Factor Prices Under Monopoly

0:00So the starting point of this study is an observation, namely that Mises and Rothbard's analysis of interventionism is characterized, among other things, by the fact that labor factors typically find themselves on both sides of the redistributive process implied in interventions among the winners and the losers, that is. There are of course good reasons for that, namely that Contra marks, we know that there is nothing exploitative per se in labor contracts, at least since Boehm-Bawerk, we know that there are good economic reasons why there would be a gap between the price of the product and the price of labor factors, namely that there is an inter-temporal exchange between between wage earners and the capitalists.

0:58And we also know from a legal point of view that there is nothing aggressive in a labor contract. So that's why exploitation is not involved in a labor contract. However, we could still wonder if some interventions might make wage earners gather on the side of Losers, while at least some capitalists would gain in the process. This paper basically provides an answer to that question. So the first thing I did to find any kind of answer was to check my favorite book, Human Action, to see what Mises had to say.

1:47I found that Mises' claims, I quote, 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. So this implies, well, of course, that there could be no such thing as labor factors paid under their marginal productivity in a free market, at least not temporarily, but also in a hampered market society, since he says only in a socialist community such a combination of employers could succeed in bringing lower wages.

2:52So this is Mises' thesis. However, well, I will not quarrel with Mises on the idea that what he described, described regarding the effects of a state-owned economy. Where I would beg to differ is on the implied idea that this cannot happen under interventionism, that is, in a hampered market society. So I want to show here that there is no need to monopolize all factors of production to bring about an overall relative lowering of prices for original factors, in particular labor factors, compared to what would prevail in a free market environment.

3:47I want to explain how grants of monopolistic privileges to capitalists in a hampered market economy can be sufficient to lower labor and land factor prices. I also want to explain how this conclusion can can be viewed as an implication of Rothbard's own work on monopoly theory. So in order to do so, I will first recall the basic tenets of Rothbard's theory, and then I will draw the implications regarding factor pricing. So first, Rothbard's monopoly price theory in a nutshell. There are basically, in order for a monopoly price to emerge, according to Rothbard, there are basically three requirements.

4:38The first is one needs a monopoly, of course. Monopoly is here defined as, and Rothbard quotes a 17th century lawyer named Lord Coke. What is the 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? This is also valid in the Rothbardian framework, it does not necessarily have to be a king who would grant the privilege, or a king or a democratic ruler, it can also be granted through private threats of aggression, the relevant criterion is the presence of an aggressive behavior that hamper the competitive process.

5:57Second thing, despite the fact that the definition is large and includes not only restriction on selling but restrictions on buying, Rothbard focuses on what we call monopoly of supply, so monopoly selling, which brings me to the second requirement for monopoly price to emerge.

6:26The second requirement is that the market demand for the considered good has to be inelastic, which simply means that above the free market price, buyers would be ready to buy less units, of course, units of course, but they would be ready to spend more money. The third requirement is that there would be one seller, only one seller, or an agreement between sellers, that is they would agree so that they would act as if they were only one.

7:11and they would be in a position to profit from the second requirement, inelasticity of the money. What are the consequences? Simple, monopoly price implies that consumers are hurt because of the higher price they have to pay for a lower available supply of the product and because of the corresponding misallocation of factors in the economy. This is pretty straightforward, and it has been stated a hundred times, not only in Mises and Rothbard, but in practically every work on the issue. However, neither Rothbard nor Mises, for that matter, are very explicit regarding factor pricing under these monopolistic conditions.

7:59And as far as distributive effects and 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, starting from there, let's see what are the implications for factor pricing that Rothbard did not explicit. I believe there are two key elements to take into consideration. First, when coercion bars 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.

8:55In other words, we do not only have here a monopoly of supply for the product, we also have a monopoly, what economists were calling monopoly of demand for its factors. and today it's usually called monopsony. What I claim here is that when we focus on producers who buy and sell, that is when we focus on capitalists, monopoly of supply and monopoly of demand are the two sides of the same monopoly coin. Murray Wieser hinted at this in his treatise, Social Economics, when he stated that, I quote, it seems impossible to imagine a combination of circumstances where a demand monopoly does not also amount to a monopoly of supply.

9:48And he also gives an example which shows it works also the other way around. Now, what is the direct implication from that? It should be clear that all this implies a downward pressure on factor prices in the monopolized sector. The reason is since some buyers of the services are excluded from the market, the monopolies lists would be able to pay them below their marginal productivity level.

10:40To contemplate why this should be the case, we can think about the condition that would be required for it not to be the case. The condition would be that the supply schedule of the factor would be purely elastic. However, we know, thanks to Rothbard again, that this is impossible. This is only in the neoclassical land of pure and perfect competition that we find this. Since pure and perfect competition If an intervention cannot exist, it means that the supply schedules have to be elastic. As a consequence, it allows the monopolist to obtain a lower price for the factor.

11:31The second key insight is that when a monopolist takes advantage of an inelastic demand for the good itself, This implies lower spending from its buyers on other goods. I refer here to Rothbard's discussion in Man Economy and State, I think it's chapter 4, on the interdependence between markets. If someone buys more somewhere necessarily, he has to spend less elsewhere. and the monopoly price, the monopoly situation implies that the buyers spend more on the monopolized goods so they have to spend less elsewhere.

12:18So the direct consequence is that the price of these goods for which the demand shrinks will be lowered. And then it means that the marginal productivity schedule of the factors which help in its production will fall too, and then their prices will fall too. So here we have the two legs of my argument. Overall, the pressure on factor prices coming from inside and outside of the monopolized sector is downward. There are differences depending on the specificity of each factor, their position in the whole structure of production.

13:05I will not tell you about all the details because it's quite complicated, but it's in the paper, so if you're interested, you can ask me and I will send you a copy. Okay, so, other implications. First, the monopoly gain of the holder of privilege does not come only from the consumers, but also from the factor he employs, including capital goods. However, capitalist net returns in earlier stages of production do not have to decrease. As with the sales tax shifted backward, 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.

14:02So I refer here to Rothbard's discussion about the sales tax in power and market. This is exactly the same effect. Lower prices for capital goods are imputed backward to original factors of production, Land and Labor Factors. Now, I told you about this idea of an overall downward pressure, but there might be an objection which is correct. It is not true that each and every factor must see its price diminish. The reason is that the monopolists, the gain of the monopolists will be spent too. And this could make some factor prices rise in the sector where he spends.

14:52The other reason is that there are some sectors expanding because of the factors displaced from the monopolized sector and factors that are complementary to these displaced factors would then be in higher demand, so they could have a higher price. But these are exceptions. And in any case, there can be, there can hardly be any doubt about the aggregate impact on original factor prices. We know from Rothbard again, the discussion, macroeconomic discussion in the chapters on the Structure of Production, we know that net income in the economy over a period of time equals consumption spending for this period. Given time preferences and demand and supply schedules for money which have no reason to change, aggregate consumption Investment Spending stays the same with or without the monopoly grants, but then, for the monopolist to gain an additional net monetary income compared to what he would earn on the free markets, other incomes have to be curtailed in the same process of production or in other.

16:18The thing is, the originary interest rates and the investment spending do not need to to be altered. Therefore, interest income is unaltered, and land and labor factors must bear the brunt. Though some of them may gain in the process, true. 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 has no reason to be different, this implies an overall tendency toward lower prices for these factors. Finally, there is an empirical consideration that we also know from Rothbard, which is that labor factors tend to be non-specific compared to land factors.

17:09The implication in the context of this discussion is that the downward pressure on original factor prices might be more widespread for labor factors. So, I think I will conclude there the general implication I want to stress in the spirit of Hans Hoppe's article that was called Marxist and Austrian Class Analysis, which has been republished, I think, in his book, Economics and Ethics of Private Property. In this spirit, it should be 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 maybe with the Marxist bathwater.

18:05Under 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. And the corresponding redistribution in favor of some capitalists implies in turn a relative proletarianization of some workers. These are basically the laborers whose lower wages are not compensated by higher incomes coming from some investments in the privileged sectors. I think a sociological insight follows.

19:01With a lower total monetary income, workers are less likely to present themselves as investors The investors on the time markets and the distribution of catalytic functions among people tends to become more rigid. So laborers stay laborers, capitalists stay capitalists. Last thing I want to mention is about the further researches that could be valuable, starting from what I've just said. First, to do some applied economics or history in the field, I think it would be necessary to have an 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.

19:59And with such a big picture, big theoretical picture, we 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. Thanks for your attention.