Thursday, October 13, 2005

Why Monopolies are by their Nature Government Controlled Economies

I constantly find myself in debates in which the words "free markets" are thrown at me like holy water at a vampire. The conception of many seems to be that 1) free market capitalism means captialism without serous interference from government, and 2) that monopolies are some sort of fluke of the market that only occurs when something goes wrong.

First, let me define a free market. I conceive a market to be free when it meets the following characteristsics:

1) The market is accessible to all who wish to participate.
2)The market is not under positive control of a political entity.
3)There are no negative controls placed on entry into the market.

Thus, by my definition, the USSR was not a free market (criterion 2), nor is the NYSE (criterion 3).

Secondly let me define a monopoly. I believe that an industry has become monopolized when:

1)One company controls enough of the market in a region, a particular industry, an infrastructure as to generate a collapse in competitiveness between companies. This begins to occur at around 30% of the market.
2)One company controls physical infrastructure that relates to products it sells that use that infrastructure, such as an airline that owns airports or a telephone company that owns an ISP.
3) One company controls a means of production from raw material to retail, giving it a huge advantage in terms of pricing, such as an oil company that pumps oil, refines it, wholesales it, and owns gas stations.

These are rough and working definitions that are somewhat open to revision, but what I would like to focus on is how monopolies meeting these criterea cause markets to become unfree. The monopolization of an industry, infrastructure, or region is an inherently political act. Markets can be thought of as a form of territory, and in fact most companies view market share as turf. Every company's aim is to control as much market share as possible, but at a certain point their control ceases to be economic and becomes political in nature. For example, when a Telco finds that it is losing revenue because Vonage and Skype are taking away traditional telephone consumers using infrastructure that they control (whether they actually paid for it or not is another question) their first response is to infringe on the use of VoIP. The infrastructure has become territory, and the traditional proprieter of the territory has become a political actor seeking to manipulate the market in conflict with all three criteria for market freedom. Simply being an economic entity does not prevent one from becoming a political entity as well.

It is in these situations that it is the responsibility of the duly elected government to consider that there are non-democratic political entities operating inside of its borders and dispense of them appropriately. The most viable method seems to be trustbusting, de-politicizing the industry by removing the monopoly. With regard to infrastructural monopolies this becomes more complex, because breaking the companies up does not ensure competion as they simply become regional monopolies. The answer in that situation could be as extreme as repatriation/annexation of the territory/infrastructure in question as government administered, or to ensure that the infrastructural monopoly remains entirely neutral through regulation of its activites outside of building, selling, and administering the infrastructure.

Hmm... I'm sounding Sweedish again.


thalassa_mikra said...

Very interesting post Brice. And I do agree that markets are extremely complex entities enmeshed in all sorts of economic, political, and social interventions as to make the term "free market" nothing more than a rhetorical device.

Just saw your comment on my Indonesian oil crisis post. I completely agree about rationalizing property rights a la De Soto. That's definitely a major issue in India, as well as inadequate regulatory mechanisms to enforce accurate reporting of income. Are you a student of NIE?

Brice Timmons said...

No, I study political science not economics, or maybe that just means that I like economics but can't stand math. I'm particularly interested in the nexus of policy and economics and the nexus of economics and real freedoms. Because of my fascination with the human drive for control and power extending beyond the self I find the idea that an economy could be "deregulated" rather comical.

jrm said...

I find the idea that an economy could be "deregulated" rather comical

Karl Polanyi's The Great Transformation is a history of the creation of the market through state intervention. It's a very quick read; I highly recommend it.

Brice Timmons said...

I've been told that before, so I think I'll actually pick it up sometime. Yes, the concept of lassiz faire economics is foolish at best, since large economic entities become de facto (or sometimes de jure) political entities.