The Fear of Monopoly - Part One

0:00The Fear of Monopoly Whenever we talk to people about the idea of a free market, most of them tend to express fears of what might happen if a free market actually appeared. Now, what we mean by a free market, of course, is a market that could be called laissez-faire, that is, one in which there is no government intervention of any kind for any reason. Any Reason. That is to say, the government would not help anybody, it wouldn't subsidize anybody, it wouldn't protect anybody, and of course, it would not intervene to tax anyone or regulate anyone. The market would behave as the individual participants in the market would cause it to behave by virtue of their independent actions. This is essentially what is meant by a free market. Incidentally, this does not exclude the area of protection. Protection Protection is something that falls into a separate category, and certainly it would be important that the market and the persons in it, including the private property and

1:05so on, be protected. But we are not talking about protection, we are talking about government, and these are two different things. Protection of course is certainly something that we want in the market. Whether or not government should be in there is really an overall question. And so we are now talking in terms of a free market and what would eventuate if we had a really free market. And as I've indicated, usually when this thought is suggested, people express various fears. Now, one of the fears that is very often brought forward is the fear that if we had a free market to it, one in which there was no intervention at all by Government, that monopolies would eventuate. In other words, there is a very popular notion that given a free market without government intervention, there would be a tendency for various industries to have fewer and fewer competitors in them, the result being that 1 or maybe 2, a very limited number or possibly just one industry or one businessman in a

2:17given area would emerge as the total dominating factor in that area. He would have all of that particular type of business. He would dominate the field. And of course the result of this would be, and this is usually the fear expressed, that having obtained such In such a monopoly, then he could charge any price he wanted to, because there would be no competition. It is recognized here tacitly that if there is competition, well of course then he wouldn't be able to raise his prices as he pleased. But assuming that you had a free market, what would prevent one businessman or one industrialist from becoming exceptionally

3:31The General Fear of a High Price Made Possible by a Monopoly Made Possible by the Skills of a particular Businessman

4:01They express the fear that just a monopolist would have too much power. If they really were worried about a monopoly as such, they would certainly not ask the government to come in to intervene, because government is a monopoly. And the idea that you could avoid whatever competitive factors that exist in the market by really turning things over to an existing monopoly in an effort to escape monopoly is, of course, an absurdity. Clearly And there would be no point in doing that. But people really aren't afraid of monopoly as such. They really don't worry about what businessman is doing what. They really don't care about that. What they care about is how this is going to affect them personally. And they see this effect as coming to them in the form of high prices, and they are very much afraid of high prices.

4:54Now the thing then that we would have to examine would be what would happen in a market assuming a free market? What would be the natural conditions that would tend to develop? Are there natural factors in a free market that would inevitably move us toward monopoly, and consequently monopoly price? The argument of those who favor government intervention at this point is that that is the case. Given a free market, they will tell you, the market will inevitably move toward the emergence of a very limited number of competitors. Probably a single monopolist will appear and then of course we will be at his mercy. So what we have to do is to examine the conditions that would eventuate in a free market. Keep in mind that what we We have in this country today is not a free market. We have a market today into which the government intervenes constantly. So we do not have what we think of as a laissez-faire marketplace. We have to now imagine such a thing because we are not dealing with that,

6:08in fact. But we can, by using our brains and by employing logic, arrive at the kind of This is a fascinating area to me. It's particularly fascinating when I take into consideration some of the things that I have run into in my personal experience here. I got engaged a while ago with a young professor at one of the universities back east who wanted to debate with me in a letter as to what a monopoly was and whether or not a free market would lead into it. I think what had happened was that he had read something I had written in which I made the statement that given a free market we did not have to worry about Monopoly because in a free market a harmful monopoly could not appear. He took exception to that remark and challenged me in a letter, and wanted to know if perhaps there wasn't a typographical error, and that I couldn't possibly have intended to say what I had said.

7:27Well, I wrote back and assured him that I had intended to say what I had said, that it was not a typographical error, and that I would stand on that statement to it, that that given a free market there is no reason to fear a harmful monopoly. Well, he responded in due course and an exchange occurred between us that went on for a number of months. And everything I said to him in our correspondence turned out to be an argument that he would then convert to show that what I was talking about to it, the conditions in a free market, would inescapably lead into a monopoly condition. And every time I gave him an instance of competition happening in the market, he replied, well, this was really proof of monopoly. Well, after we exchanged enough letters in this area, I began to wonder if we were defining our terms properly because, of course, if you define your terms differently, you're just

9:32Well, he responded in due course that, of course, this is where he was standing. He was taking the government's position here, that the government has in its various antitrust measures and subsequent legislation ever since the first Antitrust Act of 1890, the Sherman Antitrust Act, he had been operating on the basis that the definitions of monopoly as They appear in this welter of law that we have would be valid and that this is where he was arguing. Well, now it just so happened that I had an attorney in my employ and I asked him to check out the law relating to antitrust so that we could get a good understanding in this area.

10:20Now, I am not an attorney and if you want to check it with your attorney, please do So, but here is what my attorney reported to me. We have, of course, beginning in 1890 with the passage of the Sherman Antitrust Act, we have a vast library of law and rulings that have descended from the law that covers this field. In fact, it almost, you could It blankets and smothers the field. It is probably one of the most contradictory and prolific areas of law that we have in the country. For instance, there is one part of the law—I cannot tell you specifically which part of which law it is. As I say, you can check that with your attorney. I am not an attorney. He can tell you. But there is one One part of the law that specifies that if you are in business and you are selling a good or service at a price that is higher than that of your competition, and at the

11:28same time you are able to maintain as much as 8% of the market, that is defined as monopoly Monopoly per se. In other words, if your price is higher than your competition and you still are able to have 8% of the business, that is monopoly per se. The only reason, you see, in the government judgment, back of the law, that you could charge more than your competition and at the same time keep as much as 8% is because there are other factors at work that make you essentially a non-competitor. You're just in a class by yourself, and therefore under the law the government can cite you as a monopolist, take you into court, try you and convict you, after which you can be fined, imprisoned or both. Now that's one part of the law. However, there is another part of the law that specifies that if you If you charge less than your competition, never mind how much of the business you have, if you charge less than your competition, that is defined as a monopoly practice. Because

12:43the only reason that you are charging less is because you hope to put your competition out of business. Therefore you are seeking a monopoly and you are guilty under the law. You can be cited here, taken into court, tried, convicted, fined, imprisoned, or both. But But now there's still a third part of the law, which says that if you are charging the same price as your competition, that is collusion and conspiracy, and you are guilty of a felony, and you can be cited under the law, arrested, taken to court, tried, convicted, fined, imprisoned, or both. In other words, the way the laws are written, it specifies that if you are charging more more than your competition and still have 8% of the business, or if you are charging less than your competition, never mind how much business you are enjoying, or if you have the same price as your competition, you are guilty under the law.

13:42I had the interesting opportunity a few years ago to actually send a reporter to cover a A speech given by a man from the Justice Department, who happened to be in my part of the country at the time, who was talking about the activities of the antitrust provisions and the Justice Department in enforcing the antitrust provisions, and this man from the Justice Department stated flatly that if the Justice Department had the finances and the personnel, they could arrest and convict every successful businessman in the United States, because there is already So this was the thing I now played back to the professor on the East Coast. I said, if this is the way you are defining competition, then I have to give up. We can't talk anymore. Because if you are going to say that when the price is higher, that's monopoly. When it's lower, that's monopoly. And when it's the same, that's monopoly.

14:51Monopoly, there aren't any other places for prices to go. And therefore if putting a price on an item is monopoly, let's quit. There isn't any point in discussing anything. Well, he admitted that this is what he was doing. And of course if you're going to define every business action as a monopoly practice, we can of course stop talking. There is no point in Discussing it. But, of course, this is really an absurdity. Obviously, the word monopoly is an abstract term. And to understand what we mean by monopoly, we have to introduce a word that means the opposite of monopoly. And the opposite of monopoly is the word competition. Now what we have to find out is if there is such a thing as competition, if not, there is no point in having a word monopoly. To create an abstract that doesn't tell you The Theory of Money and Credit

16:13Meaning to the same man in the same situation to refer to monopoly or competition. The words are meaningless. They have no application to a situation. To have application, to create an abstraction, you create the abstraction because you want to show that it is opposite of another abstraction. So here we have two abstractions, the concept of monopoly on the one hand and the concept of competition on the other, and these are mutually exclusive So let me set that forth at the outset. Competition and monopoly are opposites. If you have one, it means that you do not have the other. To wit, if competition exists, that means the absence of monopoly. If monopoly exists, that means the absence of competition. So let's get our terms straight to begin with. Now, the question is, what happens in a market Assuming a free market, does a free market tend toward monopoly or does it tend toward competition?

17:16We should be advised, I suppose historically, to keep in mind that the word monopoly came into practice during the Middle Ages because kings granted monopolies. This is how it was done. When a businessman wanted to go into business back in these early days, and of course all business activity is risky, the businessman would probably be afraid of going into business unless he had some kind of guarantee that he wouldn't have to face too much competition. And so he would go to the king and say to him, Your Majesty, I would like to open such in such and such a business, in such a location, and I will pay you a sum—sometimes the sum was quite large—if you will grant me an exclusive monopoly to operate in that area.

18:11And if the king was pleased with the sum that was offered, or could raise it to a sum that he would finally agree to, why the king would issue an edict guaranteeing to this man that But he would have the exclusive right to operate that particular business in that particular location. And that is a monopoly. That's where the word comes from. It is a kingly grant of exclusion to a party willing to pay a fee. Now why would businessmen do that? Why would they be willing to go and pay a fee? Since there weren't any laws prohibiting Competition. Why were they worried about it, if there isn't such a thing in a free market? Clearly these businessmen were asking for government intervention right at the outset in order to give them a guarantee. But if a free market moves toward monopoly anyway, why didn't they just go into business? They would have easily obtained a monopoly. They didn't think so. They thought the minute they got into business they would face competition,

19:14and therefore they wanted an extra market activity to come in to keep that business out so that they would have clear sailing. Now that's where the word monopoly came from and that's where the concept came from. It is certainly obvious that if a free market tends toward monopoly, that whole exercise would be one of futility. They would automatically have a monopoly. If they didn't have it at the outset, they'd soon get it. Somebody Nobody would get a monopoly, because it would tend toward monopoly. So the logical thing for the businessman to do would have been simply to go into business. And as the first man in business, having an advantageous position right at the outset, he would have had no necessity for paying a big fee to the king in order to guarantee what the market would do for him anyway. Clearly, in the minds of these early businessmen, the free market didn't lead into monopoly. It led into competition, and that's what they were afraid of. So that's

20:11Were these early businessmen correct in fearing competition? They were certainly correct in realizing that given a free market, that's what they'd have to face. Competition is going to be the logical condition, the natural condition, in a free market in which the government does not intervene. In fact, let me point out to you that one of the basic items of of Competition is price. Assuming a free market, whether your price is higher than, lower than, or the same as your competition, that is a factor in competition and not an indication of monopoly, providing you are free to try to move the price. As long as you have a free market and the price can be moved, that is a factor in competition. So you can put down It is often on your list that the pricing factor, instead of being a monopoly factor, as the government would have you believe, it is actually a factor in competition, a primary factor in competition, and would remain so if there is no intervention.

21:19Another constant factor in competition would be quality. It happens that when businessmen get into the same business, supplying more or less the same type of good or service, they tend to find that their prices will equal out. It costs about so much to manufacture a ton of steel or to manufacture a kilowatt of electricity or to provide a lady's dress The amount of cost involved is only going to fluctuate fractions of pennies between one entrepreneur and another. They will very quickly find that they're on a head-on collision insofar as prices are concerned. Do what they will. Their prices are going to trend downward to the lowest possible level, and then you just can't go below that.

22:11And you don't dare go above it because if you do, your competitor gets the advantage. Advantage. So prices will trend downward and then they'll level off there. So the businessman seeking competition now turns around and introduces the element of quality. If he can't beat his competition on the basis of price, perhaps he can beat him on quality. He can add something. He can give green stamps. Or he can deliver. Or he can give you convenient credit terms. Or he can paint his widgets blue, and the others are just pink, and maybe some people prefer blue to pink, or something. He introduces some variation. He tries to come up with better quality, lighter weight, more durable merchandise, etc., etc., in an effort to become more competitive.

23:04Assuming the government doesn't regulate the quality, well, quality then becomes a factor in competition. Incidentally, most places where governments begin to intervene in the economy is at the level of price or quality. And actually, I could point out that a regulation that regulates quality has exactly the same effect in the market as a price regulation. If you are required to put out so much of something in order to sell it, it is the same as being compelled to sell it at such a price for so much. In every exchange you've got a good and money, or a service and money. And whether you regulate the money side of it, which is the price side, or the good side of it in relation to the money, the same effect occurs. Given a free market, price and quality are both active factors in competition. As long as the businessman is free without any law or government intervention, to try to beat his competition, then he can manipulate his prices, and the normal process of manipulation would be this, he will constantly

24:17endeavor to manipulate his prices downward, because that's where he gets his advantage, and he will constantly try to manipulate his quality upwards, because that's where he gets his advantage, assuming the market is free. In a free market, quality trends upward and prices trend downward. But now those are only two factors in competition. There are many more. I will get into some other factors here, and we have to examine a number of them before we see what we really have to deal with. But In the area of price and quality, governments are most active. They enter the field arguing that by so doing, they are protecting the consumer. In actual fact, they are not protecting the consumer. The consumer will pay an ever higher price and he will pay it for less and and less quality. The effort will be made not to improve the quality, but to figure out how to do the same thing cheaper. And therefore you continue to have a downgrading of merchandise and an upgrading of pricing once the government gets into the field of

25:42regulation. Certainly that should be a matter that we are all aware of at the present time. The quality of certain types of merchandise where government has primarily intervened steadily tends to deteriorate. And the price of these same items where government regulates steadily tends to increase. We figure out how to get substitutes, how to make things cheaper, not how to make them better. Because we are limited on the basis of government regulation, respecting the numbers of persons who can enter the field, the licensing fees, the requirements for how you operate, the standards and so on that are imposed upon all, only the very best can survive under these conditions, and thus the number of entrepreneurs engaged in a given area tend to be reduced with the passing of time.

26:36However, let's go into some of the other areas where competition is also a fact if If we are talking about a free market, let me just quickly name these, and then I'll get into them in detail in another lecture. The various areas of competition that I want to examine will include direct competition, parallel competition, dollar competition, and what we call market competition. These four areas, in addition to price and quality, make up the six fundamental areas where competition will exist given a free market. The major enemy of competition has always been the government, and yet the illusion exists, and it is an An illusion in the minds of many people that the government helps to preserve competition, when in point of fact it does precisely the opposite. So we'll want to take a good look at this and be sure you get to hear the next lecture. Thank you very much.