The Myth of Natural Monopoly

0:00Okay, well what I'm going to do today is a continuation of what was started yesterday when we sort of shifted gears a little bit from history and in some economics to mostly economic analysis of a number of myths that I've been mentioning to you. The first myth was the myth of antitrust, and keep in mind, this whole series, I'm going to have four lectures on all together on these myths, is the theme is how over the years, This market failure, the idea of market failure has been bandied about but with very little substance in a lot of cases and with just downright falsehoods in quite a few cases like with antitrust yesterday. So today the topic is the myth of natural monopoly and then this afternoon I'm going to talk about labor market myths and then the myth of the New Deal is the next one.

0:54and, of course, the purpose of all these myths is to attack the free market and to generate support for interventionism in bigger government. And since not everybody here is an economics student, a lot of you have had economics, I wanted to explain, simply as I can, what natural monopoly is. And there's a story that, if you have taken an economics course, you've heard this story. And the story is, in the late 19th century, when manufacturing was being developed and becoming more and more advanced, there were a lot of industries that had heavy fixed costs before they could even go into business, like electric power, for example. A company would spend many, many millions of dollars just for the infrastructure, for the power plant and the distribution network, before having a single customer.

1:47and so but then once they were up and running the cost of serving each customer is very low next to zero think of a power company today one more customer is running a line from the street to your house cost next to nothing and so what they had was their their cost per unit cost per unit of the unit one might have been kilowatts of electricity let's say or telephone service it declined very sharply initially was very This was very high because they had all these costs, these fixed costs, construction of the plant and so forth, but then as they had 100,000 customers or 200,000 customers, a cost per kilowatt approached zero, and so you had, in all the economics textbooks, talk about this, you have a graph looking something like this depicting economies of scale declining cost per unit over the long run, The story that was told about this, about natural monopoly, why are they called natural, is that supposedly, one big company would get here first, one big company would achieve the minimum cost point, and if it could do that, it could under-price everybody, and everybody would leave the market because they couldn't compete with the one big company, and therefore,

3:17It's sort of similar to the unicorn of economic theory that I talked about yesterday, predatory pricing, sort of similar to that whole idea. And so the theory goes that since this is bound to happen, we might as well take advantage of the low cost, but regulate the price. and so the story goes the government stepped in wisely and benevolently and created a monopoly by law it gave monopoly franchise to these companies and said well you're going to be a monopoly anyway because of the free market is the failure of the free market supposedly so we might as well give you a legal monopoly it's illegal to compete but we're not going to let you charge some monopoly price which may be up here my finger is we're going to make Make sure you charge a price enough to make a profit, but not so high that it's the same price that a profit-maximizing monopolist would charge.

4:21And in a nutshell, that's the natural monopoly theory. And what I'm going to have to say about this today is that it's basically all bunk. It never happened this way. The economists never had this theory at the time. This theory was made up after the fact. If you take an economics class, you probably get the impression that wise and learned economists advised the government about this and explained this economy as a scaled business to the politicians and made the case for regulation. It didn't happen that way. This was all after the fact, and it became an ex post rationale for regulation In fact, in some of my research, I did a survey of what economists were saying at the time about large-scale production.

5:19And as I said yesterday when I was talking about antitrust, I surveyed just about everybody that had anything at all to say about large-scale production and its implication for monopoly. and I'll read you a few of them. Richard T. Ely was one of the founders of the American Economic Association. This was in 1900. He wrote this, large-scale production is a thing by which no means necessarily signifies monopolized production and keep in mind Ely was a self-described socialist and so and even he admitted that this is nothing to worry about. The co-founder of the of the American Economic Association was John Bates Clark. In 1888, he wrote that combinations, he's meaning mergers, companies that merge and become big and can achieve economies of scale like this, he said that combinations are to play an increasingly important part in economic affairs is altogether probable, but that competition is to a corresponding extent, or that competition is to be to a corresponding extent destroyed should not be too hastily accepted.

6:24So he wasn't buying the fact that this is going to destroy competition. Herbert Davenport was from the University of Chicago, a well-known economist at the time. He said that large firms imply obviously a smaller number of competitors, but do not require the elimination of competition. James Laughlin of Yale said that even when the combination is large, a rival combination may give the most spirited competition. And if anyone wants to follow up on this, I can give you the article of mine from Economic Inquiry that I'm quoting from, if you'd like to look at it or use it in your own research. But that was basically the consensus of the economics profession, that large scale production like this is really nothing to worry about. In fact, it's a natural evolution of the competitive process.

7:12and they basically all thought of competition at the time like the Austrians do. It's a dynamic ongoing process of rivalry, price-cutting, entrepreneurship, product differentiation and even the fact that one firm seemed to have most of the market at one point in time doesn't mean there's little or no competition. There's always somebody out there who's going to try to undercut that person one way or another and that was their thinking and so their thinking wasn't the natural monopoly story, that was a story that came around later. And so the question becomes, well, just how natural were these monopolies? I mean, what was, what was in fact going on? Was, is there any evidence that this story was being played out, that there was one big company evolving in industry after industry? Now, there were mergers in the late 19th century. But they weren't creating one single monopoly anywhere. And even if they did, that is not even necessarily a bad thing. That's not necessarily a bad thing for consumers, because you still have competition. You still have the threat of competition, even if at any one point in time, you have one single company. As long as there's not a law preventing entry, you're going to have competition. That's the real monopoly problem, if it's illegal to enter the industry.

8:34An economist named Harold Dempsetz, who you guys probably know because you're graduate students. So these are the hardcore over here, but you're not all graduate students in economics, graduate students in other fields. But Harold Dempsetz was a professor at UCLA for many years. He was one of my favorite authors when I was a graduate student because I was interested in this whole area, industrial organization, and I've met Harold, he retired now. But he did a lot of writing on this whole issue, natural monopoly, utility regulation. And here's something he wrote about that was actually going on in the late 19th, early 20th century. I'm going to quote Demsatz. He said, six electric light companies were organized in one year of 1887 in New York City.

9:20Forty-five electric light enterprises had the legal right to operate in Chicago in 1907. Prior to 1895, Duluth, Minnesota was served by five electric lighting companies, and Scranton, Pennsylvania had four in 1906. During the latter part of the 19th century, competition was the usual situation in the gas industry in this country. He's meaning gas lights, he's not meaning gasoline. Before 1884, six competing companies were operating in New York City. Competition was common and especially persistent in the telephone industry. That's something different, isn't it? Competition in the telephone industry. Baltimore, Chicago, Cleveland, Columbus, Detroit, Kansas City, Minneapolis, Philadelphia, Pittsburgh, and St. Louis, among the largest cities, had at least two telephone services in 1905.

10:10And so what he's saying is that if you actually look at what was happening, as opposed to the theory that's in textbooks, there wasn't any monopoly being created.

10:49and the library was the warmest place to be in the wintertime, so I stayed there a lot. But I found this book called The Gaslight Company of Baltimore, which was a history of utility regulation of gas and electricity in Baltimore. And it has implications for the whole nation because it relies somewhat on the research of Richard T. Ely himself, who was at Johns Hopkins at the time, and studying this whole issue and he wrote a long series of articles for the Baltimore Sun at the time and this old book published in 1936 mentioned this. And wouldn't you know it, I had an opportunity a couple weeks ago, there's a big issue about this in Baltimore right now in Maryland about the deregulation of electricity and there's a new newspaper in Baltimore called the Baltimore Examiner circulation of 260,000 and it's funded by a billionaire who's funded about 12 or 15 of these around the country, San Francisco, D.C. and elsewhere and they put me on the editorial board and they published Walter Williams and so I've been having fun creating heartburn in Annapolis for these politicians but I had an opportunity to actually quote this book in one of my op-eds in this new newspaper, The Gaslight Company of Baltimore because what's going on right now is

12:13The state of Maryland passed a law in 1999 imposing price controls on electricity at 1993 prices for the next six years. Smart, huh? And guess what they called that law? Deregulation law. They called it electric utility deregulation. and you know and so I was invited to write a column for this newspaper and so I'm always looking for ways to stick it to the politicians in Annapolis somehow and for a month I read in the Baltimore Sun front page deregulation has failed deregulation because the law is up it's I think June 30th is the end of the law and so the price can be set at whatever the market will set the price But for the last six years, we've been paying 1993 prices for power, for electric power, and so anyway, the politicians have been saying, well, deregulation has failed because no competition has entered. We thought competition would enter.

13:17think about that you pass a law saying you can charge only 1993 prices for the next six years you're a corporate executive contemplating spending a billion dollars or so entering this big market Maryland the DC suburbs to compete with a constellation energy which has been there forever it'd be Baltimore gas and electric is the what the gas light company of Baltimore used would you invest all this money if you thought your price was going to be controlled by the most anti-business legislature in America? It's lunacy. So I wrote an article called What Deregulation? Just pointing out in the first sentence that regulating, I've emphasized regulating the price of electricity for six years is regulation, not deregulation.

14:11and like the radio talk show guys in town, so hold, you know that, you know he's right about that because they've been, this mantra, this mantra was repeated every day, every day, deregulation failed, deregulation failed and so I thought I was on all the talk radio and even like a week later I heard these guys that are still talking about this because they were sort of embarrassed that they sort of went along with this language of deregulation and they got duped by it themselves, even some conservative talk show hosts who are usually wouldn't, are very suspicious in Baltimore of this stuff. One of them, an old friend of mine, Ron Smith, he was kind of embarrassed that he fell for this business. So I had the opportunity to quote this book and that impressed everybody because they thought I must be a real scholar because I can quote books published in 1936.

14:59So that's my background story on this book. But this book tells a story of how this happened in Baltimore anyway. And like I said, it does have national implications, not just Baltimore, because a lot of the information did come from Ely, who was studying electric utilities all over. He wasn't just studying electric utilities in Baltimore. He was, after all, the founder of the American Economic Association, quite the big shot. And here's some of the things that are said in this book. In his book, from its founding in 1816, this gaslight company constantly struggled with new competitors. Its response was not only to try to compete in the marketplace, but to lobby state and local government authorities to refrain from granting corporate charters to its competitors.

15:51So it was a rent seeker in the language of modern economics. And he goes on to say that here's the bad economics in the book. The author says gas companies and other cities were exposed to ruinous competition, and then he talks about how these same companies may be operating in Boston, let's say, they're suffering from ruinous competition. They were all bidding to enter the Baltimore market so they could ruin themselves even more, supposedly. So you read things like this and, well, if they're being ruined in Boston and New York, why do they want to come and have more ruination in Baltimore? And of course the answer is they weren't being ruined, they were competing. And sometimes they competed successfully and made money in these places. Maybe they didn't make as much money as they could if they were monopolies, but they were making money, so much so that they saw the Baltimore market and they wanted in on that too.

16:45And so this book is typical, it goes on and talks about excessive competition and how destructive it can be. And this was a thinking at the time, that excessive competition is destructive, but of course it is destructive to those who can't compete. Excessive competition is destructive to the Tennessee Titans, let's say, in football, or the Miami Dolphins, if it's too excessive, Because the Pittsburgh Steelers are so much better than they are, but but that's a good thing, you know It induces the Miami Dolphins and the Tennessee Titans to get better if they want to succeed and the same is true in business If they you want to succeed do better. I tell my students I have an old article from the Wall Street Journal that I use in a lot of my classes it's probably 10 years old now and the title of it is If you like your new American-made car Thank your neighbor with the 12 year old Honda is the title. And of course, the theme of the article is the reason why the American made cars are so much better now than they were 20 years ago, is they were forced to get better by Honda, Toyota, and the rest.

17:53And that was excessive competition is a good thing. It forces them to get better. And that's what was going on here. and so anyway this the interesting story about this company was there were three competing gas companies in Baltimore and they were trying to merge and create one company and create that they thought they could have a monopoly although they were foiled by Thomas Edison at that very time they finally merged and said we're in a catbird seed now we're gonna we're a monopoly Thomas Edison came around and in the electric light industry was invented and so there were In 1890, a bill was introduced into the Maryland Legislature, which called for an annual payment to the city from the consolidated gas company of $10,000 a year, and 3% of all dividends declared in return for the privilege of enjoying a $25,000 3% of all dividends declared in return for the privilege of enjoying a 25-year monopoly."

19:01So they were like criminals sharing the loot. The politicians said, okay, we will give you a 25-year monopoly, but every year you have to give us $10,000 and 3% of all dividends, us being the legislature so that we can spend it how we want to spend it. And that's how it came about. It didn't come about like this. There was no free market evolution creating a monopoly and the regulators in white suits on white horses came around and saved the day. That's the typical corny story you're told in the economics books. It didn't happen that way. It's kind of funny to read this book, this guy, he's an advocate of regulation. I don't know why he is. He tells you stories, he's an advocate of utility regulation and then he says, I don't I don't know what his tone of voice would have been if he was saying this rather than writing it but he talks about what happened next, what happened after they did establish this electric power monopoly in Baltimore and he said people felt that the negligent manner in which their interests were being served by the legislative control of gas and electric prices resulted

20:19Monopoly Privileges. What a shocker, what a surprise. And so, and then he says, the development of utility regulation in Maryland typified the experience of other states, the whole country. And so, if you read somebody who actually did some statistical or empirical research on what happened, as opposed to spinning theories, what happened was there may have been attempts to merge by these companies, and that, even if they had merged, they wouldn't In the early part of the 20th century, not all the economists were fooled by this. Another Another one of the nuggets of gold that I dug up in my scrounging around the libraries was an old article by a man named Horace Gray, and it's in a journal called the Journal of Land and Public Utility Economics.

21:27Today it's called the Journal of Land Economics. It's a pretty decent journal if you ever study issues regarding cities and urban issues, externalities, land development, it's pretty decent. But this was a February 1940 issue of this journal, and here's what Horace Gray said about this. He said, during the 19th century, it was widely believed that the public interest would be best promoted by grants of special privilege to private persons and to corporations in many industries. This included patents, subsidies, tariffs, land grants to railroads and monopoly franchises for public utilities. This was all a version of mercantilism, which we talked about the other day. The final result was monopoly, exploitation, and political corruption.

22:13Imagine that. And so with regard to public utilities, he said, between 1907 and 1938, the policy of state-created, state-protected monopoly became firmly established over a significant portion of the economy and became the keystone of modern public utility regulation. And then here's the good line. He said, from that time on, and I'm quoting, The public utility status was to be the haven of refuge for all aspiring monopolists who found it too difficult, too costly, or too precarious to secure and maintain monopoly by private action alone or profits, and he talks about how this included the radio industry, the real estate business, milk, air transport, coal, oil, farming, and all that.

23:00Once this happened in electricity, just about everybody, dairy farmers, said, I'm a public The role of economists is, they created, quote, a confused rationalization for the sinister forces of private privilege and monopoly. He's referring to this theory of natural monopoly. Those of you who have taken microeconomics, I bet that chapter on natural monopoly where they explain this theory is not caused, not called a confused rationalization for the sinister forces of monopoly privilege, but that's what it is.

23:51So, and if you haven't taken that course, beware that that's what you're gonna be taught. You know, it took the economics profession a long time. It took them about 50 or 60 years to begin looking at the truth about this. I mentioned yesterday that I take the credit for being the first economist to look at the actual reality of the origins of the Sherman Act. I still haven't heard anybody dispute that claim in print. They actually looked at the real data involved in the so-called monopolies of the 1880s. But I think it was probably the late George Stigler who first seriously examined, well, what was going on at this time, apart from Horace Gray and people like that who wrote short articles about it.

24:40But Stigler first became, in fact, when he won the Nobel Prize in Economics, which I think was around 1983, something like that, one of the things they cited was his early statistical research on public utilities. Electric Utilities is one of the things, because it led to this whole economic analysis of regulation that the Chicago School of Economics became famous for. This was some of the earliest studies of regulation that all determined that, well, regulation usually benefits the regulated industries at the expense of the consumer. And anyway, he did some statistical studies of electric utilities, and he found that after regulation, prices either stayed the same or went up. They didn't go down like they were supposed to. That's what he found.

25:27Then more, you know, after that, there were other studies by an economist named Greg Gerald, among others. He was a pretty well-known economist at the time, who concluded that 25 states substituted state-for-municipal regulation at one point between 1912 and 1917, so they sort of centralized it at the state level, The effects of which were to raise prices by 46% on average and profits went up by 38% on average, while reducing the level of output by 23%. And so, not only were they regulated and they were created as monopolies, but when they became more centralized at the state level, they became even more severe monopolies in terms of price gouging and monopolistic pricing at the state level.

26:13It kind of makes sense if you have the mayor in charge of regulating your electric power bill and it's a relatively small town, he's going to run into constituents who are going to complain to his face about the high prices and the rising prices. But if you have to walk all the way to Montgomery, Alabama, or the state capital of your state, not walk, but get there, to complain to who? Who are you going to complain to? I'm a bureaucrat who you can't find at the State Regulatory Commission. It's much less likely that the people are going to provide political opposition to that if it's centralized at the state level, and especially at the federal level. How many of you have any hope of going to Washington, D.C. and having any influence with anybody there? Well, if you bring a knapsack full of cash, you might.

26:59But other than that, the average consumer doesn't do that. Well, the next claim that was made in defense of the so-called natural monopolies, which are unnatural, was that, well, we have to have monopolies because all this excessive duplication will cause problems with all the wires running everywhere, digging up the streets too much, and we can't have six phone companies, that's not going to work, but Demsetz again, Harold Demsetz, spelled D-E-M-S-E-T-Z, by the way, he hit the nail on the head The problem of excessive duplication of distribution systems is attributable to the failure of communities to set a proper price on the use of these scarce resources.

27:54The right to use publicly owned thoroughfares is the right to use a scarce resource. The absence of a price for the use of these resources, a price high enough to reflect The opportunity cost of such alternative uses as the servicing of uninterrupted traffic and unmarred views will lead to their over-utilization. And of course, the real reason is that the government owns all the roads and the streets. And so as long as the roads and the streets are socialized and government-owned and are for free, they're an unpriced resource. So therefore, that's the root of the problem. The root of the problem is socialist roads. And those of you who have come to Mises University or are planning on coming in the future, you'll meet, we do have a Rhodes Scholar on the faculty, his name is Walter Block, and he's spelled R-O-A-D-S, Rhodes Scholar, he's written quite a lot about Rhodes Socialism, he's our own Rhodes Scholar.

28:52Murray Rothbard said the same thing in Man Economy and State. He said the fact that government must give permission for the use of its streets has been cited to justify stringent government regulations of public utilities, in quotes, many of which must make use of the streets. The regulations are then treated as a voluntary quid pro quo, but to do so overlooks the fact that the governmental ownership of the streets is itself a permanent act of intervention. Regulation of utilities or of any other industry discourages investment in these industries, thereby depriving consumers of the best satisfaction they want. So he pinpointed the same thing, that's the real problem with regard to excessive duplication. And in fact, there's been a solution to this, if it is a problem, the problem of multiple phone companies with too many wires that people think are unsightly or things like that, and it existed, it has been known ever since 1859, an economic writer named Edwin Chadwick wrote about a system whereby you could have competitive bidding for the right to be a monopoly. But

30:05The thing is, if the bidding is competitive, the winner, if it's an honest bidding process, the winner would have to promise to charge a competitive price. That's how you would win the bid and charge the lowest price, just like on a construction project. The lowest bidder gets the bid. So in theory, you could do that. There's been research in economics on how the French water supply system is like that. They might have, in a lot of the French cities, one supplier, but it's up for bid every couple And so you have to hold your costs and prices down if you want to compete and keep that contract to be the water supplier. And Dempsets, again, wrote about that also. And in fact, here in the United States, it's worked in Jersey City, New Jersey, when Brent Schundler was the mayor.

30:52I recall reading about how the city water department was horrible in that place. The water lines were rotting away. They were losing millions of gallons of water from leaks. The water leaks, it was very expensive, the water bills were going up, so he just put the whole thing out for a three-year contract, the water supply, and there are some really good, high-tech private water companies in America that all bid for this, and the one that got the contract did it, fixed everything up very quickly, and the water rates went down towards the lower rates, and Schundler kept reminding these guys that this is only a three-year contract, and if you don't do a good job, Competition doesn't always have to be between 10 competitors or 15 competitors.

31:43There are different kinds of competition. This is called competition for the field in economics literature. That's another way of taking care of this problem. One final thing I want to do here is to talk about how there's a lot of research in economics by skeptics, I'm not the only one. One of the reasons I am a skeptic is back when I was in graduate school, I was reading a lot of the work of an economist named Walter Primo, P-R-I-M-E-A-U-X, Walter Primo, and he was publishing all these articles in these top economics journals on the electric utility industry, which I kind of had an interest in at the time.

32:35And what he found was there were dozens of cities in America who never did establish a monopoly franchise in electric power. They allowed competition, and it wasn't a monopoly sharing in the spring situation, it wasn't like, we'll give you a monopoly franchise for this half of Auburn, Alabama, and then this company, you get the franchise, you serve the other half of Auburn, Alabama. It was, it was, they were, they both competed for all of Auburn, Alabama, for example, and so there was direct, in fact, his book is called Direct Utility Competition, The Natural Monopoly Myth. And Chad tells me that I could push a few buttons here and make it so that you could read some of this stuff. Chad doesn't always tell the truth, as we all know.

33:22Oh yeah, there it is. It's getting a little bigger. I don't know if you can read it. And this is just a list of some of the conclusions of Professor Primo. He taught at the University of Illinois for many years. And so he studied and he published in the Review of Economics and Statistics, which is a prestigious economics journal, places like that, of what he found. Direct rivalry between two competing firms that existed for a long time, over 80 years in some cities, you know, who ever heard of that? The rival electric utilities compete vigorously. What a shocker. Customers have gained substantial benefits from the competition. Contrary to natural monopoly theory, costs are lower where there are two competing firms operating.

34:07There is no more excess capacity under competition than under monopoly. And he says the theory of natural monopoly fails on every count here in this sample of several dozen cities. Competition exists. Price wars are not, quote, serious, he said. It's price competition. It's not ruinous. about ruinous, there is better consumer service and lower prices with competition, competition persists for very long periods of time and guess what, consumers themselves prefer competition to regulated monopoly, who would have thought. Any consumer satisfaction problems caused by dual power lines are considered by consumers to be less significant than the benefits from competition and those are basically the main The President has been doing a lot of research on electric power competition.

34:57You never do hear about this. Back in Baltimore when I left, I published my article about this several weeks ago. What's going on now since then was every politician in the state, the governor, all the legislators, the mayors, the mayor of Baltimore, they all have their plan for what the price ought to be for electric power. The Mayor says it ought to go up only by 20% this year and then 35% next year. The Governor says, no, no, it should go up by 30% this year and then 29.5% next year. But every one of them advocates price controls. None of them have said, gee, this has created quite a mess. Maybe we should just let the market set the price. So what's going to happen there is that there's going to be some kind of re-regulation and they're going to call it deregulation again, probably. But it's a horrible The same thing is true of cable TV. Even a lot of the textbooks in economics when they talk about this, if they use exhibit A of a franchise monopoly, will point to the cable TV industry.

36:01But the same thing is true of cable as has been true of electric utilities. There have been dozens of cities in America who did not have a cable monopoly. Monopoly. They allowed direct competition in cable services for years, although most cities did establish a monopoly franchise. And how this happens, I can recall reading when I was at George Mason University some years ago. Washington, D.C. did not have cable TV. And the suburbs all around had cable TV. And the people who lived in D.C. were kind of upset about this. You know, why don't we have cable? The nation's capital. You know, can't even watch this. This was even before CNN became I'm reading about this in the Washington Post and elsewhere, and what was going on was they took bids for about 10 or 12 years.

36:53This was when Marion Barry was the mayor, the guy who went to prison for snorting coke with a prostitute on television. You saw him on the video. You never heard about that? Well, you're from Serbia. I don't expect you to know about this. This is before your time anyway. He was videotaped snorting cocaine with a prostitute in a hotel room and went to jail for that. And then he was re-elected after he got out of jail. His campaign theme was, felons should be given the right to vote. But anyway, his administration took about 12 years to give out the monopoly franchise. And you're reading about this, why did they take so long? Well, all the cable companies in the country were whining and dining and financing the political careers of Barry and all his associates.

37:47And that's what they were doing. And as long as they could do this year in and year out and being sent to expensive resorts with all expenses paid with your wife and or your girlfriend or your mistress or whatever, and campaign contributions, When they finally gave the franchise to one company, all of the mayor's political advisors were all given stock in the company, and so they made out pretty well. And I did read a few years ago, just a couple years, about two years ago, that some of these people held on to the stock for seven or eight years and cashed it in for $12, $15 million. So this was a pretty good gift to these politicians who were all around Mary and Barry, and so that's the way it worked. They just held back. On one hand, they wanted to sit back and collect all these bribes as long as they can, but on the other hand, the people were beginning to revolt about this.

38:40They must have decided, well, we've hit the margin here, where the marginal benefit of collecting bribes is roughly equal to the marginal cost of losing votes from no cable in D.C., a third world country, why don't we have cable? of Cable, so they finally gave out the monopoly bid, you know, thanks a lot, you know, from the people of Washington, D.C. They went from having no cable to having to pay monopoly prices for crappy service for cable. I guess that's an improvement. But the point is, it doesn't have to happen this way because it hasn't happened this way in dozens of cities in America. It's only some cities that have done this. And the final example I want to So what we're going to offer here is telephone services. AT&T was the first telephone company, but AT&T had patents on telephone services, but they expired in 1893.

39:38And what happened was dozens of phone companies propped up. And I'm quoting here an article by Adam Theurer in the Cato Journal, fall 1994, about the telephone monopolies. He says, by the end of 1894, over 80 new independent competitors had already grabbed 5% of the total market share. After the turn of the century, over 3,000 competitors existed. So AT&T had 3,000 competitors. and Competitors. Then World War I came, and the government nationalized the telephone industry for national security purposes. Just like Lincoln censored all the telegraph during his administration, with the new technology, the government censored all the telephone, Congress wanted to, and now with the Bush administration, they're doing the same thing, aren't they, with the domestic spying. That seems to be the trend there. But anyway, the war ended, and so there was no longer a national National Security excuse for nationalizing the telephone industry.

40:41But they didn't move back to competition, which is where they started from. They moved back to a situation where AT&T, which had been lobbying vigorously, as you can imagine, for a franchise monopoly, was given a franchise monopoly operated by each state. Each state ran a monopoly within that state and regulated the monopoly. And so, and the same arguments were made, competition is duplicative, it's destructive, it's excessive, it's wasteful, and he quotes one politician as saying, there is nothing to be gained by competition in the local telephone business. Now, that was the conclusion of a congressional hearing, nothing to be gained by AT&T, that's true, but a lot to be gained by the consumers.

41:28And so that's how we came to have a monopoly in telephone services until recently. They finally deregulated much of the telephone services in the last 15 years or so, but that's why AT&T was a monopoly. Again, it was a government-franchised monopoly. And so the final thing I'm going to say before taking questions or comments or brilliant commentaries, I keep asking for brilliant commentaries, haven't had any yet, but don't I don't feel badly, I asked my classes for that for 14 weeks sometimes, and I still never get any from it. No, we've had some brilliant commentaries here. I want to conclude by quoting old Horace Gray again, the guy who wrote the article in the Journal of Land Economics, by summarizing his summary of this whole thing, which I think is exactly right, and so I can't do any better than this.

42:18He says, by a soothing process of rationalization, men are able to oppose monopolies in general, but to approve certain types of monopolies. Since these monopolies were, quote, natural, and since nature is beneficent, it followed that they were good monopolies. Nature is good. Government was therefore justified in establishing good monopolies, end quote. He's sort of ridiculing this word, natural, mother nature, the goddess Gaia approves of this, it's sort of an early environmentalism. That's also, by the way, my theory of why environmentalists hate styrofoam, but not paper.

43:05They prefer you to use plastic bags and not paper bags at the grocery store. paper comes from Mother Nature, it comes from trees, plastic bags, man-made, they don't like styrofoam, but that's not related to natural monopolies, but that's what this reminds me of, and so that's his conclusion, I think I'll stop there, I don't like to talk more than 45 minutes, because I see a few people dozing off there, but him especially.

43:41I heard a rumor there was beer in the dormitory last night, so we know where it came from, I guess. Well, that's all I'm going to say for now, but questions or comments from anybody? Tom, has there been any improvement in the textbook over time? Well, some of them, as far as introductory textbooks, Gortney and Stroop is one of the better mainstream market-oriented textbooks, And they talk a lot about the bad side effects of the process of regulation in there. And they talk about how technology has rendered moot, franchise monopolies in a lot of areas, satellites replacing cable and all that. But I don't know if anybody has incorporated some of this stuff and said, and questioned the whole theory of natural monopoly to begin with.

44:33I haven't seen any, so I don't think they've been improved in that regard. The ones I've seen still all give the standard story and then tell the story that, well, the regulators mess up a lot and they create all these inefficiencies. And sometimes politics comes in and the politicians and the industry controls the regulatory agencies and they input price controls and that creates shortages. So they document all the bad effects of regulation, but then I'm not familiar with anybody who questions the whole theory, the fundamental theory that we have to have regulation. Just like with my antitrust stuff, as you know the Chicago School has written millions of pages on how misguided antitrust regulation has been for a hundred and some years.

45:21But they still won't say therefore we should scrap it all. They still tend to say, well, we need smarter regulators or regulators that are better informed by us smart Chicago School economists and things like that. Maybe there is one out there, but I haven't seen any, and I'm not sure why. I know a lot of economists make a lot of money as consultants to the utility industries. Maybe old George Stigler is right. When George Stigler wrote an article about why so many economists came to embrace antitrust regulation, Regulation. The way he put it, I can paraphrase as I did yesterday, that they caught on to the fact that they could earn significantly more than the minimum wage as antitrust consultants. And that probably has something to do with why they aren't too harsh in their criticisms of utility regulation either. Plus, you know, there aren't that many who are willing to challenge these fundamental concepts. You're the skunk at the garden party if you challenge

46:20This is something that's been incorporated into all the textbooks, because you're going to force all these people to change all their textbooks, and who wants that? And so I think there's a lot of resistance to this sort of thing. But I think we can make some progress by doing more of this kind of, you know, seriously looking at all these market failure claims, and informed by Austrian economics and the knowledge that you need to look at, dig for the facts, don't buy these theories. And to the students out there doing research, like I said yesterday, I was amazed when I started researching antitrust that no economist had ever actually looked into the notion that the trusts of the late 19th century were actually restricting or expanding output.

47:05I couldn't find any book, I looked at hundreds of sources and I couldn't find any data at all. So it was just an assumption that was thrown out there. So when you read things like this, always look for the evidence, and if there's none, you should be suspicious of that and look for it yourself. Other questions, comments? I have another comment about a lot of the things you're talking about in terms of rate gearing, the analysis that Chicago's run, and it seems to be almost all focused on price, the price of the product, the rate that they're going to be able to charge, and you know, frankly with metromonopoly, the price is not the thing that bugs me the most, it's the service that you don't get, and you typically get from a competitive industry, and I don't know if Electrician should be 5.1 cents or 5.3 cents, but I do know that if my power goes out for four or five days in a row, you know, what kind of impact that has on your life. And they always seem to be more of a circle.

48:22They'll sort of mention a few things here about non-price competition, but I think that's where the model focuses on, doesn't it? Price competition. And it's hard to model, create an economic model of how trees fall down and break the power lines, and it takes them two weeks to come out and fix them. It's hard to devise a fancy looking mathematical model of that, but that's what happens when you don't have competition. Yeah, the same with me. I live in Maryland, which is sort of right on the cusp between the northern cold winters and the more mild southern winters. And so that means we get lots of ice storms. It's not cold enough to snow, not warm enough to rain, so we get ice. And so it'll ice for two hours, and all it takes is one branch, and you'll have 15, 20 square miles out of power, because it'll just knock over one big wire.

49:17and it'll take them some three or four days to come out there and you know people are always asking well why don't they come out and cut down some of these branches you know during the summer why don't they come out and cut the wall they don't have to there's no competition why should they do that when I can just pocket the money and let you sit in the cold that's true this happened one time we went five days without power and I ended up going out and buying two gas stoves and putting them in with propane because you don't We need electricity for these propane gas stoves and things like that, but yeah, you're right.

50:00It's like the DMV.

50:13and they said, well, we can't make it out this afternoon, but we'll be out there tomorrow after. I said, tomorrow is Sunday. They said, yeah, we'll be out there on Sunday because now they have some competitions. Yeah, all right, yeah. Yeah, well, yeah, that's, I don't know, like I said, I think economists don't study that because it's hard to model, but Austrian economists do. That's, you know, we do a different type of analysis. We don't just rely on these pure models Like Joseph Salerno was saying yesterday when he was talking about his seminar for next week, Mises and the rest, they always did applied research. They were theorists, but they always did, especially Murray Rothbard. He always did, his whole career, he did a lot of really, his dissertation was on the Panic of 1819, which is applied Austrian economics. And so the Austrians are doing some of this, but not the big shots who pull down all the big bucks advising the from the regulatory agencies I guess. I've had quite a few MBA students. For years I've been teaching executive MBA students at my school and quite a few of them work at BG&E, Baltimore Gas and Electric and they just laugh, you know, we talk about these things and of course they're the recipients of all this largesse with their big travel budgets and their bloated salaries and all this and they just laugh and tell me how much money they make and how many trips to Hawaii they go for conferences on electricity.

51:43and they tell me how easy it is to recruit people too because they've got just unlimited loads of cash. If they really want to hire somebody, money is not an object. They don't really compete in the labor market for executives. It's easy to get an inside view like that. Yes sir? I think that was atypical. I think that was longer than the usual thing. Let me give you, if anybody's interested, I have a good reference. My old friend Tom Hazlett spent most of his academic career publishing about this, telecommunications in general, but cable especially. He's quite the expert on that, and it's helped him buy a very big house in Potomac, Maryland, and a very big boat on the Potomac River. One of his articles is in the Yale Journal of Regulation in 1990 called Duopolistic Competition in Cable Television, And it's one of the first articles I know of that documented the competition, direct competition in cable, you know, and there's a book called Unnatural Monopolies edited by Bob Poole, Robert Poole from the Reason Foundation that has a whole series of essays on these issues.

53:14And so those are two good references if those of you who are interested in this business. But I think the point was that Washington, D.C. was exceptionally bad because of Mayor Barry. Thoroughly corrupt. Thoroughly, totally corrupt, even more than most. The one question I'm going to ask is, with SBC communications buying up of the other regional belts and ours, buying up AT&T, a lot of people are thinking, well, the AT&T monopoly is going to get back together again, it's going to be unregulated, and we're not going to be able to afford full service in the region.

54:03capital investment, this whole idea that capital investment was a buried entry had a lot of appeal to a lot of people because you had to build an automobile plant to compete with General Motors but that doesn't seem to be a hindrance hardly at all nowadays because the capital markets are so sophisticated worldwide if somebody has the potential to earn monopoly profits in the state of Alabama I would expect competition to be drawn in from all over the place and the real problem would be do they need to get a government license? to be able to compete like that. I don't know the details about this, but that would seem to me to be the biggest barrier to entries. Do they have to get a government license, and will this company effectively lobby against a governmental license of that sort? I know that Constellation Energy in Baltimore, it's like walking distance from where I live.

54:52In fact, my next-door neighbor is the assistant treasurer at Constellation Energy, which owns BG&E, and they spend a lot of time politicking. He doesn't get home from work until 11 o'clock midnight every night because he's always at some dinner with the mayor or the governor or something like that. So I assume what they're doing is making sure that the competition doesn't come into the state of Maryland. You know, why so many dinners with politicians? That's the way they... So that would be the biggest barrier, I would think. This is more of a comment on the whole issue of monopoly in my home state of Indiana where I live. Insight is the local provider of grand monopoly power over the area. And right before I left to come here I saw a couple advertisements on the TV by Insight urging its customers to vote on upcoming referendum to determine if Insight should retain monopoly power.

55:51No, well if they vote yes, I'd say they deserve it. Unfortunately, because of the nature of democracy, the people who voted no will also get screwed also by this. What did you say there at the end? Well, I mean, I just thought it was interesting that the government gave them subsidies not only to have the monopolies out, but in fact there were subsidies to advertise with customers.

56:40The average citizen can't imagine what competition would be like. I think it was Murray Rothbard who once gave the example of if the government had taken over the shoe industry 150 years ago and then all of a sudden they privatize the shoe industry. You can bet your life people would say, well, that's preposterous. Everybody knows you need government to make shoes. The private sector could not possibly make shoes, but that's the way it is with these so-called utilities. It's been a government-run monopoly scam for so long that economists can understand what was likely to happen if you open up the competition.

57:36That's why you should be studying economics, but the average citizen, they'll fall for this sort of thing. They might like, well, the security of, what is it, Insight, is that the name of the company? Yeah, so they might like the security of that more than, of course, they'll be making threats about the upcoming monopoly if you allow competition, right, is that what their argument is? Don't allow competition, it'll lead to monopoly. It's excessive duplication, they're going to tear up all your streets. Well, yeah, sure, why wouldn't they? If I was a monopoly economics professor, I wouldn't prepare for class at all. Why should I? If I had a government monopoly in teaching economics at my school, I'd be just as big a scoundrel as these guys.

58:58and the ability to add more to the income structure, so in the winter you have one black box. So it just means that if you go out there, there's a situation where the economy's not free market yet, it's not, you're still too much economy yet, and people cancel the whole part of the economy.

59:58In India, there was a man who ran a textile plant and hired several hundred people somewhere in India, and he had horrible problems with electric power, since you mentioned underdeveloped countries, and with a textile mill, if the power goes off for one second, that screws everything up.

1:00:57In the same is true with Russia. If you're thinking of Russia, people from anywhere in the world come in there and compete to serve these customers, and you don't have to have a giant market anymore. This story I'm talking about with power, it wasn't a huge market. It was a small town in India, but it was enough to make a profit to this American power company, and they were willing to go there. The real problem would probably be Vladimir Putin giving permission to foreigners to come in and compete to provide power. Or if he chooses to try to solidify his political power through mercantilism, that is giving grants of monopoly privilege to whoever owns the infrastructure now, that's not going to happen. You're not going to have competition and the benefits of competition.

1:01:46So you're going to have Putin being responsible for this mess that they're in. But how would you deal with the traditional credit, right? The people aren't giving enough money because they don't throw money into the market prices. Eventually, you know, the folks are going to get everything both here and there if they can. It's not like maybe a year or two where they're simply not... Well, what I'm saying is that price controls aren't going to help them. It's going to create shortages, and then if you want the energy, you're going to have to pay higher black market prices. Black Market Prices or none at all. So that's really not a desirable option to do that and who ends up getting the short supply is usually who is best able to bribe the suppliers and that's usually the more affluent people who do have the money.

1:02:32So the people without the money, they're going to be worse off under price controls than under allowing the market to work. Besides, it will give them an incentive to work harder and drink less vodka, I suppose, if they can't afford it now. You can look at the example of post-war Germany, the famous example of how at the end of World War II, when the Americans came in and controlled the German economy, they admired the Nazi fascist economic regulations. They didn't like the Nazis in general, but they really liked all the price controls and the planning, so they kept it in. They kept it all in for a couple of years after World War II when the U.S. government essentially ran Germany as an occupied country. And then the economic minister named Ludwig Erhard, who was given a lot of latitude in setting economic policy, he waited until a Sunday when the Americans were off work and issued a decree on television that all wage and price controls were to be abolished the next day.

1:03:34and that's credited with the German economic miracle and so it wasn't a miracle, it was just getting rid of the fascist economic planning that was so enthusiastically endorsed by all these new dealers who were still in the Truman government and who kind of liked all these economic controls and so he went over their heads. In one of my articles on Mises.org, I think it was called 4,000 Years of Price Controls, I quoted a book that quoted an interview with Hermann Göring, the famous Nazi, who was interviewed by an American journalist after the war. And here's Hermann Göring, the Nazi, saying, you know, you're an economist, ought to come over here and study what happened here in Germany when we were in charge, we the Nazis were in charge.

1:04:22And he's essentially saying, we really screwed everything up badly with price controls. And your economists think this is a good idea now? That's craziness. Don't take us as your model. And so they had an American journalist being lectured by Herman Gehring to get rid of price controls. And so, too bad Herman is not still alive. He could go to Russia and advise Putin on his economics with regard to price controls, I suppose. But the poorer people are always the most, harm the most by price controls because of the shortages, and they can't bribe their way in the shortages. It's the more affluent people who bribe their way in to get enough fuel or whatever is necessary. In New York City for a long, long time, that bribery in the housing market is called key money.

1:05:13The rent will be great. It will be like $800 a month for a big two-bedroom apartment overlooking Central Park or something, but it will cost you $20,000 for the landlord to hand you the key. And so if you've got the 20 grand, you get a great apartment at a low rate, and that's typically how it works. How It Works. A classmate of mine in college had got one of those. She fortunately had an uncle who was a vice president at Citibank and could stake her with key money. So she got a nice apartment when she went to NYU Law School. But if you didn't come from an affluent family like that, you live in a closet somewhere in Brooklyn. Any other questions or comments?

1:06:01We've had all brilliant commentary so far, but not so many questions. Okay, well we'll wrap it up then and go drink coffee.