitive action.
Now, suppose that at the next point of decision making the monopolist decides to reduce the output of the good produced from a previously higher to a new lower level, and assume that he indeed succeeds in securing higher total returns now than at the earlier point in time. Wouldn't this be a clear instance of a monopoly price? Again, the answer must be no. And this time the reason would be the indistinguishability of this reallocational "restriction" from a "normal" reallocation that takes account of changes in demand. Every event that can be interpreted in one way can also be interpreted in the other, and no means for deciding the matter exist, for once again both are essentially two aspects of one and the same thing: of action, of choosing.
The same result, i.e., a restriction in supply coupled not only with higher prices but with prices high enough to increase total revenue from sales, would be brought about if the monopolist who, for example, produces a unique kind of apples faces an increase in the demand for his apples (an upward shift in the demand curve) and simultaneously an even higher increase in demand (an even more drastic upward shift of the demand curve) for oranges. In this situation he would reap greater returns from a reduced output of apples, too, because the previous market price for his apples would have become a subcompetitive price in the meantime. And if he indeed wanted to maximize his profits, instead of simply expanding apple production according to the increased demand, he now would have to use some of the factors previously used for the production of apples for the production of oranges, because in the meantime changes in the system of relative prices would have occurred.
However, what if the monopolist who restricts apple production does not engage in producing oranges with the now available factors, but instead does nothing with them? Again, all that this would indicate is that besides the increase in demand for apples, in the meantime an even greater increase in the demand for yet another good — leisure (more precisely, the demand for leisure by the monopolist who is also a consumer)-had taken place. The explanation for the restricted apple supply is thus found in the relative price changes of leisure (instead of oranges) as compared with other goods.
Neither from the perspective of the monopolist himself nor from that of any outside observer could restrictive action then be distinguished conceptually from normal reallocations which simply follow anticipated changes in demand. Whenever the monopolist engages in restrictive activities which are followed by higher prices, by definition he must use the released factors for another more highly valued purpose, thereby indicating that he adjusts to changes in relative demand. As M. Rothbard sums up,
We cannot use "restriction of production" as the test of monopoly vs. competitive price. A movement from a sub-competitive to a competitive price also involves a restriction of production of this good, coupled, of course, with an expansion of production in other lines by the released factors. There is no way whatever to distinguish such a restriction and corollary expansion from the alleged "monopoly price" situation. If the restriction is accompanied by increased leisure for the owner of the labor factor rather than increased production of some other good on the market, it is still the expansion of the yield of a consumer good — leisure. There is still no way of determining whether the "restriction" resulted in a "monopoly" or a "competitive" price or to what extent the motive of increased leisure was involved. To define a monopoly price as a price attained by selling a smaller quantity of a product at a higher price is therefore meaningless, since the same definition applies to the "competitive" price as compared with a subcompetitive price.M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, p.607.
The analysis of the monopoly question, then, provides no reason whatsoever to modify the description given above of the way a pure market economy normally works and its superiority over any sort of socialist or statist system of production. Not only is a process of monopolization highly unlikely to occur, empirically as well as theoretically, but even if it did, from the point of view of the consumers it would be harmless. Within the framework of a market system a restrictive monopolistic price could not be distinguished from a normal price hike stemming from higher demand and changes in relative prices. And as every restrictive action is simultaneously expansionary, to say that the curtailment of production in one production line coupled with an increase in total revenue implies a misallocation of production factors and an exploitation of consumers is simply nonsense. The misunderstanding involved in such reasoning has been accurately revealed in the following passage from one of L. v. Mises's later works in which he implicitly refutes his own above-cited orthodox position regarding the monopoly-price problem. He states,
An entrepreneur at whose disposal are 100 units of capital employs, for instance, 50 units for the production of p and 50 units for the production of q. If both lines are profitable, it is odd to blame him for not having employed more, e.g., 75 units, for the production of p. He could increase the production of p only by curtailing correspondingly the production of q. But with regard to q the same fault could be found with the grumblers. If one blames the entrepreneur for not having produced more p, one must blame him also for not having produced more q. This means: one blames the entrepreneur for the fact that there is scarcity of factors of production and that the earth is not a land of Cockaigne.L.v. Mises, "Profit and Loss," in: Planning for Freedom, South Holland, 1974, p.116.
The monopoly problem as a special problem of markets requiring state action to be resolved does not exist.In fact, historically, governmental anti-trust policy has almost exclusively been a practice of providing less successful competitors with the legal tools needed to hamper the operation of their more successful rivals. For an impressive assembly of case studies to this effect cf. D. Armentano, Antitrust and Monopoly, New York, 1982; also Y. Brozen, Is Government the Source of Monopoly? And Other Essays, San Francisco, 1980. In fact, only when the state enters the scene does a real, nonillusory problem of monopoly and monopoly prices emerge. The state is the only enterprise whose prices and business practices can be conceptually distinguished from all other prices and practices, and whose prices and practices can be called 'too high' or 'exploitative' in a completely objective, nonarbitrary way. These are prices and practices which consumers are not voluntarily willing to pay and accept, but which instead are forced upon them through threats of violence. And only for so privileged an institution as the state is it also normal to expect and to find a permanent process of increasing monopolization and concentration.
As compared to all other enterprises, which are subject to the control of voluntarily buying or not-buying consumers, the enterprise "state" is an organization that can tax people and need not wait until they accept the tax, and can impose regulations on the use people make of their property without gaining their consent for doing so. This evidently gives the state, as compared to all other institutions, a tremendous advantage in the competition for scarce resources. If one only assumes that the representatives of the state are as equally driven by the profit motive as anyone else, it follows from this privileged position that the organization "state" must have a relatively more pronounced tendency toward growth than any other organization. And indeed, while there was no evidence for the thesis that a market system would bring about a tendency toward monopolistic growth, the thesis that a statist system would do so is amply supported by historical experience.
This article is excerpted from A Theory of Socialism and Capitalism, chapter 9, "Capitalist Production and the Problem of Monopoly" (1989; 2007).
"The US government's enforcement of 'antitrust' law has consistently fallen on those companies who excel at lowering prices, innovating their products, and expanding their customer base."On September 21, 2011, Google executive chairman Eric Schmidt faced a hailstorm of criticism from senators and rival CEOs alike at a hearing of the Senate Judiciary Committee's Antitrust, Competition Policy, and Consumer Rights Subcommittee. According to Nextag (who?) CEO Jeffrey Katz, "Google rigs the results" of searches to give preferential treatment to its own businesses. Yelp (who, again?) CEO Jeremy Stoppelman claimed, "Google is no longer in the business of sending people to the best destinations on the Web. It has everything to do with generating more revenue." Senator Mike Lee of Utah charged the search engine of having "clear and inherent conflict of interest."
Two questions come immediately to mind. First, who cares about Google's business practices? If you disagree with how Google runs its incredibly popular search engine, don't patronize it. There is no need for paternalistic bureaucrats to intervene in such a simple matter. If my local pizza shop bombards me with advertisements for other local businesses every time I walk through its doors, I will think twice about picking up lunch from there next time.
Second, is Google's behavior really that unexpected? After all, it is a business pursuing a profit. The better question to ask is why wouldn't Google show preferential treatment to its other business ventures on its own search engine? It doesn't take a college degree in marketing to realize how beneficial it is for Google to use its own heavily trafficked enterprise to promote itself.
In Power and Market, the complimentary book to his ambitious economic treatise Man, Economy, and State, Murray Rothbard cites a relevant passage from Isabel Paterson on the early antitrust mentality circulating around the energy giant Standard Oil:
Standard Oil did not restrain trade; it went out to the ends of the earth to make a market. Can the corporations be said to have "restrained trade" when the trade they cater to had no existence until they produced and sold the goods? Were the motor car manufacturers restraining trade during the period in which they made and sold fifty million cars, where there had been no cars before.… Surely … nothing more preposterous could have been imagined than to fix upon the American corporations, which have created and carried on, in ever-increasing magnitude, a volume and variety of trade so vast that it makes all previous production and exchange look like a rural roadside stand, and call this performance "restraint of trade," further stigmatizing it as a crime!Isabel Paterson, The God of the Machine (New York: G.P. Putnam's Sons, 1943), pp. 172, 175. See also Scoville and Sargent, Fact and Fancy in the T.N.E.C. Monographs, pp. 243–44.
Google wasn't the first Internet search engine, but it has progressed the industry far beyond its humble beginnings. Through the development of a unique algorithm called "PageRank," Google has become the world's leading Internet search engine. Its success and nearly 30,000 employees should be celebrated, not demonized and treated as a target by easily manipulated politicians.
Yet the congressional scrutiny Google is facing is nothing new. The US government's enforcement of "antitrust" law has consistently fallen on those companies who excel at lowering prices, innovating their products, and expanding their customer base. What every rational businessman strives to accomplish is essentially what the government attempts to slow down.
Some place blame on the state's parasitic need to control; I place it on the politicians' desire to live vicariously through bullying those whose success outshines their own accomplishment of deceiving more voters than their opponents on election day. It's no better than the schoolyard bully, whose reign is enforced by the threat of violence, forcibly taking the newest fad in electronic devices from another classmate.
And note who is bringing these complaints. As with nearly every antitrust case in American history, the pressure to break up the dominant player in the industry is being brought by its less-successful competitors. This isn't about consumers. This isn't about some scientific formula concerning ideal market share to achieve a perfectly competitive market. This is about companies that are giving up trying to compete on the market and hoping that government will do the deed. The potential beneficiaries here are not consumers but inefficient competitors and government regulators.
While libertarians may have reservations about Google's use of patents to achieve superiority in the market (clearly not a failure of an uninhibited free market), Google remains the top dog because it continues to satisfy consumers. Like Kodak, Xerox, and IBM before it, Google was a market creator, but its lasting success is not guaranteed. Competitors will arise, which in turn will incentivize further innovation. As Jeffery Tucker recently pointed out, Google is now entering the social-media industry after failing with its initial "Buzz" effort. Even the almighty of businesses fails to hit it out of the park every time.
As long as the world's biggest search engine continues to innovate, consumers will continue to benefit from whatever will be the next, best idea to come out of Mountain View, California. Instead of dedicating their resources to get the federal government to slow Google's growth, competitors such as Yelp and Nextag would be better off using their manpower to outwit and out-innovate. Unlike our caretakers in Washington, they are capable of succeeding.
So yeah, I'm a geek. So much so that it really starts to eat into my productivity. In fact, I'm even falling behind in my geek duties. Dungeons and Dragons; War Hammer 40,000; Starcraft II — I just can't keep up with it all. I haven't even finished season 3 of Battlestar Galactica yet. Yes, I know, it's a sin, but I'm trying my hardest. Really, I am!
In a way, I really can't blame my fellow geeks for not taking the time to study economics. There is a lot of material to cover. By rights, nearly everyone in America should know this stuff like the back of their hand. You would think after 12 years of public education, the masses would have learned something about how the world works. Unfortunately, most of the half-truths and lies that we learn in school are taken as dogma by most — most people I know, anyway.
On the other hand, we've been in a depression for how many years now? Is there really any excuse for not knowing this material by heart? Is there any excuse for not knowing at least how banking and interest rates work? With all the failed government programs, the trillions of dollars wasted, doesn't this at least warrant some skepticism, if not the questioning of every positive thing you've ever heard about government from your government-paid teachers?
Last spring, I wrote an article about AT&T's plan to purchase T-Mobile, the US branch of the German company Deutsche Telekom. Since then, Sprint has been lobbying the Justice Department (DOJ) to block the deal, and the geek pundits have been steadily writing editorials denouncing the merger as AT&T's attempt to restore the old Ma Bell monopoly. Being a geek myself and a regular reader of all the latest tech talk on smart phones (holding out for that blessed day when the iPhone will finally have a micro SD card slot), this was big news for me as well. At the time, it wasn't clear exactly whether or not the federal government would oppose the deal. My goal was simply to provide a free-market view of the merger in order to counteract what I saw as a large volume of writing that was tech savvy, but historically and economically ignorant.
On August 31, the US Department of Justice announced it was suing AT&T over its merger with T-Mobile. Bob Murphy wrote an excellent article for Mises Daily on the federal government's case against AT&T. He shows how the Fed's move to block the merger is not only morally wrong but also, from the standpoint of sound economic theory, completely unsound and harmful to consumers. Murphy also touches on the cold, hard fact that "the typical antitrust case is filed by the unsuccessful competitors of the dominant firms." The case of US v. AT&T Inc. is no different.
Peculiar CircumstancesReports Bloomberg,
On the morning of Aug. 31, AT&T Inc. (T) Chief Executive Officer Randall Stephenson said in a television interview that he expected his company's bid for T-Mobile USA Inc. to get government approval by the first quarter of 2012.
An hour later, his lawyers received a call from the U.S. Justice Department and were told the government was suing to block the $39 billion transaction, a person familiar with the matter said. The suit halted the biggest deal of the year and drew a line in the sand on antitrust policy that may affect pending acquisitions.
This announcement by the Justice Department came only a day after the August 30 meeting between the DOJ and representatives from Deutsche Telekom, T-Mobile, and AT&T.
"We are deep into the analysis with the Department of Justice, and it's all the questions and data gathering you might expect," Stephenson had told CNBC's "Squawk Box" at 8:39 a.m., about an hour before the company's lawyers were advised of the complaint.
"The news caught everybody by surprise," said Steve Largent, president and CEO of CTIA-The Wireless Association, which hadn't taken a position on the transaction. "AT&T was in the middle of explaining and detailing the merger that was being proposed when the Justice Department filed," Largent said. CTIA includes AT&T, T-Mobile and Sprint Nextel Corp. among its members.
Jessica Smith, a Justice Department spokeswoman, declined to comment on the details of the meeting or the decision as did Brad Burns, an AT&T spokesman in Dallas and T-Mobile spokeswoman Anna Friedges.
The first court hearing is scheduled for September 21.
This is all very strange. Why would the Justice Department move so quickly to sue when they were in the middle of negotiations? AT&T "had offered to divest up to 10 percent of T-Mobile assets" to local providers. This sort of offer was enough to secure Verizon's purchase of Alltel in 2009, so why not now for AT&T? In the wake of the DOJ's announcement, AT&T upped it to 25 percent, and is asking for another meeting with the Justice Department to try to come to a settlement before the suit goes to court. Sales on the national market will likely be bought up by Sprint, as the purchase of those assets by Verizon, the current largest wireless provider, will likely be blocked by the feds as well.
In fact, the evidence shows that Sprint's financial interests are driving this lawsuit by the DOJ. Like AT&T, Sprint had been planning to modernize its cell-phone network. Sprint's new cell towers will be configurable to handle multiple bandwidths in addition to its current 800MHz, 1.9 GHz, and 2.5 GHz spectrum. This includes the new LTE standard, one already used by AT&T and Verizon. Acquiring T-Mobile, which also had plans to utilize the LTE standard, would help that plan along.
In early March of this year, it was leaked that Sprint had been in negotiations with Deutsche Telekom to purchase T-Mobile. Negotiations were on and off, as there were some disagreements between Sprint and Deutsche Telekom as to the value of T-Mobile. Deutsche Telekom has been hoping to get $25 billion, but Sprint, it seems, was unwilling to pay more that $15–20 billion. By the time the press leak occurred on March 8, it is likely that the private negotiations between Deutsche Telekom and Sprint had completely broken down. Come March 20, AT&T announced its merger with T-Mobile.
The deal offered by AT&T to Deutsche Telekom was excellent. Not only did Deutsche Telekom get the full $25 billion in cash, but it would also receive $14 billion in AT&T stock, over 8 percent of the company, as well as a representative on AT&T's board of directors. This allows Deutsche Telekom to maintain its stake in the US market while also disinvesting itself of T-Mobile, which has slowly been losing customer base to AT&T, Verizon, and Sprint. It also gives Deutsche Telekom a huge influx in cash for capital expansion and research into new technologies. Lastly, to assuage Deutsche Telekom's concern over the deal being blocked, AT&T agreed to pay a $3 billion breakup fee as well as give some of its wireless spectrum over to T-Mobile and reduce charges for calls into AT&T's network, an additional $4 billion in value.
Just days after the AT&T merger with T-Mobile was announced, Sprint issued a press release denouncing Deutsche Telekom's agreement with AT&T as monopolistic:
AT&T and Verizon are already by far the largest wireless providers. If approved, the proposed acquisition would create a combined company that would be almost three times the size of Sprint in terms of wireless revenue and would entrench AT&T's and Verizon's duopoly control over the wireless market. The wireless industry moving forward would be dominated overwhelmingly by two vertically integrated companies with unprecedented control over the U.S. wireless post-paid market, as well as the availability and price of key inputs, such as backhaul and access needed by other wireless companies to compete.
In the wake of the DOJ's press conference over its suit filed against AT&T in US District Court, AT&T's stock dropped over 4 percent and Sprint's stock went up by over 9 percent. Deutsche Telekom's stock dropped as well. Sprint's response was ecstatic:
The DOJ today delivered a decisive victory for consumers, competition and our country. By filing suit to block AT&T's proposed takeover of T-Mobile, the DOJ has put consumers' interests first. Sprint applauds the DOJ for conducting a careful and thorough review and for reaching a just decision — one which will ensure that consumers continue to reap the benefits of a competitive U.S. wireless industry. Contrary to AT&T's assertions, today's action will preserve American jobs, strengthen the American economy, and encourage innovation.
It's clear that Sprint is benefiting greatly from this while at the same time getting its revenge at AT&T and Deutsche Telekom, but how does the Justice Department factor into all this? Why is it filing this suit on Sprint's behalf? As it turns out, representing Sprint in its negotiations with Deutsche Telekom was none other than Goldman Sachs Group Inc.
Goldman Sachs is known to be the most politically savvy public-private corporation in the United States, netting $12.9 billion in the government's TARP bailout of AIG, a measure that was supported by both President Bush and Senator Obama. Goldman Sachs was by far Obama's biggest campaign contributor during his 2008 presidential campaign, donating close to 1 million dollars. It's also no secret that his administration is filled to the brim with Goldman Sachs employees. Press Secretary Jay Carney denies any involvement from the White House. Even if Goldman Sachs puppet Obama didn't directly order the Justice Department to stop negotiations with AT&T, Goldman likely had something to do with Sprint's public call for the DOJ to block the merger. These sorts of corrupt backroom political deals are the historical norm.
How AT&T Got Its Monopoly in the First PlaceNot only is government itself a monopoly on the use of violence; it is often the stated goal of government legislation to create more monopolies. An example of this is government patent law. A patent grants an inventor an exclusive monopoly over a particular idea for a limited time. The justification for this is to create an incentive for invention and technological advancement. It is the defense of so-called intellectual property that causes technological stagnation.
Alexander Graham Bell was granted his patent of the telephone in 1876. From 1876–1894, the Bell Company filed some 600 lawsuits to defend some 900 patents and keep competitors out of the market. During this time, only about 270,000 telephones were produced. When the patents expired, by the end of 1894, over 80 competing companies had already grabbed 5 percent of the market. By 1900, that number grew to over 3,000, capturing 51 percent of the market. By 1906, the number of telephones in the Unites States had grown to a vast network of 6 million.
When Theodore Vail returned to AT&T as its president in 1907, the number of telephones owned and leased by AT&T had fallen from 100 percent to 55 percent. AT&T was not as economically efficient as its smaller competitors.
According to AT&T's official history,
Vail wrote in that year's AT&T Annual Report that government regulation, "provided it is independent, intelligent, considerate, thorough and just," was an appropriate and acceptable substitute for the competitive marketplace.
Theodore Vail believed that "the telephone by the nature of its technology would operate most efficiently as a monopoly providing universal service."
In AT&T's 1917 annual report, Vail makes the case for a single-monopoly system. "A combination of like activities under proper control and regulation, the service to the public would be better, more progressive, efficient, and economical than competitive systems."
World War I, as in so many other areas of the economy, gave the federal government the excuse it needed to nationalize the telephones. In 1918, "for reasons of national security," a government commission headed by Postmaster General Albert S. Burleson was placed in charge of the nation's telegraphs and telephones. Vail was appointed by Burleson to manage the telephones. His friend Newcom Carlton, president of telegraph giant Western Union, would manage the telegraphs. Long-distance rates were standardized nationwide.
Under a free-market system, rates vary based on population density. People living in urban areas are charged less, because operating a telephone system in a city is much cheaper. The higher population density allows for a much more efficient system. Rural areas, where the population is much lower with people living in remote and hard-to-reach areas, are much more difficult and expensive to provide phone services to. Thus, people living in the country are charged more than those who live in the city. The upside to this is that the high prices paid by consumers in the country for phone service attracts investment to those areas and helps spur the growth of new communications infrastructure.
When rates became standardized, the government fixed their rates according to average costs, and city callers were charged the same rates as country callers. Those who lived in urban areas had to pay much higher rates, while those living in rural areas paid less. Because the vast majority of those owning a telephone lived in the city, the extra profit gained from overcharging urban areas more than made up for the loss incurred in the more remote areas. US long-distance rates went up an average of 20 percent. These rates remained in force years after nationalization ended in 1919.
They didn't have to remain in force for long. States began to expand the authority of their own regulatory commissions. By 1922, 40 of the 48 states had imposed a regime of statewide rate averaging. This policy of rural subsidization, while intended to expand service to these areas with the ultimate goal of extending telephone services to every American, resulted in the stagnation of growth in the rural areas. Rural telephone service had been made artificially unprofitable. Not only did this discourage investment and expansion by city-based telephone companies; it also served as a barrier for smaller, local phone companies who could neither compete with the artificially low prices nor subsidize those rates with profits from denser areas.
During this period of increased regulation on the state level, many state and federal officials began to openly argue that it would be much more efficient if telephones were operated under a single, unified system. The telephone industry was viewed as a "natural monopoly." Multiple telephone services operating in a single area were deemed a "duplication of investment" and a waste of resources. Various state regulatory agencies refused to allow telephone companies to construct new telephone lines in areas already served by another carrier. They also encouraged companies to exchange and consolidate their networks in order to increase efficiency.
These policies not only caused the rise of telephone monopolies within large geographical areas; they also served to stunt the growth of the phone industry in the United States. Were it not for state-imposed price controls, it's likely that wireless coverage for cell-phone networks would be much greater today outside of cities, and AT&T would not be suffering the very problems that moved it to purchase T-Mobile in the first place. Also, the Radio Act of 1927, which nationalized the entire electromagnetic spectrum, would ensure that the development of cell-phone technology would be crippled for decades.
The Great Depression saw the rise of vast new government agencies to regulate the economy. This includes the Communications Act of 1934, which created the Federal Communications Commission. Telephone providers were now required to get a license to operate in the United States from the FCC. This barrier to entry secured Ma Bell's place as the de facto government-sanctioned telephone monopoly in the United States. All this, according to the Communications Act, was
for the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges.
Telephone ownership in the United States would not even reach 50 percent until 1945, with near-universal ownership not being achieved until the 1970s.
Reality CheckSprint — like AT&T in 1907, unable to compete efficiently as its competitors on the free market — has decided to manipulate the coercive powers of government violence to get its way. Filing suit just seven days after the DOJ, Sprint is seeking to enhance its financial position under the guise of public service. The current lawsuit against AT&T is Sprint's way of striking a blow at a company that is able to outcompete it in both closed corporate negotiations and the wireless market as a whole.
Those supporting the federal government with their written opinion are in both a state of historical ignorance and political naïveté. If this lawsuit succeeds, it will be just another case of government hindering the rise of consumer living standards. What's more, it would be a tragic blow to the cause of freedom if the general public is once again fooled into supporting antitrust litigation on behalf of corporate interest. What geeks and everyone else must learn is that the only way to end the current depression and usher in a new era of economic progress and technological innovation is to free the market from the regulatory stranglehold of the state. Better yet, we could abolish the state completely.
Archived from the live Mises.tv broadcast, this lecture by Tom DiLorenzo was presented at the 2011 Mises University in Auburn, Alabama. Includes an introduction by Mark Thornton.
[Speech delivered February 8, 1844. Reprinted in The Liberal Tradition from Fox to Keynes (1957).]
I am a manufacturer of clothing, and I do not know why, in this climate, and in the artificial state of society in which we live, the making of clothes should not be as honorable — because it is pretty near as useful — a pursuit as the manufacture of food.
Well, did you ever hear any debates in the House to fix the price of my commodities in the market? Suppose we had a majority of cotton-printers (which happens to be my manufacture) in the House. Let us suppose that you were reading the newspaper some fine morning, and saw an account of a majority of the House having been engaged the night before in fixing the price at which yard-wide prints should be sold: 'Yard-wide prints, of such a quality, 10d. a yard; of such a quality, 9d.; of such a quality, 8d.; of such a quality, 7d.,' and so on.
Why, you would rub your eyes with astonishment! Now, did it ever occur to you that there is no earthly difference between a body of men, manufacturers of corn, sitting down in the House, and passing a law enacting that wheat shall be so much, barley so much, beans so much, and oats so much?
Why, then, do you look at this monopoly of corn with such complacency? Simply because you and I and the rest of us have a superstitious reverence for the owners of those sluggish acres, and have a very small respect for ourselves and our own vocation. I say the Corn-Law monopolists, who arrogate to themselves power in the House of Commons, are practicing an injustice on every other species of capitalists. Take the iron trade, for example — a prodigious interest in this country. Iron of certain qualities has gone down in price, during the last five or six years, from £15 10s. to £5 10s. per ton. Men have seen their fortunes — ay, I have known them — dwindle away from £300,000 till now they could not sit down and write their wills for £100,000.
Well, did any man ever hear in the House of Commons an attempt made to raise a cry about these grievances there, or to lodge a complaint against the Government or the country because they could not keep up the price of iron? Has any man come forward there proposing that by some law pig iron should be so much, and bar iron of such a price, and other kinds of iron in proportion? No; neither has this been the case with any other interest in the country.
But how is it with corn? The very first night I was present in the House this session, I saw the prime minister get up, having a paper before him, and he was careful to tell us what the price of corn had been for the last 50 years, and what it was now. He is employed for little else but as a kind of corn steward, to see how the prices may be kept up for his masters.
Our opponents tell us that our object in bringing about the repeal of the Corn Laws is, by reducing the price of corn, to lower the rate of their wages. I can only answer upon this point for the manufacturing districts; but, as far as they are concerned, I state it most emphatically as a truth, that, for the last 20 years, whenever corn has been cheap wages have been high in Lancashire; and, on the other hand, when bread has been dear wages have been greatly reduced.
Now, let me be fully understood as to what Free Traders really do want. We do not want cheap corn merely in order that we may have low money prices. What we desire is plenty of corn, and we are utterly careless what its price is, provided we obtain it at the natural price. All we ask is this, that corn shall follow the same law which the monopolists in food admit that labor must follow; that 'it shall find its natural level in the markets of the world.'
To pay for that corn, more manufactures would be required from this country; this would lead to an increased demand for labor in the manufacturing districts, which would necessarily be attended with a rise of wages, in order that the goods might be made for the purpose of exchanging for the corn brought from abroad. I observe there are narrow-minded men in the agricultural districts, telling us, 'Oh, if you allow free trade, and bring in a quarter of corn from abroad, it is quite clear that you will sell one quarter less in England.'
What! I would ask, if you set more people to work at better wages — if you can clear your streets of those spectres which are now haunting your thoroughfares begging their daily bread — if you can depopulate your workhouses and clear off the two millions of paupers which now exist in the land, and put them to work at productive industry — do you not think that they would consume some of the wheat as well as you; and may not they be, as we are now, consumers of wheaten bread by millions, instead of existing on their present miserable dietary?
With free trade in corn, so far from throwing land out of use or injuring the cultivation of the poorer soils, free trade in corn is the very way to increase the production at home, and stimulate the cultivation of the poorer soils by compelling the application of more capital and labor to them. We do not contemplate deriving one quarter less corn from the soil of this country; we do not anticipate having one pound less of butter or cheese, or one head less of cattle or sheep: we expect to have a great increase in production and consumption at home; but all we contend for is this, that when we, the people here, have purchased all that can be raised at home, we shall be allowed to go 3,000 miles — to Poland, Russia or America — for more; and that there shall be no let or hindrance put in the way of our getting this additional quantity.
This article is excerpted from The Liberal Tradition from Fox to Keynes, chapter 32, "On the Repeal of the Corn Laws" (1957). It was originally given as a speech by Richard Cobden in February 8, 1844.
Don't leave the job of criminal investigation to the politicized state, writes William L. Anderson.
This audio Mises Daily is narrated by Colin Hussey.
[Originally published in The Review of Austrian Economics 9 (2), 1996.]
The very term "public utility" … is an absurd one. Every good is useful "to the public," and almost every good … may be considered "necessary." Any designation of a few industries as "public utilities" is completely arbitrary and unjustified.— Murray Rothbard, Power and Market
Most so-called public utilities have been granted governmental franchise monopolies because they are thought to be "natural monopolies." Put simply, a natural monopoly is said to occur when production technology, such as relatively high fixed costs, causes long-run average total costs to decline as output expands. In such industries, the theory goes, a single producer will eventually be able to produce at a lower cost than any two other producers, thereby creating a "natural" monopoly. Higher prices will result if more than one producer supplies the market.
Furthermore, competition is said to cause consumer inconvenience because of the construction of duplicative facilities, e.g., digging up the streets to put in dual gas or water lines. Avoiding such inconveniences is another reason offered for government franchise monopolies for industries with declining long-run average total costs.
It is a myth that natural-monopoly theory was developed first by economists, and then used by legislators to "justify" franchise monopolies. The truth is that the monopolies were created decades before the theory was formalized by intervention-minded economists, who then used the theory as an ex post rationale for government intervention. At the time when the first government franchise monopolies were being granted, the large majority of economists understood that large-scale, capital-intensive production did not lead to monopoly, but was an absolutely desirable aspect of the competitive process.
The word "process" is important here. If competition is viewed as a dynamic, rivalrous process of entrepreneurship, then the fact that a single producer happens to have the lowest costs at any one point in time is of little or no consequence. The enduring forces of competition — including potential competition — will render free-market monopoly an impossibility.
The theory of natural monopoly is also ahistorical. There is no evidence of the "natural-monopoly" story ever having been carried out — of one producer achieving lower long-run average total costs than everyone else in the industry and thereby establishing a permanent monopoly. As discussed below, in many of the so-called public-utility industries of the late 18th and early 19th centuries, there were often literally dozens of competitors.
Economies of Scale During the Franchise Monopoly Era During the late 19th century, when local governments were beginning to grant franchise monopolies, the general economic understanding was that "monopoly" was caused by government intervention, not the free market, through franchises, protectionism, and other means. Large-scale production and economies of scale were seen as a competitive virtue, not a monopolistic vice. For example, Richard T. Ely, cofounder of the American Economic Association, wrote that "large scale production is a thing which by no means necessarily signifies monopolized production."Richard T. Ely, Monopolies and Trusts (New York: MacMillan, 1990), p. 162. John Bates Clark, Ely's cofounder, wrote in 1888 that the notion that industrial combinations would "destroy competition" should "not be too hastily accepted."John Bates Clark and Franklin Giddings, Modern Distributive Processes (Boston: Ginn & Co., 1888), p. 21.
Herbert Davenport of the University of Chicago advised in 1919 that only a few firms in an industry where there are economies of scale does not "require the elimination of competition,"Herbert Davenport, The Economics of Enterprise (New York: MacMillan, 1919), p. 483. and his colleague, James Laughlin, noted that even when "a combination is large, a rival combination may give the most spirited competition"James L. Laughlin, The Elements of Political Economy (New York: American Book, 1902), p. 71. Irving FisherIrving Fisher, Elementary Principles of Economics (New York: MacMillan, 1912), p. 330. and Edwin R.A. SeligmanE.R.A. Seligman, Principles of Economics (New York: Longmans, Green, 1909), p. 341. both agreed that large-scale production produced competitive benefits through cost savings in advertising, selling, and less cross-shipping.
Large-scale production units unequivocally benefited the consumer, according to turn-of-the-century economists. For without large-scale production, according to Seligman, "the world would revert to a more primitive state of well being, and would virtually renounce the inestimable benefits of the best utilization of capital."Ibid, p. 97. Simon Patten of the Wharton School expressed a similar view that "the combination of capital does not cause any economic disadvantage to the community. … Combinations are much more efficient than were the small producers whom they displaced."Simon Patten, "The Economic Effects of Combinations," Age of Steel, Jan. 5, 1889, p. 13.
Like virtually every other economist of the day, Columbia's Franklin Giddings viewed competition much like the modern-day Austrian economists do, as a dynamic, rivalrous process. Consequently, he observed that
competition in some form is a permanent economic process. … Therefore, when market competition seems to have been suppressed, we should inquire what has become of the forces by which it was generated. We should inquire, further, to what degree market competition actually is suppressed or converted into other forms.Franklin Giddings, "The Persistence of Competition," Political Science Quarterly, March 1887, p. 62.
In other words, a "dominant" firm that underprices all its rivals at any one point in time has not suppressed competition, for competition is "a permanent economic process."
David A. Wells, one of the most popular economic writers of the late 19th century, wrote that "the world demands abundance of commodities, and demands them cheaply; and experience shows that it can have them only by the employment of great capital upon extensive scale."David A. Wells, Recent Economic Changes (New York: DeCapro Press, 1889), p. 74. And George Gunton believed that
concentration of capital does not drive small capitalists out of business, but simply integrates them into larger and more complex systems of production, in which they are enabled to produce … more cheaply for the community and obtain a larger income for themselves. … Instead of concentration of capital tending to destroy competition the reverse is true. … By the use of large capital, improved machinery and better facilities the trust can and does undersell the corporation.George Gunton, "The Economics and Social Aspects of Trusts," Political Science Quarterly, September 1888, p. 385.
The above quotations are not a selected, but rather a comprehensive list. It may seem odd by today's standards, but as A.W. Coats pointed out, by the late 1880s there were only ten men who had attained full-time professional status as economists in the United States.A.W. Coats, "The American Political Economy Club," American Economic Review, September 1961, pp. 621637. Thus, the above quotations cover virtually every professional economist who had anything to say about the relationship between economies of scale and competitiveness at the turn of the century.
The significance of these views is that these men observed firsthand the advent of large-scale production and did not see it leading to monopoly, "natural" or otherwise. In the spirit of the Austrian School, they understood that competition was an ongoing process, and that market dominance was always necessarily temporary in the absence of monopoly-creating government regulation. This view is also consistent with my own research findings that the ''trusts" of the late 19th century were in fact dropping their prices and expanding output faster than the rest of the economy — they were the most dynamic and competitive of all industries, not monopolists.Thomas J. DiLorenzo, "The Origins of Antitrust: An Interest-Group Perspective," International Review of Law and Economics, Fall 1985, pp. 7390. Perhaps this is why they were targeted by protectionist legislators and subjected to "antitrust" laws.
The economics profession came to embrace the theory of natural monopoly after the 1920s, when it became infatuated with "scientism" and adopted a more or less engineering theory of competition that categorized industries in terms of constant, decreasing, and increasing returns to scale (declining average total costs). According to this way of thinking, engineering relationships determined market structure and, consequently, competitiveness. The meaning of competition was no longer viewed as a behavioral phenomenon, but an engineering relationship. With the exception of such economists as Joseph Schumpeter, Ludwig von Mises, Friedrich Hayek, and other members of the Austrian School, the ongoing process of competitive rivalry and entrepreneurship was largely ignored.
How "Natural" Were the Early Natural Monopolies? There is no evidence at all that at the outset of public-utility regulation there existed any such phenomenon as a "natural monopoly." As Harold Demsetz has pointed out:
Six electric light companies were organized in the one year of 1887 in New York City. Forty-five electric light enterprises had the legal right to operate in Chicago in 1907. Prior to 1895, Duluth, Minnesota, was served by five electric lighting companies, and Scranton, Pennsylvania, had four in 1906. … During the latter part of the 19th century, competition was the usual situation in the gas industry in this country. Before 1884, six competing companies were operating in New York City … competition was common and especially persistent in the telephone industry … Baltimore, Chicago, Cleveland, Columbus, Detroit, Kansas City, Minneapolis, Philadelphia, Pittsburgh, and St. Louis, among the larger cities, had at least two telephone services in 1905.Burton N. Behling, "Competition in Public Utility Industries" (1938), in Harold Demsetz, ed., Efficiency, Competition, and Policy (Cambridge, Mass.: Blackwell, 1989), p. 78.
In an extreme understatement, Demsetz concludes that "one begins to doubt that scale economies characterized the utility industry at the time when regulation replaced market competition."Ibid.
A most instructive example of the non-existence of natural monopoly in the utility industries is provided in a 1936 book by economist George T. Brown entitled "The Gas Light Company of Baltimore," which bears the misleading subtitle, "A Study of Natural Monopoly."George T. Brown, The Gas Light Company of Baltimore: A Study of Natural Monopoly (Baltimore, Maryland: Johns Hopkins University Press, 1936). The book presents "the study of the evolutionary character of utilities" in general, with special emphasis on the Gas Light Company of Baltimore, the problems of which "are not peculiar either to the Baltimore company or the State of Maryland, but are typical of those met everywhere in the public utility industry."Ibid., p. 5.
The history of the Gas Light Company of Baltimore figures prominently in the whole history of natural monopoly, in theory and in practice, for the influential Richard T. Ely, who was a professor of economics at Johns Hopkins University in Baltimore, chronicled the company's problems in a series of articles in the Baltimore Sun that were later published as a widely-sold book. Much of Ely's analysis came to be the accepted economic dogma with regard to the theory of natural monopoly.
The history of the Gas Light Company of Baltimore is that, from its founding in 1816, it constantly struggled with new competitors. Its response was not only to try to compete in the marketplace, but also to lobby the state and local government authorities to refrain from granting corporate charters to its competitors. The company operated with economies of scale, but that did not prevent numerous competitors from cropping up.
"Competition is the life of business," the Baltimore Sun editorialized in 1851 as it welcomed news of new competitors in the gas light business.Ibid., p. 31. The Gas Light Company of Baltimore, however, "objected to the granting of franchise rights to the new company."Ibid.
Brown states that "gas companies in other cities were exposed to ruinous competition," and then catalogues how those same companies sought desperately to enter the Baltimore market. But if such competition was so "ruinous," why would these companies enter new — and presumably just as "ruinous" — markets? Either Brown's theory of "ruinous competition" — which soon came to be the generally accepted one — was incorrect, or those companies were irrational gluttons for financial punishment.
By ignoring the dynamic nature of the competitive process, Brown made the same mistake that many other economists still make: believing that "excessive" competition can be "destructive" if low-cost producers drive their less efficient rivals from the market.Ibid., p. 47. Such competition may be "destructive" to high-cost competitors, but it is beneficial to consumers.
In 1880 there were three competing gas companies in Baltimore who fiercely competed with one another. They tried to merge and operate as a monopolist in 1888, but a new competitor foiled their plans: "Thomas Aha Edison introduced the electric light which threatened the existence of all gas companies."Ibid., p. 52. From that point on there was competition between both gas and electric companies, all of which incurred heavy fixed costs which led to economies of scale. Nevertheless, no free-market or "natural" monopoly ever materialized.
When monopoly did appear, it was solely because of government intervention. For example, in 1890 a bill was introduced into the Maryland legislature that "called for an annual payment to the city from the Consolidated [Gas Company] of $10,000 a year and 3 percent of all dividends declared in return for the privilege of enjoying a 25-year monopoly.Ibid., p. 75. This is the now-familiar approach of government officials colluding with industry executives to establish a monopoly that will gouge the consumers, and then sharing the loot with the politicians in the form of franchise fees and taxes on monopoly revenues. This approach is especially pervasive today in the cable TV industry.
Legislative "regulation" of gas and electric companies produced the predictable result of monopoly prices, which the public complained bitterly about. Rather than deregulating the industry and letting competition control prices, however, public utility regulation was adopted to supposedly appease the consumers who, according to Brown, "felt that the negligent manner in which their interests were being served [by legislative control of gas and electric prices] resulted in high rates and monopoly privileges. The development of utility regulation in Maryland typified the experience of other states."Ibid., p. 106.
Not all economists were fooled by the "natural-monopoly" theory advocated by utility industry monopolists and their paid economic advisers. In 1940 economist Horace M. Gray, an assistant dean of the graduate school at the University of Illinois, surveyed the history of "the public utility concept," including the theory of "natural" monopoly. "During the 19th century," Gray observed, it was widely believed that "the public interest would be best promoted by grants of special privilege to private persons and to corporations" in many industries.Horace M. Gray, "The Passing of the Public Utility Concept," Journal of Land and Public Utility Economics, February 1940, p. 8. This included patents, subsidies, tariffs, land grants to the railroads, and monopoly franchises for "public" utilities. "The final result was monopoly, exploitation, and political corruption."Ibid.
With regard to "public" utilities, Gray records that "between 1907 and 1938, the policy of state-created, state-protected monopoly became firmly established over a significant portion of the economy and became the keystone of modern public utility regulation."Ibid., p. 9. From that time on, "the public utility status was to be the haven of refuge for all aspiring monopolists who found it too difficult, too costly, or too precarious to secure and maintain monopoly by private action alone."Ibid.
In support of this contention, Gray pointed out how virtually every aspiring monopolist in the country tried to be designated a "public utility," including the radio, real estate, milk, air transport, coal, oil, and agricultural industries, to name but a few. Along these same lines, "the whole NRA experiment may be regarded as an effort by big business to secure legal sanction for its monopolistic practices."Ibid., p. 15. Those lucky industries that were able to be politically designated as "public utilities" also used the public utility concept to keep out the competition.
The role of economists in this scheme was to construct what Gray called a "confused rationalization" for "the sinister forces of private privilege and monopoly," i.e., the theory of "natural" monopoly. "The protection of consumers faded into the background."Ibid., p. 11.
More recent economic research supports Gray's analysis. In one of the first statistical studies of the effects of rate regulation in the electric utilities industry, published in 1962, George Stigler and Claire Friedland found no significant differences in prices and profits of utilities with and without regulatory commissions from 1917 to 1932.George Stigler and Claire Friedland, "What Can Regulators Regulate? The Case of Electricity," Journal of Law and Economics, October 1962, pp. 116. Early rate regulators did not benefit the consumer, but were rather "captured" by the industry, as happened in so many other industries, from trucking to airlines to cable television. It is noteworthy — but not very laudable — that it took economists almost 50 years to begin studying the actual, as opposed to the theoretical, effects of rate regulation.
Sixteen years after the Stigler-Friedland study, Gregg Jarrell observed that 25 states substituted state for municipal regulation of electric power ratemaking between 1912 and 1917, the effects of which were to raise prices by 46 percent and profits by 38 percent, while reducing the level of output by 23 percent.Gregg A. Jarrell, "The Demand for State Regulation of the Electric Utility Industry," Journal of Law and Economics, October 1978, pp. 269295. Thus, municipal regulation failed to hold prices down. But the utilities wanted an even more rapid increase in their prices, so they successfully lobbied for state regulation under the theory that state regulators would be less pressured by local customer groups, than mayors and city councils would be.
These research results are consistent with Horace Gray's earlier interpretation of public utility rate regulation as an anticonsumer, monopolistic, price-fixing scheme.
The Problem of "Excessive Duplication" In addition to the economies of scale canard, another reason that has been given for granting monopoly franchises to "natural monopolies" is that allowing too many competitors is too disruptive. It is too costly to a community, the argument goes, to allow several different water suppliers, electric power producers, or cable TV operators to dig up the streets. But as Harold Demsetz has observed:
[T]he problem of excessive duplication of distribution systems is attributable to the failure of communities to set a proper price on the use of these scarce resources. The right to use publicly owned thoroughfares is the right to use a scarce resource. The absence of a price for the use of these resources, a price high enough to reflect the opportunity costs of such alternative uses as the servicing of uninterrupted traffic and unmarred views, will lead to their overutilization. The setting of an appropriate fee for the use of these resources would reduce the degree of duplication to optimal levels.Demsetz, Efficiency, Competition, and Policy, p. 81.
Thus, just as the problem with "natural" monopolies is actually caused by government intervention, so is the "duplication of facilities" problem. It is created by the failure of governments to put a price on scarce urban resources. More precisely, the problem is really caused by the fact that governments own the streets under which utility lines are placed, and that the impossibility of rational economic calculation within socialistic institutions precludes them from pricing these resources appropriately, as they would under a private-property competitive-market regime.
Contrary to Demsetz's claim, rational economic pricing in this case is impossible precisely because of government ownership of roads and streets. Benevolent and enlightened politicians, even ones who have studied at the feet of Harold Demsetz, would have no rational way of determining what prices to charge. Murray Rothbard explained all this more than 25 years ago:
The fact that the government must give permission for the use of its streets has been cited to justify stringent government regulations of 'public utilities,' many of which (like water or electric companies) must make use of the streets. The regulations are then treated as a voluntary quid pro quo. But to do so overlooks the fact that governmental ownership of the streets is itself a permanent act of intenention. Regulation of public utilities or of any other industry discourages investment in these industries, thereby depriving consumers of the best satisfaction of their wants. For it distorts the resource allocations of the free market.Murray N. Rothbard, Power and Market: Government and the Economy (Kansas City: Sheed Andrews and McMeel, 1977), pp. 7576.
The so-called "limited-space monopoly" argument for franchise monopolies, Rothbard further argued, is a red herring, for how many firms will be profitable in any line of production
is an institutional question and depends on such concrete data as the degree of consumer demand, the type of product sold, the physical productivity of the processes, the supply and pricing of factors, the forecasting of entrepreneurs, etc. Spatial limitations may be unimportant.Murray N. Rothbard, Man, Economy, and State: A Treatise on Economic Principles (Auburn, Ala.: Ludwig von Mises Institute, 1993), p. 619.
In fact, even if spatial limitations do allow only one firm to operate in a particular geographical market, that does not necessitate monopoly, for "monopoly" is "a meaningless appellation, unless monopoly price is achieved," and "all prices on a free market are competitive."Ibid., p. 620. Only government intervention can generate monopolistic prices.
The only way to achieve a free-market price that reflects true opportunity costs and leads to optimal levels of "duplication" is through free exchange in a genuinely free market, a sheer impossibility without private property and free markets.Ibid., p. 548. Political fiat is simply not a feasible substitute for the prices that are determined by the free market because rational economic calculation is impossible without markets.
Under private ownership of streets and sidewalks, individual owners are offered a tradeoff of lower utility prices for the temporary inconvenience of having a utility company run a trench through their property. If "duplication" occurs under such a system, it is because freely choosing individuals value the extra service or lower prices or both more highly than the cost imposed on them by the inconvenience of a temporary construction project on their property. Free markets necessitate neither monopoly nor "excessive duplication" in any economically meaningful sense.
Competition for the Field The existence of economies of scale in water, gas, electricity, or other "public utilities" in no way necessitates either monopoly or monopoly pricing. As Edwin Chadwick wrote in 1859, a system of competitive bidding for the services of private utility franchises can eliminate monopoly pricing as long as there is competition "for the field."Edwin Chadwick, "Results of Different Principles of Legislation and Administration in Europe of Competition for the Field as Compared With Cmopetition Within the Field of Service," Journal of the Statistical Society of London, vol. 22 (1859), pp. 381420. As long as there is vigorous bidding for the franchise, the results can be both avoidance of duplication of facilities and competitive pricing of the product or service. That is, bidding for the franchise can take place in the form of awarding the franchise to the utility that offers consumers the lowest price for some constant quality of service (as opposed to the highest price for the franchise).
Harold Demsetz revived interest in the concept of "competition for the field" in a 1968 article.Harold Demsetz, "Why Regulate Utilities?" Journal of Law and Economics, April 1968, pp. 5565. The theory of natural monopoly, Demsetz pointed out, fails to "reveal the logical steps that carry it from scale economies in production to monopoly price in the market place."Ibid. If one bidder can do the job at less cost than two or more,
then the bidder with the lowest bid price for the entire job will be awarded the contract, whether the good be cement, electricity, stamp vending machines, or whatever, but the lowest bid price need not be a monopoly price. … The natural monopoly theory provides no logical basis for monopoly prices.Ibid.
There is no reason to believe that the bidding process will not be competitive. Hanke and Walters have shown that such a franchise bidding process operates very efficiently in the French water supply industry.Steve Hanke and Stephen J.K. Walters, "Privatization and Natural Monopoly: The Case of Waterworks," The Privatization Review, Spring 1987, pp. 2431.
The Natural-Monopoly Myth: Electric Utilities According to natural-monopoly theory, competition cannot persist in the electric-utility industry. But the theory is contradicted by the fact that competition has in fact persisted for decades in dozens of US cities. Economist Walter J. Primeaux has studied electric utility competition for more than 20 years. In his 1986 book, Direct Utility Competition: The Natural Monopoly Myth, he concludes that in those cities where there is direct competition in the electric utility industries:
Direct rivalry between two competing firms has existed for very long periods of time — for over 80 years in some cities;
The rival electric utilities compete vigorously through prices and services;
Customers have gained substantial benefits from the competition, compared to cities were there are electric utility monopolies;
Contrary to natural-monopoly theory, costs are actually lower where there are two firms operating;
Contrary to natural-monopoly theory, there is no more excess capacity under competition than under monopoly in the electric utility industry;
The theory of natural monopoly fails on every count: competition exists, price wars are not "serious," there is better consumer service and lower prices with competition, competition persists for very long periods of time, and consumers themselves prefer competition to regulated monopoly; and
Any consumer satisfaction problems caused by dual power lines are considered by consumers to be less significant than the benefits from competition.Walter J. Primeaux, Jr., Direct Electric Utility Competition: The Natural Monopoly Myth (New York: Praeger, 1986), p. 175.
Primeaux also found that although electric utility executives generally recognized the consumer benefits of competition, they personally preferred monopoly!
Ten years after the publication of Primeaux's book, at least one state — California — is transforming its electric utility industry "from a monopoly controlled by a handful of publicly held utilities to an open market.""California Eyes Open Electricity Market," The Washington Times, May 27, 1995, p. 2. Other states are moving in the same direction, finally abandoning the baseless theory of natural monopoly in favor of natural competition:The following information is from Toni Mack, "Power to the People," Forbes, June 5, 1995, pp. 119126.
The Ormet Corporation, an aluminum smelter in West Virginia, obtained state permission to solicit competitive bids from 40 electric utilities;
Alcan Aluminum Corp. in Oswego, New York has taken advantage of technological breakthroughs that allowed it to build a new power generating plant next to its mill, cutting its power costs by two-thirds. Niagara Mohawk, its previous (and higher-priced) power supplier, is suing the state to prohibit Alcan from using its own power;
Arizona political authorities allowed Cargill, Inc. to buy power from anywhere in the West; the company expects to save $8 million per year;
New federal laws permit utilities to import lower-priced power, using the power lines of other companies to transport it;
Wisconsin Public Service commissioner Scott Neitzel recently declared, "free markets are the best mechanism for delivering to the consumer … the best service at the lowest cost";
The prospect of future competition is already forcing some electric utility monopolies to cut their costs and prices. When the TVAwas faced with competition from Duke Power in 1988, it managed to hold its rates steady without an increase for the next several years.
The potential benefits to the US economy from demonopolization of the electric utility industry are enormous. Competition will initially save consumers at least $40 billion per year, according to utility economist Robert Michaels.Ibid., p. 120. It will also spawn the development of new technologies that will be economical to develop because of lower energy costs. For example, "automakers and other metal benders would make much more intensive use of laser cutting tools and laser welding machines, both of which are electron guzzlers.Ibid., p. 126.
The Natural-Monopoly Myth: Cable TV Cable television is also a franchise monopoly in most cities because of the theory of natural monopoly. But the monopoly in this industry is anything but "natural." Like electricity, there are dozens of cities in the United States where there are competing cable firms. "Direct competition … currently occurs in at least three dozen jurisdictions nationally."Thomas Hazlett, "Duopolistic Competition in Cable Television: Implications for Public Policy," Yale Journal on Regulation, vol. 7 (1990).
The existence of longstanding competition in the cable industry gives the lie to the notion that that industry is a "natural monopoly" and is therefore in need of franchise monopoly regulation. The cause of monopoly in cable TV is government regulation, not economies of scale. Although cable operators complain of "duplication," it is important to keep in mind that "while over-building an existing cable system can lower the profitability of the incumbent operator, it unambiguously improves the position of consumers who face prices determined not by historical costs, but by the interplay of supply and demand."Ibid.
Also like the case of electric power, researchers have found that in those cities where there are competing cable companies prices are about 23 percent below those of monopolistic cable operators.Ibid. Cablevision of Central Florida, for example, reduced its basic prices from $12.95 to $6.50 per month in "duopoly" areas in order to compete. When Telestat entered Riviera Beach, Florida, it offered 26 channels of basic service for $5.75, compared to Comcast's 12channel offering for $8.40 per month. Comcast responded by upgrading its service and dropping its prices.Ibid. In Presque Isle, Maine, when the city government invited competition, the incumbent firm quickly upgraded its service from only 12 to 54 channels.Thomas Hazlett, "Private Contracting versus Public Regulation as a Solution to the Natural Monopoly Problem," in Robert W. Poole, ed., Unnatural Monopolies: The Case for Deregulating Public Utilities (Lexington, Mass.: Lexington Books, 1985), p. 104.
In 1987 the Pacific West Cable Company sued the city of Sacramento, California on First Amendment grounds for blocking its entry into the cable market. A jury found that "the Sacramento cable market was not a natural monopoly and that the claim of natural monopoly was a sham used by defendants as a pretext for granting a single cable television franchise … to promote the making of cash payments and provision of 'in-kind' services … and to obtain increased campaign contribution."Pacific West Cable Co. v. City of Sacramento, 672 F. Supp. 1322, 13491340 (E.D. Cal. 1987), cited in Hazlett, "Duopolistic Competition." The city was forced to adopt a competitive cable policy, the result of which was that the incumbent cable operator, Scripps Howard, dropped its monthly price from $14.50 to $10 to meet a competitor's price. The company also offered free installation and three months free service in every area where it had competition.
Still, the big majority of cable systems in the U.S. are franchise monopolies for precisely the reasons stated by the Sacramento jury: they are mercantilistic schemes whereby a monopoly is created to the benefit of cable companies, who share the loot with the politicians through campaign contributions, free air time on "community service programming," contributions to local foundations favored by the politicians, stock equity and consulting contracts to the politically well connected, and various gifts to the franchise authorities.
In some cities, politicians collect these indirect bribes for five to ten years or longer from multiple companies before finally granting a franchise. They then benefit from part of the monopoly rents earned by the monopoly franchisee. As former FCC chief economist Thomas Hazlett, who is perhaps the nation's foremost authority on the economics of the cable TV industry, has concluded, "we may characterize the franchising process as nakedly inefficient from a welfare perspective, although it does produce benefits for municipal franchiser."Hazlett, "Duopolistic Competition." The barrier to entry in the cable TV industry is not economies of scale, but the political price-fixing conspiracy that exists between local politicians and cable operators.
The Natural-Monopoly Myth: Telephone Services The biggest myth of all in this regard is the notion that telephone service is a natural monopoly. Economists have taught generations of students that telephone service is a "classic" example of market failure and that government regulation in the "public interest" was necessary. But as Adam D. Thierer recently proved, there is nothing at all "natural" about the telephone monopoly enjoyed by AT&T for so many decades; it was purely a creation of government intervention."Adam D. Thierer, "Unnatural Monopoly: Critical Moments in the Development of the Bell System Monopoly," Cato Journal, Fall 1994, pp. 267285.
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 … after the turn of the century, over 3,000 competitors existed.Ibid., p. 270. In some states there were over 200 telephone companies operating simultaneously. 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 obviously almost nonexistent, contrary to the standard account of the theory of natural monopoly as applied to the telephone industry.Ibid.
The eventual creation of the telephone monopoly was the result of a conspiracy between AT&T and politicians who wanted to offer "universal telephone service" as a pork-barrel entitlement to their constituents. 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.G.H. Loeb, "The Communications Act Policy Toward Competition: A Failure to Communicate," Duke Law Journal, vol. 1 (1978), p. 14.
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."Thierer, "Unnatural Monopoly," p. 277.
Conclusions The theory of natural monopoly is an economic fiction. No such thing as a "natural" monopoly has ever existed. The history of the so-called public utility concept is that the late 19th and early 20th century "utilities" competed vigorously and, like all other industries, they did not like competition. They first secured government-sanctioned monopolies, and then, with the help of a few influential economists, constructed an ex post rationalization for their monopoly power.
This has to be one of the greatest corporate public relations coups of all time. "By a soothing process of rationalization," wrote Horace M. Gray more than 50 years ago, "men are able to oppose monopolies in general but to approve certain types of monopolies. … Since these monopolies were 'natural' and since nature is beneficent, it followed that they were 'good' monopolies. … Government was therefore justified in establishing 'good' monopolies."Gray, "The Passing of the Public Utility Concept," p. 10.
In industry after industry, the natural monopoly concept is finally eroding. Electric power, cable TV, telephone services, and the mail, are all on the verge of being deregulated, either legislatively or de facto, due to technological change. Introduced in the United States at about the same time communism was introduced to the former Soviet Union, franchise monopolies are about to become just as defunct. Like all monopolists, they will use every last resource to lobby to maintain their monopolistic privileges, but the potential gains to consumers of free markets are too great to justify them. The theory of natural monopoly is a 19th century economic fiction that defends 19th century (or 18th century, in the case of the US Postal Service) monopolistic privileges, and has no useful place in the 21st century American economy.
This article was originally published in The Review of Austrian Economics 9 (2), 1996.
[In Restraint of Trade (2008)]
Until relatively recent times, the symbiotic relationship existing between economic and political institutions has only been vaguely comprehended. It has been popular to view these two major sectors of American society as having a generally antagonistic relationship, with political institutions serving as a countervailing force to economic influence.
This view is reflected in the traditional conception of economic history that suggests the American business system had, during the late 19th and early 20th centuries, maintained an existence largely independent of, and indifferent to, the interests of the American public. The business community in this era is seen by many as ruthless and hegemonic, exercising nearly unlimited corporate power that threatened the very foundations of a free and competitive economic system.
Those who hold to this view insist that the interests of the public required the imposition of political controls to regulate such matters as trade practices, pricing policies, and the size and entry of business firms in the market. It supports a consensus that government regulation of economic activity represents a national policy commitment to elevating the "ethical plane" of competition in order that market influences may more freely serve some vaguely defined "general welfare." One business scholar has reflected this attitude well:
It is not always safe to leave business to its own devices; experience has shown that its freedom will sometimes be abused. … Competitors have been harassed by malicious and predatory tactics, handicapped by discrimination, excluded from markets and sources of supply, and subjected to intimidation, coercion, and physical violence. Consumers have been victimized by short weights and measures, by adulteration, and by misrepresentation of quality and price; they have been forced to contribute to the profits of monopoly. …
[T]he nation's resources have been dissipated through extravagant methods of exploitation. These abuses have not characterized all business at all times, but they have occurred with sufficient frequency to justify the imposition of controls. Regulation is clearly required, not only to protect the investor, the worker, the consumer, and the community at large against the unscrupulous businessman, but also to protect the honest businessman against his dishonest competitor.Clair Wilcox, Public Policies Toward Business, 4th ed. (Homewood, Ill.: Richard D. Irwin, 1971), p. 8.
This impression of the purposes and effects of the regulatory process is reinforced by a common historical view of the 1920s as the declining years of laissez-faire capitalism, in which "big business" had its last profligate fling before being brought under the discipline of rational, politically supervised economic planning. Indeed, the so-called Great Depression that ended this decade is generally perceived as one of the high-water marks of corporate dissipation and irresponsibility, ushering in the uncomfortable aftereffects of the 1930s.
The New Deal is, to this day, regarded as a major turning point in government and business relationships, and it represents to many the inevitable consequences of undisciplined market power. The National Industrial Recovery Act, the Agricultural Adjustment Act, the National Labor Relations Act, and the Fair Labor Standards Act, as well as the operation of intraindustrial agencies such as the Federal Communications Commission, the Securities and Exchange Commission, the Civil Aeronautics Board, and the Federal Power Commission are commonly depicted by historians as having imposed competitive discipline and socially responsible behavior upon a recalcitrant business community.
Paralleling this view of history, however, is a recognition that government regulation has generally served to further the very economic interests being regulated. The economist — and later United States senator — Paul Douglas was not the first to become aware of this fact when, in 1935, he observed with some bewilderment, "Public regulation has proved most ineffective. Instead of the regulatory commissions controlling the private utilities, the utilities have largely controlled the regulatory commissions."Paul Douglas, Controlling Depressions (New York: W.W. Norton, 1935), p. 247.
Nor was he the last to perceive the truth of that proposition. Indeed, in the intervening years, research has revealed the dominant influence of commercial and industrial interests in shaping and directing government regulatory policies in order to advance such business interests.Some of the more significant contributions have included Gabriel Kolko, The Triumph of Conservatism (Glencoe, Ill.: Free Press, 1963); Gabriel Kolko, Railroads and Regulation, 1877–1916 (Princeton: Princeton University Press, 1965); James Weinstein, The Corporate Ideal in the Liberal State, 1900–1918 (Boston: Beacon Press, 1968); G. William Domhoff, The Higher Circles (New York: Random House, 1970); Michael Parrish, Securities Regulation and the New Deal (New Haven: Yale University Press, 1970); Robert Cuff, The War Industries Board (Baltimore: Johns Hopkins University Press, 1973); Murray Rothbard, America's Great Depression (Princeton, N.J.: D. Van Nostrand Co., 1963); Ron Radosh and Murray Rothbard, eds., A New History of Leviathan (New York: E.P. Dutton, 1972); Melvin Urofsky, Big Steel and the Wilson Administration (Columbus: Ohio State University Press, 1969); James Gilbert, Designing the Industrial State (Chicago: Quadrangle Books, 1972); Ellis Hawley, The New Deal and the Problem of Monopoly (Princeton: Princeton University Press, 1966); and Robert Himmelberg, The Origins of the National Recovery Administration (New York: Fordham University Press, 1976). While there is a debate as to whether businessmen had advocated the establishment of political agencies in order to structure the marketplace for their benefit or had only captured such agencies after they had been created, few would question the idea that the regulatory processes of government have been actively and purposefully employed by business interests in order to gain advantages denied them in the marketplace.
Though recognizing the existence of a legitimate debate on the question of the origins of regulatory legislation, one of the underlying premises of this book is that most political intervention into economic activity has been fostered by business leaders and trade associations desirous of restraining or eliminating those trade practices of their competitors that most threatened existing market positions or price structures.
As historian Gabriel Kolko and others have observed, competition was very intense among business firms in the early 20th century. Firms with established market positions wanted to reduce the impact of such competition and employed voluntary methods (such as mergers, pooling, trade association "codes of ethics," and other agreements) in efforts to stabilize competitive relationships. When such voluntary means failed due to lack of effective enforcement, influential corporate leaders — having found a condition of unrestrained competition and decision making unacceptable to their interests — helped promote the enactment of legal restraints upon trade practices. As Kolko has written,
The dominant fact of American political life at the beginning of this century was that big business led the struggle for the federal regulation of the economy. If economic rationalization could not be attained by mergers and voluntary economic methods, a growing number of important businessmen reasoned, perhaps political means might succeed.Kolko, Triumph, pp. 57–58.
Or, as an earlier scholar, Myron Watkins, noted,
From the time of President Theodore Roosevelt's second administration there had been an insistent movement among certain industrial leaders for either a legislative or administrative definition of an exact standard of competitive conduct."Myron Watkins, Public Regulation of Competitive Practices in Business Enterprise, 3d ed. (New York: National Industrial Conference Board, 1940), p. 38.
It is the purpose of this book to inquire into the attitudes of business leaders toward competition during the years 1918–1938 and to see how those attitudes became translated into proposals for controlling competition through political machinery under the direction of trade associations.
This particular 20-year period has been selected because of the fundamental metamorphosis taking place within the business community itself and the importance of this era in the history of government regulation of economic activity. During these years, men of commerce and industry began forging, through the trade associations, a consensus as to the proper scope and intensity of competitive behavior. This 20-year period brackets American business experiences with two major industry-dominated government regulatory systems: the War Industries Board (WIB) and the National Recovery Administration (NRA).
Under these two systems, businessmen increasingly exhibited a disposition for a collectivized authority over one another, with trade associations serving as government-backed enforcement agencies. Perhaps the historian Robert Wiebe has best summarized the attitudes toward government-business relationships with which business leaders emerged from World War I. Recognizing that "[o]nly the government could ensure the stability and continuity essential to their welfare," men of commerce and industry did not focus upon a "neutralization of the government." On the contrary, "They wanted a powerful government, but one whose authority stood at their disposal; a strong, responsive government through which they could manage their own affairs in their own way."Robert Wiebe, The Search for Order, 1877–1920 (New York: Hill and Wang, 1967), p. 297.
The attraction of so many business leaders to systems of government-enforced trade practice standards reflected a continuing institutionalization of economic life. The systemwide benefits of maintaining openness in competition — with no legal restrictions on freedom of entry into the marketplace or on the terms and conditions for which parties could contract with one another — were being rejected by business organizations more concerned with the survival of individual firms and industries. As a consequence, business leaders expressed an increasing desire for the maintenance of conditions of equilibrium that would help preserve the positions of existing firms.
Free and unrestrained competition demanded a continuing resiliency in responding to market changes. The innovation in products, services, and business methods that made economic life creative and vibrant came to be seen as a threat to the survival of firms unable or unwilling to respond. Concerns for security and stability began to take priority over autonomy and spontaneity in the thinking of most business leaders.
There were a number of factors that helped to influence efforts on behalf of government-enforced equilibrium policies. To begin with, there were significant organizational and technological changes that occurred within the business system, both prior to and following World War I, to which businessmen had to respond. One analyst of the business scene, Carl F. Taeusch, declared that the factor that did the most to stimulate the growth of trade associations was "the advent of trade — or industrial — as opposed to individual competition."Carl Taeusch, Policy and Ethics in Business (New York: Arno Press, 1931), p. 258.
Taeusch noted that starting with the early 1900s and continuing through the 1920s, American business underwent quite radical changes in the development of major new industries and new methods of manufacture and product distribution. The combination of these factors had a major impact, not only upon the firms within the industries that were undergoing such changes, but also upon businesses indirectly related to such industries.
The principal new industries included those producing automobiles, airplanes, electrical power, and products powered by electricity (including radio, motion pictures, the phonograph, and consumer appliances). There was also a total revamping of the petroleum industry — which, prior to the automobile and electricity, had existed primarily as a source of lighting — accompanied by a realignment of the relative market positions of petroleum, electricity, and coal as fuel and power sources.
The revolutionary changes in distribution methods included the development of chain stores, direct selling by manufacturers, vertically integrated retailing organizations, and the growth of new consumer-credit practices. The new manufacturing methods embraced many industries and resulted in a restructuring of business organizations to take advantage of new efficiencies brought about by such new production methods. The combination of these factors led to the growth of product (or "industrial") competition. Some of the consequences to industries of such radical changes are given by Taeusch:
The use of structural steel and cement in the building industry has confronted the lumber interests with a problem of self-preservation; changes in food habits and the more aggressive tactics of new food businesses have faced the older staple-goods concerns with the problem of rapidly declining sales; style changes ruthlessly affect the use of textile goods.Ibid., pp. 258–59.
Taeusch's explanation found support in the analysis offered by economist Joseph Schumpeter. Addressing himself to the "process of Creative Destruction," through which established firms are challenged and often replaced by new sources of competition, Schumpeter concluded that price competition is not the most significant factor to which firms have to respond. In his view,
it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization … competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.
Citing retailing as an example, Schumpeter declared that the competition that was most critical arose "not from additional shops of the same type, but from the department store, the chain store, the mail-order house and the supermarket."Joseph Schumpeter, Capitalism, Socialism, and Democracy, 3d ed. (New York: Harper & Bros., 1950), p. 156. It should be noted that a contemporary economist of the Austrian School, Israel Kirzner, minimizes the distinction Schumpeter draws between "price competition" and the more meaningful "entrepreneurial competition." Kirzner suggests that "the process of price competition is as entrepreneurial and dynamic as that represented by the new commodity, new technique, or new type of organization." See Kirzner, Competition and Entrepreneurship (Chicago: University of Chicago Press, 1973), p. 129.
"Because 'collectivism' reflects conservative, status quo sentiments, its underlying premises were consistent with business efforts to resist change."Whatever its relative significance vis-à-vis price competition, there is no doubt that the processes emphasized by Schumpeter served as the progenitors of economic advancements that revolutionized American life: the replacement of the horse by the automobile and of the kerosene lamp by the electric light; the opening up of worldwide systems of communication, transportation, and distribution; and the introduction of the consumer to an increased variety of services and products.
In such a volatile climate, change became one of the few constants upon which businessmen could rely. Economic survival often depended upon innovative resiliency; firms with higher unit costs and prices had to either become more efficient or drop out of the race. Instability and turnover were continuing threats with which firms had to contend. The severity of the competitive struggle was best reflected in the automobile industry: of the 181 firms manufacturing cars at some time during the years 1903 to 1926, 83 remained in business as of 1922, while 20 managed to survive through 1938.Taken from Ralph C. Epstein, The Automobile Industry (Chicago, 1928), p. 164ff., and other sources cited in Donald A. Moore, "The Automobile Industry," in The Structure of American Industry, ed. Walter Adams, rev. 2d ed. (New York: Macmillan, 1954), p. 274ff.
In addition to the technological and organizational sources of change, trade policies proved disquieting. So intense was the pace of competition that many firms turned with increasing frequency to aggressive sales practices and lowered prices in order to gain some comparative advantage. The consequence, of course, was to further heighten the intensity of trade rivalry. Businessmen seeking nothing more than the most pragmatic route to survival in such a competitive and evolving environment became pariahs to industry colleagues.
Such aggressive trade practices provided the climate in which American business found itself as it entered World War I. Paradoxically, men of commerce and industry found, in the wartime management of the WIB, a temporary respite from what many regarded as the killing pace of commercial warfare. The economic cease-fire imposed by a centrally directed alliance of government and business afforded businessmen the opportunity of experiencing a less-menacing trade atmosphere.
When peace was restored to the rest of the world, however, competitive aggression returned to the marketplace. Businessmen, recalling the managed harmony of the war years, confronted the intensely competitive 1920s with hopes of realizing a more durable and predictable setting in which to conduct business. Firms that viewed the processes of change as threats to their positions began organizing resistance. Speaking to this phenomenon, economist Walter Adams observed that such firms "quickly and instinctively understood that storm shelters had to be built to protect themselves against this destructive force."Walter Adams, "The Military-Industrial Complex and The New Industrial State," American Economic Review 65 (May 1968), reprinted in Superconcentration/Supercorporation, ed. Ralph Andreano (Andover, Mass.: Warner Modular Publications, 1973), R337–2-3.
Businessmen confronted, not only the kinds of changes observed by Taeusch and Schumpeter, but a political environment within which antibusiness sentiments were widespread.Robert H. Wiebe, Businessmen and Reform: A Study of the Progressive Movement (Cambridge: Harvard University Press, 1962), p. 69ff. As Wiebe has observed, political hostility toward large industrial combinations, and a good deal of confusion over Supreme Court cases that sought to distinguish "reasonable" and "unreasonable" restraints of trade, left the business community in a somewhat unsettled frame of mind.Ibid., pp. 82–84.
These "tensions from political uncertainty and economic instability"Ibid., p. 100. generated a transformation in the thinking of business leaders. Politics and ideology became employed in the efforts of businessmen "to protect their positions of leadership in America's twentieth-century society in transition."Ibid., p. 221ff. The result was a more conciliatory attitude toward government; for purely pragmatic reasons business leaders attempted to absorb reform movements and use them to their advantage.
A very broad range of social and economic conditions existed during the years 1918–1938: a war, an era of seemingly endless prosperity, the Great Depression, and the New Deal with its promises of a politically engineered recovery. Continuing throughout this period, however, was an organizational transformation that had begun long before World War I: the "collectivization" of human society. The principle of "collective organization," postulating the superior interests of the group over those of its individual members, was emerging within the business system as well as within other sectors of society.
Because "collectivism" reflects conservative, status quo sentiments, its underlying premises were consistent with business efforts to resist change. Industries organized themselves through the machinery of the trade associations and began the task of altering the attitudes, belief systems, and practices that represented the old order. Business decision making that emphasized the well-being of the individual firm was to be eschewed in favor of attitudes that stressed the collective interests of the industry itself. Individual profit maximizing was to be de-emphasized when confronted by the "greater interests of the group"; independence and self-centeredness were to be put aside in favor of a more "cooperative" form of "friendly competition."
Nothing so threatened the interests of this emerging industrial order as the free play of market forces at work in an environment of legally unrestrained competition. Nothing so preoccupied industry-oriented business leaders in the post–World War I years as the effort to structure this environment so as to keep the conduct of trade within limits that posed no threat to their collective interests.
Throughout the years 1918–38, there was a consistent effort by many business officials and trade associations to develop a spirit of "business cooperation" through which, it was hoped, severe competitive pressures could be restrained. As we shall discover, many business leaders tried to establish systems of business relationships that would mitigate aggressive competitive practices and reduce the threat of economic loss to firms unable to withstand such competition. One finds industry leaders and trade groups railing constantly against the "price cutter," the "cutthroat" competitor, and the entrepreneurial interloper who dared to "invade the territory" of an established competitor. Such efforts invariably began with voluntary methods of "self-restraint."
When voluntary approaches failed to produce the desired stability, many businessmen — mindful of the advantages experienced under the WIB — sought to effectuate this spirit of "cooperation" through politically backed programs designed to fashion a greater degree of centralized business decision-making. Characterizing their proposals as "industrial self-regulation," business spokesmen and trade associations worked to secure for themselves a diluted competitive environment that would not be threatening to their interests.
Such political efforts to control trade practices led, ultimately, to the enactment of the National Industrial Recovery Act, a piece of legislation put to death in 1935 by the US Supreme Court. We shall examine both the contributions and responses of businessmen to this recovery program and will consider the post-NRA period in order to determine whether its existence had significantly affected the policy recommendations of business leaders for controlling trade practices.
After a more general development, in the first four chapters, of business responses to competition, we shall examine a number of specific industries. In chapters 5 through 7, we shall look at such industries as steel, petroleum, coal, textile manufacturing, and retailing in order to obtain a more detailed understanding of competitive conditions and business responses to those conditions. These particular industries were selected for a number of reasons:
they were all considered major industries throughout the period encompassed by this book and were among the principal industries undergoing the substantial changes discussed by Taeusch and Schumpeter;
representing such diverse fields as capital-goods manufacturing, natural-resource development, consumer-goods manufacturing, and retailing, they provide a fair cross section of American commerce and industry;
not having had a "public-utility" status imposed upon them, these industries were, for the most part, open to entry by would-be competitors and had pricing practices determined by market rather than political influences; and
because competition was particularly intense within these industries during the period, some of the most spirited and vocal efforts to tranquilize competitive inclinations came from these sectors of the economy.
An examination of other industries reveals similar tendencies and influences at work, and it is believed that the industries selected for specific study herein offer a fairly representative picture of the development of business attitudes toward competition and regulation during the 20 years following the end of World War I.
This article is excerpted from the introduction to In Restraint of Trade: The Business Campaign Against Competition, 1918–1938 (2008).
Have you ever wondered why the "tiny ship" famously tossed in the opening credits of Gilligan's Island was named the SS Minnow?
This audio Mises Daily is narrated by Steven Ng.
[Thomas DiLorenzo discusses his upcoming online Mises Academy class Competition, Monopoly, and Antitrust: The Austrian Perspective, a five-week course starting March 15.]
For all his other problems, Alan Greenspan was certainly right about antitrust regulation:
The world of antitrust is reminiscent of Alice's Wonder-land: everything seemingly is, yet apparently isn't, simultaneously. It is a world in which competition is lauded as the basic axiom and guiding principle, yet "too much" competition is condemned as "cutthroat." It is a world in which actions designed to limit competition are branded as criminal when taken by businessmen, yet praised as "enlightened" when initiated by the government. It is a world in which the law is so vague that businessmen have no way of knowing whether specific actions will be declared illegal until they hear the judge's verdict — after the fact. (Alan Greenspan, "Antitrust," in Ayn Rand, ed., Capitalism: The Unknown Ideal, 1962)
Greenspan was also right when he concluded in the same essay that "the entire structure of antitrust statutes in this country is a jumble of economic irrationality and ignorance" and is the product of "a gross misrepresentation of history, and of rather naïve, and certainly unrealistic, economic theories."
In Power and Market Murray Rothbard pointed out that almost the entire economics profession has aided and abetted this "irrationality and ignorance" by constructing a theoretical apparatus (the "perfect-competition" model and myriad theories of "imperfect" competition) that has long served as an intellectual "justification" for one of the most destructive forms of economic interventionism.
Only the Austrian School, with a much more intellectually rigorous understanding of competition and monopoly, has provided consistent opposition to the destructiveness of antitrust regulation. The Austrian economists' theories of competition and entrepreneurship have always been at the heart of their contributions to all economic debates (not just the antitrust debate), from the famous socialist-calculation debate of the early 20th century to criticisms of central banking as just another cartel, to government regulation of industry in general, and many other issues. The Austrian theory of competition as a dynamic, rivalrous process of entrepreneurship and discovery — as opposed to a set of static mathematical equilibrium conditions (as with the "mainstream" theory) — is a cornerstone of the Austrian School of economics.
This is why I am offering a five-week online Mises Academy course beginning on March 15 entitled "Competition, Monopoly, and Antitrust: The Austrian Perspective." The first two classes will present the Austrian theories of completion and monopoly, contrast them with the "mainstream" theory, and point out the implications for both economic theory and public policy. The last three classes will be devoted to applications of the Austrian theory of competition and monopoly to present critiques of antitrust and "natural-monopoly" regulation, and to dispel numerous myths about such competitive business practices as mergers, corporate takeovers, price cutting, advertising, product differentiation, and more. The general course outline is as follows:
Week
Hayekian vs. Neoclassical Theories of Competition and Monopoly
Rothbard and Kirzner on Competition, Monopoly, and Entrepreneurship
How Antitrust Regulation Destroys Competition
Natural vs. Unnatural Monopolies: Rhetoric vs. Reality
Myths about Free-Market Monopoly: Mergers, Takeovers, Predatory Pricing, Monopolistic Competition, and Other Economic Fables
Among the things students will learn is what F.A. Hayek meant when he said that "in perfect competition there is no competition"; how antitrust regulation has been a protectionist racket from the very beginning; how, for more than a century, antitrust regulation has handicapped American entrepreneurs to the benefit of their foreign competitors; how Ludwig von Mises's understanding of competition as a dynamic, rivalrous process was a key to his critique of socialism; how regulation in general short-circuits free-market efforts to solve economic problems through the competitive process; the role of the economics profession in concocting myriad myths about the free market; and how, as Murray Rothbard wrote, "the antitrust laws … do not in the least 'diminish monopoly'" but rather "impose a continual, capricious harassment of efficient business enterprise."
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Diamonds are considered a unique resource because the price level is always on the increase without any big swings, unlike other commodities, such as gold, whose prices fluctuate (sometimes violently) in the market.
The constant increase in the price of diamonds is usually attributed to the monopolistic behaviors of the infamous De Beers Group. But the details of the monopoly are concealed from public knowledge, because they involve not only private institutions but also various governments around the world, including the United Nations.
Murray N. Rothbard explained the workings of the diamond industry in 1992:
DeBeers has persuaded the world's diamond miners to market virtually all their diamonds through DeBeer's Central Selling Organization (CSO), which then grades, distributes, and sells all the rough diamonds to cutters and dealers further down on the road toward the consumer.
Furthermore, Rothbard mentions that the CSO was sustained by the support of the South African government:
The [South African] government long ago nationalized all diamond mines, and anyone who finds a diamond mine on his property discovers that the mine immediately becomes government property. The South African government then licenses mine operators who lease the mines from the government and, it so happened, that lo and behold!, the only licensees turned out to be either DeBeers itself or other firms who were willing to play ball with the DeBeers cartel.
Eventually, the Soviet Union also made a deal with the cartel by giving a major percentage of the annual supply to De Beers. And yet this was not complete control over the global supply, because the rest of the diamond-producing nations (such as Angola and Botswana) were not part of it. Rothbard describes why Angola was not able to participate in the CSO:
First, even though the Angolan civil war is over, the results have left the government powerless to control most of the country. Secondly, the end of the war has given independent wildcatters access to the Cuango River in northern Angola, a territory rich in diamonds. And thirdly, the African-drought has dried up the Cuango along with other rivers, leaving the rich alluvial diamond deposits in the beds and on the banks of the Cuango accessible to the eager prospectors.
So with certain major players absent from the CSO, everyone predicted the demise of the cartel due to increased competition. But events took a turn for the worse. De Beers and other quasi-public companies returned stronger than ever with even more control over the diamond-supply market.
What the public ignored was the rise of a subtle tool used by De Beers known as the Diamond Trading Company. The DTC was incorporated as a joint venture between De Beers and the governments of South Africa, Botswana, and Namibia. This lucrative venture effectively allowed them to control 75 percent of the world's diamonds by value. This allowed the price of diamonds to stay relatively high and therefore create an artificial price level for the commodity. However, this was not the end of the deal. De Beers and various governments around the world were on an even bigger mission to control the entire supply of diamonds — this time through the United Nations.
The late 1990s saw the outrage over "blood diamonds," with numerous NGOs asking for immediate regulatory action from the United Nations. Blood diamonds are diamonds mined using slavery and sold for weapons that fuel a militia's (usually a nonstate group) battles. The DTC took advantage of this outrage — in spite of accusations that they too were involved.
The proposed solution to stem the flow of blood diamonds was the Kimberly Process Certification Scheme. The Process set forth the rules that all diamonds mined and sold must be certified as "conflict free." It set up the World Diamond Council to look after the Certification Process. The WDC consisted of the major diamond-producing companies and gave them regulatory authority through the United Nations. In other words, the WDC is nothing but a cartel in disguise.
There are six committees in the WDC, which is currently dominated by representatives from the De Beers Group, diamond companies based in Belgium, and the World Federation of Bourses. The WFB is another small-sized cartel in Antwerp, consisting of 29 diamond bourses.
Any diamond that enters the market must be certified by the WDC; those that aren't are considered conflict diamonds, and the individuals involved are prosecuted.
But this is just a smoke screen for a bigger motive held by the institutions of the WDC. The regulatory authority is used to control the global supply and price by stopping large amounts of diamonds from entering the market.
In fact, the WDC constantly criticizes mining companies that are not part of the cartel and subjects them to criminal prosecution. The latest victims are the Marange rough diamonds from Zimbabwe, which are demonized by the WDC and the DTC as being used to sponsor human-rights violations, when in fact they are a threat to control of the global diamond supply.
All in all, the monopoly supported by certain African governments and the United Nations ensures that the price of diamonds stays relatively high, leading in turn to undeserved profits for governments and corporations.
It may seem odd to associate an invasive, property-denying measure like frisking with the principles of the free market. There's little room for individual sovereignty when it comes to national security — at least that's how the government thinks and acts: we are guilty until proven innocent; individuals aren't rational enough to make decisions about their well-being, so government officials have to step in. This is how the United States has acted since the 9/11 attacks.
Is there an alternative to this Big Brother approach to managing homeland security? I think there is: private defense agencies offering competitive services on an open market.
Recently, an airport in Orlando, Florida, has announced that it is considering ditching the Transportation Security Administration (TSA), reviving the debate about whether or not it is appropriate to have a private company instead of the TSA screen passengers.
Should customers and markets dictate who attends to national-security needs? If you look at sensitive public-interest industries like transportation, quality security service can only be provided by those who are under market pressure and depend on a wide customer base for their survival.
In the aftermath of the 9/11 attacks, governments all over the world increased airport security. The US Congress, in a hasty overreaction to that tragic day, gave the job of screening passengers and luggage to a new federal agency, the TSA. This has led to a massive bureaucracy that has bloated the system and created more problems. The American taxpayers now pay for more than 50,000 airport security screeners. The TSA has also requested nearly $8 billion in funding for 2011. In spite of all these expenses, the quality of airport screening has declined, as the underwear-bomber incident has shown.
The TSA has a severe conflict of interest because it serves as both the aviation-security regulator and the provider of key security. Who's watching the watchmen? When it comes to baggage and passenger screening, the TSA is regulating itself. This is the same recipe for disaster found in every state monopoly: unaccountability and inflexibility. And as with any bureaucracy, the TSA's natural incentive is to hide errors and make itself look good.
Having federal screeners also fragments airport security: airport perimeters are managed by airports and not the TSA. This leads to security gaps that allow incidents like the Christmas bomber. In Europe, most airports have hired certified, private security firms to do their screening, making each airport responsible for every aspect of its own security.
Having the federal government in charge of security screening in airports also means that the taxpayers are stuck with much of the cost. A market-orientated strategy would have played out much better, with security fees on tickets and airline charges covering the complete cost of airport safety. This would mean that the service providers are paid by consumers and accountable to them alone. When this sort of accountability is no longer part of the equation, customer complaints skyrocket — as does the risk of dangerous mistakes.
The recent pat-down controversy echoes such general discontent with TSA employees. Public opinion considers private screening companies to be far more responsive. If an individual is truly performing under par, a private company is able to react more swiftly than the federal government. With a private company, if something happens — say a weapon gets through — that employee is gone the next day. If you don't perform, you're out. It's not a job for life, as federal jobs sometimes seem to be.
So, how will private contractors improve security and keep the airport customer happy? First, private defense will decentralize security, which means letting each airport implement its own procedures, fitting its own needs, under loose government supervision. As Larry Dale, president of the Sanford Airport Authority in Orlando, told CNN, "Airports are unique … one size doesn't fit all."
Second, the cost of airport security should be paid by those who use airports — airlines and passengers. Like any other private and competitive enterprise, private screening companies are wired to consumer needs and demands. For example, in order to avoid overcrowding, private screeners can have more flexible staffing levels to meet an airport's varying needs. Unlike the federal government, they could expand their ranks when passenger loads triple during the summer and contract when fewer people are traveling in the winter. It's obvious that the ability to adjust the number of screeners quickly leads to more efficient screening and shorter waits, which translates into satisfied customers and safer flights.
[Originally published in the Spectator, January 26, 1945.]
For some months now I have been constantly reminded, by one well-meaning friend or critic after another, of the English genius for compromise. The occasion for this is a book in which I pointed to certain dangers created by the present trend of economic policy. The regularity with which it has since been intimated to me that, however blameless my logic, I did not, and presumably could not, appreciate the British capacity for muddling through, for reconciling opposites, and for achieving what by mere logic should be impossible, suggests that these have become somewhat stereotyped responses, readily employed as an excuse for closing the eyes to unpleasant facts.
The peculiar point about these invocations of the genius for compromise is that they are produced in reply to an argument which, at least by implication, was a defense of the very institutions which have created this trait, and a warning that they are rapidly disappearing. If in the growth of the social and political structure of Britain the unforeseen and unintended has so frequently emerged, this is of course merely another way of saying that it has never been planned as a whole. In the piecemeal process of adaptation and change there has always been opportunity for the people to change institutions into something different from what they were intended to be, to create a society which was not the result of a single coherent plan, but of innumerable decisions of free men and women.
The confidence that in the end things would somehow turn out right was largely justified by the fact that in a free society the actions of the government were of minor importance compared with the manner in which the people turned to their own use whatever instruments the government provided. The trust in muddling through, in the capacity for reconciling opposites, is in fact an unconscious tribute to the laissez-faire age, wholly inappropriate to the fully organized society now widely regarded as an ideal.
Reliance on such a belief may indeed prove to be a very dangerous superstition. When one finds this particular argument used in effect as a defense of central planning of all economic activity, when it is appealed to as an assurance that none of the consequences need follow which experience shows to have followed elsewhere, the muddle has clearly been allowed to persist too long. If there is anyone who has no right to argue that things will not work out according to logic, who is not entitled to put his trust in the genius for compromise and for muddling through, it is the modern planner. If everything is to be "consciously directed according to a single blueprint," as he wishes, if every detail is to be thought out beforehand and to be made part of an integrated plan, there can be no room for those spontaneous adjustments by which a people adapt a system to their peculiar genius.
The reply of the more sensible planners generally is that they never wanted a completely planned system, but merely a judicious admixture of planning to correct the evils of competition. But principles to which one commits oneself have a way of producing corresponding social systems, whether we wish it or not. And where, as is true of planning and competition, we have to choose between social systems which require altogether different legal and institutional frameworks, if we create the conditions suitable for the one we destroy at the same time the conditions required by the other.
There is such a thing as the inherent logic of events, which forces us forward on a given path whether we logically think it out beforehand or not. The trouble with a partial planning is precisely that every step forces us to further steps if the remaining free forces are not to upset our plans, and that it thus constantly reduces our freedom of action and makes us more and more the servants of the machinery we have created. You cannot afford to be illogical in a planned society, because its success depends on things turning out precisely as you expect. If they do not, they must be made to, even if, had the necessity of such further action been foreseen, the plan would never have been adopted. Beim ersten sind wir frei beim zweiten sind wir Knechte.Faust, line 1412. "In the first we’re free, in the second slaves to the act." Translated by A.S. Kline, 2003.
Planning is the last thing on which we ought to embark without first thinking it out completely; and the least one must ask of the planners is that they think their system through before they try it on us. But that is exactly what they refuse and resent if somebody else attempts to do it for them. Every piece of planning that is shown to fit into an otherwise competitive system deserves serious examination. But whoever wants to plan to supersede competition cannot refuse responsibility for first showing how he proposes to do all the necessary things which used to be brought about by competition before he can claim to be taken seriously.
It is curious that the point which contemporary planners are so anxious to deny, that there is no stopping halfway on the road to a centrally planned society, used to be a favorite argument of the socialists. The famous phrase about "the inevitability of gradualness" says precisely what I have been trying to say; and it has certainly worked, not only in the sense in which it was meant, of advancing to a given goal step by step, but also in the sense that it has driven its inventors by its ruthless logic from Fabianism to out-and-out communism. The halfway house is as little an intellectual as a practical resting place. Though it is the position now occupied by the majority of thinking people, and the natural preference of the judicious mind on first looking at the matter, it is not a view long held by anyone after closer study of the problems.
The difficulty arises because most of the arguments which sound plausible enough if advanced in support of a particular proposal for state control do not bear application as general principles. But as a society which is not to be governed dictatorially must be governed by principles, and once a principle is admitted in a particular instance, the demand for its general application cannot be resisted, the purely empirical procedure of treating each case on its merits won't work, because each decision to act creates a precedent and provides irresistible arguments for further action. That practically all planners deprecate any laying down of general principles and prefer to judge each case by itself points to the most fundamental issue of all — that adherence to principles is the only alternative to arbitrary government.
Signs are not wanting that some of those who are largely responsible for the present craze for planning are beginning to be uneasy about the forces they have loosened, and to feel a little like the sorcerer's apprentice who cannot lay the ghosts he has raised. Once prices or incomes are guaranteed to some producers, there is little ground left for refusing the same to any others. If the supply of pig iron or coal cannot be left to the unregulated forces of competition there is no reason why that of tobacco should. If you argue for a particular purpose that "individuals have no machinery for limiting imports to the level of exports" you must not be surprised if your disciples insist that the government should individually match each item of imports with a corresponding item of exports. And if you generally denounce the "humbug of finance" you must not expect the people to respect the particular piece of financial machinery of your own design.
All this is of course not meant to say that we are likely ever to put into practice either of the two great opposing principles in all its purity. We are always on the move. All I am arguing is that the guiding principle which we adopt is likely to carry us far beyond the point at which we at first aim. Even Adam Smith thought that "to expect, indeed, that freedom of trade should ever be entirely restored in Great Britain is as absurd as to expect that an Oceana or Utopia should ever be established in it." Our planners are likely to be equally mistaken when they think they can stop the movement long before any of the horrors are reached which most of the more sensible among them admit that a completely planned society would involve. It takes a long time before such a tendency can be stopped, once the intellectual forces driving it on have got well under way. What I am pleading for is that it is time to stop and reflect if the momentum of the movement is not to produce very unpleasant results.
There is no reason to believe that the things the British people are capable of producing in a fit of absence of mind must always be of an agreeable character.
This article originally appeared in the Spectator, January 26, 1945.
"There are a lot of Deadheads in finance," claims CNBC's big-government cheerleader and economics reporter Steve Liesman. On the financial network's website, he relates a story about having "really good seats at a Dead show once, and I was never so recognized because of all the Wall Street guys had all the upfront tickets to the show. They were as surprised to learn that I was a Deadhead as much as I was surprised that they were Deadheads."
The uninitiated wouldn't associate the Grateful Dead with finance or commerce or business practices of any sort. But this impossible-to-categorize, San Francisco Bay–area band is, in its various iterations, the most successful touring band of all time.
By no means the best instrumentally or vocally, the band built its success on an approach to the music business that was 180 degrees from their competitors. While other bands posted signs at the entrances to concert venues saying, "Recording and photography of tonight's performance is strictly prohibited," the Grateful Dead encouraged fans to record their concerts and shoot pictures of the show.
I remember flying from Seattle to Las Vegas, the night before a Dead show, with a plane full of Deadheads. The guy next to me said he was "Jonesin' for some Hornsby" (Bruce Hornsby, who played over a hundred shows with the Dead, from 1988 until founder Jerry Garcia's death in 1995). My fellow passenger proceeded to pull down a suitcase from the overhead compartment; it was filled with cassette tapes — all labeled and sorted by concert date and location.
Did this taping hurt album sales? No. It served as free marketing for the band. And as David Meerman Scott and Brian Halligan point out in their new book, Marketing Lessons from the Grateful Dead: What Every Business Can Learn From the Most Iconic Band in History, the band went as far as to set up special sections for tapers in 1984. These sections were behind the band's mixing board and would form a "forest of professional-grade microphones rising to the sky."
So if there were all these bootleg tapes floating around, has anyone been buying Dead albums? I guess so: the band has had 19 gold albums, 6 platinum albums, and 4 albums that have gone multiplatinum.
In their punchy little book, Scott and Halligan point out that the Grateful Dead turned the "the-band-tours-to-support-the-album" concept completely on it's head. For the Dead, the concerts are the experience they are selling. The scarce good is that particular night's performance, and the band makes each performance radically different. The band in its various forms has done over 2,300 shows, and no 2 are alike. Not only have the song lists been different each night, but the band plays different versions of all the songs. Instead of only touring periodically in support of a new album, the Dead has toured constantly.
Committed Deadheads have followed the band around to see hundreds of shows. In some cases these fans support their Dead habit by selling merchandise or food items in the parking lot, and this activity is endorsed by the band. Like Amazon with its affiliate program, the Dead supports anyone who sells band merchandise.
Because the concert experience is the product the band is selling, "technology has continued to be an essential element of live shows," write Halligan and Scott. "In the 1970s it was live concert technology and in 2009 it was a real-time iPhone application."
Early on, the band took control of selling tickets to their shows. They cut out the middlemen (such as Ticketmaster) and were able to ensure that their most dedicated fans purchased the best tickets, nurturing enormous amounts of fan loyalty. So, the Wall Street guys that Liesman saw at the concert in the front rows were likely real Deadheads, not casual fans who paid through the nose for tickets from a ticket broker.
In the chapter "Upgrade to Premium," the authors explain the band's ingenious way of selling professional concert recordings. During recent tours of two modern versions of the Grateful Dead — The Dead, and Further — fans could buy a three-CD set of the concert they were attending. Deadheads would pay $20 for a wristband prior to the show. After each set, crew members would make 1,000 copies of that set, and after the last encore they'd produce and copy the third CD. The three CDs were then bundled and rushed to the merchandise table, where fans would trade their wristbands for the professionally engineered CDs of the concert they had just enjoyed. During a 2009 tour, a similar program to sell concert photos was created in partnership with Blurb.
The authors estimate that the Grateful Dead has performed in the neighborhood of 500 different songs live, with 150 of those being original compositions. The band has always experimented: Sometimes it works. Sometimes it doesn't. The band has produced some shows that were duds, but, as Smith and Halligan point out, the band "didn't become conservative and stop experimenting." They quote Grateful Dead founder Jerry Garcia: "You go diving for pearls every night but sometimes you end up with clams."
The Grateful Dead cultivated a following of fans that is still growing larger despite Jerry Garcia's passing 15 years ago. Playing in jeans and T-shirts and with a free-form style that is the antithesis of the slickly produced modern rock or pop concert, this band has maintained their popularity for 45 years and counting. Their success is obviously no fluke. Committed Deadheads and marketing gurus Scott and Halligan lay it out in their tiny book of common Deadhead sense that's not so common: Give away what isn't scarce, and make what is scarce — live performance — truly scarce and unique. Sell service and upgrades, and always foster loyalty.
Like a Dead show, Marketing Lessons from the Grateful Dead is quirky and fun. It may be a strange trip, but the advice is sound; there are plenty of pearls and only the occasional clam.
Austrian critique of mainstream analysis of monopoly, monopsony, and perfect competition; the logical contradictions of anti-trust law. Recorded at Mises University 2010.
Like a submarine patent, the intellectual-property issue has lurked beneath the surface of libertarianism for decades. IP was for a long time largely assumed by most libertarians to be legitimate, a type of property right. This is because of the influence of Ayn Rand, one of the most influential of all modern libertarians, who was strongly pro-IP. One reason Rand was so much in favor of IP was probably due to her reverence for the American system, which enshrined patent and copyright in the Constitution, which she saw as almost perfect (Judge Narragansett in Atlas Shrugged only had to tweak a few things to make it ideal).
But though weakly pro-IP, most libertarians never gave the issue much thought, assuming that it was an arcane and technical type of property right whose details were best left to experts. The arguments for IP looked similar in structure to those for regular property: there were principled, natural-rights-type arguments based on justice and the merit of production and "creating value"; and there were utilitarian arguments that said it makes sense for the market to provide incentives to innovate and create, just as it does to produce goods for a profit. But most libertarians didn't look at it too closely; indeed most had, and still have, a hard time distinguishing between copyright, patent, and trademark — they use them erroneously and interchangeably quite often.
Those that did look more closely at the issue felt uneasy about it — Mises and Hayek had a few things to say about it, but not completely conclusively, and not in depth (see "Mises on Intellectual Property"; Jeff Tucker, "Misesian vs. Marxian vs. IP Views of Innovation"; Jeff Tucker, "Hayek on Patents and Copyrights"). Even Rothbard, obviously another very influential libertarian, only dealt with patent and copyright in a few short passages — criticizing patents but defending a tentative notion of private copyright (see Against Intellectual Property, the "Contract vs. Reserved Rights" section).
But all along there were dissenters — such as Benjamin Tucker, way back in 1888, as explained by Wendy McElroy in "Copyright and Patent in Benjamin Tucker's Periodical Liberty." In the last couple of decades, scholarly criticism of IP by libertarians has begun to mount: by Wendy McElroy, Boudewijn Bouckaert, Tom Palmer, Roderick Long, and others (see the section "Anti-IP Resources" in "The Case Against IP: A Concise Guide"; and Against Intellectual Property, "The Spectrum" section).
My own Against Intellectual Property, first published in 2000, had a definite (and unanticipated) effect among libertarians, primarily, I think, because of its timing (five years after the Internet), and the fact that, although it built on the work of previous scholars, it was more systematic and comprehensive, and more explicitly integrated with Austrian-libertarian insights and principles (plus my status as a practicing patent attorney made some people take notice). In the last three to five years, it seems that the libertarian tide has turned against IP — dramatically and decisively (we might mark the inflection point in 2004, when Jeff Tucker asked me to to do a post on the Mises Blog collecting the various growing resources on IP, shortly after his own conversion to the Light Side of the Force). Thus, today, most libertarians, especially the young, are very aware of the IP issue and are adamantly opposed to it; they see it as clearly unlibertarian (see Jeff Tucker, "The Great IP Breakthrough"; "Have You Changed Your Mind About Intellectual Property?").
As noted here,
While Objectivists, libertarians and conservatives strongly agree on the principle of physical property rights, the picture is much more divided when it comes to "intellectual property," a catch-all phrase for several different items, including patents, copyright and trademarks. In a landmark essay by Stephan Kinsella, Against Intellectual Property, argues that "intellectual property" is not only meaningless and harmful, it is in direct violation of the general principle of private property, and primarily constitutes a state-sanctioned creation of artificial scarcity, leading ultimately to poverty, not job creation and wealth.
The wider libertarian movement accepted the argument, put it into action (see this achievement) and moved on. Objectivists, on the other hand, maintained that what Ayn Rand spoke and practiced on the subject remains the unalterable truth.
But even some Objectivists are now switching sides.As noted, the IP criticisms in my publications of course built on the work of earlier libertarians; but the point is that in recent years libertarians have widely accepted the anti-IP argument.
Some of the Austrian or libertarian critics of IP who have emerged in recent years include Jeff Tucker (see various chapters in the "Technology" section of his recent Bourbon for Breakfast), Julio Cole, Jacob Huebert (who has a great chapter on IP in his recent book Libertarianism Today), Manuel Lora and Daniel Coleman, and Timothy Sandefur. Left-libertarians who have been quick to condemn IP as unlibertarian include Kevin Carson, author of "Intellectual Property — A Libertarian Critique"; Sheldon Richman; and Gary Chartier, author of the forthcoming The Conscience of an Anarchist; not to mention Roderick Long. (That said, some of the leftists who oppose IP have, not surprisingly, some confusing ideas that weaken their case; see "Eben Moglen and Leftist Opposition to Intellectual Property," "Thick and Thin Libertarians on IP and Open Source," and "An Open Letter to Leftist Opponents of Intellectual Property: On IP and the Support of the State.")
There are also a growing number of IP critics who are artists, philosophers, techies, or journalists, most of them at least libertarian leaning, including artist Nina Paley, philosopher David Koepsell, tech blogger Mike Masnick, and reporter Joe Mullin. Standing in a league all its own, there is the monumentally important 2008 book Against Intellectual Monopoly, by Michele Boldrin and David Levine (see Jeff Tucker, "A Book that Changes Everything").
"The direction of the future, of progress, is towards more abundance and prosperity and wealth. It is obscene to undermine the glorious operation of the market in producing wealth and abundance by imposing artificial scarcity on human knowledge and learning."Why the sea change in the prominence of IP as an issue among libertarians, and their decisive rejection of it, in contrast to the apathetic pro-IP stance of the past? It appears that IP could be taken for granted only so long as no one looked at it very closely. But as soon as libertarians turned their attention to IP, they realized the case for it was full of holes.
But why did they turn their attention to it? Why did it emerge from the depths after decades of relative obscurity? A primary reason is that the damage done by patent and copyright law has been magnified and exacerbated by the advent of digital information and the Internet — copyright, for example, is being invoked more than ever because of the ease of duplicating and transmitting digital files. And the flood of news and information delivered over the Internet alerts millions to the consequences of IP law. We see horror stories every day (see "The Patent, Copyright, Trademark, and Trade Secret Horror Files").
The younger generation of libertarians is larger, more radical, more Austrian, more sophisticated, and more informed than ever before — largely due to the resources and efforts of the Mises Institute (just see the typical arguments made in the comments threads such as these). Combine this with the mounting — and Austrolibertarian — case against IP and its more conspicuous damages and daily outrages, it's no wonder that the IP issue, out of nowhere it seems, in the last three or so years has been "settled": libertarians are now, almost universally, against IP. Their arguments are sophisticated, they are technically savvy, they love the Internet, and they love the Mises Institute and its complementary open-information policy (see Doug French, "The Intellectual Revolution Is in Process"; Jeff Tucker, "A Theory of Open" and "up with iTunes U"; Gary North, "A Free Week-Long Economics Seminar"). The young libertarians and Austrians "get it." For them the IP issue (and, increasingly, the anarchy issue) is a no-brainer.
The speed of this recent IP awakening appears to have caught the old-guard libertarian defenders of IP — mostly Randians and older libertarians from a generation or two ago — slumbering, clinging to the tattered remnants of arguments for IP. As they have gradually realized that a revolution has taken place around them, a few have tried to mount a rear-guard defense; but it has been tepid and half-hearted for the most part. You can see it in the quality of their arguments. Most of these are smart libertarians, who usually make much better arguments than they do when talking about IP. Why are their arguments so weak? It is because they are just wrong. There is no defense of IP (see "There are No Good Arguments for Intellectual Property").
IP law is unlibertarian and unjustified. I realized this myself after trying, and failing, for years to figure out a way to justify IP and square it with libertarian principles. IP is a type of systematic redistribution of property rights, contrary to Lockean homesteading rules, that can only be implemented by the state and its legislation. So the IP libertarians have nothing left but the tired old arguments of the type you might hear dashed off in law school or in a mainstream economics class.
They trot out tired bromides, make unsubstantiated claims, refuse to engage critics honestly. We own things we create, they say, even though ownership is meant to solve conflicts over scarce things (see "What Libertarianism Is"), not just any thing you can conceptualize and put a name to. Or they'll repeat the Randian notion that you own "value" that you create, as if value is a substance you create, as opposed to the way we demonstrably regard and use an object due to its configuration (see "Rand on IP, Owning 'Values,' and 'Rearrangement Rights'," discussing Hoppe's criticism of property rights in value).
They accuse "pirates" of "stealing"; when you point out that copying is not theft because the originator still has his copy, then they switch to some other argument, such as claims that the value of the original copy is diminished; when you point out that there are no property rights in value, but only in the physical integrity of property, they switch to arguments about incentives, even though they usually condemn utilitarian arguments. If you explain that every creator's work also built on the thought of others, they come up with a convenient public domain or "fair use" exception. When you point out obviously outrageous injustices of the current IP system, they say they are not in favor of the current IP system … yet they oppose the call to abolish it! And when you ask them what type of IP system they do favor, they have no answer, punting it to judges or Randian legislators to figure out, on the grounds that they are not patent lawyers or specialists!
"There are no property rights in value, but only in the physical integrity of property."They say that you need patents to stimulate invention and copyright to stimulate artistic creativity — they are often hyperbolic and say there would be no innovation in an IP-free world. If you point out that there would obviously be some innovation absent IP law, they then say there would not be enough innovation. If you ask them how much is enough, they have no answer — though some apparently think even the monopoly IP grant doesn't ensure enough innovation, and propose using tax dollars to provide innovation awards to state-recognized geniuses — even some libertarians favor this! (See "Libertarian Favors $80 Billion Annual Tax-Funded 'Medical Innovation Prize Fund'"; "$30 Billion Taxfunded Innovation Contracts: The 'Progressive-Libertarian' Solution"; "Re: Patents and Utilitarian Thinking Redux: Stiglitz on using Prizes to Stimulate Innovation.")
What does a libertarian say to that argument? Is that supposed to be serious? It reminds me of my conservative friends in Houston who are — surprise, surprise — in favor of NASA, and repeat the propaganda about the value of "spinoff technology." After all, think of all the spinoff technology the space program has produced. Never mind the cost of the unseen — have some Tang, boys! Ain't that Tang good? You woudn't want to be deprived of Tang, now, would ya?
When they say that we need IP to stimulate innovation, they presume that the value of the extra innovation thereby stimulated is greater than the cost of the IP system (see "There's No Such Thing as a Free Patent"). If you ask them how they know this, they have no answer. They've never wondered and don't care. Ask them what the cost of the IP system is, or what the value of the marginal innovation is, or how they even know it's a "net gain" — they have no idea (my estimate is over $30 billion net loss annually in America from patents alone — see "Reducing the Cost of IP Law").
And if you point out the methodological and moral problems with utilitarian reasoning (see Against Intellectual Property, "Utilitarian Defenses of IP"), why, you're a nutty Austrian or extremist! If you point out that despite their claim that the IP system generates wealth, almost all studies conclude otherwise (see "Yet Another Study Finds Patents Do Not Encourage Innovation"), they change the subject. Or maybe they toss out the sloppy comment that, well, America has done pretty well since its founding, which — eh, eh, EH? — was the same time we adopted patent law! Never mind that you could make the same argument about war, imperialism, democracy, antitrust law, taxation, and so on.
They demand to know how artists and innovators are supposed to be paid absent IP. If you point out that it's the job of the entrepreneur to figure out how to make profit in the market given the costs of exclusion and externalities, they are not satisfied: they switch from individualist free marketeers to central planners demanding to know exactly what a market freed of the IP restrictions they favor would look like. Never mind that one reason we don't know for sure what market institutions and practices would arise is because the statist IP they support has preempted and crowded these solutions out. And if you point out some possible solutions, they sneer and call it charity or "not enough."
For just a sampling of some of the recent, futile libertarian attempts to defend IP and to stem the migration to the anti-IP side, see: "The L. Neil Smith — FreeTalkLive Copyright Dispute" and Jeff Tucker, "L. Neil Smith on IP"; "IP: The Objectivists Strike Back!"; "Shughart's Defense of IP"; "Richard Epstein on 'The Structural Unity of Real and Intellectual Property'"; "Yeager and Other Letters Re Liberty article 'Libertarianism and Intellectual Property'"; "Objectivists: 'All Property is Intellectual Property'"; "Objectivist Law Prof. Mossoff on Copyright; or, the Misuse of Labor, Value, and Creation Metaphors."
When the holes in their weak arguments are exposed, they escalate and call us IP socialists or communists — even though the idea that people who mentally "labor" "deserve" a "reward" for their labor is itself Marxian (see "Locke, Smith, Marx and the Labor Theory of Value"; "Objectivists: 'All Property is Intellectual Property'"). Their escalating rhetoric is driven by a desperation arising from the growing awareness that they have lost. It resembles a bit the way the state keeps increasing IP protection — copyright terms always lengthening, the West twisting the arms of emerging economies to "strengthen" IP protection and the coming ACTA (see "Stop the ACTA [Anti-Counterfeiting Trade Agreement]") — in the face of a growing, unstoppable wave of piracy and torrenting. We are seeing the thrashings of a dying institution and a dying idea.
The mistake made by IP libertarians stems in part from the imprecise, overly metaphorical Lockean notion that the reason you own things you homestead is that you "own" the labor you "mixed" with these things — rather than the more straightforward argument that by first appropriating an unowned resource you establish a better claim than latecomers — no fiction of "labor ownership" is needed (see "Intellectual Property and Libertarianism"). This mistake permeates the modern — mostly Randian — thinking about IP. This way of thinking about homesteading, and the American Founders' choice to put copyright and patent in the "protolibertarian" American Constitution (even though it was just a centralizing document used in a coup d'etat as a legitimacy cover for the state; see "Rockwell on Hoppe on the Constitution as Expansion of Government Power"), and Rand's and others' adoption of these ideas, has created a road block to clear thinking about IP.
"'Making' or 'creating' simply refers to the process of transforming something you already own by rearranging it."They say that you own things you find (appropriate or homestead) and things you buy from others — and "also" anything you create. They miss the fact that finding and contractual acquisition exhaust the ways of legitimately acquiring ownership of external objects. "Making" or "creating" simply refers to the process of transforming something you already own by rearranging it so that it is more valuable to you, or to a customer, say (even Rand saw this — see "Rand on IP, Owning 'Values,' and 'Rearrangement Rights'"). Creation is not an independent source of ownership; it is a way of making your property more valuable. (See "A Theory of Contracts: Binding Promises, Title Transfer, and Inalienability"; Against Intellectual Property, "Creation vs. Scarcity" section; "Objectivist Law Prof. Mossoff on Copyright; or, the Misuse of Labor, Value, and Creation Metaphors"; "Libertarian Creationism." "Trademark and Fraud")
By assuming the "ownership" of labor, even though the ability to control one's actions and labor is simply a by-product or consequence of ownership of one's body (all rights are property rights, as Rothbard has shown), and not an independent property right; by assuming that creation is an independent source of property rights, even though it is not; by assuming values are created, ownable things, rather than the changed utility of property the owner himself rearranged — these libertarians have equated nonscarce ideas and patterns with physical, scarce resources. After all, by your effort or labor, you create a plow, a house, or a song, right?
By treating these dissimilar things — nonscarce, infinitely reproducible patterns of information and physical, scarce objects — similarly, the IP advocates try to treat them with the same rules. They take property rules designed precisely to allocate ownership of scarce physical objects in the face of possible conflict and try to apply them to information patterns. In so doing, they end up imposing artificial scarcity on that which was previously nonscarce and infinitely reproducible.
Thus, what the pro-IP libertarians have missed is that it is good that ideas, information, patterns, and recipes are nonscarce and infinitely reproducible. Technological and other progress is possible because we can learn and build on previous knowledge. The market itself crucially relies on emulation — entrepreneurs emulate the successful action of others, thereby competing and serving consumers, and always bidding down prices and even profits. (As Jeff Tucker has noted, the role of emulation and learning in the market is ripe for further research and inquiry by Austrians. See "Hayek, IP, and Knowledge"; Jeff Tucker, "Without Rejecting IP, Progress is Impossible.")
The market also enables the production of products that are scarce goods — with ever-increasing efficiency — and, crucially, makes scarce goods more abundant. The market is always trying to overcome and reduce the scarcity that is inherent in physical resources. The human actors on the market use infinitely reproducible, nonscarce knowledge and information to guide their use of scarce resources in ever-more efficient ways, so as to reduce the real scarcity that does exist in the physical world of useful goods. (See "Intellectual Property and the Structure of Human Action.")
And what does IP do? In the name of capitalism and the free market, it imposes artificial scarcity on things that are already infinitely reproducible. In the name of the market — the same market that is working to increase the abundance of scarce goods, to decrease scarcity — IP libertarians argue that we should impose restrictions on nonscarce information — to make it scarce so that it fits into the round-hole property-rights framework they have erroneously decided to apply to the square peg of information. They are going the wrong direction. The direction of the future, of progress, is towards more abundance and prosperity and wealth. We work with the real world of scarcity, using our ever-expanding base of knowledge to prosper in the face of scarcity; we make more things in the face of entropy and physical limitations!
It is obscene to undermine the glorious operation of the market in producing wealth and abundance by imposing artificial scarcity on human knowledge and learning (see "IP and Artificial Scarcity"). Learning, emulation, and information are good. It is good that information can be reproduced, retained, spread, and taught and learned and communicated so easily. Granted, we cannot say that it is bad that the world of physical resources is one of scarcity — this is the way reality is, after all — but it is certainly a challenge, and it makes life a struggle. It is suicidal and foolish to try to hamper one of our most important tools — learning, emulation, knowledge — by imposing scarcity on it. Intellectual property is theft. Intellectual property is statism. Intellectual property is death. Give us intellectual freedom instead!
A proper solution to the taxicab crisis is not to co-opt the movement of gypsy cab drivers by the offer to take them into the system, but rather to destroy the system of restrictive cab licenses, writes Walter Block.
This audio Mises Daily is narrated by Jeff Riggenbach.
With so many state governments' budgets now under severe strain, there are serious discussions about how to cut state funding to public education. Hopefully, the schools themselves will become only a memory of a less-enlightened past, writes Gennady Stolyarov II.
This audio Mises Daily is narrated by the author.
[This article is excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith. An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.]
François du Noyer, sieur de Saint-Martin, had a dream. It was a grandiose vision of the future. All around him, in the early 17th century, and in all major nations of the West, the state was creating monopoly companies. Then why not, du Noyer reasoned, go all the way? If monopoly companies for specific products or specific areas of trade were good, why not go one better? Why not one big company, one gigantic monopoly for virtually everything?
King Henry IV listened to du Noyer's schemes with interest. They were, after all, only logical conclusions of doctrines and notions that were everywhere in the air. But it was not until 1613 that du Noyer worked out his plan in detail, and set it before the council of state. It was to be an enormous, virtually all-inclusive company, to be called the French Royal Company of the Holy Sepulcher of Jerusalem. The company, to be headed of course by du Noyer himself, was to have either a privileged monopoly, or the right to regulate all other firms, in virtually every trade.
Thus, the Royal Company was to make cloth, and regulate all other manufacture and preparation of all types of cloth; control all aspects of wine making, and all merchants and hotels buying wine would have to invest certain sums in the company, at a low fixed return; hold four privileged fairs a year in Paris; have a monopoly of all public coaches; control all mines in France; obtain gratis various unoccupied Crown lands and abandoned quarries; dig canals, erect mills; have a monopoly on sale of playing cards; make munitions; borrow and lend money; and numerous other activities. Furthermore, du Noyer would have the Royal Company obtain extraordinary powers from the Crown:
It would have the right to seize beggars and vagabonds and take them to the French colonies, which it would presumably run.
All convicted criminals would be sentenced to forced labor for the company in the colonies.
All bankrupts who had managed to save some money from their wreckage would be forced to invest that amount in the company.
All people exiled from France could be let back into the country by serving or paying money to the company.
All who conducted trade higher than their rank or privileges would be forced to join the company.
All business documents whatsoever would have to use stamped paper sold to them by the company.
The council of state was impressed by du Noyer's vision and ordered an investigation of the project. The following year, 1614, the Royal Company plan was approved by the estates-general of France, and various generals, admirals, and other high-level officials joined in the praise. Du Noyer reached the peak of his influence, being given the old Laffemas post of controller-general of commerce. It seemed as if the grandiloquent Royal Company plan was actually going to be adopted. Du Noyer elaborated on his plan in a pamphlet which he presented to the king in 1615.
The king, or rather the regent, Marie de Medici, was impressed, and in 1616 recreated the old Commission of Commerce, formerly headed by Laffemas, with instructions to study the du Noyer project in detail. The commission met, and the following year approved the plan of the Royal Company, and urged that all persons carrying on trade be forced to invest their money exclusively in it. In short, the Royal Company would be the monopoly company to end all companies. The delighted du Noyer, in the meanwhile, seeing his cherished scheme close to fruition, published a longer pamphlet on the plan, urging his one big company upon France. Like the king himself, the Royal Company would be unique and universal, and its capital would come from both private and royal sources.
The Royal Company project seemed to keep barreling along, the council of state granting its approval in 1618, and again in 1620, when King Louis XIII himself gave it his warm endorsement. In early 1621, public criers throughout Paris announced the glad tidings that the Royal Company had been formed, and was open to receive funds for investment.
The problem, however, was money. No one seemed to want to provide actual cash or even pledges to the new enterprise, however grandiloquent and privileged it appeared to be. The king urged every city in France to join, but the cities kept hanging back, pleading that they had no funds. In desperation, controller-general of commerce du Noyer scaled down the Royal Company to concentrate only on commerce and trade with the Indies and other overseas areas. Finally, du Noyer narrowed the scope of his beloved company's capital still further to just Paris and Brittany. But even the Bretons proved not to be interested.
"Old du Noyer's loss was the French public's gain."The coming to power as prime minister of Cardinal Richelieu in 1624 put the du Noyer scheme into abeyance. But four years later, the project had its final fling. The king urged the Commission of Commerce to act, and in the spring of 1629, it again approved the plan, this time adding to its original grandiose powers the right to make treaties with foreign countries, and to establish colonial islands for entrepôt trade.
After nearly three decades of planning and lobbying, du Noyer now needed only the simple signature of King Louis to put his hypertrophied vision into effect. But for some reason, the royal signature never came. No one knows quite why. Perhaps the powerful Richelieu didn't want a rival's scheme to be approved. Or perhaps the king was getting weary of the aging monomaniac and his untiring enthusiasm. Repeated entreaties and importuning, however, fell only on deaf ears. The Royal Company was at last dead, stillborn, and old du Noyer's loss was the French public's gain.
This article is excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith. An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.
If monopoly companies for specific products or specific areas of trade were good, reasoned François du Noyer, sieur de Saint-Martin, why not go one better? Why not one big company, one gigantic monopoly for virtually everything?
This audio Mises Daily is narrated by Jeff Riggenbach.
The system of mercantilism needed no high-flown "theory" to get launched. It came naturally to the ruling castes of the burgeoning nation-states. Theory came later — to sell to the deluded masses, writes Murray N. Rothbard (1926–1995).
This audio Mises Daily is narrated by Jeff Riggenbach.
[United States Court of Appeals for the District of Columbia Circuit, Federal Trade Commission v. Whole Foods Market, Inc., No. 07-5276, Circuit Judge Brett M. Kavanaugh, dissenting (November 21, 2008)This case was heard by a three-judge panel: Janice Rogers Brown, David S. Tatel, and Brett M. Kavanaugh. On July 29, 2008, Judges Brown and Tatel issued an opinion for the court supporting the FTC; Judge Kavanaugh filed a dissenting opinion. Subsequently, on November 21, 2008, Brown and Tatel withdrew their joint opinion and filed separate opinions, concurring in the result but differing in their reasons; Kavanaugh filed a revised dissenting opinion, which is reproduced here.
The Federal Trade Commission has sought a preliminary injunction to block the Whole Foods–Wild Oats merger as anticompetitive under § 7 of the Clayton Act. As in many antitrust cases, the analysis comes down to one issue: market definition. Is the relevant product market here all supermarkets? Or is the relevant product market here only so-called "organic supermarkets"?
If the former, as Whole Foods argues, the Whole Foods–Wild Oats merger would be lawful because it would not lessen competition in the broad market of all supermarkets: Whole Foods and Wild Oats together operate about 300 of the approximately 34,000 supermarkets in the United States. If the latter, as the FTC contends, the merger may be unlawful: Whole Foods and Wild Oats are the only significant competitors in the alleged organic store market, and their merger would substantially lessen competition in such a narrowly defined market.
More than a year ago, after a lengthy evidentiary hearing and in an exhaustive and careful opinion, the district court found that the record evidence overwhelmingly supports the following conclusions: Whole Foods competes against all supermarkets and not just so-called organic stores; the relevant market for evaluating this merger for antitrust purposes is all supermarkets; and the merger of Whole Foods and Wild Oats would not substantially lessen competition in a market that includes all supermarkets. The court therefore denied the FTC's motion for a preliminary injunction.When the FTC challenges a merger, there are usually two proceedings: the first is the administrative hearing before the agency's own judge on whether the merger is illegal; the second is before a federal district court to determine whether the merger should be enjoined pending the outcome of the first proceeding. In practice, the FTC usually abandons its administrative proceeding if it doesn't obtain the injunction, although this case was an exception.
Also more than a year ago, a three-judge panel of this court unanimously denied the FTC's request for an injunction pending appeal, thereby allowing the Whole Foods–Wild Oats deal to close.This panel included Judges Tatel and Kavanaugh, but not Brown. Judge David B. Sentelle was the third judge on the earlier panel. Since then, the merged entity has shut down, sold, or converted numerous Wild Oats stores and otherwise effectuated the merger through many changes in supplier contracts, leases, distribution, and the like.
The court's splintered decision in this case seeks to unring the bell. In my judgment, this court got it right a year ago in refusing to enjoin the merger, and there is no basis for a changed result now. Both a year ago and now, the same central question has been before the court in determining whether to approve an injunction: whether the FTC demonstrated the necessary "likelihood of success" on its § 7 case. A year ago, the court said no. Now, the court says yes. The now-merged entity, the industry, and consumers no doubt will be confused by this apparent judicial about-face.Following the D.C. Circuit's decision, Whole Foods signed a "consent order" with the FTC, forcing the company to sell 32 stores and related assets. The FTC appointed an outside firm to conduct the sales of the "divested" stores, which remain ongoing.
The law does not allow the FTC to just snap its fingers and temporarily block a merger. Even at the preliminary-injunction stage, the relevant statutory text and precedents expressly require that the FTC show a "likelihood of success on the merits." Because "[m]erger enforcement, like other areas of antitrust, is directed at market power," the FTC therefore needs to make a sufficient showing that the merged company could exercise market power and profitably impose a "small but significant and nontransitory increase in price," typically meaning a 5 percent or greater price increase.Quoting the Executive Branch's Horizontal Merger Guidelines. As the district court concluded, the FTC did not come close to presenting that kind of evidence in this case; the FTC completely failed to make the economic showing that is Antitrust 101.
By seeking to block a merger without a sufficient showing that so-called organic stores constitute a separate product market and that the merged entity could impose a significant and nontransitory price increase, the FTC's position — which Judge Brown and Judge Tatel largely accept — calls to mind the bad old days when mergers were viewed with suspicion regardless of their economic benefits. I would not turn back the clock. I agree with and would affirm the district court's excellent decision denying the FTC's motion to enjoin the merger of Whole Foods and Wild Oats.
I.A.Section 7 of the Clayton Act prohibits mergers "where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." The Horizontal Merger Guidelines jointly promulgated by two Executive Branch agencies (the Department of Justice and the FTC) implement that statutory directive and recognize that the key initial step in the analysis is proper product-market definition. Proper product-market analysis focuses on products' interchangeability of use or cross-elasticity of demand. A product "market can be seen as the array of producers of substitute products that could control price if united in a hypothetical cartel or as a hypothetical monopoly."Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 530a, p. 226.
In the merger context, the inquiry therefore comes down to whether the merged entity could profitably impose a "small but significant and nontransitory increase in price" typically defined as 5 percent or more. If the merged entity could profitably impose at least a 5 percent price increase (because the price increase would not cause a sufficient number of consumers to switch to substitutes outside of the alleged product market), then there is a distinct product market and the proposed merger likely would substantially lessen competition in that market, in violation of § 7 of the Clayton Act.
In considering whether the merged entity could increase prices, courts of course recognize that "future behavior must be inferred from historical observations."Ibid. Therefore, the courts scrutinize existing markets to assess the probable effects of a merger.
This approach was applied sensibly by Judge Thomas Hogan in his thorough and leading opinion in FTC v. Staples (D.D.C. 1997). There, Judge Hogan found that office products sold by an office superstore were functionally interchangeable with office products sold at other types of stores, but he nonetheless found that office supply superstores constituted a distinct product market. One key fact led Judge Hogan to that conclusion: In areas where Staples was the only office superstore, it was able to set prices significantly higher than in areas where it competed with other office superstores (Office Depot and OfficeMax). For example, the FTC presented "compelling evidence" that Staples's prices were 13 percent higher in areas where no office-superstore competitors were present. Judge Hogan ultimately concluded that "[t]his evidence all suggests that office superstore prices are affected primarily by other office superstores and not by non-superstore competitors." For that reason, the court enjoined the merger of Staples and Office Depot.
B.Consistent with the statute, the Executive Branch's Merger Guidelines, and Judge Hogan's convincing opinion in Staples, the district court here carefully analyzed the economics of supermarkets, including so-called organic supermarkets. The court considered whether Whole Foods charged higher prices in areas without Wild Oats than in areas with Wild Oats. After an evidentiary hearing and based on a painstaking review of the evidence in the record, the court concluded that "Whole Foods prices are essentially the same at all of its stores in a region, regardless of whether there is a Wild Oats store nearby." That factual conclusion was supported by substantial evidence offered by Dr. David T. Scheffman, Whole Foods's expert, and by the lack of any credible evidence to the contrary.Scheffman is a senior advisor at Capstone Research and twice served as the FTC's chief economist.
Dr. Scheffman analyzed Whole Foods's actual prices across stores and concluded that "there is no evidence that [Whole Foods] and [Wild Oats] price higher" where they face no competition from so-called organic supermarkets compared with where they do face such competition. At a regional level, his studies revealed that only a "very small percentage" of products vary in price within a region, indicating that "prices are set across broad geographic areas." He also analyzed prices at the individual store level, examining how many products sold at a specific store have prices that differ from the most common price in the region. He found that "differences in prices across stores are generally very small (less than one half of one percent) and there is no systematic pattern as to the presence or absence of [organic supermarket] competition."
Moreover, the record evidence in this case does not show that Whole Foods changed its prices in any significant way in response to exit from an area by Wild Oats. In the four cases where Wild Oats exited and a Whole Foods store remained, there is no evidence in the record that Whole Foods then raised prices. Nor was there any evidence of price increases after Whole Foods took over two Wild Oats stores.
The facts here contrast starkly with Staples, where Staples charged significantly different prices based on the presence or absence of office superstore competitors in a particular area. The evidence there showed that Staples charged prices 13 percent higher in markets without office superstore competitors than in markets with such competitors. There is nothing remotely like that in this case.
In the absence of any evidence in the record that Whole Foods was able to (or did) set higher prices when Wild Oats exited or was absent, the district court correctly concluded that Whole Foods competes in a market composed of all supermarkets, meaning that "all supermarkets" is the relevant product market and that the Whole Foods–Wild Oats merger will not substantially lessen competition in that product market.
In addition to the all-but-dispositive price evidenceJudge Tatel's opinion disparages the evidence about Whole Foods's prices, calling it "all-but-meaningless" and implicitly suggesting that Whole Foods manipulated its prices just for the expert study. But Judge Tatel offers no evidence for that suggestion., the district court identified other factors further demonstrating that the relevant market consists of all supermarkets.
The record shows that Whole Foods makes site selection decisions based on all supermarkets and checks prices against all supermarkets, not only so-called organic supermarkets. As Dr. Scheffman concluded, Whole Foods "price checks a broad set of competitors … nationally, regionally and locally." This "demonstrates that [Whole Foods] views itself as competing with a broad range of supermarkets and that these supermarkets, in fact, constrain the prices charged by [Whole Foods]." Those other supermarkets include conventional supermarkets such as Safeway, Albertson's, Wegman's, HEB, and Harris Teeter, as well as so-called organic supermarkets like Wild Oats.
As Professors Phillip Areeda and Herbert Hovenkamp have explained, a "broad-market finding gains some support from long-standing documents indicating that A or B producers regard the other product as a close competitor."Antitrust Law, ¶ 562a, p. 372. The point here is simple: Whole Foods would not examine the locations of and price check conventional grocery stores if it were not a competitor of those stores. Whole Foods does not price check Sports Authority; Whole Foods does price check Safeway.
The record also demonstrates that conventional supermarkets and so-called organic supermarkets are aggressively competing to attract customers from one another. After reviewing a wide variety of industry information and trade journals, Dr. Scheffman concluded that "'[o]ther' supermarkets are competing vigorously for the purchases made by shoppers at [Whole Foods] and [Wild Oats]." Whole Foods "recognizes the fact that it has to appeal to a significantly broader group of consumers than organic and natural focused consumers." The record shows that Whole Foods has made progress: most products that Whole Foods sells are not organic. Conversely, conventional supermarkets have shifted towards "emphasizing fresh, 'natural' and organic [products] … most of the major chains and others are expanding into private label organic and natural products."
So the dividing line between "organic" and conventional supermarkets has blurred. As the district court aptly put it, the "train has already left the station." The convergence undermines the threshold premise of the FTC's case. This is an industry in transition, and Whole Foods has pioneered a product differentiation that in turn has caused other supermarket chains to update their offerings. These are not separate product markets; this is a market where all supermarkets, including so-called organic supermarkets, are clawing tooth and nail to differentiate themselves, beat the competition, and make money.
The district court's summary of the evidence warrants extensive quotation:
In sum, while all supermarket retailers, including Whole Foods, attempt to differentiate themselves in some way in order to attract customers, they nevertheless compete, and compete vigorously, with each other. The evidence before the Court demonstrates that conventional or more traditional supermarkets today compete for the customers who shop at Whole Foods and Wild Oats, particularly the large number of cross-shopping customers — or customers at the margin — with a growing interest in natural and organic foods. Post-merger, all of these competing alternatives will remain. Based upon the evidence presented, the Court concludes that many customers could and would readily shift more of their purchases to any of the increasingly available substitute sources of natural and organic foods. The Court therefore concludes that the FTC has not met its burden to prove that "premium natural and organic supermarkets" is the relevant product market in this case for antitrust purposes.A showing that the merged entity would possess market concentration in a defined product market is necessary but not sufficient to establish an antitrust violation. I need not address the other necessary components of the FTC's case, however, because the FTC has not satisfied the threshold requirement of showing that the merged entity would have such market concentration.
II.In an attempt to save its merger case despite its inability to meet the test reflected in the Merger Guidelines and applied in Staples, the FTC cites marginally relevant evidence and advances a scattershot of flawed arguments.
First, the FTC says that so-called organic supermarkets like Whole Foods and Wild Oats constitute their own product market because they are characterized by factors that differentiate them from conventional supermarkets. Those factors include intangible qualities such as customer service and tangible factors such as a focus on perishables.
This argument reflects the key error that permeates the FTC's approach to this case. Those factors demonstrate only product differentiation, and product differentiation does not mean different product markets. As the district court noted, supermarkets, including so-called organic supermarkets, differentiate themselves by emphasizing specific benefits or characteristics to attract customers to their stores. They may differentiate themselves along dimensions such as "low price, ethnic appeal, prepared foods, health and nutrition, variety within a product category, customer service, or perishables such as meats or produce."
The key to distinguishing product differentiation from separate product markets lies in price information. As Professors Areeda and Hovenkamp have stated, differentiated sellers "generally compete with one another sufficiently" that the prices of one are "greatly constrained"Ibid., ¶ 563a, p. 384. by the prices of others. To distinguish differentiation from separate product markets, courts thus must "ask whether one seller could maximize profit" by charging "more than the competitive price" without "losing too much patronage to other sellers."Ibid., p. 385.
Here, in other words, could so-called organic supermarkets maximize profit by charging more than a competitive price without losing too much patronage to conventional supermarkets? Based on the evidence regarding Whole Foods's pricing practices, the district court correctly found that the answer to that question is no. So-called organic supermarkets are engaged in product differentiation; they do not constitute a product market separate from all supermarkets.
Second, the FTC points to internal Whole Foods studies and other evidence showing that if a Wild Oats near a Whole Foods were to close, most of the Wild Oats customers would shift to Whole Foods. But that says nothing about whether Whole Foods could impose a 5 percent or more price increase and still retain those customers (and its other customers), which is the relevant antitrust question.
In other words, the fact that many Wild Oats customers would shift to Whole Foods does not mean that those customers would stay with Whole Foods, as opposed to shifting to conventional supermarkets, if Whole Foods significantly raised its prices. And even if one could infer that all of those former Wild Oats customers would so prefer Whole Foods that they would shop there even in the face of significant price increases, that would not show whether Whole Foods could raise prices without driving out a sufficient number of other customers as to make the price increases unprofitable.
In sum, this argument is a diversion from the economic analysis that must be conducted in antitrust cases like this. The district court properly found that the expert evidence in the record leads to the conclusion that Whole Foods could not profitably impose such a significant price increase.According to Judge Tatel's opinion, the FTC's expert purported to say that Whole Foods could impose a 5 percent or greater price increase because of the number of Wild Oats customers who would switch to Whole Foods rather than conventional supermarkets. But that ambiguous statement constituted a single, unexplained sentence in the middle of a lengthy report. Moreover, the expert apparently based his conclusion entirely on the so-called "Project Goldmine" analysis of diversion ratios associated with store closures — that is, of the number of Wild Oats customers who would switch to Whole Foods in the event that a Wild Oats store closes and Whole Foods prices remain constant. As the expert himself appeared to acknowledge, the data do not necessarily shed any light on how many customers would continue to shop at a merged Wild Oats-and-Whole Foods entity in the event that the entity uniformly increased prices. All of this no doubt explains why the FTC never even mentioned this aspect of its expert's report in the argument section of its opening brief.
Third, the FTC cites comments by Whole Foods CEO John Mackey as evidence that Whole Foods perceived Wild Oats to be a unique competitor. Even if Mackey's comments were directed only to Wild Oats, that would not be evidence that Whole Foods and Wild Oats are in their own product market separate from all other supermarkets. It just as readily suggests that Whole Foods and Wild Oats are two supermarkets that have similarly differentiated themselves from the rest of the market, such that Mackey would be especially pleased to see that competitor vanish. Beating the competition from similarly differentiated competitors in a product market is ordinarily an entirely permissible competitive goal. Saying as much, as Mackey did here, does not mean that the similarly differentiated competitor is the only relevant competition in the marketplace.
Moreover, Mackey nowhere says that the merger would allow Whole Foods to significantly raise prices, which of course is the issue here. In any event, intent is not an element of a §7 claim, and a CEO's bravado with regard to one rival cannot alter the laws of economics: mere boasts cannot vanquish real-world competition — here, from Safeway, Albertson's, and the like. As Judge Frank Easterbrook has explained,
Firms need not like their competitors; they need not cheer them on to success; a desire to extinguish one's rivals is entirely consistent with, often is the motive behind, competition. … If courts use the vigorous, nasty pursuit of sales as evidence of a forbidden 'intent', they run the risk of penalizing the motive forces of competition.…Intent does not help to separate competition from attempted monopolization…A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc., 881 F.2d 1396, 1402 (7th Cir. 1989).
Fourth, the FTC says that a study by its expert, Dr. Kevin Murphy,Professor of Economics at the University of Chicago Booth School of Business. demonstrates that Whole Foods's profit margins decreased in geographic areas where it competed against Wild Oats. But the relevant inquiry under the Merger Guidelines is prices. And Dr. Murphy did not determine whether Whole Foods prices ever differed as a result of competition from Wild Oats.
Moreover, there was only a slight difference between Whole Foods margins when Wild Oats was in the same area and when it was not. The overall difference was 0.7 percent, which Dr. Murphy himself recognized was not statistically significant. The FTC's evidence on margins is wafer-thin and does not suffice to show that organic stores constitute their own product market.
Fifth, the FTC points to evidence that Whole Foods's entry into a particular area, unlike the entry of conventional supermarkets, caused Wild Oats to lower its prices. Dr. Murphy's reliance on Wild Oats's reaction to Whole Foods's entry is questionable. Dr. Murphy based his entire analysis on a meager two events, hardly a large sample size. In addition, Dr. Murphy's analysis did not control for the reaction of conventional supermarkets to Whole Foods's entry. In other words, he assumed that the relevant product market was so-called organic supermarkets (the point he was trying to prove) and therefore assumed that all changes in Wild Oats's prices were directly caused by Whole Foods's entry.
But if conventional supermarkets also lowered prices to compete with Whole Foods when Whole Foods entered, Wild Oats's price decreases may well have been due to the overall reduction in prices by all supermarkets in the area. If that were true, the relevant product market would obviously be all supermarkets, not just so-called organic supermarkets. Dr. Murphy's analysis never confronted that possibility or the complexity of how competition works in this market; his analysis appears to have assumed the conclusion and reasoned backwards from there.
Moreover, the fact that Whole Foods and Wild Oats went toe-to-toe on occasion does not mean that they did not also go toe-to-toe with conventional supermarkets, which is the key question. And it is revealing that despite having access to the necessary data for six such events, Dr. Murphy did not analyze the effect of a Wild Oats exit on Whole Foods's prices. As Dr. Scheffman wrote:
A number of [Wild Oats] stores have closed. … [Dr. Murphy] has done no analysis to assess the effects of those store exits in the local shopping areas. … This is a curious omission, since such evidence, if reliable and reliably analyzed, would be relevant to the issue of what happens in local market areas in which a [Wild Oats] store closes.
The bottom line is that, as the district court found, there is no evidence in the record suggesting that Whole Foods priced differently based on the presence or absence of a Wild Oats store in the area. That is a conspicuous — and all but dispositive — omission in Dr. Murphy's analysis and in the FTC's case.
Sixth, the FTC cites the openings of three Earth Fare stores near Whole Foods stores in North Carolina, which caused decreases in Whole Foods's prices in those areas. But soon after those entries, Whole Foods's prices returned to normal levels. So the record hardly shows the sort of "nontransitory" price changes that are the touchstone of product-market definition. A price increase ordinarily must last "for the foreseeable future," considered by some to be more than a year, to qualify as "nontransitory." Moreover, the entry of a Safeway store in Boulder, Colorado, had a similar short-term impact on Whole Foods, indicating that whatever inference should be drawn from the Earth Fare entries cannot be limited to so-called organic supermarkets but rather applies to conventional supermarkets.
The FTC's reference to Earth Fare mistakenly focuses on a few isolated trees instead of the very large forest indicating a competitive market consisting of all supermarkets. In short, I fail to see how Whole Foods's temporary price changes to compete against three Earth Fare stores in North Carolina could possibly be a hook to block this nationwide merger of Whole Foods and Wild Oats.
III.The opinions of Judge Brown and Judge Tatel rest on two legal points with which I respectfully but strongly disagree.
First, the court's decision resuscitates the loose antitrust standards of Brown Shoe Co. v. United States, 370 U.S. 294 (1962), the 1960s-era relic. This is a problem because Brown Shoe's brand of freewheeling antitrust analysis has not stood the test of time. As demonstrated in this court's most recent merger case, the practical indicia test of Brown Shoe no longer guides courts' merger analyses because it does not sufficiently account for the basic economic principles that, according to the Supreme Court, must be considered under modern antitrust doctrine.
Judge Robert Bork forcefully catalogued the flaws in the Brown Shoe approach 30 years ago in his landmark antitrust book; indeed, his cogent critique helped usher Brown Shoe and several other cases to the jurisprudential sidelines.The Antitrust Paradox: A Policy at War With Itself (New York: The Free Press, 1978). The court's revival of the loose Brown Shoe standard threatens to reverse this trend and to upend modern merger practice.As two antitrust commentators perceptively stated: "The basic problem with the FTC's position in Whole Foods was that it lacked the pricing evidence it had in Staples, which showed that customers did not go elsewhere if the office superstores increased their prices. Whole Foods is an attempt by the FTC to persuade a court that if you take a CEO's statements about a merger and stir it in with evidence showing the existence of several 'practical indicia' from Brown Shoe, the resulting mixture should trump objective evidence about how customers would react in the event of a price increase." Carlton Varner & Heather Cooper, Product Markets in Merger Cases: The Whole Foods Decision (Oct. 2007), www.antitrustsource.com.
Second, the opinions of Judge Brown and Judge Tatel both dilute the standard for preliminary-injunction relief in antitrust merger cases, such that the FTC apparently need not establish a "likelihood of success on the merits." In particular, Judge Brown and Judge Tatel rely heavily on their belief that
[i]n this circuit, the standard for likelihood of success on the merits is met if the FTC has raised questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance and ultimately by the Court of Appeals.
In applying this watered-down test for issuing a preliminary injunction in FTC merger cases, Judge Brown and Judge Tatel rely on language contained in our opinion in FTC v. H.J. Heinz Co. (2001). However, Heinz only assumed this particular gloss on the "likelihood of success on the merits" requirement for preliminary injunctions based on a concession in the case. Heinz did not hold that this gloss was the proper meaning of 15 U.S.C. § 53(b) in FTC preliminary-injunction merger cases.The gloss on § 53(b) appears to have arisen originally in other circuits around the middle of the 20th century in connection with a more general view that a lighter "likelihood of success" standard is appropriate whenever the balance of equities weighs strongly in favor of issuing an injunction. But as explained below in footnote [6], Congress in 1973 codified a preliminary-injunction standard for FTC merger cases that specifically directs courts to consider the Commission's "likelihood of ultimate success." And as explained in the text, the Supreme Court recently repudiated the "serious questions" approach to preliminary injunctions in general by requiring a likelihood of success showing in all cases, regardless of whether the balance of equities weighs in favor of the injunction.
This "serious questions" standard is inconsistent with the relevant statutory text. The statute unambiguously requires that courts consider "the Commission's likelihood of ultimate success" when the FTC seeks to preliminarily enjoin a merger.In justifying his adoption of the "serious questions" test for likelihood of success, Judge Tatel highlights the "unique 'public interest' standard in 15 U.S.C. § 53(b)." But the statute explicitly preserves the traditional likelihood of success requirement. What makes § 53's standard for preliminary injunctions "unique," as we have explained, is that the FTC need not show irreparable harm and, secondarily, that private equities are subordinated to public equities. Far from reading the "likelihood of ultimate success" language out of the statute, we have recognized that the statutory phrase "weighing the equities and considering the likelihood of ultimate success" was specifically added by the Conference Committee and that this "deliberate addition" should not "be brushed aside as essentially repetitive or meaningless." See FTC v. Weyerhaeuser Co., 665 F.2d 1072, 1081 (D.C. Cir. 1981).
There is a significant difference, moreover, between the relaxed "serious questions" standard applied by Judge Brown and Judge Tatel and the traditional likelihood of success standard — as the Supreme Court explained just a few months ago in Munaf v. Geren, (2008). To be sure, that case did not involve a merger; but the Supreme Court there did address the general likelihood-of-success preliminary-injunction standard — the same standard that is expressly articulated in 15 U.S.C. § 53(b). The district court in the [Munaf] litigation — like Judge Brown and Judge Tatel here — had concluded that a preliminary injunction was justified because the case presented questions "so serious, substantial, difficult and doubtful, as to make them fair ground for litigation and thus for more deliberative investigation." This court then affirmed the district court's preliminary injunction.
But the Supreme Court unanimously rejected that lesser "serious questions" standard as too weak and not equivalent to the "likelihood of success" necessary for a preliminary injunction to issue. And the Supreme Court directly criticized the approach of the district court and this court in the [Munaf] litigation: "one searches the opinions below in vain for any mention of a likelihood of success as to the merits."
The court in this case repeats the same mistake made in [Munaf] of watering down the preliminary-injunction standard. Both Judge Brown and Judge Tatel approve the FTC's request for preliminary injunction without making the essential "likelihood of success" finding that is required by the statutory text and Supreme Court precedent. To the extent the "serious questions" standard they apply was ever appropriate for preliminary-injunction merger cases, the combination of the clear statutory text in 15 U.S.C. § 53(b) and the Supreme Court decision in Munaf convincingly demonstrates that it is not the proper standard now.
In short, the approach of Judge Brown and Judge Tatel revives the moribund Brown Shoe practical indicia test and applies an overly lax preliminary-injunction standard for merger cases. I respectfully disagree on both counts. In my judgment, the FTC may obtain a preliminary injunction only by establishing a likelihood of success — namely, a likelihood that, among other things, the merged entity would possess market power and could profitably impose a significant and nontransitory price increase.The precedential effect of today's splintered decision is muddied somewhat by the fact that Judge Brown and Judge Tatel have issued individual opinions concurring in the judgment. That said, it is of course well settled that the mere fact that there is no majority opinion does not mean that the decision constitutes no precedent for future cases. This happens quite frequently with splintered Supreme Court decisions where there is no majority opinion. As the Supreme Court has repeatedly explained, in the vast majority of cases without a majority opinion there is still a binding holding of the Court — even if it can occasionally be difficult to determine. This is known as the Marks principle. Like the Supreme Court, this court has routinely recognized that a decision without a majority opinion usually still constitutes a binding precedent. Only in very rare cases do the opinions making up a majority of a court contain no common principles or common ground on which to derive any precedential holding of the court. It is unclear whether district courts and future courts of appeals will construe this case as one of those rare situations that falls entirely outside the Marks rule. At a minimum, this confused decision will invite years of uncertainty and litigation over what the holding of this case is — a separate but important problem with the court's approach.
B.In reaching her conclusion, Judge Brown also relies on a distinction between marginal consumers and core consumers:
[i]n sum, the district court believed the antitrust laws are addressed only to marginal consumers. This was an error of law, because in some situations core consumers, demanding exclusively a particular product or package of products, distinguish a submarket.
But the FTC never once referred to, much less relied on, the distinction between marginal and core consumers in 86 pages of briefing or at oral argument. The terms "marginal consumer" and "core consumer" are nowhere to be found in its briefs.
In any event, I respectfully disagree with Judge Brown's emphasis on core customers. For a business to exert market power as a result of a merger, it must be able to increase prices (usually by 5 percent or more) while retaining enough customers to make that price increase profitable. If too many "marginal" customers are turned off by a price hike, then the hike will be unprofitable even if a large group of die-hard "core" customers remain active clients. Therefore, a focus on core customers alone cannot resolve a merger case.
The question here is whether Whole Foods could increase prices by 5 percent or more without losing so many marginal customers as to make the price increase unprofitable. As discussed above, the FTC has not come close to making that showing. Moreover, there is no support in the law for that singular focus on the core customer. Indeed, if that approach took root, it would have serious repercussions because virtually every merger involves some core customers who would stick with the company regardless of a significant price increase. So under this "core customer" approach, many heretofore-permissible mergers presumably could be blocked as anticompetitive. That cannot be the law, and it is not the law.
In a related vein, Judge Brown repeatedly suggests that Whole Foods and Wild Oats engage in "price discrimination" — more specifically, Judge Brown asserts that organic supermarkets "discriminate on price between their core and marginal customers, thus treating the former as a distinct market." But this assertion has no factual support in the record. For antitrust purposes, price discrimination normally involves one seller charging different prices to different customers for the same product. If there is price discrimination in an industry, then under certain circumstances a relevant market may be defined to include only those customers who pay the higher price. In this case, however, neither Judge Brown nor the FTC has pointed to any evidence suggesting either that price discrimination occurred before this merger or that the merged entity will be able to price discriminate. In other words, there is no reason to think that "core" as opposed to non-core customers ever pay higher prices for the same products in organic supermarkets.
IV.In the end, the FTC's case is weak and seems a relic of a bygone era when antitrust law was divorced from basic economic principles. The record does not show that Whole Foods priced differently based on the presence or absence of Wild Oats in the same area. The reason for that and the conclusion that follows from that are the same: Whole Foods competes in an extraordinarily competitive market that includes all supermarkets, not just so-called organic supermarkets. The merged entity thus could not exercise market power such that it could profitably impose a significant and nontransitory price increase. Therefore, there is no sound legal basis to block this merger.
The issues presented in this case are important to antitrust regulators and practitioners, to potentially merging companies, and ultimately to the overall economy. The splintered panel opinions will create enormous uncertainty, debate, and litigation over the meaning and effect of this decision. And to the extent common principles and holdings are derived from the opinions of Judge Brown and Judge Tatel, those principles will authorize the FTC to obtain preliminary injunctions and block mergers based on a watered-down preliminary-injunction standard and without sufficient regard for the economic principles that have undergirded modern antitrust law. That will give the FTC far greater power to block mergers than the statutory text or Supreme Court precedents permit.
[This essay is excerpted from chapter 3 of Murray N. Rothbard's Power and Market: Government and Economy.]
It may seem strange to the reader that one of the most important governmental checks on efficient competition, and therefore grants of quasi monopolies, are the antitrust laws. Very few, whether economists or others, have questioned the principle of the antitrust laws, particularly now that they have been on the statute books for some years. As is true of many other measures, evaluation of the antitrust laws has not proceeded from an analysis of their nature or of their necessary consequences, but from an impressionistic reaction to their announced aims.
The chief criticism of these laws is that "they haven't gone far enough." Some of those most ardent in the proclamation of their belief in the "free market" have been most clamorous in calling for stringent antitrust laws and the "breakup of monopolies." Even the most "right-wing" economists have only gingerly criticized certain antitrust procedures, without daring to attack the principle of the laws per se.
The only viable definition of monopoly is a grant of privilege from the government.For further elaboration, see Man, Economy, and State, chapter 10. It therefore becomes quite clear that it is impossible for the government to decrease monopoly by passing punitive laws. The only way for the government to decrease monopoly, if that is the desideratum, is to remove its own monopoly grants. The antitrust laws, therefore, do not in the least "diminish monopoly." What they do accomplish is to impose a continual, capricious harassment of efficient business enterprise.
The law in the United States is couched in vague, indefinable terms, permitting the Administration and the courts to omit defining in advance what is a "monopolistic" crime and what is not. Whereas Anglo-Saxon law has rested on a structure of clear definitions of crime, known in advance and discoverable by a jury after due legal process, the antitrust laws thrive on deliberate vagueness and ex post facto rulings. No businessman knows when he has committed a crime and when he has not, and he will never know until the government, perhaps after another shift in its own criteria of crime, swoops down upon him and prosecutes.
The effects of these arbitrary rules and ex post facto findings of "crime" are manifold: business initiative is hampered; businessmen are fearful and subservient to the arbitrary rulings of government officials; and business is not permitted to be efficient in serving the consumer. Since business always tends to adopt those practices and that scale of activity which maximize profits and income and serve the consumers best, any harassment of business practice by government can only hamper business efficiency and reward inefficiency.See John W. Scoville and Noel Sargent, Fact and Fancy in the T.N.E.C. Monographs (New York.: National Association of Manufacturers, 1942), pp. 298–321, 671–74.
It is vain, however, to call simply for clearer statutory definitions of monopolistic practice. For the vagueness of the law results from the impossibility of laying down a cogent definition of monopoly on the market. Hence the chaotic shift of the government from one unjustifiable criterion of monopoly to another: size of firm, "closeness" of substitutes, charging a price "too high" or "too low" or the same as a competitor, merging that "substantially lessens competition," etc.
All these criteria are meaningless. An example is the criterion of substantially lessening competition. This implicitly assumes that "competition" is some sort of quantity. But it is not; it is a process, whereby individuals and firms supply goods on the market without using force.F.A. Hayek, Individualism and Economic Order (Chicago: University of Chicago Press, 1948), chap. V. To preserve "competition" does not mean to dictate arbitrarily that a certain number of firms of a certain size have to exist in an industry or area; it means to see to it that men are free to compete (or not) unrestrained by the use of force.
"It is vain, however, to call simply for clearer statutory definitions of monopolistic practice. For the vagueness of the law results from the impossibility of laying down a cogent definition of monopoly on the market."The original Sherman Act stressed "collusion" in "restraint of trade." Here again, there is nothing anticompetitive per se about a cartel, for there is conceptually no difference between a cartel, a merger, and the formation of a corporation: all consist of the voluntary pooling of assets in one firm to serve the consumers efficiently. If "collusion" must be stopped, and cartels must be broken up by the government, i.e., if to maintain competition it is necessary that cooperation be destroyed, then the "antimonopolists" must advocate the complete prohibition of all corporations and partnerships. Only individually owned firms would then be tolerated. Aside from the fact that this compulsory competition and outlawed cooperation is hardly compatible with the "free market" that many antitrusters profess to advocate, the inefficiency and lower productivity stemming from the outlawing of pooled capital would send the economy a good part of the way from civilization to barbarism.
An individual becoming idle instead of working may be said to "restrain" trade, although he is simply not engaging in it rather than "restraining" it. If antitrusters wish to prevent idleness, which is the logical extension of the W.H. Hutt concept of consumers’ sovereignty, then they would have to pass a law compelling labor and outlawing leisure — a condition certainly close to slavery.Municipal ordinances against "vagrancy" or "loitering" are certainly a beginning in this direction and are used to impose forced labor upon the poorest sectors of the population. But if we confine the definition of "restraint" to restraining the trade of others, then clearly there can be no restraint of trade at all on the free market — and only the government (or some other institution using violence) can restrain trade. And one conspicuous form of such restraint is antitrust legislation itself!
One of the few cogent discussions of the antitrust principle in recent years has been that of Isabel Paterson. As Mrs. Paterson states:
Standard Oil did not restrain trade; it went out to the ends of the earth to make a market. Can the corporations be said to have "restrained trade" when the trade they cater to had no existence until they produced and sold the goods? Were the motor car manufacturers restraining trade during the period in which they made and sold fifty million cars, where there had been no cars before… Surely… nothing more preposterous could have been imagined than to fix upon the American corporations, which have created and carried on, in ever-increasing magnitude, a volume and variety of trade so vast that it makes all previous production and exchange look like a rural roadside stand, and call this performance "restraint of trade," further stigmatizing it as a crime!Isabel Paterson, The God of the Machine (New York: G.P. Putnam's Sons, 1943), pp. 172, 175. See also Scoville and Sargent, Fact and Fancy in the T.N.E.C. Monographs, pp. 243–44.
And Mrs. Paterson concludes:
Government cannot "restore competition" or "ensure" it. Government is monopoly; and all it can do is to impose restrictions which may issue in monopoly, when they go so far as to require permission for the individual to engage in production. This is the essence of the Society-of-Status. The reversion to status law in the antitrust legislation went unnoticed… the politicians… had secured a law under which it was impossible for the citizen to know beforehand what constituted a crime, and which therefore made all productive effort liable to prosecution if not to certain conviction.Paterson, God of the Machine, pp. 176–77.
In the earlier days of the "trust problem," Paul de Rousiers commented:
Directly the formation of Trusts is not induced by the natural action of economic forces; as soon as they depend on artificial protection (such as tariffs), the most effective method of attack is to simply reduce the number and force of these protective accidents to the greatest possible extent. We can attack artificial conditions, but are impotent when opposing natural conditions… America has hitherto pursued the exactly reverse methods, blaming economic forces tending to concentrate industry, and joining issue by means of antitrust legislation, a series of entirely artificial measures. Thus there is to be no understanding between competing companies, etc. The results have been pitiful — a violent restriction of fruitful initiative… [The legislation] does not touch the rest of the evil, enlarges, in place of restraining, artificial conditions, and finally regulates and complicates matters whose supreme needs are simplification and removal of restrictions.Paul de Rousiers, Les Industries Monopolisées aux Etats-Unis, as quoted in Gustave de Molinari, The Society of Tomorrow (New York: G.P. Putnam's Sons, 1904), p. 194.
This essay is excerpted from chapter 3 of Murray N. Rothbard's Power and Market: Government and Economy.
[Libertarian Forum (1971)]
Introduction by Leonard P. LiggioProfessor Rubinstein's fine summary of traditional Chinese political concepts suggests an important lesson for libertarians.
In Chinese thought the anarchist ideas were applied within a statist structure; there had been no attempt to overthrow the state but merely to introduce anarchist practices to modify and improve the situation. The result was oppressive; anarchist ideas cannot be applied while the state system continues in existence, In fact, it may be that the application of anarchist ideas within a statist structure can only lead to worse oppression.
The state is the central issue; its abolition is the central objective. The introduction of anarchist practices or operations while the state continues to exist may not only be irrelevant but if widespread in application may result in worse oppression.
This is an important warning for libertarians. What was the reason for the failure in China to move to an anarchist society? Elitism. There was a disdain for the common people and their institutions. The clan and self-help organizations provided a suitable basis for a libertarian legal system. But their powers were curtailed and limited because they were viewed as a threat to the state structure from which the ruling class drew its wealth.
Although they might be committed to the anarchistic philosophy of the Chinese sages, the local rulers recognized that they drew their wealth from the statist structure. Thus, they viewed all activities against the standard of the preservation of the statist structure and acted in their official capacities not as anarchist philosophers but as statist oppressors.
– Leonard P. Liggio
Traditional China and AnarchismThe Chinese civil service system, with its complicated examination path and its structured pattern of rule and control from above, seems far distant from an anarchistic model of society based on free association, or voluntarism, and a laissez-faire economy.
Yet at the heart of this system are basic concepts very close to those libertarians adopt as their own. The ideological basis of the system was a combination of Taoism and Confucianism that represented a functional application of these seemingly contradictory thought systems.
It is my purpose to examine some of these basic tenets and see how they were modified in the process of application.
Taoism, in its philosophical form, is represented by two major works, the Tao Te Ching (Book of the Way) and the Chuang Zu. Each of these books is a product of the Warring States Period, an age in which much of Chinese philosophy was developed. Taoism on this level is a pantheistic thought system that holds that the universe is a continuum in which all matter is in the process of becoming differentiated and then nondifferentiated. The Taoist believes that there is a single source to the "ten thousand things" and that he must reestablish his unity with the universe.
"The magistrate was thus an overburdened local bureaucrat, very far from the ideal of a man leading by the force of moral virtue alone."The inner harmony of nature should be related to the outer harmony of man's actions. To achieve this external harmony is to leave things alone. The best government is the least government; the best ruler is he who is content to leave his subjects alone.
Confucianism on the surface seems the opposite of this wu wei (nonaction) form of rule (or nonrule). It is a philosophy that seems to stress precedent and strict adherence to rites and ceremonies. Li (ritual) is only one aspect of the Confucian ideology, for there is also deep faith in jen (benevolence-good) and chih (wisdom). The operation of government and thus of society should be in the hands of the chuntzu — the gentleman who advises the ruler and leads by moral virtue.
The Confucians viewed formal punitive law as negative and only to be used as a last resort. There was no formal concept of civil law, for in a society based on virtue such would be unnecessary. In the Analects, this belief in government by virtue is expounded at length.
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Confucius said, "If a ruler himself is upright, all will go well without orders. But if he himself is not upright, even though he gives orders, they will not be obeyed."
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Confucius said, "Lead the people by laws and regulate them by penalties and the people will try to keep out of jail, but will have no sense of shame. Lead the people by virtue and restrain them by rules of decorum and the people will have a sense of shame and moreover will become good."
Theoretically, therefore, government means good men, living properly, rather than good laws, strictly enforced. How did these ideas, Taoist and Confucian, work out in application?
Taoist political thought was never put into practice, but the ethics became formalized, and a concrete set of rituals and church structure were developed. This religious Taoism can still be seen in operation today on Taiwan.
Confucianism, on the other hand, did become the state orthodoxy. In the reign of the Han emperor Wu Ti, the philosophy of Confucius, as it had been passed down and thus modified since 500 BC, became the theoretical basis for government.
During the T'ang Dynasty a method of examination was developed, and a complicated government structure developed to make use of the talents of the trained scholars.
The means of choosing and utilizing the potential chuntzu were thus devised. Once the student had passed through the three stages of exams, the district level, the province level and the central administration level and had achieved the degree of chin shih, he was ready to put into practice the lessons he had learned (lessons learned by memorizing and analyzing the works of Confucius and the other "classics"). He became on the district level the embodiment of the concept of "rule by good men."
But instead of letting society run itself, he found himself forced to rule as a despot, acting as tax collector, judge, jury and prosecuting attorney, defense chief, police chief, flood-control expert, and moral instructor to the local gentry. He was constantly under the scrutiny of his superiors and had to move to a new post every three years in accordance with custom. The magistrate was thus an overburdened local bureaucrat, very far from the ideal of a man leading by the force of moral virtue alone.
The lesson of traditional China for those who believe in freedom and the creation of a totally free society is this: that ideas are not enough, that even concepts conceived of by men such as Confucius and Lao Tzu can become stale, rigid — even despotic — in application.
China in the formative centuries developed protoanarchistic ideas. The total, unsystematic application of those ideas created a system as rigid, as formalistic and tyrannical, as any we have today.
This article was first published in the Libertarian Forum, Vol. 3, Nos. 6–7, pp. 7–8.
It is disturbingly easy for arguments originally employed on behalf of the free market to be turned against it. In this article I hope to redeem the concept of competition, which perhaps more than any other has been corrupted into the service of the state.
Rather than being seen as a peaceful, cooperative, and ordered network, the free market is maligned as a brutal Darwinian struggle, wherein all must wrestle tooth and claw for continued existence. Rather than as a dynamic wellspring of innovation and wealth, the free market is seen as a hegemony of powerful monopolists. In the first of these views, the free market is seen as being too competitive, and in the other it is seen as not competitive enough. Both views may be held simultaneously, and in both cases the proposed solution is government intervention.
Finally, it may be asserted that, insofar as competition is a good feature of the free market, bringing competition into the government bureaucracy would be a way of improving the government; in this way people who once favored shrinking the state are lured into believing that it can instead be restructured into a more benign form.
How might we safeguard the concept of competition against these interpretations? To answer this, we must look at how competition specifically applies to the free market as opposed to a system of state intervention.
As far as I can see, there are three kinds of competition on the free market. First, there is competition within ourselves among all our desires. We can only ever pursue a limited set of our desires, so we must always decide which are the most important. Second, there is competition among everyone for the available consumable goods. These kinds of competition will exist in any economy, whether capitalist or socialist. To describe these kinds of competition is merely a restatement of the universal fact of scarcity.
Competition on the Free MarketFinally, there is competition between producers to serve the desires of consumers. This kind of competition only exists only on the free market. When people interact by force, they do not, by definition, have any interest in serving one another.
Only on the free market, where people must cooperate in order to achieve their goals, do people wish to satisfy the desires of others. Here they must compete to satisfy one another because there are only a limited number of people to please. This is a superficial sort of competition; it is not a struggle to defend one's own life against predators but a competition over who can be the best cooperator, over who can benefit the most people.
"The free market is not a struggle to defend one's own life against predators but a competition over who can be the best cooperator, over who can benefit the most people."Since all producers are after the same thing, namely money, of which there is only so much to go around, all producers are necessarily in competition with one another.[1] The assumption that bakers compete only with other bakers is therefore false: as I noted above, all our desires are in competition with one another, and it is up to every producer to convince us that his service is the one that will bring us the most happiness.
To some extent, all consumer goods can substitute for one another, and there is no reason to suppose that the nearest substitute for my most desired goal resembles it in the slightest. Our ability to adjust our goals based on costs and benefits means that very dissimilar goods can be substitutes. If I decide to watch my favorite show, but find that it isn't on today, I might decide to watch another show, go make dinner, read a book, go out jogging, play a computer game, or any number of other things having little to do with television. All of these activities are therefore in competition with one another to be my highest priority, and therefore the producers of all of them are in competition to provide the greatest satisfaction.
The Specter of MonopolyIn short, the competition between producers is universal. But what exactly is a producer? Most production requires the cooperation of many people, who organize themselves into firms so as to coordinate their work. Is it more correct to use "producer" to refer to one of these firms, or to the individuals that comprise them?
I have implicitly defined producers to be those who attempt to earn money, and this definition applies only to individuals, not to the organizations they create. A firm is not animated by a single will, but exists only because its individual members find it convenient to belong to it as a means to their own desires. They work together under the same plan for the time being, but fundamentally they are all still in competition to earn as much as possible of a limited supply of money.
They organize themselves because they are each better off being in competition to be the most important contributor to a single product, rather than in competition to sell separate products. The firm itself is simply an illusion, an abstraction, and for our purposes a distraction that prevents us from seeing what is really happening.
People are misled into believing that competition primarily operates between firms rather than between individual people, because their choice when they shop is between products made by several firms, not between individual producers within those firms. These products exist, however, because of the desire of the individual producers to surpass one another in earnings. If they had not been in competition with one another, they would not have assembled into firms in the first place.
Under this view of competition it is immediately apparent that there is no threat from monopoly on the free market. Since all goods are interchangeable to some extent, there is an insurmountable problem of identifying a monopoly in the first place;[2] even if a firm's product is unique, the producers in this firm are still in competition with all other producers. Their product must provide a superior satisfaction to all others in at least some cases if it is to be sold.
"A firm is not animated by a single will, but exists only because its individual members find it convenient to belong to it as a means to their own desires."Regardless of the size of a firm's market share (granting, for the sake of argument, that this is even a meaningful measure), all producers within that firm are still in competition with one another, so whether or not a market is dominated by a single firm has nothing to do with whether that market is competitive.
Within a firm, competition can be expected to make the firm more efficient, just as does competition with other firms. The profitability of not only the firm as a whole, but of each department, and of each employee, can be calculated by the price system. Each part can be judged against the standard of profitability, and those that measure up can expect to be rewarded, promoted, or given increased budgets, and those that do not can expect the opposite.
A firm is only capable of remaining large and dominant if its organization allows for more efficient production than would be possible for two or more separate firms. Without providing this service, the firm would necessarily lose its position because there would be profits available for any entrepreneur who started a similar firm. Indeed, few involved in the larger firm would have any reason to stay. The owners would wish to sell their stock to invest in a smaller business with better prospects, and the employees, for the most part, would be willing to leave the firm for a better deal with a more profitable firm elsewhere.
The only group that might not want to leave would be the high-level managers, those who deal in large-scale organization and who directly benefit from the size of the firm. They could not expect to find better employment in smaller organizations. However, their choice is only to improve the efficiency of their firm and make its bulk useful, or else to accept that their responsibility must shrink.
Competition could either promote smaller or larger firms, depending on whether the degree of organization in the industry is too great or too little. For any kind of production in a given economy, there will be an ideal degree of organization to carry it out. Competition will drive firms toward this ideal size. There is no particular reason that this ideal size should be small, and once it is reached, it is quite possible that only a single firm will remain to produce a given thing.
Being the sole producer of a given good on the free market gives no special ability to profit denied to other firms, for on the free market there is always the risk that consumers will switch to a different product or that an entrepreneur will start a similar firm.[3] The position of a large firm is only as secure as its ability to produce efficiently what consumers want.
If it is to truly escape from imitation, an organization must not only produce a unique product, but must prohibit imitation. Only in this way can it grow beyond the point where further centralization is no longer useful. Even better, it must not give people the choice of buying something else, but instead require people to buy it. Only in this way can it raise its profits without risk. Only in this way can it escape competition from other producers. This sort of monopolist, however, is not a business — it is a government!
Competition over the Power to TaxWithin the government hierarchy, people still compete for money, but no longer must they satisfy the consumer to get it. Since there is no objective concept of profit and loss in government enterprises, there is no bottom line against which everyone may be measured.
"There is no threat from monopoly on the free market. Since all goods are interchangeable to some extent, there is an insurmountable problem of identifying a monopoly in the first place."The powers of government can persist as long as they are seen as being unique, imbued only in a single organization in a given territory. Beyond this, there is nothing in particular that must be done. The greatest gain, therefore, goes to those who are most successful at expanding government power and directing it to their own benefit.
To gain responsibility over the largest part of the budget, bureaucrats, politicians, and lobbyists all compete for the favor of their superiors and for responsibility over the largest projects. This is true all the way up the hierarchy, up to the elites who control the budget. They, in turn, attempt to control the greatest share of the budget and to gain the largest number of underlings. Everyone gains by increasing the overall budget because more is potentially available for him.
The result of this form of competition is deceit, intimidation, inequality, and waste. The government promotes disorder and anarchy so as to create an apparent need for further intervention. By fighting wars, creating black markets, and interfering with the economy, it incites chaos it can then blame on outside sources.
People are led to believe that this is the natural state of things. Government propaganda brings attention to the problems and makes them appear as fearsome as possible. Once the government controls the schools, it presents a false history making it out to be society's savior. The government promotes theories that make its power seem inevitable and desirable, as is the case with the theories of Hobbes, Marx, and Keynes. The weight of everything in this complex system of fraud finally convinces people to submit more and more to the control of the state.
Competition within the government bureaucracy, or among private individuals for government money, will necessarily worsen these problems. An organization becoming more or less competitive does not change the nature of the competition; to increase the competition of government will therefore only make its evil more effective and insidious. As Hoppe says, "competition in the production of goods is good, but free competition in the production of bads is not."[4]
Many who have some understanding of the benefits of the free market have been put under the impression that competition is beneficial no matter what form it takes, and therefore propose to bring more competition to the government bureaucracy without altering the monopolistic powers of government. Rather than insisting that taxes be made voluntary and that others be permitted to compete to provide government services, they instead advocate the expansion of the state into a kind of pseudo market.
This is what happens, for example, with a school-voucher system. Since under a voucher system, schools compete for money from the state; even if they receive it by a circuitous route, they have the same incentives of any government department and they will soon be turned to serve the growth of the state as much as any other beneficiary of tax money.
$25 $15
To subsidize an industry is to change the circumstances under which it thrives. No longer must it satisfy the consumer, but rather it must promote the aggrandizement of the bureaucrats in charge of its project. However, the industry is still seen as a representative of the free market rather than another wing of the government, so when it fails due to the problems of central planning, the government can simply blame the free market for its failure.
ConclusionThe concept of competition is a treacherous tool to use in the name of liberty. Competition is no less a feature of the state bureaucracy than of the market, but its effect is very different in each context. Although I have tried in this article to show how discussions of competition may be prevented from being misleading, it may often be best to emphasize instead the cooperation of the market, for this is the more fundamental feature of a capitalist order, and this is what competition on the free market promotes.
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Notes[1] See Hayek, F., "The Meaning of Competition," Individualism and Economic Order, 1958, for a discussion of perfect-competition models and why they are an impossible and harmful ideal for the real economy.
[2] See Rothbard, M., Man, Economy, and State: A Treatise on Economic Principles, With Power and Market: Government and the Economy, Ludwig von Mises Institute, 2009, for a further elaboration of this problem in the mainstream theory of monopoly.
[3] See Reisman, G., Capitalism: A Treatise on Economics, Jameson Books, 1998, as well as Block, W., "Total Repeal of Antitrust Legislation: A Critique of Bork, Brozen, and Posner," Review of Austrian Economics, vol. 8, no. 1, 1994, pp. 35–70 for detailed refutations of many arguments on the supposed dangers of monopoly.
[4] See Hoppe, H., "Why Bad Men Rule", 2004, for the source of this quote as well as a more detailed discussion of the incentives of the elite who control the state than that summarized here.
There are signs of increasing awareness among economists that what they have been discussing in recent years under the name of "competition" is not the same thing as what is thus called in ordinary language.
But, although there have been some valiant attempts to bring discussion back to earth and to direct attention to the problems of real life, notably by J.M. Clark and F. Machlup,J.M. Clark, "Toward a Concept of Workable Competition," American Economic Review, Vol. XXX (June, 1940); F. Machlup, "Competition, Pliopoly, and Profit," Economica, Vol. IX (new ser.; February and May, 1942). the general view seems still to regard the conception of competition currently employed by economists as the significant one and to treat that of the businessman as an abuse.
It appears to be generally held that the so-called theory of "perfect competition" provides the appropriate model for judging the effectiveness of competition in real life and that, to the extent that real competition differs from that model, it is undesirable and even harmful. For this attitude there seems to me to exist very little justification. I shall attempt to show that what the theory of perfect competition discusses has little claim to be called "competition" at all, and that its conclusions are of little use as guides to policy.
The reason for this seems to me to be that this theory throughout assumes that state of affairs already to exist which, according to the truer view of the older theory, the process of competition tends to bring about (or to approximate) and that, if the state of affairs assumed by the theory of perfect competition ever existed, it would not only deprive of their scope all the activities which the verb "to compete" describes but would make them virtually impossible.
If all this affected only the use of the word "competition," it would not matter a great deal. But it seems almost as if economists by this peculiar use of language were deceiving themselves into the belief that, in discussing "competition," they are saying something about the nature and significance of the process by which the state of affairs is brought about which they merely assume to exist. In fact, this moving force of economic life is left almost altogether undiscussed.
I do not wish to discuss here at any length the reasons which have led the theory of competition into this curious state. As I have suggested elsewhere in this volume,See the second and fourth chapters. the tautological method which is appropriate and indispensable for the analysis of individual action seems in this instance to have been illegitimately extended to problems in which we have to deal with a social process in which the decisions of many individuals influence one another and necessarily succeed one another in time.
The economic calculus (or the Pure Logic of Choice) which deals with the first kind of problem consist of an apparatus of classification of possible human attitudes and provides us with a technique for describing the interrelations of the different parts of a single plan. Its conclusions are implicit in its assumptions: the desires and the knowledge of the facts, which are assumed to be simultaneously present to a single mind, determine a unique solution. The relations discussed in this type of analysis are logical relations, concerned solely with the conclusions which follow for the mind of the planning individual from the given premises.
When we deal, however, with a situation in which a number of persons are attempting to work out their separate plans, we can no longer assume that the data are the same for all the planning minds.
The problem becomes one of how the "data" of the different individuals on which they base their plans are adjusted to the objective facts of their environment (which includes the actions of the other people).
Although in the solution of this type of problem we still must make use of our technique for rapidly working out the implications of a given set of data, we have now to deal not only with several separate sets of data of the different persons but also — and this is even more important — with a process which necessarily involves continuous changes in the data for the different individuals. As I have suggested before, the causal factor enters here in the form of the acquisition of new knowledge by the different individuals or of changes in their data brought about by the contacts between them.
The relevance of this for my present problem will appear when it is recalled that the modern theory of competition deals almost exclusively with a state of what is called "competitive equilibrium" in which it is assumed that the data for the different individuals are fully adjusted to each other, while the problem which requires explanation is the nature of the process by which the data are thus adjusted.
In other words, the description of competitive equilibrium does not even attempt to say that, if we find such and such conditions, such and such consequences will follow, but confines itself to defining conditions in which its conclusions are already implicitly contained and which may conceivably exist but of which it does not tell us how they can ever be brought about.
Or, to anticipate our main conclusion in a brief statement, competition is by its nature a dynamic process whose essential characteristics are assumed away by the assumptions underlying static analysis.
That the modern theory of competitive equilibrium assumes the situation to exist which a true explanation ought to account for as the effect of the competitive process is best shown by examining the familiar list of conditions found in any modern textbook. Most of these conditions, incidentally, not only underlie the analysis of "perfect" competition but are equally assumed in the discussion of the various "imperfect" or "monopolistic" markets, which throughout assume certain unrealistic "perfections."Particularly the assumptions that at all times a uniform price must rule for a given commodity throughout the market and that sellers know the shape of the demand curve. For our immediate purpose, however, the theory of perfect competition will be the most instructive case to examine.
While different authors may state the list of essential conditions of perfect competition differently, the following is probably more than sufficiently comprehensive for our purpose, because, as we shall see, those conditions are not really independent of each other. According to the generally accepted view, perfect competition presupposes:
A homogeneous commodity offered and demanded by a large number of relatively small sellers or buyers, none of whom expects to exercise by his action a perceptible influence on price.
Free entry into the market and absence of other restraints on the movement of prices and resources.
Complete knowledge of the relevant factors on the part of all participants in the market.
We shall not ask at this stage precisely for what these conditions are required or what is implied if they are assumed to be given. But we must inquire a little further about their meaning, and in this respect it is the third condition which is the critical and obscure one.
The standard can evidently not be perfect knowledge of everything affecting the market on the part of every person taking part in it. I shall here not go into the familiar paradox of the paralyzing effect really perfect knowledge and foresight would have on all action.See O. Morgenstern, "Vollkommene Voraussicht und wirtschaftliches Gleichgewicht," Zeitschrift für Nationalökonomie, Vol. VI (1935). It will be obvious also that nothing is solved when we assume everybody to know everything and that the real problem is rather how it can be brought about that as much of the available knowledge as possible is used.
This raises for a competitive society the question, not how we can "find" the people who know best, but rather what institutional arrangements are necessary in order that the unknown persons who have knowledge specially suited to a particular task are most likely to be attracted to that task. But we must inquire a little further what sort of knowledge it is that is supposed to be in possession of the parties of the market.
If we consider the market for some kind of finished consumption goods and start with the position of its producers or sellers, we shall find, first, that they are assumed to know the lowest cost at which the commodity can be produced. Yet this knowledge, which is assumed to be given to begin with, is one of the main points where it is only through the process of competition that the facts will be discovered.
This appears to me one of the most important of the points where the starting point of the theory of competitive equilibrium assumes away the main task which only the process of competition can solve.
The position is somewhat similar with respect to the second point on which the producers are assumed to be fully informed: the wishes and desires of the consumers, including the kinds of goods and services which they demand and the prices they are willing to pay. These cannot properly be regarded as given facts but ought rather to be regarded as problems to be solved by the process of competition.
The same situation exists on the side of the consumers or buyers. Again the knowledge they are supposed to possess in a state of competitive equilibrium cannot be legitimately assumed to be at their command before the process of competition starts. Their knowledge of the alternatives before them is the result of what happens on the market, of such activities as advertising, etc.; and the whole organization of the market serves mainly the need of spreading the information on which the buyer is to act.
The peculiar nature of the assumptions from which the theory of competitive equilibrium starts stands out very clearly if we ask which of the activities that are commonly designated by the verb "to compete" would still be possible if those conditions were all satisfied.
Perhaps it is worth recalling that, according to Dr. Johnson, competition is "the action of endeavouring to gain what another endeavours to gain at the same time."
Now, how many of the devices adopted in ordinary life to that end would still be open to a seller in a market in which so-called "perfect competition" prevails? I believe that the answer is exactly none.
Advertising, undercutting, and improving ("differentiating") the goods or services produced are all excluded by definition — "perfect" competition means indeed the absence of all competitive activities.
Especially remarkable in this connection is the explicit and complete exclusion from the theory of perfect competition of all personal relationships existing between the partiesCf. G.J. Stigler, The Theory of Price (1946), p. 24: "Economic relationships are never perfectly competitive if they involve any personal relationships between economic units" (see also ibid., p. 226). In actual life the fact that our inadequate knowledge of the available commodities or services is made up for by our experience with the persons or firms supplying them — that competition is in a large measure competition for reputation or good will — is one of the most important facts which enables us to solve our daily problems.
The function of competition is here precisely to teach us who will serve us well: which grocer or travel agency, which department store or hotel, which doctor or solicitor, we can expect to provide the most satisfactory solution for whatever particular personal problem we may have to face.
Evidently in all these fields competition may be very intense, just because the services of the different persons or firms will never be exactly alike, and it will be owing to this competition that we are in a position to be served as well as we are.
The reasons competition in this field is described as imperfect have indeed nothing to do with the competitive character of the activities of these people; it lies in the nature of the commodities or services themselves. If no two doctors are perfectly alike, this does not mean that the competition between them is less intense but merely that any degree of competition between them will not produce exactly those results which it would if their services were exactly alike.
This is not a purely verbal point. The talk about the defects or competition when we are in fact talking about the necessary difference between commodities and services conceals a very real confusion and leads on occasion to absurd conclusions.
While on a first glance the assumption concerning the perfect knowledge possessed by the parties may seem the most startling and artificial of all those on which the theory of perfect competition is based, it may in fact be no more than a consequence of, and in part even justified by, another of the presuppositions on which it is founded.
If, indeed, we start by assuming that a large number of people are producing the same commodity and command the same objective facilities and opportunities for doing so, then indeed it might be made plausible (although this has, to my knowledge, never been attempted) that they will in time all be led to know most of the facts relevant for judging the market of that commodity. Not only will each producer by his experience learn the same facts as every other but also he will thus come to know what his fellows know and in consequence the elasticity of the demand for his own product.
The condition where different manufacturers produce the identical product under identical conditions is in fact the most favorable for producing that state of knowledge among them which perfect competition requires. Perhaps this means no more than that the commodities can be identical in the sense in which it is alone relevant for our understanding human action only if people hold the same views about them, although it should also be possible to state a set of physical conditions which is favorable to all those who are concerned with a set of closely interrelated activities learning the facts relevant for their decisions.
However that be, it will be clear that the facts will not always be as favorable to this result as they are when many people are at least in a position to produce the same article. The conception of the economic system as divisible into distinct markets for separate commodities is after all very largely the product of the imagination of the economist and certainly is not the rule in the field of manufacture and of personal services, to which the discussion about competition so largely refers.
In fact, it need hardly be said, no products of two producers are ever exactly alike, even if it were only because, as they leave his plant, they must be at different places. These differences are part of the facts which create our economic problem, and it is little help to answer it on the assumption that they are absent.
The belief in the advantages of perfect competition frequently leads enthusiasts even to argue that a more advantageous use of resources would be achieved if the existing variety of products were reduced by compulsory standardization.
Now, there is undoubtedly much to be said in many fields for assisting standardization by agreed recommendations or standards which are to apply unless different requirements are explicitly stipulated in contracts. But this is something very different from the demands of those who believe that the variety of people's tastes should be disregarded and the constant experimentation with improvements should be suppressed in order to obtain the advantages of perfect competition.
It would clearly not be an improvement to build all houses exactly alike in order to create a perfect market for houses, and the same is true of most other fields where differences between the individual products prevent competition from ever being perfect.
We shall probably learn more about the nature and significance of the competitive process if for a while we forget about the artificial assumptions underlying the theory of perfect competition and ask whether competition would be any less important if, for example, no two commodities were ever exactly alike.
If it were not for the difficulty of the analysis of such a situation, it would be well worthwhile to consider in some detail the case where the different commodities could not be readily classed into distinct groups, but where we had to deal with a continuous range of close substitutes, every unit somewhat different from the other but without any marked break in the continuous range. The result of the analysis of competition in such a situation might in many respects be more relevant to the conditions of real life than those of the analysis of competition in a single industry producing a homogeneous commodity sharply differentiated from all others.
Or, if the case where no two commodities are exactly alike be thought to be too extreme, we might at least turn to the case where no two producers produce exactly the same commodity, as is the rule not only with all personal services but also in the markets of many manufactured commodities, such as the markets for books or musical instruments. For our present purpose I need not attempt anything like a complete analysis of such kinds of markets but shall merely ask what would be the role of competition in them.
Although the result would, of course, within fairly wide margins be indeterminate, the market would still bring about a set of prices at which each commodity sold just cheap enough to outbid its potential close substitutes — and this in itself is no small thing when we consider the insurmountable difficulties of discovering even such a system of prices by any other method except that of trial and error in the market, with the individual participants gradually learning the relevant circumstances.
It is true, of course, that in such a market correspondence between prices and marginal costs is to be expected only to the degree that elasticities of demand for the individual commodities approach the conditions assumed by the theory of perfect competition or that elasticities of substitution between the different commodities approach infinity.
But the point is that in this case this standard of perfection as something desirable or to be aimed at is wholly irrelevant. The basis of comparison, on the grounds of which the achievement of competition ought to be judged, cannot be a situation which is different from the objective facts and which cannot be brought about by any known means. It ought to be the situation as it would exist if competition were prevented from operating. Not the approach to an unachievable and meaningless ideal but the improvement upon the conditions that would exist without competition should be the test.
In such a situation how would conditions differ if competition were "free" in the traditional sense from those which would exist if, for example, only people licensed by authority were allowed to produce particular things, or prices were fixed by authority, or both? Clearly there would be not only no likelihood that the different things would be produced by those who knew best how to do it and therefore could do it at lowest cost but also no likelihood that all those things would be produced at all which, if the consumers had the choice, they would like best.
There would be little relationship between actual prices and the lowest cost at which somebody would be able to produce these commodities; indeed, the alternatives between which both producers and consumers would be in a position to choose, their data, would be altogether different from what they would be under competition.
The real problem in all this is not whether we will get given commodities or services at given marginal costs but mainly by what commodities and services the needs of the people can be most cheaply satisfied. The solution of the economic problem of society is in this respect always a voyage of exploration into the unknown, an attempt to discover new ways of doing things better than they have been done before. This must always remain so as long as there are any economic problems to be solved at all, because all economic problems are created by unforeseen changes which require adaptation.
Only what we have not foreseen and provided for requires new decisions. If no such adaptations were required, if at any moment we knew that all change had stopped and things would forever go on exactly as they are now, there would be no more questions of the use of resources to be solved.
A person who possesses the exclusive knowledge or skill which enables him to reduce the cost of production of a commodity by 50 per cent still renders an enormous service to society if he enters its production and reduces its price by only 25 per cent — not only through that price reduction but also through his additional saving of cost.
But it is only through competition that we can assume that these possible savings of cost will be achieved. Even if in each instance prices were only just low enough to keep out producers which do not enjoy these or other equivalent advantages, so that each commodity were produced as cheaply as possible, though many may be sold at prices considerably above costs, this would probably be a result which could not be achieved by any other method than that of letting competition operate.
That in conditions of real life the position even of any two producers is hardly ever the same is due to facts which the theory of perfect competition eliminates by its concentration on a long-term equilibrium which in an ever-changing world can never be reached. At any given moment the equipment of a particular firm is always largely determined by historical accident, and the problem is that it should make the best use of the given equipment (including the acquired capacities of the members of its staff) and not what it should do if it were given unlimited time to adjust itself to constant conditions.
For the problem of the best use of the given durable but exhaustible resources the long-term equilibrium price with which a theory discussing "perfect" competition must be concerned is not only not relevant; the conclusions concerning policy to which preoccupation with this model leads are highly misleading and even dangerous.
The idea that under "perfect" competition prices should be equal to long-run costs often leads to the approval of such antisocial practices as the demand for an "orderly competition" which will secure a fair return on capital and for the destruction of excess capacity. Enthusiasm for perfect competition in theory and the support of monopoly in practice are indeed surprisingly often found to live together.
This is, however, only one of the many points on which the neglect of the time element makes the theoretical picture of perfect competition so entirely remote from all that is relevant to an understanding of the process of competition. If we think of it, as we ought to, as a succession of events, it becomes even more obvious that in real life there will at any moment be as a rule only one producer who can manufacture a given article at the lowest cost and who may in fact sell below the cost of his next successful competitor, but who, while still trying to extend his market, will often be overtaken by somebody else, who in turn will be prevented from capturing the whole market by yet another, and so on.
Such a market would clearly never be in a state of perfect competition, yet competition in it might not only be as intense as possible but would also be the essential factor in bringing about the fact that the article in question is supplied at any moment to the consumer as cheaply as this can be done by any known method.
When we compare an "imperfect" market like this with a relatively "perfect" market as that of, say, grain, we shall now be in a better position to bring out the distinction which has been underlying this whole discussion — the distinction between the underlying objective facts of a situation which cannot be altered by human activity and the nature of the competitive activities by which men adjust themselves to the situation.
Where, as in the latter case, we have a highly organized market of a fully standardized commodity produced by many producers, there is little need or scope for competitive activities because the situation is such that the conditions which these activities might bring about are already satisfied to begin with. The best ways of producing the commodity, its character and uses, are most of the time known to nearly the same degree to all members of the market.
The knowledge of any important change spreads so rapidly and the adaptation to it is so soon effected that we usually simply disregard what happens during these short transition periods and confine ourselves to comparing the two states of near- equilibrium which exist before and after them.
But it is during this short and neglected interval that the forces of competition operate and become visible, and it is the events during this interval which we must study if we are to "explain" the equilibrium which follows it.
It is only in a market where adaptation is slow compared with the rate of change that the process of competition is in continuous operation. And though the reason why adaptation is slow may be that competition is weak, e.g., because there are special obstacles to entry into the trade or because of some other factors of the character of natural monopolies, slow adaptation does by no means necessarily mean weak competition.
When the variety of near-substitutes is great and rapidly changing, where it takes a long time to find out about the relative merits of the available alternatives, or where the need for a whole class of goods or services occurs only discontinuously at irregular intervals, the adjustment must be slow even if competition is strong and active.
The confusion between the objective facts of the situation and the character of the human responses to it tends to conceal from us the important fact that competition is the more important the more complex or "imperfect" are the objective conditions in which it has to operate. Indeed, far from competition being beneficial only when it is "perfect," I am inclined to argue that the need for competition is nowhere greater than in fields in which the nature of the commodities or services makes it impossible that it ever should create a perfect market in the theoretical sense. The inevitable actual imperfections of competition are as little an argument against competition as the difficulties of achieving a perfect solution of any other task are an argument against attempting to solve it at all, or as little as imperfect health is an argument against health.
In conditions where we can never have many people offering the same homogeneous product or service, because of the ever-changing character of our needs and our knowledge, or of the infinite variety of human skills and capacities, the ideal state cannot be one requiring an identical character of large numbers of such products and services.
The economic problem is a problem of making the best use of what resources we have, and not one of what we should do if the situation were different from what it actually is. There is no sense in talking of a use of resources "as if" a perfect market existed, if this means that the resources would have to be different from what they are, or in discussing what somebody with perfect knowledge would do if our task must be to make the best use of the knowledge the existing people have.
The argument in favor of competition does not rest on the conditions that would exist if it were perfect. Although, where the objective facts would make it possible for competition to approach perfection, this would also secure the most effective use of resources, and, although there is therefore every case for removing human obstacles to competition, this does not mean that competition does not also bring about as effective a use of resources as can be brought about by any known means where in the nature of the case it must be imperfect.
Even where free entry will secure no more than that at any one moment all the goods and services for which there would be an effective demand if they were available are in fact produced at the least current"Current" cost in this connection excludes all true bygones but includes, of course, "user cost." expenditure of resources at which, in the given historical situation, they can be produced, even though the price the consumer is made to pay for them is considerably higher and only just below the cost of the next best way in which his need could be satisfied — this, I submit, is more than we can expect from any other known system.
The decisive point is still the elementary one that it is most unlikely that, without artificial obstacles which government activity either creates or can remove, any commodity or service will for any length of time be available only at a price at which outsiders could expect a more than normal profit if they entered the field.
The practical lesson of all this, I think, is that we should worry much less about whether competition in a given case is perfect and worry much more whether there is competition at all. What our theoretical models of separate industries conceal is that in practice a much bigger gulf divides competition from no competition than perfect from imperfect competition.
Yet the current tendency in discussion is to be intolerant about the imperfections and to be silent about the prevention of competition. We can probably still learn more about the real significance of competition by studying the results which regularly occur where competition is deliberately suppressed than by concentrating on the shortcomings of actual competition compared with an ideal which is irrelevant for the given facts.
I say advisedly "where competition is deliberately suppressed" and not merely "where it is absent," because its main effects are usually operating, even if more slowly, so long as it is not outright suppressed with the assistance or the tolerance of the state.
The evils which experience has shown to be the regular consequence of a suppression of competition are on a different plane from those which the imperfections of competition may cause. Much more serious than the fact that prices may not correspond to marginal cost is the fact that, with an entrenched monopoly, costs are likely to be much higher than is necessary.
A monopoly based on superior efficiency, on the other hand, does comparatively little harm so long as it is assured that it will disappear as soon as anyone else becomes more efficient in providing satisfaction to the consumers.
In conclusion I want for a moment to go back to the point from which I started and restate the most important conclusion in a more general form.
Competition is essentially a process of the formation of opinion: by spreading information, it creates that unity and coherence of the economic system which we presuppose when we think of it as one market. It creates the views people have about what is best and cheapest, and it is because of it that people know at least as much about possibilities and opportunities as they in fact do.
It is thus a process which involves a continuous change in the data and whose significance must therefore be completely missed by any theory which treats these data as constant.
Excerpted from Individualism and Economic Order (1948), this essay reproduces the substance of the Stafford Little Lecture delivered at Princeton University on May 20, 1946.
Lecture 13 of 16 from Austrian Economics: An Introductory Course, presented at New York Polytechnic University in 1972.
In order for anyone to make ethical judgments, he must know the consequences of his various actions. In questions of union actions displacement or unemployment for oneself or others will be considered unfortunate by most people. Once understood, far fewer people will be prounion or hostile to nonunion competitors. Unions lower the marginal productivity of all union workers.
Part 12 of 14. Presented in 1986 at New York Polytechnic University.
The words monopoly and competition have been changed. Competition meant rivalry or competing, either active or potential. Businesses do not like this. Monopoly meant a grant of privilege by the government. It now means a falling demand curve. Government creates crazy regulations and the market works to get around them. Cheaper consumer products are better. It's difficult to sustain quotas - cartel agreements; everybody cheats. Cartels break up in the free market unless government intervenes and props them up.
Part 9 of 14. Presented in 1986 at New York Polytechnic University.
"People don't think the shallow reading harms them, but it does."Despite the juiced-up GDP numbers of the last two quarters, there is no illusion that the depression is over and the boom has resumed. While GDP is reported as being positive, the employment numbers remain weak. The headline jobless number has one in ten people out of work. Include those who have become discouraged and dropped out of the labor force, and the number is one in five. Since the start of the depression at the end of 2007, 8.4 million payroll jobs have been lost.
Gaining employment has been especially hard for young people. "From December 2008 to December 2009, the employment of 16–24 year olds in the United States fell by 1.78 million, or a third of the total drop in employment of 5.4 million," reports David G. Blanchflower in The Peninsula. Even college graduates are suffering as wages fall with fewer opportunities.
The artificial boom that misdirected so much capital into financial services, real estate, and other areas of consumer and investor excess also misdirected human resources. The bust now is cleansing those unneeded and redundant jobs. But those professions were what college students had been preparing for.
Now those boom-time career opportunities will be limited, if not gone. For example, despite the crash and the extensive layoffs in the industry, money-management firms report receiving the same number of applications for entry-level jobs.
And while Washington is trying valiantly to reinflate boom-time industries and protect those jobs with cheap money, government bailouts, and deficit spending, Austrian economists know that the structure of production — including employment and the services that work provides — must change to meet consumer demands .
"The last few decades have belonged to a certain kind of person with a certain kind of mind — computer programmers who could crank code, lawyers who could craft contracts, MBAs who could crunch numbers," writes Daniel H. Pink, "the keys to the kingdom are changing hands."
In his bestselling book, A Whole New Mind: Why Right-Brainers Will Rule the Future, Pink argues that the future belongs to those who can recognize patterns, empathize with others, be creative, and provide meaning to peoples' lives.
The left hemisphere of our brains handles the logical, sequential, and analytical heavy lifting, while the right hemisphere is our intuitive, holistic, and nonlinear side. The job market has put a premium on left-brain work and, to the extent that education trains workers, it focuses on left-brain thinking. Pink contends that technology, globalization, and material abundance are now sending simple paper-pushing white-collar professions the way of the buggy whip.
First our manufacturing was shipped overseas; next we ended up talking to someone in India when calling for technical support; soon the accountant doing your taxes or the lawyer drawing up your will or corporate documents will be working from many time zones away and doing that work for much less than what those services now cost.
The accountants and lawyers who survive will provide creativity, compassion, and caring in their service. Art students will be more in demand than MBAs; and designers of all types who can combine utility with significance, will be valued more than ever.
Those who can tell or write stories will thrive, according to Pink. With all the world's facts and figures a click away at virtually no cost, the storyteller's ability to provide "context enriched by emotion" is what will be prized. Success in the "Conceptual Age" will mean understanding the connections between diverse disciplines — what the author refers to as "symphony ."
One of the important elements of symphony is the use of metaphor or "imaginative rationality" to see relationships, communicate ideas, and understand others.
In Thinking as a Science, Henry Hazlitt makes the point that we tend to imitate the authors we read, and so it is important to only read the best books. Our thinking is formed by our reading and it's not enough to only occasionally read serious work while mostly reading useless books, magazines, and newspapers. People don't think the shallow reading harms them, but it does. "This is just as if they were to buy and eat unnutritious and indigestible food," Hazlitt explains, "and excuse themselves on the ground that they ate nourishing and digestible food along with it."
"One good meal will not offset a week of bad ones; one good book will never offset any number of poor books." For one to stay competitive, a person can't be satisfied that they have already read the required substantial books and can now relax and only ingest junk.
In Thinking, Hazlitt lays out a prescription for what ails most everyone, the neglect of thinking: "real thinking, independent thinking, hard thinking." People don't try to think through a problem themselves, but instead they "read up" on it. They examine what someone else has thought about a problem. And we are also quick to jump at the first solution presented, because "remaining in a state of doubt is unpleasant," Hazlitt reminds us. But the deeper, more satisfying solutions are the ones that come from accepting the unpleasantness of doubt and not jumping at the superficial answer.
Recognizing that we have problems concentrating, Hazlitt suggests a half hour each day be devoted to thinking about a single problem and removing temporary interest in other things. Hazlitt urges the reader to evaluate problems a number of different ways and cautions us not to be prejudiced when problem solving. By this he means we should not desire for an opinion to be right because we would benefit if it were or because we already hold that opinion, and we should not wish for an opinion to be wrong because it would force us to change our current opinion. He writes that one "must be constantly and uncompromisingly sounding his own opinions. Eternal vigilance is the price of an open mind."
"Eternal vigilance is the price of an open mind."– Henry Hazlitt In his chapter entitled "Thinking as an Art," Hazlitt stresses that memorizing a rule is nothing; applying what you learn is everything. He points out that, while the educated flatter themselves that their correct speech comes from the study of grammar, it's really derived from their unconscious imitation of the language of those they come in contact with and the books they read. "And needless to say, the cultivated man comes into contact with other cultivated men and with good literature; the ignoramus does not."
The job market is likely to be dismal for a long time, as government continues to try every trick in the Keynesian playbook to no avail. Only those who embrace Pink's advice to develop a whole new mind, and Hazlitt's recommendation to develop real thinking and problem-solving skills, will be successfully employed in the dark days ahead.
We live in an age rife with oppression. No group of Americans is better aware of this than our nation's youth. Young people today will most likely become the first generation in US history not to surpass their parents' living standards. Consider the increasing proportion of young adults who are choosing to either remain living with their parents, or move back in with them. Rather than seek new opportunities on their own, they are choosing the security of home and hearth at the expense of their future.
Why is this so? There are many hidden causes, all of which corrode the economic prospects of the up-and-coming generation, and enrich a privileged few. This is not an isolated phenomenon. All across the globe, governments have discarded fiscal responsibility in favor of short-term spending on war, welfare, and bailouts.
It's easy to see that this behavior will be costly, but not all groups are equally burdened. Government accounting wizardry and fiat money can hide the decline for a while, but the price must ultimately be borne by those who will inherit the inevitable crisis. The excesses of the older generations will come at the expense of the wealth and opportunity of the younger generations.
Let's examine the American economy: Current estimates of unfunded welfare liabilities are staggering — $107 trillion for Social Security and Medicare alone. The recession and the resulting nosedive in payroll-tax receipts have devastated the current Social Security surplus. The evaporation of this surplus will accelerate the financial implosion of the federal government and drastically increase the tax burden of the populace.
Because these programs are unsustainable, the younger you are, the less likely it is that you will recover the purchasing power lost through taxation. What this amounts to is a massive redistribution of wealth from the young to the bureaucrats and beneficiaries of these systems.
Since many young adults go to college, it's not surprising to find that the government has also enacted legislation under the pretense of assisting college students paying for their tuitions. They do this by providing subsidized loans to students, undoubtedly lining the pockets of the cartelized banking industry along the way.
As Austrian economics teaches us, when the price of a good or service is lowered below the market-clearing price, the demand for this good or service increases. The subsidized interest rates distort the price system and the consumers' rational cost-benefit analysis.
This leads many young people to go off to college who may not have done so if the interest rates were genuine. The higher, market rate might have led students to economize and decide to go to a less expensive university, attend a trade school, or perhaps eschew higher education all together.
The cheap loans discourage students from fully exploring their options and making the best choices given their personal aspirations. Students now know that they can easily obtain a tuition loan and admission into a state-run "community" college without the bother of having to study and do well in high school.
Because of this, we now find many students aimlessly drifting around the system for years, racking up enormous debts along the way, and wasting precious resources on frivolous courses and "extracurricular" activities. This perverse incentive structure has led our higher education system down a path of waste and mediocrity, within which many students are more interested in partying and slacking off than in actually learning anything.
But economic theory has yet another lesson to teach us. Because the supply of students who can afford college is artificially inflated due to the subsidized loans, colleges and universities have found that they can get away with raising their tuitions to stratospheric levels.
"Because the supply of students who can afford college is artificially inflated due to the subsidized loans, colleges and universities have found that they can get away with raising their tuitions to stratospheric levels."Nevertheless, the students keep on coming, both because the loans are so cheap and easy to obtain, and because the education establishment has an arsenal of statistics and slogans at the ready to describe the huge financial gains to be had from earning a college degree. "The huge debt is worth it," they say. "You'll make it all back after a few years."
At one time this was probably true for most students; but now an increasing number of students are finding that the crushing debt required to attend most four-year universities simply isn't worth it, especially in light of the abysmal job market.
To make matters worse, the recession has prompted many universities to raise their tuitions even higher. According to a new study by the Project on Student Debt,
Data show that for the past few years, around two-thirds of students graduating from four-year colleges had student-loan debt. The average amount these students owe has grown about six percent per year since 2003–04, reaching $23,200 for the class of 2008. For comparison, in 1996, only 58 percent of students graduated with debt, and they owed an average of $13,200.
We have found another looming crisis brought about by the heavy hand of government. Young adults must now spend many years after they graduate working off their debt to a bloated and inefficient education system. Despite the veneer of altruism, it is important to remember that this "assistance" has all been done for the benefit of the bankers, the university personnel, and the bureaucracies that serve them.
Unsurprisingly, the ever-declining value of the dollar also poses a large problem for the economic prospects of American youth. Even short of the hyperinflationary monetary collapse envisioned by the likes of Peter Schiff, John Williams, and Jim Rogers, inflation will soon be a very serious problem in the United States. Consider the enormous national debt (which now amounts to over 80% of GDP), the hopelessly massive federal budget deficit, and the overwhelming level of excess reserves lurking in the banking system. These liabilities will ultimately be financed by either printing money or repudiating the debt. Either of these scenarios will cause political upheaval on a very large scale.
In addition to that colossal problem, young people are prevented from building their wealth by a litany of state and federal regulations that prohibit their behavior and restrict their ability to find long-term employment. Laws dictating the minimum wage and regulating child labor play a significant role in preventing young people from finding jobs.
The minimum wage forbids would-be workers from accepting wages below the arbitrary cut off, and greatly increases the cost of hiring unskilled workers (many of whom are young people trying to pay for college). This results in far fewer of these workers being employed. Last year's federal minimum-wage hike will only exacerbate the youth-unemployment problem and make it more difficult for young adults to become independent.
Even the government statistics seem to support this conclusion. For December 2009, the Bureau of Labor Statistics reports that the official unemployment rate for people aged 16 through 19 was 27.1%, and the rate for people aged 20 through 24 was 15.6%, compared to the overall official unemployment rate of 10%. Teenagers made up 9% of the labor force in the 1970s, but they now account for only 3.2%.
The infamous "War on Drugs" is another failing program that targets both younger people and minorities. Nonviolent drug "offenders" are predominantly young people who are arrested for possessing small amounts of plant matter. According to the FBI, people under 25 years of age comprise about half of all drug-related arrests in the United States.
The nation's police, prosecutors, judicial agencies, and prison systems benefit greatly from this exploitation. It's far easier for them to concentrate on fining and imprisoning people who are mostly nonviolent thrill-seekers than it is for them to track down and arrest violent criminals like murderers, robbers, and rapists.
Speaking of "war," another point of interest is that military recruiters are increasingly setting up shop on high school and college campuses. They use the seductive promise of a free college education to convince young men and women into enlisting. Even assuming that the recruits' physical and mental health is still intact when they return, they often run into problems retrieving their compensation from the bureaucratic labyrinth.
While the masterminds behind these governmental intrusions are solely to blame for creating these problems, I am disappointed by the generations that came before mine. Americans have known for many years that these programs are ultimately unsustainable. Even if they were not, it is never legitimate to use coercion to pay for the retirements or medical bills of others, for the enforcement of draconian drug and labor prohibitions, or for the subsidization of student loans.
The American baby-boom generation is probably the wealthiest generation of human beings to ever walk the Earth. Even so, they have made little effort to end the subsidies given to them at the expense of their children and grandchildren, nor have they made any attempt to end the oppressive laws that prevent younger Americans from casting off the chains of debt and dependency. No society can remain civilized for long while treating its youth in this manner.
Given the rate at which our wealth and culture seem to be eroding away from beneath our feet, I urge both my elders and my peers to oppose the leviathan state and its cronies at every turn so we can start a new journey toward lasting prosperity.
[This paper is the conclusion of a two-part series. The first article was "Radical Patent Reform Is Not on the Way."]
Anti-Eating Mouth Cage US Patent Issued in 1982
As I noted in Part 1, there is a growing clamor for reform of patent (and copyright) law, due to the increasingly obvious injustices resulting from these intellectual property (IP) laws.Kinsella, Radical Patent Reform Is Not on the Way, Mises Daily (Oct. 1, 2009). However, the various recent proposals for reform merely tinker with details and leave the essential features of the patent system intact. Patent scope, terms, and penalties would still be essentially the same.
How should the IP system be reformed? For those with a principled, libertarian view of property rights, it is obvious that patent and copyright laws are unjust and should be completely abolished. See Kinsella, The Case Against IP: A Concise Guide, Mises Daily (Sept. 4, 2009). Total abolition is, however, exceedingly unlikely at present. Further, most people favor IP for less principled, utilitarian reasons. They take a wealth-maximization approach to policy making. They favor patent and copyright law because they believe that it generates net wealth — that the value of the innovation stimulated by IP law is significantly greater than the costs of these laws.Kinsella, There's No Such Thing As a Free Patent, Mises Daily (Mar. 7, 2005).
What is striking is that this myth is widely believed even though the IP proponents can adduce no evidence in favor of this hypothesis. There are literally no studies clearly showing any net gains from IP.Kinsella, Yet Another Study Finds Patents Do Not Encourage Innovation, Mises Blog (July 2, 2009). If anything, it appears that the patent system, for example, imposes a gigantic net cost on the economy (approximately $31 billion a year, in my estimate).Kinsella, What Are the Costs of the Patent System? Mises Blog (Sep. 27, 2007). In any case, even those who support IP on cost-benefit grounds have to acknowledge the costs of the system, and they should not oppose changes to IP law that significantly reduce these costs, so long as the change does not drastically reduce the innovation gains that IP purportedly stimulates. In other words, according to the reasoning of IP advocates, if weakening patent strength reduces costs more than it reduces gains, this results in a net gain.
In this paper I attempt to identify the most important changes that should be made to IP law to reduce its most egregious and significant costs, while not gutting its alleged innovation-stimulating effects. Keep in mind, however, that even the advocates of IP cannot show what its costs or alleged gains are; they provide no quantitative evidence but only intuition and qualitative reasoning. Thus, they cannot object if my suggestions also rely on common sense and extensive experience with the working of the existing IP system.
Moreover, given that virtually all empirical studies in this regard conclude that IP is either neutral or a net cost, the burden of proof should be on the IP advocate to show that a proposed change that clearly and significantly reduces costs should not be made. I will focus primarily on patent law, and also conclude more briefly with some proposed improvements to copyright and federal trademark law.
Costs and Benefits of IP LawAs noted above, the utilitarian or wealth-maximization arguments in favor of patent rights claim that a patent system is desirable because it does more good than harm — that it generates more wealth than it costs. The "wealth" purportedly generated is a result of the patent monopolySee Kinsella, Are Patents "Monopolies"? Mises Blog (July 13, 2009). providing an incentive to innovate, and to disseminate knowledge that would otherwise be kept secret.
The idea is that, instead of keeping an invention as a trade secret, the inventor, in exchange for the limited monopoly on the invention, makes the information about it public in a published patent that others can learn from, even if they can't yet use the patented device or process. And the promise of monopoly profits, or the reduction of free-rider effects, can incentivize innovation at the margins.See Kinsella, There's No Such Thing as a Free Patent; Corinne Langinier & GianCarlo Moschini, "The Economics of Patents: An Overview," Working Paper 02-WP 293, Center for Agricultural and Rural Development, Iowa State University (2002) (discussing benefits and costs of patents, including "patents can promote new discoveries" and "patents can help the dissemination of knowledge").
But benefits are not enough. The standard argument for patents is that the system leads to a net benefit — that the benefits exceed the costs. While IP proponents may dispute the claim that a patent system produces no overall, unambiguous benefits to offset its costs (discussed further below), it cannot be denied that there are significant costs.
Note also that both costs and purported benefits are related to the "strength" of patent rights: the length of the patent term, the extent and type of penalties imposed on infringers, and the scope of patent rights. Stronger patents, according to the standard argument, will produce greater incentives to generate even more innovation-related wealth, but at increased cost. Conversely, weaker patents would impose fewer costs but would provide smaller incentives to disclose and innovate.
Patent proponents must, if only grudgingly, concede that diminishing returns are achieved at a certain point — that the "net" wealth produced by the patent system decreases as the marginal increase in costs exceeds the marginal increase in alleged benefits. Patent advocates, for example, do not advocate quintuple damages instead of treble damages, or capital punishment for willful infringement, or making the patent term 1,000 years, or increasing patent scope to include algorithms and abstract scientific discoveries. They implicitly believe that strengthening the patent system in this way would cost more than would be gained.
And yet patent advocates also resist reductions in patent strength, even though it is possible that the costs could fall more dramatically than the alleged benefits. Or, as one economist puts it, that we are "on the wrong side of the Laffer curve for innovation."See Kinsella, Libertarian Favors $80 Billion Annual Tax-Funded "Medical Innovation Prize Fund," Mises Blog (Aug. 12, 2008).
The costs of the patent system are widespread. Ridiculous patents are issued or filed and companies are enjoined from selling their products. Judgments are issued and settlements reached for billions of dollars.See "Appendix: Examples of Outrageous Patents and Judgments," in Kinsella, Radical Patent Reform Is Not on the Way.
Untold hundreds of millions of dollars are spent annually on patent programs, largely for defensive purposes — to dissuade competitors from bringing a patent infringement lawsuit for fear of being hit with a similar counterclaim. Often, dominant competitors sue each other, and then back down, settling with a huge cross-license to each other's patent portfolios. This gives them freedom to operate, but the threat to the smaller players remains.
Once again, as in the case of minimum-wage, social-security, and prounion laws, federal legislation works in favor of big business,For a recent example, UPS is currently lobbying Congress to enact legislation that would redefine its rival, FedEx, as a trucking company rather than the airline it started out as in an attempt to make it easier for the Teamsters union to unionize FedEx drivers and raise their wage rates—and of course FedEx's cost structure. See Del Quentin Wilber & Jeffrey H. Birnbaum, Taking the Hill By Air and Ground: Shift in Congress Favors Labor, UPS Over FedEx, Washington Post (September 14, 2007). See also Murray N. Rothbard, Origins of the Welfare State in America, Mises.org (1996) ("Big businesses, who were already voluntarily providing costly old-age pensions to their employees, could use the federal government to force their small-business competitors into paying for similar, costly, programs…. [T]he legislation deliberately penalizes the lower cost, 'unprogressive,' employer, and cripples him by artificially raising his costs compared to the larger employer.… It is no wonder, then, that the bigger businesses almost all backed the Social Security scheme to the hilt, while it was attacked by such associations of small business as the National Metal Trades Association, the Illinois Manufacturing Association, and the National Association of Manufacturers. By 1939, only 17 percent of American businesses favored repeal of the Social Security Act, while not one big business firm supported repeal.… Big business, indeed, collaborated enthusiastically with social security."); Llewellyn H. Rockwell, Jr., "The Economics Of Discrimination," in Speaking of Liberty (2003), at 99 ("One way the ADA [Americans with Disabilities Act] is enforced is through the use of government and private 'testers.' These actors, who will want to find all the "discrimination" they can, terrify small businesses. The smaller the business, the more ADA hurts. That's partly why big business supported it. How nice to have the government clobber your up-and-coming competition."); Rothbard, For A New Liberty (2002), pp. 316 et seq.; Rothbard, The Betrayal of the American Right, 185-86 (2007) ("This is the general view on the Right; in the remarkable phrase of Ayn Rand, Big Business is 'America's most persecuted minority.' Persecuted minority, indeed! To be sure, there were charges aplenty against Big Business and its intimate connections with Big Government in the old McCormick Chicago Tribune and especially in the writings of Albert Jay Nock; but it took the Williams-Kolko analysis, and particularly the detailed investigation by Kolko, to portray the true anatomy and physiology of the America scene. As Kolko pointed out, all the various measures of federal regulation and welfare statism, beginning in the Progressive period, that Left and Right alike have always believed to be a mass movement against Big Business, are not only backed to the hilt by Big Business at the present time, but were originated by it for the very purpose of shifting from a free market to a cartelized economy. Under the guise of regulations "against monopoly" and "for the public welfare," Big Business has succeeded in granting itself cartels and privileges through the use of government."); Albert Jay Nock, quoted in Rothbard, The Betrayal of the American Right, 22 (2007) ("The simple truth is that our businessmen do not want a government that will let business alone. They want a government they can use. Offer them one made on Spencer's model, and they would see the country blow up before they would accept it."). See also Timothy P. Carney, The Big Ripoff: How Big Business and Big Government Steal Your Money (2006). and small companies or independent inventors are left out in the cold at the mercy of million-dollar patent suits filed by the business oligarchs. Or after one company prevails in a patent suit against a competitor, the wounded victim succumbs and is absorbed by the victor.See, e.g., Transocean v. GlobalSantaFe (S.D. Tex. Dec. 27, 2006) (permanent injunction granted in favor of plaintiff leads to acquisition of defendant by plaintiff). Would that these millions of dollars could have been spent on salaries, R&D, equipment, or other capital investments instead, or simply been returned to shareholders in the form of dividends.
The possibility of being shut down by a competitor is a perennial threat to businesses, especially small companies, who cannot afford to spend millions of dollars defending a patent suit. High-tech startups are even more vulnerable: they often have very low cash or profits, making them even less able to defend a patent lawsuit; and because they use newer technology, they are also more likely to infringe patents. It is virtually impossible to be aware of all the patents that are out there, or that are about to emerge, or that have just been filed (and that are secret for 18 months after filing).
And even if one could identify all of the pertinent patents, there can be literally thousands of patent claims (the several defined inventions set forth in each patent that define the "metes and bounds" of protection granted by the patent) that could be a potential problem, and no definitive interpretation of any of them. Most claims have not been parsed by a court, and many are intentionally obscure or vague, having been drafted by highly skilled, crafty patent attorneys taking maximum advantage of ever-shifting, complex and arcane rules,As the US Supreme Court has noted, "[t]he specification and claims of a patent… constitute one of the most difficult legal instruments to draw with accuracy …." Topliff v. Topliff (1892). While this would appear to be a compliment to the skills of patent practitioners, it is really a testament to the inherent subjectivity and ambiguity in patent law (and a bit of a commentary on the technical illiteracy of most attorneys — they're a bit overimpressed with engineer-attorneys: after all, they can actually do basic algebra!). and having been approved by understaffed government patent examiners unable to find all the relevant prior art.
And so companies do what they can but, in the end, they often just forge ahead, risking a patent suit (after all, a patent infringement lawsuit is not the only risk that entrepreneurs face), hoping not to be noticed, or hoping to be successful enough to accumulate the war chest needed to fight a patent suit or to have acquired enough of a patent arsenal to fight back or ward off such an attack in the first place. In some cases, no doubt, the nascent business is never formed; the would-be entrepreneur, sensing a dangerous patent thicket, steers clear of a given technology or business — thus leaving it to the techno-oligarchs (unseen costs are still costs, as Bastiat observed).See Frederic Bastiat, "That Which is Seen, and That Which is Not Seen" (1850); also Jeff Tucker, Seen and Unseen Costs of Patents, Mises Blog (Jan. 29, 2009). Or a given company sticks to its current lines of business, afraid to venture into a heavily patented area. And so on. So much for innovation or entrepreneurial risk.
So the costs of the patent system are obvious and huge, if not easily quantifiable. Patent proponents themselves have no idea what the exact costs, or purported benefits, of the patent system are; they have no idea what the net benefit of the patent system is, or whether there even is a net benefit. We can identify some of the costs, but not all of them. It is, in any event, certain that there are tremendous costs to individuals, businesses, and the economy in general.The US Constitution, Art. I, § 8, is based on such reasoning, in granting Congress the power "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." As for costs, see note 29, above, and the references collected in the section "Studies on the Costs of the Patent System" in Kinsella, Revisiting Some Problems With Patents, Mises Blog (Aug. 2, 2007); Ronald Bailey, The Tragedy of the Anticommons: Do patents actually impede innovation?, Reason (Oct. 2, 2007); An Open Letter From Jeff Bezos On The Subject Of Patents (March 2000); "The Parade of Horribles" section of "Peer to Patent": Collective Intelligence and Intellectual Property Reform. See also Robert P. Merges & Richard R. Nelson, "On the Complex Economics of Patent Scope," 90 Colum. L. Rev. 839 (1990); Edmund W. Kitch, "The Nature and Function of the Patent System," 20 J.L. & Econ. 265 (1977); Mark Lemley, "The Economics of Improvement in Intellectual Property Law," 75 Tex. L. Rev. 989, 1044–1051 (1997); Barnett, Cultivating the Genetic Commons. As noted by Dell Inc., et al., in their amicus curiae brief to the Supreme Court in the Quanta Computer v. LG Electronics case,
[Patent] rights are intended to encourage innovation but come at a significant cost to other market participants and are "restrictive of a free economy" (United States v. Masonite Corp.… (1942)). Indeed, this Court recently recognized that when patent rights are not appropriately defined, "patents might stifle, rather than promote, the progress of useful arts." KSR Int'l Co. v. Teleflex Inc.… (2007). [emphasis added]
And as pointed out by Allison et al.,
Inventors come up with a new idea, hire a lawyer, write a patent application, spend years in the arcane and labyrinthine procedures of the U.S. Patent and Trademark Office (PTO), get a patent, and then … nothing. Ninety-nine percent of patent owners never even bother to file suit to enforce their rights. They spend $4.33 billion per year to obtain patents, but no one seems to know exactly what happens to most of them. Call it "The Case of the Disappearing Patents."John R. Allison, Mark A. Lemley, Kimberly A. Moore, R. Derek Trunkey, Valuable Patents. See also Mark A. Lemley, Rational Ignorance at the Patent Office, 95 Northwestern U. L. Rev. (2001).
One study suggests that American companies spend $11.4 billion a year on software patent litigation;"End Software Patents" Launches With Website and Report, The 271 Patent Blog (Feb. 28, 2008). another conservatively estimates that "the economic losses resulting from the grant of substandard patents can reach $21 billion per year by deterring valid research with an additional deadweight loss from litigation and administrative costs of $4.5 billion annually."George S. Ford et al., Quantifying the Cost of Substandard Patents: Some Preliminary Evidence, Phoenix Center Policy Paper Number 30 (Sept. 2007) ("These estimates may be viewed as conservative because they do not take into account other economic costs from our existing patent system, such as the consumer welfare losses from granting monopoly rents to patent holders that have not, in the end, invented a novel product, or the full social value of the innovations lost."); see also The cost of substandard patents, Technological Innovation and Intellectual Property blog (Feb. 21, 2008) and How Much Harm Do Bad Patents Do To The Economy?, Techdirt (Feb. 25, 2008). I have estimated the net cost of the American patent system to be at least $31 billion annually.Kinsella, What are the Costs of the Patent System?.
Other costs include
"In Terrorem Effects" (deterring potential competitors or follow-on innovators from entering a field by the existence of patents owned by their competitors)"Holdup Licensing" (patent owners might try to game the system by seeking to license even clearly bad patents for royalty payments small enough that licensees decide it is not worth going to court, likely costing in the hundreds of millions of dollars)"Facilitating Collusion" (licensees might agree to pay royalties on patents they know are invalid as part of a scheme to cartelize an industry)Mark A. Lemley, Rational Ignorance at the Patent Office, 95 Northwestern U. L. Rev. (2001).Causing consumers to absorb monopoly prices over "inventions" that were already effectively common knowledgeDirecting resources away from productive research and instead toward strategic accumulation of patents already filed over innovations already deployedDiverting resources to "defensive patenting" or securing offensive "blocking patents"Directing research away from areas of existing patents that should not have been grantedDirecting resources toward acquiring and enforcing substandard patents and collecting royalties rather than other, more-productive fields of economic activity.See The Cost of Substandard Patents.Some argue that the patent system actually reduces net innovation — that the costs of the patent system are not only greater than its benefits, but that the patent system imposes costs and also reduces innovation.See Kinsella, Patents and Innovation, Mises Blog (Mar. 7, 2008), Revisiting Some Problems with Patents, and What Are the Costs of the Patent System? In other words, it is not only that the patent system imposes billions of dollars in costs, and that it is uncertain whether the extra innovation stimulated is worth more than this cost; it also seems likely that the patent system actually stifles and impedes innovation, adding injury to injury.
And this is just a smattering of the possible harms and costs of the patent system. If patent rights can be adjusted to significantly reduce these costs, without obviously reducing the benefits by a greater amount, then even utilitarian patent proponents should favor this change — unless they can demonstrate otherwise with sound reasoning or empirical data.
"Who can deny that, given the existing system, patent attorneys perform a valuable service? If we someday develop a cure for cancer, there will be no cancer doctors; this does not mean cancer specialists are not needed now, so long as there is cancer."
Most natural-rights patent advocates, such as Ayn Rand, also oppose patent rights of infinite duration or scope. They do not believe patents should last forever, or that capital punishment should be imposed for infringement, for example. Instead, they favor some finite duration and scope for patent rights — 17 or so years of enforceability, and so on. Now, if these limits are arbitrary, the "principled" patent proponent has little basis to oppose moving patent boundaries in one direction or the other — a 12- or 28-year patent term is just as good (and as arbitrary) as a 17-year term.To be clear: the US patent term, prior to amendments to the Patent Act in 1995, was 17 years from the date the patent issued. After 1995, patents are enforceable after they are issued, until 20 years from the date the application was filed. Since patents typically take two or three years to issue, the effective term of patents is still about 17 years. See also C. Michael White, "Why a Seventeen Year Patent," 38 J. Pat. Off. Soc'y 839 (1956) (describing historical basis for seventeen-year term and proposing shortened terms). What inevitably happens is that the deontological or principled proponent of patent rights resorts to utilitarian standards to argue for drawing the line here as oppose to there. They, too, therefore, have no principled opposition to changes that significantly reduce the patent system's costs.
As for patent skeptics and opponents, they, too, will endorse changes to the patent system that unambiguously reduce its costs. My proposals should find favor in the eyes of those who would like to abolish patents altogether. Someone who wants the patent term reduced from seventeen to zero years will be in favor of reducing the term to twelve years, for example. The proposals herein are thus analogous to arguing for a lower tax rate, no matter what type of tax is in place — as opposed to proposing tinkering with the tax system to make it more "fair" or efficient.On this see Llewellyn H. Rockwell, Jr., The Tax Reform Racket, observing that "The only tax plan anyone should trust is the most simple possible: the one that proposes to lower existing taxes." See also Rockwell, Diversions; Rothbard, The Consumption Tax: A Critique, Power and Market, and The Myth of Neutral Taxation; Laurence Vance, The Fair Tax Fraud and Flat Tax Folly.
So, it is uncontroversial that patents should not be "too easy" to get, nor should they be "too strong." Even the Supreme Court, over a century ago, acknowledged that if patent monopolies are granted "for every trifling device, every shadow of a shade of an idea, which would naturally and spontaneously occur to any skilled mechanic or operator in the ordinary progress of manufactures," then
such an indiscriminate creation of exclusive privileges tends rather to obstruct than to stimulate invention. It creates a class of speculative schemers who make it their business to watch the advancing wave of improvement, and gather its foam in the form of patented monopolies, which enable them to lay a heavy tax upon the industry of the country, without contributing anything to the real advancement of the arts. It embarrasses the honest pursuit of business with fears and apprehensions of concealed liens and unknown liabilities lawsuits and vexatious accountings for profits made in good faith.Atlantic Works v. Brady, 107 US 192, 200 (1882).
In other words, it's a good thing if patent applicants face a high hurdle; if it's difficult to obtain a patent, fewer patents on "trifling devices" will be granted.
The Silent BarSome patent attorneys balk at such critiques of the patent system. They take it personally, as if their career choice is under attack. But they should not. Who can deny that, given the existing system, patent attorneys perform a valuable service?See Kinsella, Patent Lawyers Who Don't Toe the Line Should Be Punished! Mises Blog (Sep. 29, 2009); idem, An Anti-Patent Patent Attorney? Oh my Gawd! StephanKinsella.com (July 12, 2009. By analogy, in a just society there would be no taxation, and thus no need for tax attorneys. But given the existence of taxation, tax attorneys provide a valuable service to there clients. If we someday develop a cure for cancer, there will be no cancer doctors; this does not mean cancer specialists are not needed now, so long as there is cancer. Nor are tax attorneys and oncologists expected to favor taxes or cancer.
Why, then, should patent attorneys be required to favor the current patent system as a policy matter, just because they are navigating the existing rules on behalf of their clients?See Mike Masnick, Is It So Crazy For A Patent Attorney To Think Patents Harm Innovation?, Techdirt (Oct. 1, 2009) (discussed here). The problem is not what patent attorneys do; it's what they favor. Similarly, the problem with a protax tax attorney is not that he defends people from the IRS; it's that he advocates a tax system. And everyone would object to a cancer doctor working to cause more people to have cancer.
And are my cynical views about patents really that isolated among the patent bar? Sure, most patent lawyers give lip service to the idea that patents are "necessary" to "promote innovation." Yet almost none, in my experience, give any serious thought to this. Most, if they have any opinion at all, simply repeat the bromides they hear in law school and that courts and law professors repeat ad nauseum as if they are obvious, undisputed truths. Virtually all of them have been pickled in the wealth-maximization, law-and-economics ideas rife in law school. So they have a vague notion that the patent system is good because it encourages innovation. And innovation is a good thing, right? It adds value to the economy and improves our lives. Ceteris paribus, of course.
And there's the rub — the ceteris paribus "gotcha." Rarely do any patent advocates bother to ask whether the patent system's costs are greater than its alleged benefits.See Kinsella, There's No Such Thing as a Free Patent.
Talk to a typical patent practitioner: he will almost unfailingly state his support for the patent system and "the inventor." Innovation is good, he'll say; so of course it should be protected, encouraged, and stimulated. But drill a bit deeper, ask him if he has any reasons for this other than what he has heard others say, and he'll usually cave in, or change the subject. You quickly realize most of them just do not care. (It's sort of like asking a public-school teacher why she favors public education. She claims to be in favor of it, but is not interested in coming up with a non-self-serving justification for it.)
For this reason, perhaps, almost none of them are even aware that no one seems to have ever established that the purported benefits of patents are greater than their costs. They do not know that whenever any attempt is made to estimate the costs of the patent system and to compare them to its benefits, the study is either inconclusive or concludes that the patent system is a net loss to the economy.See Kinsella, Yet Another Study Finds Patents Do Not Encourage Innovation; idem, Revisiting Some Problems With Patents; Barnett, Cultivating the Genetic Commons, p. 1008 ("There is little determinative empirical evidence to settle theoretical speculation over the optimal scope and duration of patent protection.") (citing D.J. Wright, "Optimal patent breadth and length with costly imitation," 17 Intl. J. Industrial Org. 419, 426 (1999)); Merges & Nelson, "On the Complex Economics of Patent Scope," pp. 868-70 (stating that most economic models of patent scope and duration focus on the relation between breadth, duration, and incentives to innovate, without giving serious consideration to the social costs of greater duration and breadth in the form of retarded subsequent improvement)); Tom W. Bell, Prediction Markets for Promoting the Progress of Science and the Useful Arts, 14 G. Mason L. Rev. (2006):"But [patents and copyrights] for the most part stimulate only superficial research in, and development of, the sciences and useful arts; copyrights and patents largely fail to inspire fundamental progress.… Patents and copyrights promote the progress of the sciences and useful arts only imperfectly. In particular, those statutory inventions do relatively little to promote fundamental research and development …."And see Thomas F. Cotter, "Introduction to IP Symposium," 14 Fla. J. Int'l L. 147, 149 (2002) ("Empirical studies fail to provide a firm answer to the question of how much of an incentive [to invent] is necessary or, more generally, how the benefits of patent protection compare to the costs."); Mark A. Lemley, Rational Ignorance at the Patent Office, 95 Northwestern U. L. Rev. (2001), at p. 20 & n. 74:"The patent system intentionally restricts competition in certain technologies to encourage innovation. Doing so imposes a social cost, though the judgment of the patent system is that this cost is outweighed by the benefit to innovation.… There is a great deal of literature attempting to assess whether that judgment is accurate or not, usually without success. George Priest complained years ago that there was virtually no useful economic evidence addressing the impact of intellectual property.… Fritz Machlup told Congress that economists had essentially no useful conclusions to draw on the nature of the patent system."See further Julie Turner, Note, "The Nonmanufacturing Patent Owner: Toward a Theory of Efficient Infringement," 86 Cal. L. Rev. 179, 186-89 (1998) (Turner is dubious about the efficacy of the patent system as a means of inducing invention, and would argue against having a patent system if this were its only justification); F.A. Hayek, The Fatal Conceit: The Errors of Socialism (U. Chicago Press, 1989), p. 36:"The difference between [copyrights and patents] and other kinds of property rights is this: while ownership of material goods guides the use of scarce means to their most important uses, in the case of immaterial goods such as literary productions and technological inventions the ability to produce them is also limited, yet once they have come into existence, they can be indefinitely multiplied and can be made scarce only by law in order to create an inducement to produce such ideas. Yet it is not obvious that such forced scarcity is the most effective way to stimulate the human creative process. I doubt whether there exists a single great work of literature which we would not possess had the author been unable to obtain an exclusive copyright for it; it seems to me that the case for copyright must rest almost entirely on the circumstance that such exceedingly useful works as encyclopedias, dictionaries, textbooks, and other works of reference could not be produced if, once they existed, they could freely be reproduced.… Similarly, recurrent re-examinations of the problem have not demonstrated that the obtainability of patents of invention actually enhances the flow of new technical knowledge rather than leading to wasteful concentration of research on problems whose solution in the near future can be foreseen and where, in consequence of the law, anyone who hits upon a solution a moment before the next gains the right to its exclusive use for a prolonged period. [citing Fritz Machlup, The Production and Distribution of Knowledge (1962)]"See also Kinsella, Patents and Innovation (noting economic historian Eric Schiff's conclusion that when the Netherlands and Switzerland temporarily abolished their patent systems, they experienced increased innovation; Petra Moser's finding that countries without patent systems innovate just as much, if not more, than those with patent systems). They will reflexively repeat the standard propatent mantra if asked, but they really don't care, or know, whether these purported justifications make any sense.
In a way, it is refreshing that patent attorneys do not care whether the patent system is really justifiable. Tax attorneys defend victims of a rapacious state without necessarily defending taxes — or even having an opinion about it. If you hire a tax attorney, you want an effective one, not one who has the right policy views.
Likewise with patent attorneys. They are a conservative lot — most are engineers in a former life — and don't want to rock the boat. They don't need to come out with a sophisticated stance on patent policy in order to represent clients. They don't need to point out that the emperor has no clothes, or even figure this out in the first place. And clients really don't care about this any more than they care whether their advocates read comics in private or what church they attend. It's just not relevant.
Nevertheless, my experience would indicate that the propatent stance of the patent bar is not as uniform as surface appearances might indicate. To be sure, there are the expected, official, propatent comments by the "respectable," establishment IP advocacy groups — the ABA, the AIPLA, Intellectual Property Owners Association, the various "IPLAs" — PIPLA, HIPLA, NYIPLA — and so on.
But if you press your average practitioner when the senior partner's not listening, it's not hard to get him to admit he's just doing what he has to do to pay the mortgage. He doesn't care about the system's "legitimacy," and doesn't pretend to know much about it either, other than genuflecting when the IP priests tell him to. In fact, many display a refreshingly self-honest cynicism in this regard. It's the kind of thing that many in the profession know but can't say too loudly in polite company.
Take, for example, the results of this informal web poll I conducted a while back. The poll was circulated among both patent attorneys and libertarians (and others, such as Digg readers), in which 84 percent of respondents (at this writing) answered "Yes" to the question "Would you give up your right to sue others for patent infringement in exchange for immunity from all patent lawsuits?"
And consider the offhand comment in which a patent attorney admits, "Patents are intended to lure potential inventors into the business of innovation. The truth is, however, that very little is known about how patents really drive innovation." Consider also a poignantly honest admission that was made by a patent attorney in an email to me in response to a letter in the trade magazine, IP Today.Elaboration in Kinsella, Miracle — An Honest Patent Attorney! Mises Blog (Sep. 7, 2006). It could be argued not only that the costs of the patent system are greater than its innovation-advancing benefits — but that it actually impedes innovation, so that a cost is being incurred to actually stifle innovation. See, e.g., Ronald Bailey, The Tragedy of the Anticommons: Do patents actually impede innovation?, Reason (Oct. 2, 2007); Barnett, Cultivating the Genetic Commons:"Broadly defined patents appear likely to exacerbate considerably the accessibility costs that attend any system of property rights. Extending any form of patent protection to biotechnological innovations obviously increases development costs for subsequent researchers and, depending on patent scope and duration, may reduce or eliminate some researchers' incentives to improve upon existing innovations. This danger grows as patent size increases. If broad patents sufficiently inflate subsequent improvers' accessibility costs, patent protection would fail a net social benefit test, since it would reduce the total stream of innovative output that exists in a world without any patent protection at all." I had critiqued patent litigator Joseph Hosteny's defense of patent trolls — in particular his comment that "the patent system is necessary for there to be invention and innovation." I had written,
There is … no conclusive evidence showing that the purported benefits of the patent system — extra innovation induced by the potential to profit from a patent; earlier-than-otherwise public disclosure of innovation — exceeds the significant and undeniable costs of the patent system.… Is the patent system "worth it"? Who knows? Apparently no one does. It seems to follow that we patent attorneys ought not pretend that we do.
In response I received an interesting email from a respected patent attorney, a senior partner in the IP department of a major national law firm who shall remain anonymous:
Stephan, Your letter responding to Joe Hosteny's comments on Patent Trolls nicely states what I came to realize several years ago, namely, it is unclear that the U.S. Patent System, as currently implemented, necessarily benefits society as a whole. Certainly, it has benefited [Hosteny] and his [partners] and several of their prominent clients, and has put Marshall, Texas on the map; but you really have to wonder if the "tax" placed on industry by the System … is really worth it.Our anonymous correspondent continues:"Of course, anyone can point to a few start-up companies that, arguably, owe their successes to their patent portfolios; but over the last 35 years, I have observed what would appear to be an ever increasing number of meritless patents, issued by an understaffed and talent-challenged PTO examining group, being used to extract tribute from whole industries. I have had this discussion with a number of clients, including Asian clients, who have been forced to accept our Patent System and the "taxes" it imposes on them as the cost of doing business in the USA. I wish I had the "answer". I don't. But going to real opposition proceedings, special patent courts with trained patent judges, "loser pays attorney fees" trials, retired engineers/scientists or other experienced engineers/scientists being used to examine applications in their fields of expertise by telecommuting from their homes or local offices throughout the Country, litigating patent attorneys providing regular lectures to the PTO examiners on problems encountered in patent infringement cases due to ineffective or careless examination of patent applications, and the appointment of actually qualified patent judges to the CAFC, may be steps in the right direction."See Kinsella, Miracle — An Honest Patent Attorney!
It is my belief that there is at least tacit recognition by a nontrivial segment of the patent bar that they are participating in a scheme where wealth is transferred from "infringers" to "patentees," with the patent practitioners extracting a healthy handling fee. They have no idea whether this system is "good for" the economy or society as a whole, nor do they care, despite giving lip service to the propatent yada yada.
This does not imply that companies can afford not to fight within the rules of the current system. They have to acquire patents if only for defensive reasons: to ward off patent infringement suits from competitors.
But the question at hand is what kind of changes ought to be made to improve the situation. Anything that can reduce the risks and costs faced by entrepreneurs and businesses ought to be given serious consideration. Most of all, market actors need freedom to operate — freedom to engage in business without fear of competitors using the power of the state to hobble them or shut them down.
Typical Proposals for ReformBefore laying out my own proposed changes, it is illuminating to note the reform proposals typically advanced. For example, James Bessen and Michael J. Meurer, in their book Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk (Princeton, 2008), propose the following:
"Make patent claims transparent.""Make claims clear and unambiguous by enforcing strong limits against vague or overly abstract claims.""Make patent search feasible by reducing the flood of patents.""Besides improving notice, we also favor reforms to mitigate the harm caused by poor notice. These include an exemption from penalties when the infringing technology was independently invented and changes in patent remedies that might discourage opportunistic lawsuits."The group Public Knowledge proposes the following reforms to improve patent law and the patent-litigation process:
Raising the standard from determination of obviousness from the person having "ordinary skill" in the art to a person having "recognized skill" in the art.Peer review of patent applications.Permitting third parties to submit prior art, and rewarding them with fee reimbursement if successful.Permitting post-grant review of patents by the USPTO prior to litigation.…Removing the presumption of validity that issued patents enjoy.Apportioning damages to be proportional to the value of the patent.Allowing circuit courts other than the Federal Circuit to hear patent appeals.Limiting litigation venues to those jurisdictions with a meaningful connection to one of the litigants.Other proposals for reform abound.See e.g., the Council on Foreign Relations study, "Reforming the U.S. Patent System: Getting the Incentives Right," at p. 33; the Innovation Alliance's suggestions for patent reform; Patent Reform Act of 2009, Patently-O (March 3, 2009); Patent Reform 2009: Reactionary Causes, Patent Baristas (March 3, 2009); also note 2 to Kinsella, Radical Patent Reform Is Not on the Way.
While some of these ideas would no doubt improve matters, most of them are at best minor, mere tinkering with the system. Making patent claims more "transparent" is a technical, elusive goal that still will not reduce the term or scope of patents, or the penalties imposed for infringement, for example. Of these suggestions, providing an independent inventor defense is best.
Proposed Improvements to Patent LawBelow are suggested reforms to the existing patent system that would, in my view, significantly reduce the costs and harm imposed by the patent system while not appreciably, or as significantly, reducing the innovation incentives and other purported benefits of the patent system. The changes proposed below are changes I believe would benefit high-tech companies as well as other companies that do not develop a great deal of patentable technology. I list these changes in generally descending order of importance.
Reduce the Patent TermCompanies face an immense patent thicket. In part this is due to the approximately 17-year patent term. It is not uncommon to come across patents issued 10 or 15 years earlier that pose a threat to one's business. Many of these patents should not have been issued. Appeals for "improving patent quality" are likely to be futile or of minimal effect, as are the calls for improving government "efficiency" by presidential candidates every four years.
"This does not imply that companies can afford not to fight within the rules of the current system. They have to acquire patents if only for defensive reasons. But the question at hand is what kind of changes ought to be made to improve the situation."
The patent term should be reduced to 5 or 7 years (from approximately 17–18 years now). (Amazon CEO Jeff Bezos actually proposes a 3–5 year term for business method and software patents.)An Open Letter From Jeff Bezos On The Subject Of Patents (March 2000). See also C. Michael White, "Why a Seventeen Year Patent," 38 J. Pat. Off. Soc'y 839 (1956) (describing historical basis for seventeen-year term and proposing shortened terms); Barnett, Cultivating the Genetic Commons ("There is little determinative empirical evidence to settle theoretical speculation over the optimal scope and duration of patent protection.") (citing D.J. Wright, "Optimal patent breadth and length with costly imitation," 17 Intl. J. Industrial Org. 419, 426 (1999); Merges & Nelson, "On the Complex Economics of Patent Scope," pp. 868–870 (stating that most economic models of patent scope and duration focus on the relation between breadth, duration, and incentives to innovate, without giving serious consideration to the social costs of greater duration and breadth in the form of retarded subsequent improvement)). Such a reduction would eliminate a huge portion of the patent threat that entrepreneurs and companies face, drastically reducing the costs borne by companies. There would be fewer lawsuits and fewer threats, lower insurance premiums, and reduced patent license fees and royalties. (Note: it is true that products such as pharmaceuticals and medical devices may be delayed for years by the FDA approval process. However, at least some of the time lost can be added to the patent term, so that such products would still have a patent coverage period once the product receives regulatory approval.)
Yet there would still be an incentive to file patent applications to obtain a 5–7 year monopoly on one's idea. Would the incentive be reduced somewhat? Probably. But there is no reason to think the incentive would be drastically reduced, or that we would lose more marginal innovation and disclosure than would be saved.
Another twist would be to have a sliding scale, with longer terms granted for different types of subject matter (e.g., business methods, software, and pharmaceuticals). Such an approach would, obviously, be more complex and probably hopelessly unworkable. (See also the discussion of a petty patent system, below.)
Remove Patent Injunctions/Provide Compulsory RoyaltiesPaying royalties is one thing. This is similar to a tax. It impedes and puts a drag on efficiency. Worse still is the prospect of an injunction, which can simply shut a company down. Quite often this is what a competitor will seek. They do not want damages or money: they want to dominate the market and eliminate competition. Or the threat of injunction is used to basically wring money from an alleged infringer (e.g., the $600 million RIM (BlackBerry) had to pay, even though the patents were under appeal at the PTO, due to the threat of an injunction).
If the purpose of the patent system is to provide some incentive to innovators, then receiving a monetary payment should be sufficient. Patent injunctions should be abolished entirely. The only remedy should be an award of damages (for past infringement) or a compulsory license (ongoing royalties based on future "infringement").
This would prevent patentees from shutting down competitors. At most, they could impose a small "tax." Litigation costs, insurance premiums, and the ability of patentees to extract unreasonable royalties from alleged infringers would be radically curtailed. On the other hand, because patentees would still be able to seek reasonable royalties, there would still remain a substantial incentive to file for patents.
The compulsory licensing approach is not new. Some countries impose compulsory licensing on patentees who do not adequately "work" the patent.See, e.g., Mexico-Selected Compulsory Licensing, Government Use, and Notable Patent Exception Provisions — Mexico Industrial Property Law. In accordance with article 5.A.2 and 4 of the Paris Convention, the French Patent Law (Code de la Propriété Intellectuelle) provides five different reasons for compulsory licensing, including "Non working of invention during four years from filing" (see L. 613-11 to 14). See also similar provisions in Sections 13, 24 and 81 of the German Patent Law. English translations of many foreign laws may be found in WIPO's Collection of Laws for Electronic Access. The United States already provides for compulsory licensing in certain cases, as the US government threatened to do in the Cipro anthrax drug case.See Ciprofloxacin: the Dispute over Compulsory Licenses; Tom Jacobs, Bayer, U.S. Deal on Anthrax Drug, Motley Fool (Oct. 25, 2001). See also Kinsella, Brazil and Compulsory Licenses, Mises Blog (June 8, 2007); Kinsella, Condemning Patents, Mises Blog (Feb. 27, 2005). Also, in the wake of the recent eBay case, some courts are awarding some form of ongoing royalty of compulsory license instead of an injunction. See cases cited in note 15 to "Radical Patent Reform Is Not on the Way." See also Peter S. Menell, "Intellectual Property and the Property Rights Movement," Regulation (Fall 2007) (arguing that patent rights are unlike property rights and should not automatically receive the same protections as real property rights do, such as injunctions, exclusivity, and inviolability); Julie Turner, Note, "The Nonmanufacturing Patent Owner: Toward a Theory of Efficient Infringement," 86 Cal. L. Rev. 179, 186–89 (1998), arguing that"the patent system should not benefit those who would use a patent solely as a barrier to entry, without intent to pursue commercialization of the underlying technology — entities which I will call "nonmanufacturing patent owners." While disclosure may have value, mere disclosure fails to justify the granting of a monopoly absent the patent owner's intent to commercialize the disclosed invention. As a result, the patent enforcement system should adopt a scheme whereby nonmanufacturing patent owners receive monetary relief equivalent to the "disclosure value" of their patents."For more discussion of this issue, see Merges & Nelson, "On the Complex Economics of Patent Scope," at notes 6–7 and accompanying text ("All in all, the substantial amount of evidence now available suggests that compulsory patent licensing, judiciously confined to cases in which patent-based monopoly power has been abused … would have little or no adverse impact on the rate of technological progress ….") (quoting F.M. Scherer, Industrial Market Structure and Economic Performance 456–57 (2d ed. 1980)).
Royalty Cap/Safe HarborA variation of this approach would be to set a cap on the total amount of royalties that any one company would have to pay for compulsory patent royalties (at least, for a given product) — for example, 5 percent. Thus, if one is sued by 3 different patentees, at most he has to pay 5 percent royalties on sales. If too many patent vultures hound an innocent businessman, he could simply throw his hands up, deposit his 5 percent royalty with some escrow agent and let them fight it out.
Reduce the Scope of Patentable Subject MatterCurrently, patents can be obtained for a wide array of inventions: pharmaceuticals, and any type of "useful" apparatus or method, including software and business methods. This is due to the broad wording of Section 101 of the US Patent Act, which has been construed to mean that the "statutory subject matter" includes "anything under the sun that is made by man."
Copyright already covers software. It should be excluded from the scope of patentable subject matter. Ditto "business methods." (Business and software patents are relatively new anyway, so that excluding them from the scope of patentable subject matter is only rolling the clock back a decade or two.) In fact, the example most often given to show that patents are needed is pharmaceuticals. So, let's eliminate patents for everything except pharmaceutical compounds — and reduce the term to 3–5 years. For a spoonful of sugar to help the medicine go down, the FDA should be abolished, and federal and state taxes and regulations eased.See Kinsella, Snarky IP Comment, StephanKinsella.com (Sep. 5, 2009) ("Hey, I know — let's trust the same government that imposes FDA costs, taxes, and regulatory roadblocks to set up a patent office to hand out patents to give you partial ownership of others' property to incentivize you just enough to overcome the costs they imposed on you on the first place with the FDA and taxes and regulations. Beautiful! And if that's not 'enough' incentive, establish a government panel of 'experts' to give you 'enough' of a reward paid by taxpayers. Beautiful! I like it!").
Provide for Prior-Use and Independent-Inventor DefensesUnder copyright law, someone who independently creates an original work similar to another author's original work is not liable for copyright infringement, since the independent creation is not a reproduction of the other author's work. Thus, as a defense a copyright defendant can try to show he never had access to the other's work.
Patents, however, are different. As long as someone is an actual inventor of an invention (he did not learn about it from someone else), and the invention was not publicly known, he can obtain a patent for it. Someone who previously invented the same thing and is using the idea in secret can actually be liable for infringing the patent granted to the second inventor. Also, if a later person independently invents the same idea that was previously patented by another, this is also no defense. Prior use, or independent invention, is not a general defense. There is currently only a very limited "prior user" right (or "first inventor defense"), available to those who commercially used a "business method" before someone else patented it. 35 USC § 273.
A defense should be provided for those who are prior users of, or who independently invent, an invention patented by someone else. This would greatly reduce the cost of the patent system since one difficulty faced by companies is that they do not know what patents they might infringe. If someone learns of an invention from another's patent, at least they are aware of the risk and can possibly approach the patentee for a license.
But quite often a company independently comes up with various designs and processes while developing a product, which designs and processes had been previously patented by someone else. If the goal of patent law is to reward invention, it should be sufficient to permit patentees to sue people who actually learned of the idea from the patent — just as copyright infringement exists when someone reproduced another's work but not when it is independently created.
One patent-reform bill originally proposed to broaden the existing prior-user defense by eliminating the business-method patent limitation so that users of all types of inventions would have been able to use the defense, but this was removed from later versions of the bill. A broad prior-user defense should be established, as well as an independent-inventor defense that even a later inventor could use. See Kinsella, Common Misconceptions about Plagiarism and Patents: A Call for an Independent Inventor Defense, Mises Blog (Nov. 21, 2009). The CFR study "Reforming the U.S. Patent System: Getting the Incentives Right" recommends a prior-user right be adopted; Bessen & Meurer, in Patent Failure, recommend an independent inventor defense.
Instantly Publish All Patent ApplicationsUntil 1999, patent applications remained secret until they issued. Thus arose the problem of "submarine patents": patents could remain pending in secret for decades — after industry had independently invented and widely adopted the technology — and then "emerge" like a submarine and extract heavy royalties from many companies. The 1995 amendments to patent law changed the patent term from 17 years from date issuance, to 20 years from the date of filing, to reduce this problem. And starting in 1999, US patent applications are now made public 18 months after filing, unless the applicant requests nonpublication and promises not to file the patent internationally.
Part of the "patent bargain" is that the state grants a limited monopoly to inventors in exchange for public disclosure of the invention. This is why patents are published. The publication of (most) patent applications at 18 months was an improvement, but should be changed to mandatory, instant publishing of all patent applications (with perhaps a minor delay for any national-security or foreign-filing-license clearance). This would help potential patent defendants by giving them more opportunity to be aware of potential patent threats a year and a half earlier. Patent applicants have to reveal their secrets at 18 months anyway, and are the ones requesting a state monopoly to use to sue people, so they have no grounds to complain about having to give a bit more fair notice to their potential victims.
Eliminate or Restrict Enhanced DamagesUnder current law, if the patentee can prove the infringer "willfully" infringed, up to treble damages can be obtained. This is punitive. The patentee ought to be able to recover only actual damages, not three times that amount.The CFR study "Reforming the U.S. Patent System: Getting the Incentives Right" recommends making it more difficult to find willful infringement.
Working/Reduction to Practice RequirementUnder current law, there is no requirement that an invention be actually reduced to practice before a patent is granted on it, or that it be "worked" after grant to maintain the patent in force. When a patent application is filed, this is considered to be a "constructive reduction to practice." It would make it more difficult to obtain frivolous patents if the inventor had to make an actual, working model of the invention — and if the patented invention had to be actually worked or used by the patentee to stay in force.
Provide for Advisory Opinion PanelsUnder our current patent system, if a company becomes aware of patent that might be a problem, or is accused of infringing the patent, the company has only limited choices. It can ignore it, risking possible treble damages for willful infringement; it can try to negotiate a possibly expensive license, even though the patent's claims may be ambiguous or its validity doubtful; or it can pay $30,000 or more for a patent opinion that may not do much good anyway.
A cheaper, more streamlined option ought to be introduced to permit a more authoritative opinion to be obtained that helps nail down the scope of the patent's claims and whether or not the patent is valid. The UK introduced such a service a couple of years ago. Variations of this approach could be employed; as noted above, Public Knowledge proposes "peer review of patent applications," "permitting third parties to submit prior art, and rewarding them with fee reimbursement if successful," and "permitting post-grant review of patents by the USPTO prior to litigation."
Losing Patentee PaysIn the US system, a victorious defendant in a patent-infringement lawsuit usually still pays for his legal defense, which may run in the millions of dollars. The system should be changed so that a patentee who loses an infringement suit must pay the defendant's legal and other costs. The IPO recently proposed a loser-pays approach, but in my view, the defendant should never have to pay the fees of the patentee, since the defendant did not instigate the suit.
Expand Right to Seek Declaratory JudgmentsUnder current law, someone threatened with a patent lawsuit can bring a declaratory judgment (DJ) action to have a court decide the issue. The MedImmune decision made it easier for licensees to use a DJ action to challenge the validity of patents they had previously licensed. The Declaratory Judgment Act should be expanded to make it easier for potential infringers to bring an action against a patentee if there is any doubt by the potential infringer.
For example, if A is worried about violating B's patent, A could request B to provide a written exoneration statement that it does not intend to sue A or request a license for a given product. If B does this, B is estopped from ever suing A for patent infringement with respect to that product. If B refuses to provide the statement within 30 days, then A has a right to seek a DJ. Better yet — A provides B a description of its product and demands an exoneration statement; if B does not provide one, it releases its right to sue A. This would give B 30 days to decide whether to admit to A that it intends to sue. If B makes this admission, this triggers A's right to seek a DJ.
Exclude IP from Trade NegotiationsThe United States routinely uses its international heft to coerce other states into adopting more draconian IP laws. This increases costs internationally for American and other companies.See Kinsella, IP Imperialism (Russia, Intellectual Property, and the WTO), Mises Blog (Sept. 22, 2006); idem, China, India like US Patent Reform, Mises Blog (Dec. 10, 2007).
Other ChangesThere are a host of changes that have been proposed. These include changing from a first-to-file to a first-to-invent system; reducing the scope of patent claims; See Merges & Nelson, "On the Complex Economics of Patent Scope" (arguing that excessively broad patents can impede progress and hinder or block subsequent innovation, especially in science-based industries). See also Julie E. Cohen & Mark A. Lemley, Patent Scope and Innovation in the Software Industry, Cal. L. Rev. (2001); Barnett, Cultivating the Genetic Commons (quoted in note 29 above). increasing PTO funding to "improve" the examination process; refining the criteria for injunctions to be granted; permitting postgrant challenge of patents or submission of prior art by third parties; implementing a "peer-to-patent" review system; and establishing a federal office to review PTO actions.See Peer-to-Patent Review system, Patent Baristas (Oct. 1, 2007); PatentFizz.com (allows public comments on patents). See also the proposals of Public Knowledge proposes "Peer review of patent applications," "Permitting third parties to submit prior art, and rewarding them with fee reimbursement if successful," and "Permitting post-grant review of patents by the USPTO prior to litigation." Some have suggested adopting a utility model or "petty patent" system, in which patent applications are examined only minimally and receive narrower protection; this type of IP right is already available in some countries. See, e.g., Steve Seidenberg, Novel Ideas: PTO proposes a new suite of patent products to streamline applications, InsideCounsel (Jan. 2007); D.C. Toedt, "Reengineering the Patent Examination Process: Two Suggestions," 81 J. Pat. & Trademark Off. Soc'y 462 (1999): (suggesting the creation of a convertible "low end" patent (CLEP) and conducing patent examinations as administrative trials); and Dave A. Wyatt, A Radical View On The Future Of Substantive Patent Examination, Henry Goh Intellectual Property Updates (Q1, 2006). Many of these proposals are aimed at "improving patent quality" or other dubious goals. These changes are, by and large, of either doubtful or trivial value.
Nevertheless, some fairly minor or technical, but largely positive, changes could also be made, which I list only briefly here:
Increase the threshold for obtaining a patent Economists Michele Boldrin & David K. Levine suggest amending the patent law to reverse the burden of the proof on patent seekers by granting patents only to those capable of proving that• their invention has social value• a patent is not likely to block even more valuable innovations• the innovation would not be cost-effective absent a patent. See Cory Doctorow, "Economists call for patent and copyright abolition," Boing Boing (March 11, 2009); see also Boldrin & Levine's Against Intellectual Monopoly (2008).Increase patent filing fees to make it more difficult to obtain a patentMake it easier to challenge a patent's validity at all stagesRequire patent applicants to specify exactly what part of their claimed invention is new and what part is "old" (e.g., by the use of European-style "characterized in that "claims)Require patent applicants to do a search and provide an analysis showing why their claimed invention is new and nonobvious (patent attorneys really hate this one)Limit the number of claimsLimit the number of continuation applicationsRemove the presumption of validity that issued patents enjoyApportion damages to be proportional to the value of the patentCopyright and TrademarkOf course, patent law is not the only area of IP law that could stand improvement. Examples of copyrightSee, e.g., RIAA Wants $1.5 Million Per CD Copied, Slashdot (Jan. 30, 2008); Ford Slaps Brand Enthusiasts, Returns Love With Legal Punch, AdRants (Jan. 14, 2008) (Ford Motor Company claims that they hold the rights to any image of a Ford vehicle, even if it's a picture you took of your own car); Jacqueline L. Salmon, NFL Pulls Plug On Big-Screen Church Parties For Super Bowl, Washington Post (Feb. 1, 2008) (NFL prohibits churches from having Super Bowl gatherings on TV sets or screens larger than 55 inches); Internet pirates could be banned from web, Telegraph (Feb. 12, 2008) (British proposal to punish individuals who illegally download music by banning them from the Internet); John Tehranian, Infringement Nation: Copyright Reform and the Law/Norm Gap, Utah L. Rev. (forthcoming; SSRN); Cory Doctorow, Infringement Nation: we are all mega-crooks, Boing Boing (Nov. 17, 2007); Court Says You Can Copyright A Cease-And-Desist Letter, Techdirt (Jan. 25, 2008); Kinsella, Battling the Copyright Monster, Mises Blog (June 19, 2006); idem, Copyright Kills Amazing Music Project, Mises Blog (Jan. 2, 2008); idem, "Fair Use" and Copyright, Mises Blog (Aug. 17, 2007); idem, Copyrights and Dancing, Mises Blog (Feb. 20, 2007); idem, The "tolerated use" of copyrighted works, Mises Blog (Oct. 27, 2006); idem, Copyright and Birthday Cakes, Mises Blog (June 16, 2005); idem, Heroic Google Fighting Copyright Morass, Mises Blog (June 2, 2005); idem, Copyright Gone Mad, Mises Blog (Apr. 14, 2005); idem, Copyright and Freedom of Speech, Mises Blog (Nov. 8, 2004). See also Joost Smiers & Marieke van Schijndel, Imagine a World Without Copyright, International Herald Tribune (Sat. Oct. 8, 2005); Jessica Litman, Revising Copyright Law for the Information Age, 75 Oreg. L. Rev. 19 (1996); Kinsella, Copyrights in Fashion Designs?, Mises Blog (Sep. 27, 2006); Kinsella, Britain's Copyright Laws, Based on a 300-Year-Old Statute, Desperately Need Reshaping for the Digital Age, Mises Blog (Nov. 2, 2006). For a humorous parody of copyright abuses by the RIAA, see CD Liner Notes of the Distant Present, Something Awful (Jan. 3, 2008). and trademarkSee, e.g., Lou Carlozo, Teen's charity name draws the McIre of McDonald's, Wallet Pop (Jan. 17, 2010) (McDonadl's claims Lauren McClusky's use of "McFest" for the name of a series of charity concerts she puts on infringes its "McFamily" brand); Chip Wood, A Bully-Boy Beer Brewer, Straight Talk (Oct. 16, 2007); 9th Circuit Appeals Court Says Its Ok To Criticize Trademarks After All, Against Monopoly (Sept. 26, 2007); Kinsella, Trademarks and Free Speech, Mises Blog (Aug. 8, 2007); idem, Beemer must be next… (BMW, Trademarks, and the letter "M"), Mises Blog (Mar. 20, 2007); idem, Hypocritical Apple (Trademark), Mises Blog (Jan. 11, 2007); ECJ: "Parmesian" Infringes PDO for "Parmigiano Reggiano," I/P Updates (Feb. 27, 2008); Mike Masnick, Engadget Mobile Threatened For Using T-Mobile's Trademarked Magenta, Techdirt (Mar. 31, 2008). abuse also abound. I will not discuss these matters in depth here, other than to briefly suggest a few proposals for reform.
CopyrightRadically reduce the term, from life plus 70 years to, say, 10 yearsRemove software from copyright coverage (it's functional, not expressive)Require active registration and periodic re-registration (for a modest fee) and copyright notice to maintain copyright (today it is automatic, and it is often impossible to determine, much less locate, the owner), or otherwise make it easier to use "orphaned works"See Kinsella, Improving Copyright Law: Baby Steps, Mises Blog (Feb. 24, 2005); Timothy Lee, Orphan Works Legislation Would Be A Small But Important Step Toward Copyright Reform, Techdirt (Apr. 29, 2008).Provide an easy way to dedicate works to the public domain — to abandon the copyright the state grants authorsSee Kinsella, "Copyright Is Very Sticky!" Mises Blog (Jan. 14, 2009).Eliminate manifestly unjust provisions of the Digital Millennium Copyright Act (DMCA), such as its criminalization of technology that can be used to circumvent digital protection systemsExpand the "fair use" defense and clarify it to remove ambiguitySee Kinsella, World's Fair Use Day, Mises Blog (Jan. 6, 2010); idem, "Fair Use" and Copyright; idem, The "Tolerated Use" of Copyrighted Works; idem, Copyright and Birthday Cakes; idem, Heroic Google Fighting Copyright Morass.Provide that incidental use (e.g., buildings or sculptures appearing in the background of films) is fair useReduce statutory damagesAn example of an egregious award resulting from the current statutory damages scheme was the recent $220k verdict against Jammie Thomas for sharing 24 songs. The jury awarded $9,250 in statutory damages per song for 24 songs; it could have been up to $150,000 per song, or $3.6M. See Eric Bangeman, RIAA Trial Verdict Is In: Jury Finds Thomas Liable for Infringement, ars technica (Oct. 04, 2007).TrademarkRaise the bar for proving "consumer confusion"Abolish "antidilution" protectionIn fact, abolish the entire federal trademark law, as it is unconstitutional (the Constitution authorizes Congress to enact copyright and patent laws, but not trademark law) * * *
This paper is the conclusion of a two-part series. The first article was "Radical Patent Reform Is Not on the Way."
State dominated cartels used intellectuals as apologists for the government. Big unionism was to transmit orders to the working class. Public utilities were government monopolies for fifty year terms, run without any checks by the public. It is the function of government to run everything. Regulation was rampant, e.g. prohibition. Social workers wanted to abolish the saloons. German brewers were suspect of weakening soldiers. Constitutional amendment outlawed liquor.
Lecture 8 of 13 presented in Fall of 1986 at the New York Polytechnic University.
Petroleum entered the industrial scene in 1859 with John D. Rockefeller's hard work. As the first manufacturing corporation, Standard Oil created a monopoly in kerosene refining by buying others out. A huge drop in the price of fuel followed, benefiting consumers, due to production efficiencies. Rothbard, then, discusses pietists, prohibitionists and the big political shift of 1896.
Pietists, prohibitionists, anti-immigrationists, and women suffragettes had made a big Republican drive before 1890. But then a big, sudden shift in politics occurred, with Democrats capturing the big Midwest states, due to demographics of Germans, higher birth rates, anti-prohibitionists, and hard money standards. After this, the Republican party got more moderate and the Democratic party got captured by extreme pietists in 1896. The South became a fully Democratic region. The Panic of 1893 resulted in the loss of Democratic seats due to the depression. By 1896 Bryanites were taking over the party. German Lutherans, and Catholics became majority-party Republicans, leaving the Irish to become minority-party Democratic civil servants. This situation lasts until 1932. The parties become non-ideological. Statists prevailed.
Lecture 4 of 13 presented in Fall of 1986 at the New York Polytechnic University.
During my 15-odd years working in municipal government, I often felt like an undercover agent infiltrating the mob. It became increasingly clear that my belief system and that of the bureaucracy were opposed. The bureaucratic "mob" kept pressuring me to do things contrary to my free-market principals. But like a good agent, I always exerted enough influence to achieve outcomes beneficial to the public interest. Finally, my assignment came to an end.
Nevertheless, my time spent inside the bureaucracy was invaluable. I witnessed firsthand not only the pitfalls of government regulation, but also the inefficiencies inherent in bureaucratic institutions themselves. I left with a clear understanding of how the bureaucracy encumbers our system of free-market capitalism. Read the full debriefing below for a personal view inside bureaucracy.
The Bureaucratic MindNot every aspect of organizational life can be legislated. Therefore, to fully understand how an organization operates, you must understand the bureaucratic mind. When my real-estate clients ask me to evaluate a specific proposal, the first thing I tell them is that I must feel out the regulatory authorities having jurisdiction before I go further. If I feel a serious uphill battle against the forces of bureaucratic inertia, I advise my clients to stop at this point.
It became obvious to me at the onset that certain individuals remain in government for an extended period of time, forming their own pressure groups to secure their survival. To a great extent, the bureaucrat reflects the will of his political master. In order to move up the hierarchy, he must gain the favor of City Hall. Those that succeed form the bureaucratic core; they attain higher positions and gain the ability to exert undue influence on policy outcomes.
Most of these hard-core bureaucrats are products of a left-wing-liberal tradition. Many of them came into political life during the '60s, and they are being replaced by a new generation whose opinions were formed under their tutelage. They attended left-liberal schools and majored in subjects that are geared to engender social change — urban planning, social work, and law, for example.
As a student of the social sciences, I can attest to the left-wing brainwashing that goes on in our institutions of higher learning — especially in the highly coveted classrooms of the Ivy League. There certainly is a belief that things are not right socially and that society must be changed. Most bureaucrats see the government as the instrument necessary to bring about the desired change.
In addition, many bureaucrats do not understand the workings of the free-market system because their mentors have fed them the intellectual poison of such anticapitalist thinkers as Karl Marx, John Maynard Keynes, and the Frankfurt school. Rarely have they been exposed in a positive light to the theories of the free-market thinkers. They have been taught that a capitalist is an exploiter whose success is based on luck and the hard work of others. The fact that a capitalist risks valuable dollars and creates goods and services is conveniently overlooked.
I once gave a speech on the market-stabilizing role of the speculator to a bureaucratic audience that seemed in a state of shock. They could not believe that a speculator could have any positive role in society. To them, the words "speculator," "capitalist," and "capital" convey only negatives.
Conversely, the words "government," "regulations," and "bureaucracy" convey only positives. In the bureaucratic mind, there is a misguided belief that society must be protected against the selfish interest of the capitalist. They fail to understand that it is the capitalist — through his taxes — who pays their salaries!
Even those that believe in a free-market system soon find that their thinking becomes distorted under the heavy load of bureaucratic peer pressure. For example, I was often required to interact with an attorney who kept a copy of Antonio Gramsci's Prison Notebooks on his desk. He often referred to it for guidance in the same manner that a preacher would refer to the Bible!
As a bureaucrat, almost everyone that you interact with — coworkers, union reps, community groups, politicians — has a leftist bent. Eventually, even the conservative realizes that to advance in the bureaucratic setting, he must accept their left-liberal philosophy.
One thing that I can tell you for certain is that the bureaucrat is not altruistic. I have never seen anyone refuse to accept a salary increase or a promotion of any sort. In fact, the bureaucratic push for self-aggrandizement is as powerful as that of any Wall Street trader that I have ever met. The only difference is that the Wall Street trader plays for money while the bureaucrat plays for perceived power.
An Expert in What?The bureaucracy operates in a state of constant confusion. There are always issues that must be resolved. The trivial becomes insurmountable. I often wondered, why does this place operate in such a state of disarray?
The main reason for this confusion is a lack of expertise on the part of most management and the subsequent inability of most line personnel to properly execute directives. As a result, even small problems are pushed up until they reach the desk of someone who has the competence to resolve them. If a private business were to operate in this manner, it would be bankrupt in a New York minute.
This lack of expertise is pervasive. On one occasion, I spent hours with an "engineer" who was trying to determine the cause of a significantly sloping floor. Finally, in frustration, I pointed out that the problem was caused by floor joists spanning more than the allowable limit. He then devised a $600,000 remedy that was based on replacing the entire interior framework of the building.
"You can fire your congressman or your senator but not a division head in some government agency."Unwilling to waste taxpayer dollars, I had my team introduce a midspan support that stabilized the building — and saved the taxpayer hundreds of thousands of dollars. So much for real problem-solving expertise!
Because the bureaucracy is an employer of last resort, most people are hired and promoted in an attempt to achieve socially desired goals — race or gender balancing, for example. In such a situation, the best and the brightest do not find their way to the top. Frustrated, they seek their interests elsewhere. Those that remain, in most cases, are the ones lacking an entrepreneurial drive. This situation is reflected in the product of bureaucratic action.
The bureaucracy is also clouded by ideology. Certain solutions are never considered because they go against the grain of bureaucratic thought. For example, during the Koch administration in New York City, there was an all out effort to take "troubled buildings" in rem. This disastrous policy caused the City an average loss of $400 per month per residential unit. Furthermore, it did not solve the problem of disinvestment.
A free-market approach was never considered because it went against the ideological grain of the administration. This thinking filtered down through the ranks of the bureaucracy.
Economic CalculationWe can extend the concept of economic calculation to the bureaucracy. Individual actions are efficient because each individual knows what he wants. He satisfies his desires in the market place by using his time and money to purchase things that satisfy his wants. Extend this action to all individuals and we have an efficiently functioning market.
Bureaucrats cannot produce efficient results because their actions are not efficient. The reason is simple: they don't spend their own money. When an individual acts, he acts with diligence because he needs to achieve the most satisfaction, based on his scale of utility, for his limited dollars. The bureaucrat knows no such limit. He is financed with your money.
Even the most conscientious bureaucrat, and there are many, cannot achieve efficient results. How does he know what is best for individual members of society? He can only base his actions on the instructions given to him by superiors. His superiors, in turn, can base their decisions only on the rules and regulations given to them through the political process. And the political process, as we shall see, is based on pressure-group action where "only the votes survive."
We have all heard stories that a government employee pays substantially more for an item than his counterpart in the private sector. Some attribute this disparity simply to incompetence on the part of the bureaucrat. In actuality, the problem is more complex and stems from the structure of the bureaucracy and the inability of the bureaucrat to squeeze out the best price. The bureaucrat can only discern price information by viewing the price structure of the private market. Since he is not risking his own capital, the outcome of his action can lead only to inefficiencies.
When a private businessman is purchasing a service, he shops around for the best price. A subcontractor, for example, will not submit a ridiculous bid when he knows that the reviewer is attuned to the price scale. In a private concern, the reviewer must have a strong hold on market prices. If he does not, he will overspend and jeopardize the success of the project — and of his capital.
The bureaucrat has neither this ability nor this limitation. First, he is guided by regulations and procedures; therefore, he must act within these constraints. Second, if he overspends, more taxpayer money is simply allocated to achieve the desired result. The bureaucrat is no match for the individual businessman who can use his knowledge of market pricing to achieve an efficient outcome.
The Force behind Bureaucratic ActionMy experience is that bureaucratic action is merely the will of political pressure groups. Various groups pressure politicians to enact legislation that benefits them. Those that are successful are able to impose regulations that hinder their competition. The bureaucracy is the principal administrator and enforcer of the regulations subsequently imposed.
"Even the most conscientious bureaucrat, and there are many, cannot achieve efficient results. How does he know what is best for individual members of society?"The best example of this is tariffs. Taxes on foreign goods are imposed to benefit an industry that has the clout to induce politicians to act in its favor. I have seen many different groups form such constituencies to affect political outcomes. All of these groups seek an advantage over the rest of society. They are unable to secure that advantage in the competitive market, so they use political action to suppress the free-market system.
Community groups organize in central cities to seek tenant rights at the expense of property owners. Welfare groups organize to seek a redistribution of wealth from its producers (the taxpayers) to its consumers (the welfare recipients). These groups often come together to form a solid anticapitalist block on the Left.
Most politicians accept these groups and actively encourage their operations. The reason for this is obvious. These pressure groups provide a base for their election and subsequent reelection. In New York City, for example, many local politicians are identified with particular community groups.
Because of the collaboration between politicians and these pressure groups, the groups receive preferential treatment. This is why ACORN receives millions of dollars in taxpayer funding.
Those among us who are creative and provide a valuable service to society are successful in the free-market system. We do not need the assistance of the politician or his enforcers in the bureaucracy. Those that are not successful employ the government to level the playing field. However, the playing field is leveled only for them. The rest of society is saddled with the cost and other inefficiencies that this relationship creates.
Growing By Leaps and BoundsThe bureaucracy continues to grow with a force that seems inexorable. It doesn't matter whether we are in a recession or a depression. And it doesn't matter whether we turn the reins of government over to Republicans or Democrats. The trajectory of bureaucratic growth is ever upwards.
Simply examine the number of agencies that exist at the local, state, and federal levels. Every aspect of our society is under some form of regulation. The Obama Administration has appointed more tsars in 6 months than controlled the Kremlin in 200 years.
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The danger of bureaucracy is its incipient nature. Once established, a bureaucracy grows incrementally, below the radar of the common man. It becomes a powerful branch of government, even though its members were never elected by the public. You can fire your congressman or your senator but not a division head in some government agency.
And with every increase in the power of the bureaucracy, there is a corresponding decrease in the liberties of a free society. Productive members of society must constantly retool to adjust to the extra burdens imposed upon them by bureaucratic action.
To date, these free-market operatives have been successful. Eventually, every aspect of productive life will be so controlled that capitalist drive and ingenuity will become relics of the past; and along with them, the "Great Experiment" in liberty handed down to us by the Founding Fathers.
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[From Property, Freedom and Society: Essays in Honor of Hans-Hermann Hoppe.]
I met Hans-Hermann Hoppe in 1991, I believe. Dissatisfied with inconsistencies in Hayek's concept of individual freedom, I was looking for an assessment that (at least) tried to avoid these inconsistencies. Hoppe's approach was and still is a representative of this rare species.
Hoppe was refreshing. He did not, and does not, take things for granted, for instance the classical liberal assumption that you cannot have individual freedom without government's monopoly to protect it. If we believe in free markets, why should we easily assume that they do not work when it comes to the private production of protection? On a more philosophical level: if we look for a consistent political philosophy that allows for a peaceful solution of man's most fundamental material problem, namely scarcity of resources under competing interests, why should not we look for a set of principles that do not contradict each other, no matter how difficult it appears to achieve these principles in practice?
The anarchocapitalism of Hans-Hermann Hoppe is a model developed along this guideline. Hoppe's principles of original appropriation of free goods and of production and trade of private goods are perfectly compatible. As long as goods are identifiable, all questions regarding their proper ownership can be solved—in principle. Of course, goods which are difficult to identify pose a problem—a problem that exists apparently for each approach that tries to solve the above-mentioned, most fundamental, material problem of man.
Material goods are identifiable, at least in principle. The place where you park your car cannot be taken by another car, at least not at the same time, because matter has extension. On a more general level: matter, whatever form it has or extension it takes, fills a spot in time and space. One and the same point in the time-space-coordinate- system cannot be taken more than once. This exclusive relationship between matter, time, and space helps to identify, i.e., locate, material goods: material goods can exist side by side, but they cannot collide, e.g., take simultaneously the same spot in the time-space-coordinate-system. Hence a society in which only material goods exist can solve its material conflicts without any collisions or conflict as long as we apply coherent principles of legitimate acquisition of property.
Things become more difficult if we include property in immaterial goods. To say the least, the ontological status of immaterial goods is not the same as that of material goods. Whether immaterial goods fill spots in time and space, as material goods do, is much debated. It is also disputed whether or not it is possible to claim meaningfully that something exists if its alleged existence has no material form at all.
According to Popperian ontology, ideas have an immaterial status and began with language.[1] They are entities of World 3 and can be the subject of mental processes. These processes, in turn, belong to World 2. Of course, if we do not claim of ideas, problems, theories, arguments, etc. that they fill spots in time and space, what are they after all? Where do they go when nobody thinks of them? Where have they been in the meantime when someone "remembers" them? Do they disappear with mankind?
These questions address either deep philosophical problems or pseudo-problems. Whatever we think of the characteristics of these problems, it is clear that any meaningful concept of intellectual property presupposes that it is distinct from material property, hence immaterial. A further distinction between material goods and immaterial goods is that the former, in most cases, are tangible goods, whereas immaterial goods, for instance intellectual property, are intangible.[2] Ideas, melodies, and theories have no material extension per se as material goods do. Therefore, we cannot without further assumptions claim for them what we can claim for material goods, namely that they cannot collide with other material goods.
Intellectual property turns out to be a cumbersome element in an otherwise perfectly consistent political philosophy. Of course, Hoppe provides a solution to this problem. His solution rests on the introduction of a normative-functional explanation of private property into the debate and on the fact that immaterial goods are—unlike material goods—not scarce. As Hoppe has put it:
[O]nly because scarcity exists is there even a problem of formulating moral laws; insofar as goods are superabundant ("free" goods), no conflict over the use of goods is possible and no action-coordination is needed. Hence, it follows that any ethic, correctly conceived, must be formulated as a theory of property, i.e., a theory of the assignment of rights of exclusive control over scarce means. Because only then does it become possible to avoid otherwise inescapable and irresolvable conflict.[3]
In other words, assuming that scarcity is the reason for conflict over goods with competing interests[4] and that the very function of property rights is to solve these conflicts peacefully, there is no need to provide property rights for intellectual property, because intellectual goods are not scarce.
I shall return to this argument later. Until then we should keep in mind that intellectual property (if it exists at all) is, unlike material property, difficult to identify and, hence, its philosophical treatment asks for special care. Before we address the analysis of intellectual property, let us look at some aspects of the role of definitions.
Types of Statements: Analytical, Empirical, and NormativeIt goes without saying that statements in the sciences can have different forms. Three are of importance here: some statements are purely analytical (for instance definitions, tautologies), while others are mainly empirical (theories, hypotheses) or normative (imperatives, rules, laws).
It also goes without further notice that it is sometimes quite complicated to tell whether a statement is meant to be (purely) analytical, empirical, or normative. Sometimes statements serve two or more masters. Take for instance your wife's message: "Darling, the garbage can is full." Not only do you suppose that she made an empirical statement (an assumption which is obvious because of the grammatical structure used in this sentence), you also clearly understand the implicit imperative: "Get the trash out of the kitchen and return with an empty bucket, please!"
Leaving the peculiarities of our language aside, it appears to be common sense among all scientists that language—despite all its imperfections—should be used as precisely as necessary for the theories in question and that analytical, descriptive, and prescriptive sentences should not be confused. It also appears to me that all three types of sentences have their distinct functions in all academic disciplines: definitions, being analytical statements, provide a field with abbreviations and meaning analyzes of the most central and frequently used concepts or terms,[5] while descriptive statements are mainly used for empirical assertions and prescriptive statements for normative recommendations.
Thus, when the existence or absence of some private property is either claimed or proposed, it is the definition of private property that tells us how private property, in either the empirical or normative context, is to be understood. Obviously, without knowing how private property is to be understood, we can definitely say neither what is empirically asserted nor what the norm recommends.
In order to set the stage for the discussion of the role of functionalism in intellectual property rights, to which we turn later, we should mention here that some definitions look rather functional while others do not. The reason is quite simple. It rests on the fact that some concepts are mainly—if not exclusively—used to describe a functional relation while others do not. For instance, we usually define a wife by the relation to her husband (and vice versa). The fact of bondage by marriage is constitutional for the definition of a wife—as it is for the definition of a husband. However, not for all terms are functional relations constitutional. Looking for a functional relation of the term that is to be defined might lead to the erroneous belief that this function, if found, is constitutional for the term.
For instance, it would be misleading to define private goods by their relation to public goods. Thus, it would be fallacious to conclude that unlike public goods, for which most authors claim nonexclusivity,[6] private goods are exclusive. Whether or not a good is exclusive is a coincidental character rather than a constitutional character of the good in question.
Of course, this coincidental character comes along with most of the private goods. However, it all depends on the way the good is treated by its owner and others. If an owner shares his good with others, it loses its exclusivity.[7] Take for instance a boat that you share with your friends for a trip along the coast. Though, strictly speaking, it is not exclusive for the time of the trip, it is still your boat throughout the trip.[8]
Consequently, an appropriate definition of private property presupposes identifying the subject who privatized the good. This is because the reason for a good to become private is not in the good itself, but rather in the relationship between the good in question and its "relator," i.e., someone who owns it privately, namely the owner. If the owner is sovereign over it, then the good in question is a private good, his private good. In other words: it is sovereignty rather than exclusivity that defines private property.[9]
Having said this, it seems appropriate to add an observation on the exclusion and its costs. There are but two necessary preconditions for the existence of exclusion costs of a private good:
The owner is interested in excluding others from his property; andOthers covet his property.Obviously, if the owner is uninterested in excluding others, then his property is likely to be taken away by someone who covets it. Nevertheless his exclusion costs are nil.[10] If the owner is interested in the exclusion of his property, whereas nobody covets it, he too faces no exclusion costs.
Though it may seem so at first, it is in fact not trivial to note that private property is appreciated by its owner mainly, if not exclusively, for the positive externalities that come with it. Also important is the insight that not all positive externalities that may come with a private good necessarily belong to the owner of that good. Think of a trumpet player in the street. His playing might cause positive externalities (as long as it pleases the passers-by). However, we most likely do not view him as the owner of these externalities, not to mention having an associated right to ask for compensation for the positive externalities initiated.
We may list five reasons to be reluctant to maintain that the musician has a right in these externalities. First, implicitly we assume that the busker, though the unopposed owner of his instrument, is not the owner of the public space or the air in which he performs and that, hence, he has no privilege to use that sphere exclusively or ask for compensation if others use it. He uses the public space and the free good "air," and so do the passers-by.
Second, though the musician while playing initiates the sound waves, the listening of the passers-by is required in order to produce the full effect of listening to and enjoying music. In other words, though the musician is sufficient to produce the good "music," he is not sufficient to produce the positive externality that may accompany it. Third, the passers-by could also—per impossibile— claim a property right to remuneration of positive side effects, because their forming an audience attracts others to join the event and, hence, enlarge the group of possible donators.
Fourth, the internalization of positive externalities is a problem of its initiator. To the extent that positive externalities are created without agreement (that would allow for compensation) and not internalized by its producer, these effects are nothing but free goods which can be internalized by anybody as he or she thinks fit.
Fifth, since there is no agreement between the busker and the passers-by that would allow for compensation, the positive externalities generated by the guitar player are at best an offer that one is free to accept or reject, and, if accepted, can be treated as a gift while the passers-by are free to respond to it by a return gift, i.e., throwing a few coins in the cap.
However one may view these considerations individually, they all seem to rest on the assumptions that property cannot generate new property for the owner if, in the process of this creation, property of others is included in one way or another; and that this holds true if the new "would-be property" is an externality. In other words, many positive externalities come into existence only by intermingling with property of others; and only if they don't can the initiator claim a right in these without facing awkward queries.
These considerations are closely linked with the topic of intellectual property rights, although this might be not obvious at first sight. In order to become aware of this linkage, one should review the current debate on intellectual property rights.
Libertarians Views of Intellectual PropertyLibertarians differ on the point of whether intellectual property rights can be explained and legitimized in the same way as property rights in material goods and services.[11] Some, like Ayn Rand, argue that the origin of property rights lies in the creative process that leads to private goods and thus conclude that intellectual goods, as results of a creative process, are also private and endowed with property rights. In other words, the legitimacy of patent rights, copyrights, etc. rests on the creative act of the author or inventor.[12]
Others argue that the creative act as such would not initiate new property.[13] They rest their criticism on the fact that ideas can be reproduced without any loss of quality and can be shared by many without creating any scarcity problems. As mentioned before, assuming that scarcity is the potential reason of conflict and that the very idea of property rights is to solve these conflicts peacefully, they see no need to provide property rights for intellectual property.[14]
However we might judge these competing views, it is quite interesting that both camps bring in functional explanations of private property, not functional definitions or any other sort of definition, as defined in the "Types of Statements" section above. From the proposed function of private property (be it "to give a man the right to the product of his mind" or "to assign rights of exclusive control over scarce means") they either defend or deny intellectual property rights. However successful these approaches may be, they do not provide definitions of intellectual property in terms of an exclusively analytical statement. In the above-mentioned cases, the definitions of private property serve at the same time descriptive and normative functions, i.e., they also say how private property is and ought to be used in society.
Be this as it may, following the distinctions made herein, a definition of intellectual property has to take account of at least two implications. Assuming that talking of intellectual property is meaningful at all, the definition of intellectual property seems to imply that it shares with all other sorts of property the constitutional characteristic of property, namely being owned in a sovereign way by its owner. Another implication comes from the fact that intellectual goods are immaterial, hence not to be confused with material goods.
Intellectual Property, Material Property, and ExternalitiesLet us keep in mind that the most fundamental objection to intellectual property rights seems to be the following argument: as soon as we agree to the idea to establish intellectual property rights, we agree to the fact that they can collide principally with property rights in material goods.
The reason for this collision is obvious: a patent forbids everybody, with the exception of the patentee and his licensees, from using their material property in ways that are forestalled by the patent. Thus a patent to bake a plum cake—given to a baker—would prohibit all (nonlicensee) housewives from baking the cake in the patented way despite the fact that they would do it with their own ingredients. Hence, patents can collide principally with property rights in material goods (assuming that the patentee and the owner of the material goods in question are not identical).
Consequently, as soon as we include intellectual entities among the goods that can be private we end up with a political philosophy that has incoherent elements, while the very same political philosophy was coherent before this inclusion. In order to avoid this unpleasant problem, it seems to be necessary either to demonstrate that intellectual property and/or the right in it is nonexistent or to show that the aforementioned collision does not exist at all. Hoppe's approach includes the former demonstration while the latter does not need to presuppose the nonexistence of intellectual property and/or intellectual property rights.
In fact, against the background of some arguments mentioned earlier and some to come it appears to me that the alleged collision does not exist at all and that we can talk meaningfully of intellectual property and intellectual property rights. In order to show this, it is helpful to look at the widespread distinction of the three kinds of usage of goods, namely usus, usus fructus, and abusus. Following this categorization, we distinguish the use of a good, its fruits, and its sale or transformation. I may use my apple tree by sitting under it (usus), eating its apples (usus fructus), or by selling it to a neighbor (abusus). Material usus, usus fructus, and abusus of the apple tree are possible without any further material good added to it.
Obviously, when it comes to immaterial goods, things become different. The material usus of any immaterial good is not possible without material added to it. Take a melody. It takes a voice, a guitar, or any other instrument to use it materially.[15] Mixing the melody with an instrument makes for a usus fructus. Neither an idea nor its fruits are per se material. Even if transformed into another idea, an idea stays immaterial. The material "extension" of an idea, so to speak, comes into existence subsequent to the mixture of the idea with matter.
That intellectual property alone cannot "breed" material property has far-reaching consequences. If it holds for intellectual property what holds for all private property,[16] namely that the sovereignty that comes with it does not go beyond the borders of that good, then no collision between intellectual property and material property is possible. Such a collision would require that the sovereignty that comes with an intellectual good would extend over material property.
Whatever intellectual property is (in ontological terms), the sovereignty over it does not extend to any material property. Thus an idea, whether patented or not, does not provide the owner of the idea with an extra sovereignty over any material property, be it his or the material property of somebody else.[17] That a patented idea (or any other intellectual good) cannot collide with material property means that the collision between the right of intellectual property and the homesteading principle simply does not exist. To put it differently, intellectual property rights and material property rights are in principle compatible.
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The alleged collision between the two rights (material property rights and intellectual property rights) seems to rest on a misinterpretation of intellectual property. As some reflection on the different types of usage of goods shows, this misinterpretation rests on the confusion of intellectual property and its (material) externalities. These externalities are not, as shown, per se property of the owner of the idea. Only those externalities that derive from material goods he owned before or from free goods he appropriated belong to him. In particular, he is not the owner of the material goods owned by others. Hence the owner of the plum cake recipe remains the owner of "his" idea but cannot claim sovereignty over the ingredients owned by housewives. There is no collision with his intellectual property and their "using his" recipe of baking a plum cake.
To put it differently, we can talk meaningfully of intellectual property and intellectual property rights. However, intellectual property as such—being free of any material "extension"—is of no immediate importance to business life. What counts in the market are the externalities that can be derived from intellectual property. How to deal with these externalities is, of course, a different matter.
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Notes[1] Karl Popper, The Open Universe: An Argument for Indeterminism [The Postscript to The Logic of Scientific Discovery, vol. II] (Totowa, N.J., Rowman & Littlefield, 1982), 116.
[2] Though some speak exclusively of tangible and non tangible goods, I prefer to talk of material and immaterial goods. See, for instance, Stephan Kinsella, "Against Intellectual Property," Journal of Libertarian Studies 15, no. 2 (Spring 2001): 2. The point about material goods is not that they are tangible, for some are not. For instance, atoms and many other small material units are not tangible; they are identifiable only indirectly, though this does not prevent us from calling them material.
[3] Hans-Hermann Hoppe, A Theory of Socialism and Capitalism (Boston: Kluwer Academic Publishers, 1989), 235, n. 9.
[4] Ibid., 10:
[B]ecause of the scarcity of body and time, even in the Garden of Eden property regulations would have to be established. Without them, and assuming now that more than one person exists, that their range of action overlaps, and that there is no preestablished harmony and synchronization of interests among these persons, conflicts over the use of one's own body would be unavoidable. (emphases added)
[5] On the role of definitions, see Gerard Radnitzky, "Definition," in Handlexikon zur Wissenschaftstheorie, Helmut Seiffert and Gerard Radnitzky, eds. (Munich: Ehrenwirth, 1989), 22–33.
[6] We cannot appropriately deal here with the related question of how to define public goods . It seems, however, obvious that non exclusion is an appropriate constitutional character of public goods. So while a likely concomitant of public goods, it is only coincidental. For instance: for the time a public library is used by just one person, it is, strictly speaking, not non exclusive.
[7] Bringing in the owner's right to exclude others shifts the story onto another level for which different conditions hold. Foremost, talking of rights requires the inclusion of normative sentences in the debate, while the aforesaid operates with descriptive sentences exclusively.
[8] Analogously, it would be misleading to say that a private good is a good for which the owner has solved the exclusion problem, or paid the exclusion costs. Although this may hold for many private goods, it is accidental, but not constitutional. Some private goods do not have any exclusion costs, simply because there is nobody interested in being included. Think of bulky waste that nobody wishes to have. If placed on no man's land it becomes a common good (or a bad, for that matter); if placed on a public good (street) it becomes a public good (or bad, for that matter); if thrown in the neighbor's garden, it continues being private—and most likely becomes the subject of a fierce dispute among neighbors. However, it seems appropriate at least to indicate that an explication of the term "public good" would show that one of its main characteristics is non sovereignty.
[9] As Anthony de Jasay has put it: "Sovereignty may be delegated revocably, or transferred for good, but it cannot be shared, and that is why there is no true property that, after cancelling out agents, delegates and intermediaries, is not mine, yours, his or hers." Anthony de Jasay, Choice, Contract, Consent: A Restatement of Liberalism (London: Institute of Economic Affairs, 1991), 75.
[10] Talking of the exclusion costs for goods, from which the owner does not want to exclude others, is pointless. In any case, talking of costs is meaningful only if there exists at least one possible cost-bearer. It is equally pointless to speak of the costs or the price of a good for which there is no demand. The seller might have some clear ideas on the amount of money he wishes to get in return for the good, but he cannot determine the price alone. The price is determined by supply and demand, and this determination finds its expression in the market transaction.
To put it in Lockean terms, "costly" is a secondary quality of a good, but not a primary one. Plainly speaking, secondary qualities of any object presuppose a possible relation between the object and a subject. According to Locke, the primary qualities of an object exist with the object, for instance gravity, while secondary qualities, like color, come into existence through the relation of the object and an observer.
[11] The best account on the different libertarian perspectives on this topic is given by Kinsella in "Against Intellectual Property."
[12] Ayn Rand, "Patents and Copyrights," Capitalism: The Unknown Ideal (New York: The New American Library, 1967), 130–34. "Patents and copyrights are the legal implementation of the base of all property rights: a man's right to the product of his mind" (130).
[13] For instance, Boudewijn Bouckaert, Henri Lepage, Wendy McElroy, Benjamin Tucker and—partially—Murray Rothbard. See Kinsella, "Against Intellectual Property," 11.
[14] See footnote 2.
[15] Of course, this changes the fact that you may use it immaterially, namely, mentally by thinking of it.
[16] In fact, this must hold for intellectual property if intellectual property is to be understood as a sort of private property.
[17] The only sovereignty over his material property comes with that very material property, and with nothing else.
If you want to see the devastating effects of regulation, look no further than the New York City housing market. As a former director in a municipal housing agency, I often wondered why property owners would come into my office ready to sign over their deeds. As a current property owner and developer, the reason is now all too clear. Battling all of the regulations imposed upon me, I often wonder, Who owns this property anyway?
In the Big Apple, there are several agencies having direct jurisdiction over the housing market and several other agencies whose actions impinge upon housing. These agencies employ several thousand employees whose only job is to "get the landlord." Even those programs that seem landlord oriented — rehabilitation financing, for example — are really tenant-oriented programs designed to keep rents low and to exert more bureaucratic control over the market.
"Government intervention in the housing market leads to further and further intervention."In NYC, all housing-related matters have been extracted from the NYS Supreme Court and placed under the jurisdiction of Housing Court. This was done so that more favorable tenant-oriented decisions could be rendered. It is interesting to note that many Housing Court judges are my former coworkers from the Housing Department. The administration of Housing Court justice is not exactly blind. Let us just say that in housing matters, Lady Liberty leans heavily in one direction.
The Historical SettingDuring the 1960s and '70s, the city's housing stock was devastated. Once-viable neighborhoods succumbed to the ills of decay, crime, and abandonment. As a graduate student at Columbia in the early '80s, I can relate to you the shock of traveling from mid-town Manhattan via Broadway to the campus in Morningside Heights. It was astonishing to believe that I was traveling through the financial capital of the world.
Neighborhoods such as Bedford Stuyvesant, Harlem, and Brownsville became worldwide examples of urban decay. While doing a market study of East New York, I was dumbfounded to see that virtually every other house was abandoned. Neighborhoods that I often visited as a child were now desolate and oppressive.
To counter the perception of blight, the agency once devised a plan to board up windows in abandoned buildings using plywood painted with flower pots and curtains. The idea was to hide this devastated housing from out-of-town commuters traveling to Manhattan via the Cross Bronx Expressway!
Abandonment grew to such an extent that vacancy rates in lower-income neighborhoods hovered around 2%. Decent families virtually could not find a place in which to live. Finding a decent apartment required an "old-boy network" and the ability to pay key money. I witnessed all of this happening from a key vantage point — my office at the municipal agency that was responsible for preserving and developing housing!
Neighborhood ChangeNeighborhoods have life cycles and, as they change, they provide housing opportunities for those lower on the income scale — if the market in these neighborhoods is left to operate freely. This economic concept is referred to as filtration. As high-income people vacate a unit to occupy newer, more luxurious housing, the vacated unit becomes available to those of less economic means. It is a win-win situation for all.
The problem begins when the City requires that landlords maintain the same level of services even though the lower rent received can no longer support it. As landlords cut back on those nonessential services, the City regulators step up their compliance efforts and begin bombarding the building with violations. Tenants then file for a rent reduction due to a reduction in services. Some tenants see the opportunity to withhold rent. The downward spiral in rent collection begins.
Eventually rents are so reduced and uncollectable that basic services can no longer be provided. More violations pile up. The property owner can no longer support the building and it is sold and resold until it winds up in the hands of a speculator who milks the building as best he can before walking away.
This is a common scenario, which I have witnessed hundreds of times during my 15-year employment with the City of New York. In fact, abandonment was so great that at one point I supervised the management of over 7,000 units in a City receivership- type program. This does not include the thousands of units that the City directly owned through tax foreclosure.
Magnify the above scenario thousands of times and you get a full picture of the urban blight that confronted New Yorkers. Decent tenants would no longer remain in these neighborhoods and the vacant buildings became a heaven for junkies and for all kinds of antisocial behavior.
This is the result of intervention usually pushed by interest groups determined to supplant the landlord. I once appraised a building whose tenants posted a large sign at the building entrance stating, " Buyers Beware. This is a City Managed Building." The idea was to discourage all potential free-market ownership. For many years the tactic worked.
A One-Sided BurdenThe New York City Housing-Maintenance Code places the burden of repair solely on the landlord. If a tenant creates a hazardous condition, the owner must repair — no matter what the cost is. Some tenants became very adept at creating violation-inducing conditions.
I once inspected a building that had just been rehabilitated using City money. Some tenants were withholding their rents, and the owner was having difficulty repaying the loan. The reason these tenants were withholding rent was that some tiles in the bathroom had become unglued!
"To counter the perception of blight, the agency once devised a plan to board up windows in abandoned buildings using plywood painted with flower pots and curtains."As the legions of Code Enforcement inspectors add on violations, the fines begin to pile up. Eventually, the case is referred to the Litigation Bureau, where City attorneys institute legal action. The landlord is fined and forced into a compliance agreement. If he fails to make repairs, he is held in contempt and subject to imprisonment. The inability to collect rent is no defense. Nevertheless, the Court never asks who caused the violation. Tenants are never fined or required to correct any violation that they created.
Fines can be steep. The penalty for hot water 1 degree below the legal limit is $250 per day until the violation is corrected. In the meantime, tenants can withhold rent. The landlord is always at a disadvantage because he must hire an attorney while tenants can use the "impartial" attorneys in the housing agency to press their case.
Legal ExpropriationAfter so many violations are piled on a building that the landlord is unable to correct them, the City employs one of its most confiscatory tactics — an Article 7A Proceeding. Article 7A of the NYS Real Property Law authorizes the City to petition the Housing Court for the appointment of an administrator to manage the building in lieu of the owner. Once the administrator is appointed, the owner cannot enter his building without permission and cannot collect rent. Of course, he must still pay his property taxes!
Although the administrator is charged with the removal of housing-code violations, it is interesting to note that this is seldom accomplished. Additionally, once a building is in the 7A Program, Code-Enforcement inspectors are not authorized to issue additional violations unless specifically requested by their supervisors. If only the property owner had this luxury!
The payment of property taxes is last on the administrator's list of things to do. As a result, taxes continue to pile on and eventually the property is subject to in rem proceedings and becomes City owned. After the building is rehabilitated by the City at the taxpayer's expense, it is sold to community residents for $250 per unit. The property owner, however, receives no compensation for the loss of his building, and the taxpayer continues to subsidize the property.
The 7A administrator is given a host of special privileges that are never accorded a private owner. He is not subject to City-sponsored litigation. He is not fined, and he is not imprisoned for his failure to provide building upkeep.
Tenants seldom bring action against an administrator. If they do, a representative of the housing agency appears in court to support the administrator. In fact, a 7A Administrator bears no personal liability while he is acting in his capacity as administrator.
It becomes evident, then, that government intervention in the housing market leads to further and further intervention. As each tactic fails to cure the problem, more has to be done. Eventually, all value is stripped from the property and the City becomes the owner. In the end, the intervention has achieved very little because the property continues to degenerate and tenant living conditions do not improve.
The Inequity of Rent ControlAs a real-estate investor, price ceilings do not bother me as much as the forms of regulation described above. I calculate building value according to the discounted cash flow available. However, rent control does create a serious problem of equity — something that politicians and bureaucrats are constantly clamoring about.
You can find numerous examples of someone living in a rent-controlled apartment, usually acquired through the right of succession, paying substantially less rent than someone living in a decontrolled or rent-stabilized apartment of the same type in the same building. Property owners need to charge more for the decontrolled unit to make up for the loss they are taking on the rent-controlled unit. So once again, government's efforts to foster equality generate inequality.
I am not arguing in favor of rent control. In the past, price ceilings have had a devastating effect on the NYC real-estate market. However, since they affect a smaller percentage of units than do the other forms of regulation, they are no longer as devastating to the market in general. Every multiple dwelling in the city is subject to housing-code violations, rent reductions, Housing-Court action, and possible City extortion through an Article 7A proceeding.
The Essence of Government RegulationWhy does government continue to interfere in the housing market when the results of that intervention are so devastating? The answer is simple: local interest groups organize and pressure City Hall for action.
In NYC there are dozens of community groups that devote a substantial portion of their time to housing matters. Most of these groups are subsidized by taxpayer dollars. Even the now-infamous ACORN operated in the city, agitating tenants to organize against building owners guilty of even the slightest infraction — real or imagined.
Most of these housing pressure groups are left-leaning and believe that housing is a fundamental right of all — rent paying or not. I have often discussed building issues with community group representatives who spoke in terms of the "struggle." They were often surprised to find out that I was a supporter of free-market capitalism.
Pressure from these community groups distorted the actions of most local politicians. These politicians were often allied with these local groups and beholden to them for votes. Municipal bureaucrats were often allied with these groups to gain favor with the local politician. The result of this was the intervention in the market and the disastrous consequences that followed.
The Rebirth of the Central CitiesNew York City has gone through a spectacular rebirth during the past 20 years. Neighborhoods like Harlem, Williamsburg, and areas of the Bronx are much sought-after these days. However, this rebirth is the result of macroeconomic trends set in motion by the Reagan revolution of the '80s and carried on by Clinton and Bush — not of the failed regulatory attempts of government.
As the investment climate in the United States improved in the '80s, jobs were created and investment capital came into being. Much of this capital found its way to the real-estate market. Once-shunned neighborhoods were again the focus of investors and developers. People from all over the world came to NYC seeking jobs and investment opportunities. They also occupied the housing units rehabilitated by private developers.
In addition, with the election of Rudy Giuliani as NYC Mayor, many of the regulatory activates of his predecessors were scaled back. The 7A unit was disbanded, and buildings were no longer taken in rem. Instead, tax liens were sold to private entities.
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This gave landlords a greater opportunity to reclaim their properties through negotiations with the servicer. The entire inventory of City-owned housing was put on the market and returned to the private sector. Confidence in the city was restored through these, and other, private sector initiatives.
Mayor Bloomberg for the most part continued the free-market policies of his predecessor. Even with the current real-estate meltdown, New York City is in better shape than most big cities in the United States.
So for those clamoring for increased government regulation, I have only one piece of advice: take a look at the disastrous consequences of government intervention in the housing market. The results are bound to change your mind about the effectiveness of government action.
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"Calls for abolition of the patent system — especially those coming from a principled, rights-based approach — are very unlikely to be adopted at the present time."[This paper is the first of a two-part series. The concluding article is "Reducing the Cost of IP Law"]
Hardly a day passes when we do not hear of one patent abuse or another.[1] Ridiculous patents are issued or filed and companies are enjoined from selling their products. Judgments are issued, and settlements reached, for billions of dollars. (See the Appendix for examples of ridiculous patents and outrageous judgments.) Not surprisingly, there is a growing demand for reform of our patent system.[2]
Whether their demands are modest or radical, the reformers share the belief that the patent system is broken; has gotten out of hand; and is not in sync with our fast-paced, high-tech, open-sourced, digitized world — in short, that it needs to be fixed.
At first glance, it might appear that change is already under way. In recent years the Supreme Court has issued a spate of decisions cutting back patent protection or making it more difficult to obtain patents. One of the most significant cases, KSR v. Teleflex, raised the "obviousness" bar. This raised the standards for getting a patent, and also made it easier to challenge the validity of issued patents.[3]
In eBay v. MercExchange, the Court made it more difficult to get injunctions against the alleged infringer (alas, too late for poor BlackBerry). The MedImmune decision made it easier for licensees to challenge the validity of patents they had previously licensed. Microsoft v. AT&T restricted the global reach of US patent law.[4]
And the Court of Appeals for the Federal Circuit (CAFC) — the sole appellate court for patent cases since its creation in 1982 — changed the standard for "willful infringement" in the Seagate case, making it harder to obtain enhanced (treble) damages. Most recently, in Quanta v. LG Electronics, decided in June 2008, the Supreme Court refined the "patent exhaustion" doctrine to make it more difficult for patentees to extract royalties from multiple parties for the same device or process.[5]
The U.S. Patent & Trademark Office (PTO) has also entered the fray. In August 2007, the PTO released new rules for patent practice that limit how many times a patent application can be "renewed" and also limit the number of "claims" in a patent application (these rules were enjoined just before taking effect, due to a suit from British drug maker GlaxoSmithKline).[6]
Finally, Congress has been considering various amendments to the Patent Act.[7] Possible changes include switching from a "first-to-invent" to a "first-to-file" system, reducing damage awards, reducing forum shopping, and making it easier to challenge issued patents.[8]
Plus Ça Change, Plus C'est La Même ChoseAccording to the organized patent bar and intellectual property (IP) advocates, these recent and proposed developments are "radical." In other words, they go too far.
Patent attorney John R. Harris, for example, ominously intones:
The U.S. has the best patent system in the world. What I'm afraid of is that they are about to throw the baby out with the bathwater.… The new rules are radical. The new legislation is radical. They will cause fewer patents to be issued.[9]
But the truth is that none of the developments noted above are really that dramatic. Patent law is always evolving due to court decisions, new rules issued by the PTO, and new legislation from Congress. Consider this brief sample of notable events in the history of patent law:
Date
Patent Law Development
13.7 billion years ago
God invents the universe. He does this without permission of anyone else. He doesn't look in the Celestial Patent Office filings first to make sure he is in the clear.
1.9 million years ago
Grog invents using fire to cook food. Arrgg sees this and imitates it. Soon, the practice spreads. Ditto with living in caves, using spears to kill animals, building "houses," and dressing in cured animal hides. Nobody sues anybody. No patent system has been invented yet.
1474–1700s
Sovereigns grant exclusive rights (monopolies) as a way to raise money without having to raise taxes. Strangely, nobody gets a patent on the idea of granting monopolies.
1789
US Constitution authorizes Congress to grant to "Authors and Inventors the exclusive Right to their respective Writings and Discoveries" "for limited Times" in order "To promote the Progress of Science and useful Arts."
1790
First Patent Act.
1873
Patent exhaustion doctrine clearly established in Adams v. Burke.
1912
Henry v. A.B. Dick Co. confuses the exhaustion rule with the separate doctrine of "implied license."
1917
1912 decision (above) overruled by Motion Picture Patents Co. v. Universal Film Manufacturing Co.
1930
Popular Science Monthly claims that the Patent Office "has become a national disgrace" because of the backlog of unprocessed patent applications. This complaint is still being made in 2009.
1942
United States v. Univis Lens Co. case harmonizes the exhaustion doctrine with the related law of contributory infringement.
1952
Congress significantly revises patent law, changing various aspects of settled law, e.g., in the areas of misuse and contributory infringement; it also codifies the exhaustion rule of Univis.[10]
1954
Congress amends patent law to allow patents on plants.
1966
Graham v. John Deere "clarifies" obviousness standards.
1978
Patent Cooperation Treaty enters into force.
1982
The Court of Appeals for the Federal Circuit (CAFC) is established and given exclusive appellate jurisdiction in patent cases. This leads to the unification of patent law and the strengthening of patents and patent protection.[11]
1992
CAFC in Mallinckrodt, Inc. v. Medipart, Inc. again conflates exhaustion and implied license doctrine as in the overruled 1912 case, A.B. Dick. Exhaustion doctrine to be modified yet again in 2008 Quanta Computer v. LG Electronics case (below).
1994
CAFC's In re Donaldson decision requires the "means-plus-function" test used during patent litigation to be applied by the PTO during patent prosecution as well.
1994–1995
Patent law is amended pursuant to GATT: patent terms changed from seventeen years from the date of issue to twenty years from date of filing. The right to file "provisional" patent applications is established.[12]
1995–1998
Revised PTO examination guidelines, and cases such as Alappat and State Street, make it easier to obtain patents on business methods as well as software and computer-implemented inventions.[13]
1996
In Markman v. Westview Instruments, Supreme Court declares that patent claim interpretation is a matter of law, not a question of fact; this leads to the "Markman hearings."
1997
35 USC 287(c) added to Patent Act to exempt certain surgical methods from patent liability.[14]
1999
The Intellectual Property and Communications Omnibus Reform Act of 1999 enacts "most significant changes" in U.S. Patent law since the 1952 Patent Act, according to PTO Commissioner Dickinson. Changes include early publication of pending-patent applications and a limited first inventor (prior user) defense for prior users of business methods.
2002
Festo case revises the "doctrine of equivalents."
2006
MedImmune makes it easier for licensees to challenge the validity of patents. eBay v. MercExchange makes it more difficult to get injunctions against patent defendants.[15]
2007 (April)
Microsoft v. AT&T restricts the global reach of US patent law. KSR v. Teleflex tightens "obviousness" standards, raising the bar for obtaining a patent, and making it easier to challenge the validity of an existing patent.
2007 (August)
CAFC in Seagate changes the standard for "willful infringement," making it more difficult to obtain enhanced (treble) damages.
2007 (August)
PTO releases new rules for patent practice that limit how many times a patent application can be "renewed" and also limit the number of "claims" in a patent application.
2007 (September)
Congress poised to enact amendments switching from a "first-to-invent" to a "first-to-file" system, reducing damage awards, making it easier to challenge issued patents, and reducing forum shopping.
2007 (September)
Comiskey and Nuitjen cases make it more difficult to claim mere "signals" and also seem to choke back on software, internet, and business method patents.[16]
2008 (June)
In Quanta Computer v. LG Electronics, the Supreme Court arguably overturns Mallinckdrot (1992) and clarifies the exhaustion doctrine yet again — making it more difficult for patentees to extract royalties from multiple parties for the same device or method.[17]
2008 (October)
The CAFC in In re Bilski further modifies the patentability test for software or business-method patents, partially overruling State Street.[18]
As can be seen, since the inception of modern US patent law in 1790, the field has been continually in flux. There is no reason to single out the last few years. Modern patent law has evolved for over two hundred years and will continue to do so. Indeed, frequent and arbitrary change in the law, and the uncertainty that this breeds, is common in state-run, legislation-dominated legal systems.[19] The fact that state law changes is not new.
But though various details of the patent system continue to morph pursuant to political pressures and legal trends, the essential aspects of the patent system have not changed at all: The scope of what is patentable has not shrunk appreciably. The term is still about seventeen years. Patents are still enforceable by injunction. The groundless presumption of validity is alive and well.
Patent defendants who win usually pay their own legal fees, as before. Defending patent lawsuits continues to be incredibly expensive. Lobbying goes on as before. Companies continue to need to obtain patents if only for defensive purposes.
Obviousness and novelty remain the standards for patentability — and these standards are still vague, nonobjective, and subject to unpredictable interpretation by an inept and bureaucratic government agency, by state courts, and by technically inept juries. And the patent system is still widely believed to be legitimate and necessary even while it is widely derided as seriously flawed.
"There is no reason to single out the last few years. Modern patent law has evolved for over 200 years and will continue to do so."And so, for the foreseeable future, companies will continue to spend lots of money obtaining patents. And small businesses will still face the threat of patent-infringement lawsuits and court-ordered injunctions that could put them out of business.[20] And these suits will continue to cost literally millions of dollars to defend. "Bad" patents will keep being granted, and various patentability standards will always be murky, arbitrary, and uncertain.
This is not to say that recent changes will not be felt at all. Patent attorneys, for example, can expect to see more business as a result of all this legal turmoil.[21] (Why many of them are complaining about these developments is a mystery.)
But other than more money being spent on patent attorneys and a relatively small, probably temporary, shift in the balance of power between patentees and alleged infringers, the patent system has not radically changed. All of the problems noted above stem from the basic nature of the patent system. They will not recede by merely tinkering with details and leaving the essential features of the system intact.[22]
Principle v. Pragmatism; Abolition v. RevisionWhat adjustments, then, should be made to our current patent laws? The answer to this question depends, in part, on one's basic approach to law. Most people with an opinion on IP policy — both pro and anti — have a utilitarian mindset. They favor or oppose various patent policies based on whether or not these policies produce more societal wealth, in the form of extra innovation worth more than the cost of the system.
Others favor or oppose patent rights on more principled or deontological (rights-based) grounds. Some of them, such as Ayn Rand, argue that patent rights are important property rights;[23] others maintain that patents should be abolished precisely because they undercut property rights.[24]
As for the latter position — yes, property rights are indeed undercut by patents. And even on utilitarian grounds, it could be argued that the patent system imposes an overall net cost on the economy,[25] and should therefore be abolished or radically curtailed. It is apparent, however, that the patent system is very entrenched, as is the wealth-maximization approach to policy making.
Calls for abolition of the patent system — especially those coming from a principled, rights-based approach — are very unlikely to be adopted at the present time. In my forthcoming paper, therefore, I recommend certain changes to the patent system short of abolition, assuming a general "costs-and-benefits" approach.
Accordingly, to determine what adjustments ought to be made to the patent system (again, putting arguments for abolition on principled grounds to the side), we need a sufficiently clear understanding of the nature and extent of the costs imposed by the system, as well as its alleged benefits. With this in mind, the forthcoming paper suggests a laundry list of obvious changes that should be made to the patent system to reduce its costs with only minimal impact on its purported advantages. Stay tuned.
Stephan Kinsella, BSEE, MSEE, JD (Louisiana State University), LLM (University of London-King's College London), a registered patent attorney in Houston, General Counsel of Applied Optoelectronics, Inc., and Editor of Libertarian Papers, has prosecuted hundreds of patent applications in a variety of technologies. His legal publications include Trademark Practice and Forms (editor, Oxford University Press, 2001–present); International Investment, Political Risk, and Dispute Resolution: A Practitioner's Guide (London: Oxford University Press, 2005 [2nd ed. forthcoming in 2010]); Digest of Commercial Laws of the World (editor, Oxford University Press, 1998–present); Online Contract Formation (coeditor, Oceana Publications, 2004), and other legal treatises. His libertarian publications include Property, Freedom, and Society: Essays in Honor of Hans-Hermann Hoppe (coeditor, Mises Institute, 2009), Against Intellectual Property (Mises Institute, 2008), "The Case Against IP: A Concise Guide," Mises Daily (Sept. 4, 2009), and other articles on IP. See his blog. Send him mail. See [AuthorName]'s [AuthorArchive]. Comment on the blog.
This paper is the first part of a two-part series. The concluding article is "Reducing the Cost of IP Law," Mises Daily (Jan. 20, 2010).
Appendix: Examples of Outrageous Patents and JudgmentsExamples of (at least apparently) ridiculous patents and patent applications abound (more at PatentLawPractice):
Amazon's "one-click" patent, asserted against rival Barnes & Noble;Cendant's assertion that Amazon violated Cendant's patent monopoly on recommending books to customers (since settled);The attempt of Dustin Stamper, Bush's Top Economist, to secure a patent regarding an application for a System And Method For Multi-State Tax Analysis, which claims "a method, comprising: creating one or more alternate entity structures based on a base entity structure, the base entity structure comprising one or more entities; determining a tax liability for each alternate entity structure and the base entity structure; and generating a result based on comparing each of the determined tax liabilities";Apple's patent application for digital Karaoke;the suit against Facebook by the holder of a patent for a "system for creating a community for users with common interests to interact in";the "absurdly broad patent [issued to Blackboard] for common uses of technology if that technology is employed in the context of education" (see also Patent Office Rejects Blackboard E-Learning Patent One Month After It Wins Lawsuit, Techdirt (Mar. 31, 2008);Compton's (now Encyclopedia Britannica's) patent that "broadly cover[s] any multimedia database allowing users to simultaneously search for text, graphics, and sounds — basic features found in virtually every multimedia product on the market";Carfax's patent on a "method for perusing selected vehicles having a clean title history";Acacia's patent for putting a unique transaction number on a receipt;Apparently, Acacia has collected settlement amounts — rumored to be between $50,000 and $400,000 each — from a very long list of licensees.Pat. No. 6,368,227, covering swinging sideways on a swing;The Supreme Court, in the 1882 case Atlantic Works v. Brady, 107 US 192, itself lists examples of patents issued to "gadgets that obviously have had no place in the constitutional scheme of advancing scientific knowledge … the simplest of devices." These included
a particular doorknob made of clay rather than metal or wood, where differently shaped doorknobs had previously been made of clay;making collars of parchment paper where linen paper and linen had previously been used;a method for preserving fish by freezing them in a container that operates in the same manner as an ice-cream freezer.rubber caps put on wood pencils to serve as erasers;inserting a piece of rubber in a slot in the end of a wood pencil to serve as an eraser;a stamp for impressing initials in the side of a plug of tobacco;a hose reel of large diameter so that water may flow through the hose while it is wound on the reel;putting rollers on a machine to make it movable;using flat cord instead of round cord for the loop at the end of suspenders;placing rubber hand grips on bicycle handlebars;an oval rather than cylindrical toilet paper roll, to facilitate tearing off strips.Below are a few notable or recent examples of large, significant, troubling, or apparently outrageous injunctions, damages awards, and the like:
Qualcomm has been enjoined from importing chips that help conserve power in cell phones (discussion; latest developments). See also Eric Bangeman, ITC to Bar Import of New Handsets in Patent Dustup, ars technica (June 7, 2007); Nokia's Patent-Licensing Case against Qualcomm Dropped by Dutch Court, engadget (Nov. 14, 2007); Broadcom Wins Major Injunction against Qualcomm, engadget (Dec. 31, 2007); ITC Upholds Ruling, Reiterates that Nokia Didn't Violate Qualcomm Patents, engadget (Feb. 29, 2008).
Texas-Sized Patent Win, Texas Lawyer (Feb. 21, 2008). A New Jersey doctor was awarded $432 Million as a "reasonable royalty" against Boston Scientific for infringing his "Method and Apparatus for Managing Macromolecular Distribution."
Smartphones Patented … Just About Everyone Sued 1 Minute After Patent Issued, Techdirt (Jan. 24, 2008).
Farmer David Reaps What He Has Sown: A Patent Suit, Patent Baristas (Feb. 13, 2008) Even though "the practice of saving seeds after a harvest to plant the next season is as old as farming itself," patents prevent farmers from saving patented seeds.
Apple, Starbucks Sued over Custom Music Gift Cards, AppleInsider (Feb. 20, 2008) A Utah couple sue Apple and Starbucks over their "'Song of the Day' promotion, which offers Starbucks customers a iTunes gift card for a complimentary, pre-selected song download." The suit is based on a patent on a "retail point of sale for online merchandising" which allows customers to buy a gift card from a brick-and-mortar store and then go home and redeem the card online.
Apple Sued Over Caller ID on the iPhone, Techdirt (Feb. 27, 2008). The patent is on "matching up the phone number of an incoming call with a local contact database to display who is calling."
The new 802.11n Wi-Fi standard (which promises to significantly increase Wi-Fi speed and range) is in jeopardy due to patent threats. See Bill Ray, Next Generation Wi-Fi Mired in Patent Fears, The Register (Sept. 21, 2007).
SanDisk Sues 25 Companies for Patent Infringement: "Suits have been filed against 25 companies by the SanDisk corporation this week, as the company looks to stop businesses from shipping products it alleges are infringing on its work. SanDisk has filed suits against everyone from MP3 player manufacturers to USB hard drive creators. The list of defendants is staggering, and MacWorld notes if Sandisk succeeds it could have repercussions outside of the courtroom.… The court … complaints could affect the prices and availability of products made by companies targeted in the suit if SanDisk wins and the companies are barred from importing products into the U.S."
Patent Office Upholds Tivo's "Time Warp" Patent, EchoStar Not so Happy, engadget (Nov. 29, 2007); see also Tivo Inc. v. EchoStar Communications Corp. (S. D. Tex., Dec. 2, 2006); and TiVo Wins on Appeal: Permanent Injunction against EchoStar to be Reinstated, Patently-O (Jan. 31, 2008).
Jacqui Cheng, U R SUED: Patent Holding Company Targets 131 Companies over SMS patents, ars technica (Nov. 13, 2007).
The International Trade Commission (ITC) may ban imports of many popular hard drives that "are alleged to infringe on patents owned by California residents Steven and Mary Reiber related to a 'Dissipative ceramic bonding tool tip.'" Jacqui Cheng, Hard Times for Hard Drives: US May Ban Popular Imports, ars technica (Oct. 11, 2007).
The VoIP phone service Vonage may be put out of business by patents. Sprint recently won a patent case against Vonage in which $69.5 million was awarded in damages. Sprint had planned "to ask the court to permanently ban Vonage from using its patented technology," but the case was subsequently settled for $80 million. However, in a separate patent lawsuit between Verizon and Vonage, the jury found that Vonage had violated three Verizon patents, and awarded Verizon $58 million in damages plus ongoing royalties. Vonage claims it has developed workarounds for two of the patents. See Kim Hart, Sprint Wins Patent Case Against Vonage: Reston Firm Awarded $69.5 Million in Second Blow to Internet Phone Company, Washington Post (Sept. 26, 2007); Peter Svensson, Vonage Settles Patent Suit with Sprint, BusinessWeek (Oct. 8, 2007). Latest: Vonage Settles with Verizon, Owes Up to $117.5 Million; Vonage, Nortel Call a Truce — No Cash Changing Hands, engadget (Dec. 31, 2007).
Kinsella, Revolutionary Television Design Killed by Patents (2007).
BlackBerry's manufacturer, RIM, was forced to cough up $612.5 million after NTP used patent law to threaten to shut RIM down.
Microsoft was on the receiving end of a $1.5 billion jury verdict for infringing an MP3 patent held by Alcatel-Lucent (which was recently overturned).
After Kodak sought more than $1 billion in damages from Sun Microsystems for patent infringement, Kodak finally settled for $92 million. (And according to one colleague, the verdict resulted "in the immediate shutdown of Kodak's entire instant photography division, with the immediate loss of 800 jobs. And, some say, the eventual failure of Polaroid due to lack of any real competition to keep them on their toes!")
In another recent case, Freedom Wireless obtained a $150 million damages award against Boston Communications Group, Inc., which at the time had revenues of only about $100 million. In this case, the judge also refused to stay the injunction issues against BCGI (and by extension, its customers) pending appeal.
Smith International was forced to pay Hughes Tool Company $204.8 million for infringement upon Hughes's patent for an "O-ring seal" rock bit, which led to Smith filing for chapter 11 bankruptcy protection (this was in 1986, when $200 million was considered a large patent verdict).
As of March 2003, the top 5 patent infringement damage awards ranged from $873 million (Polaroid v. Kodak, 1991) to $204.8 million (Hughes Tool v. Smith International, 1986). The top 5 patent settlements ranged from $1 billion to $300 million. Damage Awards and Settlements, IP Today (March 2003); see also Gregory Aharonian, Patent/Copyright Infringement Lawsuits/Licensing Awards. Sadly, a $200 million verdict seems normal nowadays. The recent $156 million patent-infringement verdict against AT&T, for example — which could possibly be trebled by the judge — now looks like small potatoes.
Other recent cases include a $1.67 billion patent infringement verdict in favor of Johnson & Johnson against Abbott; a $400 million settlement paid to Abbot, by Medtronic, regarding stent devices; and a $716 million settlement paid to Johnson & Johnson by Boston Scientific (cardiac stents again).
Notes[1] A patent is a state-granted legal right in an "invention," such as a device or process that performs a "useful" function. It is obtained by filing a "patent application" with the US Patent and Trademark Office (USPTO). The patent gives the patentee the right to exclude, i.e., to prevent others from practicing the patented invention.
[2] See, e.g., Rick Merritt, Countervailing Forces Propel Patent Reform, EETimes (Sept. 17, 2007); Patti Waldmeir, US Moves to Reform Patent Laws, Financial Times (Sept. 8, 2007); Executive Office of the President — Office of Management and Budget, Statement of Administration Policy: H.R. 1908 — Patent Reform Act of 2007 (2) (Sept. 6, 2007); "Patent Reform Act of 2009," Patently-O (March 3, 2009); "Patent Reform 2009: Reactionary Causes," Patent Baristas (March 3, 2009); Council on Foreign Relations, Reforming the U.S. Patent System: Getting the Incentives Right (2006); Adam B. Jaffe & Josh Lerner, Innovation and Its Discontents: How Our Broken Patent System is Endangering Innovation and Progress, and What to Do About It (2004); also Josh Lerner, The U.S. Patent Game: How to Change It (2004); Greg Blonder, Cutting Through the Patent Thicket, BusinessWeek (Dec. 20, 2005); Reed Hundt, Patently Obvious, Forbes (Jan. 30, 2006); James Bessen & Michael J. Meurer, Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk (Princeton University Press, 2008); Patent Reform is Not Enough; A Proposal for Software Patent Reform; Patent Reform for a Digital Economy and Real Patent Reform, Computer & Communications Industry Association; Declan McCullagh, Patent Reform: Who's On First?, ZDNet News (Sept. 13, 2005). Other groups advocating reform or highlighting abuse include Free Software Foundation; Business Software Alliance; Foundation for a Free Information Infrastructure; Progress & Freedom Foundation; League for Programming Freedom; Electronic Frontier Foundation; Software Freedom Law Center; Coalition for Patent Fairness; End Software Patents; and the U.S. Chamber of Commerce.
Groups opposing significant change (in particular opposing the raising of the "obviousness" bar by the Supreme Court in KSR v. Teleflex, which made it harder to get a patent and easier to challenge an issued patent) include, not surprisingly (1, 2), legal and business interests such as the American Bar Association (ABA), the American Intellectual Property Law Association (AIPLA), the Federal Circuit Bar Association, the Franklin Pierce Law Center Intellectual Property Amicus Clinic, Intellectual Property Owners Association, Pharmaceutical Research and Manufacturers of America, the Manufacturing Alliance on Patent Policy (MAPP), and a descriptively-named group of "Practicing Patent Attorneys."
See also the list of various IP groups providing comments on the PTO's proposed new rules of patent practice.
[3] Raising the bar for obtaining patents, while making them harder to obtain in the first place, may also make future patents more difficult to challenge, once they survive the more stringent examination requirements.
[4] On the Microsoft v. AT&T case, see also Patent Law: Baby Steps — Update; Microsoft v. AT&T: Extraterritorial Enforcement of US Patents.
[5] See Mike Masnick, Supreme Court Says Patent Holders Can't Shake Down Entire Supply Chain, techdirt (June 9, 2008); Supreme Court Decides Quanta v. LG Electronics, U.S. (2008), Patently-O (June 9, 2008); Justin Levine, Supreme Court continues its positive trend with patent law, Against Monopoly (June 9, 2008); Supreme Court Reverses CAFC in Quanta: Method Patents Exhaustible, Peter Zura's 271 Patent Blog (June 9, 2008); also Greg Stohr & Susan Decker, Quanta-LG Case at U.S. Supreme Court May Limit Patent Royalties, Bloomberg.com (Jan. 16, 2008); Supreme Court to Decide Patent Exhaustion Case, Patently-O (Sep. 25, 2007); Kinsella, Patent Exhaustion, Mises Blog (Feb. 1, 2008).
[6] See Court Blocks PTO Rules on Eve of Effective Date; All Four Equitable Relief Factors Suggest Injunction, Patently-O (Oct. 31, 2007). For the latest in this saga, see Stephen Albainy-Jenei, Tafas v. Doll: War Without End, Patent Baristas (July 8, 2009); Marcia Coyle, DOJ Seeks Stay on Suit Against New Patent Rules, National Law Journal (July 28, 2009).
[7] For recent status of pending patent reform legislation, see Patent Reform Act of 2009, Patently-O (March 3, 2009); Reid: Patent Reform a Top Priority (Sort Of), The 271 Patent Blog (Jan. 22, 2008); also Patently-O Bits and Bytes No. 12, Patently-O (Feb. 15, 2008) ("IPO reports a strong likelihood that no action will take place in the Senate until April 2008. In the meantime, the Reform Act is in secret revision in Senator Leahy's office.").
[8] The Eastern District of Texas, in particular, has been a popular choice for patent litigation due to its "rocket docket" and patentee-friendly juries. See What Does Forum Shopping In The Eastern District Of Texas Mean For Patent Reform?; Why Did Blackboard File in East Texas; Judge Blocks Dynamic Web Patent Troll's "Forum Shopping." The draft amendments would impose strong limitations on venue, which would hamper the ability of patent plaintiffs to sue in this district. See Senator John Cornyn Press Release, Cornyn Pledges to Fight for Fairness for Eastern District of Texas Courts (July 13, 2007).
[9] Katheryn Hayes Tucker, GCs Draw Line in the Sand Over Changes to Patent Law, Daily Business Review (December 13, 2007). Harris goes so far as to raise the possibility of a patent-reform-caused depression: "If we're about to go into a recession and all of a sudden you kill innovation in the country, we might not have a recession. We might have a depression." How Harris knows we have "the best patent system" is not explained; it's commonly believed among patent attorneys, for example, that European Patent Office examiners are much better than ours. See also Dennis Fernandez, 5 Reasons You Should No Longer Bother Getting U.S. Patents, Intellectual Property Today (February 2008).
[10] See Quanta's brief in the Quanta Computer v. LG Electronics case.
[11] See Scott Atkinson, Alan Marco & John L. Turner, Uniformity and Forum Shopping in US Patent Litigation (2006); Matthew D. Henry & John L. Turner, The Court of Appeals for the Federal Circuit's Impact on Patent Litigation (2005); Robert Hunt, Patent Reform: A Mixed Blessing For the U.S. Economy? (1999).
[12] See Kinsella, GATT and its Impact on Patents (2005).
[13] State Street was partially overruled in 2008; see discussion of In re Bilski case, below. See also Kinsella, Computer Software Patents Are On The Way, SHSL IP Report (Fall 1995); Stephan Kinsella & Robert E. Rosenthal, A New Traffic Cop at Intersection of Patents and Financial Inventions, The Legal Intelligencer (February 5, 1998).
[14] See Kinsella, How to Operate Within the Law: Patents on Medical Procedures, The Legal Intelligencer (September 3, 1998).
[15] However, it is still possible to obtain patent injunctions. See, e.g., Transocean v. GlobalSantaFe (S. D. Tex. Dec. 27, 2006) (permanent injunction granted; leading to acquisition of defendant by plaintiff); and Tivo Inc. v. EchoStar Communications Corp. (S. D. Tex., Dec. 2, 2006) (injunction granted); TiVo Wins on Appeal: Permanent Injunction against EchoStar to be Reinstated, Patently-O (January 31, 2008). Both these cases are discussed in Robert H. Resis, Life after eBay v. MercExchange — The Strong Get Stronger, Intellectual Property Today (December 2007). For an example of an ongoing royalty awarded instead of a permanent injunction, see Paice LLC v. Toyota Motor Corp. (Fed. Cir. October 18, 2007). See also CAFC Approves Compulsory License (but calls it an "ongoing royalty"), Patently-O (October 19, 2007); Innogenetics: Forward Looking Damages Approved, Patently-O (January 21, 2008). For a more recent development in the eBay case, see MercExchange v. eBay: Injunction Denied Again, Patenly-O (December 18, 2007); MercExchange Saga Over: eBay Just Buys The Patents, Techdirt blog (February 28, 2008). Moreover, as injunctions become harder to obtain, patentees simply turn to the ITC. See Eric Bangeman, Permanent Injunctions Getting Scarce; Patent Holders Turn to ITC, ars technica (June 3, 2007).
[16] See discussion of In re Bilski case, below; Signal Claims Are Not Patentable: Nuijten Stands — Rehearing Denied, Patently-O (February 11, 2008).
[17] See also Ladas & Parry, A Brief History of the Patent Law of the United States.
[18] The court here abandoned State Street's "useful, concrete, and tangible result" test for patentability and reaffirmed the "machine-or-transformation" test. Under this latter test, such a patent is valid only if (a) it is tied to a particular machine or apparatus, or (b) it transforms a particular article into a different state or thing. See "Appeals Court Smacks Down Software And Business Method Patents without Apparatus or Transformative Powers," Patent Baristas (October 31, 2008); In re Bilski: Patentable Process Must Either (1) be Tied to a Particular Machine or (2) Transform a Particular Article, Patently-O (October 30, 2008).
[19] See Kinsella, Legislation and the Discovery of Law in a Free Society (1995).
[20] Such a threat was the reason RIM, BlackBerry's maker, paid $600 million to NTP even though NTP's patents were being re-examined by the PTO: RIM couldn't risk even a short-lived injunction. See also Patent Office Rejects Blackboard E-Learning Patent One Month After It Wins Lawsuit, Techdirt (March 31, 2008). Even after the eBay case, injunctions are still granted, as noted in endnote 15, above; or patent holders find alternative means of blocking competitors, such as ITC actions.
[21] Other than Seagate, which reduces the value of the lucrative "patent opinions" patent practitioners are often hired to write. On the uncertainty engendered by legal turmoil, see Kinsella, Legislation and the Discovery of Law in a Free Society.
$29 $25
[22] The process by which the patent law ebbs and flows, and continually changes, provoking cries of doom and disaster from biased, special-interest chicken littles, calls to mind an analysis by Llewellyn H. Rockwell, Jr., in his book The Left, the Right, and the State (Auburn, Alabama: Mises Institute, 2008), pp. xiii-xiv (emphasis added):
What is the state? It is the group within society that claims for itself the exclusive right to rule everyone under a special set of laws that permit it to do to others what everyone else is rightly prohibited from doing, namely aggressing against person and property.
Why would any society permit such a gang to enjoy an unchallenged legal privilege? Here is where ideology comes into play. The reality of the state is that it is a looting and killing machine. So why do so many people cheer for its expansion? Indeed, why do we tolerate its existence at all?
The very idea of the state is so implausible on its face that the state must wear an ideological garb as means of compelling popular support. Ancient states had one or two: they would protect you from enemies and/or they were ordained by the gods.
To greater and lesser extents, all modern states still employ these rationales, but the democratic state in the developed world is more complex. It uses a huge range of ideological rationales — parsed out between left and right — that reflect social and cultural priorities of niche groups, even when many of these rationales are contradictory.
The left wants the state to distribute wealth, to bring about equality, to rein in businesses, to give workers a boost, to provide for the poor, to protect the environment.… The right, on the other hand, wants the state to punish evildoers, to boost the family, to subsidize upright ways of living, to create security against foreign enemies, to make the culture cohere, and to go to war to give ourselves a sense of national identity.…
So how are these competing interests resolved? They logroll and call it democracy. The left and right agree to let each other have their way, provided nothing is done to injure the interests of one or the other. The trick is to keep the balance. Who is in power is really about which way the log is rolling. And there you have the modern state in a nutshell.
Likewise, the vested interests moan and caterwaul at the slightest change, thus making sure that serious, radical change is not even considered. This way, they keep the basic system intact.
[23] See Ayn Rand, "Patents and Copyrights" in Capitalism: The Unknown Ideal, p. 131, 133; also Ayn Rand Biographical FAQ, sec. 5.2.2; Kinsella, Rand and Marx (2006).
[24] See Kinsella, Against Intellectual Property; idem, "The Case Against IP: A Concise Guide."
[25] See Kinsella, Yet Another Study Finds Patents Do Not Encourage Innovation, Mises Blog (July 2, 2009); Michele Boldrin & David K. Levine, Against Intellectual Monopoly (Cambridge University Press, 2008).
Like many libertarians, I initially assumed intellectual property (IP) was a legitimate type of property right. But I had misgivings from the start: there was just something too utilitarian and results oriented in Rand's purportedly principled case for IP, and something too artificial about the state's copyright and patent statutory classifications. I started practicing patent law around 1992, and the more I learned about IP, the more my doubts grew.
I finally realized that IP is incompatible with genuine property rights. (This echoed the sloughing off of my initial Randian minarchism in favor of Rothbardian anarchism, when I realized the state is aggression incarnate and cannot be justified. See my article, "What It Means To Be an Anarcho-Capitalist.")
And so, in 1995 I started publishing articles pointing out problems with IP, finally culminating in my lengthy 2001 Journal of Libertarian Studies article "Against Intellectual Property," which was republished as a monograph last year by the Mises Institute. A summary of the argument in this paper was set forth in my article "In Defense of Napster and Against the Second Homesteading Rule" (LewRockwell.com, 2000), and various of these pieces have been translated into other languages.
In recent years there has been a good deal of more useful writing on IP and, as my previous Napster article is somewhat dated now, the time is ripe to concisely restate the basic libertarian case against IP and provide links to some of the key anti-IP publications.
The Libertarian FrameworkThis section provides a brief sketch of the libertarian framework before applying these principles to IP.This section is adapted from "What Libertarianism Is," Mises Daily, August 21, 2009. More detailed notes and references pertaining to this section may be found there; many links in this section lead to endnotes in that article. See also my speech, "Intellectual Property and Libertarianism," delivered at Mises University 2009, Auburn AL, July 30, 2009 (audio), an adapted version of which is forthcoming in Liberty magazine.
As Rothbard explained, all rights are property rights. But a property right is simply the exclusive right to control a scarce resource. Property rights just specify who owns, who has the right to control, scarce resources.
No political system is agnostic on the question of who owns various resources. To the contrary: any given system of property rights assigns a particular owner to every scarce resource. None of the various forms of socialism, for example, deny property rights; each socialist system will specify an owner for every scarce resource.
If the state nationalizes an industry, it is asserting ownership of these means of production. If the state taxes you, it is implicitly asserting ownership of the funds taken. If my land is transferred to a private developer by eminent domain statutes, the developer is now the owner. Thus, protection of and respect for property rights is not unique to libertarianism.
What is distinctive about libertarianism is its particular property assignment rules — its view as to who is the owner of each contestable resource, and how to determine this. So the question is: what are the libertarian property assignment rules that distinguish our philosophy from others?
Property in BodiesThere are two types of scarce resources: human bodies, and external resources found in nature.
Human bodies are of course scarce resources. As Professor Hans-Hermann Hoppe observes, even in a paradise with a superabundance of goods,
every person's physical body would still be a scarce resource and thus the need for the establishment of property rules, i.e., rules regarding people's bodies, would exist. One is not used to thinking of one's own body in terms of a scarce good, but in imagining the most ideal situation one could ever hope for, the Garden of Eden, it becomes possible to realize that one's body is indeed the prototype of a scarce good for the use of which property rights, i.e., rights of exclusive ownership, somehow have to be established, in order to avoid clashes.
Now the distinct libertarian view is that each person completely owns his own body — at least initially, until something changes this (e.g., if a person commits some crime by which he forfeits or loses some of his rights). Implicit in the idea of self ownership is the belief that each person has a better claim to the body that he or she directly controls and inhabits than do others. I have a better claim to the right to control my body than you do, because it is my body; I have a unique link and connection to my body that others do not, and that is prior to the claim of any other person.
Thus we can see that anyone other than the original occupant of a body is a latecomer with respect to the original occupant. Your claim to my body is inferior in part because I had it first. The person claiming your body can hardly object to the significance of what Hoppe calls the "prior-later" distinction, since he adopts this very rule with respect to his own body — he has to presuppose ownership of his own body in order to claim ownership of yours.
The self-ownership rule may seem obvious, but it is held only by libertarians. Nonlibertarians do not believe in complete self ownership. Sure, they usually grant that each person has some rights in his own body, but they believe each person is partially owned by some other person or entity — usually the state, or society. In other words, we libertarians are the only ones who really oppose slavery in a principled way. Nonlibertarians are in favor of at least partial slavery.
This slavery is implicit in state actions and laws such as taxation, conscription, and drug prohibitions. The libertarian says that each person is the full owner of his body: he has the right to control his body, to decide whether or not he ingests narcotics, works for less than minimum wage, pays taxes, joins an army, and so on.
But those who believe in such laws believe that the state is at least a partial owner of the body of those subject to such laws. They don't like to say they believe in slavery, but they do. The liberal wants tax evaders put in jail — that is, enslaved. The conservative wants marijuana users enslaved.
Property in External ThingsIn addition to human bodies, scarce resources also include external objects. Unlike human bodies, however, external things are initially unowned. The libertarian view with respect to such external resources is very simple: the owner of a given scarce resource is the person who first homesteaded it, or someone who can trace his title contractually back to the homesteader. This person has a better claim than anyone else who wants the property. Everyone else is a latecomer with respect to the first possessor.
This latecomer rule is actually implied in the very idea of owning property. If the earlier possessor of property did not have a better claim than some second person who wants to take the property from him, then why does the second person have a better claim than a third person who comes later still (or than the first owner who tries to take it back)? In other words, to deny the crucial significance of the prior-later distinction is to deny property rights altogether.
Every nonlibertarian view is thus incoherent. On the one hand, they presuppose the prior-later distinction when they assign ownership to a given person (in that it says that person has a better claim than latecoming claimants). On the other hand, they act contrary to this principle whenever they take property from the original homesteader and assign it to some latecomer.
But what is relevant for our purposes here is the libertarian position, not the incoherence of competing views. And, in sum, the libertarian position on property rights in external objects is that, in any dispute or contest over any particular scarce resource, the original homesteader — the person who appropriated the resource from its unowned status, by embordering or transforming it (or his contractual transferee) — has a better claim than latecomers, those who did not appropriate the scarce resource.
Libertarianism on IPGiven the libertarian understanding of property rights, as sketched above, it is clear that the institutions of patent and copyright are simply indefensible. Patents grant rights in "inventions" — useful machines, or processes. A patent is a grant by the state that permits the patentee to use the state's court system to prohibit others from using their own property in certain ways — from reconfiguring their property according to a certain pattern or design described in the patent, or from using their property (including their own bodies) in a certain sequence of steps described in the patent.
Copyrights pertain to "original works," such as books, articles, movies, and computer programs. A copyright is a grant by the state that permits the copyright holder to prevent others from using their own property — e.g., ink and paper — in certain ways.
In both cases, the state is assigning to A a right to control B's property — A can tell B not to do certain things with B's property. Since ownership is the right to control, IP grants to A co-ownership of B's property. This clearly cannot be justified under libertarian principles. B already owns his property. With respect to him, A is a latecomer. B is the one who appropriated the property, not A. It is too late for A to homestead B's property — B already did that. The resource is no longer unowned.
Granting A ownership rights in B's property is quite obviously incompatible with basic libertarian principles. It is nothing more than redistribution of wealth. IP is thus unlibertarian and unjustified. (See Against Intellectual Property, pp. 43–45, 55–56.)
Why, then, is this a contested issue? Why do some libertarians still assert the legitimacy of IP rights?
UtilitarianismOne reason libertarians support IP is that they approach libertarianism as a whole from a utilitarian perspective instead of a principled perspective. They are in favor of laws that increase overall utility, or wealth. And they believe the state's propaganda that state-granted IP rights actually do increase overall wealth.
Now, the utilitarian perspective itself is bad enough, because all sorts of terrible policies could be justified this way: why not take half of Bill Gates's fortune and give it to the poor? Wouldn't the sum total of the welfare gains to the thousands of recipients be greater than Gates's reduced utility? After all, he's still a billionaire afterwards. And if a man is extremely desperate for sex, couldn't his gain be greater than the loss suffered by his rape victim, say, if she's a prostitute?
But even if we ignore the ethical and other problems with the utilitarian, or wealth-maximization, approach, it is bizarre that utilitarian libertarians are in favor of IP when they have not demonstrated that IP does increase overall wealth. (For further discussion of various problems with utilitarianism, see Against Intellectual Property, pp. 19–23.) They merely assume it does and then base their policy views on this assumption. It is beyond dispute that the IP system imposes significant costs, in money terms alone — not to mention the cost to liberty.
However, the argument that the incentive provided by IP law stimulates additional innovation and creativity has not even been proven. It is entirely possible — even likely, in my view — that the IP system, in addition to imposing billions of dollars of cost on society, actually reduces or impedes innovation, adding damage to damage.
But even if we assume that the IP system does stimulate some additional, valuable innovation, no one has established yet that the value of the purported gains is greater than the costs of the system. If you ask an advocate of IP how it is that they know there is a net gain, you get silence in response (this is especially true of patent attorneys). They cannot even point to any study to support their utilitarian contention; they usually point to Article I, Section 8 of the Constitution, as if the back-room dealings of politicians two centuries ago is some sort of evidence.
In fact, as far as I've been able to tell, virtually every study that attempts to tally the costs and benefits of copyright or patent law either concludes that these schemes cost more than they are worth, that they actually reduce innovation, or the study is inconclusive. There are no studies showing a net gain. There are only repetitions of state propaganda.
Anyone who accepts utilitarianism should, based on the available evidence, be opposed to IP.
Libertarian CreationismAnother reason many libertarians favor IP is confusion about the origin of property and property rights. They accept the careless observation that you can come to own things in three ways: through homesteading an unowned thing, by contractual exchange, and by creation.
The mistake is the notion that creation is an independent source of ownership — independent, that is, from homesteading and contracting. However, it is easy to see that it is not, that "creation" is neither necessary nor sufficient as a source of ownership.
If you carve a statue using your own hunk of marble, you own the resulting creation because you already owned the marble. You owned it before, and you own it now. And if you homestead an unowned resource, like a field, by using it and thereby establishing publicly visible borders, you own it because this first use and embordering gives you a better claim than latecomers. So creation is not necessary.
And suppose you carve a statue in someone else's marble — either without permission, or with permission, such as when an employee does this with his employer's marble by contract — then you do not own the resulting statue, even though you "created" it. If you are using marble stolen from another, your vandalizing it does not take away the owner's claims to it. And if you are working on your employer's marble, he owns the resulting statue. So creation is not sufficient. (See also Against Intellectual Property, pp. 36–42.)
Or, as Sheldon Richman explains,
A key reason [many libertarians support IP] is the importance attached to the act of creation. If someone writes or composes an original work or invents something new, the argument goes, he or she should own it because it would not have existed without the creator. I submit, however, that as important as creativity is to human flourishing, it is not the source of ownership of produced goods. … So what is the source? Prior ownership of the inputs through purchase, gift, or original appropriation. This is sufficient to establish ownership of the output. Ideas contribute no necessary additional factor. If I build a model airplane out of wood and glue, I own it not because of any idea in my head, but because I owned the wood, the glue, and myself.
Of course, this is not to deny the importance of knowledge, or creation and innovation. All action, including action that employs owned scarce means, involves the use of technical knowledge — knowledge of causal laws, for example. To be sure, creation is an important means of increasing wealth. As Hoppe has observed,
One can acquire and increase wealth either through homesteading, production and contractual exchange, or by expropriating and exploiting homesteaders, producers, or contractual exchangers. There are no other ways.
But while production or creation is a means of gaining "wealth," it is not an independent source of ownership or rights. Production is not the creation of new matter; it is the transformation of things from one form to another — the transformation of things one necessarily already owns. Using your labor and creativity to transform your property into more valuable finished products gives you greater wealth, but not additional property rights.
So the idea that you own anything you create is a confused one that does not justify IP.
The Contractual ApproachSome also argue that some form of copyright or possibly patent could be created by some kind of contractual tricks — for example, by a seller selling a patterned media (book, CD, etc.) or useful machine to a buyer on the condition that it not be copied. For example, Brown sells an innovative mousetrap to Green, on the condition that Green is not to reproduce it. (This is Rothbard's example, from "Knowledge, True and False," which is discussed at pp. 51–55 of Against Intellectual Property.)
However, in order for IP to work, it has to bind not only seller and buyer, but all third parties. The contract between buyer and seller cannot do this — it binds only the buyer and seller. In the example given above, even if Green agrees not to copy Brown's mousetrap, Black has no agreement with Brown. Brown has no contractual right to prevent Black from using Black's own property in accordance with whatever knowledge or information Black has. Thus, the contract approach fails as well. (See also Against Intellectual Property, pp. 45–55.)
IP and StatismOne final problem with IP can be mentioned. And that is that IP rights are statutory schemes, schemes that are constructed only by legislation. A patent or copyright code could no more arise in a decentralized, case-based legal system in a free society than the Americans with Disabilities Act could. In other words, IP requires both a legislature and a state. For libertarians who reject the legitimacy of the state or legislated law, this is yet another defect of IP.
Anti-IP Resources Various materials are linked at my IP Policy wiki.Non-normative IP law info can be found at my PatentLawPractice wiki.My own IP writings, including especially: Against Intellectual Property (comprehensive libertarian case against IP); "There's No Such Thing as a Free Patent" (arguing that utilitarian advocates of patents have not met their burden of proof); "The Intellectual Property Quagmire, or, The Perils of Libertarian Creationism" (speech, 2008); "Yet Another Study Finds Patents Do Not Encourage Innovation" (collection of studies concluding IP does not accomplish its stated goals); "What are the Costs of the Patent System?" (estimate of the costs of the patent system); "$30 Billion Taxfunded Innovation Contracts: The 'Progressive-Libertarian' Solution" (disturbing arguments to use taxes to reward innovators); "How To Improve the Patent System" (forthcoming); "Intellectual Property and Libertarianism," a speech delivered at Mises University 2009, Auburn AL, July 30, 2009, adapted version forthcoming in Liberty magazine; "What Libertarianism Is," Mises Daily (August 21, 2009).Against Intellectual Monopoly, by economists Michele Boldrin and David Levine (a superb demolition of various utilitarian and practical arguments for IP).Jeff Tucker's excellent commentaries on Boldrin and Levine's Against Intellectual Monopoly.Against Monopoly blog, run by Boldrin and Levine.Intellectual Property Page, by Boldrin and Levine (various resources).Mike Masnick's frequent and excellent anti-IP commentary on Techdirt. Mike Masnick, "The Case For Patents Harming Innovation" (Techdirt)."The Libertarian Case Against Intellectual Property Rights," Roderick T. Long, Formulations 3, no. 1 (Autumn 1995) — an excellent, principled libertarian argument against IP."Contra Copyright," by Wendy McElroy, The Voluntaryist (June 1985) — another excellent, principled libertarian attack on copyright."Copyright and Patent in Benjamin Tucker's Periodical Liberty," by Wendy McElroy (from The Debates of Liberty: An Overview of Individualist Anarchism, 1881–1908 [2003]). "Perhaps the essence of Tucker's approach to intellectual property was best expressed when he exclaimed: 'You want your invention to yourself? Then keep it to yourself.'""Intellectual Property: A Non-Posnerian Law and Economics Approach," Hamline Law Review 12 (1989) and "Are Patents and Copyrights Morally Justified? The Philosophy of Property Rights and Ideal Objects," Harvard Journal of Law & Public Policy 13, no. 3 (Summer 1990), by Tom Palmer (an excellent, principled libertarian case against IP; but see recent comments here and here in which the author seems to be retreating somewhat from his previously principled opposition to the wealth-maximization arguments for patents)."What Is Property," by Boudewijn Bouckaert, Harvard Journal of Law & Public Policy 13, no. 3 (Summer 1990).Sheldon Richman on Intellectual Property versus Liberty (2009).Julio H. Cole's Patents and Copyrights: Do the Benefits Exceed the Costs?, Journal of Libertarian Studies 15, no. 4 (Fall 2001) and "Would the Absence of Copyright Laws Significantly Affect the Quality and Quantity of Literary Output?" The Journal of Markets and Morality 4, no. 1 (Spring 2001).Intellectual Property — A Libertarian Critique, by Kevin Carson (2009) (a left-libertarian approach).
It's true that the US health-care system is a mess, but this demonstrates not market but government failure. To cure the problem requires not different or more government regulations and bureaucracies, writes Hans-Hermann Hoppe.
This audio Mises Daily is narrated by Floy Lilley.
Intellectual property is the principle that the creator of an idea has a right to certain controls over all the physical forms in which his idea is recorded. The extent of this control may be different depending on whether the idea is considered copyrighted, patented, or trademarked, but the essential principle is the same in all cases.[1] This presumed right of the creator of an idea is often believed to be similar to the right that a homesteader has to land he has settled, but the analogy is false. Intellectual property is necessarily a statist doctrine.
The Nature of PropertyPeople cannot be expected to agree unanimously on what the world ought to be like and what each person should do, nor are people necessarily coordinated and patient enough to arrive at a consensus through deliberation. Instead they will tend to be apart from one another, desiring immediate action and lacking established procedures of efficiently coming to decisions.
When people disagree and are unwilling to deliberate, one person's decision must prevail without regard to the others' desires. Whose decision prevails may be determined in two ways: physical conflict, or deferral to a system of property. With a system of property in place, it is necessary only to ask who owns a thing, rather than to endure the costs of deliberation or to resort to violence.
Without the possibility of two persons attempting to control any one thing, defining property rights would be a mere psychological game without any consequences for human action. If persons were bodiless ghosts able to pass through one another without interacting, or if everyone lived in his own universe without being able to move from one to another, all disagreements about what to do with the world would be irrelevant. The purpose of property rights is the prevention of physical conflict. An essential characteristic of property is exclusivity, meaning that the use of an object by one person prevents it from being used by another.[2]
In addition to property rights, political theorists have proposed many other kinds of rights. All such rights must resolve into rights over physical things. When we speak of a right to free speech or a right to one's labor, for example, we really mean a right over one's own physical body. All rights, therefore, are ultimately property rights.
Ultimately, though we might speak of ownership over abstract things, it is only physical things, which can actually be fought over, that are owned. This we must keep in mind, for it is possible to sound reasonable and humane when discussing in abstract terms rights that would sound monstrous if they were described in terms of property.
Libertarians have often noted, for example, that the "right" to health care, a job, or a minimum income implies a property right over the people capable of providing such things and is therefore really a form of slavery. Similarly, the right to a vote is really a joint ownership between all citizens over the people, land, and everything else within a particular jurisdiction.
Libertarians themselves are at times confused over this issue. For example, they sometimes claim that in a free market broadcast industry, broadcasters would own certain frequencies in a given region and would therefore have the right to broadcast without interference by a pirate radio station on the same frequency.
Yet it is clearly not the frequency that is owned, because a frequency is not a physical object but rather an abstract property of all waves. It is the land over which that frequency is broadcast that is owned, albeit only for the purposes of broadcasting that frequency. Ownership of a radio frequency is ultimately a property right over a region of space, which allows someone to broadcast at a given frequency over it.[3]
This example demonstrates that ownership is not necessarily over entire objects but rather over decisions to be made with regard to them. An object can be owned by many different people because there are many kinds of decisions that can be made about it. Since different frequencies of radio waves can pass through one another without interfering, the same territory can be owned separately for the purposes of broadcasting at each frequency without leading to a conflict.[4]
Ideas cannot themselves be controlled with physical force, but instead must be controlled by way of other things — paper, printing presses, computers, and people. It is therefore in these things that intellectual property consists. To own a patent in a given invention is to have rights over everything in the universe that might be used to replicate that invention. This ownership is limited; one only owns things to the extent of being able to prevent others from arranging them in a particular way.
Similarly, to have a copyright in a song or a book is to have a property right over all paper, printing presses, computers — even over all people — everywhere. The owner may prevent the copying or public performance of his work by them all. Intellectual property is, like socialism, a kind of slavery, albeit a limited kind. Unlike socialism, however, intellectual property does not limit itself to the people and property in a given town or nation, or even the entire world. Since most matter in the universe could be used to encode an idea, intellectual property is a claim over the entire universe.
"Intellectual property is necessarily a statist doctrine."Rather than seeing intellectual property as a particularly expansive kind of physical property, many people see it as a separate, analogous, and equally fundamental construction. To copy an intellectual work is therefore a form of theft analogous to burglary; however, I insist that there is no analogy.
Intellectual property and physical property cannot exist side-by-side as logically independent legal constructions. Anything that gives control over physical things necessarily limits others' control of those things, and therefore acts exactly like a physical property right. If you have an intellectual property right to your monograph, you may prevent me from copying it, thereby limiting the physical property right I have in my ink, pen, and paper.
Coordination and CommunicationTo serve this function of preventing physical conflict, it is not enough that everything controllable should be owned; in addition, what is owned must be controllable by its owner, at least to the extent of preventing others from appropriating it for their own purposes. This involves not only providing for some defense of the owner's property, whether on his own or by engaging police to help, but also communicating his ownership to other people and watching his property closely enough to know if it is being misused.
Of course, this is not to say that people can be forced to write their name on everything they own, or to register all their property with some central authority. People have a right to conceal their ownership of something; but if they do so they really have no cause to complain if someone else should claim it for himself. If a system of property is to maintain itself, it is necessary that it should not be difficult to learn who owns a given thing.
If the costs of discovering who owns what are too great, then the system of property cannot persist as it is. This is not a moral point, but simply an economic fact: if the system of property rights is too complicated for anybody to figure out, then in practice. the property rights will necessarily unravel.
A man who claims to own a piece of land so far away that he cannot communicate with anyone around it will be unable to derive any use from his land. Even if his wish is that it should remain fallow, he cannot know if it has been stolen and used in some other way. Those near his land and wishing to use it may be perfectly willing to trade with the owner for his permission but, being unable to communicate with him, may simply steal it instead. Such a system of property, therefore, would fail to prevent physical conflict.
An exchange may be consensual, but if the result is too confusing for people to understand, the exchange is impossible even in a libertarian society. People cannot expect to maintain their property if it is too difficult for others to figure out whose property it is. Therefore, some kinds of rights cannot be sustained, at least without a certain degree of capitalization in a society.
In a primitive society, rights would tend to come in the form of complete ownership of physical objects rather than as shared stakes in large enterprises, and of relatively few things kept close to the owner himself rather than many things dispersed over great distances. It would also be difficult to own property that is far away because of the expense of communicating over distances.
In such a society, it would also be difficult to own property collectively, and for the same reason: people must communicate with one another over the distance separating them, and they must deliberate on the procedures that they will use to make decisions about their shared property. A certain degree of wealth is necessary before a given organization is worthwhile; otherwise the effort to create and maintain an organization will divert people from more important activities.
The cost of communication in any society requires that there be some dispersion of authority. It cannot be that one man or organization owns everything. Instead, everyone should own something. This is not to say that property should be redistributed to those most capable of controlling it; to do so would require a giant organization that attempts to control everything, the very thing that needs to be avoided! Rather, under a system of private property, owners have an incentive to sell to those more capable of controlling a given property because it will tend to be worth more to those most capable of controlling it.
As the creation of wealth progresses, coordination and communication will become easier, and thus shared and dispersed ownership will become more feasible. However, there will always be limits to the kinds of coordination and communication that are supported in any economy. This is the Hayekian problem of knowledge.[5]
Thus, the doctrine of intellectual property is extremely impractical. It grants people property rights which are unlimited in their distribution, and which extend over things in other peoples' homes, e.g., their computers, their paper, and whatever other materials might be used to encode an idea. The degree of communication and coordination necessary to control such a property would be enormous. Although intellectual property holders will wish only to maintain control over people who actually have access to their idea, in most cases this now includes the entire world.
"Ownership is not necessarily over entire objects but rather over decisions to be made with regard to them."Whereas a physical property right establishes a set of boundaries with other people, an intellectual property right is like a series of tendrils extending beyond the boundaries of everyone else's property. It becomes necessary to keep track of each of these tendrils, because any one of them can seed an unlimited number of pirate copies.
The free market is characterized by widely dispersed management, rather than top-down control, so there is no reason to expect that the free market will support such an enormous and invasive system of monitoring.
Even during the stone age, trade routes connected North Africa and China, but obviously the people on each end of the route had no knowledge of the other. Such trade routes were not created by any hierarchical, deliberate organization, but rather arose out of the interactions of traders along the way. Many inventions that originated in China, such as the compass and gunpowder, appeared in Europe before Marco Polo made his journey to Asia. Obviously, no claim to intellectual property in such a society could be sustained; such claims would truly be nothing more than 'nonsense on stilts.'
In our society, controlling widely dispersed property is much easier, but this does not mean that intellectual property makes any more sense. Although an empire of a given size might be easier to control now, the advances in communication that made this possible have also made it far easier for a given intellectual property to expand beyond the boundaries intended for it. It is now possible to produce more information in a week than in the entire history of medieval Europe.
The owner of an intellectual property, particularly a popular one, cannot expect to retain control over his work. A work that has spread over the globe, having been enjoyed by thousands or millions of people, is simply too big. Imagine that someone were to lend out thousands of small trinkets all over the world to people he has never met, knows nothing about, and cannot keep track of. Can he, by any stretch of the imagination, believe that these will be returned to him?
Owning an intellectual property is similar to having built a fortress with a practically infinite boundary that cannot be defended, patrolled, or even charted. Anyone can get in or out without being observed. Can the residents of such a fortress expect not to be vandalized, burglarized, and overrun?
Physical property can be fenced in, defended, and forcibly retrieved if it is stolen. The only way to control an idea, on the other hand, is never to think of it in the first place. Once it is put into practice, one may try to keep the idea secret, but once it escapes, it cannot be retrieved. A piece of physical property is only in one place at a time, and one can chase after it if it is stolen, but an idea can disperse in an unlimited number of directions at once. An idea can be everywhere on the planet in a matter of minutes.
The type of infrastructure necessary to maintain such an empire is such that it could never be supported on the free market. Millions of objects would have to be monitored — in peoples' houses, on their computers, in their business affairs, and wherever the idea might be put to use. It is only by way of the state and its eagerness to employ any excuse to wield power that intellectual property might plausibly be enforced.
"Backed by the doctrine of intellectual property, every popular author and every inventor of a useful device claims an empire on which the sun never sets."Backed by the doctrine of intellectual property, every popular author and every inventor of a useful device claims an empire on which the sun never sets. In a free market, this doctrine could not survive long, for creators must bear the cost of patrolling their empires; but with the state on their side, authors are willing to cling to intellectual property rights to their logical extreme.
Whereas on the free market the costs of defending a property are as relevant as anything else in the decision to own it, the doctrine of intellectual property, backed by the extravagant monopoly power of the state, encourages people to lay claims to properties that are inherently indefensible.
As Boldrine and Levine say in Against Intellectual Monopoly, being a monopolist seems to be akin to going on drugs or joining some strange religious sect. It seems to lead to complete loss of any sense of what profitable opportunities are and of how free markets function.
Monopolists, apparently, can conceive of only one way of making money, which is bullying consumers and competitors to put up and shut up. Furthermore, it also appears to mean that past mistakes have to be repeated at a larger, and ever more ridiculous, scale.[6]
Unlike ordinary property, intellectual property cannot be defended on the free market, because of the vastly greater resources that would be required to maintain control over it. It is only to the extent that customers willingly obeyed the wishes of the author that there could be anything like intellectual property on the free market. For this reason, the doctrine of intellectual property should be seen as inherently statist. Intellectual property is nothing but a trick that the ruling class employs to increase their power, and the rulers are entirely willing to impose the degree of invasive monitoring necessary to enforce it.
Natural PropertyThe free market may not support intellectual property, but can one nonetheless make a moral argument for it? Though intellectual property may be so costly to defend that only the state might even attempt such a task, might it still be theft to violate a copyright or patent? To evaluate this possibility, I will now discuss the justification of property rights in general and test the doctrine of intellectual property against the general theory.
The proponents of intellectual property propose that creators be granted control over their works as an incentive to continue to innovate. However, like all utilitarian arguments about law, this justification presupposes our ability to shape the rules of society to our whims. To say that creators should have control over their work is one thing, but it is impossible to grant this control unless some particular king or senate actually has the right to do so.
The justification of any system of property rights must always refer to an earlier state of society, because it must show that the present system justly transitioned out of the prior one. An argument that a system of property rights is just in and of itself, without reference to how they came to be, is nonsensical.
The material substances in the world are heterogeneous, each having their own disadvantages and advantages for any given purpose. The same is true of people: each person has different skills and merits. It is subjective to compare these different merits of persons or objects with one another, so each person may have different ideas about what arrangement of property is the best. What sort of merits and needs might grant a person a first floor apartment rather than one on the third floor? Clearly, such questions are impossible to answer objectively.
Therefore, an attempt to justify an arrangement of property based on fairness rather than on a history of just actions requires that the problem of subjectivity must be averted: this can only be done by granting some organization a superior opinion to all other organizations and ordinary persons. The extreme power of such an organization would obviously be unfair, so it itself must somehow be excluded from the question of fairness entirely. Therefore, this organization, which by now the reader has certainly identified as the state, must be justified historically.
"Since most matter in the universe could be used to encode an idea, intellectual property is a claim over the entire universe."An argument that property should be distributed fairly depends on the justness of the historical circumstances under which the state (which would effect this distribution) was created. If a person should attempt a redistribution of property in the name of an organization not already believed to have the right to reorganize all property, he would have no legitimacy regardless of how fair his redistribution was.
All utilitarian arguments about how society should be structured involve some kind of historical assumption, often unspoken, in the form of a preexisting state with the right to do whatever it is they propose. When people advance utilitarian arguments for the state, there is a logical gap between promoting such an organization in the abstract and identifying the actual existing state as the very monopolist to which we all must pledge our allegiance.
It is entirely arbitrary that this particular organization, rather than any other one, should rule. Even if it could be established that there should be a ruler, it does not follow that we should therefore obey the present one, whose 'right' arose only from having defeated the other contenders in a physical conflict.
Since any system of property requires a historical justification, it is necessary that the rules of any theory of justice can be taken back to the state of humanity before society — to a state before the question of justice can arise. This is why the state of nature is so important in political theory. Humans do not seem to have ever lived without society, which evolved from the societies of our hominid ancestors, but it is not necessary that the system of property we have today actually arose from people originally in the state of nature (without society); the purpose of the state of nature is merely to consider the simplest cases of human interaction, unencumbered by history.
Those who justify the state often do so by the trick of defining the state of nature as a situation in which people are at odds with one another, and lack recourse to a third party to resolve disputes. However, such a situation clearly has a history to it; why should people find themselves so close together that there is a great need for an institution of justice, without their having already created one? Surely they would stop moving closer to one another before they became involved in a 'war of all against all.' This situation is more plausible as a society resulting from the collapse of a prior state that had monopolized all justice.
The proper state of nature is one in which people are so far apart that they do not yet know of one another's existence. Here there is no universal war and, since people will come into contact gradually, there is no reason to expect that they will automatically start fighting. Natural law theories are those which begin with this state of nature, and natural property is the system of property that arises from the application of natural law.
This version of the state of nature constrains the possible rules of justice considerably. It is not the case that law can simply be whatever the rulers desire or what some group considers most beneficial. Any system of property that cannot be explained as having been created out of natural law ultimately rests, not on any real justification, but simply on the result of force.
Rules of justice cannot depend on a society having a supply of wealth already at its disposal. Natural law cannot require people to spend time and energy they do not have to coordinate themselves into a centralized decision-making body. Natural property, therefore, necessarily begins as a system of dispersed authority and individual property, without any joint ownership.
In the state of nature there is no place for intellectual property. When one creates a work or invention, one does not 'homestead' the idea in a manner analogous to that of the land homesteader. To claim property in an idea is to make a claim over all material in the entire universe, including material of which one has no knowledge. This is never possible, even in an advanced society, and its impossibility in the state of nature demonstrates that intellectual property is not a kind of natural property.
As society progresses people will become capable of creating more complicated rights. However, these rights are still created and therefore not natural. They are built out of the consent of everyone involved, and they do not give anyone the right to involve other people without their consent.
On the free market, therefore, any kind of intellectual property must be created by the agreement of creator and consumer alike. Intellectual property, where it arises by consent, would be an arrangement beneficial to everyone, not simply to the creator alone.
Here I should bring up Rothbard's attempted justification of libertarian intellectual property. According to his model, someone writes a book and sells rights to the book other than the right to copy it. All subsequent possessors of the book do not own the right to copy the book because this right has been continually retained by the author.[7] This construction would make sense if the book had the ability to reproduce itself on command, but ordinarily, copying a book does not involve using it any differently than one would to read it. The buyer certainly must have the right to open it up, and the writer certainly cannot retain the exclusive right to aim cameras or Xerox machines at its pages.
"As long as people believe that they have a right that requires a huge concentration of power to enforce, they will be most eager to rely on the state to protect it."Copyright is not a natural right that the author can retain, but he might effectively reserve a copyright in his work by selling it with a contractual agreement that the buyer will not distribute copies himself and must require the same of anyone to whom he later resells the book. The initial pirate then is guilty of a breach of contract and may owe the author restitution, but third parties who obtain pirated copies still could not be bound by such a contract.
No matter how the author attempts to word the contract, the pirate need only create copies out of material that does not belong to the author, and the author would have no say over those copies at all. This would be the case, for example, if people created copies for themselves by downloading a file onto their computers. No property is transferred; the hard drives have simply rearranged their internal state.[8]
Suppose that a creator is somehow able to retain rights to his creation such that one cannot copy it without violating the creator's property rights. Perhaps an inventor of a machine could do this by selling only the right to possess his machine and turn it on and off but not to open it up or tamper with the inside. As long as the machine cannot be probed with X-rays, he would have effectively 'patented' his device.
However, he would find his property — in many sets of machine innards — to be an extremely inconvenient thing to own. He does not know where his property is, what is being done with it, or who holds it presently; he cannot control it in any way from where he sits. His property is also difficult to alienate: who would buy property that cannot be altered?
Suppose, however, that the buyer of the invention has no desire to act in bad faith and is interested to pay to look inside the machine, but he finds that the original inventor no longer owns the inside of the machine — he may have sold it or died and passed it on to an heir. It may quickly become extremely difficult for someone who encounters the invention to figure out who owns it. Under these circumstances, the invention should simply be regarded as unowned; anyone may look inside and claim the interior.
The conclusion is quite clear: on the free market, intellectual property requires the consent of the consumer because attempts to retain control of all instances of a work are too easily circumvented and too inconvenient to maintain, especially in the state of nature. Unfortunately, in our world, 'orphaned works' like the invention I described above are not regarded as unowned, but are simply abandoned out of fear that the owner will suddenly show up again.
ConclusionIntellectual property violates the libertarian principles of homesteading and exchange, and it makes no sense as a right at all without the assumption of an omniscient and omnipotent organization willing to enforce it. Unlike homesteading and exchange, intellectual property is not something that anyone can reasonably expect to be able to defend and control.
It therefore serves the state well to promote such a doctrine; as long as people believe that they have a right that requires a huge concentration of power to enforce, they will be most eager to rely on the state to protect it.
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Notes[1] See Kinsella, N. Stephan, Against Intellectual Property, Ludwig von Mises Institute, 2008 for a much fuller summary of property rights law.
[2] Kinsella, 2008 makes this argument in much greater detail.
[3] Rothbard, Murray N., "Law, Property Rights, and Air Pollution,"
[4] See Marcus, B. K., "The Spectrum Should Be Private Property: The Economics, History, and Future of Wireless Technology," 2004 for an elaboration of this view.
[5] Hayek, F. A., "The Use of Knowledge in Society," American Economic Review, XXX, (1945), no. 4. pp. 519 – 30.
[6] Boldrine, Michele and Levine, David K, Against Intellectual Monopoly, Cambridge University Press, 2008, p. 98.
[7] Rothbard, Murray, The Ethics of Liberty, New York University Press, 1998, p. 123.
[8] See Kinsella, 2008 for a refutation of Rothbard on similar lines in much greater detail.
[This article is excerpted from chapter 16 of Human Action. Robert Murphy has written a study guide for this chapter, available in HTML and PDF.This article follows "Chapter XVI. Prices, Part 1."]
Competitive prices are the outcome of a complete adjustment of the sellers to the demand of the consumers. Under the competitive price the whole supply available is sold, and the specific factors of production are employed to the extent permitted by the prices of the nonspecific complementary factors. No part of a supply available is permanently withheld from the market, and the marginal unit of specific factors of production employed does not yield any net proceed. The whole economic process is conducted for the benefit of the consumers. There is no conflict between the interests of the buyers and those of the sellers, between the interests of the producers and those of the consumers. The owners of the various commodities are not in a position to divert consumption and production from the lines enjoined by the state of supply of goods and services of all orders and the state of technological knowledge.
Every single seller would see his own proceeds increased if a fall in the supply at the disposal of his competitors were to increase the price at which he himself could sell his own supply. But on a competitive market he is not in a position to bring about this outcome. Except for a privilege derived from government interference with business he must submit to the state of the market as it is.
The entrepreneur in his entrepreneurial capacity is always subject to the full supremacy of the consumers. It is different with the owners of vendible goods and factors of production and, of course, with the entrepreneurs in their capacity as owners of such goods and factors. Under certain conditions they fare better by restricting supply and selling it at a higher price per unit. The prices thus determined, the monopoly prices, are an infringement of the supremacy of the consumers and the democracy of the market.
The special conditions and circumstances required for the emergence of monopoly prices and their catallactic features are:
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There must prevail a monopoly of supply. The whole supply of the monopolized commodity is controlled by a single seller or a group of sellers acting in concert. The monopolist — whether one individual or a group of individuals — is in a position to restrict the supply offered for sale or employed for production in order to raise the price per unit sold and need not fear that his plan will be fruitrated by interference on the part of other sellers of the same commodity.
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Either the monopolist is not in a position to discriminate among the buyers or he voluntarily abstains from such discrimination.Price discrimination is dealt with below, PP. 385–388.
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The reaction of the buying public to the rise in prices beyond the potential competitive price, the fall in demand, is not such as to render the proceeds resulting from total sales at any price exceeding the competitive price smaller than total proceeds resulting from total sales at the competitive price. Hence it is superfluous to enter into sophisticated disquisitions concerning what must be considered the mark of the sameness of an article. It is not necessary to raise the question whether all neckties are to be called specimens of the same article or whether one should distinguish them with regard to fabric, color, and pattern. An academic delimitation of various articles is useless. The only point that counts is the way in which the buyers react to the rise in prices. For the theory of monopoly price it is irrelevant to observe that every necktie manufacturer turns out different articles and to call each of them a monopolist. Catallactics does not deal with monopoly as such but with monopoly prices. A seller of neckties which are different from those offered for sale by other people could attain monopoly prices only if the buyers did not react to any rise in prices in such a way as to make such a rise disadvantageous for him.
Monopoly is a prerequisite for the emergence of monopoly prices, but it is not the only prerequisite. There is a further condition required, namely a certain shape of the demand curve. The mere existence of monopoly does not mean anything. The publisher of a copyright book is a monopolist. But he may not be able to sell a single copy, no matter how low the price he asks. Not every price at which a monopolist sells a monopolized commodity is a monopoly price. Monopoly prices are only prices at which it is more advantageous for the monopolist to restrict the total amount to be sold than to expand his sales to the limit which a competitive market would allow. They are the outcome of a deliberate design tending toward a restriction of trade.
In calling the monopolist's conduct deliberate, it is not meant to suggest that he compares the monopoly price he is asking with the competitive price which a hypothetical nonmonopolized market would have determined. It is only the economist who contrasts the monopoly price with the potential competitive price. In the deliberations of the monopolist who has already got his monopolistic position, the competitive price plays no role at all. Like every other seller he wants to realize the highest price attainable. It is only the state of the market as conditioned by his monopolistic position on the one hand and the conduct of the buyers on the other that results in the emergence of monopoly prices.
- It is a fundamental mistake to assume that there is a third category of prices which are neither monopoly prices nor competitive prices. If we disregard the problem of price discrimination to be dealt with later, a definite price is either a competitive price or a monopoly price. The assertions to the contrary are due to the erroneous belief that competition is not free or perfect unless everybody is in a position to present himself as a seller of a definite commodity.
The available supply of every commodity is limited. If it were not scarce with regard to the demand of the public, the thing in question would not be considered an economic good, and no price would be paid for it. It is therefore misleading to apply the concept of monopoly in such a way as to make it cover the entire field of economic goods. Mere limitation of supply is the source of economic value and of all prices paid; as such it is not yet sufficient to generate monopoly prices.Cf. the refutation of the misleading extension of the concept of monopoly by Richard T. Ely, Monopolies and Trusts (New York, 1906), pp. 1–36.
The term monopolistic or imperfect competition is applied today to the cases in which there are some differences in the products of different producers and sellers. This means that almost all consumers' goods are included in the class of monopolized goods. However, the only question relevant in the study of the determination of prices is whether these differences can be used by the seller for a scheme of deliberate restriction of supply for the sake of increasing his total net proceeds. Only if this is possible and put into effect, can monopoly prices emerge as differentiated from competitive prices. It may be true that every seller has a clientele which prefers his brand to those of his competitors and would not stop buying it even if the price were higher. But the problem for the seller is whether the number of such people is great enough to overcompensate the reduction of total sales which the abstention from buying on the part of other people would bring about. Only if this is the case, can he consider the substitution of monopoly prices for competitive prices advantageous.
The confusion which led to the idea of imperfect or monopolistic competition stems from a misinterpretation of the term control of supply. Every producer of every product has his share in controlling the supply of all commodities offered for sale. If he had produced more a, he would have increased supply and brought about a tendency toward a lower price. But the question is why he did not produce more of a. Was he in restricting his production of a to the amount of p intent upon complying to the best of his abilities with the wishes of the consumers? Or was he intent upon defying the orders of the consumers for his own advantage? In the first case he did not produce more of a, because increasing the quantity of a beyond p would have withdrawn scarce factors of production from other branches in which they would have been employed for the satisfaction of more urgent needs of the consumers. He does not produce p + r, but merely p, because such an increase would have rendered his business unprofitable or less profitable, while there are still other more profitable employments available for capital investment. In the second case he did not produce r, because it was more advantageous for him to leave a part of the available supply of a monopolized specific factor of production m unused. If m were not monopolized by him, it would have been impossible for him to expect any advantage from restricting his production of a. His competitors would have filled the gap and he would not have been in a position to ask higher prices.
In dealing with monopoly prices we must always search for the monopolized factor m. If no such factor is in the case, no monopoly prices can emerge. The first requirement for monopoly prices is the existence of a monopolized good. If no quantity of such a good m is withheld, there is no opportunity for an entrepreneur to substitute monopoly prices for competitive prices.
Entrepreneurial profit has nothing at all to do with monopoly. If an entrepreneur is in a position to sell at monopoly prices, he owes this advantage to his monopoly with regard to a monopolized factor m. He earns the specific monopoly gain from his ownership of m, not from his specific entrepreneurial activities.
Let us assume that an accident cuts a city's electrical supply for several days and forces the residents to resort to candlelight only. The price of candles rises to s; at this price the whole supply available is sold out. The stores selling candles reap a high profit in selling their whole supply at s. But it could happen that the storekeepers combine in order to withhold a part of their stock from the market and to sell the rest at a price s + t. While s would have been the competitive price, s + t is a monopoly price. The surplus earned by the storekeepers at the price s + t over the proceeds they would have earned when selling at s only is their specific monopoly gain.
It is immaterial in what way the storekeepers bring about the restriction of the supply offered for sale. The physical destruction of a part of the supply available is the classical case of monopolistic action. Only a short time ago it was practiced by the Brazilian government in burning large quantities of coffee. But the same effect can be attained by leaving a part of the supply unused.
While there constantly prevails a tendency to make profits disappear, the specific monopoly gain is a permanent phenomenon and can disappear only with a change in the market data. While profits are incompatible with the imaginary construction of the evenly rotating economy, monopoly prices and specific monopoly gains are not.
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The competitive price is determined by the state of the market. There prevails on a competitive market a tendency toward the disappearance of differences in prices and the establishment of a uniform price. With regard to monopoly prices things are different. If it is possible for the seller to increase his net proceeds by restricting sales and increasing prices per unit sold, then as a rule there are several monopoly prices which satisfy this condition. As a rule one of these monopoly prices yields the highest net proceeds. But it may also happen that various monopoly prices are equally advantageous to the monopolist. We may call this monopoly price or these monopoly prices most advantageous to the monopolist the optimum monopoly price or the optimum monopoly prices.
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The monopolist does not know beforehand in what way the consumers will react to a rise in prices. He must resort to trial and error in his endeavors to find out whether the monopolized good can be sold to his advantage at any price exceeding the competitive price and, if this is so, which of various possible monopoly prices is the optimum monopoly price or one of the optimum monopoly prices. This is in practice much more difficult than the economist assumes when, in drawing demand curves, he ascribes perfect foresight to the monopolist. We must therefore list as a special condition required for the appearance of monopoly prices the monopolist's ability to discover such prices.
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A special case is provided by the incomplete monopoly. The greater part of the total supply available is owned by the monopolist; the rest is owned by one or several men who are not prepared to cooperate with the monopolist in a scheme for restricting sales and bringing about monopoly prices. However, the reluctance of these outsiders does not prevent the establishment of monopoly prices if the portion pt controlled by the monopolist is large enough when compared with the sum of the outsiders' portions p2. Let us assume that the whole supply (p=p1 + p2) can be sold at the price c per unit and a supply of p−z at the monopoly price d. If d (pt − z) is higher than c p1, it is to the advantage of the monopolist to embark upon a monopolistic restriction of his sales, no matter what the conduct of the outsiders may be. They may go on selling at the price c or they may raise their prices up to the maximum of d. The only point that counts is that the outsiders are not willing to put up with a reduction in the quantity which they themselves are selling. The whole reduction required must be borne by the owner of p1. This influences his plans and will as a rule result in the emergence of a monopoly price which is different from that which would have been established under complete monopoly.It is obvious that an incomplete monopoly scheme is bound to collapse if the outsiders come into a position to expand their sales.
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Duopoly and oligopoly are not special varieties of monopoly prices, but merely a variety of the methods applied for the establishment of a monopoly price. Two or several men own the whole supply. They all are prepared to sell at monopoly prices and to restrict their total sales accordingly. But for some reason they do not want to act in concert. Each of them goes his own way without any formal or tacit agreement with his competitors. But each of them knows also that his rivals are intent upon a monopolistic restriction of their sales in order to reap higher prices per unit and specific monopoly gains. Each of them watches carefully the conduct of his rivals and tries to adjust his own plans to their actions. A succession of moves and countermoves, a mutual outwitting results, the outcome of which depends on the personal cunning of the adverse parties. The duopolists and oligopolists have two objectives in mind: to find out the monopoly price most advantageous to the sellers on the one hand and to shift as much as possible of the burden of restricting the amount of sales to their rivals. Precisely because they do not agree with regard to the quotas of the reduced amount of sales to be allotted to each party, they do not act in concert as the members of a cartel do.
One must not confuse duopoly and oligopoly with the incomplete monopoly or with competition aiming at the establishment of monopoly. In the case of incomplete monopoly only the monopolistic group is prepared to restrict its sales in order to make a monopoly price prevail; the other sellers decline to restrict their sales. But duopolists and oligopolists are ready to withhold a part of their supply from the market. In the case of price slashing one group A plans to attain full monopoly or incomplete monopoly by forcing all or most of its competitors, the B's, to go out of business. It cuts prices to a level which makes selling ruinous to its more vulnerable competitors. A may also incur losses by selling at this low rate; but it is in a position to undergo such losses for a longer time than the others and it is confident that it will make good for them later by ample monopoly gains. This process has nothing to do with monopoly prices. It is a scheme for the attainment of a monopoly position.
One may wonder whether duopoly and oligopoly are of practical significance. As a rule the parties concerned will come to at least a tacit understanding concerning their quotas of the reduced amount of sales.
- The monopolized good by whose partial withholding from the market the monopoly prices are made to prevail can be either a good of the lowest order or a good of a higher order, a factor of production. It may consist in the control of the technological knowledge required for production, the "recipe." Such recipes are as a rule free goods as their ability to produce definite effects is unlimited. They can become economic goods only if they are monopolized and their use is restricted. Any price paid for the services rendered by a recipe is always a monopoly price. It is immaterial whether the restriction of a recipe's use is made possible by institutional conditions — such as patents and copyright laws — or by the fact that a formula is kept secret and other people fail to guess it.
The complementary factor of production the monopolization of which can result in the establishment of monopoly prices may also consist in a man's opportunity to make his cooperation in the production of a good known to consumers who attribute to this cooperation a special significance. This opportunity may be given either by the nature of the commodities or services in question or by institutional provisions such as protection of trademarks. The reasons why the consumers value the contribution of a man or a firm so highly are manifold. They may be: special confidence placed on the individual or firm concerned on account of previous experience;Cf. below, pp. 376–380, on good will. merely baseless prejudice or error; snobbishness; magic or metaphysical prepossessions whose groundlessness is ridiculed by more reasonable people. A drug marked by a trademark may not differ in its chemical structure and its physiological efficacy from other compounds not marked with the same label. However, if the buyers attach a special significance to this label and are ready to pay higher prices for the product marked with it, the seller can, provided the configuration of demand is propitious, reap monopoly prices.
The monopoly which enables the monopolist to restrict the amount offered without counteraction on the part of other people can consist in the greater productivity of a factor which he has at his disposal as against the lower productivity of the corresponding factor at the disposal of his potential competitors. If the margin between the higher productivity of his supply of the monopolized factor and that of his potential competitors is broad enough for the emergence of a monopoly price, a situation results which we may call margin monopoly.The use of this term "margin monopoly" is, like that of any other, quite optional. It would be vain to object that every other monopoly which results in monopoly prices could also be called a margin monopoly.
Let us illustrate margin monopoly by referring to its most frequent instance in present-day conditions, the power of a protective tariff to generate a monopoly price under special circumstances. Atlantis puts a tariff t on the importation of each unit of the commodity p the world market price of which is s. If domestic consumption of p in Atlantis at the price s + t is a and domestic production of p is b, b being smaller than a, then the costs of the marginal dealer are s + t. The domestic plants are in a position to sell their total output at the price s + t. The tariff is effective and offers to domestic business the incentive to expand the production of p from b to a quantity slightly smaller than a. But if b is greater than a, things are different. If we assume that b is so large that even at the price s domestic consumption lags behind it and the surplus must be exported and sold abroad, the imposition of a tariff does not affect the price of p. Both the domestic and the world market price of p remain unchanged. However the tariff, in discriminating between domestic and foreign production of p, accords to the domestic plants a privilege which can be used for a monopolistic combine, provided certain further conditions are present. If it is possible to find within the margin between s + t and s a monopoly price, it becomes lucrative for the domestic enterprises to form a cartel. The cartel sells in the home market of Atlantis at a monopoly price and disposes of the surplus abroad at the world market price. Of course, as the quantity of p offered at the world market increases as a consequence of the restriction of the quantity sold in Atlantis, the world market price drops from s to s1. It is therefore a further requirement for the emergence of the domestic monopoly price that the total restriction in proceeds resulting from this fall in the world market price is not so great as to absorb the whole monopoly gain of the domestic cartel.
In the long run such a national cartel cannot preserve its monopolistic position if entrance into its branch of production is free to newcomers. The monopolized factor the services of which the cartel restricts (as far as the domestic market is concerned) for the sake of monopoly prices is a geographical condition which can easily be duplicated by every new investor who establishes a new plant within the borders of Atlantis. Under modern industrial conditions, the characteristic feature of which is steady technological progress, the latest plant will as a rule be more efficient than the older plants and produce at lower average costs. The incentive to prospective newcomers is therefore twofold. It consists not only in the monopoly gain of the cartel members, but also in the possibility of outstripping them by lower costs of production.
Here again institutions come to the aid of the old firms that form the cartel. The patents give them a legal monopoly which nobody may infringe. Of course, only some of their production processes may be protected by patents. But a competitor who is prevented from resorting to these processes and to the production of the articles concerned may be handicapped in such a serious way that he cannot consider entrance into the field of the cartelized industry.
The owner of a patent enjoys a legal monopoly which, other conditions being propitious, can be used for the attainment of monopoly prices. Beyond the field covered by the patent itself a patent may render auxiliary services in the establishment and preservation of margin monopoly where the primary institutional conditions for the emergence of such a monopoly prevail.
We may assume that some world cartels would exist even in the absence of any government interference which provides for other commodities the indispensable conditions required for the construction of a monopolistic combine. There are some commodities, e.g., diamonds and mercury, the supply of which is by nature limited to a few sources. The owners of these resources can easily be united for concerted action. But such cartels would play only a minor role in the setting of world production. Their economic significance would be rather small. The important place that cartels occupy in our time is an outcome of the interventionist policies adopted by the governments of all countries. The great monopoly problem mankind has to face today is not an outgrowth of the operation of the market economy. It is a product of purposive action on the part of governments. It is not one of the evils inherent in capitalism as the demagogues trumpet. It is, on the contrary, the fruit of policies hostile to capitalism and intent upon sabotaging and destroying its operation.
The classical country of the cartels was Germany. In the last decades of the nineteenth century the German Reich embarked upon a vast scheme of Sozialpolitik. The idea was to raise the income and the standard of living of the wage-earners by various measures of what is called prolabor legislation, by the much glorified Bismarck plan of social security, and by labor-union pressure and compulsion for the attainment of higher wage rates. The advocates of this policy defied the warnings of the economists. There is no such thing as economic law, they announced. The Hohenzollern Empire which had defeated the Emperors of Austria and of France and before which the nations of the world trembled was above any law. Its will was the supreme canon.
In stark reality the Sozialpolitik raised costs of production within Germany. Every progress of the alleged prolabor legislation and every successful strike disarranged industrial conditions to the disadvantage of the German enterprises. It made it harder for them to outdo foreign competitors for whom the domestic events of Germany did not raise costs of production. If the Germans had been in a position to renounce the export of manufactures and to produce only for the domestic market, the tariff could have sheltered the German plants against the intensified competition of foreign business. They would have been in a position to reap higher prices. What the wage earner would have profited from the achievements of the legislature and the unions, would have been absorbed by the higher prices he would have had to pay for the articles he bought. Real wage rates would have risen only to the extent the entrepreneurs could improve technological procedures and thereby increase the productivity of labor. The tariff would have rendered the Sozialpolitik harmless in preventing a spread of unemployment.
But Germany is, and was already at the time Bismarck inaugurated his prolabor policy, a predominantly industrial country. Its plants exported a considerable part of their total output. These exports enabled the Germans to import the foodstuffs and raw materials they could not grow in their own country, comparatively overpopulated and poorly endowed with natural resources as it was. As has been pointed out above, such a surplus production renders a protective tariff ineffective. Only cartels could free Germany from the catastrophic consequences of its "progressive" prolabor policies. The cartels charged monopoly prices at home and sold abroad at cheaper prices. The cartels are the necessary accompaniment and upshot of a "progressive" labor policy as far as it affects industries dependent on foreign markets. The cartels do not, of course, safeguard for the wage earners the illusory social gains which the labor politicians and the union leaders promise them. There is no means of raising wage rates for all those eager to earn wages above the height determined by the productivity of each kind of labor. What the cartels achieved was merely to counterbalance the apparent gains in nominal wage rates by corresponding increases in domestic commodity prices. But the most disastrous effect of minimum wage rates, permanent mass unemployment, was at first avoided.
Germany was not the first country that resorted to "prolabor" legislation and gave its labor unions a free hand to enforce minimum wage rates. Other countries had preceded Germany in this respect. But the oppositon which these policies had encountered on the part of economists, reasonable statesmen, and businessmen had for many years put a check upon the progress of these destructive methods of government. For the most part their alleged benefits did not grant the wage earners more than they had already won, without any interference on the part of the government, by the technological improvements which never cease under capitalism. When in some cases the government had gone a little farther, the propulsive evolution of business in a very short time made things even. But in later years, especially after the end of the First World War, all other nations adopted for their labor policies the thorough methods of the Germans. Again the cartel had to supplement the "prolabor" policies in order to conceal their futility and to postpone for a time their manifest fiasco.
With all industries which cannot content themselves with the domestic market and are intent upon selling a part of their output abroad the function of the tariff, in this age of government interference with business, is to enable the establishment of domestic monopoly prices. Whatever the purpose and the effects of tariffs may have been in the past, as soon as an exporting country embarks upon measures designed to increase the revenues of the wage earners or the farmers above the potential market rates, it must foster schemes which result in domestic monopoly prices for the commodities concerned. A national government's might is limited to the territory subject to its sovereignty. It has the power to raise domestic costs of production. It does not have the power to force foreigners to pay correspondingly higher prices for the products. If exports are not to be discontinued, they must be subsidized. The subsidy can be paid openly by the treasury or its burden can be imposed upon the consumers by the cartel's monopoly prices.
The advocates of government interference with business ascribe to the "State" the power to benefit certain groups within the framework of the market by a mere fiat. In fact this power is the government's power to foster monopolistic combines. The monopoly gains are the funds out of which the "social gains" are financed. As far as these monopoly gains do not suffice, the various measures of interventionism immediately paralyze the operation of the market; mass unemployment, depression, and capital consumption appear. This explains the eagerness of all contemporary governments to foster monopoly in all those sectors of the market which are in some way or other connected with export trade.
If a government does not or cannot succeed in attaining its monopolistic aims indirectly, it resorts to direct action. In the field of coal and potash the Imperial Government of Germany established compulsory cartels. The American New Deal was prevented by the opposition of business from organizing the nation's great industries on an obligatory cartel basis. It succeeded better in some vital branches of farming with measures designed to restrict output for the sake of monopoly prices. A long series of agreements concluded between the world's most prominent governments aimed at the establishment of world-market monopoly prices for various raw materials and foodstuffs.A collection of these agreements was published in 1943 by the International Labor Office under the title Intergovernmental Commodity Control Agreements. It is the avowed purpose of the United Nations to continue these plans.
It is necessary to view this promonopoly policy of the contemporary governments as a uniform phenomenon in order to discern the reasons which motivated it. From the catallactic point of view these monopolies are not uniform. The contractual cartels into which entrepreneurs enter in taking advantage of the incentive offered by protective tariffs are instances of margin monopoly. Where the government directly fosters monopoly prices we are faced with instances of license monopoly. The factor of production by the restriction of the use of which the monopoly price is brought about is the license which the laws make a requisite for supplying the consumers.
Such licenses may be granted in different ways:
An unlimited license is granted to practically every applicant. This amounts to a state of affairs under which no license at all is required.
Licenses are granted only to selected applicants. Competition is restricted. However, monopoly prices can emerge only if the licensees act in concert and the configuration of demand is propitious.
There is only one licensee. The licensee, e.g., the holder of a patent or a copyright, is a monopolist. If the configuration of the demand is propitious and if the licensee wants to reap monopoly gains, he can ask monopoly prices.
The licenses granted are limited. They confer upon the licensee only the right to produce or to sell a definite quantity, in order to prevent him from disarranging the authority's scheme. The authority itself directs the establishment of monopoly prices.
Finally there are the instances in which a government establishes a monopoly for fiscal purposes. The monopoly gains go to the treasury. Many European governments have instituted tobacco monopolies. Others have monopolized salt, matches, telegraph and telephone service, broadcasting, and so on. Without exception every country has a government monopoly of the postal service.
- Margin monopoly need not always owe its appearance to an institutional factor such as tariffs. It can also be produced by sufficient differences in the fertility or productivity of some factors of production.
It has already been said that it is a serious blunder to speak of a land monopoly and to refer to monopoly prices and monopoly gains in explaining the prices of agricultural products and the rent of land. As far as history is confronted with instances of monopoly prices for agricultural products, it was license monopoly fostered by government decree. However the acknowledgment of these facts does not mean that differences in the fertility of the soil could never bring about monopoly prices. If the difference between the fertility of the poorest soil still tilled and the richest fallow fields available for an expansion of production were so great as to enable the owners of the already exploited soil to find an advantageous monopoly price within this margin, they could consider restricting production by concerted action in order to reap monopoly prices. But it is a fact that physical conditions in agriculture do not comply with these requirements. It is precisely on account of this fact that farmers longing for monopoly prices do not resort to spontaneous action but ask for the interference of governments.
In various branches of mining conditions are often more propitious for the emergence of monopoly prices based on margin monopoly.
- It has been asserted again and again that the economies of big-scale production have generated a tendency toward monopoly prices in the processing industries. Such a monopoly would be called in our terminology a margin monopoly.
Before entering into a discussion of this topic one must clarify the role an increase or decrease in the unit's average cost of production plays in the considerations of a monopolist searching for the most advantageous monopoly price. We consider a case in which the owner of a monopolized complementary factor of production, e.g., a patent, at the same time manufactures the product p. If the average cost of production of one unit of p, without any regard to the patent, decreases with the increase in the quantity produced, the monopolist must weigh this against the gains expected from the restriction of output. If on the other hand cost of production per unit decreases with the restriction of total production, the incentive to embark upon monopolistic restraint is augmented. It is obvious that the mere fact that big-scale production tends as a rule to lower average costs of production is in itself not a factor driving toward the emergence of monopoly prices. It is rather a checking factor.
What those who blame the economies of big-scale production for the spread of monopoly prices are trying to say is that the higher efficiency of big-scale production makes it difficult or even impossible for small-scale plants to compete successfully. A big-scale plant could, they believe, resort to monopoly prices with impunity because small business is not in a position to challenge its monopoly. Now, it is certainly true that in many branches of the processing industries it would be foolish to enter the market with the high-cost products of small, inadequate plants. A modern cotton mill does not need to fear the competition of old-fashioned distaffs; its rivals are other more or less adequately equipped mills. But this does not mean that it enjoys the opportunity of selling at monopoly prices. There is competition between big businesses too. If monopoly prices prevail in the sale of the products of big-size business, the reasons are either patents or monopoly in the ownership of mines or other sources of raw material or cartels based on tariffs.
One must not confuse the notions of monopoly and of monopoly prices. Mere monopoly as such is catallactically of no importance if it does not result in monopoly prices. Monopoly prices are consequential only because they are the outcome of a conduct of business defying the supremacy of the consumers and substituting the private interests of the monopolist for those of the public. They are the only instance in the operation of a market economy in which the distinction between production for profit and production for use could to some extent be made if one were prepared to disregard the fact that monopoly gains have nothing at all to do with profits proper. They are not a part of what catallactics can call profits; they are an increase in the price earned from the sale of the services rendered by some factors of production, some of these factors being physical factors, some of them merely institutional. If the entrepreneurs and capitalists in the absence of a monopoly price constellation abstain from expanding production in a certain branch of industry because the opportunities offered to them in other branches are more attractive, they do not act in defiance of the wants of the consumers. On the contrary, they follow precisely the line indicated by the demand as expressed on the market.
The political bias which has obfuscated the discussion of the monopoly problem has neglected to pay attention to the essential issues involved. In dealing with every case of monopoly prices one must first of all raise the question of what obstacles restrain people from challenging the monopolists. In answering this question one discovers the role played in the emergence of monopoly prices by institutional factors. It is nonsense to speak of conspiracy with regard to the deals between American firms and German cartels. If an American wanted to manufacture an article protected by a patent owned by Germans, he was compelled by the American law to come to an arrangement with German business.
- A special case is what may be called the failure monopoly.
In the past capitalists invested funds in a plant designed for the production of the article p. Later events proved the investment a failure. The prices which can be obtained in selling p are so low that the capital invested in the plant's inconvertible equipment does not yield a return. It is lost. However, these prices are high enough to yield a reasonable return for the variable capital to be employed for the current production of p. If the irrevocable loss of the capital invested in the inconvertible equipment is written off on the books and all corresponding alterations are made in the accounts, the reduced capital working in the conduct of the business is by and large so profitable that it would be a new mistake to stop production altogether. The plant works at full capacity producing the quantity q of p and selling the unit at the price s.
But conditions may be such that it is possible for the enterprise to reap a monopoly gain by restricting output to q/2 and selling the unit of p at the price 3 s. Then the capital invested in the inconvertible equipment no longer appears completely lost. It yields a modest return, namely, the monopoly gain.
This enterprise now sells at monopoly prices and reaps monopoly gains although the total capital invested yields little when compared with what the investors would have earned if they had invested in other lines of business. The enterprise withholds from the market the services which the unused production capacity of its durable equipment could render and fares better than it would by producing at full capacity. It defies the orders of the public. The public would have been in a better position if the investors had avoided the mistake of immobilizing a part of their capital in the production of p. They would, of course, not get any p. But they would instead obtain those articles which they miss now because the capital required for their production has been wasted in the construction of an aggregate for the production of p. However, as things are now after this irreparable fault has been committed, they want to get more of p and are ready to pay for it what is now its potential competitive market price, namely, s. They do not approve, as conditions are now, the action of the enterprise in withholding an amount of variable capital from employment for the production of p. This amount certainly does not remain unused. It goes into other lines of business and produces there something else, namely, m. But as conditions are now, the consumers would prefer an increase of the available quantity of p to an increase in the available quantity of m. The proof is that in the absence of a monopolistic restriction of the capacity for the production of p, as it is under given conditions, the profitability of a production of the quantity q of s would be such that it would pay better than an increase in the quantity of the article m produced.
There are two distinctive features of this case. First, the monopoly prices paid by the buyers are still lower than the total cost of production of p would be if full account is taken of the whole input of the investors. Second, the monopoly gains of the firm are so small that they do not make the total venture appear a good investment. It remains malinvestment. It is precisely this fact that constitutes the monopolistic position of the firm. No outsider wants to enter its field of entrepreneurial activity because the production of p results in losses.
Failure monopoly is by no means a merely academic construction. It is, for instance, actual today in the case of some railroad companies. But one must guard against the mistake of interpreting every instance of unused production capacity as a failure monopoly. Even in the absence of monopoly it may be more profitable to employ variable capital for other purposes instead of expanding a firm's production to the limit fixed by the capacity of its durable inconvertible equipment; then the output restriction complies precisely with the state of the competitive market and the wishes of the public.
- Local monopolies are, as a rule, of institutional origin. But there are also local monopolies which originate out of conditions of the unhampered market. Often the institutional monopoly is designed to deal with a monopoly which came into existence or would be likely to come into existence without any authoritarian interference with the market.
A catallactic classification of local monopolies must distinguish three groups: margin monopoly, limited-space monopoly and license monopoly.
A local margin monopoly is characterized by the fact that the barrier preventing outsiders from competing on the local market and breaking the monopoly of the local sellers is the comparative height of transportation costs. No tariffs are needed to grant limited protection to a firm which owns all the adjacent natural resources required for the production of bricks against the competition of far distant tile works. The costs of transportation provide them with a margin in which, the configuration of demand being propitious, an advantageous monopoly price can be found.
So far local margin monopolies do not differ catallactically from other instances of margin monopoly. What distinguishes them and makes it necessary to deal with them in a special way is their relation to the rent of urban land on the one hand and their relation to city development on the other.
Let us assume that an area A offering favorable conditions for the aggregation of an increasing urban population is subject to monopoly prices for building materials. Consequently building costs are higher than they would be in the absence of such a monopoly. But there is no reason for those weighing the pros and cons of choosing the location of their homes and their workshops in A to pay higher prices for the purchase or the renting of such houses and workshops. These prices are determined on the one hand by the corresponding prices in other areas and on the other by the advantages which settling in A offers when compared with settling somewhere else. The higher expenditure required for construction does not affect these prices; its incidence falls upon the yield of land. The burden of the monopoly gains of the sellers of building materials falls on the owners of the urban soil. These gains absorb proceeds which in their absence would go to these owners. Even in the — not very likely — case that the demand for houses and workshops is such as to make it possible for the owners of the land to attain monopoly prices in selling and leasing, the monopoly prices of the building materials would affect only the proceeds of the landowners, not the prices to be paid by the buyers or tenants.
The fact that the burden of the monopoly gains reverts to the price of urban employment of the land does not mean that it does not check the growth of the city. It postpones the employment of the peripheral land for the expansion of the urban settlement. The instant at which it becomes advantageous for the owner of a piece of suburban land to withdraw it from agricultural or other nonurban employment and to use it for urban development appears at a later date.
Now arresting a city's development is a two-edged action. Its usefulness for the monopolist is ambiguous. He cannot know whether future conditions will be such as to attract more people to A, the only market for his products. One of the attractions a city offers to newcomers is its bigness, the multitude of its population. Industry and commerce tend toward centers. If the monopolist's action delays the growth of the urban community, it may direct the stream toward other places. An opportunity may be missed which never comes back. Greater proceeds in the future may be sacrificed to comparatively small short-run gains.
It is therefore at least questionable whether the owner of a local margin monopoly in the long run serves his own interests well by embarking upon selling at monopoly prices. It would often be more advantageous for him to discriminate between the various buyers. He could sell at higher prices for construction projects in the central parts of the city and at lower prices for such projects in peripheral districts. The range of local margin monopoly is more restricted than is generally assumed.
Limited-space monopoly is the outcome of the fact that physical conditions restrict the field of operation in such a way that only one or a few enterprises can enter it. Monopoly emerges when there is only one enterprise in the field or when the few operating enterprises combine for concerted action.
It is sometimes possible for two competing trolley companies to operate in the same streets of a city. There were instances in which two or even more companies shared in supplying the residents of an area with gas, electricity, and telephone service. But even in such exceptional cases there is hardly any real competition. Conditions suggest to the rivals that they combine at least tacitly. The narrowness of the space results, one way or another, in monopoly.
In practice limited-space monopoly is closely connected with license monopoly. It is practically impossible to enter the field without an understanding with the local authorities controlling the streets and their subsoil. Even in the absence of laws requiring a franchise for the establishment of public utility services, it would be necessary for the enterprises to come to an agreement with the municipal authorities. Whether or not such agreements are to be legally described as franchises is unimportant.
Monopoly, of course, need not result in monopoly prices. It depends on the special data of each case whether or not a monopolistic public utility company could resort to monopoly prices. But there are certainly cases in which it can. It may be that the company is ill-advised in choosing a monopoly-price policy and that it would better serve its long-run interests by lower prices. But there is no guarantee that a monopolist will find out what is most advantageous for him.
One must realize that limited-space monopoly may often result in monopoly prices. In this case we are confronted with a situation in which the market process does not accomplish its democratic function.About the significance of this fact see below, pp. 676–678.
Private enterprise is very unpopular with our contemporaries. Private ownership of the means of production is especially disliked in those fields in which limited-space monopoly emerges even if the company does not charge monopoly prices and even if its business yields only small profits or results in losses. A "public utility" company is in the eyes of the interventionist and socialist politicians a public enemy. The voters approve of any evil inflicted upon it by the authorities. It is generally assumed that these enterprises should be nationalized or municipalized. Monopoly gains, it is said, must never go to private citizens. They should go to the public funds exclusively.
The outcome of the municipalization and nationalization policies of the last decades was almost without exception financial failure, poor service, and political corruption. Blinded by their anticapitalistic prejudices people condone poor service and corruption and for a long time did not bother about the financial failure. However, this failure is one of the factors which contributed to the emergence of the present-day crisis of interventionism.See below, pp. 851–853.
- It is customary to characterize traditional labor-union policies as monopolistic schemes aiming at the substitution of monopoly wage rates for competitive wage rates. However, as a rule labor unions do not aim at monopoly wage rates. A union is intent upon restricting competition on its own sector of the labor market in order to raise its wage rates. But restriction of competition and monopoly price policy must not be confused. The characteristic feature of monopoly prices is the fact that the sale of only a part p of the total supply P available nets higher proceeds than the sale of P. The monopolist earns a monopoly gain by withholding P − p from the market. It is not the height of this gain that marks the monopoly price situation as such, but the purposive action of the monopolists in bringing it about. The monopolist is concerned with the employment of the whole stock available. He is equally interested in every fraction of this stock. If a part of it remains unused, it is his loss. Nonetheless he chooses to have a part unused because under the prevailing configuration of demand it is more advantageous for him to proceed in this way. It is the peculiar state of the market that motivates his decision. The monopoly which is one of the two indispensable conditions of the emergence of monopoly prices may be — and is as a rule — the product of an institutional interference with the market data. But these external forces do not directly result in monopoly prices. Only if a second requirement is fulfilled is the opportunity for monopolistic action set.
It is different in the case of simple supply restriction. Here the authors of the restriction are not concerned with what may happen to the part of the supply they bar from access to the market. The fate of the people who own this part does not matter to them. they are looking only at that part of the supply which remains on the market. Monopolistic action is advantageous for the monopolist only if total net proceeds at a monopoly price exceed total net proceeds at the potential competitive price. Restrictive action is always advantageous for the privileged group and disadvantageous for those whom it excludes from the market. It always raises the price per unit and therefore the total net proceeds of the privileged group. The losses of the excluded group are not taken into account.
It may happen that the benefits which the privileged group derives from the restriction of competition are much more lucrative for them than any imaginable monopoly price policy could be. But this is another question. It does not blot out the catallactic differences between these two modes of action.
Murphy's Guide to MisesThe prevailing labor-union policies are restrictive and not monopoly price policies. The unions are intent upon restricting the supply of labor in their field without bothering about the fate of those excluded. They have succeeded in every comparatively underpopulated country in erecting immigration barriers. Thus they preserve their comparatively high wage rates. The excluded foreign workers are forced to stay in their countries in which the marginal productivity of labor, and consequently wage rates, are lower. The tendency toward an equalization of wage rates which prevails under free mobility of labor from country to country is paralyzed. On the domestic market the unions do not tolerate the competition of nonunionized workers and admit only a restricted number to union membership. Those not admitted must go into less remunerative jobs or must remain unemployed. The unions are not interested in the fate of these people.
Even if a union takes over the responsibility for its unemployed members and pays them, out of the contributions of its employed members, unemployment doles not lower than the earnings of the employed members, its action is not a monopoly price policy. For the unemployed union members are not the only people wronged by the union's policy of substituting higher rates for the potential lower market rates. The interests of those excluded from membership are not taken into account.
The Mathematical Treatment of the Theory of Monopoly PricesMathematical economists have paid special attention to the theory of monopoly prices. It looks as if monopoly prices would be a chapter of catallactics for which mathematical treatment is more appropriate than it is for other chapters of catallactics. However, the services which mathematics can render in this field are rather poor too.
With regard to competitive prices mathematics cannot give more than a mathematical description of various states of equilibrium and of conditions in the imaginary construction of the evenly rotating economy. It cannot say anything about the actions which would finally establish these equilibria and this evenly rotating system if no further changes in the data were to occur.
In the theory of monopoly prices mathematics comes a little nearer to the reality of action. It shows how the monopolist could find out the optimum monopoly price provided he had at his disposal all the data required. But the monopolist does not know the shape of the curve of demand. What he knows is only points at which the curves of demand and supply intersected one another in the past. He is therefore not in a position to make use of the mathematical formulas in order to discover whether there is any monopoly price for his monopolized article and, if so, which of various monopoly prices is the optimum price. The mathematical and graphical disquisitions are therefore no less futile in this sector of action than in any other sector. But, at least, they schematize the deliberations of the monopolist and do not, as in the case of competitive prices, satisfy themselves in describing a merely auxiliary construction of theoretical analysis which does not play a role in real action.
Contemporary mathematical economists have confused the study of monopoly prices. They consider the monopolist not as the seller of a monopolized commodity, but as an entreprenuer and producer. However, it is necessary to distinguish the monopoly gain clearly from entrepreneurial profit. Monopoly gains can only be reaped by the seller of a commodity or a service. An entrepreneur can reap them only in his capacity as seller of a monopolized commodity, not in his entrepreneurial capacity. The advantages and disadvantages which may result from the fall or rise in cost of production per unit with increasing total production, increase or diminish the monopolist's total net proceeds and influence his conduct. But the catallactic treatment of monopoly prices must not forget that the specific monopoly gain stems, with due allowance made to the configuration of demand, only from the monopoly of a commodity or a right. It is this alone which affords to the monopolist the opportunity to restrict supply without fear that other people can frustrate his action by expanding the quantity they offer for sale. Attempts to define the conditions required for the emergence of monopoly prices by resorting to the configuration of production costs are vain.
It is misleading to describe the market situation resulting in competitive prices by declaring that the individual producer could sell at the market price also a greater quantity than what he really sells. This is true only when two special conditions are fulfilled: the producer concerned, A, is not the marginal producer, and expanding production does not require additional costs which cannot be recovered in selling the additional quantity of products. Then A's expansion forces the marginal producer to discontinue production; the supply offered for sale remains unchanged. The characteristic mark of the competitive price as distinguished from the monopoly price is that the former is the outcome of a situation under which the owners of goods and services of all orders are compelled to serve best the wishes of the consumers. On a competitive market there is no such thing as a price policy of the sellers. They have no alternative other than to sell as much as they can at the highest price offered to them. But the monopolist fares better by withholding from the market a part of the supply at his disposal in order to make specific monopoly gains.
This article is excerpted from chapter 16 of Human Action. Robert Murphy has written a study guide for this chapter, available in HTML and PDF.This article follows "Chapter XVI. Prices, Part 1."
Austrian economists have long been critical of the static, unrealistic models of neoclassical economics and instead take a dynamic, causal-realist approach. Similarly, the role of government, while receiving heavy analysis from Austrians, is taken as a given in most neoclassical models and textbooks, used today in almost all university economics courses.
Laying aside the Austrian critique of neoclassical models, an analysis of the role and characteristics of government — within the neoclassical framework — will show that this institution most closely resembles the model viewed as least efficient in terms of production and allocation of scarce resources.
The government is not a deus ex machina. The question of where the government fits into the neoclassical framework demands an answer. It cannot just be assumed that any market "inefficiencies" (in the neoclassical sense) could be limited or eliminated by government, when government itself is arguably the most inefficient of all institutions.
In the neoclassical view, there are four market models that can exist in a society, all of which are described as having degrees of costs and benefits. Based on this analysis, the models could be ranked according to how efficiently goods are produced and allocated. The role of government in such models is usually taken as a given — it is an existing institution, smuggled in with many (false) assumptions, unexamined, and excluded from economic analysis.
In this article, I will (a) briefly review the neoclassical models and (b) apply them to the US government in order to (c) analyze which model — perfect competition, monopolistic competition, oligopoly, or pure monopoly — corresponds most closely with characteristics of the federal government of the United States.
Neoclassical models can be analyzed by looking primarily at the following characteristics of each model: number of firms, control over price, and ease of entry.
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In the neoclassical model of perfect competition, there is a relatively large number of firms offering a standardized product or service with no control over price. Firms are "price takers" and face a horizontal demand curve, by which it follows that price equals marginal revenue. Because of the extreme amount of competition, the rationale is that if an individual firm increases its price, consumers — possessed with perfect information and no switching or transactions costs — will turn to one of its many competitors. The firm that raises its price will lack customers and, therefore, revenues. It is very easy to enter (and exit) the industry, and there is no nonprice competition, e.g., advertising or product differentiation. Firms earn a "normal profit," breaking even, where marginal revenue (and price) equals marginal cost and total revenue equals total cost. This imaginary world may be labeled "ideal" due to its productive and allocative efficiency.
In monopolistic competition, there are also many firms, but with differentiated products (through advertising, location, service, brand name, etc.). Firms possess some control over price, but, unlike perfect competition, firms do face a downward-sloping demand curve. It is relatively easy for new firms to enter and compete in this model. Inefficiencies are typically "allowed" to exist because, although the model is not efficient, consumers benefit from product differentiation and choice.
In the oligopoly model, there are only a few large firms offering standardized or differentiated products. These firms are constrained by mutual interdependence that may lead to collusive behavior, although this is illegal. Collusion of firms may lead to a de facto monopoly, thus charging a monopoly price and producing a monopoly output. In other words, this model, like monopoly, underproduces and overprices relative to pure competition. It is also difficult to enter and compete in an oligopolistic industry.
The final model, pure monopoly, is where only one firm exists and sells a unique product with no close substitutes. The firm is the industry because of its ownership of resources, patents, or economies of scale. The pure monopoly firm has considerable control over price— although not absolute, as it also faces a downward-sloping demand curve — and can restrict product availability. Entry barriers are very high; it is essentially impossible for new firms to enter. One identified failure of the monopoly model is that a monopolist will charge a price in the elastic portion of its demand curve (where marginal revenue is positive). A monopolist underproduces and charges a higher price (relative to perfect competition).
Characteristics of GovernmentHaving briefly explained the models, we can now attempt to answer the question, which model does government most closely fit? While Austrolibertarians knew the answer from the beginning, a review of government's attributes will make the answer — or at least its justification — clearer.
One difficulty with analyzing the US government is that it consists of seemingly endless programs and bodies. Therefore, in order to allocate government to one of the four models, its most-commonly-agreed-upon functions — judicial and military protection — will be used to analyze number of firms and ease of entry. Taxation and control over (monetary) inflation will be used to consider control over price.
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In terms of judicial protection, the US Supreme Court has exclusive judicial power. It is the "final arbiter of the law … [and] functions as guardian and interpreter of the Constitution." Competition in law and legislation is not merely difficult — it is illegal. If a citizen has a dispute with the government, it takes place in a government court. Although simplified, it should not be difficult to see the problem with one party holding its own proceedings and deciding the outcome. Rothbard explained this in For a New Liberty:
[W]e turn over all of our powers of ultimate decision-making to this deified group, and then we must jolly well sit back quietly and await the unending stream of justice that will pour forth from these institutions — even though they are basically judging their own case.
Not only does the US government claim ultimate decision-making authority in the court system; it is in complete control of national defense, where it is also illegal to compete. Individuals may not start up National Defense Firm B and attempt to lower costs through diplomacy, since war is costly in terms of lives and money. This is the function Rothbard believed was
reserved most jealously by the State. It is vital to the State's existence, for on its monopoly of force depends its ability to exact taxes from the citizens.
Protection and defense services would surely be in demand in a free society, i.e., without government provision of them. Yet the utilitarian question of whether or not such services would be better provided by the private sector seems to answer itself with the number of YouTube videos exposing police officers abusing their power. The apposite question is more likely to be, could private cops be any worse?
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To analyze control over price, income tax will suffice as an appropriate measure. According to the Urban Institute and Brookings Institution's Tax Policy Center, "the individual income tax has been the largest single source of federal revenue since 1950, averaging just over 8 percent of GDP." In 2008, 45% of federal tax revenue came from individual income taxes, or over one trillion dollars.
In terms of government's control over "price" through taxation, government cannot necessarily set its price as high as it wants for fear of a potential revolution by the population. However, with self-granted access to the unlimited printing of money through inflation, the less seen price — the hidden tax — may be almost as high as the government wishes. The important point is that government is not a "price taker" as in the perfect-competition model; its price is also not constrained by mutual interdependence as in the oligopolist model. Similar to the pure-monopoly model, government, through tax and access to a printing press, can exercise great control over its "price"; it is a price maker.
However, there is an important difference between government and pure monopoly. Even in the neoclassical pure-monopoly model, individuals are making voluntary exchanges, with each party expecting to benefit. In contrast, government force to extract taxes creates an "exchange" where one party benefits at the expense of the other. This creates a conflict between classes of net taxpayers and net tax consumers. Unlike even pure monopoly — that most dreadful of neoclassical models — it is only the government (and a criminal gang) that obtains its "revenue" through force.
ConclusionThis article sought to analyze the US government and place it into one of the four neoclassical models, leaving aside the Austrian critique of such models. By now the obvious answer should be that government most closely corresponds to the pure-monopoly model, the model viewed as least efficient by neoclassical economists. As demonstrated above, the government is in many cases worse than the pure-monopoly model. There is only one "firm"; it is illegal to compete; and price is controlled through tax and, especially, the ability to print money.
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Neoclassical economists would argue that government can correct for (alleged) "inefficiencies" in the market through legislation, subsidies, and taxes. However, government itself cannot be excluded from economic analysis and assumed to be able to remove inefficiencies. As shown above, it is the most inefficient model that exists. Neoclassicals, instead of viewing the government as savior to "inefficient markets," should realize it is the least productive, gaining all of its revenue from others' labor in the private sector. In Man, Economy, and State, Rothbard explains government's monopoly ownership in the following way:
[I]n all countries the State has made sure it owns the vital nerve centers, the command posts of the society. It has acquired compulsory monopoly ownership over these command posts, and it has always tried to convince the populace that private ownership and enterprise in these fields is simply and a priori impossible.
Fortunately, Austrian economists have shown that every product and service can be offered privately, without the use of monopoly force through government.
Typically, neoclassical models assume government as a given, and as a means to step in and overcome "market failure." This amounts to turning a blind eye to one of the most powerful and dangerous institutions in all of history: the state. It is a monopoly in the purest sense.
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One of the most harmful of Barack Obama's public-private partnerships (PPPs) has to do with his support of entrepreneurship in an attempt to "spur job growth." I would like to show why this is not only a particularly bad idea but also a destructive one, leading to exactly the opposite of the result sought by the program.
Mr. Obama plans to create a business-incubator program to help more individuals start their own business. Obama's goal is the following:
Create a National Network of Public-Private Business Incubators: support entrepreneurship and spur job growth by creating a national network of public-private business incubators and investing $250 million per year to increase the number and size of incubators in disadvantaged communities throughout the country.
Business incubators aim to help entrepreneurs in the startup and early stages of growth by creating an infrastructure of resources for a company. This may include providing the company with an office, access to a network of mentors, help with regulatory requirements, and access to funding. It is important to note that in the United States over 70% of business incubators are funded by government or government-funded institutions (e.g., economic development organizations, universities), while only 4% are for profit.
Of course, Obama's nominal figure of $250 million seems like a drop in the government cesspool when compared to the trillions of dollars being wasted on company bailouts and US war efforts. However, there is a more fundamental question here of whether Obama's effort to "spur job growth" by facilitating the creation of startup companies is actually desirable. Are more startup companies a "good thing?" Do they create jobs? If so, what kind of jobs?
Since I have already argued the Austrian case for the fallacy of government investment and the adverse effects of government intervention, I will now turn to some empirical research findings on startup and small companies, and how they compare to larger companies. While these views will be contrary to what many government officials regurgitate, Professor of Entrepreneurial Studies Scott Shane argues that policy makers should not attempt to encourage entrepreneurial activity, as it is not a "worthwhile goal."
Contrary to popular myth, startup companies do not generate many new jobs, and actually create net job losses after their first year. Findings from the Bureau of Labor Statistics support this fact. For example, in 1998 there were 152,668 people employed by new startups in the leisure and hospitality industry, a number that declined year after year, until there were only 105,941 people employed by those same startups in 2002 — a 31% loss (see table I). The figures are similar for nearly all industries, and overall there is net job destruction after the first year for a startup company.
Table I. Total employment of survivors, by sector and years since birth, 1998–20021998
1999
2000
2001
2002
Natural Resources and mining
21,809
19,781
19,945
17,636
16,789
Construction
98,750
93,468
84,550
75,256
69,426
Manufacturing
45,670
51,271
52,055
50,073
45,732
Trade, transportation, and utilities
139,125
140,462
137,448
127,135
118,266
Information
17,794
22,064
25,085
22,131
18,241
Financial activities
45,098
47,745
46,314
43,855
41,665
Professional and business services
137,908
154,160
170,016
158,281
147,618
Education and health services
57,068
64,594
67,017
65,534
64,881
Leisure and hospitality
152,668
139,041
126,323
114,154
105,941
Other services
69,736
55,664
49,639
45,027
39,932
National
798,066
792,131
781,506
721,103
670,111
Source: Knaup (2005)In addition, there is a waste of resources being used in the creation of most small businesses. Only 44% of new businesses are in operation at the end of 4 years. And other studies have found that after 7 years only 33% are still in business with a positive cash flow. Professor Shane, using US census data, explains the amount of labor and time a startup would need to add just nine employees:
to create one business employing at least one person in ten years, we need 43 entrepreneurs to begin the process of starting a company. And the typical business that is created will have nine employees in a decade. That is, 43 people have to try to start companies so that we can have 9 jobs a decade from now.(Emphasis added)
While the average new business is a waste of resources, what about other startups that have generated millions of jobs, billions of dollars in revenue, and grown into multinational corporations? We can think of Google, FedEx, Dell, Microsoft, eBay, and many other startup companies that have benefitted many people's lives. The common link between all of these companies, however, is the market solution of venture-capital funding, not government intervention.
In addition to a waste of resources to create few jobs, the average startup is also less productive than the older firm. Only a small percentage of startups improve productivity and add to better resource allocation. In answering the question of whether more startups are desirable, we can look to a paper — "Productivity Differences Across Employers: The Roles of Employer Size, Age, and Human Capital" — by John Haltiwanger, Julia Lane, and James Speltzer (1999) in the American Economic Review. They showed that firm productivity increases with firm age. That is, older firms make better use of existing resources than younger firms. So if government encourages more people to start more firms, instead of working for existing firms, they are creating an incentive to decrease productivity.
Governments that create incentives for the average startup do not benefit anyone, including the entrepreneur starting the business. Professor Shane explains why we should be wary of government involvement in startups:
I'm not sure we'd be doing the entrepreneurs themselves any favors either. When governments intervene to encourage the creation of new businesses, they stimulate people to start new companies disproportionately in competitive industries with lower barriers to entry and high rates of failure. And the entrepreneurs who run those businesses typically earn less money and have worse benefits than they would have earned had they remained working for someone else.
What is the difference in benefits between small and large companies? The US General Accounting Office (GAO) 2000 report on pension plans shows that 82% of firms with fewer than 25 employees lacked pension coverage. In contrast, the GAO report found that among firms with 100 or more employees, only 41% lacked pension coverage. Why this difference? Nineteen percent of the GAO sample said that uncertainty about future revenue was a reason the firm could not commit to a pension plan.
Figure 1: Percentage of All Firms Offering Health Benefits, 1999–2008Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999–2008In terms of health insurance, research by the Employee Benefit Research Institute (2008) found that, while only 18.2% of all workers were uninsured, more than 26% of self-employed workers were uninsured. In fact, the EBRI reported that nearly 63% "of all uninsured workers were either self-employed or working in private-sector firms with fewer than 100 employees in 2007." Private-sector firms with fewer than 10 employees had 34% of workers uninsured, which can be contrasted with 12.9% of uninsured workers for firms with 500–999 employees, and 12.6% for firms with 1,000 or more employees.
Other studies show the stark difference between smaller firms and larger firms in terms of even offering health benefits. For example, figure I shows that nearly all firms (99%) with over 200 employees offer health insurance, while less than half (49%) of firms with 3–9 employees offer health insurance.
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To conclude, average startup companies create few jobs — and do so only in their first year — and they offer fewer fringe benefits than larger companies. They make worse use of resources relative to older firms and are less productive. Government efforts to stimulate entrepreneurship and startup companies, and to spur job growth, are not only detrimental to market participants but to the startup companies themselves.
Austrolibertarians will no doubt agree with Professor Shane's conclusion: "So perhaps we would be better off letting the market work and not provide extra incentives for people to start businesses."
Policy makers would do well to heed this advice, not only because of the Austrian theory of government intervention but also because of history: the empirical evidence on the average startup company reveals a record of loss rather than gain.
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One of the projects that President Obama's close to trillion dollar stimulus package is designed to pay for will be a much delayed subway line in New York City. The line has been authorized and paid for by taxpayers time and again through bond issues and federal aid over more than 60 years. Yet the line is years away because of cost overruns and various public sector problems.
Given the porkish nature of all these federal and state make-work programs, it is unlikely the subway line will be operating any time soon, yet riders are already being told of the marvels of public-sector projects.
Few things are funnier than reading Metropolitan Transportation Authority releases, the subway statements of pols or one of the delightfully devious "Heads Up" ads posted in subway cars. Recently, as I was delayed once again on the subway between stations one Saturday, I looked up and almost fell on the ground laughing as I read this gem from the MTA.
Starting in 2015, the new Second Avenue Subway will help relieve overcrowding on the Lexington Ave Lines. Overdue, but excellent news.
The MTA's leaders, along with their political enablers, obviously assume that the typical rider has no sense of history; that he or she has either forgotten or never learned the sordid history of countless broken promises by long-forgotten politicians. Reviewing their Second Avenue Subway promises, one thinks of the solemn and almost-always-broken treaties made with Native Americans, or what historian Helen Hunt called "The Shame of a Nation." The Second Avenue Subway could be called "The Shame of a City" — and of its political class across generations.
But our ruling Plunkitts and Tweeds know there's no need to worry. Indeed, as a former British cabinet member, Duff Cooper, once said, "Old men forget." We forget almost all of what has happened in the disastrous 67-year history of city and state authorities running our subways — and the federal government also kicking in big bucks. And that's a good thing for our rulers in New York and Washington. Otherwise we would remember that this infamous Second Avenue line was promised and repromised, as well as paid for several times over in the past 65 years or so!
Mayor Fiorello LaGuardia, who left City Hall in 1945, promised a Second Avenue Subway. He ran a "reform administration" that bought out the last privately managed lines. He ordered the Second and Third Avenue Els dismantled with the promise that a brand new underground Second Avenue line would replace them.
It never happened on his reform watch.
Yes, but the regulars, under Mayor William O'Dwyer, got back in power in 1946 after LaGuardia departed. O'Dwyer, in the Rancid Apple tradition of Mayor Jimmy Walker, later had to leave town owing to his legal problems. But in the 1950s, the regulars still persuaded the voters to pass a bond issue for a Second Avenue Subway. The voters once again believed their politicians — reform, regular, extra crispy, etc. — who regardless of party label usually run on a platform of promising the sun, moon, stars, and all the planets if only one gives them one's vote.
The bond issue, which added more debt, easily passed in 1951 — and guess what? The line was never built. The money was needed for other things because in the 1950s — as in the 1960s, '70s, '80s, '90s, 2000s, etc — the system was falling apart, but money was needed then and now just to close the persistent deficits that happen whenever the government runs anything.
Yet despite the best efforts of pols and mainstream journalists — who lectured people to use mass transit, while they themselves often used cars — bad things happened. Fewer and fewer people over the last 60 years rode the wretched subways. And why not? The public system has progressively become dirtier and slower. It is a hopeless place where one should be advised to wear ear protection.
So the government through its various authorities couldn't get people to ride subways. The subways ran bigger and bigger deficits, a frequent theme in just about any government-sponsored enterprise, as some are just learning with Freddie Mac and Fannie Mae.
However, authority enablers (who in the 1950s and '60s looked the other way as authorities started skimping on maintenance) kept insisting that it was ridiculous to ever expect the system to break even, no less turn a profit. This conveniently overlooked the fact that, in the first 20 years of the system from 1904 until the early 1920s under a private management company like the Interborough Rapid Transit System (IRT), the subway did make money. Indeed, it was considered "an engineering marvel," according to Robert Caro in his biography of Robert Moses, The Power Broker.
Later, of course, the IRT was happy to sell out. The backdoor socialism of price controls — the fare was never allowed to rise above a nickel until the government and then the fare went through the roof — destroyed the IRT just as rent controls slowly destroy many properties.
But back in the golden era of the subways under private management, people came from all over the world to admire our system. Try telling that to people who ride the system today on the weekends when there is no express service. Try telling that to passengers who are constantly delayed because the signaling system is ancient, dating back to the 1930s (even though reverse signaling has been the standard for a generation or more). But in the 1960s, the politicians continued on their merry way when the subject was the now mythical Second Avenue line.
In 1967, another bond issue was passed. Once again, the voters agreed to impose more debt on themselves and their scions with the promise of a new subway line. These decisions have helped to make New York State one of the highest debt states in the nation.
Mayor John Lindsay (1966–1973) knew all about running red ink and making promises that never came to fruition.
In the 1960s, Lindsay promised to expand the E and F lines from Jamaica to the Queens/Nassau border. That, of course, never happened, although the Archer Avenue extension in the 1980s tried to make riders forget that any such promise had ever been made.
Lindsay broke ground for the Second Avenue line in October 1972, or tried to do so. He had trouble with the jackhammer, which was an ominous sign. Nevertheless, someone helped him and, with a pack of vote-hungry public officials watching, the ground was broken for the Second Avenue line. Overburdened East Side riders expected a new line by the 1970s or surely by the early 1980s.
Then it happened again. You guessed it. The money disappeared, even though the voters had approved a second bond issue. Once again, there was no Second Avenue Subway. But politicians always have new elections on the horizon and schemes to make those elections turn out the way they want.
So, with the fervent hope that none of his constituents ever cared about subway history, Rockefeller Republican Governor George Pataki, in 2005, proposed a state transportation bond issue, which easily passed. Every Democrat in the state loved it. So did most Republicans, who, in an example of what Orwell called newspeak, represent themselves as fiscal conservatives.
The bond issue included the infamous East Side line. Yes, more debt for the highly taxed Big Apple, but now we would "only" have ten years to wait. That's all.
Sure, it's "overdue" (sic), but it's coming, according to the official MTA party line, as explained to long-suffering subway riders who look up while hearing PA announcements that either blast their hearing or are announced in a strange, static-filled, undecipherable language.
New York's Founding Father of "Internal Improvements"Still, before we all get carried away, let us remember history. Let us remember that the record of the MTA and of prior authorities finishing projects is about as good as the New York Mets' recent record in finishing seasons. Let us remember that the MTA has been promising reverse signaling for years, a development that is, even now, years in the offing, according to its own schedule. Let us remember the record of the WPA in restoring prosperity to America in the 1930s.
Finally, let us remember that there is a word that can never be discussed or even mentioned when we talk about the myriad flawed federal, state, and city transportation systems. I mention the word now sotto voce, because I fear for my life to even say it. It is a word so evil that no important pol in New York will ever utter it even in private.
That word is "privatization."
[Excerpt from "Chapter 1: Introduction" in Against Intellectual Monopoly by Michele Boldrin and David K. Levine. Copyright © 2008 Michele Boldrin and David K. Levine. Reproduced with the permission of Cambridge University Press. Additional information may be obtained here.]
In late 1764, while repairing a small Newcomen steam engine, the idea of allowing steam to expand and condense in separate containers sprang into the mind of James Watt. He spent the next few months in unceasing labor building a model of the new engine. In 1768, after a series of improvements and substantial borrowing, he applied for a patent on the idea, requiring him to travel to London in August. He spent the next six months working hard to obtain his patent. It was finally awarded in January of the following year. Nothing much happened by way of production until 1775. Then, with a major effort supported by his business partner, the rich industrialist Matthew Boulton, Watt secured an act of Parliament extending his patent until the year 1800. The great statesman Edmund Burke spoke eloquently in Parliament in the name of economic freedom and against the creation of unnecessary monopoly — but to no avail.[1] The connections of Watt's partner Boulton were too solid to be defeated by simple principle.
Once Watt's patents were secured and production started, a substantial portion of his energy was devoted to fending off rival inventors. In 1782, Watt secured an additional patent, made "necessary in consequence of ... having been so unfairly anticipated, by [Matthew] Wasborough in the crank motion" [2]. More dramatically, in the 1790s, when the superior Hornblower engine was put into production, Boulton and Watt went after him with the full force of the legal system.[3]
During the period of Watt's patents the United Kingdom added about 750 horsepower of steam engines per year. In the thirty years following Watt's patents, additional horsepower was added at a rate of more than 4,000 per year. Moreover, the fuel efficiency of steam engines changed little during the period of Watt's patent; while between 1810 and 1835 it is estimated to have increased by a factor of five.[4]
After the expiration of Watt's patents, not only was there an explosion in the production and efficiency of engines, but steam power came into its own as the driving force of the Industrial Revolution. Over a thirty year period steam engines were modified and improved as crucial innovations such as the steam train, the steamboat and the steam jenny came into wide usage. The key innovation was the high-pressure steam engine — development of which had been blocked by Watt's strategic use of his patent. Many new improvements to the steam engine, such as those of William Bull, Richard Trevithick, and Arthur Woolf, became available by 1804: although developed earlier these innovations were kept idle until the Boulton and Watt patent expired. None of these innovators wished to incur the same fate as Jonathan Hornblower.[5]
Ironically, not only did Watt use the patent system as a legal cudgel with which to smash competition, but his own efforts at developing a superior steam engine were hindered by the very same patent system he used to keep competitors at bay. An important limitation of the original Newcomen engine was its inability to deliver a steady rotary motion. The most convenient solution, involving the combined use of the crank and a flywheel, relied on a method patented by James Pickard, which prevented Watt from using it. Watt also made various attempts at efficiently transforming reciprocating into rotary motion, reaching, apparently, the same solution as Pickard. But the existence of a patent forced him to contrive an alternative less-efficient mechanical device, the "sun and planet" gear. It was only in 1794, after the expiration of Pickard's patent that Boulton and Watt adopted the economically and technically superior crank.[6]
The impact of the expiration of his patents on Watt's empire may come as a surprise. As might be expected, when the patents expired "many establishments for making steam-engines of Mr. Watt's principle were then commenced." However, Watt's competitors "principally aimed at...cheapness rather than excellence." As a result, we find that far from being driven out of business "Boulton and Watt for many years afterwards kept up their price and had increased orders" [7].
In fact, it is only after their patents expired that Boulton and Watt really started to manufacture steam engines. Before then their activity consisted primarily of extracting hefty monopolistic royalties through licensing. Independent contractors produced most of the parts, and Boulton and Watt merely oversaw the assembly of the components by the purchasers.
In most histories, James Watt is a heroic inventor, responsible for the beginning of the Industrial Revolution. The facts suggest an alternative interpretation. Watt is one of many clever inventors working to improve steam power in the second half of the eighteenth century. After getting one step ahead of the pack, he remained ahead not by superior innovation, but by superior exploitation of the legal system. The fact that his business partner was a wealthy man with strong connections in Parliament, was not a minor help.
Was Watt's patent a crucial incentive needed to trigger his inventive genius, as the traditional history suggests? Or did his use of the legal system to inhibit competition set back the industrial revolution by a decade or two? More broadly, are the two essential components of our current system of intellectual property — patents and copyrights — with all of their many faults, a necessary evil we must put up with to enjoy the fruits of invention and creativity? Or are they just unnecessary evils, the relics of an earlier time when governments routinely granted monopolies to favored courtiers? That is the question we seek to answer.
In the specific case of Watt, the granting of the 1769 and especially of the 1775 patents likely delayed the mass adoption of the steam engine: innovation was stifled until his patents expired; and few steam engines were built during the period of Watt's legal monopoly. From the number of innovations that occurred immediately after the expiration of the patent, it appears that Watt's competitors simply waited until then before releasing their own innovations. This should not surprise us: new steam engines, no matter how much better than Watt's, had to use the idea of a separate condenser. Because the 1775 patent provided Boulton and Watt with a monopoly over that idea, plentiful other improvements of great social and economic value could not be implemented. By the same token, until 1794 Boulton and Watt's engines were less efficient they could have been because the Pickard's patent prevented anyone else from using, and improving, the idea of combining a crank with a flywheel.
Also, we see that Watt's inventive skills were badly allocated: we find him spending more time engaged in legal action to establish and preserve his monopoly than he did in the actual improvement and production of his engine. From a strictly economic point of view Watt did not need such a long-lasting patent — it is estimated that by 1783 — seventeen years before his patent expired — his enterprise had already broken even. Indeed, even after their patent expired, Boulton and Watt were able to maintain a substantial premium over the market by virtue of having been first, despite the fact that their competitors had had thirty years to learn how to make steam engines.
The wasteful effort to suppress competition and obtain special privileges is referred to by economists as rent-seeking behavior. History and common sense show it to be a poisoned fruit of legal monopoly. Watt's attempt to extend the duration of his 1769 patent is an especially egregious example of rent seeking: the patent extension was clearly unnecessary to provide incentive for the original invention, which had already taken place. On top of this, we see Watt using patents as a tool to suppress innovation by his competitors, such as Hornblower, Wasborough and others. Hornblower's engine is a perfect case in point: it was a substantial improvement over Watt's as it introduced the new concept of the "compound engine" with more than one cylinder. This, and not the Boulton and Watt design, was the basis for further steam-engine development after their patents expired. However, because Hornblower built on the earlier work of Watt, making use of his "separate condenser" Boulton and Watt were able to block him in court and effectively put an end to steam-engine development. The monopoly over the "separate condenser," a useful innovation, blocked the development of another equally useful innovation, the "compound engine," thereby retarding economic growth. This retardation of innovation is a classical case of what we shall refer to as intellectual-property inefficiency, or IP inefficiency for short.
Finally, there is the slow rate at which the steam engine was adopted before the expiration of Watt's patent. By keeping prices high and preventing others from producing cheaper or better steam engines, Boulton and Watt hampered capital accumulation and slowed economic growth.
The story of James Watt is a damaging case for the benefits of a patent system, but we shall see that it is not an unusual story. A new idea accrues almost by chance to the innovator while he is carrying out a routine activity aimed at a completely different end. The patent comes many years after that and it is due more to a mixture of legal acumen and abundant resources available to "oil the gears of fortune" than anything else. Finally, after the patent protection is obtained, it is primarily used as a tool to prevent economic progress and hurt competitors.
$30 $27
While this view of Watt's role in the Industrial Revolution may appear iconoclastic, it is neither new nor particularly original. Frederic Scherer, a prestigious academic supporter of the patent system, after going through the details of the Boulton and Watt story, concluded his 1986 examination of their story with the following illuminating words:
Had there been no patent protection at all,…Boulton and Watt certainly would have been forced to follow a business policy quite different from that which they actually followed. Most of the firm's profits were derived from royalties on the use of engines rather than from the sale of manufactured engine components, and without patent protection the firm plainly could not have collected royalties. The alternative would have been to emphasize manufacturing and service activities as the principal source of profits, which in fact was the policy adopted when the expiration date of the patent for the separate condenser drew near in the late 1790s…. It is possible to conclude more definitely that the patent litigation activities of Boulton & Watt during the 1790s did not directly incite further technological progress…. Boulton and Watt's refusal to issue licenses allowing other engine makers to employ the separate-condenser principle clearly retarded the development and introduction of improvements.[8]
[bio] See his [AuthorArchive]. You can subscribe to future articles by Michele Boldrin via this [RSSfeed].
[bio2] See his [AuthorArchive2]. You can subscribe to future articles by David K. Levine via this [RSSfeed2].
Comment on the Mises blog.
Notes[1] Lord [1923] p. 5–3.
[2] Carnegie [1905] p. 157.
[3] Much of the story of James Watt can be found in Carnegie [1905], Lord [1923], and Marsden [2004]. Information on the role of Boulton in Watt's enterprise is drawn from Mantoux [1905]. A lively description of the real Watt, as well of his legal wars against Hornblower — and many others — and of how he subsequently used his status to alter the public memory of the facts, can be found in Marsden [2004]. That Pickard's patent was unjust is also the view of Selgin and Turner (2006), who, like Watt, do not seem to provide any evidence of why it was so.
As both the Lord and Carnegie works are out of copyright, both are available online at the very good Rochester site on the history of steam power. Later drafts of this chapter benefited enormously from the arrival of Google Book Search, which allowed us to check so many original historical sources about James Watt and the steam engine we would have never thought possible.
[4] Lord [1923] gives figures on the number of steam engines produced by Boulton and Watt between 1775 and 1800, while the The Cambridge Economic History of Europe [1965] provides data on the spread of total horsepower between 1800 and 1815 and the spread of steam power more broadly. However, Kanefsky [1979] has largely discredited the Lord numbers, which is why we use figures on machines and horsepower from Kanefsky and Robey [1980].
Our horsepower calculations are based on 510 steam engines generating about 5,000 horsepower in the United Kingdom in 1760. During the subsequent forty years we estimate that about 1,740 engines generating about 30,000 horsepower were added. This gives us our estimate that the total increased at a rate of roughly 750 horsepower each year. For 1815 we estimate about 100,000 horsepower — that is, the average of the figures Kanefsky and Robey [1980] give for 1800 and 1830. This together with the 35,000 horsepower we estimate for 1800 gives us our estimate that the total increased at a rate of roughly 4,000 horsepower each year after 1800.
Data on the fuel efficiency, the "duty," of steam engines is from Nuvolari [2004b].
[5] Kanefsky and Robey [1980] together with Smith [1977–78] provide a careful historical account of the detrimental impact of the Newcomen's, first, and of Watt's patents, later, on the rate of adoption of steam technology. Apart from the books just quoted, information about Hornblower's engine and its relation to Watt’s are widely available through easily accessible web sites, such as Encyclopedia Britannica, Wikipedia, and so on. Some details of Hornblower’s invention may be of interest. It was patented in 1781 and consisted of a steam engine with two cylinders, significantly more efficient than the Boulton and Watt design. Boulton and Watt challenged his invention — claiming infringement of their patent because the Hornblower engine used a separate condenser — and won. With the 1799 judicial decision against him, Hornblower had to pay Boulton and Watt a substantial amount of money for past royalties, while losing all opportunities to further develop the compound engine. His compound-steam-engine principle was not revived until 1804 by Arthur Woolf. It became one of the main ingredients in the efficiency explosion that followed the expiration of Boulton and Watt’s patent.
Watt’s low-pressure engines were a dead end for further development; history shows that high-pressure, noncondensing engines were the way forward. Boulton and Watt's patent, covering all kinds of steam engines prevented anyone from working seriously on the high-pressure version until 1800. This included William Murdoch, an employee of Boulton and Watt, who had developed a version of the high-pressure engine in the early 1780s. He named it the "steam carriage" and was legally barred from developing it by Boulton and Watt's successful addition of the high-pressure engine to their patent, although Boulton and Watt never spent a cent to develop it. For the details of this story the reader should check the online Cotton Times or Carnegie [1905, pp. 140–141]. The "William Murdoch" entry in Wikipedia provides a good summary. More generally various researchers directly connect Murdoch to Trevithick, who is now considered the official "inventor" (in 1802) of the high-pressure engine. Quite plainly, the evidence suggests that Boulton and Watt's patent retarded the high-pressure steam engine, and hence economic development, for about 16 years.
[6] The story about Pickard's patent blocking adoption by Watt is told in von Tunzelmann [1978].
[7] Thompson [1847] p. 110 and quoted also in Lord [1923].
[8] Scherer [1984] pp. 24–25.
At a taped video interview in my office, before the crew would start the camera, a man had to remove my Picasso prints from the wall. The prints are probably under copyright, they said.
But the guy who drew them died 30 years ago. Besides, they are mine.
Doesn't matter. They have to go.
What about the poor fellow who painted the wall behind the prints? Why doesn't he have a copyright? If I scrape off the paint, there is the drywall and its creator. Behind the drywall are the boards, which are surely proprietary too. To avoid the "intellectual-property" thicket, maybe we have to sit in an open field; but there is the problem of the guy who last mowed the grass. Then there is the inventor of the grass to consider.
Is there something wrong with this picture?
The worldly-wise say no. This is just the way things are. It is for us not to question but to obey. So it is with all despotisms in human history. They become so woven into the fabric of daily life that absurdities are no longer questioned. Only a handful of daring people are capable of thinking along completely different lines. But when they do, the earth beneath our feet moves.
Such is the case with Against Intellectual Monopoly (Cambridge University Press, 2008) by Michele Boldrin and David Levine, two daring professors of economics at Washington University in St. Louis. They have written a book that is likely to rock your world, as it has mine. (It is also posted on their site with the permission of the publisher.)
With piracy and struggles over intellectual property in the news daily, it is time to wonder about this issue, its relationship to freedom, property rights, and efficiency. You have to think seriously about where you stand.
This is not one of those no-brainer issues for libertarians, like minimum wage or price controls. The problem is complicated, and solving it requires careful thought. But it is essential that every person do the thinking, and there is no better tool for breaking the intellectual gridlock than this book.
The issue is impossible to escape, from the grave warnings you get from the FBI at the beginning of "your" DVD to the posters warning kids never to download a song to the outrageous settlements transferring billions from firm to firm. It even affects the outrageous prices you pay for medicine at the drug store. The issue of "intellectual property" is a ubiquitous part of modern life.
Some of the police-state tactics used to enforce IP have to make anyone with a conscience squeamish. You have surely wondered about the right and wrong of all this, but, if you are like most people, you figure that copyrights and patents are consistent with the justice that comes from giving the innovator his due. In principle they seem fine, even if the law might be in need of reform.
The first I'd ever thought critically about issues of intellectual property was in reading about it in the abstract many years ago. The Austrian position has traditionally favored copyrights on the same grounds it has favored property rights in general, but has tended to oppose patents on grounds that they are government grants of monopolistic privilege. Machlup, Mises, and Rothbard — as well as Stigler, Plant, and Penrose — have discussed the issue but not at great length and with varying levels of cautious skepticism.
That changed in 2001 with the publication of Stephan Kinsella's article and now monograph "Against Intellectual Property." He made a strongly theoretical argument that ideas are not scarce, do not require rationing, are not diminished by their dissemination, and so cannot really be called property. All IP is unjust, he wrote. It is inconsistent with libertarian ethics and contrary to a free market. He favors the complete repeal of all intellectual-property laws.
The argument initially struck me as crazy on its face. As I considered it further, my own view gradually changed: it's not crazy, I thought, but it is still pie-in-the-sky theorizing that has nothing to do with reality. Kinsella's article appeared just before the explosive public interest in this subject. The patent regime has in the meantime gone completely wild, with nearly 200,000 patents issued every year in the United States, and half a million more in other countries — with 6.1 million patents in effect worldwide — and large firms collecting stockpiles of them.
And the copyright issue has led to a massive struggle between generations: young people live by "pirating" music, movies, software, whereas the old consider this practice to presage the end of the capitalist system as we know it. The music industry has spent billions trying to contain the problem and only ended up engendering consumer embitterment and terrible public relations.
Kinsella's article continued to haunt me personally. It took about six years or so, but I finally worked through all the theoretical problems and came to embrace his view, so you might say that I was predisposed to hear what these authors have to say. What I hadn't realized until encountering the Boldrin/Levine book was just how far-reaching and radical the implications of a detailed look at IP really is.
It is not just a matter of deciding what you believe from a theoretical or political perspective. It is not just a matter of thinking that "pirates" are not really violating moral law. To fully absorb what these authors say changes the way you look at technology, at history, at the ebbs and flows of economic development, and even who the good guys and bad guys are in the history of civilization.
Kinsella deals expertly with the theoretical aspects, while Against Intellectual Monopoly doesn't really go into the theory at great length. What this amazing book deals with is the real-world practice of intellectual-property regulation now and in history. I can make a personal guarantee that not a single objection you think you have to their thesis goes unaddressed in these pages. Their case is like the sun that melts all snow for many miles in all directions.
The implications are utterly shattering, and every day I've turned the pages in the Boldrin/Levine book I've felt that sense of intellectual stimulation that comes along rarely in life — that sense that makes you want to grab anyone off the street and tell that person what this book says. It helps you understand many things that had previously been confusing. The emergent clarity that comes from having absorbed this work is akin to what it must feel like to hear or see for the first time. If they are right, the implications are astonishing.
Their main thesis is a seemingly simple one. Copyright and patents are not part of the natural competitive order. They are products of positive law and legislation, imposed at the behest of market winners as a means of excluding competition. They are government grants of monopolies, and, as neoclassical economists with a promarket disposition, the authors are against monopoly because it raises prices, generates economic stagnation, inhibits innovation, robs consumers, and rewards special interests.
What they have done is apply this conventional model of monopoly to one of the most long-lasting, old-world forms of mercantilist/monopolistic institutional privilege, a surviving form of mercantilist privilege of the 16th century. IP is like a dam in the river of development, or perhaps very large boulders that impede the flow.
They too favor its total repeal but their case goes far beyond the theoretical. They convince you that radical, far-reaching, uncompromising, revolutionary reform is essential to our social well-being now and in the future.
The results are dazzling and utterly persuasive. I personally dare anyone who thinks that he believes in patent or copyright to read this book and deal with it. For this reason, I'm thrilled that the Mises Institute is now carrying the book to give it the broadest possible exposure.
I'm not sure what aspect of their case is the most powerful. Here are just a few examples:
They show that people like James Watt, Eli Whitney, and the Wright Brothers are not heroes of innovation, as legend has it, but rent-seeking mercantilists who dramatically set back the cause of technological development. These people spent vast resources prohibiting third parties from improving "their" product and making it available at a cheaper price. Instead of promoting innovation and profitability, they actually stopped it, even at the cost of their own business dreams.
The authors show that every great period of innovation in human history has taken place in the absence of intellectual property, and that every thicket of IP has ended up stagnating the industries to which they apply. Think of the early years of the web, in which open-source technology inspired breakneck development, until patents and copyright were imposed with the resulting cartelization of operating systems. Even today, the greatest innovations in digital communications come from the highly profitable open-source movement.
It is impossible to develop software without running into IP problems, and the largest players are living off IP and not innovation. Meanwhile, the most profitable and most innovative sector of the web, the porn sector, has no access to courts and IP enforcement because of the stigma associated with it. It is not an accident that absence of IP coincides with growth and innovation. The connection is causal.
And look at the industries that do not have IP access, such as clothing design and architecture and perfume. They are huge and fast moving and fabulous. First movers still make the big bucks, without coercing competition. Boldrin and Levine further speculate that IP is behind one of the great puzzles of the last millennium: stagnation in classical music. The sector is seriously burdened and tethered by IP.
Other mysteries are answered. Why no musical composition of note in England after 1750? England had the world's most strict copyright laws. Why was English literature so popular in the United States in the 19th-century schoolrooms? It could be imported without copyright restriction — and therefore sold cheaply — whereas American authors used IP and limited their market. And consider the irony that Disney, which relies heavily on IP, got its start and makes it largest profits by retelling public-domain stories!
Examples like this abound. One wonders if the modern history of literature and art needs to be completely rewritten. Examples will occur to you that are not discussed in the book, such as fan fiction. It is technically illegal, so far as anyone can tell, to take a copyrighted character and tell a story about him even if the story is original. And yet Harry Potter fan-fiction sites enjoy tens of millions of hits per month. One hosts 5,000 pieces of fan fiction, some as long as 1,000 pages. Enforcement has been spotty and unpredictable.
And yes, the book covers the poster child of the IP world: pharmaceuticals. They muster plenty of evidence that IP here does nothing to promote innovation and widespread availability and is largely responsible for the egregiously high prices of drugs that are driving the system toward socialization.
The authors explore the very strange tendency of capitalists to misdiagnose the source of their profits in a world of IP, spending far more on beating up pirates than they would have earned in a free market. They further demonstrate that IP is a form of exploitation and expropriation that is gravely dangerous for civilization itself.
In short, they have taken what might seem to be merely a geeky concern and moved it to the center of discussion over economic development itself.
What about the far-flung conclusion that IP should be repealed? The authors take away your fears. The development of IP came about in the 16th century as a mechanism for governments to enforce political control and punish dissenters. The cause of this "property right" was then taken over by individuals in the 18th and 19th century as part of the liberal revolution for individual rights. In the 20th century, it was transferred again, to corporations who become the effective owners through copyright. The creators no longer own anything, and let themselves be beaten and abused by their own publishers and production companies.
Boldrin and Levine's thesis really steps up this issue. It makes you wonder how long authors and creators will put up with the nonsense that some company has a state-enforced exclusive to use the work of others for longer than 100 years. Fortunately, the digital age is forcing the issue, and alternatives like Creative Commons (roughly akin to what would exist in a free market) are becoming increasingly popular. As the tyranny has grown more obvious, the free market is responding.
No, the authors are not really Austrian, and I'm not even sure that they can be called libertarians, but they understand the competitive process in ways that would make Hayek and Mises proud. As I've thought more about their book, it seems that it might suggest a revision in classical-liberal theory. We have traditionally thought that cooperation and competition were the two pillars of social order; a third could be added: emulation. In addition, there is surely work to do here that integrates Hayek's theory of knowledge with the problem of IP.
A book that must be understood and absorbed by every thinking personIf the book lacks for anything, it is precisely what Kinsella provides: a robust theory behind the practical analytics. But since Kinsella has already provided this, the value added of real-world application is enormous. I have a minor nit to pick with them on their passing comment on trademarks, which strikes me as wrong. Otherwise, this book moves mountains.
In the coming weeks I will blog about this book chapter by chapter, and Mises.org plans a series of excerpts from it. For now, let me say that a book like this comes along very rarely. Against Intellectual Monopoly is a relatively small manifesto on economics that absolutely must be understood and absorbed by every thinking person without exception.
[In Notes and Recollections, Mises revealed that he meant to include this essay — written in 1926 —in the original German edition of Critique of Interventionism (1929). It was left out of that volume through editorial error, but was included in later editions. An MP3 audio version of this article, read by Dr. Floy Lilley, is available for download.]
Arthur Travers-Borgstroem, a Finnish writer, published a book entitled Mutualism that deals with ideas of social reform, and culminates in a plea for the nationalization of credit. A German edition appeared in 1923. In 1917, the author had established a foundation under his name in Berne, Switzerland, whose primary objective was the conferring of prizes for writings on the nationalization of credit. The panel of judges consisted of Professors Diehl, Weyermann, Milhaud, and Reichesberg, the bankers Milliet, Somary, Kurz, and others. The judges awarded a prize to a paper submitted by Dr. Robert Deumer, director of the Reichsbank in Berlin. This paper was published in book form by the Mutualist Association of Finland.Die Verstaatlichung des Kredits: Mutualisierung des Kredits (Nationalization of Credit: Mutualization of Credit), Prize Essay of the Travers-Borgstroem Foundation at Berne, Munich, and Leipzig, 1926.
From the background material of the paper we can learn why the author is not concerned with the rationale of credit nationalization, but merely with the details of its realization. Dr. Deumer is presenting a proposal, elaborated in its insignificant details, on the nationalization of all German institutions of banking and credit, and the establishment of a national credit monopoly. But his plan can be of no interest to us as no one is contemplating its implementation in the foreseeable future. And if there ever should be such a movement, conditions may be quite different so that the Deumer proposal will not be applicable. Therefore, it would not make any sense to discuss its details, such as article I, section 10, of the "Draft of a Bill Nationalizing Banking and Credit," which reads,
"He who engages in any banking and credit transaction after the nationalization will be subject to a fine not exceeding ten million gold marks, or imprisonment up to five years, or both."Ibid., p. 335.
Deumer's work is of interest to us because of its motives for the nationalization of credit, and its statements on a reform that preserves the superiority of "profit" management over "bureaucratic" management. These statements reveal an opinion that is shared by a large majority of our contemporaries — yes, that is even accepted without contradiction. If we should share this Deumer-Travers-Borgstroem-mutualist position we must welcome a nationalization of credit and every other measure leading to socialism. In fact, we must agree to its realizability and even its urgent necessity.
The public welcomes all proposals designed to limit the sphere of private property and entrepreneurship because it readily accepts the critique of the private-property order by the Socialists of the Chair in Germany, the Solidarists in France, the Fabians in Great Britain, and the Institutionalists in the United States. If the nationalization proposals have not yet been fully realized we must not search for any opposition in social literature and the political parties. We must look to the fact that the public realizes that whenever enterprises are nationalized and municipalized or government otherwise interferes with economic life, financial failure and serious disruption of production and transportation follow instead of the desired consequences. Ideology has not yet taken stock of this failure of reality. It continues to hold fast to the desirability of public enterprises and the inferiority of private enterprises. And it continues to find only malice, selfishness, and ignorance in opposition to its proposals, of which every objective observer should approve.
Under such conditions an analysis of Deumer's reasoning seems to be in order.
- Private Interest And Public InterestAccording to Deumer, banks presently serve private interests. They serve public interests only inasmuch as these do not conflict with the former. Banks do not finance those enterprises that are most essential from the national point of view, but only those that promise to yield the highest return. For instance, they finance "a whiskey distillery or any other enterprise that is superfluous for the economy."
"From the national point of view, their activity is not only useless, but even harmful."
"Banks permit enterprises to grow whose products are not in demand; they stimulate unnecessary consumption, which in turn reduces the people's purchasing power for goods that are more important culturally and rationally. Furthermore, their loans waste socially necessary capital, which causes essential production to decline, or at least their costs of credit, and thus their production costs, to rise."Ibid., p. 86.
Obviously, Deumer does not realize that in a market order, capital and labor are distributed over the economy in such a way that, except for the risk premium, capital yields the same return, and similar labor earns the same wage everywhere. The production of "unnecessary" goods pays no more and no less than that of "essential goods." In the final analysis, it is the consumers in the market who determine the employment of capital and labor in the various industries. When the demand for an item rises its prices will rise and thus the profits, which causes new enterprises to be built and existing enterprises to be expanded. Consumers decide whether this or that industry will receive more capital. If they demand more beer, more beer will be brewed. If they want more classical plays, the theaters will add classics to their repertoire and offer fewer antics, slapstick, and operettas. The taste of the public, not the producer, decides that The Merry Widow and The Garden of Eden are performed more often than Goethe's Tasso.
To be sure, Deumer's taste differs from that of the public. He is convinced that people should spend their money differently. Many would agree with him. But from this difference in taste Deumer draws the conclusion that a socialistic command system should be established through nationalization of credit, so that public consumption can be redirected. On this we must disagree with Deumer.
Guided by central authority according to central plan, a socialistic economy can be democratic or dictatorial. A democracy in which the central authority depends on public support through ballots and elections cannot proceed differently from the capitalistic economy. It will produce and distribute what the public likes, that is, alcohol, tobacco, trash in literature, on the stage, and in the cinema, and fashionable frills. The capitalistic economy, however, caters as well to the taste of a few consumers. Goods are produced that are demanded by some consumers, and not by all. The democratic command economy with its dependence on popular majority need not consider the special wishes of the minority. It will cater exclusively to the masses.
But even if it is managed by a dictator who, without consideration for the wishes of the public, enforces what he deems best — who clothes, feeds, and houses the people as he sees fit — there is no assurance that he will do what appears proper to "us." The critics of the capitalistic order always seem to believe that the socialistic system of their dreams will do precisely what they think correct. While they may not always count on becoming dictators themselves, they are hoping that the dictator will not act without first seeking their advice. Thus they arrive at the popular contrast of productivity and profitability. They call "productive" those economic actions they deem correct. And because things may be different at times, they reject the capitalistic order, which is guided by profitability and the wishes of consumers, the true masters of markets and production. They forget that a dictator, too, may act differently from their wishes, and that there is no assurance that he will really try for the "best," and, even if he should seek it, that he should find the way to the "best."
"In the final analysis, it is the consumers in the market who determine the employment of capital and labor in the various industries."It is an even more serious question whether a dictatorship of the "best" or a committee of the "best" can prevail over the will of the majority. Will the people, in the long run, tolerate an economic dictatorship that refuses to give them what they want to consume and gives them only what the leaders deem useful? Will not the masses succeed in the end in forcing the leaders to pay heed to public wishes and taste and do what the reformers sought to prevent?
We may agree with Deumer's subjective judgment that the consumption by our fellow men is often undesirable. If we believe this, we may attempt to convince them of their errors. We may inform them of the harm of excessive use of alcohol and tobacco, of the lack of value of certain movies, and of many other things. He who wants to promote good writings may imitate the example of the Bible Society that makes financial sacrifices in order to sell Bibles at reduced prices and to make them available in hotels and other public places. If this is yet insufficient, there cannot be any doubt that the will of our fellow men must be subdued. Economic production according to profitability means production according to the wishes of consumers, whose demand determines goods prices and thus capital yield and entrepreneurial profit. Whenever economic production according to "national productivity" deviates from the former, it means production that disregards the consumers' wishes, but pleases the dictator or committee of dictators.
Surely, in a capitalistic order a fraction of national income is spent by the rich on luxuries. But regardless of the fact that this fraction is very small and does not substantially affect production, the luxury of the well-to-do has dynamic effects that seem to make it one of the most important forces of economic progress. Every innovation makes its appearance as a "luxury" of the few well-to-do. After industry has become aware of it, the luxury then becomes a "necessity" for all. Take, for example, our clothing, the lighting and bathroom facilities, the automobile, and travel facilities. Economic history demonstrates how the luxury of yesterday has become today's necessity. A great deal of what people in the less capitalistic countries consider luxury is a common good in the more capitalistically developed countries. In Vienna, ownership of a car is a luxury (not just in the eyes of the tax collector); in the United States, one out of four or five individuals owns one.
The critic of the capitalist order who seeks to improve the conditions of the masses should not point at this luxury consumption as long as he has not disproved the assertion of theorists and the experience of reality that only capitalistic production assures highest possible production. If a command system produces less than a private-property order it will obviously not be possible to supply the masses with more than they have today.
The poor performance of public enterprises is usually blamed on bureaucratic management. In order to render state, municipal, and other public operations as successful as private enterprise, they should be organized and directed along commercial lines. This is why for decades everything has been tried to make such operations more productive through "commercialization." The problem became all the more important as state and municipal operations expanded. But not by a single step has anyone come closer to the solution.
- Bureaucratic Management or Profit Management of Banking?Deumer, too, deems it necessary "to manage the national banking monopoly along commercial lines," and makes several recommendations on how to achieve this.Ibid., p. 210. They do not differ from many other proposals in recent years or from those which under the circumstances could and have been achieved. We hear of schools and examinations, of promotion of the "able," of sufficient pay for employees, and of profit sharing for leading officials. But Deumer does not see the essence of the problem any more clearly than do any others who seek to make the inevitably unproductive system of public operations more productive.
"A government enterprise can never be 'commercialized' no matter how many external features of private enterprise are superimposed on it."Deumer, in step with prevailing opinion, seems to believe erroneously that the "commercial" is a form of organization that can easily be grafted onto government enterprises in order to debureaucratize them. That which usually is called "commercial" is the essence of private enterprise aiming at nothing but the greatest possible profitability. And that which usually is called "bureaucratic" is the essence of government operations aiming at "national" objectives. A government enterprise can never be "commercialized" no matter how many external features of private enterprise are superimposed on it.
The entrepreneur operates on his own responsibility. If he does not produce at lowest costs of capital and labor what consumers believe they need most urgently, he suffers losses. But losses finally lead to a transfer of his wealth — and thus his power of control over means of production — to more capable hands. In a capitalistic economy, the means of production are always on the way to the most capable manager, that is, to one who is able to use these means most economically to the satisfaction of consumer needs. A public enterprise, however, is managed by men who do not face the consequences of their success or failure.
The same is said to be true of the leading executives of large private enterprises which therefore are run as "bureaucratically" as state and municipal operations. But such arguments ignore the basic difference between public and private enterprises.
In a private, profit-seeking enterprise, every department and division is controlled by bookkeeping and accounting aiming at the same profit objective. Departments and divisions that are unprofitable are reorganized or closed. Workers and executives who fail in their assigned tasks are removed. Accounting in dollars and cents controls every part of the business. Monetary calculation alone shows the way to highest profitability. The owners — that is, the stockholders of a corporation — issue only one order to the manager who transmits it to the employees: earn profits.
The situation is quite different in the bureaus and courts that administer the affairs of the state. Their tasks cannot be measured and calculated in a way market prices are calculated, and the order given to subordinates cannot be so easily defined as that of an entrepreneur to his employees. If the administration is to be uniform and all executive power is not to be delegated to the lowest officials, their actions must be regulated in every detail for every conceivable case. Thus it becomes the duty of every official to follow these instructions. Success and failure are of lesser importance than formal observance of the regulation. This is especially visible in the hiring, treatment, and promotion of personnel, and is called "bureaucratism." It is no evil that springs from some failure or shortcoming of the organization or the incompetence of officials; it is the nature of every enterprise that is not organized for profit.
When state and municipality go beyond the sphere of court and police, bureaucratism becomes a basic problem of social organization. Even a profit-seeking public enterprise could not be unbureaucratic. Attempts have been made to eliminate bureaucratism through profit sharing by managers. But since they could not be expected to bear the eventual losses, they are tempted to become reckless, which then is to be avoided by limiting the manager's authority through directives from higher officials, boards, committees, and "expert" opinions. Thus again, more regulation and bureaucratization are created.
But usually public enterprises are expected to strive for more than profitability. This is why they are owned and operated by government. Deumer, too, demands of the nationalized banking system that it be guided by national rather than private considerations — that it should invest its funds not where the return is highest, but where they serve the national interest.Ibid., p. 184.
We need not analyze other consequences of such credit policies, such as the preservation of uneconomical enterprises. But let us look at their effects on the management of public enterprises. When the national credit service or one of its branches submits an unfavorable income statement, it may plead, "To be sure, from the viewpoint of private interest and profitability we were not very successful. But it must be borne in mind that the loss shown by commercial accounting is offset by public services that are not visible in the accounts. For instance, dollars and cents cannot express our achievements in the preservation of small and medium enterprises, in the improvements of the material conditions of the 'backbone' classes of population."
Under such conditions the profitability of an enterprise loses significance. If public management is to be audited at all, it must be judged with the yardstick of bureaucratism. Management must be regimented, and positions must be filled with individuals who are willing to obey the regulations.
No matter how we may search, it is impossible to find a form of organization that could prevent the strictures of bureaucratism in public enterprises. It won't do to observe that many large corporations have become "bureaucratic" in recent decades. It is a mistake to believe that this is the result of size. Even the biggest enterprise remains immune to the dangers of bureaucratism as long as it aims exclusively at profitability. True, if other considerations are forced on it, it loses the essential characteristic of a capitalistic enterprise. It was the prevailing etatistic and interventionist policies that forced large enterprises to become more and more bureaucratic. They were forced, for instance, to appoint executives with good connections to the authorities, rather than able businessmen, or to embark upon unprofitable operations in order to please influential politicians, political parties, or government itself. They were forced to continue operations they wished to abandon, and merge with companies and plants they did not want.
"No matter how we may search, it is impossible to find a form of organization that could prevent the strictures of bureaucratism in public enterprises."The mixing of politics and business not only is detrimental to politics, as is frequently observed, but even much more so to business. Many large enterprises must give thousands of considerations to political matters, which plants the seeds of bureaucratism. But all this does not justify the proposals to bureaucratize completely and formally all production through the nationalization of credit. Where would the German economy be today if credit had been nationalized as early as 1890, or even 1860? Who can be aware of the developments that will be prevented if it is nationalized today?
- The Danger of Overexpansion and ImmobilizationWhat has been said here applies to every attempt at transferring private enterprises, especially the banking system, into the hands of the state, which in its effects would amount to all-around nationalization. But in addition, it would create credit problems that must not be overlooked.
Deumer seeks to show that the credit monopoly could not be abused for fiscal reasons. But the dangers of credit nationalization do not lie here; they lie with the purchasing power of money.
As is well known, demand deposits subject to checks have the same effect on the purchasing power of a monetary unit as bank notes. Deumer even proposes an issue of "guaranteed certificates" or "clearing house certificates" that are never to be redeemed.Ibid., p. 152 et seq. In short, the national bank will be in the position to inflate.
Public opinion always wants "easy money," that is, low interest rates. But it is the very function of the note-issuing bank to resist such demands, protecting its own solvency and maintaining the parity of its notes toward foreign notes and gold. If the bank should be excused from the redemption of its certificates, it would be free to expand its credits in accordance with the politicians' wishes. It would be too weak to resist the clamor of credit applicants. But the banking system is to be nationalized, in Deumer's words, "to pay heed to the complaints of small industrial enterprises and many commercial firms that they are able to secure the necessary credits only with great difficulties and much sacrifice."Ibid., p. 184.
A few years ago it would have been necessary to elaborate the consequences of credit expansion. There is no need for such an effort today. The relationship between credit expansion and rising goods prices and foreign-exchange rates is well known today. This has been brought out not only by the research of some economists, but also by the American and British experiences and theories with which Germans have become familiar. It would be superfluous to elaborate further on this.
- SummationDeumer's book clearly reveals that étatisme, socialism, and interventionism have run their course. Deumer is unable to support his proposals with anything but the old étatist and Marxian arguments which have been refuted a hundred times. He simply ignores the critique of these arguments. Nor does he consider the problems that arose from recent socialistic experience. He still takes his stand on the ground of an ideology that welcomes every nationalization as progress, even though it has been shaken to its foundations in recent years.
Politics, therefore, will ignore Deumer's book, which may be regrettable from the author's viewpoint because he invested labor, ingenuity, and expertise in his proposals. But in the interest of a healthy recovery of the German economy, it is gratifying.
While the current financial crisis has received much attention, another crisis has led to calls for government intervention. The Maryland blue crab population has dropped sharply in recent years.
The annual catch is now thirty percent of its previous level of 140 million crabs. Some people blame pollution, overharvesting, and development of nesting areas for the decline in the crab population. The Virginia Marine Resources Commission has failed to remedy this situation. Twenty-two regulatory measures (enacted in 1994) have failed to stem the decline in the crab population. New regulations and licensing requirements have been proposed to limit the ability to catch crabs.
Some senators are urging that the crab crisis be declared a federal disaster, so that Chesapeake crabbers can receive $20 million in aid. This is not the first time that there have been calls for subsidies for the Maryland crab industry.
While politicians think in terms of subsidies and production limits as solutions to the crab crisis, economics points to different solutions. The root cause of the crab crisis is that nobody owns the breeding grounds (which of course are water) for crabs or crabs themselves. Fishing areas and swamps are not generally private property, and crabs themselves for the most part roam freely and are not the property of any individuals. Lack of private-property rights leads to particular problems. The tragedy of the commons exists because nobody has an incentive to invest in communal property. In a true fishing commons, anyone can draw fish or crabs, simply by having access (by boat) and the necessary equipment. Private owners of cattle capture the gain from breeding and caring for their livestock, but anyone investing in breeding and maintaining crabs shares any gain with all other (noncontributing) fisherman.
Government regulations and licensing requirements set limits on the ability to harvest crabs, but these limits are arbitrary. Since the crab population is itself commonly owned, there is no price on any market for the crab population as an asset. So government restrictions on crab harvesting are not economically rational. A government-regulated crab industry will therefore not be coordinated with other lines of production. The ability to invest rationally in preserving or breeding crabs requires some estimate of the associated capital costs.
Of course, one could argue that there is no way to establish property rights for schools of crabs. But this is not true. There are many examples where people have established self-governing, self-organized associations to solve the type of problems that plague the Maryland crab industry. People all over the world have established "common pools resource" (CPR) associations that regulate access to water-related resources that are difficult to define in terms of normal property rights. The specific terms of CPRs vary according to local circumstances and problems, but the general idea behind a CPR is that the people who are directly involved in using resources where property boundaries are hard to define construct a set of rules for exploiting the resource in question. For example, fishermen in Alanya, Turkey established a CPR organization that defined rights to fishing areas. Central officials in government could not have crafted such rules, as only the local people understood the economic value of fishing areas (Ostrom, p. 20).
While CPR organizations do not produce property rights in exactly the same way as we are accustomed to, such arrangements do function very much like normal property-rights systems. CPR systems also have a good track record in comparison to overt government regulation. CPRs are in fact quasi-governmental arrangements that emerge to deal with tragedies of the commons.
Those who have publicized their concerns about the Maryland crab crisis have turned to governmental regulation and subsidies too quickly. CPR organizations can emerge out of individual trading and negotiating, and such arrangements are more likely to lead to economically efficient results. In fact, the government has already tried and failed to alleviate the Maryland crab crisis. Perhaps we should let capitalism have a crack at this problem.
SourcesOstrom, Elinor. Governing the Commons."Solution to Crab Crisis Requires Immediate and Fair Action, Long-term Commitment," Chesapeake Bay Foundation. September 25, 2008."Disaster status urged for crabs," TheBaltimoreSun.com. June 26, 2008."Another Crisis for the Bay," WashingtonPost.com. September 25, 2008.
Walter Block met Rothbard in 1966. Here, Block tells a joke making the point that antitrust law is dead from the neck up.
There is nothing wrong with a monopoly price. Whatever price the free market establishes will be the best price. There exists an unfortunate illusion about monopoly price. Labor unions, by exacting higher wage rates, do achieve identifiable restrictionist prices for their members, but only at the expense of lowering the wage rates of of all other workers in the economy.
Patents are grants of exclusive monopoly privilege by the State and are invasive of property rights on the market. A copyright is a logical attribute of property right on the free market.
An Alice J. Lillie Seminar. This lecture covers pp. 629-753 in the Scholar's Edition of Rothbard's Man, Economy, and State.
The movement towards socialized medicine is strong but widely misunderstood. Many ordinary people see health care as a right and complain that it is too expensive. Some economists also see problems with the existing health care system and propose public-sector alternatives. One serious problem with those who want socialized medicine is that they fail to see the problems that already exist with governmental involvement in health care, writes D.W. MacKenzie.
This audio Mises Daily is narrated by Floy Lilley.
Professor Dominick T. Armentano and Congressman Ron Paul discuss anti-trust and monopoly. Recorded 13 July 1983. Hosted by Roger Ream.
Recorded at the Mises Circle in Houston: "Great Economic Myths," Saturday, 26 January 2008; Sponsored by Jeremy S. Davis. [54:13]
Delivered at the Mises Institute's 25th Anniversary Celebration, 13 October 2007, in New York City.
At the time I write this, the United Autoworkers Union just ended a seven-hour strike against Chrysler — thus ending the walking off of jobs by workers and the restriction by threat of violence of those who would have tried to take their place.
Those are, after all, the two characteristics of a strike. You don't work, and you physically threaten those who want to. Unions are, as Rothbard noted, the only organization in society besides the government with the legal right to use coercive force on adults. Unions in the United States were given this right with the passage of the Norris-LaGuardia Act of 1932.
There was a time when such strikes would cause serious harm to companies. In the 1950s, the autoworkers faced a less competitive labor market, so strikes and their threat were things to be feared. Output could fall to zero, and the myriad of firms that support the automotive industry (unionized or not) would face shutdowns. Meanwhile, friction existed between employers and employees who otherwise would have strong incentives to compromise and cooperate, as is the norm in non-unionized sectors of the labor force.
But strikes were easier to pull off in those days. Public sentiment was more sympathetic to the union workers, and the percentage of union labor in the workforce was much higher. It was likely that you or many of your friends depended on union jobs to provide for families. Also, postwar America was largely immune from international competition for manufactured goods. This meant that if workers struck, they could often damage their firms without threatening them with bankruptcy.
Furthermore, union labor back then had skills that restricted competition from other workers. Given the tools and other forms of capital that existed at the time, workers making Ford Fairlanes required skill sets that simply aren't necessary for today's workers building Ford Explorers with modern robotic technologies. The increased skill requirements on their own would give workers bargaining power over their firms, notwithstanding the many legal protections unionized workers received.
Taken altogether, union labor enjoyed a heyday at this time. But its success incurred two significant costs that are ignored by union labor's partisans.
The first concerns the many unseen costs of union labor. On the surface, we see workers earning higher salaries through labor contracts arrived at collectively. But beneath it, there are workers who cannot find work because they either cannot join the union or because firms can afford less labor when they are restricted to union labor. At the same time, racism abounds because it can no longer be thwarted by market forces. Workers not favored by unions (or pro-union legislation) find it difficult to learn skills they would have gained on the job. By keeping such workers unskilled, organized labor protects existing workers by restricting possible entry into skilled labor markets.
The second cost is the redistribution of wealth that occurs when unions are strong. In the market economy, the benefits of productive activity are shared among three groups: the owners of capital, the laborers, and the consumers, with the benefits of the last group greatly exceeding those of the previous two. Unions, when successful, pervert this relationship by acquiring benefits from the owners of capital and the consumers. As a result, capital owners have fewer resources to invest for the satisfaction of future consumer needs, and industry in general has less capacity for innovation. Consumers suffer as well, when their consumption choices are reduced and when they pay higher prices reflecting increased scarcity.
Today's marketplace, in contrast, is more competitive, both in the labor and the goods markets, and such competition is the bane of union power. Competitive markets mean that massive strikes can now prove fatal to employers and employees, which explains why the UAW Chrysler strike was so short-lived. With competition rendering strikes ineffective, the strike option can only be effective for teachers, government employees, and other professions that function in less competitive environments.
What's more, technology today requires workers with strong work ethics (and not necessarily hard-to-acquire skills), something that is not in short supply and means that automobile plants no longer need to congregate in specific geographic locations near labor pools and agglomerations. Indeed, an increased competitive atmosphere causes automobile firms that do not eschew union labor to pay a significant market price.
All this happens because in the end, economic forces reflect the constant consumer desire for more products and lower prices. Protected markets may circumvent these desires in the short run, but in the long run they trump even the most successful labor cartels. We see this happening when another Detroit factory is shuttered while new ones open in places foreign to Detroit culture, whether in southern Alabama or southern China.
This illustrates the risk that the UAW invited by striking against Chrysler. The union may be emboldened by the deal it received last month from General Motors, including stock ownership that could result in union control of the company. But Chrysler, in contrast, is no longer publicly traded and may be less able to offer benefits to the union in exchange for the union's assumption of legacy costs.
The extent those costs harm the domestic auto industry illustrates what happens to industries in which worker benefits exceed worker productivity. No market participant consistently gambles with economic law and wins, and the UAW has been gambling for a long time.
Book link: Antitrust: The Case for Repeal
IntroductionMonopoly TheoryCartels and Predatory PracticesGovernment and MonopolyAntitrust: Some Classic Cases Standard Oil of New Jersey (1911)American Tobacco (1911)American Can (1949) and United Shoe (1954)Microsoft (2001)Conclusions Author
The United States has had antitrust legislation at the federal and state level for more than 100 years. (The Sherman Antitrust Act [1890] and the Federal Trade Commission Act [1914] are the basic federal statutes.) The laws make illegal "every contract, combination … or conspiracy in restraint of trade" and any attempt to "monopolize" through merger or acquisition; in addition, "unfair … and deceptive practices" are also forbidden. Given this broad regulatory mandate, antitrust law is arguably this nation's oldest ad hoc "industrial policy." But whether any of this regulation has ever made economic sense is entirely debatable.
Two recent legal developments illustrate the ongoing ambiguity of antitrust policy. The first involves the Supreme Court decision (Leegin Creative Leather Products v. PSKS, Inc., 2007) to allow manufacturers to set and enforce minimum prices, a practice knows as resale price maintenance. This decision breaks with decades of precedent and has been hailed generally as a step toward a more rational antitrust policy.
The second development is the attempt by the Federal Trade Commission to block Whole Foods, Inc. from acquiring the Wild Oats company. But unlike the Supreme Court decision above, the FTC's action has been widely ridiculed as an exercise in pure regulatory nonsense. Indeed, a district court judge recently denied a preliminary injunction against the merger.
Actually, both public reactions miss the larger perspective. The Supreme Court did not really legitimize resale price maintenance; it simply ruled that the practice is no longer illegal per se but should be judged, instead, by a "rule of reason." Firms that make such agreements are still subject to antitrust scrutiny and unreasonable attempt to restraint trade will unleash the trustbusters. In short, antitrust continues to regulate so-called vertical price agreements.
And certainly the Federal Trade Commission's prosecution of Whole Foods is nonsense but it is hardly new or even novel nonsense. The FTC has a long history of litigating silly cases (Ready to Eat Cereals, 1981; Staples, 1997) based on illogical theories of monopoly power and totally irrational definitions of the "relevant market."
Indeed, the FTC's overall historical record of enforcement (especially in price-discrimination cases) is staggeringly anticonsumer. Yet despite the dismal enforcement experience, the antitrust establishment generally still supports vigorous enforcement of the antitrust laws.
In antitrust, the more things change the more they seem to stay the same.
MONOPOLY THEORY The economic logic for having any antitrust regulation is fairly straightforward. Economists have developed theories that imply that business firms could find it profitable to eliminate competition and "monopolize in restraint of trade" and, thus, misallocate economic resources. In plain English, antitrust exists to prevent firms from restricting market outputs and raising prices to consumers or retarding the pace of technological change. This is the so-called "public interest" rationale for antitrust.
But are these theories correct? Is there really a free-market monopoly problem? Assuming that we can even define what we mean by a "free-market monopoly," it would certainly follow that firms in a free market would have the freedom to attempt to monopolize (control the entire supply of) some raw material, product or service. But whether they would be able to restrict market output for any reasonable period of time is debatable.
First, such attempts (mergers, buying up available supplies of raw materials) can be prohibitively expensive, even unprofitable, and therefore unlikely.
Second, any other existing firm in the economy (or any new firm with access to capital) would be perfectly free to compete with any would-be monopolist, free to innovate, free to improve product, free to increase its own output, and consumers would be free to take advantage of that competition.
Thus, any firm that attempted to monopolize and restrict market output could lose sales and profits to any other business organization that found it profitable to cater to consumers and compete. Any alleged free-market monopoly supplier that attempted to "restrain trade" would create profitable opportunities for competitors and potential competitors, and these profitable opportunities would exist as long as markets are legally open to new suppliers and consumers are legally free to support alternative suppliers. It is not obvious, therefore, that attempting to monopolize actually can restrain trade or misallocate economic resources.
Following the approach above, a free-market monopoly supplier is not theoretically impossible. For example, if a firm were substantially more efficient than all of its competitors and potential competitors, that is, if it were able to produce some product or service at the lowest cost and charge the lowest price to consumers, it could become (temporarily, perhaps) the only supplier in some well-defined market. The firm's "efficiency" would create a "barrier of entry" of sorts, totally benign of course, since the only competitors "excluded" would be relatively inefficient suppliers. Alternatively, consumers could always "monopolize" all of their choices for a specific product or service on only one company, making that company a momentary monopoly supplier.
But it is difficult to understand what is economically problematic with any of this. Clearly this circumstance is not the devilish monopoly problem envisioned by critics of the free market since low costs, expanded outputs, lower prices, and free consumer choice are the beneficial attributes of an open market process; they clearly enhance, not harm, any reasonable definition of consumer welfare. So a free-market "monopoly" supplier is theoretically possible but not necessarily harmful and would not rationalize any antitrust regulation.
CARTELS AND PREDATORY PRACTICES Free-market cartels are possible theoretically but they would be inherently unstable. Cartels, unlike a one-firm supplier, would require inter-firm cooperation and coordination in order to achieve any market-output restraint. But how is market output for each cartel member to be reduced? How are the reductions to be monitored? Won't the firms attempt to cheat and won't the cheating lead to larger outputs and lower prices? Indeed, won't the higher cartel prices encourage new supply from outside the cartel, and won't that lead to lower prices? In reality, free-market cartels (absent governmental support) have proved notoriously short lived and unsuccessful, especially when courts refuse to enforce cartel price-coordination agreements.
Predatory practices are still another monopoly chimera. It is usually not rational for a dominant firm to attempt to eliminate all of its competitors through severe price-cutting since this practice is inherently expensive and uncertain, especially if the market is easily open to new supply. Even if a dominant firm were to succeed temporarily and eliminate some of its rivals, competitors would likely return when and if prices were increased to profitable levels. How, then, are dominant firms to profit from predation and how are consumers to be injured by price reductions?
Lower prices, for whatever reason and for whatever length of time, are extremely proconsumer and are never to be regretted. Would critics of predation rather have dominant firms fix prices and not ever reduce them, or not respond to lower costs or the lower prices of rivals?
Consumers, of course, can always decide whether they prefer the lower prices of the dominant firm or not. If they prefer lower prices, then they buy more from the dominant firm; if they don't, then they continue to support the higher-priced rivals of the dominant firm. Either way, there is nothing whatever to be regretted about lower prices either initiated by (or matched by or undercut by) dominant firms. Again, no antitrust regulation is justified.
GOVERNMENT AND MONOPOLY If we drop the strict free-market assumption, however, a real monopoly problem is easy to visualize. Government could license only one supplier (e.g., a taxi cab company) in some city market and restrict entry to all other suppliers; the market would then be monopolized by law. Or government could establish a legal monopoly in telecommunications, electricity generation, telephone service, first-class mail delivery, and in many other areas; indeed, government in the United States has historically done precisely this. And, curiously, these monopolies have always been legally immune from antitrust law!
Clearly this is a monopoly problem since consumers, regardless of their preferences, would then legally be tied to only one supplier. In addition, would-be entrepreneurs with lower costs or with new products would legally be prohibited from offering those benefits to willing buyers.
And with competition prohibited by law, the monopoly supplier would have few (if any) incentives to innovate, to expand output and to lower prices.
But this monopoly problem ought never to be associated with "free markets" since its explicit source is the power of government to prohibit new supply. Removing all legal barriers to entry and competition (deregulation, correctly understood) would end this monopoly problem without antitrust intervention.
ANTITRUST: SOME CLASSIC CASES If firms in free markets can really monopolize in restraint of trade, the empirical evidence should reside in the many classic antitrust cases brought over the last 100 years. Yet an examination of some of the most famous of these classic antitrust cases reveals that the firms indicted and (mostly) convicted were generally increasing market output, lowering market prices, and innovating.
Standard Oil of New Jersey (1911) One of the most famous (and misunderstood) antitrust cases in history is US v. Standard Oil of New Jersey (1911).
The popular explanation of this case is that Standard Oil monopolized the oil industry, destroyed rivals through the use of predatory price-cutting, raised prices to consumers, and was punished by the Supreme Court for these proven transgressions. Nice story but totally false.
First, Standard never even monopolized petroleum refining, let alone the entire oil industry (production, transportation, refining, distribution) which would have been an impossibility. Even in domestic refining, Standard's share of the market declined for decades prior to the antitrust case (64% in 1907) and there were at least 137 competitors (firms like Shell, Gulf, Texaco) in oil refining in 1911.
Second, although predatory practices were alleged by the government at trial, Standard offered rebuttal on all counts. Neither the trial court nor the Supreme Court ever made any specific finding of guilt on the conflicting charges of predatory practices.
Third, petroleum market outputs increased and prices declined for decades during the alleged period of "monopolization" by Standard Oil. For example, prices for kerosene (the industry's major product) were 30 cents a gallon in 1869 and fell to about 6 cents a gallon at the time of the antitrust trial.
Finally, the Supreme Court broke up the Standard Oil holding company not because of any demonstrable harm to consumers (there was none) but because it discerned some vague "intent" to monopolize through Standard's many mergers, an "intent" that just as clearly never succeeded in producing any monopoly. Yet generations of economic and legal commentators have been misled about monopoly and the alleged efficacy of antitrust policy because of the "facts everybody knows" concerning the Standard Oil antitrust case.
American Tobacco (1911) The antitrust case against the American Tobacco Company (US v. American Tobacco, 1911) is similar in many respects to Standard Oil. American Tobacco put together a large diversified tobacco company through merger with smaller specialty companies. Yet they were never able to monopolize the tobacco industry as the government alleged, nor were they able to raise prices of tobacco products. Outputs increased and prices fell for decades prior to the antitrust suit. Many thousands of cigarette, smoking tobacco, snuff, and cigar companies competed against the American companies and ease of entry and availability of raw materials (leaf tobacco obtained at auction) made vigorous competition inevitable. The American Tobacco holding company was broken up by the Supreme Court because of some vague intent to monopolize (again, as evidenced through mergers) but, like Standard Oil, there was a total absence of demonstrable (economic) injury to consumers of tobacco products.
Alcoa (1945) US v. Aluminum Company of America (1945) is one of the most egregious anticonsumer antitrust cases on record. Modern trustbusters are forever offering apologies for Alcoa. And with good reason. The government pursued Alcoa in court for 13 years (between 1937 and 1950). Yet after a long and laborious trial that ended in 1939, Judge Caffey dismissed almost 150 separate government charges against the defendant Alcoa, including allegations that they monopolized waterpower sites (for producing electricity) and monopolized the raw material bauxite, from which aluminum ingot is made. Caffey also determined that Alcoa innovated rapidly, expanded aluminum refining capacity and outputs continuously, and had lowered aluminum ingot prices for 50 years, while taking a very modest return on its investment.
Yet an appellate court in 1945 (acting in lieu of the Supreme Court) decided that expanding outputs and lowering prices illegally excluded rivals from the opportunity to compete and thereby violated antitrust law. (Translation: if Alcoa had been less efficient in serving its customers there would have been more "competition" — read competitors — less exclusion, and no antitrust violation.) The Alcoa appellate decision confirmed that antitrust was hell bound: economic efficiency now counted as illegally exclusionary and ultimately a violation of law.
American Can (1949) and United Shoe (1954) This trend was confirmed in US v. American Can (1949) and in US v. United Shoe Machinery Corporation (1953). In American Can, the trial judge determined that American Can held its dominant market position because it "coerced" its customers into signing long-term leases. How, in a free market, did it do that? Why, by offering generous and attractive terms to its customers such as generous price discounts for large orders of cans. So, as a part of his final decision in the case, the judge ordered American to raise prices to its can customers so that there could be more competition with less efficient can producers and can-closing machinery makers. Consumers of cans ultimately paid for this contrived increase in "competition."
In United Shoe, United had manufactured shoe machinery and leased its many machines to hundreds of domestic and international shoemakers. Its market share was always high (85%) because (as the trial court found) its machines were technologically superior to those of competitors, its leasing rates were reasonable, and it repaired machines promptly and at no extra charge to the customer. As a consequence of this superior economic performance, customers were extremely loyal and tended to renew leases when old ones expired; less efficient rivals had great difficulty convincing shoe companies to switch their business since the shoe companies were generally satisfied with United's terms. Several shoemakers testified for the defendant United Shoe at the trial.
Yet the trial judge spied the illegality inherent in superior economic performance provided over many decades: smaller rivals were thereby "excluded" from competing and that fact violated the antitrust laws. The trial court then saddled United with restrictions that, it reasoned, would destroy its unique economic advantages and put it back in the same (less efficient) class as its competitors. But when the legal sanctions failed to really hamper United Shoe's efficiency, the Department of Justice appealed the lower court decision to the US Supreme Court (1968), which divested (and eventually wrecked) the company.
The wrong-headed theory being actualized in all of these cases is the notion that free consumer choice and business efficiency somehow restrain trade and violate the antitrust law, the exact opposite of the truth. Efficient firms such as Alcoa and United Shoe innovated new products and production techniques and lowered prices; they always did more business (while less efficient rivals did less) in order to keep and even expand their dominant market position. But this is precisely how free markets are supposed to work, such that scarce resources tend to maximize consumer value. Yet consistently throughout business history, antitrust regulation has been employed (by both government and business rivals) as a legal weapon to bludgeon aggressively competitive firms that innovate and lower costs and prices.
Microsoft (2001) Despite so-called regulatory reforms, this pernicious trend in antitrust enforcement has continued. The best and most recent example is, of course, US v. Microsoft (2001). The heart of the antitrust case brought by the Department of Justice and 19 state attorney generals in 1998 was that Microsoft's decision to integrated its Web browser, Explorer, into its Windows 98 operating software system illegally excluded competitive browsers, such as rival Netscape's Navigator, and evidenced an intent to "monopolize" in violation of the Sherman Act.
Since Microsoft allegedly held a "monopoly" in operating systems and employed its monopoly power to exclude competitors unfairly, trial court judge Thomas Penfield Jackson, having agreed with the bulk of the government's argument, found the company guilty of illegal monopolization and ordered the firm regulated and divested. On appeal, however, important parts of this decision, in particular the divestiture order, were overturned and the lower court judge rebuked.
The government's charges were always baseless. The plaintiffs first argued that Microsoft held a monopoly in operating systems (a near 90% market share) and that they had leveraged that market power into the browser market to crush Netscape. But the government's market share numbers were grossly inaccurate. To arrive at a so-called monopoly market share, the trial court accepted a definition of the relevant market ("single user desktop PCs that use an Intel-compatible chip") that conveniently excluded all of the computers and networking software made by Microsoft's major rivals such as Apple, Sun, Novell, and a host of other companies. In addition, counting only licensed systems allowed Judge Jackson to exclude arbitrarily all of the operating systems sold at retail, those downloaded from the Web, and all "naked" computers shipped without any operating system installed at all. These factual errors narrowed severely the actual competitive market and simply turned Microsoft into the "monopolist" the government required for its antitrust violation. If market share is meaningful at all in antitrust analysis (extremely doubtful), Microsoft's actual share of any realistic relevant market was less than 70% and not enough for any monopoly designation.
But if Microsoft had no actual monopoly, then its battle with Netscape over the browser market takes on a totally different perspective. When Microsoft first integrated its browser into its operating system software, it was Netscape that held the bulk of the browser sales. It was Netscape that held the "dominant" market position in browsers and it was Microsoft that was attempting to better compete by improving the terms of exchange for PC consumers. Microsoft proceeded to fully integrate its browser and effectively reduce its price to zero and consumers responded favorably; Microsoft's browser did more business and Netscape's browser did less. Nor was the Netscape browser ever unfairly "foreclosed" or "excluded" from the market; PC users downloaded millions of copies of Netscape's browser during the period of alleged exclusion by Microsoft. Thus, the entire government's case was an attempt to regulate innovation and consumer choice at the behest of ambitious attorneys and disgruntled competitors. That Microsoft eventually emerged victorious in this particular case at the appellate level (after a decade of litigation some of which involved the FTC) does not mitigate the absolute folly of this persecution.
CONCLUSIONS Antitrust theory and history are both a myth and a hoax. The laws were never intended to help consumers (Robert Bork's protestations to the contrary) and their long historical track record is that they have not helped consumers. They have, instead, punished innovative and efficient business organizations while protecting less efficient competitors and every state-sanctioned monopoly. They have tended to make consumers poorer and the overall economy less efficient and they deserve to be repealed, not reformed. That the antitrust paradigm still can find support among a majority of economists, lawyers, and the public is a testament to intellectual laziness, to the power of special interest, and to decades of successful myth making.
Some great books are the product of a lifetime of research, reflection, and labored discipline. But other classics are written in a white heat during the moment of discovery, with prose that shines forth like the sun pouring into the window of a time when a new understanding brings in the world into focus for the first time.
The Market for Liberty is that second type of classic, and what a treasure it is. Written by two authors—Morris and Linda Tannehill—just following a period of intense study of the writings of both Ayn Rand and Murray Rothbard, it has the pace, energy, and rigor you would expect from an evening's discussion with either of these two giants.
More than that, these authors put pen to paper at precisely the right time in their intellectual development, that period rhapsodic freshness when a great truth had been revealed, and they had to share it with the world. Clearly, the authors fell in love with liberty and the free market, and wrote an engaging, book-length sonnet to these ideas.
This book is very radical in the true sense of that term: it gets to the root of the problem of government and provides a rethinking of the whole organization of society. They start at the beginning with the idea of the individual and his rights, work their way through exchange and the market, expose government as the great enemy of mankind, and then—and here is the great surprise—they offer a dramatic expansion of market logic into areas of security and defense provision.
Their discussion of this controversial topic is integrated into their libertarian theoretical apparatus. It deals with private arbitration agencies in managing with disputes and criminality, the role of insurers in providing profitable incentives for security, and private agencies in their capacity as protection services. It is for this reason that Hans Hoppe calls this book an "outstanding yet much neglected analysis of the operation of competing security producers."
The section on war and the state is particularly poignant. "The more government 'defends' its citizens, the more it provokes tensions and wars, as unnecessary armies wallow carelessly about in distant lands and government functionaries, from the highest to the lowest, throw their weight around in endless, provocating power grabs. The war machine established by government is dangerous to both foreigners and its own citizens, and this machine can operate indefinitely without any effective check other than the attack of a foreign nation."
Also overlooked is the Tannehill's challenging plan for desocialization or transition to a full free society. They argue against privatization as it is usually understood, on grounds that government is not the owner of public property and so it cannot sell it. Public property should be seized or homesteaded by the workers or by people with the strongest interest it in, and then put on the open market. If that sounds crazy or chaotic, you might change your mind after reading their case.
What's remarkable is how this book actually predates Rothbard's For A New Liberty. In fact, Rothbard chose it as one of the top 20 libertarian books of all time, to be printed in his series for Arno Press. It had a huge impact when it came out in 1970, especially among the generation that was debating the question of whether the state needed to provide "night watchman" functions or be eliminated all together.
The authors were drawn to Rand's ethical outlook but Rothbard's economics and politics. But, clearly, they were surrounded by classics of all ages when they wrote. So this fiery little treatise connected with the burgeoning movement at the time, providing just the type of integration that many were seeking.
Since the 1980s, however, the book has languished in obscurity. If the authors are still around, no one seems to have heard from them, a fact which seems only to add to the mystery of this never-to-be-repeated book.
Who should read this book? It makes a bracing read for a person who has never been introduced to these ideas. No reader could be left unchanged by it. For the person who has an appreciation of free enterprise, this book completes the picture, pushing the limits of market logic as far as it can go. For those who have been drawn to the argument concerning insurance agencies in the free market, this explanation is still the most extended in print.
One of the greatest tragedies of intellectual property law is how it generates intellectual confusion among successful businesspeople. Many are under the impression, even when it is not true, that they owe their wealth to copyrights, trademarks, and patents and not necessarily to their business savvy.
For this reason, they defend intellectual property as if it were the very lifeblood of their business operations. They fail to give primary credit where it is due: to their own ingenuity, willingness to take a risk, and their market-based activities generally. This is often an empirically incorrect judgment on their part, and it carries with it the tragedy of crediting the state for the accomplishments that are actually due to their own entrepreneurial activities.
Certainly there is no shortage of narratives ready to back up this misimpression. Countless business histories of the US observe how profits come in the wake of patents and thereby assume a causal relationship. Under this assumption, the history of American enterprise is less a story of heroic risk and reward and more a story of the decisions of patent clerks and copyright attorneys.
As a result, many people think that the reason the United States grew so quickly in the 19th century was due to its intellectual property protection, and assume that protecting ideas is no different from protecting real property (which, in fact, it is completely different).
A clue to the copyright fallacy should be obvious from wandering through a typical bookstore chain. You will see racks and racks of classic books, presented with beautiful covers, fancy bindings, and in a variety of sizes and shapes. The texts therein are "public domain," which isn't a legal category as such: it only means the absence of copyright protection.
But they sell. They sell well. And no, the authors are not misidentified on them. The Bronte sisters are still the authors of Jane Eyre and Wuthering Heights. Victor Hugo still wrote Les Miserables. Mark Twain wrote Tom Sawyer. The much-predicted disaster of an anti-IP world is nowhere in evidence: there are still profits, gains from trade, and credit is given where credit is due.
Why is this? Quite simply, the bookstore has gone to the trouble of bringing the book to market. It paid the producer for the book and made an entrepreneurial decision to take a risk that people will buy it. Sure, anyone could have done it, but the fact is that not everyone has: the company made the good available in a manner that suits consumer tastes. In other words, with enterprise comes success. It is no more or less simple than that. IP has nothing to do with it.
So it would be in a completely free market, which is to say, a world without IP. But sometimes businessmen themselves get confused.
Let's consider the case of an ice-cream entrepreneur with a hypothetical brand name Georgia Cream. The company enjoys some degree of success and then decides to trademark its brand name, meaning that it now enjoys the monopoly on the use of the name Georgia Cream. And let's say that the company creates a flavor called Peach Pizzazz, which is a great success, so it copyrights the recipe such that no one can publish it without the company's permission. It then realizes that the special quality of its ice cream is due to its mixing technique, so it applies for and achieves a patent on that.
So this company now has three monopolies all sewn up. Is that enough to ensure success? Of course not. It must do good business, meaning that it must economize, innovate, distribute, and advertise. The company does all these things and then goes from success to success.
If you suggest to the founder and CEO that we should get rid of intellectual property law, you will elicit a sense of panic. "That would completely destroy my business!" How so? "Anyone could just come along and claim to be Georgia Cream, steal our recipe for Peach Pizzazz, duplicate our mixing technique, and then we'd be sunk."
Do you see what is happening here? A small change that would threaten the very life of the business is indirectly being credited, by implication, for being the very life of the business. If that were true, then it would not be business prowess that made this company, but government privilege, and that is emphatically not true in this case. The repeal of intellectual property legislation would do nothing to remove from the business its capacity to create, innovate, advertise, market, and distribute.
The repeal of IP might create for it an additional cost of doing business, namely efforts to ensure that consumers are aware of the difference between the genuine product and impersonators. This is a cost of business that every enterprise has to bear. Patents and trademarks have done nothing to keep Gucci and Prada and Rolex impersonators at bay. But neither have the impersonators killed the main business. If anything, they might have helped, since imitation is the best form of flattery.
In any case, the costs associated with keeping an eye on imitators exists whether IP is legally protected or not. To be sure, some businesses owe their existing profits to patents, which they then use to beat their competitors over the head. But there are costs involved in this process as well, such as millions in legal fees.
Big companies spend millions building up warchests of patents that they use to fight off or forestall lawsuits from other companies, then agree to back down and cross-license to each other after spending millions on attorneys. And no surprise, just as with minimum wage or pro-union legislation, the IP laws don't really hurt the larger companies but rather the smaller businesses, who can't afford million-dollar patent suit defenses.
The Internet age has taught that it is ultimately impossible to enforce IP. It is akin to the attempt to ban alcohol or tobacco. It can't work. It only succeeds in creating criminality where none really need exist. By granting exclusive rights to the first firm to jump through the hoops, it ends up harming rather than promoting competition.
But some may object that protecting IP is no different from protecting regular property. That is not so. Real property is scarce. The subjects of IP are not scarce, as Stephan Kinsella explains. Images, ideas, sounds, arrangements of letters on a page: these can be reproduced infinitely. For that reason, they can't be considered to be owned.
Merchants are free to attempt to create artificial scarcity, and that is what happens when a company keeps it codes private or photographers put watermarks on their images online. Proprietary and "open-source" products can live and prosper side-by-side, as we learn from any drug store that offers both branded and generic goods inches apart on the shelves.
But what you are not permitted to do in a free market is use violence in the attempt to create an artificial scarcity, which is all that IP legislation really does. Benjamin Tucker said in the 19th century that if you want your invention to yourself, the only way is to keep it off the market. That remains true today.
So consider a world without trademark, copyright, or patents. It would still be a world with innovation — perhaps far more of it. And yes, there would still be profits due to those who are entrepreneurial. Perhaps there would be a bit less profit for litigators and IP lawyers — but is this a bad thing?
See Stephan Kinsella's "Against Intellectual Property," Journal of Libertarian Studies (Vol. 15 Num. 2), available in PDF.
Competition can mean rivalry or freedom. All firms must serve the preferences of consumers in order to exist. Monopoly has historically been an artificial privilege granted by the state.
Monopolies do not last for long in free markets unless maintained by government interventions. Antitrust policies were generally not demanded by consumers, but created by jealous competitors. Antitrust laws are insensible and wasteful.
The eighth in a series of ten lectures, from Fundamentals of Economic Analysis: A Causal-Realist Approach.
Download the MP4 video.
I have something that I have to get off my chest. Please be kind as it's always tough to admit ones indiscretions in a public forum. OK, well here goes, and forgive me: I have been skating with the enemy. Yes, indeed, I have been associating with the number one enemy of the free market, the dreaded monopolist.[1]
Please let me explain. Until last month, there were two owners of public ice skating facilities in Central Ohio. There was the small outfit that operated a marginal rink, and a ravenous organization that managed the other seven. Here is where my indiscretion occurred; my son and I skate for the club run by the ravenous ice shark — a robber baron hidden beneath a friendly logo.
Now, everything used to be just fine. There were two entrepreneurs operating ice rinks, and my son and I simply chose the one that provided the opportunity to speedskate. We stated our preference for ice sports and slept soundly knowing that there was an active skating market in Central Ohio.
Then it happened. In order to capture the local market for ice time, and to drain ice lovers of their precious dollars, the robber baron bought his competitors' rink. This heroic rink had fought the competition of the monopolist for a number of years, but finally succumbed to the unfair practices of my sponsor.
You see the evil ice baron created a market that slowly drained the lifeblood from our tragic heroes. What with heated areas, clean restrooms and lockers, pro shop, and a stocked snack bar, there was no way for our heroes — the small outfit — to compete.
Of course, the baron was obviously offering such services to the consumers of ice time in order to capture the local market. We all know his evil intent: once all local rinks are under the baron's control, he will inevitably reduce offerings and increase ice fees. The baron is pure evil.
The baron will do whatever he can to harm consumers. He will engage other suppliers in heartless competition so that he can monopolize the market in the end. The baron's sole goal is to make as much money as fast as he can. He will reduce supply, increase prices, and sit back and watch profits shoot through the roof.
That is the standard view of competition in the free market. A view that keeps the feds and state attorneys general in hot pursuit, eager to prosecute and bring justice to an unjust system.
However, that view is simply untrue. Whether a sole supplier, or one of many similar suppliers, the entrepreneur — the baron in this case — actually satisfies the greater good: a public service that government claims only it can perform. Let's use the ice market of Central Ohio as the example.
Ice sports are relatively new to this part of Ohio; they are marginal sports at best. Anyone investing in skating facilities is taking a great risk as the market could collapse overnight, leaving the entrepreneur with big box refrigerators and years' worth of debt.
To enter a market such as this, the entrepreneur has to be very careful not to destroy burgeoning ice sports. After talking to the baron's lieutenants, it becomes obvious that they understand their position relative to the market for their product, and this is the reason that there is a speedskating club in Central Ohio.
As the assistant general manager notes, evening ice time is a very scarce commodity. There are youth leagues that have some money to spend, and then there are the adult leagues that are loaded with cash. And, these adults love hockey so much that they are willing to pay top dollar in order to buy any available after-work ice time. They can simply outbid the youth leagues, not to mention the marginal sports such as speedskating, curling, figure skating, etc.
Yet, the assistant general manager does not just go with the adults and the profit. He recognizes that his company's large, long-term investment relies on a farm system of sorts; a system that produces a continual supply of wealthy, adult hockey players. He wants to see ice sports grow, for the profits of course. However, this desire for profits ends up serving the greater good.
Figure skating has a strong base, but why would anyone want to support and grow speedskating and curling? Simple: To grow the market for ice sports in general so that long-term investments in ice facilities lead to long-term profits. To that end, the baron provides marginal sports with a portion of the scarce, and expensive, ice time at a reasonable price.
To think, it didn't take an elected body, their appointed committees, and coerced tax dollars to provide a system where all ice consumers benefits. Profit-seeking individuals are able to address the needs of active participants; in a localized monopoly nonetheless.
OK, but what about the unfair competition between the heroic rink owners and the evil baron? The owners of the marginal rink could not meet the demands of the consumer. In addition, I suspect, they were not very adept at running such a business. Therefore, they went under. Since the baron fears anything that could be perceived as a negative reflection on ice sports, he bought the failed facility and began making significant investments in order to revamp it.[2]
The baron was not looking to reduce the available supply of ice time; he was looking to keep it at its then-current level, and potentially increase it in the near term. The baron could have allowed the rink to close and then raised prices on the remaining rinks due to an increased demand on a reduced number of local rinks. Nevertheless, that is not his operating model. He wants the market to grow. As he sees it, anything that grows the market is good for him in the end. Good for the consumers of ice time too.
The other supposed supplier of the general good is government. While the free market has been able to address the needs of the consumers of ice time, a government solution would have harmed local residents, and ice consumers and their chosen sports. All area residents would be taxed for the benefit of the few who enjoy the sound of sharp metal slicing through ice, and we — the lovers of ice — would suffer due to the whims of the government bozos who know nothing about, nor even care about, sports on ice. The tax-funded bozos would simply be doling out ice time to those who will support them in their next election campaign, not a pleasant situation for anyone other than the elected elite, their appointed minions, and benefit-eager supporters.
Wow, after this mea culpa and some reflection, I am now very comfortable with my association with the market monopolist. While the individual looking for my spending money is there to serve, the entity draining my wallet through coerced taxation simply wants my money. Go with the robber baron over the elected official every time.
Notes
[1] Of course, there can be no real monopolies absent government intervention.
[2] "Chiller's Move Solidifies Place in Market," The Columbus Dispatch, March 31, 2007
"Bankers' hours" is an old phrase that actually reflects monopolistic privilege. The 10AM to 3PM that banks formerly were open to serve customers was made possible by government regulation and the consequent lack of competition to force bankers to be more available when customers needed them. With modest deregulation (and the electronic bookkeeping that deregulation encouraged) banks today are open a little longer than the former hours and some are even open on Saturdays.
Doctors, dentists, lawyers, and professors, however — a distinguished group that enjoy government-granted privileges in the form of licensing and other regulatory protections — still do not usually work weekends. Free-market service firms must be open and available when their customers need them. Why should medical or educational services only be available Monday through Friday, 8AM to 5PM? The significantly unregulated computer industry's "24/7" indicates the ultimate in service. The free market gives privilege to no one.
Privilege is a remnant of aristocratic life, special enjoyments granted due to birth or rank in society. Today, the rank stems directly from bureaucratic intrusions into the marketplace. Its key trait is that it is unearned, making the holder of the rank exempt from competition. Regulations restrict a portion of the market to the exclusive enjoyment of those protected at the expense of those who are not so protected. Sometimes, those enjoying this rank exhibit aristocratic arrogance, such as the professor who says to a student, during the professor's posted office hours: "I can't talk now. I have a meeting." The meeting is with other professors and the message conveyed is that other professors are more important than paying customers.[1]
Robert Fuller, former president of Oberlin College, has coined a word that actually is broader than the monopolistic privileges I am talking about here. (And Fuller, who is a social liberal, would certainly not agree with my application of his term.) Fuller recognizes that there is legitimate rank that can be earned, so he coined the term "rankism" to mean "the abuse of rank." Rankism, he says, describes a concept similar to, but broader than, racism, sexism, and bullying in general:
"Rankism insults the dignity of subordinates by treating them as invisible, as nobodies. Nobody is another n-word and, like the original, it is used to justify denigration and inequity."[2]
Fuller argues that equality means "equal dignity" and everyone has a right to it; equality does not mean equal wealth or equal rank. As a social liberal, he thinks the government, as in the case of race and gender inequities, must step in. My interpretation is that the government was a cause or magnifier of these particular inequities.
Despite his social liberalism, Fuller's concept provides valuable insight into the psychological underpinnings of the abuse of rank by those in higher or privileged authority. Earned rank does exist naturally in society — parents hold rank over children, teachers over students, and employers over employees — and more earned rank would exist in a truly free-market economy because bureaucrats would have to get jobs in business and compete for their positions of authority.
From the standpoint of psychology, though, as Fuller demonstrates, "lording it over" one's subordinates derives from defensive anxiety and the necessity of setting oneself up as special or superior to others. Sometimes this necessity is made manifest through regulatory privilege.
Rankism, says Fuller, is the last "vestige of aristocratic class" that must be eliminated from the home, school, workplace, and social order before we can achieve a just society based on equal dignity. The first step, in contrast to what Fuller would say, involves removing the last semblance of regulatory privilege by getting government out of our lives and economy.
Notes
[1] Oops! Did I say students were paying customers? I realize that many professors — a privileged group I know well — object strenuously to this characterization. Yet students in a state-financed university, such as mine, often work thirty or more hours per week to pay for their education. This means they are paying substantial taxes to pay for their professors' meal tickets. And this doesn't count the taxes the students' parents have paid over the years. So, yes, I do believe it is correct to call my students paying customers.
[2] Robert Fuller, Somebodies and Nobodies: Overcoming the Abuse of Rank, p. 5. Fuller's web site is called Breaking Ranks.
In 1844 Massachusetts resident Lysander Spooner (1808–1887) advertised in the public press the establishment of the American Letter Mail Company. That agency promised to carry letters from New York to Philadelphia, Baltimore, and Boston at a uniform rate of 5 cents (significantly less than the 12 ½ cents the federal postal service required for letters traveling from Boston to New York and 25 cents to Washington, D.C.); in so doing, it intentionally challenged the legitimacy of the federal postal monopoly. To be sure, Spooner intended to realize a profit from that venture.
Volume 21, Number 2 (2007)
Last year Russian President Putin called for a state monopoly on vodka, due to what many consider a serious health crisis. He estimated that around 40,000 deaths annually can be attributed to various illegal products sold as vodka. All this while the state-owned RosSpirtProm was producing as much as 60 percent of the country's spirits. Beside the official vodka business, worth $9 billion according to some estimations, there was a $2 billion moonshine market.
The black market serves mainly the very poor with products of dubious quality. The solution proposed in the mid 2005 by Mr. Putin, and reported by Russian news agencies, was clear: "The best way for us to solve this problem is if we got from the government a decision which would practically move to a monopoly on spirits."
So the state moved swiftly and decisively to correct this problem by cracking down on foreign products of high quality, introducing a new labeling policy. The result was a crippling of the import of expensive wines and the like, but for some reason this did not halt the moonshine market that was — according to the officials who pushed for the restrictions in the first place — hitting the poor hard.
The moonshine market, by the way, is almost entirely local, so it is difficult to see how restrictions of foreign-quality alcohol may hurt it.
Now, in late 2006, the situation is even grimmer. The local black market is alive and well. Authorities are constantly battling the illegal production of vodka, while the quality of this counterfeit product plummets ever lower. Illegal traders are putting additives in drinks to make them stronger and cheaper, but the result is often lethal. These additives may include cleaners, car-window deicers, and chemicals used for removing rust. Bootleggers turn to drugstores for cheap antiseptics that contain alcohol and chemicals that may cause hepatitis to the consumer.
Once again, politicians like house's speaker Serghei Mirono, can't think of any other solution than state monopoly on ethyl alcohol. He accuses the Cabinet of not acting more vigorously in this direction.
State monopoly over spirits is nothing new in Russia. The first decree to that effect dates from the time of Ivan III in 1472. Apparently, on the eve of the WWI the court's revenue from the business was around 800 million rubels, or 30 percent of its total revenue.
Stalin learned his lesson well and reinstated the lucrative monopoly. Gorbachev's attempt to raise the level of sobriety in the country was a disaster. It brought a severe sugar shortage, as ordinary people rushed to produce their own vodka, privately. These consumers were the lucky ones.
Taxi drivers found a lucrative black market for hooch prepared out of windscreen-wiper fluid, eau de cologne, or melted shoe polish, which they were selling from under the car seat.
Putin knows best. He just wants the monopoly back, not some unrealistic prohibition that serves no one. But will a monopoly be beneficial for the health crisis brought forth by the black market products?
The prime mover of every market is the profit motive. On the free market the profit motive is set loose and is openly for the benefit of both parties in a trade. The same profit motive, however, will have distorted effects in a market controlled by outside factors, such as the state. On the black market, the profit motive has the strangest and most dangerous effects. What makes the difference is the level of outside interference between consenting parties of a trade. The alcohol market is an excellent example.
In developed countries with a long tradition of free markets, the alcohol business worked as any other. With the passing of time it became more and more diversified with finer and finer products for more and more people. The cheap and strong alcohol consumed by the lower classes lost its appeal as the poor rose into the middle class. True, it was not only the free market of alcohol that lifted the general quality of spirits, but a generally more laissez-faire economy that made possible the merging into the middle class of the lower classes.
A state-controlled market has a general tendency to keep the level of innovation and diversification low, while the prices are kept artificially high. All this because there is no competition. So it is precisely the quality of products that suffers with the process of monopolization. And the artificially high price will create a demand for cheaper counterfeit products, giving birth to the black market. On a free market you have two options: (1) find a way to produce more cheaply but at the same quality, so that you gain a greater share of the market from your competitors; or (2) improve quality and diversify.
On a monopolized market you don't have to do either of these to stay in business. You just have to be a good bureaucrat.
So, a state monopoly will only divert the income from the vodka market to the state and will expand the bureaucracy while creating the proper conditions for a lucrative moonshine market. It will not (and cannot) bring forth an increase in quality. It can only bring forth a health crisis like the one that we have now.
The desired improvement of the health standard for the general population can be achieved in one way only: allow laissez-faire capitalism to merge the lower classes into the middle class. That takes time, but no state intervention can do it.
And if we are talking about the general standard of living, one more thing should be said about the whole vodka affair. Alcohol is a big thing in Russia, obviously. A free market of alcohol would become a lucrative market for countless people if left in private hands. By monopolizing it, the Russian government takes bread from the mouths of average families.
From the 2006 Supporters Summit: Imperialism: Enemy of Freedom, 27-28 October 2006, Auburn, Alabama.
From the 2006 Supporters Summit: Imperialism: Enemy of Freedom, 27-28 October 2006, Auburn, Alabama.
Congress purported to act to protect the values of the American people when it passed the "Unlawful Internet Gambling Enforcement Act." The result has been a serious blow to a growing industry. Whose values was Congress protecting? It had nothing to do with the American people at large. Congress was protecting the "values" of casino owners and those who work in the state lottery racket.
This "enforcement act" bans credit card transactions involving internet gambling websites. The bill was added to port security legislation at the last minute giving no one the chance to read it and little political opportunity for Congress to amend it or vote against it. It was the capstone to another very bad session of Congress.
The first fallout from this legislative bombshell was its impact on the major internet gambling companies who lost half their stock market value. Americans are reported to make up about half the global demand for internet gambling. These are the companies that were best serving their customers, providing them with relatively safe and low-cost opportunities to gamble.
Due to the nature of internet commerce, online gambling sites had already taken several measures to demonstrate that they provided a fair and reliable service. Competition between gambling websites had also produced enhanced consumer satisfaction as new safety features were added and copied across the marketplace for internet gambling.
For example, with online gambling you can go to a practice casino website where you can learn the rules, how to play the games, and the relevant strategies without risking real money. Once you are experienced and comfortable with the process you can then proceed to the real casino where real money is wagered. Do physical casinos offer such opportunities?
These online companies are competition for casinos and state lotteries and because of their lower cost, online casinos can offer their customers a much better payout rate — the percentage of bets that are paid out in winnings. Online casinos have a much higher payout rate with the best online casinos offering a rate exceeding 97 percent. State lotteries that target low income groups have a payout rate less than 50 percent.
We are told that families will no longer have to face all the dire consequences and socially destructive forces of gambling via the internet, but internet gambling companies actually solve many of the so-called negative externalities associated with brick-and-mortar casino gambling. Internet gambling does not undermine community values, expose women and children to socially undesirable activities, or introduce prostitution into communities. All of the so-called "unsightly" problems with Las Vegas-style casino gambling are not present with internet gambling.
Yes, people still lose money gambling, but that is not unlike "losing" money when I go to the grocery store, the baseball game, or Amazon.com. Many people find gambling fun and rewarding even though they know the odds are against them. The proliferation of online gambling has turned casino gaming into a normal good without the special allure that government bans once provided Las Vegas.
Online gambling also provides good jobs for people who want them. I am not a real gambler, but I recognize that gambling has created economic development in places where it otherwise had not occurred (think Las Vegas, Indian Reservations, Atlantic City, Mississippi). Online gambling is likewise creating jobs in development in places like poor island nations in the Caribbean
Will the ban work? The legislation is similar to the alcohol prohibition of the 1920s. It does not prevent Americans from gambling online so we are still free to search for potential websites. It only prevents the companies from making credit card transactions with US citizens so that the most "legitimate" online companies who "play by the rules" will exit the market. Other companies will operate in the underground economy. New companies will enter the market using techniques to get around the legislation.
People are generally safe using their credit cards online, but the new financial transactions will inevitably be less secure, more cumbersome, and subject to more fraud and abuse. The big, safe and secure sites have too much to lose from bad business practices and government attacks and these companies are precisely the ones that are most likely to go out of business in the United States. Their replacements in the underground e-economy are likely to be smaller companies that pose more risks to consumers.
This legislation will not stop internet gambling and will only make American online gamblers less safe. It is nothing more than a cheap election year ploy — covertly enacted — that purports to protect Americans and maintain moral values. The hypocrisy of the legislation goes beyond the exemption for brick and mortar casinos because it also allows internet gambling for horseracing and state lotteries. Don't be surprised if Congress even reverses itself after the election when the overseas internet gambling companies have the opportunity to lobby (i.e., buy off) the Congress.
More than anything else, this legislation is the very pinnacle of puritanical nannyism. Here the government is declaring what you do in your home with your own money to be illegal. Even if it did work perfectly, it violates a critical stricture of the free society. As Mises noted, if we allow government to regulate such behavior there is nothing to prevent complete tyranny.
Congressman Paul observedthey have no business telling us what is useful behavior and what is not:
The big government nanny-state is based on the assumption that free markets can't provide the maximum good for the largest number of people. It assumes people are not smart or responsible enough to take care of themselves, and thus their needs must be filled through the government's forcible redistribution of wealth. Our system of intervention assumes that politicians and bureaucrats have superior knowledge, and are endowed with certain talents that produce efficiency.
The trouble with online gambling was that it was too successful in the eyes of many. To what extent were brick-and-mortar companies involved in lobbying for this? Forbesputs it this way:
U.S. gambling resorts and casinos like MGM Mirage and Harrah's Entertainment — which is reportedly being eyed by a private-equity consortium — may be the few to profit from the new law, along with the horse-racing industry, lotteries and fantasy sports operators, who have all been carved out of the new law.
If we want to know who was really behind the move, we need only ask: Cui Bono?
Frédéric Bastiat is considered by many to be one of the greatest economic journalists of all time.[1] However, it has been argued that he also made far more important contributions to the science of economics than most economists realize. Various current issues could benefit greatly from many of the ideas put forth in his writings. One such issue is that of intellectual property. His belief in the importance of competition leads one to conclude that a naturally harmonious economy is only possible when the economic laws are undisturbed.[2] Though Bastiat wrote very little about patents, his position against them can be strengthened by much of his writings.
Economic Harmonies
A great deal of Bastiat's writing shows him in attack mode, e.g., against protectionism. Economic Harmonies is different. It was written as a positive case for how a market economy operates. The fact that patents are not mentioned in the book at all shows that they have no necessary place in a free market. Yet, if you take at closer look you can see many arguments against them.
In Economic Harmonies, Bastiat outlines the three stages that an invention goes through. In the first stage the inventor is the only one with the knowledge of how the invention works. So the inventor is the only one who can produce it (or work with others to initially produce it). The inventor is rewarded in that he can now charge a higher price than his labor would normally warrant under competition. The second stage is imitation. People gradually (although it could be rapid, depending on what the invention is) figure out the new ideas and copy the innovation. There is a proven incentive for replicating the idea owing to the high returns already enjoyed by the first sellers. As a result of this new competition entering the market, the price falls. Bastiat's third and final stage is when the idea becomes "gratuitous," as he calls it. The idea is now widely known and enjoyed by all and has become tantamount to a gift from nature.
Bastiat would say that in the end the idea destroyed value while keeping the utility constant; and this is a benefit for all.[3] The invention is extremely useful to people and very desirable; in this way, it has a high utility, but the invention also succeeds in making things easier.[4] With the new invention, fewer costs have to be taken to achieve the same goal, thus market value decreases.
Consider the invention of the printing press. Before the printing press, books were very hard to come by due to the extremely high costs associated with their production. With the invention of the printing press, the production of books became easier. Initially, the inventor was the only one with the knowledge of this new technique. Because of his exclusive knowledge, he could charge whatever he wished as long as the price fell below the price of books produced with the older method. Far from being unfair, this benefited the inventor. Even though the costs of producing the book went down considerably, the high price was still acceptable because the value came not from the costs for the inventor to produce it, but rather from the cost saved by the consumer. You could pay his lower price for the book, pay the old higher price, or go through the costs of discovering the technique and producing the book yourself.
As stated above, the high returns bring about an incentive for others to figure out how to replicate the idea themselves. As time goes by, more and more people do so. The more the new invention or process is replicated, the easier and less risky it becomes, and in return less worthwhile (for the profits have dwindled). Today the idea of the printing press is well known and a benefit to all. Thus books are cheaper and easier to come by than they were 100 years ago. In light of this, books are less valuable (in Bastiat's sense) today then before the printing press because they are less expensive to produce and thus more available. The utility is the same but it has shifted from a more onerous utility (more effort required by man) to a more gratuitous utility (a part of nature, common to all).
But what happens if you view ideas as property? A non-scarce thing is artificially made scarce. Something that anyone could previously have had for nothing now has a price. To give someone property rights over an idea is to artificially limit the supply. In essence, a monopoly has been created.
Bastiat viewed monopoly as pure evil and really only possible through coercion:
People who class together artificial monopoly and what they call natural monopoly, because they both have in common the power to increasing the value of labor, are either quite blind or quite superficial.
Artificial monopoly is downright plunder. It produces evils that otherwise would not exist. It inflicts hardship on a considerable part of society, because it often includes the most vital articles. In addition it gives rise to resentments, hatred, reprisals, all the fruits of injustice.[5]
Those who get hurt are always the consumers and the producers who are restricted from entering the market. The intentional limiting of supply causes the price of the good to rise artificially. It may be understandable that people fight for the privilege of being the only seller but to do so only causes adverse effects for consumers. As Bastiat noted,
We understand how every producer, in order to set the highest price on his labor, tries to hold on for as long as possible to the exclusive use of a resource, a technique, or a tool of production. Now, since competition quite properly has its mission and result the taking away from the individual of this exclusive enjoyment and making it common property, it is inevitable that all men, in so far as they are producers, should join in a chorus of imprecations against competition. They can become reconciled to it only when they take into account their interests as consumers; when they look upon themselves, not as members of a special group or corporation, but as men.[6]
Intellectual property should be no different. A monopoly is a monopoly is a monopoly, whether it's the post office, the electric company, or patented ideas. Competition needs to be allowed to work in order for its benefits to bring about abundance and the improvement of all of society.
Economic Sophisms
Bastiat believed that protectionism of all kinds was evil. His book, Economic Sophisms, is full of possible exceptions and why they are all wrong. Protectionism comes in many forms including that of a monopoly. Monopolies in patents are just another form of protectionism, in this case for the inventor or innovator.
Inventions or new techniques and methods of doing things succeed in removing obstacles that were naturally in the way. To Bastiat, removing these obstacles is man's natural inclination. "It is also clear that, all things considered, it would be better for all mankind, or for society, if all obstacles were as easy to over come and as infrequent as possible."[7] The elimination of such obstacles is in vain, however, when laws are put into existence that do nothing more than to re-establish these or new obstacles. In the case of patents, the obstacles are eliminated by the new invention or technique and then new obstacles are established for the protection or privilege of the patent holder. The fault here is one of the most common sophisms presented in Economic Sophisms, to look at the producer rather then at the consumer. As Bastiat notes,
I have said that as long as one has regard, as unfortunately happens, only to the interests of the producer, it is impossible to avoid running counter to the general interest, since the producer, as such, demands nothing but the multiplication of obstacles, wants, and efforts.[8]
All issues should be taken from the point of view of the consumers because everyone in a market economy is in some way a consumer.
Conclusion
The endeavor of this article is not to attack intellectual property but rather to outline what Bastiat would have said concerning the issue.[9] The argument presented by Bastiat, however, should make one wonder about the so-called justice contained in the issuance of patents. These apparent "necessary" monopolies are just as dangerous as any other monopoly and stand in the way of everything that helps make society better off.
The monopoly that is granted to an inventor is a privilege that hampers progress and hurts the consumers (which is everyone!). This could be demonstrated by a reductio ad absurdum to the effect that if any idea or process could be patented then everyone would be restricted from doing almost anything without paying the first to come up with the idea.
Bastiat had two questions regarding patents: Is the component of property in the invention? And, under this assumption, is it within the capacity of the government to guarantee this property? Put more simply, do you have the principle and the possibility of application? The answer from Bastiat is clearly no. The term "invention" has too great an elastic meaning for Bastiat. The creation was not property in his opinion because inventions are more of a discovery of a natural law than a creation of the mind. Enforcing it as property would also prove too difficult.
This is an ethical question as well as a practical one. The state-grant of a patent could really be viewed as another form of everyone trying to live at the expense of everyone else. Surely Bastiat would say that patents are just another instance of the law perverted.
References
Bastiat, Frédéric. 1864. Essais, Ebauches, Correspondance. Paris: Guillaumin.
—— 1996a. Economic Harmonies. Irvington-on-Hudson: Foundation for Economic Education.
—— 1996b. Economic Sophisms. Irvington-on-Hudson: Foundation for Economic Education.
Hulsmann, J.G. 2006. "Bastiat's Legacy in Economics." Auburn: Ludwig Von Mises Institute.
Schumpeter. Joseph. 1954. History of Economic Analysis. New York: Oxford University Press.
Notes
[1] Example being Schumpeter (1954, p. 500) in his History of Economic Analysis, interestingly he also says that Bastiat was not a theorist in the same book.
[2] As Hülsmann wrote, "It is in this book [Economic Harmonies] that he develops and defends the thesis that the interests of all members of society are harmonious if and insofar as private property rights are respected or, in modern parlance, that the unhampered market can operate independent of government intervention."
[3] I should explain what Bastiat means here by "utility" and "value". Utility is a good's usefulness while the value is the relationship existing between two services that have been exchanged, essentially the price or a service for a service. These definitions were put forth and further elaborated in Economic Harmonies. Also, it is possible for utility to be created rather then staying the same. The new technique could create new utility in a good or just create a new utility in the invention itself.
[4] If it didn't then this would be just like any failed entrepreneurial effort.
[5] Bastiat (1996a, p. 552)
[6] Bastiat (1996a, p. 314)
[7] Bastiat (1996b, p. 17)
[8] Bastiat (1996b, p. 94)
[9] This is why I do not mention a lot of the arguments for patents. High research and development costs for example were not an issue in Bastiat's day (or were not as big an issue), thus there is no need for me to mention them. Still I do believe that Bastiat's arguments are important to today's debate, not on their own necessarily but as insights to further the rights based argument (which for Bastiat was the right of imitation).
The eighth of ten lectures from Joseph Salerno's Introduction to Austrian Economic Analysis seminar.
Naturally occurring monopolies do not last long. Competition emerges to upset them. The sovereignty of the individual defines the free market. The only monopolies that do persist are those maintained by government interventions.
Cartels are not monopolies. There is no essential difference between a cartel and an ordinary corporation or partnership. But, the cartel is an inherently unstable form of operation.
Libertarians often cite the internet as a case in point that liberty is the mother of innovation. Opponents quickly counter that the internet was a government program, proving once again that markets must be guided by the steady hand of the state.
In one sense the critics are correct, though not in ways they understand.
The internet indeed began as a typical government program, the ARPANET, designed to share mainframe computing power and to establish a secure military communications network.
Of course the designers could not have foreseen what the (commercial) internet has become. Still, this reality has important implications for how the internet works — and explains why there are so many roadblocks in the continued development of online technologies. It is only thanks to market participants that the internet became something other than a typical government program: inefficient, overcapitalized, and not directed toward socially useful purposes.
In fact, the role of the government in the creation of the internet is often understated.
The internet owes its very existence to the state and to state funding. The story begins with ARPA, created in 1957 in response to the Soviets' launch of Sputnik and established to research the efficient use of computers for civilian and military applications.
During the 1960s, the RAND Corporation had begun to think about how to design a military communications network that would be invulnerable to a nuclear attack. Paul Baran, a RAND researcher whose work was financed by the Air Force, produced a classified report in 1964 proposing a radical solution to this communication problem. Baran envisioned a decentralized network of different types of "host" computers, without any central switchboard, designed to operate even if parts of it were destroyed. The network would consist of several "nodes," each equal in authority, each capable of sending and receiving pieces of data.
Each data fragment could thus travel one of several routes to its destination, such that no one part of the network would be completely dependent on the existence of another part. An experimental network of this type, funded by ARPA and thus known as ARPANET, was established at four universities in 1969.
Researchers at any one of the four nodes could share information, and could operate any one of the other machines remotely, over the new network. (Actually, former ARPA head Charles Herzfeld says that distributing computing power over a network, rather than creating a secure military command-and-control system, was the ARPANET's original goal, though this is a minority view.)
By 1972, the number of host computers connected to the ARPANET had increased to 37. Because it was so easy to send and retrieve data, within a few years the ARPANET became less a network for shared computing than a high-speed, federally subsidized, electronic post office. The main traffic on the ARPANET was not long-distance computing, but news and personal messages.
As parts of the ARPANET were declassified, commercial networks began to be connected to it. Any type of computer using a particular communications standard, or "protocol," was capable of sending and receiving information across the network. The design of these protocols was contracted out to private universities such as Stanford and the University of London, and was financed by a variety of federal agencies. The major thoroughfares or "trunk lines" continued to be financed by the Department of Defense.
By the early 1980s, private use of the ARPA communications protocol — what is now called "TCP/IP" — far exceeded military use. In 1984 the National Science Foundation assumed the responsibility of building and maintaining the trunk lines or "backbones." (ARPANET formally expired in 1989; by that time hardly anybody noticed). The NSF's Office of Advanced Computing financed the internet's infrastructure from 1984 until 1994, when the backbones were privatized.
In short, both the design and implementation of the internet have relied almost exclusively on government dollars. The fact that its designers envisioned a packet-switching network has serious implications for how the internet actually works. For example, packet switching is a great technology for file transfers, email, and web browsing but not so good for real-time applications like video and audio feeds, and, to a lesser extent, server-based applications like webmail, Google Earth, SAP, PeopleSoft, and Google Spreadsheet.
Furthermore, without any mechanism for pricing individual packets, the network is overused, like any public good. Every packet is assigned an equal priority. A packet containing a surgeon's diagnosis of an emergency medical procedure has exactly the same chance of getting through as a packet containing part of Coldplay's latest single or an online gamer's instruction to smite his foe.
Because the sender's marginal cost of each transmission is effectively zero, the network is overused, and often congested. Like any essentially unowned resource, an open-ended packet-switching network suffers from what Garrett Hardin famously called the "Tragedy of the Commons."
In no sense can we say that packet-switching is the "right" technology. One of my favorite quotes on this subject comes from the Netbook, a semi-official history of the internet:
"The current global computer network has been developed by scientists and researchers and users who were free of market forces. Because of the government oversight and subsidy of network development, these network pioneers were not under the time pressures or bottom-line restraints that dominate commercial ventures. Therefore, they could contribute the time and labor needed to make sure the problems were solved. And most were doing so to contribute to the networking community."
In other words, the designers of the internet were "free" from the constraint that whatever they produced had to satisfy consumer wants.
We must be very careful not to describe the internet as a "private" technology, a spontaneous order, or a shining example of capitalistic ingenuity. It is none of these. Of course, almost all of the internet's current applications — unforeseen by its original designers — have been developed in the private sector.
(Unfortunately, the original web and the web browser are not among them, having been designed by the state-funded European Laboratory for Particle Physics (CERN) and the University of Illinois's NCSA.)
And today's internet would be impossible without the heroic efforts at Xerox PARC and Apple to develop a useable graphical user interface (GUI), a lightweight and durable mouse, and the Ethernet protocol. Still, none of these would have been viable without the huge investment of public dollars that brought the network into existence in the first place.
Now, it is easy to admire the technology of the internet. I marvel at it every day. But technological value is not the same as economic value. That can only be determined by the free choice of consumers to buy or not to buy. The ARPANET may well have been technologically superior to any commercial networks that existed at the time, just as Betamax may have been technologically superior to VHS, the MacOS to MS-DOS, and Dvorak to QWERTY. (Actually Dvorak wasn't.) But the products and features valued by engineers are not always the same as those valued by consumers. Markets select for economic superiority, not technological superiority (even in the presence of nefarious "network effects," as shown convincingly by Liebowitz and Margolis).
Libertarian internet enthusiasts tend to forget the fallacy of the broken window. We see the internet. We see its uses. We see the benefits it brings. We surf the web and check our email and download our music. But we will never see the technologies that weren't developed because the resources that would have been used to develop them were confiscated by the Defense Department and given to Stanford engineers. Likewise, I may admire the majesty and grandeur of an Egyptian pyramid, a TVA dam, or a Saturn V rocket, but it doesn't follow that I think they should have been created, let alone at taxpayer expense.
What kind of global computer network would the market have selected? We can only guess. Maybe it would be more like the commercial online networks such as Comcast or MSN, or the private bulletin boards of the 1980s. Most likely, it would use some kind of pricing schedule, where different charges would be assessed for different types of transmissions.
The whole idea of pricing the internet as a scarce resource — and bandwidth is, given current technology, scarce, though we usually don't notice this — is ignored in most proposals to legislate network neutrality, a form of "network socialism" that can only stymie the internet's continued growth and development. The net neutrality debate takes place in the shadow of government intervention. So too the debate over the division of the spectrum for wireless transmission. Any resource the government controls will be allocated based on political priorities.
Let us conclude: yes, the government was the founder of the internet. As a result, we are left with a panoply of lingering inefficiencies, misallocations, abuses, and political favoritism. In other words, government involvement accounts for the internet's continuing problems, while the market should get the credit for its glories.
This is a question that no one seems to be asking. And so I've asked it. And here, in essence, is what I think is the answer. (The answer, of course, applies to Ford and Chrysler, as well as to General Motors. I've singled out General Motors because it's still the largest of the three and its problems are the most pronounced.)
First, the company would be without so-called Monday-morning automobiles. That is, automobiles poorly made for no other reason than because they happened to be made on a day when too few workers showed up, or too few showed up sober, to do the jobs they were paid to do. Without the UAW, General Motors would simply have fired such workers and replaced them with ones who would do the jobs they were paid to do. And so, without the UAW, GM would have produced more reliable, higher quality cars, had a better reputation for quality, and correspondingly greater sales volume to go with it. Why didn't they do this? Because with the UAW, such action by GM would merely have provoked work stoppages and strikes, with no prospect that the UAW would be displaced or that anything would be better after the strikes. Federal Law, specifically, The National Labor Relations Act of 1935, long ago made it illegal for companies simply to get rid of unions.
Second, without the UAW, GM would have been free to produce in the most-efficient, lowest cost way and to introduce improvements in efficiency as rapidly as possible. Sometimes this would have meant simply having one or two workers on the spot do a variety of simple jobs that needed doing, without having to call in half a dozen different workers each belonging to a different union job classification and having to pay that much more to get the job done. At other times, it would have meant just going ahead and introducing an advance, such as the use of robots, without protracted negotiations with the UAW resulting in the need to create phony jobs for workers to do (and to be paid for doing) that were simply not necessary.
(Unbelievably, at its assembly plant in Oklahoma City, GM is actually obliged by its UAW contract to pay 2,300 workers full salary and benefits for doing absolutely nothing. As The New York Times describes it, "Each day, workers report for duty at the plant and pass their time reading, watching television, playing dominoes or chatting. Since G.M. shut down production there last month, these workers have entered the Jobs Bank, industry's best form of job insurance. It pays idled workers a full salary and benefits even when there is no work for them to do.")
Third, without the UAW, GM would have an average unit cost per automobile close to that of non-union Toyota. Toyota makes a profit of about $2,000 per vehicle, while GM suffers a loss of about $1,200 per vehicle, a difference of $3,200 per unit. And the far greater part of that difference is the result of nothing but GM's being forced to deal with the UAW. (Over a year ago, The Cincinnati Enquirer reported that "the United Auto Workers contract costs GM $2,500 for each car sold.")
Fourth, without the UAW, the cost of employing a GM factory worker, including wages and fringes, would not be in excess of $72 per hour, which is where it is today, according to The Post-Crescent newspaper of Appleton, Wisconsin.
Fifth, as a result of UAW coercion and extortion, GM has lost billions upon billions of dollars. For 2005 alone, it reported a loss in excess of $10 billion. Its bonds are now rated as "junk," that is, below, investment grade. Without the UAW, GM would not have lost these billions.
Sixth, without the UAW, GM would not now be in process of attempting to pay a ransom to its UAW workers of up to $140,000 per man, just to get them to quit and take their hands out of its pockets. (It believes that $140,000 is less than what they will steal if they remain.)
Seventh, without the UAW, GM would not now have healthcare obligations that account for more than $1,600 of the cost of every vehicle it produces.
Eighth, without the UAW, GM would not now have pension obligations which, if entered on its balance sheet in accordance with the rule now being proposed by the Financial Accounting Standards Board, will leave it with a net worth of minus $16 billion.
What the UAW has done, on the foundation of coercive, interventionist labor legislation, is bring a once-great company to its knees. It has done this by a process of forcing one obligation after another upon the company, while at the same time, through its work rules, featherbedding practices, hostility to labor-saving advances, and outlandish pay scales, doing practically everything in its power to make it impossible for the company to meet those obligations.
Ninth, without the UAW tens of thousands of workers — its own members — would not now be faced with the loss of pension and healthcare benefits that it is impossible for GM or any of the other auto companies to provide, and never was possible for them to provide. The UAW, the whole labor-union movement, and the left-"liberal" intellectual establishment, which is their father and mother, are responsible for foisting on the public and on the average working man and woman a fantasy land of imaginary Demons (big business and the rich) and of saintly Good Fairies (politicians, government officials, and union leaders). In this fantasy-land, the Good Fairies supposedly have the power to wring unlimited free benefits from the Demons.
Tenth, Without the UAW and its fantasy-land mentality, autoworkers would have been motivated to save out of wages actually paid to them, and to provide for their future by means of by and large reasonable investments of those savings — investments with some measure of diversification. Instead, like small children, lured by the prospect of free candy from a stranger, they have been led to a very bad end. They thought they would receive endless free golden eggs from a goose they were doing everything possible to maim and finally kill, and now they're about to learn that the eggs just aren't there.
It's very sad to watch an innocent human being suffer. It's dreadful to contemplate anyone's life being ruined. It's dreadful to contemplate even an imbecile's falling off a cliff or down a well. But the union members, their union leaders, the politicians who catered to them, the journalists, the writers, and the professors who provided the intellectual and cultural environment in which this calamity could take place — none of them were imbeciles. They all could have and should have known better.
What is happening is cruel justice, imposed by a reality that willfully ignorant people thought they could choose to ignore as long as it suited them: the reality that prosperity comes from the making of goods, not the making of work; that it comes from the doing of work, not from the shirking of it; that it comes from machines and methods of production that save labor, not the combating of those machines and methods; that it comes from the earning and reinvestment of profits not from seizure of those profits for the benefit of idlers, who do all they can to prevent the profits from being earned in the first place.
In sum, without the UAW, General Motors would not be faced with extinction. Instead, it would almost certainly be a vastly larger, far more prosperous company, producing more and better motor vehicles than ever before, at far lower costs of production and prices than it does today, and providing employment to hundreds of thousands more workers than it does today.
Few things are more obvious than that the role of the UAW in relation to General Motors has been that of a swarm of bloodsucking leeches, a swarm that will not stop until its prey exists no more.
It is difficult to believe that people who have been neither lobotomized nor castrated would not rise up and demand that these leeches finally be pulled off!
Perhaps the American people do not rise up because they have never seen General Motors, or any other major American business, rise up and dare to assert the philosophical principle of private property rights and individual freedom and proceed to pull the leeches off in the name of that principle.
It is easy to say, and also largely true, that General Motors and American business in general have not behaved in this way for several generations because they no longer have any principles. Indeed, they would project contempt at the very thought of acting on any kind of moral or political principle.
One of the ugliest consequences of the loss of economic freedom and respect for property rights is that it makes such spinelessness and gutlessness on the part of businessmen — such amorality — a requirement of succeeding in business. Business today is conducted in the face of all pervasive government economic intervention. There is rampant arbitrary and often unintelligible legislation. There are dozens of regulatory agencies that combine the functions of judge, jury, and prosecutor in the enforcement of more than 75,000 pages of Federal regulations alone. The tax code is arbitrary and frequently unintelligible. Judicial protection of economic freedom has not existed since 1937, when the Supreme Court abandoned it, out of fear of being enlarged by Congress with new members sufficient to give a majority to the New Deal on all issues. (Try to project the effect of a loss of judicial protection of the freedoms of press and speech on the nature of what would be published and spoken.)
Any business firm today that tried to make a principled stand on such a matter as throwing out a legally recognized labor union would have to do so in the knowledge that its action was a futile gesture that would serve only to cost it dearly. And a corporation that did this would undoubtedly also be embroiled in endless lawsuits by many of its stockholders blaming it for the losses the government imposed on it.
But none of this should stop anyone else from speaking up and making known his outrage at what the UAW has done to General Motors.
This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author's web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. His book is available through Mises.org, Amazon.com, and on his web site. See his Mises.org Daily Articles Archive and read his interview in the Austrian Economics Newsletter. You can contact him by mail. To comment on this piece, go to the blog.
Taking up the study of economics can help unravel many mysteries of history, among which the pressing issue: Whatever happened to sexy stewardesses? I don't mean as individuals, but as an institution, as a cultural icon, as a persistent commercial expectation.
There was a time when a jetsetting playboy was pictured as having a stewardess or two on his arm. On TV, one guy would be trying to get some other guy to be the necessary second guy for a double date: "They're stewardesses, Bob ... stewardesses!"
Today? To be a "flight attendant" is just a profession like any other, sexless and devoid of meaning beyond passenger management.
Several theories immediately come to mind, such as the observation that everything is in decline, due in part to the campaign to eradicate conspicuous signs of sex differences from mainstream commercial culture (thereby forcing it all into the red-light district).
Or we might come up with a more economically sophisticated answer, such as: Supply and Demand. More passengers means more stewardesses means less exacting selection standards means moving lower toward the hump of the bell curve.
Here's an answer that most people would never think of: Price Fixing
Yes, it's possible that there are fewer attractive stewardesses for similar reasons to there being fewer nuts in a Baby Ruth, or rip-off "toy" "surprises" in my childhood box of Cracker Jack: namely that the inflation of the money supply, in addition to raising prices, has reduced quality available per dollar.
Let's review the basics.
A price ceiling, when legal prices are not allowed to rise to their market-clearing level, causes shortages. There are more buyers at the legal price than there are sellers. Only the most efficient producers can afford to produce the controlled goods, because only they still have a margin between their costs and the legal price. Less efficient producers stop producing the controlled goods, steering those resources where there's more profit, or at least less risk of loss. Price ceilings explain bread riots and the so-called oil crisis of the 1970s. (No, it wasn't French aristocrats or Arab sheiks at fault.)
A price floor, when legal prices are not allowed to fall to their market level, causes gluts. There are fewer willing buyers than there are willing producers at the inflated prices. For agricultural goods, the result is that the government buys up all the surplus with coercively acquired funds. This hurts domestic taxpayers and foreign farmers. It also steers resources away from the goods people actually want, thereby hurting consumers as a whole. A too-seldom recognized form of price-floor-fixing is minimum wage law. Unemployment is a labor glut. Same economic laws apply.
So that's the review of basic price fixing, but the above summary assumes uniform goods at established quantity and quality.
With many goods, quality can vary significantly, not always in easy-to-measure ways. If people are used to paying 25¢ for a Baby Ruth, to use Rothbard's example, then the Baby Ruth company is going to be loath to raise the price to 50¢, even if inflation has doubled all their input costs.
What they do instead is cut whatever costs they can to keep the price at a quarter. Maybe they cut the number of peanuts in half, dilute the chocolate with cheaper vegetable oil, and make the candy bar 10% smaller. The product looks the same on the outside, and many people won't notice the difference on the inside. But fans of the Baby Ruth chocolate bar will notice that the quality has fallen.
In my case, it wasn't the falling quality of the candy I noticed, but the ever-crummier toy surprise in a box of Cracker Jack. Grownups would tell me about the whistles and decoder rings their childhood boxes of Cracker Jack had contained. Meanwhile, I watched plastic toys become cardboard-and-plastic toys become pure cardboard crapola.
Those are inflation examples, but similar dynamics are at work under a legislated cost ceiling of 25¢ for candy.
If price ceilings drive quality down, do price floors drive quality up?
In a sense, yes.
Suppose you used to be able to employ 3 unskilled, fresh-off-the-boat immigrants to perform a job at $1/hour each. And suppose a skilled craftsman for that job can do the same work as 3 unskilled men, but he charges $5/hour. Some people will employ the more expensive, higher quality craftsman, and others will employ the 3 less expensive, lower quality unskilled workers. Historically, the craftsmen don't like the unskilled competition, so they launch a minimum wage campaign: how dare anyone pay less than $4/hour?!
With the new price floor on labor, the 3 marginal workers are all unemployed while the demand rises for the "higher quality" labor product of the craftsmen.
It's not exactly the same thing with sexy stewardesses, but very close. According to Tom DiLorenzo's Mises U 2005 lecture on monopoly and competition, when the airlines were all cartelized, it was illegal for them to compete with each other on price.
The result was that (1) only a certain jet set could afford to fly with any regularity, and (2) the airlines competed for these wealthier passengers not by cutting costs and lowering prices, but with comfy seats, free booze, and stews who looked like fashion models.
The many depredations of the state: $10
Once the industry was deregulated, however, the inefficient giants went out of business and the survivors found that they had to compete by cutting costs and lowering prices. At cheaper airfares, we unwashed masses started to fly more often, and airline flights became commoditized. Get me from here to there. I'll pack my own lunch and bring my own booze, thank you very much. If I want to stare at unattainable fashion models, I can bring a magazine.
There are plenty of people who will see this as an inherent failure on the part of the market -- Just look at how small the bag of peanuts is! Can you believe they charged me for that tiny bottle of scotch? -- but more people can travel more conveniently for less money.
If you want something fancier, you can pay for a first-class ticket. The fact that so many people don't fly first class tells us those dollars are better spent elsewhere.
I guess that leaves us free marketeers leading a lonely cheer for average-looking flight attendants.
BK Marcus is an editorial assistant at the Mises Institute. Send him mail. His blog is lowercase liberty. Comment on the Mises blog.
In almost every discussion of the FCC specifically, or American spectrum policy in general, someone will assert that radio spectrum is a unique resource that belongs to the public. This will be said as if it were axiomatic—a starting point rather than the historical consequence of special interests pretending to misunderstand economics. More harm has been done to the public in the name of “the public interest” than could ever have been done by private interests in a free market. Yet the public tends to call for more intervention instead of less. The case of radio is typical.
I will attempt to review, from a Rothbardian perspective, the history, economics, and potential future of American wireless technology.
Volume 20, Number 1 (2006)
Competition Can’t Be PlannedMises Review 11, No. 3 (Fall 2005)THE ABOLITION OF ANTITRUSTGary Hull, ed.Transaction Publishers, 2005, xi + 176 pgs.
The authors of this important book have undertaken a twofold task. They continue the free- market criticism of antitrust legislation by Dominick Armentano and other economists who defend laissez-faire. Armentano himself has an excellent article here; and Thomas Bowden and Eric Daniels contribute outstanding discussions of the legal and historical background of antitrust.
But the authors have in mind a more ambitious and original goal. Economic and legal arguments against antitrust, they contend, do not suffice: we must penetrate to the philosophically flawed essence of antitrust in order fully to uproot this misbegotten product of modern interventionism. To accomplish this ambitious goal, we must of course think from the standpoint of a sound philosophy; and this, in the opinion of our authors, is Objectivism.1
Proponents of antitrust maintain that monopoly prices impose a welfare loss on the economy. Murray Rothbard, the most far-reaching of all critics of the economic theory of monopoly, explains the standard view in this way: "A certain quantity of a good, when produced and sold, yields a competitive price on the market. A monopolist or a cartel of firms can, if the demand curve is inelastic at the competitive-price point, restrict sales and raise the price, to arrive at the point of maximum returns" (Man, Economy, and State, Scholar’s Edition, [Mises Institute, 2004], p. 672). Unfortunately, none of the contributors cite Rothbard’s work.
Suppose the standard view were correct; and suppose further that the higher price imposes a welfare loss on society. Harry Binswanger raises a fundamental point: "The owners [of a firm] have the inalienable right to decide how they will use and dispose of the firm’s product. They may charge nothing for the product, a billion dollars for it, or anything in between. . . . It is their product, just as the customer’s money is his" (p. 132).
As Binswanger rightly notes, antitrust advocates act with particular ill grace when they assail the prices charged by monopolists who introduce altogether new products. Rather than praise innovators for their efforts to satisfy consumers in radically new ways, these carping critics indict them for deviations from what they deem the socially correct price.
But Binswanger’s argument, as it stands, is not complete. If the monopolist holds legitimate title to his property, then Binswanger’s point hits home: why should he not be free to seek whatever price he can get? But under what conditions does one acquire property? Binswanger does not tell us; and I do not think that Objectivists of his school have given a satisfactory account of this issue. Absent such an account, a defender of antitrust can say to Binswanger: "I grant you that an owner of property can ask whatever prices he wishes for what he owns. But, in my view, capitalists are not ‘owners’ in the sense you suggest."
Unclarity about property rights also weakens the force of the claim that antitrust theory rests on the false philosophical doctrine of altruism. If capitalists are required to price their products according to the dictates of a certain welfare ideal, has not altruism supplanted individualism? Why must the businessman sacrifice his own interests for those of others? "Thus, on the premise of altruism, businessmen are extortionists: businessmen charge money for relinquishing possession of goods, but these goods, altruism holds, rightfully belong to those who hold or need them. . . . The moral theory of altruism results in an inverted version of property rights: ownership by means of non-production" (p. 139).
This argument strikes me as confused. An altruist would contend that the businessman must sacrifice his own property to others. But do not advocates of antitrust contend rather that individuals can acquire property only subject to certain limitations? They do not then say that businessmen should altruistically give up what they own. Binswanger might respond that only an altruist could hold such a view of property rights, but this is not so. Those who contend that "society" owns all resources are to my mind profoundly mistaken. But to adopt the views of, e.g., Henry George or Hillel Steiner on property acquisition does not make one an altruist.2
John Ridpath endeavors to show the philosophical mistakes involved in Frank Knight’s view of economics. Knight in Risk, Uncertainty, and Profit developed the model of perfect competition that, Ridpath holds, underlies modern antitrust policy; if so, a convincing attack on Knight strikes a decisive blow to antitrust. Ridpath’s efforts are not altogether a success. Under perfect competition, all firms in an industry have the same costs, and everyone has full knowledge of all relevant information. Ridpath objects: "The basic fact of reality is that everything that exists has an identity—everything, including human knowledge, is specific and finite. A world of undifferentiated products, traded by infinitely numerous and infinitely knowledgeable beings, is metaphysically impossible" (p. 19).
But surely the postulate of the perfect competition model is that firms have very specific knowledge, i.e., whatever they need to know to make judgments about price and cost. Their knowledge is hardly infinite in any questionable sense. Ridpath, though, may also have in mind another objection. How can two different firms be identical in all their attributes? Does not Leibniz’s Law tell us that entities with the same attributes are identical? Here once more the argument relies on a false assumption. Only in certain relevant respects are the firms under perfect competition the same: so long as, e.g., a different person owns each firm, the appeal to Leibniz’s Law is unavailing.
Knight famously argued that profit depends on uncertainty: the entrepreneur cannot calculate in advance the chances his investment will be successful. By "profit" he of course meant a return that exceeds the rate of return on capital, i.e., the rate of interest. Knight here is making a very similar point to that stressed by these Objectivist authors themselves. Businessmen are creative, and it is this that accounts for their ability to earn profits. "As was the case with earlier market leaders—Ford, Alcoa, Kodak, Xerox, and IBM—Microsoft earned its position of leadership. All of these companies were not just market leaders: they were market creators. . . . The market creator provides a practical demonstration of the value and salability of a new product" (p. 134).
Ridpath ascribes this perfectly true claim to Knight’s irrationalism. Knight was a philosophical disciple of Heraclitus and Henri Bergson; as such, he held that change could not be explained. "In the world of perfect competition, the ‘pure’ profits earned by entrepreneurs would not exist. Knight concluded that these profits must have their source in Heraclitean uncertainty. Profits, which in fact are the earned reward for intelligently and courageously producing material values, are to Knight nothing more than manna randomly sprinkled by the unknowable flux and human irrationality" (p. 23).
The fact that entrepreneurial gain cannot be calculated in advance is a perfectly ordinary truth of experience; it does not depend on controversial philosophical views. Ridpath is right that, on Knight’s view, there is a type of change, which Knight calls "Bergsonian," that cannot be rationally explained (p. 21). It hardly follows from this, though, that Knight thought that no change whatever can be explained. It also does not follow from Knight’s reference to Bergsonian change that he was a disciple of Bergson, who was, by the way, as much a twentieth-century philosopher as a "nineteenth-century Heraclitean" (p. 21).
Much more successful are the essays in Part II, "The Legal History of Antitrust." Thomas A. Bowden maintains that the progress of civilization depends on the extension of contract. "Contract law, then, aims not at benefiting a privileged economic class but at supplying an objective requirement of life in civilized society. Because the ability to make contracts serves man’s basic economic needs, the wider the scope of contract, the greater will be the potential for individuals to grow and prosper" (p. 103).
During the nineteenth century, the development of contract took giant steps forward. "The great, largely unrecognized achievement of nineteenth century lawmakers was to take the broad, general structure of government handed down to them by the Founding Fathers and translate it into a capitalist legal system, with freedom of contract as its keystone" (p. 107).
This happy tale came to an "abrupt end" once antitrust legislation began to be enacted in the 1890s. No longer could firms make contracts as they wished. If, e.g., a company wanted to guarantee price discounts to regular customers, it might find that antitrust laws barred the way. Its discounts might constitute unacceptable "price discrimination."
Bowden’s argument must face an objection, but to this he has an insightful response. All contracts take place within a certain legal framework that defines property rights. If I steal your copy of Atlas Shrugged and trade it for a copy of Lou Thesz’s autobiography, I cannot complain that when the law refuses to recognize my exchange, it has restricted my freedom of contract. In like fashion, why cannot defenders of antitrust claim that they are specifying property rights, rather than destroying freedom of contract?
But in a legal framework that allows freedom of contract, people must have a clear idea of what actions fall within their legal powers. Here precisely lies the failing of antitrust legislation. Virtually any action of a business stands subject to condemnation as "restraint of trade"; any contract may be without notice overturned by a court or administrative tribunal. "Because antitrust laws can be employed arbitrarily to outlaw any type of contract, parties to an agreement cannot know in advance whether their actions will be deemed legal or illegal" (p. 111).
Bowden emphasizes the role of freedom of contract in American legal history; and Eric Daniels in his excellent "Reversing Course: American Attitudes about Monopolies, 1607–1890" discusses a closely related theme. Following English legal precedent, Americans in the eighteenth and early nineteenth centuries saw monopoly as a government grant of privilege, and a movement against such grants found considerable support in the courts.
But "[b]eginning in the 1790s, pro-monopoly politicians exhibited a deep-seated belief that certain businesses—banking, canals, roads, harbors, schools, even manufacturing and industrial concerns—were inherently different from others because of their public character" (p. 75). Unfortunately, the courts also took up this doctrine, and the distinction between coercive monopolies and voluntary business activities was attenuated. With Munn v. Illinois (1876), disaster struck. Here the Supreme Court held that states could regulate any business where the public claims an interest. "On this standard, no business could possibly escape state regulation—when the ‘public’ dictates what private individuals may do with their property, all pretense of rights vanishes" (p. 86).
No review of this book could be complete that ignored a remarkable discovery made by one of the contributors. Richard M. Salsman has identified a hitherto unsuspected enemy of the free market—none other than Ludwig von Mises. Incredibly, he holds that Mises "improperly attributed profit to entrepreneurs and never refuted the myth that capitalists, in his own words, ‘are merely parasites who pocket the dividends.’ For Mises, even entrepreneurs merely buy low and sell high as a passive service to consumers who, he claims, are the real drivers of the economy and profit" (p. 45).
A more complete misunderstanding of Mises can hardly be imagined. In Mises’s view, the most significant entrepreneurs are capitalists, who use their judgment to decide how to invest their money in order to satisfy customers. Their activity is not at all passive: capitalists creatively anticipate the wants of consumers.
How has Salsman fallen into an error of such "numbing grossness," in Peter Strawson’s phrase? The causes of mental aberration far exceed my competence, but our learned author has apparently misread Mises’s comment that entrepreneurs "earn profit not because they are clever in performing their tasks, but because they are more clever or less clumsy than other people are" (p. 45, quoting Mises). Incredibly, he takes Mises to be saying that entrepreneurs are passive. Can he not grasp that Mises means that to be successful, the entrepreneur must be better than the competition, rather than "better" in some absolute sense? Salsman is also horrified by Mises’s claim that profits do not exist in his "imaginary friend," the evenly rotating economy (p. 45). Profits, says Mises, are never normal; is this not definitive proof that Mises is anticapitalist? If Salsman finds Mises’s use of the ERE beyond him, this is no concern of mine; but it is puzzling why the editor allowed his book to be disfigured by such obvious nonsense.
1I do not know the philosophical views of Professor Armentano, but all of the other contributors are Objectivists.
2See my discussion of the "left libertarianism" of Michael Otsuka, Libertarianism Without Inequality, in The Mises Review 9, no. 3 (Fall, 2003).
Those of us who appreciate liberty, voluntary exchange, and workers’ property rights to their own labor have long-objected to the American organized labor movement. Since the 1930s, this movement has been defined by the AFL-CIO.
This “mother of all unions” is the biggest, with a membership of just under 13 million workers at the end of 2004. It is the baddest, defined by corruption and thuggery that can only result from state protection (and that would be snuffed out if labor were defined by market forces). And today, it is broken, after last week’s announcement that Andrew Stern’s Service Employees International Union and James P. Hoffa’s Teamsters are leaving the AFL-CIO. Both unions command 3.2 million workers.
The schism reflects deeper problems than a simple disagreement about strategy between Stern and the John J. Sweeney, the AFL-CIO’s longtime boss. Both the United Food and Commercial Workers and Unite Here, which represents apparel, hotel and restaurant employees, are boycotting the AFL-CIO’s annual convention and are likely to go their own way as well. The union family is showing its dysfunctional colors.
This is a huge split, fomented by falling living standards of union members, the ascendancy of the hard-to-organize service sector, the inability to unionize an automobile industry that is escaping Detroit, and an increasingly competitive, dynamic, and global economy that eschews high-priced and stagnant labor markets. Take away public-sector employees, who operate outside of market forces, and labor union membership in the U.S. is at a record low 7.9 percent of all wage and salary workers. As they say in the South, you can stick a fork in organized labor. It’s done.
What amazes is what took this development so long to come about. From an Austrian perspective, the same logic that informed Ludwig von Mises’ prediction that Soviet communism would never last explains the demise of American organized labor. Mises argued that socialism’s lack of market prices would make economic coordination impossible. How would shortages or surpluses get communicated to economic planners? How would changes in consumer tastes and preferences be known? Socialist governments, which often become warlike in order to maintain popular support, would never match the efficiency of the market system. Their longevity reflected the West’s willingness to subsidize them more than any inherent soundness to socialism as an idea.
In the same way, labor unionism, when state supported, removes workers from the normal coordinating mechanisms found in labor markets. These markets operate like any other market for scarce resources. Firms demand labor and pay wages for it, demanding more at lower wages and less at higher wages. Workers sell their labor to these firms, selling less for low wages and more for high wages. Through the interaction of buyers and sellers of labor, labor markets tend to clear, coordinating the movement of labor inputs in the production process.
The rise of unionism, on its own, would normally pose no threat to labor markets’ coordinating tendencies. Any group of workers would be free to organize and demand higher wages in exchange for labor. Firms would be free to pay those wages—or not. If some workers held monopoly power in the supply of their labor—which could be the case if they had unique skills that were especially valued by firms—then firms may very well choose to pay higher wages. In a competitive labor market, these workers’ success at earning higher wages would also sew the seeds for their eventual reduction, as the higher wages would signal other workers to obtain the skills necessary for their line of work too.
This benign case of unionism becomes destructive, however, when these workers receive protection from the government. This introduces violence into what otherwise would have been peaceful, voluntary exchanges of labor between buyers and sellers. Make no mistake: absent the state, any success that organized labor might have in obtaining higher wages, and thus increasing the costs of production, would be short-lived. With government comes the introduction of force in the relationship between labor producers and consumers, either directly (such as when authorities jail un-anointed non-union laborers for working in unionized industries) or indirectly (such as when union violence occurs, as allowed by the Norris-LaGuardia Act of 1932).
As socialism is impossible in the long run, so is state-supported labor unionism, because all of the government protection in the world cannot stop market forces from operating. These forces explain the dire straits that organized labor faces today. Taken as a whole, the growth of outsourcing, right-to-work laws, technological changes that improve the movement of capital and labor, all reflect that market forces in labor markets can be delayed when government and organized labor join, but not completely squelched.
The reason is simple. No matter what governments do to protect a special class of workers, consumers’ desire for lower prices never ceases, setting in motion entrepreneurial activities that will make centralized labor organization a thing of the 20th century.
So let’s cheer the division of organized labor. Its implosion is a reminder that, in the long run, market forces trump state power. And that’s an idea that unites Miseseans …even without state-support.
The Austrians view is that monopoly came about as privilege, usually granted by royalty, given to a particular person or industry. This process is arbitrary and capricious. Free entry is required in capitalism. There cannot be restrictions on entry, as with doctors.
Price, quantity, profit, and deadweight loss are four criticisms of monopolies.
Lecture 9 of 10 from Walter Block's Radical Austrianism, Radical Libertarianism.
There are major and fundamental disagreements between some of the leading Austrians, and these disagreements are created by wholly different theories concerning the definition of monopoly, the origins of monopoly, and the supposed effects of monopoly on consumer sovereignty and efficient resource allocation.
The Foundations of Modern Austrian Economics, Edwin G. Dolan, ed., Kansas City: Sheed and Ward, 1976, pp. 115-125.
[From the Review of Austrian Economics, Vol. 2, No. 1, 1988]
Public choice can be defined as the application of economic theory and methodology to the study of politics and political institutions, broadly defined. Neoclassical price theory has been one of the principal tools of the public-choice theorist, having been applied to address such questions as why people vote, why bureaucrats bungle, the effects of deficit finance on government spending, and myriad other questions regarding the operations and activities of governments. There has indeed been a public-choice "revolution" in economics. But neoclassical price theory has its limitations, many of which have been investigated by Austrian economists. These limitations have implications for the study of public choice. Namely, if neoclassical price theory is itself flawed, then perhaps its applications to the study of political decision making has produced uncertain results.
In this article, I shall explore two strands of Austrian economics—theories of competition and of entrepreneurship—and their implications for public-choice theory. I do not claim to provide an exhaustive examination of public-choice theory from an Austrian perspective, but only to offer a few insights. The first section notes some limitations of applying the neoclassical competitive model to the study of political decision making. The next discusses the implications of placing more emphasis on the role of political entrepreneurship in the study of public choice. The final section contains a summary and conclusions.
Competition, Entrepreneurship, and Public ChoiceOne area in which the neoclassical competitive model has been applied by public-choice theorists is the economics of local public finance. There exists a large volume of mostly empirical research purporting that when metropolitan areas are composed of larger numbers of governments, competition among governments for population and, consequently, tax base induces them to be more cost-conscious, thereby putting downward pressures on government spending (DiLorenzo, 1981a, 19816, 1982, 1983). Thus, on efficiency grounds, public-choice economists often take the position that more governments within a metropolitan area are preferred to fewer. This is a direct application of the neoclassical competitive model, which holds that more firms in an industry leads to stronger competitive forces. It is also derived from the related structure-conduct-performance (SCP) paradigm of industrial organization theory.
Industrial Organization and Public Choice
The SCP paradigm asserts that a more concentrated market structure is likely to be more monopolist because, in such a setting, the cost of collusion is lower. But this assumption has been called into question by research that constitutes yet another revolution in economic theory—a revolution in the field of industrial organization (Goldschmidt, Mann, and Weston, 1974; Brozen, 1982). One of the significant features of the "revolution" in the field of industrial organization is that many researchers have taken a more dynamic view of the market as a process. Thus, they have moved closer to the Austrian view of the nature of competition. By taking a more dynamic view of how industries evolve over time, economists have learned (or relearned, according to DiLorenzo and High, forthcoming) that an important reason why industries become concentrated is the superior efficiency of one or a few firms. "Dominant" firms can only remain that way by continuing to offer competitive products at favorable prices, in the absence of government-imposed entry barriers. Substitutes and potential entry have placed effective limits on monopoly pricing by firms in concentrated industries (Brozen, 1982). Thus, the traditional antitrust prescription of divestiture to avoid monopolization is now widely believed to be sometimes harmful. Focussing attention on the reasons why industries become concentrated has advanced our knowledge over the days when it was simply assumed that market concentration meant monopolization and "market power."
This shift in research emphasis is welcomed by many Austrians, who for decades have criticized the neoclassical competitive model as almost devoid of behavioral content, given its emphasis on static equilibrium conditions rather than the process of competition. "Competition is by its nature a dynamic process whose essential characteristics are assumed away by the assumptions underlying the static analysis .... Advertising, [price] undercutting, and improving ... the goods or services produced are all excluded by definition—"perfect" competition means indeed the absence of all competitive activities" (Hayek, 1948, p. 96). By viewing competition as a static equilibrium condition rather than as a dynamic, rivalrous process, economists are prone to condemn competitive activities as monopolistic.
These developments in the economics of industrial organization are relevant to the study of public choice. If the neoclassical competitive model—and its derivative, the structure-conduct-performance (SCP) paradigm-are themselves flawed, perhaps the model's applications to the study of the local government "industry" are also subject to question. I contend that by relying on static, market structure models of the local government "industry," public-choice economists have often drawn false conclusions. However, by relying on static models, they have not erred in the same direction as the structuralist industrial organization economists. Rather than condemning as monopolist many practices that are inherently competitive, they have done the opposite. By focussing on government structure at a point in time rather than on the dynamic, historical process by which the institutional structure of government evolves, they have sometimes praised as "competitive" government actions that are inherently monopolistic.
Consider, for example, how public-choice economists often interpret U.S. Census Bureau data on local government structure. Among public-choice economists who have studied local government, it is generally agreed that the greater the number of government units in a metropolitan area (the more "fragmented" the governmental structure), the better. Fragmentation creates interjurisdictional competition, which supposedly provides incentives for lowering the costs of service provision. This purportedly lowers expenditures and taxes and also results in higher-quality government services. These conclusions are usually drawn from cross-section data on government expenditure, regressed against several "determinants" of public expenditures, with some sort of proxy for interjurisdictional competition, i.e., number of government units in a metropolitan area. More often than not, the independent variable for government structure reveals that more fragmented metropolitan areas have lower levels of government expenditure, ceteris paribus. These empirical studies are similar to the early empirical work in industrial organization that found a positive correlation between market concentration and profitability. More concentrated metropolitan governments are thought to lead to higher levels of political "profits" in the form of higher spending than would otherwise occur.
But just as taking a more dynamic or historical view of industrial market structure can yield different interpretations of the causes of market concentration, it can also change one's view of the meaning of a more or less concentrated structure of local government. Consider the example of off-budget government spending at the state and local levels (Bennett and DiLorenzo, 1983).
Off-budget Spending and the Government Process
Historically, tax revolts and fiscal constraints in the form of statutory or constitutional restrictions on taxing, spending, or borrowing at the state and local levels of government have been met by politicians not by catering to "the will of the people," but, rather, by subverting that will by creating off-budget enterprises (OBEs) that permit them to preach fiscal conservatism by continuing to practice fiscal profligacy. The "solution" politicians have for more than a century applied to the "problem" of taxpayer demands for tax or expenditure restraint is disarmingly simple: Separate corporate entities are created by state and local governments, which could issue bonds that are not subject to the legal restrictions on public debt or even to voter approval. These entities are called a variety of names, including districts, boards, authorities, agencies, commissions, corporations, and trusts. Regardless of their title, an essential feature of all such organizations is that their financial activities do not appear in the budget of the government unit that created them. One distinguishing feature of OBEs is that their operations, at least in theory, are not financed from taxes, but from revenues generated by their activities. Because the taxpayer is not deemed to be liable for the financial obligations of OBEs, voter approval is not required for the debt issued by such organizations and, more importantly, debt restrictions do not apply. However, the idea that off-budget finance should not require voter approval because the projects financed are self-supporting is a myth, for billions of taxpayer dollars are used to subsidize OBE activity (Bennett and DiLorenzo, 1983). The array of activities undertaken by OBEs is quite large and includes the financing of school buildings, airports, parking lots, recreation centers, courthouses, subways, bridges, tunnels, highways, parks, lakes, sewer systems, sports arenas, electric utilities, race tracks, outer space programs (in California), and housing, to name a few examples. In short, any activities that are undertaken on budget by state and local governments (or by private enterprises, for that matter) are also undertaken by OBEs in every state.
Even if debt restrictions did not exist, politicians would benefit from off-budget activities. The public sector is constrained by numerous regulations designed to protect the public interest. Virtually none of these applies to any OBE. For example, civil service regulations do not apply, so it is easier for politicians to create patronage jobs off-budget; there are no requirements for competitive bidding procedures on contracts, so campaign contributions can be obtained and loyal supporters can be rewarded; the members of the boards of directors of every OBE are political appointees who are not elected or responsible to voters, so that the will of politicians cannot easily be frustrated by a recalcitrant bureaucracy. OBEs are given wide powers by law. They are granted monopoly franchises, may have powers of eminent domain, can override zoning ordinances, are exempt from regulations and paperwork that impose heavy costs on private enterprises, have no legal restrictions on collective bargaining agreements, and are often specifically exempted from antitrust laws regarding price fixing.
Unfortunately, it is impossible to obtain accurate data on the number of OBEs that exist or on their activities. Most states do not keep statistics on their numbers. One thing is known with certainty, however: There are thousands of OBEs throughout the nation, including more than 2,500 in Pennsylvania alone as of 1977 (Schlosser, 1977).
One implication of this research for public choice theory is that the structure of the local government industry at any one point in time does not necessarily reveal how "competitive" government is. Bureau of the Census data on the number of government units in metropolitan areas includes many OBEs, designating them as special districts, public corporations, statutory authorities, and so on. But an increase in the number of such entities often results in a government that is increasingly detached from the consent of the governed, is not subject to direct voter approval at the ballot box, and grants itself extraordinary powers—even by government standards—of eminent domain, zoning authority, and immunity from civil service, collective bargaining, antitrust, and other laws that others in society must comply with. A strong argument can be made that avoiding taxpayer demands for fiscal restraint is the whole purpose of off-budget spending, which renders government more monopolist. To designate these developments as "competitive" or "efficient" is misleading, at best. But this is precisely the problem public-choice economists experience when applying the neoclassical competitive model to the study of local government (see, for example, Blewitt, 1984).
Efficiency and the Structure of Local Government
Competitive markets are praised by neoclassical economists because, among other reasons, they promote allocative efficiency. Austrian economists, however, have little use for such notions because of their belief that all costs and benefits are subjective. To state that a certain allocation of resources is allocatively efficient and maximizes "social welfare" is to assume that benefits and costs are objective and measurable by some outside observer/social engineer. Moreover, to claim that one allocation of resources is superior to another on neoclassical efficiency grounds requires one to make interpersonal utility comparisons, a sheer impossibility. For instance, if an industry is judged to be producing less than the competitive level, a common policy prescription to promote efficiency is to somehow induce the firm(s) to increase their production (through divestiture, for instance). This may harm the producers since it forces them to do something they did not voluntarily choose to do, but it is said to be efficient because the utility gain to some other group in society—usually called consumers—is said to outweigh the utility loss to the producers.
Policy recommendations based on such efficiency norms often attenuate the rights of political minorities such as "monopolist" producers on the grounds that their utility loss is outweighed by the utility gains of others. This arbitrarily assumes that the property rights of the former group are unimportant. In short, what passes for science is loaded with normative judgments.
There is an alternative (and equally normative) definition of "efficient" institutions that has its roots in Adam Smith's Wealth of Nations and embraces the notion of individualist property rights norms: Those institutions are efficient that facilitate mutually advantageous, voluntary exchange (Buchanan, 1964). From this perspective, a "better" allocation of resources can only be determined by people themselves, not by professional maximizers of social welfare functions. The standard of evaluation is ultimately consent among individuals. Also, according to this perspective, the proliferation of the number of local governments cannot be said to be "efficient," since the growth of government embodies a further reallocation of resources from the private to the public sector. The private sector is the exclusive domain of mutually advantageous exchange. Outside of its role of enforcing and protecting private property rights, all government resource allocation is necessarily coercive in the absence of direct democracy and voting rules mandating unanimous consent. The proliferation of local government units, on- or off-budget, represents an expansion of the domain of rent-seeking behavior, which is necessarily coercive, at the expense of a contracted private sector and of the domain of voluntary exchange.
Public-choice economists typically criticize a consolidated local government structure as monopolist compared to the alternative of a larger number of jurisdictions within a metropolitan area. In many instances, this criticism is probably well grounded. One centralized school district, for instance, is likely to be even more monopolist than if there were several to choose from by "voting with your feet." As George Orwell might have said, all governments are monopolist, only some are more monopolist than others.
However, it is not clear that the relevant alternative to a fragmented government structure within a metropolitan area is a more centralized, monopolist government. Another alternative is a return to private-sector provision of the private goods now supplied by local governments: education, libraries, hospitals, airport operation, fire protection, parking lot operation, water supply, police protection, sewerage treatment, parks and recreation, operation of liquor stores, mass transportation, and myriad other activities. One thing all these activities have in common is that no strong case can be made that any of them is a public good. They are all divisible in consumption and exclusion is not costly. Moreover, they are all things that are supplied throughout the country by private businesses as well as by governments, leading one to question the existence of any economic rationale for government provision.
Governments usually grant themselves distinct advantages whenever direct competition with the private sector is permitted (which it often is not) by not having to pay taxes or comply with costly regulations imposed on private enterprises. Thus, these are often money-making operations for local governments that have taken over services that would have alternatively been provided by private businesses. Government imperialism is a more likely explanation than market failure for why these activities are carried out by hundreds of local government jurisdictions. Governments are redirecting resources from the private to the public sector as private firms are either banned by law from competing with government monopolies or are driven out of business because of the special advantages that government service providers have. Viewed in this way, it appears that the public-choice characterization of the "efficient" organization of local government is grossly misleading.
Public Choice and Political EntrepreneursAustrian economists often claim that neoclassical economics ignores many important economic phenomena by not sufficiently emphasizing the role of entrepreneurship in the economic organization. Ludwig von Mises broadly defined entrepreneurship to encompass capitalists, workers, consumers, and others: "Economics, in speaking of entrepreneurs, has in view not men, but a definite function" (1966, p. 246). The function of the entrepreneur is to react to (and create) change in the market. The efficiency of markets does not depend upon the equality of price to marginal costs, the familiar equilibrium condition of neoclassical price theory, but, rather, "it depends on the degree of success with which market forces can be relied upon to generate spontaneous corrections ... at times of disequilibrium" (Kirzner, 1974, p. 6). Entrepreneurship is the engine of economic growth and wealth creation in capitalist economies, for according to Robert Tollison:
When competition is viewed as a dynamic, value-creating, evolutionary process, the role of economic rents in stimulating entrepreneurial decisions and in prompting an efficient allocation of resources is crucial. ... [P]rofit seeking in a competitive market order is a normal feature of economic life. The returns of resource owners will be driven to normal levels ... by competitive profit seeking as some resource owners earn positive rents which promote entry and others earn negative rents which cause exit. Profit seeking and economic rents are inherently related to the efficiency of the competitive market process. Such activities drive the competitive price system and create value (e.g., new products) in the economy. (1982, p. 577)
But neoclassical economics does not view competition as a "dynamic, value-creating, evolutionary process." Rather, it is a static equilibrium condition. And in equilibrium, there is no place for the function of entrepreneurship, since in equilibrium, there are no changes in the given data of endowments, technologies, or preferences. By downplaying or ignoring the role of entrepreneurship and of competition as a dynamic, rivalrous process, neoclassical economics has probably underestimated the wealth-creating and welfare-enhancing capabilities of capitalism.
Similarly, by applying the static, neoclassical model to the study of political "markets," public-choice theorists have probably downplayed or ignored the role of political entrepreneurship. But this has not led them to ignore the role of entrepreneurship in creating wealth and facilitating exchange, as with the study of private markets. The essence of political entrepreneurship is to destroy wealth through negative-sum rent-seeking behavior. Thus, adherence to the static, neoclassical model is likely to lead one to understate the beneficial economic effects of private markets while, when applied to the study of public choice, understating the destructive effects of politics.
In much of public-choice theory, interest groups are viewed as entities that coalesce to express a demand for wealth transfers. In seeking political profit, politicians respond by supplying the transfers through legislation and regulation. Politicians are accordingly labeled "brokers" of legislation (Tollison and McCormick, 1981). Thus, just as a perfectly competitive, profitmaximizing firm would cater to consumer demands, politicians passively respond to the wishes of interest groups. But the price theory analogy is not entirely accurate, for in a world of uncertainty, producers are constantly searching for and creating profit opportunities by advertising, offering new or different products, and other activities aimed at stimulating the demand for their goods or services. They do not merely respond to changing consumer demands. Similarly, political entrepreneurs do not just passively respond to interest-group pressures; they also try to stimulate the demand for their "services," i.e., the provision of wealth transfers (Mitchell, 1984 ). Although it has been relatively neglected in the public-choice literature, Richard Wagner (1966) described the importance of political entrepreneurship in a hypothetical example where interest groups are outlawed.
Consider farm interests after pressure groups are outlawed. It clearly seems contrary to intuition and common sense to claim that farmers would no longer have [political] activities undertaken to increase their real incomes. For a reconciliation we must turn to the political entrepreneur and observe the impact of the outlawing of lobbying upon his profit opportunities. If a political profit existed before the institutional change [i.e., outlawing lobbying], what reason exists for the belief that such profit will not exist after the change? Clearly, for a reduction in the political profit from farm votes, either voting or organizational rules must be changed. Since the outlawing of pressure groups is unrelated to either of these two features, the profit must still exist after pressure groups are outlawed. Therefore, some political entrepreneur would carry their cause to congress. (p. 165)
Wagner further stated that various institutional arrangements often emerge to promote individual interests when free-rider problems prevent the formation of effective interest groups. For instance, one role of government bureaucracies is to serve the wishes of political entrepreneurs with whom they share a common objective: an expansion of the agency's activity (and budget). Bureaucracies have strong incentives to promote and stimulate a perceived need for their activities-every bureaucracy is a vigorous lobbyist. Peter Woll (1977) noted the importance of bureaucratic lobbying in his book, American Bureaucracy:
The ability of administrative agencies to marshal support in favor of particular programs is often severely tested, and as a result the agencies have frequently created public relations departments on a permanent basis to engineer consent for their legislative proposals. It has been estimated that the executive branch spends close to half a billion dollars [in 1971] a year on public relations and public information programs .... [A]gencies are expending huge amounts of funds, time, and effort on indirect and direct lobbying activities. (p. 194)
As recent examples of bureaucratic lobbying expenditures, the U.S. Department of Agriculture in 1984 officially employed 144 full-time public affairs persons with a budget of $6.5 million. The entire department, including subagencies, employs 704 people involved in public affairs (Palmer, 1985). The Department of Education had 21 public affairs professionals and a $1.5 million budget; and the Pentagon listed 1,066 full-time public relations employees. Similar programs are sure to be found in other agencies as well.
The effect of political advertising is likely to be public acquiescence in the continued growth of the government wealth-transfer process. Unlike private advertising, political advertising does not foster competition and lower prices by facilitating comparison shopping, for no comparisons are permitted. Governments usually grant themselves statutory monopolies in the goods and services they provide. Nor are there strong constraints on false advertising by government because of the absence of competitive pressures. Few private businesses, for instance, would risk criticizing false advertising by government enterprises for fear of regulatory retribution by the government authorities. Nor can one expect government regulatory agencies such as the Federal Trade Commission to crack down on fraudulent claims made by government itself. Thus:
Politicians cannot be held liable for their promises. If a hot dog manufacturer's all-meat product turns out to be 30 percent chicken and bread crumbs, he will most likely encounter difficulty with the government, even if consumers buy the product. But when the government's comparable product turns out to be 60 percent baloney, no regulatory agency will take action. (Wagner, 1976, p. 81)
Moreover, the principal function of political advertising "would seem to be to promote acquiescence about the prevailing public policies. The purpose of public advertising would be to reassure citizens that the fact that their public goods are composed of 60 percent baloney indicates good performance" (Wagner, 1976, p. 97). In this way, political entrepreneurship in the form of public advertising facilitates the process of rent seeking.
Another example of political entrepreneurship is tax-funded politics (Bennett and DiLorenzo, 1985). Hundreds of millions of dollars per year are doled out by the federal government to special interest groups including Ralph Nader-type consumer groups, environmentalists, welfare rights lobbyists, civil rights organizations, labor unions, senior citizens organizations, and various conservative political activists, to name a few examples. The funds are obtained through grants and contracts ostensibly for helping consumers, the unemployed, the elderly, minorities, the environment, and so on, but then are diverted (illegally) for partisan politics. In these instances, Congress is directly stimulating the perceived demand for its "services" by giving taxpayers' money to special interests to lobby, campaign, register voters, publish books (as well as op-eds and political training manuals), hold media events, and conduct other forms of partisan politics. Politicians use tax-funded politics to fabricate demands for legislation and government activity to stimulate the demand for their services. Interest groups that receive government funding can be more blatant in their political activities than government bureaucracies can since it is illegal for government employees to engage in on-the-job political activity. And, as Gordon Tullock (1983) pointed out, "interest groups normally have an interest in diminishing the information of the average voter. If they can sell him some false tale which supports their particular effort ... it pays. They ... produce misinformation" (p. 71).
In sum, focussing on the role of political entrepreneurship is likely to improve one's understanding of the government process. Demand-side models of the political process (such as the median voter model) can be misleading if they fail to incorporate the fact that political entrepreneurs are experts at fabricating false crises to convince the public to acquiesce in their policy proposals. Voters are rationally ignorant, and much of the information about politics they do receive is propaganda issued by self-serving politicians, interest groups, and bureaucracies. It does not pay to be as well informed about politics as about one's own personal affairs, which permits political entrepreneurs to manufacture a false "will of the people." Joseph Schumpeter (1942) recognized this more than four decades ago: "Human nature in politics being what it is, [politicians] are able to fashion and, within very wide limits, even to create the will of the people. What we are confronted with in the analysis of political processes is largely not a genuine but a manufactured will. ... [T]he will of the people is the product and not the motive power of the political process" (p. 263 ).
Even though private and political entrepreneurship both serve to transmit information, they produce fundamentally different results. The nature of market activity is to enhance people's propensity to truck, barter, and exchange-generally a positive-sum game-and entrepreneurship facilitates this process. By contrast, the nature of most government activity, including political entrepreneurship, is to promote wealth transfers, which is, at best, a zero-sum game. Mancur Olson (1982) provides evidence that such rent seeking is, in fact, a negative-sum game and a major cause of economic stagnation.
ConclusionsAustrian economics and public choice are two of the most exciting areas of economic research. With its emphasis on competition as a dynamic, rivalrous process and the role of entrepreneurship, Austrian economics clarifies how markets work. Public-choice theory has been absolutely revolutionary in focussing attention on how the tools of economics can be employed to better understand how governments work. This article is, if anything, a plea to consider the two research programs as complementary. Economic reasoning can and will be applied to advance our understanding of the political process, but one need not adopt the entire neoclassical economic framework to do so. The two strands of Austrian economics discussed here—theories of competition and of entrepreneurship—offer some insights into the government process that neoclassical economics ignores, at best, and possibly even misinterprets. One implication of this is that the type of public-choice research conducted might take on a different focus. Specifically, it would be a wise investment of intellectual resources to conduct more historical studies of the evolution of political institutions from a public-choice perspective. Public choice is often a study of comparative institutions, but economic history is one research approach which has, unfortunately, been relatively neglected by public-choice theorists. There is much to learn from economic and political history from a public-choice perspective that just cannot be captured by regression equations of the "determinants" of government spending, taxing, and borrowing.
Not only can a careful consideration of the usefulness of Austrian economics to the study of public choice expand our knowledge of government institutions; it can also prevent us from making mistakes. I have claimed elsewhere (DiLorenzo, 1984) that the economics of rent seeking has become confused. One reason for this is the failure to properly distinguish between rent seeking and profit seeking by not viewing real-world competition as a dynamic, rivalrous process. Consequently, some authors have condemned as "wasteful rent seeking" many activities (e.g., competitive advertising, product innovation, research and development, the market for corporate control) that are an essential part of a dynamic, competitive market. This is a step backward in the public-choice revolution, something that might have been avoided by being aware of some of the limitations of the neoclassical competitive model and its applications to public choice.
Published in Austro-Libertarian Critique of Public Choice (Co-Written by Walter Block)
DT Armentano A Critique of Mainstream and Austrian Theories of Monopoly Adobe Acrobat 6.0 Paper Capture Plug-in
Insider trading per se is obtaining information from non-public sources and using it for purposes of enhancing one's financial advantage. Is there anything unethical or morally wrong in this exercise?
Encyclopedia of Law and Economics, Northampton, MA: Edward Elgar, Vol. I, pp. 456-489. (2000).
Dominick T. Armentano Antitrust Reform: Predatory Practices and the Competitive Process Acrobat Distiller 7.0.5 (Windows)