A reader asks how anarcho-capitalism protects against monopolies.
I’m Gábriel from Hungary, one of your many readers; your articles about Bitcoin are of particular interest to me, but I frequently read the other ones as well.
Of course I too sympathize with Libertarianism, but there is a single question that I don’t yet understand, and hope that as an expert of the field, you could explain this to me – but if you have already written an article about this and I just didn’t find it yet, then of course a single link pointing to that would be a perfect answer as well.
So the question is simply this: in an ideal free market environment (this meaning completely and absolutely free from any and all sorts of state regulation and intervention), what defense would we have against trusts and monopolies? What would prevent the more powerful businesses from unscrupulously buying up or perhaps simply eliminating any and all emerging competition in their area through other, even more forceful means?
So that was my question… I would really appreciate any answer you could give to it, since I’ve been looking for answer to this one for a long time, but couldn’t find any yet.
Thank you for time, and all the best to you. Regards,
Thanks for reading! Great question Gábriel.
Let us suppose that you are a “monopolist.” Suppose that you are the CEO of a widget producing corporation. You currently have 100% of the market share for widgets. Now ask yourself, why isn’t anyone competing against you?
Now ask yourself, what would happen to your market share if you decided to raise your price! Isn’t that the whole point of a monopoly? To be able to cut production and raise the price of your goods by reducing supply?
Let’s say I’m a venture capitalist. My whole job is to scan the market looking for opportunities to invest other people’s capital in highly profitable business ventures. I happen to notice that you have cut back your widget production in order to drive up the price of widgets. I notice that there is a huge profit margin in widget production. What do you think I’m going to do with my clients’ capital? Isn’t it reasonable to assume that if you are not meeting the market demand for widgets, that someone like myself will come along and start a firm to compete against you?
What would my competition cause you to do? Let’s say that my start up firm is tiny and only produces a tenth of the widgets that you produce – what would eventually happen if you did not lower your price by maximizing your production? Clearly my start up firm would get bigger and bigger until it over-took your firm’s market share. If you don’t want to lose market share, you have no choice but to maximize your production even if there are currently no other competitors in the market! Because you know that if you don’t, someone like myself will come along and compete against you.
Let’s look at why people produce things in a free market. Generally, people produce things in order to satisfy two basic types of human needs: good feelings and solutions to problems. If something does not satisfy either one of those two needs, it is highly unlikely that it will be worth anything to anyone in the open market. Is it possible for ONE firm to meet all of humanity’s needs for a specific problem? Is it possible for ONE firm to meet all of humanity’s needs for good feelings? When put into this context, it should become clear that a monopoly by one firm in a free market is impossible.
It may be that there is only one firm producing goods to meet a specific market need, but that does not mean that firm meets the definition of a monopoly. Remember, a monopoly must be able to cut production in order to raise the price of their goods without losing market share to competitors. Clearly as soon as any firm starts cutting back its productive capacity intentionally, they will face new competitors who will move to meet the market’s needs.
A real monopoly can only be created through the use of violent force! Let me give you some examples of a real monopoly:
1. US currency – there is a market need for money, but no one is allowed to create their own money which can be used for the payment of taxes. US taxes must be paid in dollars, and the courts will always discharge debts that are paid in US dollars. Businesses do not have a choice about accepting dollars as payment of debts. These restrictions on currency production are enforced at gun point.
2. US First Class Mail – there is a market need for letter mail delivery. In the United States, it is illegal for anyone to compete against the US Post Office in first class letter mail delivery. The US Post Office has a legal monopoly on first class mail delivery. If anyone tried to start up a company to compete against the Post Office, armed men would raid their business and shut them down. The US Post Office can charge whatever it likes for first class delivery, and the people have no choice but to pay what the Post Office demands if they want first class letter delivery.
3. iPhone production – there is a market demand for iPhones. Apple holds a patent on iPhone production. If anyone tried to copy Apple’s iPhone and sell it, armed men would raid their business establishment and shut them down. Even if they called it something else, it doesn’t matter. Apple has a monopoly privilege on the production of iPhones that has been granted to them by the State. Of course, people could chose to buy a different brand of phone, but clearly if people want an iPhone, they must buy it specifically from Apple. No competition is allowed in the production of iPhones.
Consider that if I use my own factory and my own resources to produce an iPhone replica, I have not stolen any property from Apple at all. Apple hasn’t lost a single transistor to theft. Ask yourself why the State should prevent me from using my own property to create a replica iPhone? Are consumers of iPhones helped or harmed by the State’s actions? Clearly they are harmed because this means there are less iPhones available and their prices will be higher.
What you should take away from my examples is that the State is necessary in order for any corporation to have a monopoly. Violent force or threats of force must be leveled against people in order to prevent them from competing in the open market. In the absence of the State, anyone could compete against anyone by utilizing their own resources as they saw fit. Private security can only protect physical property owned by individuals, they can not go out running around looting people simply because they are copying each other’s ideas. If they did, they would have to face the private security of those whom they wished to shut down.
In a real free market, if Apple wanted to protect itself from iPhone competitors, they would simply have to keep the technical details of iPhone production a secret. If I wanted to replicate Apple’s phone, I would have to first discover how it is produced. Today, all I have to do is look up the patents they have filed with the State in order to discover how an iPhone is built. Patents not only grant monopoly privilege, but they also destroy trade secrets.
For a more thorough explanation of why free markets prevent monopolies, listen to these lectures by professional economist Thomas DiLorenzo:
The Myth of Natural Monopoly, by Thomas DiLorenzo:
Most so-called public utilities have been granted governmental franchise monopolies because they are thought to be “natural monopolies.” Put simply, a natural monopoly is said to occur when production technology, such as relatively high fixed costs, causes long-run average total costs to decline as output expands. In such industries, the theory goes, a single producer will eventually be able to produce at a lower cost than any two other producers, thereby creating a “natural” monopoly. Higher prices will result if more than one producer supplies the market.
Furthermore, competition is said to cause consumer inconvenience because of the construction of duplicative facilities, e.g., digging up the streets to put in dual gas or water lines. Avoiding such inconveniences is another reason offered for government franchise monopolies for industries with declining long-run average total costs.
It is a myth that natural-monopoly theory was developed first by economists, and then used by legislators to “justify” franchise monopolies. The truth is that the monopolies were created decades before the theory was formalized by intervention-minded economists, who then used the theory as an ex post rationale for government intervention. At the time when the first government franchise monopolies were being granted, the large majority of economists understood that large-scale, capital-intensive production did not lead to monopoly, but was an absolutely desirable aspect of the competitive process.
The word “process” is important here. If competition is viewed as a dynamic, rivalrous process of entrepreneurship, then the fact that a single producer happens to have the lowest costs at any one point in time is of little or no consequence. The enduring forces of competition — including potential competition — will render free-market monopoly an impossibility.
The theory of natural monopoly is also ahistorical. There is no evidence of the “natural-monopoly” story ever having been carried out — of one producer achieving lower long-run average total costs than everyone else in the industry and thereby establishing a permanent monopoly. As discussed below, in many of the so-called public-utility industries of the late 18th and early 19th centuries, there were often literally dozens of competitors.