The term “monopoly” is back in the news again after Facebook announced that its subsidiaries, Instagram and WhatsApp, will soon sport a “by Facebook” brand. The social media juggernaut aims to make it “clearer about the products and services that are part of Facebook,” but critics assert that this will superciliously parade its monopoly status. This might be part of a game of 4D chess since the company ostensibly wants to be broken up by the US government. But is Facebook a monopoly? If so, is it natural or born from government privileges? That second question is far more pertinent than the first.
A Study in Monopoly
The consensus is that a monopoly or oligopoly is a horrendous development for an economy. A single business or a handful of companies controlling the supply of a good would lead to higher prices and shoddy quality.
Because of these concerns, this eight-letter word has struck fear into the hearts and minds of the public. Anytime there is public concern over the possibility of a cartel forming, politicians and bureaucrats from the Federal Trade Commission (FTC) will spring into action and rescue us from Acme Industries being the sole provider of outlandish products failing at the worst possible times.
But while these efforts might appear benevolent and benign on the surface, you often discover that their motives were far more baleful. Throughout the nation’s past, you typically find legislative blitzkriegs that were aimed at benefiting a well-connected group of executives who feared newcomers, pioneers, and innovators disrupting the sector and eating away at their market share.
Assessing the history of monopolies and oligopolies in the United States, you learn that nearly all their sources of power were derived from government intervention. Indeed, it has been rare in the marketplace to pinpoint a monopoly or oligopoly that did not enjoy government privileges and instead were formed solely based on producing high-quality goods or services at a lower cost than any other company in the market economy.
Cable news networks receive exclusive TV licenses at no cost. The steel industry gains from protectionist tariffs. Trade unions have entire bills written (Davis-Bacon or Walsh-Healey) and passed to shield them from the competition. Railroads became a monopoly because of the Interstate Commerce Commission (ICC). The taxicab industry prevented newcomers by using the power of city hall. The Big Three automakers were given bailouts at the height of the recession. These are all case studies in anti-market monopolies.
Too many industries – past and present – shower in government assistance. How is that free market?
A Monopoly is Born
It is safe to say that naturalized monopolies have rarely existed. As Thomas DiLorenzo brilliantly wrote in a 1996 piece titled “The Myth of Natural Monopoly,” even the early ones were not natural – they all employed the tools of the state to some degree.
Let’s say, for argument’s sake, that a natural monopoly is created. Is this really a bad thing? As long as there is no government help and competition remains open, then not necessarily.
This entity may be devised through several means, including producing goods at very little cost, selling products at the lowest possible price, and offering great customer service unseen anywhere else. Consumers have been so satisfied by the company’s operations, products, and prices that they have shut down other businesses by only patronizing this one firm.
But it is important to note that the monopoly cannot wield the government club to prevent new competition from popping up. In a truly free market, a start-up can form, market to customers, and threaten the juggernaut’s monopoly status. Should the private behemoth tattle to the government, that is when it is no longer a natural monopoly.
How to Prevent a Monopoly
There are a few primary methods that serve as roadblocks to either the formation of a monopoly or the continuation of one.
The first is to leave other people free to enter the industry. There should never be a barrier to entry in the form of licensing, regulatory compliance, or heavy taxation. If politicians were truly worried about oligopolies, then they would torch the inventory of red tape.
The second is to remove all tariffs and abolish all restrictions on foreign trade.
The third is to end big government because that is how corporations garner their power, through legislators who pass laws that benefit a few at the expense of the many.
The fourth is to use your wallet. If you do not like Amazon capturing a bigger share of the sector, then visit your local mom and pop shop, frequent Walmart, or spend time at flea markets.
A Threat to Free Enterprise
Legendary economist Milton Friedman often quipped that the biggest threat to the free-enterprise system was free enterprise itself. Most big businesses detest competition. They become complacent and comfortable with the way things are – even start-ups eventually adopt this attitude when they morph into titans of industry.
Critics will typically allude to monopolies as a hiccup in the capitalist system. The US is largely capitalist, but there is still a massive big government presence in the Land of the Free that produces these very hiccups, from bubbles to monopolies to malinvestment. Nearly all monopolies are caused by statism; they are not generally the result of too much free-market capitalism.
Every century, the US economy has contended with bad economics: mercantilism in the 19th century, socialism in the 20th century, and corporatism in the 21st century. These are all antithetical to capitalism, yet this very system repeatedly takes the blame for a diverse array of issues that were the fault of these three concepts. Capitalism is essentially The Dark Knight: “We’ll hunt him. Because he can take it. Because he’s not our hero. He’s a silent guardian. A watchful protector. A Dark Knight.”