Sunday, January 26, 2014

Tom Woods on the Misplaced Fear of “Monopoly”

monopoly_1Tom Woods wrote a great post back in 2012 for the Future of Freedom Foundation on the Misplaced Fear of “Monopoly”.

Monopoly is a confusing term which has various meanings and definitions.  It is an important concept within economics as well as political philosophy (especially in the libertarian realm).

What is one to think of monopoly?  Woods explains.

Those of us who get drawn, often against our better judgment, into Internet debates soon discover that the case against the market economy in the popular mind boils down to a few major claims. Here I intend to dissect one of them: under the unhampered market we’d be at the mercy of vicious monopolists.
This fear can be attributed in part, no doubt, to the cartoon history of the 19th century virtually all of us were exposed to in school. There we learned that rapacious “robber barons” gained overwhelming market share in their industries by means of all sorts of underhanded tricks, and then, once secure in their position, turned around and fleeced the helpless consumer, who had no choice but to pay the high prices that the firms’ “monopoly” position made possible.
This version of events is so deeply embedded in Americans’ brains that it is next to impossible to dislodge it, no matter the avalanche of evidence and argument applied against it.
Historian Burton Folsom made an important distinction, in his book The Myth of the Robber Barons, between political entrepreneurs and market entrepreneurs. The political entrepreneur succeeds by using the implicit violence of government to cripple his competitors and harm consumers. The market entrepreneur, on the other hand, makes his fortune by providing consumers with products they need at prices they can afford, and maintains and expands his market share by remaining innovative and responsive to consumer demand.
It is only the political entrepreneur who deserves our censure, but both types are indiscriminately attacked in the popular caricature that has deformed American public opinion on the subject.
Andrew Carnegie, for instance, almost single-handedly reduced the price of steel rails from $160 per ton in 1875 to $17 per ton nearly a quarter century later. John D. Rockefeller pushed the price of refined petroleum down from more than 30¢ per gallon to 5.9¢ in 1897. Cornelius Vanderbilt, operating earlier in the century, reduced fares on steamboat transit by 90, 95, and even 100 percent. (On trips for which a fare was not charged, Vanderbilt earned his money by selling concessions on board.)
These are benefactors of mankind to be praised, not villains to be condemned.
To be sure, there are caveats, as there always are in history. For a time, Carnegie did support steel tariffs. Since he substantially reduced the price of steel rails, though, this political position of his did not harm the consumer. Other critics will point to the Carnegie and Rockefeller foundations and the dubious causes those institutions have supported. Their objection is irrelevant to the specific question of whether the men themselves, in their capacity as entrepreneurs, improved the American standard of living. That question is not even debatable.
Mainstream economics identifies monopolists by their behavior: they earn premium profits by restricting output and raising prices. Was that behavior evident in the industries where monopoly was most frequently alleged to have existed? Economist Thomas DiLorenzo, in an important article in the International Review of Law and Economics, actually bothered to look. During the 1880s, when real GDP rose 24 percent, output in the industries alleged to have been monopolized for which data were available rose 175 percent in real terms. Prices in those industries, meanwhile, were generally falling, and much faster than the 7 percent decline for the economy as a whole. We’ve already discussed steel rails, which fell from $68 to $32 per ton during the 1880s; we might also note the price of zinc, which fell from $5.51 to $4.40 per pound (a 20 percent decline) and refined sugar, which fell from 9¢ to 7¢ per pound (22 percent). In fact, this pattern held true for all 17 supposedly monopolized industries, with the trivial exceptions of castor oil and matches.
In other words, the story we thought we knew from our history class was a fake.
Click here to read the rest of this post. (via Tom Woods facebook page)

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