The one thing I know government is good for is countervailing against monopoly. It’s not great at that either, but it is the only force I know that is fairly reliable. But if you’ve got a truly free market you only have a free market for a while before it becomes completely regulated by those aspects of it that have employed power laws to gain a complete monopoly.
The above paragraph appears in the latest edition of libertarian magazine Reason, one of the best and most thought-provoking mags out there in my opinion. The quote is taken from John Perry Barlow, veteran campaigner for civil liberties issues, scourge of government attempts to invade privacy, and a writer of lyrics for none other than the Grateful Dead.
And yet the above quotation is to my mind a piece of economic illiteracy so bad that I was rather surprised that the Reason interviewer, Brian Doherty, let him get away with his assertion about the free market so easily. However, where Reason failed, Samizdata can step in.
First off, when Barlow talks of ‘power laws’, what exactly does he mean? If he means stuff like draconian copyright laws, or licencing privileges to shaft potential competitors, then surely such things are the creation of governments and not a feature of a ‘free market’! Most of the restrictions on competition which bar entrepreneurs from entering a field were created by governments in response to business lobbying. That is clearly a bad thing, but it is weird for Barlow to suggest that the remedy to such abuse of power is to ‘re-regulate’ the market to somehow make it freer. The solution to the problem is surely to cut the state down to size so that it cannot disburse such corporate welfare privileges to vested interests in the first place.
In holding this view, Barlow makes the classic mistake of so many folk who think they have discovered a fatal flaw in capitalism in that some sectors of an economy get to be dominated by one or two major businesses such as Microsoft or the aluminium firm Alcoa. “Monopoly!”, they cry, before demanding anti-trust style laws to break up businesses into smaller, supposedly more ‘perfectly’ competing bits. (Yes, I know Microsoft’s particular circumstances are open to many legitimate attacks – I am not an apologist for them, in case commenters bring this up). This view is based on the failure to grasp that just because a firm has X percent of a market share and is very big, it is therefore somehow able to coerce folk into buying its products. However inconvenient it may be for me to avoid using the products of Bill Gates, say, I can do so. Microsoft or General Motors do not force me to buy their services at the point of a gun.
Another mistake linked to this confusion about monopoly is the failure to see that competition is not a state of affairs desirable for its own sake, but rather a dynamic process in which economic actors like businessmen are trying to figure out new and better ways to satisfy demands and also to come up with goods and services previously unthought of. At any one freeze-frame of an economy, there will be big, mature businesses fighting to hold their ground and operating on thin profit margins; medium-scale firms still posting sharp growth, and embryonic small fry waiting to burst into the scene. If a big firm with a large market share takes its eye off the ball for a second, it quickly can be overtaken by a previously unkown upstart, as indeed happened to IBM and other firms once thought to be invincible by critics like Barlow.
Big businesses are often the worst defenders of free markets, and are often only too keen on spending millions of their shareholders’ money in lobbying for tariffs and other cushy deals from the State. But to expect the State, given its terrible track record, to make the market more “free” is one of the dumbest delusions there is.
Addendum: Thomas Sowell’s excellent Basic Economics is a good place to clear up the sort of economic fallacies such as Barlow’s.
The simplest counterargument I can come up with that assuming that private bureaucracy of a certain size is bad, the answer isn’t a public bureaucracy ten times or a hundred times bigger. Granted highly theoretical, but I’m a firm believer that huge interests could not have formulated if it weren’t for State intervention in the first place. I believe that there is a natural boundary as to the size of associations that individuals will make in an uncoerced society.
If ‘anti-trust’ were merely a one time shot to try and counteract the previous Statist effects, fine, let’s discuss it, but this endless give and take of punitive regulation and selective breaks has simply left the State as the de facto owner of resources and property. Anti-trust is not a solution. It merely creates a bigger, hungrier bear to deal with, and one in which the individual can only a pull a lever every so often to try and counteract while in a market their will always be other alternatives.
Government efforts to “level the playing field” are also one of the main factors leading businessmen to take their jobs overseas, where they can be truly competitive, further eroding any control by one particular state over the conditions of employment and manufacture.
“This view is based on the failure to grasp that just because a firm has X percent of a market share and is very big, it is therefore somehow able to coerce folk into buying its products. However inconvenient it may be for me to avoid using the products of Bill Gates, say, I can do so. Microsoft or General Motors do not force me to buy their services at the point of a gun. ”
So what? The criticism of monopoly is not that you are forced to buy the company’s products, but that those products will be suboptimal because the company has no need to innovate. Similarly prices will be set to maximise profits not at the free-market level, which would be lower.
Uh. The power laws referred to are those of growth. If growth is “better” than linear, meaning incumbents have higher relative growth compared to those entering the market, then the first to enter the market will corner it.
So what? The criticism of monopoly is not that you are forced to buy the company’s products, but that those products will be suboptimal because the company has no need to innovate. Similarly prices will be set to maximise profits not at the free-market level, which would be lower.
Likewise, the criticism of anti-trust laws is that this is an excessive method for dealing with the ‘problem’ that products of company x are suboptimal or overpriced. There are other remedies and one of those is simply not to buy the product. I don’t have any patience for customers of Microsoft products who whinge endlessly about the company and want the government to intervene on their behalf as a Microsoft consumer, yet still go out and buy the over-priced crap software update after update. There are other alternatives for everything Microsoft does, it is only inertia which prevents unhappy Microsoft consumers from switching. No small-government advocate could seriously suggest that the proper role for government is to uphold the interests of people who just can’t be bothered to uphold their own interests.
That would explain why Ford have cornered the market in cars then, and IBM in computers, and Curtiss Wright, and ICI, and KLM, and Marconi, and Standard Oil, and, and, and, and,…
I suspect that power laws refers to the ditribution of different size firms, meaning that the biggest firms will be much bigger than the rest, as opposed to with a normal distribution.
John writes that a large firm will provide “suboptimal” products because it does not need to innovate, unlike a smaller one. Huh? He surely missed the point that big firms, like small ones, need to innovate if they are to stay, er, big! Big firms which don’t innovate to stay ahead of the pack get eaten up pretty quick, as of course has happened to hundreds of big firms which were once thought of as invincible.
“suboptimal” is also a rather question-begging term. In the real world of imperfect economic information, there is no such thing as an “optimal” product. That is the delusion of socialist central planning.
A couple years ago, after reading a defense of copywrited music sharing written by good ol’ JPB, I decided to send him an email… In it I tried to convey how illogical his position on file sharing was, and his main response was that he had personal experience that sharing creative work results in the increase in value of that creative work… It never ceases to amaze me how intelligent people can take positions so contrary to common sense…
tanstafl@gmail.com
Only government can grant monopolies.
Right after WWII, some pilots bought surplus C-54s and opened Non-Sched service like Frisco to New York for $89. The plane did not take off until it was full, and so they always had a 100% load factor.
The monopoly airlines killed the Non-Scheds.
One can only wonder what air travel would have been today had competition shaped it.
John writes that a large firm will provide “suboptimal” products because it does not need to innovate, unlike a smaller one. Huh? He surely missed the point that big firms, like small ones, need to innovate if they are to stay, er, big! Big firms which don’t innovate to stay ahead of the pack get eaten up pretty quick, as of course has happened to hundreds of big firms which were once thought of as invincible.
Come on. With a monopoly, there is no pack, therefore no reason to innovate; hence the problem.
Dr Mysterio (great name!), a big firm is not the same as a monopoly. A big firm, just because it is big, cannot prevent newcomers unless it can get governments to stop them.
As I have said already several times (sigh) there are many examples of big “monopoly” firms like IBM, Ford, Reuters et al being humbled by upstart newcomers far more effectively than anything from govt.
Don’t confuse bigness with monopoly. They are not the same thing. What counts is how a firm got to be be large in the first place and how it retains its leadership.
In today’s modern economies, where capital is less and less associated with factories and land than with ideas, it is also much, much harder for a big firm to dominate a market without innovating constantly to retain its lead over the rest.
Come on. With a monopoly, there is no pack, therefore no reason to innovate; hence the problem.
Show me one real-life example of a monopoly that was NOT created with the help of government. You won’t find one; a true monopoly has never been achieved by ANY business without the use of government (i.e., force.)
The monopoly airlines killed the Non-Scheds.
I think it was competition that killed the non-scheds (charters). They were doing well in the early ’70s but that had much to do with youth travel and military contract. With partial deregulation, they and many scheds went empennage up.
I used to load some of them at JFK like this nice stretch DC-8. TIA is alive and well as Transamerica Airlines.
Oh, and by the way, I can think of no firm which could retain a monopoly over any particular domain without the active collusion of the state. Barlow’s dumb idea was to suppose that big firms, by the very nature of their bigness, could somehow crush the markets which gave them birth. I don’t agree, and I think the current fast-moving computer world gives a good example of how wrong he is.
Government is definitely the culprit here. What a bizarre state of affairs where a government-induced market distortion (rent-seeking by businesses) has to be counteracted with another (anti-trust legislation).
I certainly don’t regard big business as friendly to capitalism. Large industries can prosper quite handily under corporatism and even fascism (and I’m not using that as a boo-word, but in its poli-sci definition). I don’t think of hard-Left socialism in relation to this, more the paternalistic high-Tory ‘picking winners’ nonsense of dinosaurs like Michael Heseltine (boo, hiss).
Check the work of George Stigler
1982 Nobel Laureate in Economics
for his seminal studies of industrial structures, functioning of markets and causes and effects of public regulation.
for a thorough debunking of Barlow’s thesis…
Stigler was not content to examine the effects of regulation. He wanted to understand its causes. Did governments regulate industries, as many had believed, to reduce the harmful effects of monopoly? Stigler did not think so. In a seminal article, “The Theory of Economic Regulation,” published in 1971, he presented and gave evidence for his “capture theory.” Stigler argued that governments do not end up creating monopoly in industries by accident. Rather, he wrote, they regulate at the behest of producers who “capture” the regulatory agency and use regulation to prevent competition. Probably more important than the evidence itself was the fact that Stigler made this viewpoint respectable in the economics profession. It has now become the mainstream view.
For his earlier work on industrial organization and his work on the effects and causes of regulation, Stigler won the 1982 Nobel Prize for economics.
Even when governments do nothing directly to help monopolies or big businesses, they indirectly help these firms by creating a stifling environment which discourages innovation and competition…
In the US, taxation and regulation dramatically raise the market entry cost for almost all business types, to the point that many potential entrepreneurs with strong business proposals and work ethics simply do not try. They judge that the business they want to start can not succeed without risking much more capital than they feel is reasonable.
In such an environment, increasingly more successful smaller businesses are started by experienced and connected people with enormous amounts of capital to risk. Increasingly, Average Jane and Joe have no way of acquiring the large amount of capital they would need to survive and thrive with the established and the elite (except through the use of government loans, which many consider morally and ethically wrong).
Of course, the government tries to convince us it wants to help out small businesses, but they never stop creating new regulations (457 pending regulations since July 06, 2004) and taxes haven’t been significantly lowered lately. Rezoning and welfare-type programs for small businesses only scratch the surface of the problem.
The solutions attempted by the government are actually making the business environment worse for the little guy. I wonder if this has something to do with all those lobbyists in DC?
The economic crop is ripe for corporate picking, but with government involved, it becomes too expensive for the little guy to even think about harvesting.
“John writes that a large firm will provide “suboptimal” products because it does not need to innovate, unlike a smaller one”
Theories governing a firm’s incentive to innovate vs. its size and or market power: Actually, this was very much an open question when I was taking “Industrial Economics” way back when. Bell Labs used to be very good at innovating, as I recall. The empirical data was very much inconclusive…
Barlow is repeating the theory that in a free market a monopoly can naturally arise because the distribution of firm sizes follows Zipf’s Law which is a mathematical function similar to a number of others generally refered to as the power laws.
…so I’m afraid the blog article is based on a misunderstanding of what Barlow was talking about.
Andy Dwelly, you make an interesting point. My problem is that Reason magazine’s interviewer did not ask Barlow to spell out what he meant by “power law”. Plus his other comments (in what is a generally interesting piece) suggest to me he holds some erroneous views about the functioning of big firms in the market.
rgds
One of the long standing “monopolies” in Britain is snuff (tobacco for sniffing up the nose) making.
There have long being only a couple of snuff makers (and remember the antitrust crowd cry “monopoly” even when there is more than one producer), but there is no evidence of “monopoly pricing” even of this evil product (sniffing tobacco) which suppose to enslave the will of its users, turing them into the addicted victims of the wicked corporations.
The reason for this lack of “monopoly pricing” is fairly simple (even if one believes the stuff about addiction) – if the snuff makers radically pushed up prices new companies would come into the market.
In the vast majority of markets the only “barriers to entry” that matter are goverenment restrictions. If there are no restrictions then a companies (either new companies or existing companies going into a new field – or both) will come into the market place if they think that existing companies are ripping off the customers (i.e. they see a chance to make a profit by having these customers switch to them).
Economies of scale are often overstressed (people tend to forget that their are DISECONOMIES of scale – for example the difficulties of effectively managing a big corporation – as an enterprise gets bigger it becomes ever more difficult for even the best manager to know what is happening “on the ground”), and in any case a big company can diversify into a new field (one does not have to rely entirely on new companies being founded to challenge existing producers).
Even in the much cited area of natural resources “anti monopoly” and “anti trust” stuff tends to be based on legend rather than fact. Take the most famous example of all – Standard Oil.
There is no evidence that Standard Oil engaged in “monopoly pricing” and even if one is just concerned with market share (and if there is never any ripping off of the customer WHY should one be concerned with market share?) Standard Oil’s market share had been declining for many years BEFORE it was broken up.
“Anti trust” is a political game (and has been ever since the Act of 1890), politically connected companies use antitrust to attack their rivals. It is the supporters of antitrust (not its victims) who are really ripping off customers. As for efficient enterprises (the normal victims of antitrust) they can be blackmailed into supporting the leading political groups of their day – in an effort to avoid being hit.
The economics of anti trust is the standard “perfect competition absurdity of neo classical economics – in which all enterprises have (or should have) the same cost curves, all information is (or should be) generally known, everyone runs (or should run) their enterprise the same way………. and so on.
That anyone bases law on the absurdities of the neo classical perfect competition model beggers belief.
The only monopolies worth really worrying about are government enabled monopolies.
Where there are no state granted monopolies or restrictions, dominant monopolistically acting firms risk quickly being overtaken by more nimble competitors and new entrants into the market.
But thats not to say I don’t dislike private firms that have quasi-monopolistic tendencies – Micro-f**king-soft and BT come to mind. But since I can’t be arsed to set up my own, better competing software producer or telephone network, this laziness means I rely on others to do so or put up with bad products and services. Same thing with cartels.
One thing I don’t want is the government to help. That will definitely have negative repurcussions.
State granted monopolies, patents in particular, present interesting paradoxes for libertarians of the anarcho-capitalist kind. Murray Rothbard argued powerfully that monopoly cannot arise in the free market. Real monopoly hinges on grants by the state – direct or indirect – to particular firms, reserving the production of a certain good; these include, in Rothbard’s analysis, tariffs, quotas, licenses, patents, eminent domain, franchises, and other regulations.
As I observe with irony so many of the world’s free market think tanks producing protectionist propaganda about Intellectual Property (financed by the drug companies) I can’t help but wonder what Rothbard, Cobden and old Adam Smith would make of their heir pretenders.
All property “rights” are “monopoly” rights granted and protected to some extent by the state. Property is, after all, the exclusive right to use something, and the corollary right to bar others. These rights are enforceable in court, meaning the rights-holder can call on the power of the state to defend his monopoly.
Patents are no more a monopoly right than any other property right. Those who refer to patents as monopolies invariably do so in the hope that attaching the bad word “monopoly” to patents will make everyone believe that patents are bad.
Patent rights may or may not be bad, but in most respects they are indistinguishable from other property rights. I personally find the closest parallel to patent and other intellectual property rights in the various legal rights to real property.
The only necessity for rules assigning property rights is the scarcity of resources. I can’t use this PC for my ends at the same time as you are, so we need some rules deciding who gets to use or decide over the PC.
I can use the same ideas as you at the same time, though. If you want to use a hammer and take it from me, I can’t now use it. If, on the other hand, you want to use a recipe for making cakes, and take it from me (memorising it, rather than stealing the paper), then I can still use that recipe. Scarcity seems not to apply.
Add to this another difference between property and patents: Suppose that you and I are both in our basements, working indepependently and without knowledge of each other, to come up with the same invention. Now imagine that you get to the patent office first. Now it is illegal for me to market my invention until your patent expires, or unless I pay you for the right to and pretend that you invented it. Is this not an act of theft? Is this not a violation of my property rights? In what way do other property rights do this?
All property rights may be protected by the state (to some extent, and at least as often violated by it). But unlike patents and some other registered rights they aren’t necessarily granted by it. Other property is bought by, given to, or made by the labour of the owner, who requires the state’s aid to defend title, but not to acquire the use of the property in the first place.
Where the lines of their authority are drawn by different states serves to obscure the matter. Real property may be a good comparison for intellectual property in some places but not in others because if similarity or difference in treatment, not because there is any inherent common feature.
Until 1926 real property in England was transferred without any state registration of the relevant rights; now all transactions and rights over land must be registered, and the state constantly threatens to demand universal registration of title. Meanwhile in Britain no formality at all is now required for copyright to subsist and so an Englishman can easily see that as a form of intellectual property not granted by the state; but to an American, for whom copyright is a formal privilege to be registered under a power granted to Congress in the Consitution, it looks much more like a patent.
In England land law is becoming less a question of real possession and use and more a creature of the state, copyright grows more of a “natural right” quality, while patent is less real–more a creation of the state–than either. In the States the institutional treatment is relatively similar for all three. (The USPO sometimes gives the impression to outsiders that is inclined to allow any formally correct application and leave any issues of substance to the courts.)
Some good debunking of the “Monopoly” position. However, like most economic debates amongst libertarians, the moral aspects are forgotten. Even if Microsoft or whoever *was* a genuine monopoly, in that economic advantages of size made competition impossible forever, so what? They created that state of affairs without using force – no one is compelled to buy their product. Even if they charged $1 million for every copy of windows, they would have every right to do so, and it would be tyrannical evil to introduce any law at all preventing them from charging as much as they liked, just because they happened to be the only provider.
Remember – it is only moral to punish or restrict immoral behaviour. Offering to sell your software product to someone at a high price is not immoral, therefore it is immoral to legislate against that.
Part of Barlow’s (unstated) argument is specific to markets where lock-in creates stronger-than-usual increasing returns.
http://webseitz.fluxent.com/wiki/IncreasingReturns
Part of Barlow’s (unstated) argument is specific to markets where lock-in creates stronger-than-usual increasing returns.
http://webseitz.fluxent.com/wiki/IncreasingReturns
(Note that I don’t necessarily agree with the use of AntiTrust actions to mitigate it. Just trying to fill in the background…)