Monopoly and Competition

0:00We're entering the wonderful world, the wild wonderful world of monopoly and competition to sum up, like I said last time, what's happened is that the words monopoly and competition have been changed. They originally meant, I mean from the 17th, 18th century, 19th century, and also in the minds of the ordinary person, the average person in the public, what competition means is competing. In other words, rivalry, competing, offering a, trying to offer a better product or a cheaper price than the other guy, the next guy in the industry, so it means competing, means active competing and as I say what the average person thinks of and what businessmen think of when they see competition.

0:47Also competition can be potential as well as active, very important point, even if you If you have one firm in an industry, it could still suffer or be subjected to the rigors of competition because if it raises prices and cuts production, another firm might come in and not compete it, and then it's stuck with the other firm forever, very important point. In other words, the competition can be potential as well as active. And business firms, what business firms hate more than anything else is to bring in other competitors. They don't like other competitors. And if they put production and raise prices to enjoy what's known as monopoly price, they will then bring in where their higher profits will attract more or other capitalists will come in with new equipment and new plants, more modern equipment than this firm has.

1:35So potential competition is just as powerful as actual competition in the minds of the businessmen. have competing, either actual or potential or both. Monopoly meant from the 17th century on meant a grant of exclusive privilege by the government. It means exclusive to either one person or one firm or several firms. So, for example, the King of England gave to John John Smith, the monopoly of production of world playing cards in the Kingdom of England. So anybody else who produced cards was shot with the state of illegality, in other words.

2:22Why did he do this? It means that John Smith benefits and the consumers suffer and potential competitors suffer. In other words, if somebody else wants to go into the playing card business, here's price and quantity, say, for playing cards, decks of cards. If you say that only John Smith can produce it, it means you're shipping a supply curve to the left and you're forcing consumers to pay more for a lower product or a smaller product and you're keeping out all other competitors, people who will want to produce cards if they're allowed to do it. So in other words, what happens is John Smith benefits the monopolist at the expense of who, in other words, from a monopoly, who benefits? You should ask yourself this in all cases of government interference anyway. Who benefits and who pays? Who whom? In other words, who's screwing whom in any act of government whatsoever. The beneficiaries are John Smith, the monopolist of playing cards.

3:19The losers are the consumers and the competitors, the people who would have competed, the excluded competitors, in other words. Also benefiting is the king and his bureaucracy because what the king does in the old days, the king would simply sell the monopoly privilege to John John Smith. In other words, John Smith wouldn't make a deal with a king. John Smith gets the monopoly privilege of producing playing cards for 20 years or something. The king gets paid for it. He pays the king a certain amount. And also the king of the government builds up a bureaucracy and builds up political allies with John Smith. This of course is happening all the time, not just with monopoly but also with cost plus contracts, any contract. Take for example, the New York City Scandal right now, the famous parking violation scandal.

4:08I had a question, who should get the computer? They wanted to sell computerized parking ticket violator search machines to search for parking violator. Two companies competed for the contract, Metrosum, Motorola, an old distinguished computer company, an obscure little app called CitySource, CompuSource, nobody ever heard of, CompuSource gets the contract, CompuSource has no money and no computers yet, why do they get the contract, because Stanley Friedman, distinguished The British head of the Bronx Democracy, the Bronx Democratic Party, was the lobbyist for the contract.

4:59Stanley Freeman had no money, but as a return for getting the contract, he received a majority shareholdership of the company. In other words, he got a million and a half dollars in shares as a legal fee. McCain, the majority shareholder of the previously non-existent company, which was formed only for the purpose of getting the contract. Okay, so this sort of thing, in other words, who benefits the recipient of a privilege, monopoly privilege or contract, and the government official, in this case, Lindenauer or all the other guys, Friedman, all these guys were on the take. So whether it's the king that does it, or some city official does it, it really doesn't make much difference. The government is in a position of selling monopoly privileges, and the people are then buying it.

5:45When gambling is outlawed, for example, which it is, except for government OTB efforts, if roulette wheels are outlawed, then if a police captain allows a certain roulette wheel establishment to operate his district, and it gets on the tape from the company that does it, then the police captain is selling monopoly privileges, the monopoly privilege of operating a roulette wheel in that district to whatever family is operating it. So this sort of thing is going on all the time. This is essentially known as the government-industrial complex, I guess. In the defense area, it's called the military-industrial complex. It's wider than that. It's the government-industrial complex, the government-business complex. Also known as government-business partnership.

6:32Okay, so this is, and we'll see various examples of exclusive privilege, the taxi industry, the airlines, the 4D regulations, et cetera, et cetera, et cetera. Now monopoly, the American Revolution was fought largely against monopoly. In other words, against the British government, which had given to the East India Company, which had a monopoly of all trade with the Far East Corporation, gave them exclusive privilege to import tea in the United States through America, and all the Americans rose up against it and dumped the tea in Boston Harbor, the so-called Boston Tea Party. This was an attack not only on the tax, but also on the monopoly privilege. When the first states were created, the American states, they put in their constitutions outlawing monopoly.

7:19What they meant, of course, was not outlawing what is now meant by monopoly in the textbooks. They meant no grants of monopoly privilege by the government. This, of course, is a dead letter, basically, but at least it was in the state constitution to express the fact that the American Revolution was an anti-monopoly revolution as well as an anti-tax. And this was the definition of competition monopoly until the 1930s, basically, to simplify this situation. In the 1930s, a crazy new theory of microeconomics was coined, and about the same slightly earlier, in Keynesianism and macroeconomics. So what we've had in the last 50 years, essentially 30 years, is a process of rollback by which Keynesianism is getting increasingly discredited in macroeconomics, and it's gone too soon, and also increasing discredit on this new competition theory, which is still, however, in the textbooks. In other words, it's been rolled back quite a bit. It's not taken as seriously as it used to in the 30s, but it's still there, the alleged ideal competition.

8:17Competition, so in the 1930s, competition and monopoly were redefined, keeping the old terms, because keeping the old value connotation everybody kept on. It was a favor of competition against monopoly, the American public, economists, intellectuals, everybody agreed competition was good and monopoly was bad, or in the so-called scientific terms competition is efficient and monopoly is inefficient, but basically it's good and bad, and for obvious reasons. So the same value, they redefined the words competition and monopoly and then applied the same old value judgments of the emotional baggage these terms had to a new set of definitions, Competition was defined as a state of, not competing, but a condition of so-called perfection, purity, perfection and purity.

9:16Monopoly was a state of imperfection, monopolistic, imperfect and impure. And notice the terms here. It's supposed to be value-free scientific terms. Who does not prefer perfection to imperfection? I mean the very terminology gets you to be in favor of perfect. Who doesn't prefer pure to impure? Who doesn't prefer competition to monopolistic? So this is also called monopolistic. And the redefinition was as follows. Competition meant a situation where each firm, not the industry but the firm, faces a horizontal demand curve. The infinitely elastic demand curve, and monopoly is a situation, monopolistic, impure, imperfect, all the same jazz, is defined as a situation where each firm faces a falling demand curve.

10:09That's it. This is really the definition. You cut through all the jargon, all the junk, and there's many chapters in the textbooks. Fortunately, Miller has less of it than most other textbooks, but essentially what it means is that a firm is monopolistic or monopoly or impure, imperfect, it's all the same thing, if it faces a falling demand curve, it's only perfect and pure if the firm faces a horizontal demand curve. Well, I've already proved, it took me several weeks to demonstrate, that all the demand curves are falling. Where do we get this horizontal demand curve from? You get it in this way, if each firm in an industry is very, very tiny, say the model If Hiram Jones has 100 acres of wheat in Iowa, if Hiram Jones has a very, very tiny proportion of the total wheat industry, then whatever he does on the wheat farm doesn't make any difference to the price.

11:03In other words, if he increases the production by 20%, it's not going to make a hell of a big dent in the total supply. So he can therefore assume, according to the theory, that he's facing a horizontal man curve. In other words, he can increase the supply by 20%. and you can sell it at the same price because it makes a very tiny dent on the total. Well, in other words, the model, the ideal which every industry is supposed to face is where every firm is so tiny that it can't affect its price, whether it goes out of business or triples its production, will have no effect on price. This is supposed to be ideal situation. Everything else is imperfect and impure and monopolistic, and of course, each one of us This is a monopolist, by the way. Each one of us faces a falling demand. We're all monopolists, every one of us, if we're engineers or economists or whatever, because if you go out in the

11:53engineering labor market and you insist on a higher wage rate, a very high wage rate, you're going to see a falling off of the man for your services. If, for example, you insist that you won't work for IBM for less than $500,000 a year, you'll probably get disemployed very fast. So this is, in other words, everybody, we're all monopolists. What kind of a crazy The next point is to try to figure out why it is that competition is better than so-called monopoly. What's so great about a horizontal man curve anyway? And by the way, the result of this is that all during the 1930s and 1940s, the antitrust division, which is influenced by these economists who have this view, was trying to break up There's a lot of big business in the small parts, so that to duplicate the small wheat farm situations.

12:48In other words, it's like taking General Motors and Ford and breaking them up into two million teeny little blacksmith shop-sized automobile plants. And of course, if you had a million small plants, originally the automobiles used to be made in blacksmith shops and bicycle shops when it first got started in 1900. Bicycles were used to wheel and axle technology, so they'd start producing cars in bicycle shops or blacksmith shops. I think Henry Ford's original was a blacksmith shop or a bicycle shop, forget which, but they're very small, grinding out two cars a month or something, or two cars a year. That's what these guys, the ideal that they're setting forth to go back to that kind of situation. Every firm has a tiny, teeny size compared to the whole industry.

13:34Why is this supposed to be better? Okay, I will now give you the full schtick, the full argument about why this is better, why a fully demand curve is supposed to be evil. Here's the, I'm going to set forth for you now a series of insane assumptions, none of which are realistic, all of which are flawed, deeply flawed, which wind up with the conclusion that competition is better than monopoly. The definition of the sense of horizontal demand curve is better than monopoly in the sense of a fulling demand curve. First of all, we're getting out of the concept that Professor Hoppe has already mentioned to you before, final equilibrium, long run equilibrium.

14:26A long run equilibrium is different from what I've been talking about, supply and demand every day to day. is this, if you're going along with lots of stuff going on in business, lots of changes taking place in values and resources and technology, if the angel Gabriel came to the earth and froze everything, like a freeze frame operation, froze all value scales, so no value scales are changing anymore, froze all resources, supply, labor, land, etc., froze all technology, so no new technology, freeze everything, then if you did that in a few years you'd wind end up with every corporation making the same long-run interest rate. In other words, there would be no pure profits, no pure losses. Because everything would be the same all the time.

15:11Everybody would know that the world would remain the same forever, like an ant heap. So this would mean if data were frozen, you'd wind up after a few years with every firm making 6% interest return, no extra profits beyond the regular time preference or interest rate, and no losses, of course. If you can foresee everything, you're not going to make any losses. If you can predict everything in the future, because everything will always be the same as it has been in the last 20 years, you'd wind up with no profits and no losses. In other words, you'd wind up with an interest return only for every firm. So a firm which is now making heavy profits, firms with capital will pour into that industry. Computers, let's say, you wind up with an usual 6%. Industries which are making losses, firms would leave it. You wind up after this kind of shuffling back and forth after a few years with everybody making 6%, no more, no less, 4%, whatever the interest rate is.

16:04So geometrically you'd have a tangency situation, in other words, geometrically you'd have something like total cost tangent to total revenue at whatever the production point is. In the average cost diagram, you have a U-shaped average cost curve and you have an average revenue curve. It will have to be tangent and final equilibrium. Remember final equilibrium does not exist, never can exist, never has existed, never will exist. Remember this because life is not, you don't freeze the data. The data are always changing.

16:51Values are changing, value scales are changing, fashions are changing, preferences are changing, technology changes, investment changes, labor changes, lots of stuff is changing all the time. So you never get to long run equilibrium. The important thing about long run equilibrium is to try to tell you to analyze profits and interests, to show you that profits and losses are a matter of forecasting and interest is a matter of time, time preference. It's really an analysis of where the economy is going. It should not be taken seriously as an existing situation because it never has existed and never will. But what happens in microeconomics, unfortunately, since the 1930s, Long-run equilibrium has been taken seriously as a not only existing, but something which is existing and should exist. If it did exist, it shouldn't. We all would be in miserable shape. We'd be in a state of stasis. Nothing would ever improve, nothing would ever change.

17:39We'd be pretty miserable. It's not like an ant heap or a beehive. We'd be pretty miserable in existence. Anyway, this is supposed to be the ideal situation. Okay, given a U-shaped average cost curve, we've already seen it's not really U-shaped, I forgot about that. Given that, and following the man curve for the firm, the man curve of the firm can only be tangent in this area, once you assume a U-shaped average cost curve and a linear demand demand curve, it can only be tangent say here, this in other words is the tangency of this firm, this business firm, if it's quote monopolistic unquote, in other words if the faces are following a man curve.

18:27On the other hand if the demand curve is horizontal, if it's in a situation where it's a teeny fraction of the entire industry, then it can only be tangent on this point here, given Given the same average cost curve, remember that, given the average cost curve as being the same, you then have this kind of situation, in other words, if the demand curve for the firm is horizontal, you're tangent here, therefore, conclusion, just as we conclude with a monopoly privilege that the government excludes firms, you have a smaller product at a higher price, by Screwing the Consumers. So these people conclude about the free market, or the market in general, that a firm facing a falling demand curve will, the output will be smaller and the price will be higher than a firm with a horizontal demand curve, just from this diagram here, that's the conclusion.

19:26That's it, that's the whole shtick, this is it, that the entire case for the horizontal In the entire case, given the same average cost curve, given a tangency in the final long-run equilibrium, and given the shape of the u-shape of the average cost curve, given the rest of it, the linear shape, you wind up with an output smaller, under so-called monopoly under monopolistic and a price higher. Inclusion is therefore the consumers are being strewed by monopoly and therefore the antitrust divisions are coming in and break every firm up into teeny parts so as to get to the bottom of the average cost curve.

20:15Now, the many, say the many problems with this is it's putting it kindly. One question is, how big is this anyway? If you're going to the trouble of breaking out firms, is this like 1.5% or is it really important? Nobody knows. Remember, all laws and economics are qualitative. Apart from that, you might be going through all this headache, a very small fraction of return. As a matter of fact, some economists have tried to estimate what this percentage is, something like 2% or something, even at best, 2% difference. But, anyway, that's the least of the problems here. One thing is, who says that the U-shaped course curve, as we've already seen, is not really U-shaped?

21:01It's, in most cases, the course curve goes down like this and is flat. In a flat, flat toe, none of this works. This whole thing is out the window. Because, first of all, the intersection point is now the whole business, not just one point. point. We have a whole range at which marginal cost and average cost are equal, and there's nothing to say, I mean supposing you have a, this would be a flat demand curve like this, the falling demand curve could easily be like that, could easily hit, see at this point go down like that. Don't forget there's nothing that says that it has to be linear, can be a little gap in the line here, and so you can easily twist it around a little bit and have the thing All of these things coincide at the same point as the falling demand curve, the falling and the linear and the horizontal.

21:54As long as your math can even have it here, you can twist it around a little bit, like that, and you can hit it at the bottom point. Remember, the linear part is purely for simplification purposes. Nobody knows that it's a straight line. All we know is that it's falling. So if it's falling, it can easily cut around like that, and simply nip in there and intersect at the same point. As I say, with this thing here, with a flat bottom, the intersection point is pretty extensive. There's even more room to nip in and nip around and get in there. So, this really only works if you're committed to a straight line at all times, there's no reason for that. If you're committed to one single cross point, there's no reason for that.

22:41In fact, there's a reason for the opposite. Second of all, it only works in equilibrium. In other words, the rest of the time, in the real world, when there is no long run equilibrium, none of this applies. There's no way you can say that output is smaller or price higher in a so-called monopolistic situation. Then you have something like this. You have this, so you have a point like that, you have something like that, a point like that. There's no way to show the price is higher or the output is smaller. You can only show that in long run equilibrium. and Equilibrium. Since there never is long-term equilibrium, never exists, this whole thing is pointless because this situation, this tangency never exists in real life, never can exist, never will exist. So this whole situation, this whole thesis applies only, at best, to tangencies where you jimmy up the things, this has to be linear and this has to be one point, neither of which is true.

23:38And secondly, it only exists in long-term equilibrium, which doesn't really exist anywhere in the real world, purely artificial construction. We'd be in bad shape if it did exist. There's nothing great about long-run equilibrium. Also, and finally, and probably the most important point here, is that who says that the course curve remains the same in this situation? Who said? Where is it written? In fact, it's just the opposite. If we took the General Motors of Ford and broke it up into 500,000 or whatever teeny plants, each were the size of a blacksmith shop, you might get a hit at the bottom, it's true, but on the other hand you'd be way up on the 10th floor, the non-existent 10th floor, the cost curve would be extremely high because each plant would be very inefficient, you wouldn't capture the advantages of large scale production, so you might get 5 million dollars per car, only a few millionaires can afford to ride, which is by the way what happened in the early

24:36days of the automobile, it was a toy for the rich, and only when Henry Ford and the Theory of Mass Production came in did he say, no, no, we can have the average person ride, just have a mass production, interchangeable parts, because before that the cars were beautiful except they were very expensive, only millionaires could ride around, Diamond Jim Brady or whatever could ride around in it. So in other words, we could be at the bottom, but the consumers would have the thrill of knowing that each firm would be at the bottom of the cost curve, you tap, eliminate the so-called monopoly here. On the other hand, of course, you'd be paying five million dollars a car, because each cost curve would be infinitely higher than the cost curve on a large-scale production. So the rub is to say that the cost curve is equal, cost curves are never equal, and the reason for large-scale production is precisely because the cost curve is lower, because when

25:23you get to the large-scale production, you can tap the indivisibility of the large-scale production and get down to a much lower cost. So the fact you'd be up here somewhere, happily the bottom of the cost curve is not going to give us much consolation if we pay the five million bucks per car. So all this, I think, demonstrates the egregious fallacies of this whole concept, whole idea that somehow purifying competition is better than so-called monopolistic, there's nothing evil about a falling to man curve. It's not true. Foley Mankers are great, also they exist everywhere, we always have them, and we're able to tap large scale production here, so you're much better off than you would be even at the bottom of a close curve of way up on the 10th floor, in other words if it's 5 million bucks per car outside.

26:12So the question is how does this whole thing arise, and it's interesting, it was probably generally the anti-business climate of the 1930s where this kind of doctrine became popular. So what's been happening over the years in the economics profession has been slowly rolling backward from this commitment to this crazy perfect competition doctrine, but it's still there as an ideal. It's still listed as the ideal, somehow as an ideal situation. And it'll take quite a while before that gets blasted loose, I'm afraid. So there we have it. That's the full argument for the perfection of the desirability of perfect competition and alleged undesirability of falling demand curves.

26:58And to say that it's pretty feeble, of course, is being very kind to it. So what's happening now is economists have essentially stopped endorsing the idea of breaking up old businesses into tiny little blacksmith shop size, but they're still somehow intellectually committed to this alleged ideal, largely because, you see, you can use tangency and equations and differential calculus here, because if you start talking about something like this, the math has to drop out, but if everything is tangent and finally lower in equilibrium and it curves smoothly arcing and so forth, you can have all sorts of beautiful equations and tangencies and graphs are great, and as soon as you drop that and bring in the real world, the graphs and equations either have to be modified or have to be eliminated, which reduces the alleged science, the alleged hard science of economics.

27:52Of course, the hard science is only alleged, obviously the whole thing is an issue of fabrication of alleged science. So, at any rate, that's the setup and part of the argument you see is that in order to have so-called competition, every firm has to be very tiny. Goods are given. The good is quote given unquote. I mean, you can't have any improvement because then any improved product becomes quote monopolistic unquote because there's only one firm that comes out with a new product or a new invention. So according to this doctrine, say Polaroid is the first firm that comes out with a Polaroid camera, Polaroid process, it makes it monopolistic right away because you only have a million firms, each one very small. But monopoly is is good in that sense because without that you wouldn't have any improvement at all.

28:47Every firm would be like a small wheat farm, no firm would be able to get out there and invent a new product or a new process or whatever. There wouldn't be any computers, there wouldn't be any Xerox, there wouldn't be Polaroid, there wouldn't be no calculators because everybody would be stuck in their own wheat farm kind of thing where no one firm can do anything and one firm can be even active as a competing force much less as doing anything else. So anyway, what I'm trying to say here is that the whole alleged ideal is a lot of hocus pocus. It's mumbo jumbo based on a whole series of crazy assumptions, tangency, the given cost curve, the tangency which only exists in long run equilibrium in a peculiar shape, a linear Shapes and the U-shape point, so in real life, again, the real problem of monopoly is not following the man curve, nothing wrong with following the man curve, nothing inefficient or unethical or anything of the sort, the problem of monopoly is once again the same

29:50problem we had in the 17th, 18th century and 19th century, namely, government grants of have exclusive privilege, either for one firm or for several firms, that's really the situation where monopoly comes in. Cost plus or exclusive contracts or keeping out different parts of the industry and thereby shifting the supply curve to the left, raising prices, keeping out competitors, that sort of thing which always has existed, always has been the problem of monopoly, still is, despite the redefinition of monopoly being a falling demand curve, monopoly is still by the government. Okay, let's see how this works. The, for example, before deregulation of airlines, I mean from the 1930s until a couple of years ago, we had the Civil Aeronautics Board, a beloved institution, which was put in by the large airlines, United Pan Am in the 1930s, These serve as a cartelizing device, in other words as a monopolizing device.

30:56The CAB was put in a lobby form of the big airlines with staff, essentially people from the big airlines. The idea was to exclude airlines and assign monopoly routes and also to regulate the rates so the rate would keep going up. For example, in New York to Boston, I think only Eastern Airlines could do that route in those days. If anybody else tried to fly from New York to Boston, they were shot. In other words, they were considered illegal. They were excluded by the CAB. The CAB gave certificates of convenience and necessity, I think it was called, to any airline on any route. The CAB said, no, you can't fly on that route. You couldn't do it. There was no free market, in other words, no free enterprise in the airline industry. I think at one point, Pan Am had the entire Pacific locked up. All routes in the Pacific had to be Pan Am. Nobody I think it was only, I forget now, which I think Pan Am was a Republican airline and TWA was Democratic, I think, or vice versa, I think, yeah, I think that's what it is.

31:57When Democrats came in, they allowed TWA to fly in that route. So, and there still is, by the way, a very powerful international airline cartel, IATA, International Airline Something Association, Transport Association, something like that, which has a lock up on all the European flights. And those of you who've ever flown to Europe will see that to your horror, it's more expensive to fly from London to Frankfurt than this from the United States to New York to London because the intra-European flights in Europe are locked up by a very powerful intergovernmental cartel which used to be, which the United States has now finally busted, has been busted inside the United States from American Airlines. So in other words, you have a rationing situation You assign routes, you exclude everybody except one or two airlines from each route.

32:51You lock up particularly the major routes, the most profitable routes, and jack up the price. Now originally, I think as late as the 1950s, there was no such thing as first class and tourist. All classes were first class. Everything was very extremely expensive. What you had then was heroic little airlines. They have names like Transamerica and Transcontinental, Transcontinental. They were competing and there were small airlines. Another thing you have to realize which will emphasize this course too, a big company doesn't necessarily out-compete a small one, sometimes small competitors are more efficient. And so in this case the small airlines came in, they started out-competing the big ones by offering cheaper service and a no-frill service.

33:40This is the days before People's Express, and immediately the CAB and the rest of the airlines comes in and puts them, prohibits them from scheduling their flights. In other words, it says, okay, from now on, you guys, there's no safety problem, by the way. Safety is the FAA, Federal Aviation Administration. CAB was purely in charge of economic monopoly, part of the airline business. And these guys, they had a very good safety record, much better than the big airlines per mile flown, but the CAB said, well, you guys are unfair competitors, we won't allow you to schedule your flights, in other words, they couldn't have any timetables, they had to sit there on the runway until they filled up, so they could only say, well, we're flying on Tuesday, they couldn't say we're flying Tuesday at 11 a.m., they're prohibited by the law, by the CAB from doing that.

34:34Even so, they were called the non-scheduled, the non-scheduled airlines. Even as non-scheduled, they were able to out-compete. They were able to fly people from New York or L.A., I'd say, for half the price of United or American or PWA. They were very good. Yeah? Yeah, it affects how much the consumers are willing to go for, right, and there was a cut down on the consumer demand, obviously, for, you know, they don't know when you're But even so, even with the non-sked repression by the CAB, they were still out competing, they were doing very well. They were cutting the price literally in half, a fair, and it's true there were no frills. Some of these out-bits used to weigh you along with the luggage, there's a maximum weight of you plus the luggage.

35:22For those of us who are on the heavyset side, we felt it was kind of discrimination. Nation. Still in the law, you're paying as a trade-off, in other words, you're in term for getting the ignominy of getting weighed, you also, you know, cost you a lot less. I remember my wife flew from Los Angeles to New York on a non-scare, I think it was Transamerica, and it was very cheap, it was kind of scary in the sense that they said, well, at one point they announced, please everybody go to the back of the plane, that sort of thing. It didn't give you a feeling of great confidence. So at one point there was a leak in the, it was raining outside, there was a leak in the ceiling of the plane, the stewards were very, a great aplomb went up there and took a Band-Aid and put it on the leak. So it was kind of a raffish, a raffish airline, it didn't give you great security, on the

36:10other hand they had a very good safety record, had no crashes, as I remember, and they forced, they were the ones, it was a competition of trans-American, trans-continentalists, forced the big five, finally create a coach section along with the first class section, cut their Fair in the rear of the plane in half. That was in the 1950s. It was them that did it. The heroic battle competition of these little airlines that forced America and United Airlines and TWA and so forth to finally create a second-class fair system. Finally, what the CAB did is they simply put them out of business. They forced them out of business. From now on, you can't fly anymore. That was the end of that. The end of poor trans-American, trans-continental and the rest of it. There was another plane that went to Europe, I forget the airline, friends of mine used to go on when they were students. They would fly to Iceland and Luxembourg and it would land in the United States, it would land somewhere on a field in New Hampshire

37:06and you make your way to New York by train or bus or something. Again, very cheap, much cheaper than official fares in that period. So what happens is, in other words, these These planes had minimum, their rates were kept up, they were set by the CAB, a very high rate. Also, there's all sorts of ways to compete. Now, if you can't compete on the basis of price, you compete on the basis of quality of service, of thrills. And so, you start giving better food or swankier portions, prettier stewardesses, these became the methods of competition rather than price. At one point, Iata cracked down and said, from now on, no more meals, no more hot meals on transatlantic flights.

37:56You can only have sandwiches, no more hot meals, no more, you know, real dinners. And so what the individual airline started to do in order to break the cartel, they started having, okay, we're only having sandwiches. They had open-faced sandwiches. They'd take the whole beef bourguignon and put them on a piece of bread and call it a sandwich. and this way getting around the crazy cartel regulation. So economic history by the way, history of government and economy is essentially a history of the government versus the market, the government puts on crazy regulations, the market tries to get around it, we've seen the price control and so forth. Same thing is working here with monopoly privileges, you put on a regulation, you have to keep the price up, then the airlines start competing in things like better meals, then the cartel The phallocytes are cracked down on the meal and say, no, you can only serve sandwiches, only serve open-faced sandwiches.

38:47The whole meal on top of a piece of bread and call it a sandwich. What finally began to happen in the airlines is they became, if you're a monopoly, you get a very high profit. But eventually, in the long run, the profit gets competed away to higher costs. In other words, what then happens is, in other words, you have a high demand curve, high profits, then increase your demand curve for workers, for raw material, for whatever, and the prices start going up, and what happens is you have a very high salary, for example, for pilots and stewardesses, much higher for these big airlines than anybody else, from the on-schedule types, very high costs, plush offices, and enormous amount of inefficiency.

39:36We wound up after about 40 years of this with the airlines losing money anyway, even though they were monopolistic, even though they were restricted and so forth and so on, they're still losing money. This, by the way, was what happened with the trains and railroads in general. Railroads were overbuilt. They were then regulated. Their fares were kept up. Rates were kept up by the Interstate Commerce Commission. And finally, after many decades of this, they started losing money, even though they were getting privileged by the ICC, losing money as monopolists, because monopolists tend to and so you wound up with these airlines losing money anyway and finally when the move for deregulation came in the late years of the Carter administration in 1978, the airlines were almost ready for it, they had to try something new and so they more or less went along with it even though reluctantly because monopoly just wasn't working finally, they were just losing money anyway and they began to realize maybe we'd do better under deregulation

40:31Even though they weren't happy about it, their love for monopoly had more or less withered away after 40 years of this. As a result of deregulation, you have tremendous changes in the airline industry. Some lines went bankrupt, other lines popped up as new and effective competitors like People's Express. Again, with People's Express, it's much cheaper. On the other hand, you have to realize that you're not quite sure when they're going to take off, because they might sit there loading up, etc. So, and you realize that and you pay for the difference. So various outfits have been involved, a lot of reshuffling in the airline industry, plus the invention of the hub and spoke thing, which came about only by market, began to realize it's more efficient in hub cities like Denver, let's say. So instead of having a lot of non-stop flights, say from New York to Los Angeles, you stop at Denver, you stop at Houston, you have a lot of airlines coming in from other cities,

41:25coming into Denver and then going out again. only could have predicted in advance this is what would happen, this only came about as a result of the market forces, or turned out that this is the most efficient way of doing it. So, at any rate, this is, so in the long run even the monopolists begin to lose out in this situation, but it often takes you know half a century to do that, okay that's enough for today. Keep you up on the news, since the term has started, you might have noticed if you had Time Magazine, the current issue of Time Magazine has a front cover, it says, oil price, cheap oil, good news, and underneath has a headline, cheap oil, bad news, and then has a typical time type discussion, which is very middle of the road, having quotes from both sides saying cheap oil are good, cheap oil are bad.

42:22The latest political flap is Vice President Bush, who is indeed a Texas oil man, who came out in favor of raising the price of oil, quote, stabilizing it, thereby violating the current principles of the Reagan administration, there's a big flap on that. So here we have a situation, the price of oil has magnificently fallen from 30 bucks a barrel, 35 dollars a barrel several years ago to about 10 dollars a barrel now, something like that. In real terms, since the prices in general have tripled in the last 20 years, this means it's the equivalent of about 3 dollars a barrel in 1967 or so. So it's more or less, in real terms, corrected for inflation, it's more or less what it was before the OPEC Arab oil explosion in the early 70s, a little bit higher, but more or less the same.

43:16So what happens with any price change is hysteria hits, in other words, whether the price is going up or down, most of the establishment, most of the media is attacking it. Terrible thing will cause inflation or depression or whatever the heck it is, and it can't both be right. It couldn't have been a terrible thing to raise the price of oil from $3 to $35, and And it's also terrible to go down to 10. I mean, you can't have it both ways. Unless you take a position, any change whatsoever is bad, which needs to be an idiotic position to take. So what's the real story here? It's true that the Texans don't like the fact... Texans love the fact that the price of oil is $35. If you're a Texas oil man, you'll love the $35 an ounce of barrel, excuse me, $35 an ounce...

44:01$35 a barrel crude oil price. You don't like it going down to ten. On the other hand, who cares about Texas oil man? Why should they set the standard for how we decide something, how we judge it? The standard of all these things should be judged. The way to look at it, you don't go take Gallup polls and ask a Texas congressman and ask a New England congressman. What you do is you figure out where the consumers stand on this thing. In other words, the whole point of production, the whole point of an economy in general is for consumption. The whole point of producing oil so that eventually it gets to the consumer in the form of kerosene And so the whole point of production is that over time, from the days of the caveman until the present, more and more consumer wants are being satisfied, because standard of living keeps going up.

44:51Everything gets cheaper and more abundant, the choices available to the consumer keep improving and increasing, and the new products come on the market and old products get cheaper. That's the whole point of production. production. That's what increased standard of living means. The consumer can get more and more goods and services. So we know, then, how to judge any change, up or down, of a dollar and prices, whatever. Namely, cheaper is better, period. Of course, if you have maximum price control, you screw everything up. So I'm talking about cheaper on the free market. Cheaper is an expression of increased supply, of breaking cartels. Cartels are breaking I'm going to cartels today. Cartels deliberately restrict production and raise prices. Breaking up of a cartel is what's been happening in the last couple of years with OPEC. It means the consumers are enjoying the benefit of cheaper oil and lower prices. Cheaper is better.

45:48And that solves the problem. It's better to have computers on your lap for whatever it is, $35 rubber computers, and they have it plug into a mainframe of $2 million or whatever. So it's better, cheaper is better, that's what you hold in your heart, which is of course what the average person's reaction is anyway. What you find in economics is that basically the average person's immediate reaction is usually correct. Unfortunately, the average person's reaction is often overlauded with phony economics and bad advice they get from the media. So cheaper is better, cheaper gasoline is better, cheaper fuel is better, all the rest of it. Notice some of the phony arguments you get. Well, the trouble with cheaper oil is that people use a lot of it and then it will get more expensive. Well, and then we worry about it after that. You take each thing a day at a time. You don't say you have to jack up the price of oil now, reestablish the cartel, which is essentially what Bush

46:43wants to do, and raise the price of oil so that it will avoid an increase in the price The Price of Oil 10 years from now. The whole concept is nuts. I mean, looking at it as a logical argument, the whole thing is full of prunes. And the only reason people advance the argument is not because they believe it. Nobody can believe it. No rational person can believe it. What we should do is to force the price of oil up now, because eventually in 10 years it might go up by itself. That's an argument so ridiculous, nobody can really hold it. These arguments are advanced for sinister economic interests. By sinister, against the public interest, for those who want to reestablish the cartel, jack up the price of oil and cut the supply, which Texas oil people want to do, of course. So it's not a middle situation, you don't have to be in the middle of a rotor on this thing, you don't have to take gallop polls from everybody, it should be crystal clear

47:36that cheaper is better. And finally the oil people are finally getting their comeuppance, the OPEC types. And the classic method by which cartels always get comeuppance, okay, let's get into that. The cartel is a situation where suppliers of any sort, and we're going to go through various examples of this, suppliers of medical services, suppliers of taxi service, suppliers of oil, doesn't really make any difference. They try to band together, here's the supply and here's the man, to restrict the supply and raise the price, taking advantage of an alleged inelastic demand curve. Let's assume that the man curve of the industry is inelastic. We know, of course, the man curve of every firm is elastic, it's fairly flat.

48:22So they can't, in each individual, if Wonder Bread, let's say you want to have a bread cartel, if Wonder Bread try to raise the price to two bucks a loaf, nobody's going to buy it except a couple of Wonder Bread, very wealthy Wonder Bread fanatics, everybody else will shift the Pepperidge Farm or Silver Tasty Bread or whatever, but if all the bread firms get together and try to raise the price, they're trying to go up their industry to man curve curve and thereby increase the alleged, let's assume we have an inelastic demand curve, it doesn't have to be inelastic, but in those industries where the demand curve is inelastic, firms are tempted to try to restrict production and raise the price thereby benefiting each firm and screwing the consumer. Now most people think that it's easy to have a cartel, most people think, I think the average person, in this case the average person has the wrong instincts, but the, let's say General National Electric and Westinghouse, which is essentially a two-person, a two-firm electrical

49:12industry, a major firm in the electrical industry. And the vice president of each gets together over at a union league club or something and they're having a cocktail and they're saying, well, and one says to the other, hey, Jim, why don't we increase our price by 20%? And we'll both do it and we'll have an inelastic demand curve, we'll have an increased profit and Jim says, that's a great idea, Joe, and at the end of it, it's not the end of it. It's very difficult to establish a quartile, even with that, even with that, forgetting and many antitrust laws. The reason is this, it's easy for both Westinghouse and General Electric to say, hey, let's raise the price. That's great. But in order to have a viable rise in price, in order to be able to do it, they have to cut production. In other words, whatever it is, 10%, 15, whatever it is, each one has to agree to cut production in order to have this joint rise in price.

49:59Every businessman hates to cut production. They hate in their gut to cut production, what they want to do is increase production. Every business man wants to expand his operation, he doesn't want to cut them. And so this is a goal in the heart of every business man. So the former cartel is a very difficult process, causing a great deal of negotiations, even when it's legal, even when there's no antitrust problem. Months of negotiation, well, we have to cut production, how much do we cut production? And each one, let's say, you have to have a base year, okay, let's say 1985 was the base year. Let's say both parties or two or three firms in the industry, they each agreed to cut production Well, they can do that, but you see, over time, and the time doesn't have to be very long, a year or so, each one will think, Jesus, why am I restricted to 1985? 1985 is getting to be obsolete.

50:45I've got new machines, I've got better equipment, I've got new products. Why should I be bound by 1985 when I could, I know darn well if I expand production, I can out-compete these guys now, I can get a bigger share of the market. Each firm has to believe that, because if you're in business, you have to be an optimist, to be an entrepreneur. You're spending a lot of money, investing a lot of money, and pessimists don't last long in business, so most businessmen are optimistic. And most businessmen are chafing in the bit. Why should I be restricted by 1985, which is now three years ago? And so the cartel quotas tend to be busted. In other words, each businessman, they tend to renegotiate. They say, well, I've got a better product, I want to increase my production this year. And the other guy says, no, you can't do that, you're violating a quota. And often the quota then breaks up, the whole agreement breaks up in mutual recrimination and hatred.

51:30of Hatred, and you're back down again. So this is, it's very difficult to maintain sustained quotas of this sort over time. And also, in addition to that, each firm has a tremendous temptation to cheat. Here they are, they've restricted production by 15%, they have a higher price, each banking better higher profits, each one says, boy, if I can only pick up, if I can cut my price to suppliers secretly, I can pick up enormous increase in product, go down my firm demand Curve and make millions. So he goes to a supplier and the other guy says, look Jim, I'll give you a secret discount, rebate of 15% or 20%. You don't tell a listing house about it, whatever. Because we have this cartel agreement. The key price is up and cut production. So each firm has a temptation to cheat. The temptation is enormous. And they cheat and they have a secret rebate. I don't mean an illegal rebate in the sense of the manager stealing from

52:25in the Company. I mean, it's simply a rebate where you say, look, I'll send you this product, though, electrical product, whatever it is, for 15% less, but don't tell anybody. So because I don't want to violate my agreement with General Electric or Westinghouse or whatever. So each one cheats. It takes, you know, after about six months, everybody spies on everybody else, and they find out the other guy cheats, and the whole cartel breaks up in mutual hatred, and they're back down again, except now they hate each other. So this is a tremendous pressure on every cartel to cheat and to break up in general, to break up the code of agreements and to cheat as time goes on. In many cases in railroads, when railroads was a big business in the 19th century, one guy would own two railroads, and he couldn't get any form of pool or cartel, let's say the three railroads, two of which was owned by the same guy.

53:14He couldn't get his own managers not to cheat, because the vice president in charge of sales, His whole life is devoted to increasing sales. He hates, like hell, to cut sales. So each guy was competing against the other railroad, even though there was one tycoon who owned both of them. They still cheated. They still busted the cartel. So even when one guy owns both companies, it's very difficult to get your sales managers or sales vice presidents to go along with the idea of restricting sales. So as a result, cartels break up from internal pressure, number one. There are two things One of the things which break out of every cartel, one is internal pressure, this sort of pressure, to cheat, to violate, to go down your firm demand curve, here you have making big profits, boy, if I can only cut my, secretly cut prices by 20% I can pick up enormous business.

54:01And the second reason is, here you have two or three firms get together and raise production, cut production and raise prices and increase profits, there's a lot of loose capital around, a lot of capitalists in the world who have a lot of money they like to invest, and looking Making your way out from profitable investments, they see, hey, this industry here, electrical machinery or railroads, whatever it happens to be, or sugar refining, the industry's making high profits, they've got this little cartel going, let's go in and bust it, let's go in and put in a new plant, new equipment, and undercut the cartel. So a new capitalist come in, they have a new railroad or a new plant, and the old firms are now confronted with this new plant with better equipment, because it's starting from scratch, they're going to use all the modern equipment. And then they're faced with the question, either they have to cut these guys into the cartel, the new firm, which means they have to cut their own production by 30% or something,

54:50or else the whole cartel gets busted, you're back down again to square zero. This is external pressure. In other words, new firms coming in with brand new factories and all that to break up the cartel, external pressure. And when you have an external pressure, when a new sugar refining plant comes in or a new The New Firm is there permanently. In other words, here are the two or three firms in the industry. They cut production and raise prices. The result is a new firm comes in with better equipment, outcompeting them. They're back down to square zero except they got a fourth firm which is outcompeting them and driving them to the wall. So no firm likes to do this. No industry likes to have an umbrella, a high-profit umbrella to invite new unwelcome competitors into the industry. So external pressure, internal pressure, broken up, every Every cartel in the history of the world has broken up on the free market, very quickly broken up.

55:47It doesn't take very long either, a year or two. Cartel tends to break up. The only thing which can sustain a cartel is government intervention to compulsory cartels to keep external, keep the price up, keep production limited and keep new firms from coming in. This is when the government comes in and enforces a cartel, that's the essence of what we're living under right now. or the Welfare State or the Welfare, Warfare State, whatever you want to call it, is essentially a cartilaging state where government intervenes to try to cartilage different industries.