A Final Word On Monopolies

About two weeks ago, we had quite a spirited debate here about the question of monopolies in a free market system, and specifically the question of whether Microsoft, or any other supposed monopoly was a problem that libertarians and classical liberals needed to concern themselves with. For a recap of those arguments, you should start here and then go here, and then here, then here, then here, and, finally, here. Be sure to read the comments along the way.

On several ocassions during our discussion I started, then stopped, writing a more detailed post discussing what a monopoly actually is in economic terms and whether a monopolist in a free market economy, should one exist, would be a problem worth worrying about. For many reasons, I never got around to it, and now it looks like someone has beat me to it.

Over at Liberty Corner, there’s an excellent post titled Monopoly And The General Welfare that puts the issues forward fairly succintly. The post goes into detail to explain why, in a free market economy, a monopolist would be no different than any other market player and would still be subject to the same free market forces that any other company would be, with the added benefit that the monopolist would not be able to appeal to the state for protection from competition.

The only kind of monopoly that harms consumers is a legal monopoly, one that is operated or regulated by government. Such a monopoly isn’t harmful per se, it’s harmful because the government’s operation or regulation of the monopoly ensures that it cannot and will not respond to price signals. A natural monopolist (like Jack the breadmaker) must bargain with his customers, and must be alert to the possibility that his customers will turn to substitutes and near-substitutes if he doesn’t bargain with them. But when government operates and regulates whole sectors of the economy (e.g., telecommunications and health care), price signals are practically meaningless — there is no bargaining — and substitutes are hard to come by (near-substitutes will be regulated, of course).

The only real monopoly, then, is one that is operated or regulated by government. It is that kind of monopoly — not Microsoft or Wal-Mart (for example) — which ought to be broken up or fenced in by the trust-busters.

As usual, the real harm comes from the state.

  • http://thelibertypapers.org/2005/11/21/who-is-eric/ Eric

    Doug, it’s an apples and oranges thing, still. When you say free market you do not mean what an economist means.

  • http://belowbeltway.blogspot.com Doug


    I know that you and I don’t disagree when it comes to fundamental princples, so I guess this debate has me perplexed on some level.

    When I talk about a free market, I meam a market completely free of government internvention. From the time I started reading Milton Friedman, Hayek, and Mises, that’s the paradigm I’ve always believed that we should strive for.

    On a completely theoretical level, I beleive its entirely possibile for “monopoly”, or at least a dominaant market player, to arise under a free market. If that were to happen, I would see nothing wrong with it.

  • http://thelibertypapers.org/2005/11/21/who-is-eric/ Eric

    I’m stumped too. A “market completely free of government intervention” simply isn’t possible as long as you have governments in today’s form. Even if you were able to achieve it, you still wouldn’t have achieved a true free market. I think there’s a two part issue, maybe three parts.

    1. We are meaning two different things when we say free market. Your meaning is the normally accepted political definition. mine is the strict economic definition. This leads to a certain amount of difficulty when, for example, I say that a monopoly is impossible in a free market.

    2. We have a fundamental disagreement on the nature of how a monopoly arises. While it is theoretically possible that a monopoly could arise in an unregulated market (for the sake of clarity, I will use that term from now on when I mean a market that is free of government intrusion) without it having acted in an anti-competitive or coercive fashion, it is exceedingly unlikely. Whether that fashion is direct, or it is to indirectly use others, including government bureaucracy and regulations. It should be pointed out that the two most well known American monopolies (that didn’t involve direct government intervention) did indirectly use the coercive and/or disruptive power of the government to their advantage. It seems to me to be inconsistent to argue that we want markets free of government intrusion and then turn around and argue that a company that achieves monopoly by, in part, taking advantage of tax money, the market distortion power of the government or coercive regulations, taxes and import/export controls is not doing anything wrong. If government intrusion in the market is bad, then using that to your advantage is bad too, isn’t it?

    3. I suspect, to a certain extent, that some of the disagreement has to do with the concept of real “intellectual property” vs. legal “intellectual property”. Regardless of patents and copyrights, if I create something, I own it. If you do something with it that I didn’t say you could, whether you are legally wrong, or not, you are ethically wrong. The flip side of that is that I’m also convinced that copyright and patent law, as it exists today, has been created by a concerted effort to manipulate the government and the market by entertainment companies, led by Disney and Sony.

  • http://belowbeltway.blogspot.com Doug


    I think its a mistake to define a “free”, or unregulated, market as one where there is perfect information, which is how I think you are defining it, then you’re playing into the hands of those opposed to free markets……because a situation where there is absolutely perfect information available to all parties is, I think, simply not possible.

    Throughout all of our discussions, and everything I’ve read about the case, I have yet to see any real evidence that Microsoft used government coercion to protect its monopoly. Did the fact that the Federal Government switched from Lotus to Office at some point influence the market ? No doubt it did, but that’s not coercion.

    Finally, the issue of intellectual property is one that deserves a post, or two, or three, of its own. I will try to address it in the next couple days.

  • http://thelibertypapers.org/2005/11/21/who-is-eric/ Eric

    Doug, it’s not me that defines a free market as one where perfect information exists. That’s the point I keep trying to make. That is part and parcel of economics.

  • http://belowbeltway.blogspot.com/ Doug


    I know that most economists would say that a market free of government intervention would be superior because it would result in better flow of information, but, for me at least, the goal is the end, or at least a reduction, in the intervention.

  • http://thelibertypapers.org/2005/11/21/who-is-eric/ Eric

    Sorry, maybe that wasn’t clear. Economists define a free market as one where all regulation, intrusion, collusion, etc. is removed and every player has perfect information. I’m not the one who is defining it to be that. The point I’m trying to make is that you have to measure everything against that as your starting point. You can’t redefine it, otherwise words have no meaning. This would be like saying that you realize that a physicist or mathematicians defines PI as the circumference of a circle divided by twice the radius, but that’s inconvenient so we’re going to redefine it as 3.0. It might be inconvenient, but that is what it is. Redefining the term “free market” because we like our new definition better plays right into the hands of the other side, in my opinion. Better to educate people about real economics than that.

    That said, a monopoly is a monopoly, in my opinion, whether it be government, union or corporation. I just can’t see how one is okay and another is not, when they all have the same practical outcome for the individual.

  • http://belowbeltway.blogspot.com Doug


    I don’t know many libertarian economists who would equate the collusion that might take place between, to continue our example, Microsoft and Dell, to that which might take place between a corporation and the government with the aim of using the power of the state to legally prevent people from competing with you.

    From a libertarian point of view, there is a normative (moral) difference between the two. One is the result of individuals free choosing to do what they wish with their property. The other is the state intervening in the market.

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