Definition of Monopoly Problem
Monopoly, duopoly and oligopoly have been defined as domination of a market for a commodity or service by one, two and a limited number of producers/sellers, respectively. Monopolies are characterized by a lack of economic competition to produce the good or service. Milton Friedman claimed a monopoly exists “when a specific individual or enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it." Monopolies are assumed to be market participants that benefit from barriers to entry incurred by others (e.g., an added cost). Typically, monopolies seek higher profits through above-market prices, even at the expense of decreasing supply.
History of Monopoly Problem
Throughout world history, the monopoly problem has always been pervasive. The powerful have used public and private monopolies to subjugate the masses in mostly authoritarian economies. Monopolies have denied people the freedom to compete for markets and buy the basic necessities of life at fair prices.
During the late-1700s, Scotsman Adam Smith, the father of economics and capitalism, said "Monopoly of one kind or another, indeed, seems to be the sole engine of the mercantile system." In addition, he said of the authoritarian system: “The oppression of the poor must establish the monopoly of the rich.”
During the late-1700s and early 1800s, capitalism was championed by Thomas Jefferson, who considered freedom from monopolies to be one of the fundamental human rights. Samuel Webster, a small businessman who donated to the American Revolution, warned “Let monopolies and all kinds and degrees of oppression be carefully guarded against.” Although America’s founding fathers claimed to to be pursuing capitalism, the support of banking and manufacturing monopolies, led by the first President George Washington and his treasurer Alexander Hamilton, actually just continued mercantilism.
During the mid-1800s, Karl Marx, "the father of authoritarian socialism and communism," claimed monopolies would lead to the end of capitalism. Although monopolies would lead to the extreme wealth disparity of the late-1800s Gilded Age (and eventually socialism), the monopolies were created by and ended mercantilism (i.e., not capitalism).
The early-1900s Progressive Era in the U.S. was led by socialist economists like Thorstein Veblen. “Trust Buster” President Theodore Roosevelt ineffectively regulated monopolies that eventually led to the Great Depression. President Franklin D. Roosevelt's socialist state with even more public control of monopolies led to a continuation of the depression until World War II. Economist John Maynard Keynes led the use of easy money and debt policies over opposition from “laissez-faire” economists like Ludwig von Mises and Friedrich von Hayek.
During the mid-1900s, President John F. Kennedy economic adviser John Kenneth Galbraith admitted the problem was monopolies controlled most of the economy. The monopolies, along with money supply manipulation, led to the Great Inflation of the 1970s, the severe Recession of 1981-2 and the end of socialism.
In the late 1900s, “laissez-faire” capitalist economists like Milton Friedman and George Stigler claimed to be trying to foster competition through deregulation. However, their efforts were subverted by corporatists to lead to deregulated monopolies.
Since 2000, this corporatism, along with Keynesian policies, has led to recent and emerging global economic crises. In 2016, Nobel Prize winning economist Joseph Stiglitz found “markets are characterized by the persistence of high monopoly profits."
Today's Monopoly Problem
This year, University economists Jan De Loecker and Jan Eeckhout found basically every problem in the U.S. economy is due to monopoly power. The nation’s so-called problems cited by Americans in the most recent Gallup poll are mostly symptoms of the monopoly problem: (1) corruption of government, (2) the economy, (3) unemployment, (4) immigration, (5) healthcare, (6) moral decline, (7) racism, (8) terrorism, (9) the federal debt, (10) education, (11) poverty, (12) national insecurity, (13) wealth disparity, and (14) crime.
Federal, state and local government officials are corrupt. From 1998 to 2016, federal officials were lobbied with billions of dollars from monopolists, especially from nine sectors: health care, banking (and other finance), housing (and other real estate), energy, tech (telecommunications and info tech), autos (and other transportation), food (and other agriculture), other miscellaneous private sectors and the public sector (e.g., education and defense). Monopolists tend to buy politicians from both major political parties, although those in energy and agriculture (likely the biggest polluters) spend much more on Republicans.
Virtually the entire economy has been comprised of and corrupted by monopolists from these sectors. Fortune 500 companies alone represent two-thirds of the U.S. GDP. Moreover, the monopolists in sectors that spend the most money lobbying politicians tend to make the most profits, especially banking, tech, health care and energy. The sectors that produce the most billionaires include banking, tech and real estate (even though its corporations are often not as large).
The monopolists that spend the most money buying politicians have tended to have the highest costs and also be on the list of the public's most hated industries, especially those within the health care, energy and banking sectors. Also among the most hated industries are those who distort the truth for monopolists, including legal, PR and media. The public education monopoly is also among the most hated. But the federal government is the most hated.
Monopolists, including their investors like "Wall Street" and serial monopoly investors like Warren Buffet, get rich, while small businesses and "Main Street" struggle and most Americans face near poverty.
Monopolists block economic development attempts by small business and others. When monopolists limit supply, the result is unemployment, underemployment (even among the highly educated), lower wages and poverty. When monopolists increase prices, the result is the ripping off of consumers and taxpayers, especially for the necessities like health care (which has caused most of the federal debt) energy, food and housing. The combination of lower wages and higher prices leads to wealth disparity and less consumer demand, consumption and economic growth. Monopolists have responded by loaning money to the poor for purchases of necessities, like homes and cars, while demanding high interest rates and collateral. Only the rich are allowed to invest in high-risk, high-return investments.
When monopolies squeeze people economically, they suffer from financial distress, poor decisions and health problems. In the 1960s and 1970s, people thought that if they just did what their parents did that they too would achieve job security, pensions and a decent lifestyle. But Angus Deaton won the 2015 Nobel Prize in economics for a study that found middle-aged, white Americans with a high school education or less are killing themselves from substance abuse and even suicides at a growing rate. Blacks continue to suffer from an even higher death rate.
The activities of monopolists are also leading to societal problems like moral decline, racism, crime, terrorism, national insecurity and war. Numerous studies have found the link between poverty and crime. The National Commission on Terrorist Attacks Upon the United States found: "A comprehensive U.S. strategy to counter terrorism should include economic policies that encourage development, more open societies, and opportunities for people to improve the lives of their families." Wars are often fought over resources made scarce by monopolies.
Worldwide, the disenfranchised know the economic system is rigged against them, and are reacting with resentment, anger and even violence against the establishment.
Economics of Monopoly Problem
Economists recognize that a competitive enterprise economy will produce the nation's largest possible income. Economist Henry Hazlitt described how free markets control prices: “Prices are fixed through the relationship of supply and demand…..When people want more of an article, they offer more for it. The price goes up. This increases the profits of those who make the article. Because it is now more profitable to make that article than others, the people already in the business expand their production of it, and more people are attracted to the business. This increased supply then reduces the price.”
The principles of economics state all economic problems are caused by scarcity, and monopolies create artificial scarcity by limiting supply with help from market entry barriers (i.e., other people can't enter the market). Nobel Prize winning economist George Stigler repeated the view of Adam Smith that “the purely “economic” case against monopoly is that it reduces aggregate economic welfare. When the monopolist raises prices above the competitive level in order to reap his monopoly profits, customers buy less of the product, less is produced, and society as a whole is worse off.”
The Linux Project finds monopolies damage economies with (1) higher prices, (2) inferior quality, (3) inferior quality services, (4) corrupting politics, and (5) slowing technological advance. Because they don’t face competition, monopolies have less incentive to cut prices and costs, offer higher quality and innovate.
Friedman argued: “The great danger to the consumer is the monopoly -- whether private or governmental. His most effective protection is free competition at home and free trade throughout the world. The consumer is protected from being exploited by one seller by the existence of another seller."
Monopolies decrease productivity, which is the efficiency at which goods or services are produced from resources (e.g., workers). A monopoly is productively inefficient because it is not the lowest point on the average cost (AC) curve. Productivity is essential for increasing profits, wages and economic growth.
The Federal Reserve’s Yi Li Chien states “technological progress is the main driver of long-run growth.” Just one or two technological innovations have led to each of the major economic booms: the steam engine and cotton during the late-1700s, railways and steel in the mid-1800s, electricity and chemistry during the late-1800s, petrochemicals and automobiles during the mid-1900s, and information technology during the 1990s.
The Minneapolis Fed's Neel Kashkari laments today's Twitter and Facebook don't provide comparable booms. The Fed hopes to foster future booms by promoting education, innovation, long-term investment and productivity. But monopolies limit opportunities before and after new technologies are developed.
The 1975 textbook "Contemporary Macroeconomics" states: "U.S. policy-makers can achieve full employment with appropriate fiscal and monetary policies. However, they face the constraint of inflation resulting from monopolistic elements in the economy." The book adds that monopolies are not addressed "because of the political costs it may entail."
After raising interest rates to break inflation at the expense of employment until the early 1980s, the U.S. has been trying to salvage employment while still controlling inflation by incrementally lowering interest rates and increasing spending and debt. As gains from lower interest rates dwindle, President Trump is expected to allow rates to rise, increase spending on infrastructure, and explode the debt. Sustainable economic growth will continue to be blocked by monopolies.
When monopolization causes unemployment, economic theory says firms are less likely to provide workers with training, good working conditions, fair compensation and advancement, while practicing higher hiring standards in regards to education and experience, and discrimination (e.g., against young, old, women and minorities). When unemployment is low, they tend to become trainable for good jobs with advancement.
Causes of Monopoly Problem
Free markets allow sellers to compete for sales to buyers. Markets become monopolized when government imposes regulations favoring privileged sellers (and buyers) that often create barriers to entry for potential new competitors into the market. Throughout U.S. history, politicians have favored their monopoly supporters in virtually all industries with many regulations, including granting monopolies outright, excessive patent and copyright protection, licensing, guarantees, mandates, subsidies, tax loopholes, environmental exemptions, zoning and tariffs.
Adam Smith believed monopoly cannot persist without the assistance of government and said “furious monopolists” will fight to the bitter end to keep their privileges, which no politician dare cross. Friedman claimed “In the United States, the most important and the strongest monopolies are unquestionably those derived from government privilege.”
Stigler claimed: "most important enduring monopolies or near monopolies in the United States rest on government policies. The government’s support is responsible for fixing agricultural prices above competitive levels, for the exclusive ownership of cable television operating systems in most markets, for the exclusive franchises of public utilities and radio and TV channels, for the single postal service—the list goes on and on. Monopolies that exist independent of government support are likely to be due to smallness of markets or to rest on temporary leadership in innovation."
The economics profession has generally accepted Stigler's viewpoint that governments regulate at the behest of producers who “capture” the regulatory agency and use regulation to prevent competition. Jean Tirole won the 2014 Nobel Prize in economics for telecommunications models that attempted to prevent monopolies from using superior knowledge to rig the industry rules during deregulation proceedings.
Even liberal economist Fareed Zakaria says the nation needs a Republican party focused on “improved access to the market for the poor and middle class …. greater competition …. specific plans to cut regulations that hamper the formation and growth of small businesses … get rid of the ever-expanding licensing requirements put into place to keep out the competition.”
Once regulations create monopolies, they cause further monopolization within the economy. During the industrialization of the Gilded Age (in the late 1880s), government created railroad monopolies with low-interest loans, land grants and special frontier privileges, and the railroads monopolized much of the rest of the economy by favoring big suppliers, big consumers and big banks. Recently, regulated monopolies in industries like health care, energy and tech use big banks to buy competitors and suppliers, and make special deals with big business consumers and suppliers while shifting costs unto others, especially small business.
After economic growth is suppressed by monopolies, U.S. politicians try to artificially stimulate the economy by pumping in credit at low interest rates through the Federal Reserve banking monopoly and increasing deficit spending. But the "Keynesian" stimulus increases monopolization and wealth disparity even more by creating asset price bubbles, including stocks (especially those of monopolies who enjoy higher profits) and real estate (e.g., homes), preferential lending by big banks to big businesses, and short-term financial engineering, including buyouts, mergers and acquisitions. Since the 2008 lowering of interest rates to near zero, U.S. firms have engaged in $10 trillion in acquisitions. The stimulus also risks crises by increasing government, business and consumer debt, and uneconomic and risky investments. Regardless who gets saddled with the debt, it starts to slow growth and makes the crisis more inevitable and worse.
(Note: A stimulus can likely be justified in the case of war and rebuilding, especially since this spending has not caused U.S. economic crises by itself. However, a stimulus should not be used to counter problems caused by monopolies, and a case can be made that monopolies lead to war.)
Doubtful Causes of Monopoly Problem
Government-controlled economies are based on the false premise that capitalism creates monopolies. Communist Karl Marx believed a few companies can gain cost, size, capital and monopoly advantages in a competitive free market through new technology, mass production and especially economies of scale, including larger plants, labor specialization and bulk purchasing. Vladimir Lenin tried to demonstrate capitalism’s tendency toward monopolies by calculating the growth in the numbers of large companies in the U.S. from the late 1800s through the early 1900s. But "correlation is not causation".
In 2014, the liberal think tank New America Foundation claimed to be the only popular economic writers challenging monopolies, and blamed free markets for concentrating economic power in many industries, and even killing capitalism. At their 2016 conference, keynote speaker Senator Elizabeth Warren indicated markets led to monopolies and were subsequently strengthened by preferential government regulations bought from politicians. The think tank favors better regulation, especially antitrust.
Although the nation and world have failed to study monopolies sufficiently, the initial, main and enduring cause of monopolies appears to be government regulations, and not capitalism, for many reasons including:
- new technology is often patented by governments, and while intellectual property may have value, the resulting entry barriers should be dealt with as a problem of regulation, for example by reducing patent lives,
- even more significant government regulations favoring and creating monopolies in specific industries and the larger economy have also preceded monopolization (as discussed in the Causes of the Monopoly Problem),
- monopolies are not limited to large corporations (e.g., doctors, unions, etc.),
- markets shouldn't be blamed for monopolization if companies gain temporary market power and then use political power to gain government regulations favoring monopolies,
- antitrust regulations have, for the most part, failed to foster competition, and
- without regulations favoring monopolies, competing companies would likely have sufficient opportunities to challenge monopolies, including developing low-cost niche production, niche markets, disruptive technologies and foreign partners.
Since the 1700s, economists, starting with Adam Smith, have extolled the virtues of free trade. When foreigners make products just as well for a lower price, it should be more economical to pay less for these goods and invest the savings in industries the nation does best and develop new industries. However, governments continued to erect trade barriers that promoted domestic manufacturing monopolies and led to economic problems and even war, until after World War II. Today, Harvard economics professor and George W Bush adviser Gregory Mankiw claims: "Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards." Yet, socialists, like Marx and Bernie Sanders today, and nationalists, like Adolf Hitler and Trump today, call for regulation of free trade, which they blame without analysis for the loss of domestic manufacturing and related jobs (to foreign monopolies).
Analysis is needed to demonstrate accusations of unfair trade practices against foreign nations. If lower labor costs are mainly responsible, attempts to use trade barriers to take some low-technology manufacturing (e.g., I-phones) from developing countries (e.g. China) could offer Americans mostly low-paying tedious jobs for workers and/or prohibitively higher prices for consumers. So could restricting immigration. The poor need economic freedom and growth to lift them out of poverty. Advanced manufacturing (e.g., robotics) should be used if competitive or economic, but tends to increase other costs, like capital investment and electricity, while reducing total jobs. The U.S. trade deficit of about $500 billion ($2.75 trillion imports minus $2.25 trillion exports) is only about 3% of GDP and could be more favorably fixed by making the nation more competitive through de-monopolization (e.g., health care adds $1500 per car), and better harmonization of labor and environmental laws, and tax rates.
The U.S. should abolish regulations favoring and creating monopolies before considering resorting to increasing less effective regulations like antitrust and anti-trade.
Barriers to Solving Monopoly Problem
The following six barriers to solving the longstanding monopoly problem might seem overwhelming, but the internet provides new hope for freedom-aspiring citizens to spread the word about regulations favoring monopolies (e.g., on this web site).
The first and underlying barrier to preventing monopolies is the inherent subjectivity of economics. Paul Samuelson said "Economics has never been a science." Free market economists and others lacking lobby money are limited in what they can prove in economics (e.g., when a monopoly exists, when regulations create monopolies, when monopolies cause economic problems, etc.). This subjectivity can limit the resistance moneyed monopoly interests receive. Fortunately, it should be obvious the U.S. shouldn't have government regulations favoring and creating monopolies.
A second barrier is business-people, especially from large businesses, support regulations favoring and creating their own monopolies. Monopolies are preferred because they generate more profits than competitive markets. The U.S. economy is so monopolized even small businesses must often have some connection or synergy with monopolies. Generally, large corporate and wealthy donors buy regulations favoring private and professional monopolies from Republicans. Intellectual elites and organized union labor buy regulations favoring public or government-regulated monopolies and labor monopolies from Democrats. Unfortunately, it can be difficult to fault those pursuing regulations that serve their financial self-interest.
A third barrier is government officials prefer monopolies because they can get their hooks into them for more money. Monopolists buy politicians, regulators and judges from both major political parties, but especially Republicans, with money and other campaign contributions, and often other "carrot" incentives like personal investments. They can also use "stick" reinforcement like threats and blackmail. Monopolies can also create the need for larger regulatory bureaucracies for politicians to control, especially Democrats. Sometimes, monopolists offer to provide more tax money or serve social needs for their government. Big business, big government, big professional associations and big labor unions buy government officials for the privilege of formulating and implementing preferential public policy analyses, laws, rules, regulations and decisions favoring private, public, professional and labor monopolies, respectively. House Speaker Paul Ryan admits politicians spend money “on favored industries, on favored individuals, picking winners and losers in the economy, that's not pro-growth economics. That's not entrepreneurial economics. That's not helping small businesses. That's cronyism, that's corporate welfare.” Politicians ignore their duties to protect the basic rights of citizens, including freedom. They also report falsely to uninformed voters.
A fourth barrier is the corruption of the professional "elite," especially economists. Government bureaucrats rationalize regulations favoring monopolies during both legislation and rule-making. Monopoly-supported Universities and research institutes avoid studying and challenging monopolies on anything more than a superficial level. Private economists often work for monopolists or benefit from predicting or writing about crises, but rarely ever explaining or solving them. Friedman explained “jobs for economists has arisen out of government regulation. So the special interests of economists is to be in favor of government regulation.” Since economists provide academic cover for politicians, they must be discredited.
A fifth barrier is the corruption of the media, including television, cable, radio and newspapers. The media is used by the rich to whitewash their abuse of the poor. They just report on the symptoms of the problem and/or falsely blame markets. The entire media has ignored their duty to tell the truth that regulations favor monopolies. Monopolists control the media by contributing advertising payments, stock investment and special access, as well as the methods used to control politicians. They are also using government regulations to monopolize the telecommunications industries. Since the media provides news cover for politicians, they must also be discredited.
A sixth and final barrier is voters are uninformed about economics. This could be considered a failure of democracy. But voters can’t be blamed for being uninformed. The U.S. global economic leader does not educate the public about capitalism, while pretending government regulations favoring monopolies don't exist. Monopolists, politicians, economists and the media are being rewarded handsomely to mislead the public with propaganda, wreck the nation's economy, jeopardize the future of capitalism and democracy, and invite the tyranny of authoritarianism, whether fascism or socialism.