Austrian Economics, Free Markets and Monopolies: A Response

This is a response to a youtube comment. You can see the entire conversation here. The person offering a critique is in italicized bold letters and quotes. Person commenting runs a facebook page. I disagree with a lot of their conclusions but I want to share their link because dialog on these ideas is important. You can check out “The International Community’s Free Constitution Project” here.

“We’ll start with your claim that resources are scarce so we shouldn’t try to preserve them. I take the exact opposite position. Because resources are scarce, we should try to preserve them.”

I’d like to point out that I never said this. I too think that scarce resources are in need of protection and economizing. This is why I think that private property is the best method for economizing these sorts of things and rationing them properly. Again, lets take this from the study of human action and behavior. First, all individuals engage in purposeful action by economizing scarce means in their control by applying them to the ends they wish to satisfy. Not only that, but all individuals vary in preferences and desired ends.The point is that individuals are going to want to use the least amount of scarce means in their control in order fulfill the maximum amount of ends. This naturally means that people will want to be the best caretaker they can of their property (generally). So I agree that we need to protect these resources and protecting property rights (which are an offspring of self-ownership because if you cannot own your body you cannot own your labor or the rewards of your labor or the resources you mixed your labor with). Producers of materials that go into lawn mowers (he used the crappy lawnmowers most home owners have as an example of waste) will raise prices as demand for resources increase and the resource itself decreases. This increase in price lowers demand. Shortages of resources only occur (or are guaranteed) under governments that set price ceilings on commodities. Mises said the following as to how this can occur:

“It diverts production from those channels into which the consumers want to direct it into other lines. Under a market not manipulated by government interference there prevails a tendency to expand the production of each article to the point at which a further expansion would not pay because the price realized would not exceed costs. If the government fixes a maximum price for certain commodities below the level which the unhampered market would have determined for them and makes it illegal to sell at the potential market price, production involves a loss for the marginal producers. Those producing with the highest costs go out of the business and employ their production facilities for the production of other commodities, not affected by price ceilings.”1

Shortages can still occur in free markets for sure, but they are not guaranteed like they are under coercive intervention. And again, coercive intervention is not part of the free market competitiveness that is a part of voluntary exchange, association and private property.

“So, you are calling cooperation competition? They seem like diametric opposites to me. Maybe you mean team competition as they have in sports and corporations?”

I further elaborated on what I meant here and you actually agreed with me on it. Here is what I am talking about:

“‘In the economic/social competition buyer compete with other buyers for the cooperation of the sellers and sellers compete with other sellers for the cooperation of the buyer. Entrepreneurs and producers select each other. Consumers and entrepreneurs select each other. Capitalists and entrepreneurs select each other.’

I have no problems with this, and encourage it.”

The competition, again, is between sellers competing with other sellers for the voluntary cooperation of buyers and buyers competing with other buyers for the voluntary cooperation of sellers.

“In one breath, Austrians say that competition is good for the economy. In another breath they say monopolies are just fine. You can’t have it both ways.”

You can, in fact, have it both ways. Monopolies in a free society, where there are not coercive barriers to entry, means that monopolies are always temporary. Even where government does have some coercive barriers to entry, like smartphones, monopolies are temporary because competition is just around the corner. Look at Apple and the iPhone. They were the first to market with this product and enjoyed a monopoly, temporarily, until Samsung, LG and other producers entered the market after them. Since then, competition has made the iPhone and smartphones in general less exclusive and better. The monopoly by apple was also temporary. Monopolies can benefit the consumer as well because, if a monopoly attempts to engage in predatory pricing to price out competition and then price gouge after all the competition has left the market, competition can always swoop in and underbid thus breaking down the monopoly. Not only that, but this idea of selling commodities at a loss to price out competitors and then price gouging afterwards has never been documented. Again look at Herbert Dow’s example with the German cartels on Bromine.2

“why not make the community and its infrastructure the monopoly which would take the most advantage of economies of scale.”

I really have no issue with this so long as the community does not violently enforce its monopoly by keeping private competition out of the market.

“…fair wages and still be able to provide the service.”

How are “fair wages” determined? Prices (wages are just a price for labor) come about from, at least from my understanding (in a simplified way), the aggregate voluntary exchanges for that good or service or comparable good or services on the market. So for me to understand your position and either be ok with it or not depends on whether or not your community can wield coercive power against private competitors over either the same good or an economic substitute. From what I can read about you from your previous responses, I can assume you are not a fan of coercive force against peaceful people. So if you’re community monopoly does not coercively infringe upon the property of others than I have no issue with it. Again, my issue is only with coercion against individuals and their property (which is an extension of their person since it is a reward of their labor which is brought about by their body).

“consumers don’t have to pay extra monies which are siphoned off by investors in the form of dividends.”

I’m skeptical of your system’s competitiveness compared to private property but if it works and it is not coercive, more power to it.

“Just to be clear, I don’t agree with any of the other economists from the non-Austrian camp who talk about what to do about natural monopolies either.”

That’s a relief.

“‘In the case of natural monopolies, trying to increase competition by encouraging new entrants into the market creates a potential loss of efficiency.’
Which is why I think that corporations shouldn’t manage infrastructure, the community should. So, these monopolies are natural, so we have have to allow them to gouge us rather than just collectivizing infrastructure and providing its services at cost (the Austrian solution)? I don’t agree with using competition to solve this problem either (the standard position). I believe that utilities should be a public service. I have this all worked out in my ‘community corporation’ business model. Also, I wonder what the U.S. would look like if we didn’t ever regulate and break up monopolies. I think it would be a disaster. According to Austrian economics, these monopolies only exist because of government, so then why would government choose to break them up if they intentionally created them?”

I’ve never understood why people apply certain economic principles to one commodity like food but not others like roads, power or anything else like that. Food is just as important to life as safe roads yet I’m sure you would not be necessarily opposed to private production of food. So again, I have no issues with your system so long as your community solution does not coercively ban competition all together. As to your question for why the government wants to break up “monopolies” it’s because another crony corporate welfare recipient paid legislators to wield their coercive monopoly on force to extinguish their competition outside of the voluntary competition/cooperation of the market (remember, sellers compete with other sellers for the cooperation of buyers).

“What if the owner who laid the tracks disagrees and doesn’t want to let other companies use them? If we force the owner to let others use his, her, or their tracks, then why would anyone build tracks knowing they may be building them from their competition?”

Duplication will occur and end when it is no longer profitable to do so. As Mises said, the “tendency to expand the production of each article to the point at which a further expansion would not pay because the price realized would not exceed costs.”1

“nobody should have to be awarded profits as an incentive for creating them, then we can avoid this whole mess.”

So, again clarification is needed. Are you going to stop people from seeking profits? How? Will “communal” businesses be competing along private ones? How voluntary are these communal businesses/monopolies? Remember that all individuals engage in purposeful behavior and all individuals vary in preferences. This means choice is demanded in the market and it would be unethical to deny such choice. In your scenario of community x and y, what happens within the community if a minority disagrees with the communal subsidizing of the road? Will the majority use violence to coerce payment from them? This is why private property is a less violent prone solution to the problem. If you allow the majority to use coercion to take a “railroad tax” from the minority, you have just created a coercive government. You have created a fertile environment for a leviathan state to grow since it is monopoly privileges on violence that allow the state to be what it is and do what it does. This is why I do not like democracy in a lot of ways; it essentially boils down to mob rule.

“Infrastructure is a community asset and should be treated as such.”

This is the exact line of argumentation used by statists though. “Government is all of us. We’re you!” So for me it begins to sound iffy to me so I hope you can understand my skepticism and where I am coming from with that.

“Private corporations should have nothing to do with it. Pretty simple concept, right? It still isn’t technically public though because community corporations are private corporations that are owned by a local community.”

Which is it? I feel like you are playing with semantics? How can it be private but public? This hasn’t been sussed out yet. The legitimate owner of property is morally justified in using defensive force to defend property. When it is communal, it becomes confusing as to what constitutes defensive force. Rothbard, in “For a New Liberty”, said the following:

“In the first place, we can state that this ideal rests on an absurdity: proclaiming that every man is entitled to own a part of everyone else, yet is not entitled to own himself… a world in which no man is free to take any action whatever without prior approval or indeed command by everyone else in society.”3

I know this is not exactly your position (honestly, I still feel your position is a bit fuzzy to me, mostly on the coercive nature of your communal operation).

“Okay, let’s take electric lines as an example here, then. Let’s assume there are no government regulations and we live in an ancap society. Corporation X creates and builds an extensive electrical power line system that goes to every house and building in community Y. Now, corporation X starts gouging people… Can it be done? If so, how?”

Perhaps through contracts, the landowner owns the hook up equipment on their property. The road owner where cables run under the their road owns those hook ups and so on. Perhaps property owners could offer the right to provide utilities on their property by putting up the provider position to bidders every few years therefore still allowing competition. This method of taking bids every few years could be a great step for right now in the current statist system as a step towards zero government and privatizing utilities. I am of the mind that government granted monopolies have limited advancements that competition brings about by it being coercively subsidized at the moment.

“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. …”4

At some point, these people did compete. I know nothing of how power works so it is an area I am admittedly weak at. However, I default to the position Rothbard takes on the matter:

“For one thing, utilitarianism assumes that we can weigh alternatives, and decide upon policies, on the basis of their good or bad consequences. But if it is legitimate to apply value judgments to the consequences of X, why is it not equally legitimate to apply such judgments to X itself? May there not be something about an act itself which, in its very nature, can be considered good or evil?”

All I can say is that coercive subsidizing is just theft and an invasion of people’s fundamental rights to their bodies and the product of their bodies. So sorry, this is actually an area I’ve been meaning to delve more into so I haven’t fully formulated my own opinion beyond the idea that coercively funding things is immoral.

“Well, what was everyone else charging? You seem to be ignoring this. Was it 7 cents per gallon too? If so, then how did Standard Oil manage to achieve a monopoly in the first place? This is a very good example because, for the most part, oil is oil. One company doesn’t really provide any better oil than another company, and consumers will not buy a product which cannot be transported to them, so the only competitive marker here is price itself….”

Prices come about from the cost producers incur (they don’t want to be upside down) as well as the subjective valuations in people’s minds based off of how that good fulfills the ends they desire which will vary from individual to individual. Not only that but standard oil was able to industrialize oil production and produce it more efficiently. This is how Dow initially underbid the German cartels with Bromine; he found a more efficient method of production which lowered his production costs and allowed him to lower his selling price thus gaining more business. These advancements and efficiencies in production is what helped contribute to Standard Oil gaining such a large market share. I don’t know what his competition was charging but Rockefeller consistently underbid his competition.

“hey could offer a cheaper price because of anti-competitive business practices, not because of efficiency. Remember, a system of economics is essentially a system of rewards and penalties for commercial actions. Hence, if we say this is fine, then what we are essentially either promoting or acquiescing to the idea that businesses should be rewarded for anti-competitive practices either as well as, or instead of efficiency. Do you agree with that statement?”

What kind of “anti-competitive practices” are you talking about? How is it not historically accurate? Rockefeller, as an example, purchased his own forest and created his own barrels thus bring the cost of barrels to himself from $3 to $1. Rockefeller obtained railroad rebates by offering consistent traffic to the railroads. His competition offered unreliable and inconsistent traffic to the railroads so of course the owners would be willing to partner with Rockefeller who promised consistent traffic which meant a consistent reward for them. The Lake Shore Railroad’s James Devereux stated that Rockefeller and Standard Oil cut transport costs from $900,000 to $300,000 per trip.5 Again, there is no example in history that shows a monopoly arising out of pure competition, engaging in predatory pricing, and then gouging the consumer without competition swooping in. The case of kerosene with Standard Oil and Bromine with Dow had a reduction in price to the consumer which raised the consumer’s standard of living. Henry Hazlitt, in his book “Economics in One Lesson” points out (in relation to tariffs but the concept is still useful here) how more accessibility to goods due to naturally falling prices is good:

“But there are also results which, while much more difficult to trace, are no less immediate and no less real. For now sweaters that formerly cost $15 apiece can be bought for $10. Consumers can now buy the same quality of sweater for less money, or a much better one for the same money. If they buy the same quality of sweater, they not only get the sweater, but they have $5 left over, which they would not have had under the previous conditions, to buy something else.”6

So again, when monopolies are not created and enforced by government intervention and coercion, they create value to the consumer because competition, even at Standard Oils 90% share, still kept Rockefeller on his toes. This benefited the consumer.

1. “Planning and Freedom” by Ludwig Von Mises
3. “For a New Liberty” by Murray N. Rothbard
6. “Economics in One Lesson” by Henry Hazlitt

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