Monopolies
So far this is the most enjoyable part of the critique. Simply the idea that I know the history of the US better than AC(who presumably is a US citizen) is on its own funny. Austrians claim that monopolies in a free market are either not a problem at all or a very small problem at most. AC disagrees:
"The claim that governments cause monopolies defies the historical evidence. History actually shows the opposite: the more unregulated the market is, the worse the problem of monopolies."
That right there is incorrect even on its own terms. Even if we accepted the idea of natural monopoly as a given, state-granted monopolies still far outnumber natural monopolies.
AC: "However, the Austrian claim is not wholly without merit. Utilities are examples of monopolies run or regulated by the government (although they are natural monopolies, and privatizing them doesn't work, as Britain found out in the 80s)."
Really: Here AC has the perfect opportunity to engage in a theoretical exposition of what natural monopoly is and how it emerges on the market. He doesn't do it and simply states something as a fact, even though it's the subject he's arguing about. It's like arguing that democracy doesn't work by saying: "But democracy doesn't work, as we saw in [-insert country and year here-]
Six electric light companies were organized in the one year of 1887 in New York City. Forty-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 nineteenth century, competition was the usual situation in the gas industry in this country. Before 1884, six competing companies were operating in New York City . . . competition was common and especially persistent in the telephone industry . . . Baltimore, Chicago, Cleveland, Columbus, Detroit, Kansas City, Minneapolis, Philadelphia, Pittsburgh, and St. Louis, among the larger cities, had at least two telephone services in 1905[1].
I'm not familiar with Britain and the 80s, but if it's the kind of "privatization" I've seen in other cases, then I'd rather call it corporatism. Usually they sell the assets to a company and give some kind of privileges on top of it. After all, the company was probably selected because of its lobbying efforts. Not to mention if there hasn't been any market process in that particular industry for years or decades, then it's no surprise that there is no competition when the industry is "privatized".
AC: "Often companies persuade governments to erect barriers of market entry to potential competitors. Sometimes government subsidies allow one company to overpower its competitors. But such cases are usually the result of money-based lobbying, which is a corruption of the system. Corruption in the public sector no more "refutes" its central principle than does corruption in the private sector. The solution to corruption is to eliminate it by enforcing better laws. European democracies offer broad practical evidence that this sort of corruption can be greatly reduced."
Really: Corruption in the public sector is a perfect rationale for not giving the public sector so much power. After all, without power there's no incentive to corrupt. Corruption in the public sector is vastly different from other kinds of corruption. For starters, politicians don't use their own money. The last phrase is obvious BS. AC apparently idolizes Europe out of ignorance.
AC: "But this Austrian critique completely ignores another, more common type of monopoly: that which forms naturally on the unregulated market. There are many reasons for this tendency, ranging from "it takes money to make money" to the greater efficiency of large corporations. Without antitrust laws or some other countervailing market force, growing companies will not stop until they become monopolies or oligopolies."
Really: Even if natural monopolies did emerge on a free market, it still wouldn't be a "...more common type of monopoly...", that's simply false. Also I'm not sure if I read this correctly, but I think AC is saying that antitrust laws are a "countervailing market force", which I find rather hilarious(market forces are born within the market, not out of legislation). Also of note is the complete lack of theoretical substance here. AC instead tries to back his claims up with rewritten history.
AC: "The height of monopoly growth and abuse in the U.S. coincided with its greatest period of laissez-faire, or government nonintervention in the market. Known as the Gilded Age (the period between the Civil War and World War I), this period saw the phenomenal rise of the Robber Barons and their great trusts (monopolies). John D. Rockefeller monopolized oil under his Standard Oil Company; J.P. Morgan dominated finance; Andrew Carnegie, steel; James Hill, railroads. Historians have well chronicled the ruthlessness of these men..."
Really: It is slightly problematic that AC doesn't list a single monopoly here. He doesn't offer any proof either. To mention Hill is especially hilarious, since Hill was competing against government rail roads(and Hill was far better at it, even though he got no subsidies or land grants). How many domestic competitors did Standard Oil have when it was finally brought to court by the state in 1907? Was it 47? Couldn't quite remember, so I checked it and it was actually 147[2].
Did any of these companies restrict production to drive prices up? No, they expanded production faster than their competitors and slashed prices continuously. Hell, the state eventually outlawed Hill's price cutting in the name of consumer production(Interstate Commerce Act of 1887 & Hepburn Act of 1906).
These men were innovative workaholics who improved the lives of pretty much everyone. To promote state intervention to stop the actions of these people is equivalent to declaring war on human civilization and progress.
AC: "In the late 19th century, trusts formed also in wheat, fruit, meat, salt, sugar refining, lumber, electrical power, rubber, nickel, paper, lead, gypsum, iron, cottonseed oil, linseed oil, whiskey distilling, cord manufacture -- and many others."
Really: Seriously what? Wheat? Salt? Electrical power is the only one that could qualify for a natural monopoly, but the rest is ridiculous.
AC: "Once a trust emerged, it would raise its prices and drop its quality of service, as well as engage in unfair trading practices that drove other firms out of business. The abuses of these monopolies became so great that they became a national scandal. So deep was antitrust sentiment that when both houses of Congress passed the Sherman Antitrust Act in 1890, there was only a single dissenting vote!"
Really: AC has yet to name a single trust that raised its prices by restricting production. The Sherman Act was nothing but a beautiful display of political entrepreneurship by less efficient firms. They wanted to break bigger and better companies up, so they got a law passed. What about the experts at the time? What were economists saying about monopolies? They were saying large-scale production and mergers were not a threat to competition or the consumer. Even self-descrived socialists said this[3].
The theory of monopoly was an ex post rationale for a policy that was created for special interests. The idea that there was some little get-together of experts who then carefully crafted a wise piece of legislation with the public in mind is preporterous.
Why don't we see what Congress said and what actually happened? When the Sherman Act was being passed(1890) Congress claimed that the following industries among others were being monopolized: salt, petroleum, zinc, steel, bituminous coal, steel rails, sugar, lead, liquor, twine, iron nuts and washers, jute, castor oil, cotton seed oil, leather, linseed oil, and matches(that's 17 industries). Let's see some nominal data:
As a general rule, output in these industries expanded more rapidly than GNP during the 10 years preceding the Sherman Act. In the nine industries for which nominal output data are available, output increased on average by 62 percent; nominal GNP increased by 16 percent over the same period. Several of the industries expanded output by more than 10 times the increase in nominal GNP. Among the more rapidly expanding industries were cottonseed oil (151 percent), leather goods (133 percent), cordage and twine (166 percent), and jute (57 percent)[4].What about real output?
Real GNP increased by approximately 24 percent from 1880 to 1890. Meanwhile, the allegedly monopolized industries for which a measure of real output is available grew on average by 175 percent. The more rapidly expanding industries in real terms included steel (258 percent)[remember the evil Andrew Carnegie?], zinc (156 percent), coal (153 percent), steel rails (142 percent), petroleum (79 percent), and sugar (75 percent)[4].AC: "The worst period of monopoly formation was between 1898 and 1902. Prior to this, there was an average of 46 major industrial mergers a year. But after 1898, this soared to 531 a year. (3) By 1904, the top 4 percent of American businesses produced 57 percent of America's total industrial production, and a single firm would dominate at least 60 percent of production in 50 different industries."
Really: Yes, exploiting economies of scale is beneficial to us all. Sometimes production should be concentrated. There is absolutely no proof of monopolization in what AC is telling us, even though AC probably thinks otherwise.
AC: "The power of these monopolies easily dwarfed the governments that oversaw them. As early as 1888, a Boston railroad company had gross receipts of $40 million, whereas the entire Commonwealth of Massachusetts had receipts of only $7 million."
Really: It would be very helpful, if you actually told us what company that would be! Google didn't help. But seriously, what's with the phony comparison? The Commonwealth of Massachusetts has a monopoly on the use of legalized force and they have the power to legislate. Besides, what do gross receipts have to do with power? If this railroad company was private and operated on a free market, then it had no power at all. They were at the mercy of their customers and the whims of politicians.
AC: " It wasn't until Teddy Roosevelt launched his great "trust-busting" campaign in 1902 that this process was reversed. Actual enforcement of the Sherman Act reduced monopolies until the Roaring 20s, when laissez-faire policies again returned to Washington. Over that decade, about 1,200 mergers swallowed up more than 6,000 previously independent companies; by 1929, only 200 corporations controlled over half of all American industry."
Really: Yet again, there isn't a single example offered. AC tells us that when the state isn't actively preventing mergers, there are more mergers. Proof of monopolization? No, not at all in fact.
AC: "The New Deal era ushered in yet another era of antitrust policy, again reducing the percentage of monopolies. This was followed by the Reagan era, a period which saw both massive deregulation and another frenzy of mergers and takeovers."
Really: At least the first part of the New Deal(1933-34) was a huge cartelization program and competition was actively restricted by the state. Not suprisingly it was also a time of economic misery. Basically AC has his history as wrong as it can get. The "deregulation" was in fact started by Carter and I still don't see how more mergers equals monopoly.
AC: "...the periods of government trust-busting show the proper role of government, and its effectiveness in restoring market competition."
Really: How so? I'd like to remind everyone that AC here still hasn't managed to prove that trust-busting helps the economy. He didn't even try. He's like Keynes; he has hunches and simply tells it to us as fact. On the other hand I presented the reader with statistics that back my statements up.
AC: "Two objections are possible here ... The second objection is that a wave of mergers may result in a more natural and efficient equilibrium of larger players, and this could be beneficial for the economy."
Really: Well yes. Without mergers we'd all live in personal autarky.
AC: "The result doesn't have to be a monopoly -- perhaps just an oligopoly."
Really: A situation where there are only a few sellers can be competitive. In fact even a monopoly can operate in a competitive environment.
AC: "The problem is that at the top end, mergers become increasingly harmful to the economy, with monopolies merely representing the worst result. Even oligopolies engage in price-gouging and collaboration."
Really: Why do mergers become increasingly harmful? Do mergers keep automatically happening until there is an uncompetitive situation? If so, then why? Why do you equate the number of firms with how competitive the market is? Do we have anything but your hunches?
AC: "A natural equilibrium hardly represents the best equilibrium -- as recessions and depressions show."
Really: To show us how natural equilibrium is bad, you give us two examples of disequilibrium? Besides, to use equilibrium analysis to examine competition is in my opinion misguided.
AC: "How do Austrians deal with the historical correlation between laissez-faire and monopolies?"
Really: By shredding your arguments to pieces one by one.
[1] Burton N. Behling, Competition and Monopoly in Public Utility Industries
(1938), in Harold Demsetz, ed., Efficiency, Competition, and Policy (Cambridge, Mass.:
Blackwell, 1989), p. 78.
[2] Dominick T. Armentano Freedom Daily, May 1992: Monopoly
[3] Thomas J. DiLorenzo The Review of Austrian Economics Vol. 9, No. 2(pp. 44-46): The Myth of Natural Monopoly
[4] Thomas J. DiLorenzo Austrian Economics Newsletter(Summer 1991, pp 1-6): The Antitrust Economists' Paradox
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