“Bad” Monopolies?

An argument against absolutely free markets comes up often. What about so-called natural monopolies? So-called infrastructure projects (e.g. sewage plants) have high barriers to entry, and are a challenge to true competition.

 

monopoly-abnormal-profitThis is the kind of chart you will find in modern economics textbooks on the topic of “monopoly”. Allegedly, monopolies will achieve “abnormal profits” and their allocative efficiency will be sub-optimal as well, hence they are considered an example of “market failure”. Not to put too fine a point to it, this is complete bunkum (sorry, economics students – you are being taught piffle!). For one thing, there is not a shred of empirical evidence for this. On the contrary, over many decades, papers published in economic journals that have studied “natural monopoly” type situations throughout history, had to admit that the exact opposite of what this diagram suggests has actually happened in free competitive markets in which the State did not intervene on the suspicion that it had to counter the threat of a private “monopoly”.  The theory on monopoly may look superficially convincing, if not for the fact that Rothbard came along in 1963 and completely debunked it in Man, Economy and State. We have a more detailed article on the topic in the works that will flesh out many of the points made by Keith here – stay tuned! [PT] – click to enlarge.

 

Therefore, if left to private companies, they would become bad monopolies. So it is best for the government to provide them.  I think there are answers on several levels.

 

  1. Moral. The argument is saying that men need to be forced, like brutes. Horses will do no work unless harnessed, and led around by a bit in their mouth (if not whipped). Haven’t we proven beyond a shadow of a doubt that this is wrong?
  1. Economic. The question of how men coordinate their actions – how they can coordinate – is one of the major questions of economics. The answer is: each must pursue his own interest, which in an economics context means pursuit of profit. Pursuit of profit and only this pursuit leads men to work together. Adam Smith may have used an unfortunate phrase by referring to “the invisible hand”. I describe the mechanics of it in my dissertation. But no matter how you slice it, economics is about people coordinating based on their individual interests and individual knowledge. Central planning is about the negation of coordination, and the destruction of economics as such.
  1. Scope. There is an analogy to when people demand of philosophy to explain the latest observation from astronomy or a particle accelerator. It is outside the scope of philosophy. It is not the job of the philosopher to answer what it means when you see a super massive black hole.

 

Similarly, it is not the job of the economist to envision every business model in a free market. It is the job of a million entrepreneurs, each developing his own unique business model. Indeed, economists often make lousy entrepreneurs.

 

  1. The 8th grader. I love using the standard of a precocious 13 yr old. “So you’re saying that government is smarter than the people, and only government is smart enough to figure out how to build a sewer!?”

 

Chart by: “Friedmanseconomy”

 

Chart caption by PT

 

Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.

 

 

 

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One Response to “Should the Government Give Us Infrastructure?”

  • Bogwood:

    Sewers are one of the great false trails in human history. Back in the day there were two choices for human waste, local composting and centralized sewer systems. Japan had recycled waste safely for centuries, but John Crapper and English government swept us along in the direction of giant infrastructure. It changed the whole scale of future development for the worse.

    It is somewhat like the arguments against agriculture, impractical, but at least we could agree on no new future sewers,back to recycling, close the nitrogen and phosphorus chemical loops. Cities might be smaller, but more natural and pleasant.

    The other great government project, the interstate highway system is also a false trail, even though transiently enjoyable. Future generations will more than shake their heads, barf on their deerskin moccasins comes to mind. So one vote for smaller government, but then I could be wrong.

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