Some of these I have touched on in my other blogs, but I haven't given a full explanation.
For my intellectual debts, I have relied heavily on the late "Austrian" economists Ludwig von Mises and Murray Rothbard.
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| Ludwig von Mises |
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| Murray Rothbard |
I also have picked up this book again lately, which I cited in an earlier blog:
I talked about this in my blog about alternatives to government regulations, and why everything they teach us in school about the "Progressive Era" is wrong.
I think that I should be clear what the title really means here; conservatism in this case, is not conservatism in the modern sense, like Ted Cruz or Donald Trump.
In the late mid to late nineteenth century, and early twentieth century, liberalism and conservatism were far different than they are today.
Conservatism: Conservatism during this time meant adhering to the old mercantilism ways, in other words, government granted privileges to certain companies, (like the "East India Trading Company") corporate subsidies, limits on buying goods from foreign countries, etc.
Liberalism: Classical liberalism back then was what we would call "libertarianism" today. The classic liberals wanted laissez faire capitalism, free trade, sound money, separation of government from banking, and pretty much everything else.
The terms "left wing" and "right wing" come from during the French Revolution, where the "liberals" sat on the left, and the "conservatives" sat on the right.
The great libertarian economist Frederic Bastiat sat in the left side of the French legislature, because he was considered "left wing" by the standards of that day.
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| Frederic Bastiat |
In school we are taught that the "Progressive Era" was an intellectual movement orchestrated by farmers, workers and academia, in order to use government to protect the general public from the emerging wealthy industrial class.
Reality was the opposite; Big business lobbied the government for special favors, and found ways to use the government in order to crush their competition, and give themselves an edge.
Kolko had grown up believing that the government was regulating the economy to protect the average citizens, but upon digging through these old letters and sources, realized that this wasn't reality.
The "Progressive Era" was in essence, a return to the "conservative" mercantile ways of doing business, albeit more discreetly.
It should be pointed out here that Gabriel Kolko was a socialist, and cited primary sources.. so he was just interested in what the facts were, rather than simply promoting his ideology.
Later in his life, Kolko resented the fact that libertarian thinkers (like Rothbard) used his work to promote their views.
Monopoly and Competition:
In von Mises' magnum opus "Human Action", Mises explained how and why a monopoly could never exist in a unhampered market.
In Murray Rothbard's book "Man, Economy, and State", he borrowed heavily from Mises, but also added many of his own findings.
First off, what is a monopoly?
The phrase monopoly is actually kind of vague. It's gone throw a few different incarnations.
In school, they tell us that a monopoly is when a single producer takes over a market and becomes the only seller of a good.
The fact of the matter is, that this is a very new definition, which started around the time of the New Deal.. Originally, this sort of explanation was given:
"A monopoly is an institution or allowance by the King, by his grant, commission, or otherwise... to any person or persons, bodies politic or corporate, for the sole buying, selling, making, working, or using of anything, whereby any person or persons, bodies politic or corporate, are sought to be restrained of any freedom or liberty that they had before, or hindered their lawful trade." - The seventeenth century jurist, Lord Coke.
"Why are monopolies illegal?"
In school, we're taught at the Sherman Anti-Trust Act was signed into law in order to protect us from the "robber barons" such as John D. Rockefeller.
Again, this is mythology.
The late nineteenth century America saw an economy that grew at the fastest rate in history. It was the greatest economic expansion in the history of mankind. The economy was intensely competitive, with prices falling across the board.
Immigrants came here by the millions, and were still able to find work. The economic pie grew fast enough to feed all these mouths.
The fact of the matter, is that there were emerging wealthier interests that weren't satisfied; they were struggling to handle all of the competition, so they wanted aid in crushing it.
The late nineteenth century America could be described as a conflict between the great oil tycoon John D. Rockefeller and his allies, Harriman, (railroads), Kuhn, Loeb, (both investment bankers) on one hand, and JP Morgan the banker, and his various banker associates on the other.
The two agreed to work together in some instances, (as in the case of the Federal Reserve) but each still wanted to outdo the other.
Think of those mafia movies where you see the families meet to "keep the peace", but you know that it's only an act, and they still plot each others' demise.
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| John D. Rockefeller |
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| JP Morgan |
In another one of Rothbard's books, he does an excellent job of laying this out, by following what went on in our financial system during this time period.
One of the biggest problems with history as it's taught in school, as that they simply teach you to memorize facts, rather than look at connections between various people and organizations; where they worked before coming to power, who they helped once in power, and where they worked after, and so on.
Rothbard talked in this book about how if you follow the different presidents and their administrations, you can see who worked for whom, and how they helped their benefactors.
I particularly love the introduction to this book, where the economist Joseph Salerno talks about how some would label this interpretation of history as "conspiracy theory", but it's really the exact opposite. Rothbard cites names, places, dates, dollar amounts, and so on.
It would be a "theory" if it wasn't proven.
True conspiracy theory, would be like the more extreme feminists blaming "the patriarchy" for our problems, or the McCarthyists of the 1950's blaming "embedded communist traitors" for problems in the US.
Both of those ideologies attack a sort of vague, nameless, faceless enemy as the source of their problems.
Examples in the late 19th to early 20th centuries:
Grover Cleveland: Cleveland and almost his entire cabinet (both terms) had ties to JP Morgan.
Before his career in politics, Cleveland worked as a lawyer in Buffalo, NY with the New York Central Railroad which Morgan funded, as a major client.
In between his non-consecutive terms as president, he worked as a partner at the law firm of Bangs, Stetson, Tracey and MacVeagh, which was the chief law firm that worked for the House of Morgan.
Cleveland's administration signed into law the "Interstate Commerce Commission", which Kolko wrote about in his book about the railroads seeking government regulation to block competition.
The railroad industry was intensely competitive, and various lines could charge lower and lower rates. The big firms didn't like this, so they lobbied to do something about it.
The government signed the "Interstate Commerce Commission" into law, which imposed a "price floor" which required that you charged a certain amount for shipping. This was spun to the public as being done to protect them from "predatory pricing" but in reality, it allowed the railroads to charge higher fees, and make more money.
Let me give an example to illustrate how this would work:
Say that there were multiple railroads, each charging various amounts per trip. One charged $10, another $15, another $17. The ICC would require that by law you had to charge $17 per trip.
This was a boon to the less efficient railroads, who would now have to charge more, and would guarantee higher profits.
JP Morgan bankrolled several of these railroads.
William McKinley:
McKinley came from, and was a Republican governor of Rockefeller's home state of Ohio.
As a Congressman, he pushed for protective tariffs, (taxes on imports) which would shut out foreign goods from competing with domestic goods.
This was orchestrated by American manufacturers, who wanted an edge over their competition.
Morgan, Carnegie, and Rockefeller gave McKinley $200,000 each when he campaigned for president, which altogether would be about $20 million today. McKinley outspent his Democrat opponent by about 5:1.
McKinley signed into law the "Gold Standard Act" which put the US on a completely gold standard, rather than the bi-metallic silver and gold standard.
This was strongly opposed by McKinley's Democrat opponent, the populist candidate William Jennings Bryan. Bryan wanted to be on a bi-metallic standard, with the price of silver to gold being about 16:1. This would allow for more inflation, since silver was more common.
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| William Jennings Bryan |
In an era of price disinflation (prices rising, but the rate at which they're rising, declining) and ultimately price deflation, (falling prices) the Gold Standard would ultimately benefit the Northern moneyed interests, since they were creditors, and hurt the farmers, who would end up selling their products for less money.
The farmers supported this "free silver" movement, because inflationary monetary policy would have driven up the prices of the crops, and earned them more money.
Inflation benefits debtors, and hurts creditors. Let me give an example to illustrate:
Say you borrow $1,000, with a 10% interest rate. This means you ultimately have to pay $1,100.
If prices go up by say, 15%, you still only have to pay back that $1,100. However, this hurts your lender, because after they get their money back, they won't be able to buy as much as they could with it before.
While I believe that sound money is a good thing, the purpose here was nefarious; Morgan and Rockefeller wanted the gold standard, but it would be controlled by the Wall Street banks that they owned. Bryan, by contrast, wanted the money to be created by Congress, as the Constitution says.
This act was one step closer to establishing the Federal Reserve in 1913.
Theodore Roosevelt:
Upon McKinley's death, Roosevelt took power.
Roosevelt was a Morgan man his whole life; both his father and uncle were wealthy Wall Street bankers, both of whom were closely associated with Morgan financed railroads.
Roosevelt's wife, Alice Lee, was the daughter of George Cabot Lee, the head of one of the wealthiest Boston families.
One of his acts upon coming to power, was to throw a lavish dinner in favor of JP Morgan.
Roosevelt's administration enforced the Sherman Anti-Trust Act, which went primarily after Rockefeller's oil empire.
The trials started during his presidency, but ultimately concluded during Taft's administration.
The famous "trust buster" differentiated between "good trusts" and "bad trusts" which seemed to be based on who ran them.
Meanwhile, as Kolko demonstrated, Roosevelt essentially reached a detente with International Harvester and US Steel, both Morgan backed companies. This was to give the impression that he was on the public's side, but not bite the hand that fed him at the exact same time.
William Howard Taft:
Like McKinley, Taft was also a Republican from Rockefeller's home state.
Taft aggressively pushed anti trust suits against International Harvester and US Steel. Both companies are broken up, which hurt the Morgan interests.
Woodrow Wilson:
The election of 1912 was an interesting scenario, and there is evidence that it was rigged.
The "Bull Moose party" was essentially a ploy to cut the Republican vote in half, thus making a Democrat victory easier. This would remove Taft from power, who was hurting the Morgan interests.
Wilson was ultimately the man who signed the Federal Reserve into law, ironically running on "cracking down on Wall Street" (sound familiar?) as one of his selling points.
You have to look at Wilson's career, and as with Grover Cleveland's ask what accounts for such a rapid rise to power.
Wilson went from being an unknown academic, to president of Princeton, to Governor of New Jersey, to President of the United States... all in a few years.
This sort of pattern continued amongst our presidents until about the 1930's or so, when the House of Morgan lost influence. (Morgan himself died in 1913)
They were superseded by Goldman Sachs and others, who have remained powerful to this day.
The Marxian, versus the Misesian and Rothbardian view of history
Marx's view:
Feudalism created capitalism, which lead to moneyed groups taking power and exploiting the workers. This capitalists would keep accumulating more and more capital, ultimately impoverishing the workers. The workers would rise up, overthrow the government, and create an egalitarian society.
Government would initially work to ensure equality, then dismantle itself, and society would become self sufficient.
I talked about a friend with this recently, and Marx's thinking was clearly flawed in the sense that people who gain power very rarely, (in fact, almost never) willingly give it up.
Marx himself never laid out plans for how this would happen.
Ludwig von Mises' view:
A minimal government and laissez faire capitalism would produce an immensely wealthy nation.
Up until the mid to late 19th century, the majority of Americans owned their own businesses, or ran one with only a few other people. This is why the economy was intensely competitive, and prices fell so rapidly.
Large corporations only started to emerge in larger numbers after the Civil War, beginning with the railroads.
These moneyed groups would seek to control the government, in order to enrich themselves further at the expense of everyone else. This would lead to the widening gap between the rich and the poor, which we have today.
This had already happened in the US during Mises' time, (He came here during World War 2, but died during the 70's.) and Mises believed that the way to correct this problem was to reduce the government back to focus strictly on defense and courts.
The wealthy special interests would then have to earn their wealth by competing with everyone else.
In a sense, you could say that Mises view was essentially the polar opposite of Marx's; it's only because of government intervention that we have massive recessions (which hurt the poor the most) and a widening income gap. Due to the dynamic and competitive nature of real capitalism, this is far less likely to happen in a "non interventionist" economy.
Murray Rothbard's view:
Although Rothbard was a student of Mises, he became an anarchist because he believed that even a limited government couldn't stay limited forever.
It was inevitable that groups would seek to take control of it for their own ends.. Hence, why the United States went from having the most limited government in history, to one of the largest.
This was the underlying reason behind private courts, law, defense, police, and so on; (I have written blogs about all of these, for those that are reading my writing for the first time) the competition amongst the various groups and agencies was ultimately what would keep them in check.
As long as there is a monopoly on force, (which is the definition of a government) there will always be ways for the government to dole out favors to their constituents.
While Marx viewed the classes as the "capitalists" against the "proletariat", Rothbard took a different view.
Rothbard viewed the history of mankind as a struggle between two groups:
1)The State, and the interests that it works for (and vice versa) on one hand.
2) The honest business people and consumers, who earn and buy what they have without government assistance on the other.
The historical monopoly experience.
"Okay, well even if cracking down on monopolies was done for the wrong reasons, wasn't it ultimately a good thing?"
Well, lets evaluate some of these "trusts" that historians trash so much.
As stated above, there was rapid price deflation (falling prices) across the board in the late nineteenth century. That should give you a clue that there weren't businesses gouging people.
The fact is that various "sour grapes" competitors got together in order to oust competitors who they couldn't compete with. Hence why they got together and lobbied the government to break them up. The government could then present this as "we're doing this to protect you."
Standard Oil:
This is the example that is most commonly taught in school. We're taught that the Sherman Anti Trust Act was enacted in order to protect us from Standard Oil.
Well let's look at some of the facts:
The price of kerosene fell from $0.30 per gallon in 1869 to $0.10 in 1874, to $0.08 in 1885.
Whale oil and candles, which had been the primary sources of light before kerosene, were too expensive for the poor to afford in large amounts. Thanks to the mass production of kerosene, the poor could more afford to light their homes. People were even preferring it to coal, in some cases.
Rockefeller was almost obsessed I would say, with cutting costs. He hired his own teams of plumbers and chemists, he found ways to make hundreds of alternative products from the oil, (like petroleum jelly, lubricating oils, paints, and paraffin wax for candles) shipped oil in tank cars instead of barrels, and had his own men load and unload the tanks rather than the railroad.
Rockefeller never completely dominated the field, as most people claim. His company went from holding 4% of the petroleum market in 1870, to 25% in 1874, to 85% in 1880, to 88% in 1890. By 1911 when the company was broken up by the courts, their share had dropped down to 64%, and was continuing to fall, from pressures by both foreign and domestic competitors.
At the time of the company's break up, Rockefeller had hundreds of competitors.
All of this being said, doesn't mean that I condone Rockefeller using his wealth to influence government. However, there are definitely aspects of the way he ran things that could be emulated.
Alcoa Aluminum
Alcoa was charged with holding a monopoly on aluminum production, which it did at the time. The company was brought to the Supreme Court.
One of the charges was that it "kept prices too low" which prevent competition from emerging.
Why/how is this a bad thing? Alcoa didn't actively block anyone else from producing aluminum, nobody else was able to produce it cheaper in the current environment.
Also, during this current time other metals such as tin, steel, and nickel were still being used. It wasn't as though Alcoa had a monopoly on all metals.
IBM, Microsoft, and Apple
In the last few decades, these three giants have dominated the computer field.
There were anti trust law suits pushed against IBM (again, by bitter competitors) in order to break them up.
Reality that from about the 80's onward, IBM made the major mistake of focusing too much on the production of mainframes, instead of personal computers. Microsoft did the exact opposite, which is why Microsoft dominated the field.
Anti trust lawsuits were pushed against Microsoft, (yet again, by weaker competitors) but as with IBM, they were thrown out. Although Microsoft is still an immensely wealthy and powerful company, this weakened it, and took time and resources away from developing new products.
Apple really took off in recent times with the various "i" products, such as the "iPhone", "iPad", "iPod" and and so on. In the nineties, Apple was largely overlooked. My grandfather even sold his Apple stock back then, which he regrets to this day.
Give Apple another 10-15 years, and someone else will come along and supplant them.
So even in this highly regulated, corporatist economy, there is still intense competition, with even the strongest firms very rarely dominating their field for long.
"Why can't a monopoly exist in a truly free market?"
I will explain this by answering some common questions and objections to this. I will also add several of my own points.
"Won't one business be able to take over an industry, and charge as much as possible?"
First off, I think that the whole concept of "monopoly price" needs to be explored.
The fundamental basic fact of any market economy (whether it be true capitalism, what we have now, or something in between) is that every consumer wants to pay as little as possible, but every producer wants to charge as much as they can.
It's human nature; everyone would love to pay nothing, or close to it. Conversely, business people want to make as much as possible from their products.
As I have stated in other blogs, and I don't think can be stated enough:
Human desires are infinite, but resources are finite.
Just think about your wants on a daily basis; you would love a faster computer, be able to travel more, be able to eat better, or live in a nicer home.
The fact of the matter is that you're not the only person on the planet who wants the resources necessary to make those things happen. Hence, why we have prices for things.
Starbucks:
Many look at Starbucks and complain that their coffee is "overpriced".
Well again, everyone would love to pay as little as possible, but they charge what the do, and they still have lines out the door.
If people want their prices to come down, they have to stop buying enough of the product so that the demand curve drops, and this puts a downward pressure on the prices.
Of course, I don't see this happening anytime soon.
Sports' franchises:
The same logic applies here, but more to the extreme.
New York Yankee seasonal passes cost thousands of dollars, and yet they still pack those stadiums full.
And why shouldn't they? People are willing to blow much of their income on these tickets and passes, and they're in the business of making money.. Nobody is forcing them to pay that much.
"Isn't it unfair that people are able to charge so much, as in the two examples listed above?"
I don't think so. A price itself, is agreed on by the buyer and seller.
As much as the businesses listed immediately above charge, people are still willing to pay those amounts.
Unless that changes, they don't really have an incentive to lower their prices.
They charge "what the traffic will bear".
If one steakhouse restaurant chain were to dominate the entire industry and start charging $200 for a steak, smart entrepreneurs would see an opportunity to open their own restaurants and charge much less.
"What is the optimal size of a business? Is there such thing as a business that's too dominate?"
That's up to the entrepreneurs to decide, based on their market research.
I realize that is vague, but there are so many variables. What people want, the demographic that is being targeted, the income level of the people living there, the level of competition in the area, just to name a few.
I don't consider Starbucks the best coffee, but they do have a mass audience appeal, and are brilliant at marketing themselves. Hence, why they went from just Seattle, to dominating the country.
Indirect competition:
As I laid out in my cases of real world monopolies above, alternatives always exist.
Standard Oil didn't force anyone to buy oil; people could still have bought coal, whale oil, and so on. The demand for kerosene was hurt severely once the light bulb came out too.
Alcoa didn't force anyone to buy aluminum; other metals could be used.
There are different phone and mp3 player companies.
In the case of Starbucks, there are other coffee producers as well as teas, sodas, and so on.
"Predatory pricing"
One of the common fears of a market dominating the field is the myth of "predatory pricing".
This is the belief that a business holds a "war chest" of savings, and will lower prices to an exceptionally low level, in order to sell their products, and deprive others businesses of customers. This will drive other competitors from the market, granting the business a monopoly..
This is illogical, for a few reasons:
- Where would this "war chest" come from? This theory suggests that a company would have to have been extremely successful in years prior, and it were already so, why take such a stupid risk?
- Even if this "war chest" were attained, how long could the company hold prices low, for a long enough time to bankrupt all of its competitors? No business would willingly take losses for years or even decades, in the hopes that it would end up on top. As I started above, Rockefeller had hundreds of competitors at the time of Standard Oil's break up.
- Ultra low prices even for a limited time, are a boon to consumers.
- If a business is practicing "predatory pricing", competitors can either temporarily shut down, or operate at a lesser capacity, until said business goes bankrupt. If the "predatory price" company raises prices again, the competitors can just compete as before.
"Restricted production"
One fear is that a business with a pretty stable demand curve for its product, will destroy some of its product, in order to create a scarcity and thus demand a higher price.
This is clearly illogical, because that would mean the costs or producing said product would have all been for nothing.
This is not the same as a business error, that is spending years acquiring resources to produce something that is no longer desired.
The whole concept of "restricting production" is a fallacy, because resources are scare, and it doesn't make sense to pay for them in order to waste them.
Changes in technology
I already explained this in my Standard Oil and computer company references, but I think it's important to emphasize that this is one of the greatest threats to most companies in a freer economy.
No one person can predict what the next big trends will be. New technology is often dismissed.
JP Morgan was the first person to light his house with electric light bulbs, supplied by Thomas Edison.
Upon learning that his son had invested in this new technology, his father Junius remarked to him:
"I'm disappointed in you Pierpont. (Morgan's middle name) This is the stuff of carnivals and fairs. You've been played for a fool."
"One big, evil company"
As I think that you can tell from the principles I have laid out above, the notion that there will be some "big, bad company" that will dominate the Earth in a James Bond type scenario is pretty absurd.
There are too many factors working against any company for that to happen.
Conclusion:
I think that I did a pretty good job of laying out why a monopoly can't exist under anarcho capitalism. If anyone has any feedback, I would be happy to hear it.
- STK
