Arnold Kling  


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David R. Henderson writes,

The best statement of the philosophical case against antitrust is in philosopher Harry Binswanger's essay, "Antitrust: 'Free Competition' at Gunpoint." Binswanger draws a fundamental distinction between economic power and political power. Economic power, he notes, is simply the power to produce and trade, whereas political power is the power of the government and necessarily rests on the use of force or threat of force. Someone can earn a large market share, even, in rare cases, a 100% market share, without ever coercing anyone. That person creates power simply through his productivity and does not forcibly take anything away from anybody; therefore, he should not be persecuted.

I think that a lot of mass-market politics consists of trying to convince people that the market power of corporations is something to be feared, while the coercive power of government is not. The reality of public hoice is that government ends up using its coercive power mostly to advantage one producer's interest over another. Consumers benefit more from the market, even when there is monopoly.

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The author at Anger Management in a related article titled THE DOLLAR AND THE GUN writes:
    No matter how many times Objectivists explain the distinction between political power and economic power, statists continue to evade it. Well, here I am explaining it once again in the comments of this post over at EconBlog. Fazal writes: "The distinct... [Tracked on August 2, 2005 1:11 PM]
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I always say that the biggest economy of scale is political influence.

Dan Landau writes:

I don't think monopoly isn't sometimes a problem. There is the Microsoft crushing of Netscape.

However, the real function of "fighting monopoly" in our political economy is to allow the government to control firms and markets in ways Americans would not otherwise accept. Once a firm reaches a certain size, every merger requires government approval. That is grotesque.

Americans don't dislike business and markets like the Europeans seem to, but we are distrustful of large business. That makes us easily to manipulate under the slogan of "fighting monopoly."

Fazal Majid writes:

The two usually go together, but political power can be overturned more easily, at least in democracies. Most antitrust legislation stemmed from the excesses of the robber barons who used their monopoly on railroads to extract monopoly rents from farmers. Not coincidentally, they paid off venal state pols to look the other way, and it was only when a populist backlash put new men like Theodore Roosevelt in power that government did something to curb this power.

The distinction between economic and political coercion is disingenuous. When you are a California farmer and the Crocker-Huntington-Stanford-Hopkins railroad determines whether your family will starve or not because they can cut off your access to the East Coast markets you depend on for your livelihood, that is just as coercive as when government shows up with police at your doorstep. The control Microsoft or Intel have over the IT industry is just as stark.

Mr. Econotarian writes:

How did the farmers not starve before the railroad came?

Behind every "horrible monopoly" story, the truth is that these businesses were providing real value, and they were trying to maximize their profit. Other examples: Standard Oil reduced oil prices, Microsoft unified computer platforms and made it easier for other software manufacturers to reach mass numbers of computers without having to have hundreds of ports for different OS's.

Don Watkins writes:

Fazal writes:
"The distinction between economic and political coercion is disingenuous. When you are a California farmer and the Crocker-Huntington-Stanford-Hopkins railroad determines whether your family will starve or not because they can cut off your access to the East Coast markets you depend on for your livelihood, that is just as coercive as when government shows up with police at your doorstep."

You are conflating two essentially different things: freedom from coercion and "freedom" from the demands of nature. A man with a gun has the power to destroy your life. A man who refuses to trade with you leaves you free to deal with nature's demands as best you can.

To equate the two is to say that you have a right to the impossible: a right to a guaranteed existence. But the only way to achieve such a guarantee is at the expense of other men, i.e., the only way to free yourself from the demands of nature is by coercing other men, i.e., by violating their rights. But there can be no right to violate rights.

Matt McIntosh writes:

"I don't think monopoly isn't sometimes a problem. There is the Microsoft crushing of Netscape."

Show your work. Why was this a problem?

Dan Landau writes:

I have no expertise on the case. I am accepting the standard view that Microsoft's browser was inferior to Netscape, but by bundeling it for free with Windows MS drove Netscape bankrupt.
The standard story continues, "This type of action and the threat of it has limited the development of independent software in areas competitive with MS."

If you can prove that isn't so, I am not the one to push to standard view.

However, the bottom line on regulating monopoly is that the government controls imposed in the name of fighting monopoly due much more harm to economic advance than private monopolies do.

Bob Knaus writes:

Reaching back in time a bit farther from Fazal's statement, the excesses of the railroads were due to a heavy government hand in their development. Other consequences included a series of financial crises in the late 1800's, meandering routes designed to maximize gov't land giveaways, and the "checkerboard" pattern of public/private land ownership which has complicated both development and conservation in the west.

From this view, anti-trust was goverment's attempt to fix some of the problems it had created itself.

Arnold Kling writes:

"the standard view that Microsoft's browser was inferior to Netscape, but by bundeling it for free with Windows MS drove Netscape bankrupt."

As someone who was running a Web startup at the time, I can say that this is false. Netscape's browser was bloated and failed to comply with Web standards. And their server software, which was their best hope for making money, was even worse.

Netscape deserved to lose, in that sense.

I don't know any web expert who thought that Netscape's browser was a superior product. That includes Netscape itself, which abandoned it and started from scratch with Mozilla.

Lancelot Finn writes:

Antitrust law assumes that governments behave altruistically but individuals do not.

Suppose a stable monopoly emerges in a certain industry. This means that either 1) the industry is a natural monopoly, with economies of scale sufficiently large that one is the most efficient number of producers, 2) if the industry's production function is characterized by constant marginal cost, it implies that the company is selling at marginal cost, earning no extra-normal profits, and thus allowing no incentive for others to enter the industry, 3) the company is earning some extra-normal profits, but they could reduce their price to marginal cost at any time if a new firm tried to enter, and barriers to entry are high enough that it's worth no one else's while to play this game.

If the government is some approximation of omniscient and benevolent, then in case (1) it might benefit society by regulating the monopolist firm, and in case (3) it might benefit society by breaking up the monopolist firm. In case (2) it should do nothing.

But it's foolish, and more to the point it's unworthy of an economist, to assume that the government is omniscient and benevolent. If we're going to be intellectually serious, we have to model the behavior of the government, treating the various people who comprise it-- campaign contributors, voters, politicians, bureaucrats-- as rational agents. The result is public choice theory, a field of economics profoundly subversive of faith in government.

A policy ostensibly designed to regulate harmful monopolies to benefit the public interest may be captured by private interests in various ways. Or ineffectual bungling by a bureaucratic apparatus inadequately motivated to serve its notional interests may simply wreck around and mess things up without inducing free competition. Indeed, this almost certainly WILL happen, unless we assume a good deal of altruism on the part of politicians and bureaucrats. This assumption seems realistic enough, since we observe people behaving altruistically in real life all the time.

But if we're going to assume altruism on the part of the government, why not assume it on the part of individuals? Why not assume that the monopolist will dedicate his extra-normal profits to various forms of charity, either through donating to United Way, or through educating his children so that they make great contributions to society, or through donating to his church, or through patronizing the arts, or through building a fine home for himself that increases land values throughout the neighborhood, or whatever?

The rationale for antitrust regulation rests on an unwarranted assumption that altruism on the part of the government and its agents is greater than altruism on the part of individuals.

dolly writes:

Its actually a question not a comment, and i would really appreciate if given an answer.
1)How is it possible to measure monoploy power in practice?
2) What do the economists mean by shortage and surplus? How can martket mechanism work to eliminate such phenomena and why in practice may shortage and surplus persist over time?

I kindly anticipate your help.

Kind regards

Hi, Dolly.

You asked two great questions:

1)How is it possible to measure monopoly power in practice?

One common measure is the total share of an industry's sales made by the two or three largest firms. (The government reports industry sales, and corporations report their own sales, so this is not hard to compute.) The idea is this: If only one firm sells most of a whole industry's output, it might be monopolozing the product or colluding with other firms to do the same thing--illegally or inappropriately keeping other competitors out of the market in order to raise the price to buyers.

I emphasized "might" for a reason. Even though measuring market share is commonly used to estimate monopoly power, it's quite possible that buyers simply like the product of one firm best! So the market share measure really only tells us if there is no monopoly: If the market shares turn out to be distributed across many firms, we can say with some assurance that it is unlikely that one firm is exercising monopoly power or colluding with a few other firms.

There's an easy-to-read discussion of this and other measures in Monopoly, a short article by Nobel Prize winner George Stigler in the Concise Encyclopedia of Economics. You might also want to look at Fred McChesney's article, Antitrust.

Your second question is a whole course in economics!

2) What do the economists mean by shortage and surplus? How can market mechanism work to eliminate such phenomena and why in practice may shortage and surplus persist over time?

Here's the short answer, which is not all that short:

First, some definitions. A shortage is when there is not enough of some good or service, and a surplus is when there is too much. In a free market (a market where the price of the good or service can rise or fall to reflect the supply offered by producers and the demand desired by consumers), this typically only persists if there are large transportation costs or if there is government regulation that does not allow prices to adjust despite the willingness of sellers and buyers to strike a deal.

How does the market work to eliminate shortages or surpluses? Here's one common way. If there is not enough of something to go around, buyers tend to offer higher prices to sellers for whatever they've got on hand. "He's offering you $2/pound of those tomatoes you've got left? I'll give you $3!" Sellers then say to themselves, "Why would I say no to that?! My product is worth more than I'm charging! I have to raise my price." They do just that. As the price rises, a few buyers then say to themselves, "Hmmm. That's more than I'm willing to pay for that. I think I'll do without it for now and use my money to buy something else." The upshot is, the market price is bid up till the quantity demanded equals the quantity supplied.

Another way the market works to clear a shortage is that the sellers expand their supply as a response to the higher price being offered. For example, they could increase what they supply by paying workers overtime, or by investing in new ideas to increase future output. They could work longer hours themselves, at the expense of time with their families. They could buy more output from other companies, even abroad. New companies can even spring into existence, sometimes overnight! These quantity adjustments sometimes take longer than changing the price, but sometimes they happen very quickly. The final upshot of what starts as a shortage is that the market forces cause the price of the item to rise, the quantity supplied to increase, and the quantity demanded to fall, in some combination.

Even when buyers and sellers don't bargain directly with each other--as they do in roadside farmer's markets, on Ebay, or in the stock market--a bidding process still occurs in a more subtle way. If you see a long line at a gas station because the price of gas there is the lowest in town, you may decide to pay a little more across the street where there is no line even though gas is $.10/gallon more. Soon enough, the gas station with the long lines will raise its prices, eliminating the lines and thus removing the "shortage."

Shortages can persist, though, and the main known reason is government interference with the market bidding process: say, if the government tries to regulate prices or quantities of the good or service.

Suppose the government were to say "No gas station can charge more than $2.00/gallon." The lines will become really long overnight! Gas stations will even go out of business because they won't be able to afford to buy gas at that price.

Sometimes the way in which a government is behind a shortage (or surplus) is more subtle. Suppose a government requires a license to sell gas, and then only offers 5 licenses per town. You may have to drive out of your way to even find a gas station--which is the same as having to wait on a line.

Not all shortages are caused by government regulation of free markets. When tastes change, forces such as transportation costs do sometimes cause temporary shortages or surpluses, but they usually don't persist for long and don't inconvenience many people at a time. For example, if eating some kind of exotic fruit becomes a fad, you may have to wait for your local supermarket to supply enough of it. In principle, you could go to the supermarket manager and offer to pay more for it! In the meantime, you could spend some time on the Internet and possibly locate it and have it shipped. Sellers of the fruit will start contacting supermarket managers pointing out that their fruit is selling like hotcakes. When your local supermarket figures out that people are interested in the fruit and willing to pay in money and even their time to have it, they will start offering it themselves.

So, this kind of local or temporary shortage doesn't tend to persist long if the market is allowed to operate naturally.

Shortages and surpluses can be initiated by actions of other governments, foreign monopolies/cartels, or foreign taste changes. For example, if foreign oil suppliers solidify their cartel via sanctions from their governments, U.S. consumers can find themselves having to pay higher oil prices. If the citizens of China suddenly increase their demand for oil, people in the U.S. can find that they temporarily don't "have enough." When a shortage or surplus is initiated abroad, even if a foreign government's action is behind it, the interesting question for helping U.S. citizens is: Can U.S. citizens best be helped by the U.S. government taking action, or by letting U.S. markets do the best they can to respond? What's your thought on this question, Dolly? I'm interested!

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