The most viscious form of monopoly

Case One
Imagine in your minds eye a firm that continuously pumps out ever improving products and services. Imagine further that this firm is able systematically to improve its product line with differentiation (adding new features or services to current products making them even more attractive to consumers). Even more stunning, through efficiency, hard work, and sheer brilliance, this firm continuously provides its products and services at ever-lower prices to its consumers. Imagine also that no government agency is forcing anyone to purchase the products and services of this firm, and no license or special grant of privilege has been imposed by the government that render consumers with no other economic options. Moreover, the superiority of the products this firm creates is so widely recognized that industry, world-wide, uses them almost to the exclusion of virtually all other would-be competitors. In short, the use of the products produced by this firm has markedly and measurably raised living standards, improved productivity, and created wealth beyond imagination all around the world resulting in a net increase in wealth and standard of living.

If you have a world view that is success oriented and grounded in reality, individual rights (particularly private property rights), free markets, individual freedom and liberty you would perceive such a capitalistic success story as something to be heartily applauded and regaled. It would be self-evident, no question about it, that this is an unadulterated success of capitalism. As a consumer, I would desire to buy more of what this firm produced unless someone else could do it better, for a price I was willing to pay. Or, if a competitor actually produced a functionally equivalent product (without violation of the rights of the inventor) at a lower price, one might purchase the work of that competitor. Lastly, I could altogether concluded that I did not need these products anymore due to another innovation which rendered this firms products and services obsolete. Time actually would be working against this marvelous firm; as time passed and the firm attracted economic profits competitors would find ways to chip away at their market share – it is axiomatic. In a free market, economic profits cannot last because it implies a mis-allocation of resources over the long run. Innovators and competitors will enter the space, unless they are restrained by force.

Notwithstanding the aposteriori of success above, there are others who would not view such a firm as necessarily virtuous. To some, such widespread success, regardless the obvious benefits and low cost to consumers, would be problematic in and of itself – that it was “unfair” or “inequitable” that anyone would be so successful. Some would even argue that the above firm, due to its widely successful product differentiation strategy, its ability to use scale economies to its competitive benefit, and the mere fact that such policy had thwarted virtually all competition (real or imagined) created a “barrier to entry” into the market (a market, incidentally, that was created by the firm in the first place), and that this particular situation was reducing society’s welfare. Inexplicably, such Walt Disney style economists regard such behavior in the marketplace as a mis-allocation of scarce consumer resources simply by virtue of the mere fact that there are not enough choices of producers (by consumers), given their(the consumers) time preferences – that because at some arbitrary time point there happens not to be what they subjectively consider “perfect competition.” Their view is strictly based on a relatively instantaneous measure of consumer options (or the mere lack thereof) as a proxy for fairness and a definition of societal welfare. Consequently, they would characterize this firm guilty of monopoly and argue for state intervention. This is the mentality of the Sherman Act and its supporters.

Case Two
Imagine another situation, a provision of a certain type of product and service, that is also dominated by a single producer. In this particular situation, all consumers are compelled by law to seek an outcome which this producer supplies; therefore, this producer faces a perfectly inelastic demand for its goods and services. Furthermore, the state specifies all the general parameters of both the mandated outcome, and the means to achieving the outcome.

Additionally, in order to satisfy this government-induced demand, this single producer is granted special rights (privileges) in both production and revenue generation. This special grant is such that, although other producers are allowed to participate in this market, the producer who was granted the special rights is rendered virtually immune from economic competition because its revenues are fully guaranteed by the state. If a competitor desires to enter the market he may do so, but he must do so fully aware that any consumer who purchases his product (regardless of the quality, or cost) is forced by the state to also purchase the product of the special grantee-whether the special grantee’s product is consumed or not, and regardless the relative quality of the special grantee’s product. In short, a consumer in this scenario is prohibited by law from making an economic choice between ‘competing’ producers of similar products.

Thus, in this scenario, the notions of marginal revenue and marginal cost are rendered-particularly for the special grantee, but also for the general marketplace for the mandated outcome-meaningless. There is simply no way to accurately calculate the marginal cost of a product when the state intervenes to this degree. In this case, the state takes control of key factors of production, forces consumption by law, and purposefully restricts the inputs that would impel competing producers to enter the market. The whole idea of cost accounting and comparative financial analysis is also impossible. Consequently, there is no way to know how inefficient the special grantee is with the resources they utilize, or the degree to which resources are mis-allocated in the marketplace. What one does know is that resources must be being mis-allocated; it is, profoundly, the degree to which they are mis-allocated that is unknown.

Such a special grant of privilege to control a single market obviously reduces competition while mis-allocating capital. Competition is reduced directly as the marginal costs of the consumer is coercively raised-the source of the total revenue received by the special grantee. This point is critical, because it is the marginal costs to the consumer in evaluating the idea of purchasing a competing product that becomes the issue, rather than the marginal cost of the producer in its attempts to capture market share – which, for the special grantee, is guaranteed (remember, in this scenario, the consumer is compelled by law to effect an outcome which is satisfied-not exclusively-by the special grantee). The higher the actual marginal cost to a consumer for purchasing a competing product, the less that product will be demanded and thus the higher the market share (and revenue) will be for the special grantee. Capital is mis-allocated precisely because the consumer cannot properly, in economic terms, evaluate the benefit of a competitive product due to artifically high marginal cost. If the consumer cannot effectively evaluate options that would optimize capital utilization by virtue of the fact he is coercively prevented by the state, then it is a foregone conclusion that capital must be being mis-alocated; the only question, as mentioned above, is one of measurement.

Clearly, such an arrangement, or special grant, by any governmental entity would be viewed by individual consumers very dimly: destructive of consumer satisfaction relative to alternatives offered, or, in the abscence of government coercion would appear, in the marketplace, and relative to their experience with virtually all other classes of goods and services in the economy. Also, it clearly reduces (virtually eliminates) competition, and absolutely restricts consumer choice; therefore, such an arrangement clearly and unequivocally violates consumer sovereignty as well as injuring their welfare. A mis-allocation of resources is self evident, pervasive, and maximized by such government intervention into the marketplace. This then is a description of the most vicious and pure form of monopoly, and one would expect complete and total opposition from consumer advocates, concerned politicians and, especially, anti-monopoly crusaders such as former Presidential candidate Ralph Nader.

Conclusion
Believe it or not, these two scenarios are very real, and both occur here in the United States. The first case is, in fact, the experience of Microsoft Corporation. The second is the current state of affairs in K12 government schooling.

The former resulted in direct benefits to society that are measurable, clear, and tangible. Yet, incredibly, were characterized as egregious monopoly! In fact, the European Union recently sued Microsoft on such grounds.

The results of the latter (Government monopolized K12) cannot be measured accurately, and may or may not be benefiting society (there really is no objective way to measure it due to the lack of proper accounting) because there is objectively nothing with which to honestly compare to the same degree. It becomes a pure leap of faith. It is without question, however, that if the special grant were removed from the government schools, and the grantees monopoly status revoked, more producers would enter the market and thus measurement by comparison would be possible, and the implicit mis-allocations of capital would be dramatically lessened while consumer sovereignty would be restored.

I find it utterly stunning that Drew Gilpin Faust, President of Harvard University, would not even suggest, in an interview with Charlie Rose (10/14/2009), that moving to a market based education system would not be an important aspect to improve the K12 system here in the U.S. Her commentary illustrates precisely the problem: those in academia have a preconceived notion of what elementary and secondary education ought to look like. The fact that the results of government monopolized, state-run and mandated, K12 are deplorable, and seem to be getting worse, don’t register ANY critical analysis. What it triggers is an unscientific and non-thinking response suggesting more funding, more support, and more intervention by government into K12, rather than to challenge the basic idea and model of government monopolized primary education.

It is ironic, to say the least, that the loudest anti-monopoly crusaders cry so loudly about the Microsofts of the world, and yet are dead silent about the most viscious form of monopoly; also known as K12..

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Posted in Capitalism Advocacy, Education. Comments Off on The most viscious form of monopoly
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