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Modern Misconceptions About Monopoly

Much of the modern-day concern about the existence of monopolies is woefully misdirected. The government’s current assault against Microsoft provides good evidence of a very misinformed understanding about what constitutes a detrimental monopoly. As D. T. Armentano has pointed out in connection to the case, “[Microsoft] earned its market position by innovating a user-friendly operating system at minimal cost to the consumer…. That it competed vigorously for market share cannot be doubted; but more important, it committed neither force nor fraud in its commercial activities. Yet for all this, it was rewarded with massive competitor envy and a decade of legal harassment.” In light of the facts of this case, it is timely that we should consider the nature of monopoly.

We live in an age when the term monopoly has a very negative connotation, but we ought to examine in what sense the word deserves this negative assessment. Webster’s Dictionary defines monopoly as “the sole power of vending any species of goods, obtained either by engrossing the articles in market by purchase, or by a license from the government confirming this privilege.” In the first instance of the common usage of the term, namely the sovereign control over property following its purchase on the market, the word means that the ownership of property itself is a monopoly. This is certainly not a bad thing. In fact, a free market cannot exist unless people possess this kind of monopoly over their own property. It is the very essence of the free market. Fundamentally, this general privilege affirms the individual’s right to hold and use his own possessions according to his own inclinations.

The Monopoly of Private Property

To understand why the protection of property is so important to the existence of a vibrant marketplace, we need to consider the definition of a free market. Basically, a free market is one in which people are free to engage in trading relationships on terms that they find agreeable. That is, a free market is one in which people trade with one another on a voluntary basis. In this case, each party to any particular trade is sovereign over whatever property he brings to the marketplace. Since each potential party is sovereign over his own property, a prospective buyer is free to accept or reject the offer of any seller. Furthermore, the consumer is free to enter or withdraw from the market at will. Likewise, every seller is free to accept or reject any offer made by a prospective customer to buy his product. In addition, every seller is free to withdraw from the marketplace any amount of the product that he might offer for sale. To be sure, some buyers and sellers are in better bargaining positions than others. Nonetheless, if an exchange of property is to be made at all, both parties to the trade must believe that they will be made better off as a result of the exchange. Otherwise, they would not trade. For this reason, sellers are always in competition with other sellers, and buyers are always in competition with other buyers. When a buyer and a seller agree to make an exchange of property, however, they enter into a cooperative relationship. That relationship will continue within the context of terms agreeable to both parties so long as both are mutually satisfied. However, either party may choose to end the relationship if some better prospects come along, so long as they fulfill any prior obligations.

One of the problems of securing a free market is that sellers and buyers are amply motivated to avoid the rigors of competition in the marketplace through price-fixing schemes. Indeed, rather than live in a world where people are free to trade according to their own inclinations, many a seller would like to limit the choices available to consumers, and many a purchaser would desire to dictate the price that sellers might receive in exchange for their wares. As Clarence Carson has put the matter in Basic Economics:

However effective the market may be in setting prices which move goods and services or in benefiting people as consumers, there is always some degree of dissatisfaction with anything approaching the free market…. After all, the market is neither sentimental nor compassionate, nor does it take into account to any extent how hard anyone may have struggled to produce the goods he offers there or acquire the money with which to purchase goods…. Nothing is more likely than that we will often conclude that the price of what we have to offer is too low and that of what we want to buy too high.

For this reason, our immediate interest in our own wherewithal in a free marketplace is a constant threat to the market’s very existence. That is, each of us has sufficient motivation to limit the choices of others in order to promote our own interests. It is unquestionably the case, however, that material prosperity is most readily promoted in the free market. Study after economic study continues to point out the beneficial effects of freedom, but economic freedom rests on the existence and protection of private property. Therefore, we ought not use the term monopoly negatively if we mean by it the existence of private property. That sellers might be free to produce and sell their products as they see fit is hardly a situation that we should lament. Regrettably, as we examine the Microsoft case, the essence of the government’s argument against the firm rests on the notion that the company ought not have that kind of control over its own property. That is, the government would argue that Microsoft ought not have the right to sell its own product in the marketplace on terms agreeable both to the company and its customers. Instead, the government claims that it is in a “better position” to direct the use of the firm’s property. However, this “better position” is fundamentally driven by Microsoft’s competitors who have not been as successful in attracting customers to their products. Basically, the government’s case is one aimed at undermining the private property rights of one company for the purpose of providing benefits for its competitors.

This brings us to the second meaning of the term monopoly. When the term is used in this fashion, it means that the sole privilege to direct certain property comes not simply from purchasing the property in the open market but, rather, from a grant of special privilege. In this case, the governing authority has assigned to one party a special favor that is being denied to all others. This is the kind of monopoly that was bemoaned by many people in the seventeenth and eighteenth centuries and by early economists because it undercuts the free market by denying the inherent property rights of some so as to provide others with a special privilege. When governments engage in extending such favoritism to some at the expense of others, not only do those who are out of political favor lose, but consumers lose as well since there is less from which to choose in the marketplace. Herein lies the reason the term monopoly developed a negative connotation to begin with.

The Legacy of Utilitarianism

Nevertheless, this negative connotation has more and more been associated with the legitimate use of private property. In a kind of perverse fashion, our government is using the term as a means of waging an assault on private property, with antitrust laws being but one front of the attack. To understand this, it is necessary to understand the context in which these laws were developed. During the latter part of the nineteenth century the study of economics began embracing utilitarianism. This had much to do with the work of John Stuart Mill, who was an exceptionally brilliant man rigorously educated by his father. In turn, Mill’s father was a student of Jeremy Bentham, who had argued that government policy ought to promote “the greatest happiness for the greatest number” and, therefore, argued that policy ought to be driven by a “hedonistic calculus.” While this hedonistic calculus often translated into a defense of the free market in the minds of many economists of that day, Mill himself did not always argue in this fashion. In fact, John Stuart Mill favored numerous governmental interventions into the economy. For example, he favored the regular redistribution of wealth as a way to achieve a greater equality in society and, presumably, a greater level of happiness. But the very essence of such a position is an implicit denial of the importance of maintaining property rights on traditional moral grounds. Instead, a new kind of morality is imported into the discussion–namely, that property may be violated regularly if it serves the purpose of increasing happiness.

Utilitarianism is, however, wholly inadequate as a basis for developing a moral rule of life. In fact, the problems of this approach are numerous. For instance, how can interpersonal comparisons of happiness be made? As a first flaw in argumentation, this one is fatal. We might think of two children arguing between themselves as to which one of them would be happier to receive an ice cream cone. The first one says, as a matter of fact, that he would be very happy to have it, while the next child says that he would be infinitely happy to have the ice cream cone as his own. The argument between the two continues, as the first child claims emphatically that he will be infinitely, infinitely happy to receive it. The simple fact of the matter is that all such arguments degrade into sheer nonsense.

In addition to this problem, utilitarianism has no means of discerning between different kinds of pleasure or of inter-temporal tradeoffs in pleasure and pain. In the first case, it cannot be determined whether sensual pleasures ought to be preferred to spiritual pleasures or vice versa. As a result, utilitarians invariably regard over-indulgence as a mere preference that cannot be judged inferior to moderation. In the second case, within the confines of utilitarianism, no judgment can be offered as to how we should judge between an immediate pleasure that might have long-term costs versus those pleasures that might be had in the course of time if only we could endure some initial pain. Once again, the utilitarian will treat the prodigal who pays no regard to his future prospects as being morally equal to the prudent man who saves in order to secure his future. In fact, utilitarianism offers no means of judging such problems since all such decisions are reduced to matters of immediate personal preference. Conversely, traditional morality has always excelled in discerning between foolish and wise behavior.

Monopolies, Good and Bad

In truth, utilitarianism has greatly influenced the thinking of economists as well as that of the general populace. As a result, this has led to the development and expansion of welfare economics. The notion of consumers’ sovereignty as an ideal rather than as a necessary fact of life has proliferated through society. Murray Rothbard in Man, Economy, and State has argued that it is a basic fact that everyone who is engaged in a productive endeavor in a free market is a property owner and, therefore, must make a sovereign choice of whether or not to produce for monetary gain. In addition, consumers in a free market have the choice of whether to buy something or not. In essence, the actions of all parties, both as consumers and as producers, reflect a sovereign control over property. Utilitarian ethics aims to make it an evil to withhold an item from the marketplace so long as forcing a sale at a low price would bring greater happiness to the person buying the product at that price than it would cause pain to the person forced to sell at that price. However, to argue this is to undercut the very essence of property rights. This, he argues, is what many people have been more than a little willing to do. They have sacrificed the importance of property rights and the free market so as to promote utilitarian ethics. It is largely as a result of this kind of argumentation that antitrust laws, as well as a host of other kinds of government regulations of property, have been developed. It is also a result of this kind of thinking that has led to the extension of actual monopoly privileges in society.

The problem with this kind of thinking is that it enslaves the property of some for the benefit of others, and this is exactly the kind of monopoly that ought to be deplored. The end result of this kind of thinking has, in fact, been an expansion of governmental privileges and favors for some, achieved by imposing costs on others. Today, the government doles out favors by way of franchises, certificates of public convenience, licenses, price supports, and subsidies. In addition, it penalizes some efforts by way of tariffs and other taxes aimed at undermining the economic wherewithal of some potential producers in the market. These activities are the kind of monopolies that ought to be feared, but are more and more merely taken for granted. In truth, the American populace has been very much misled about the nature of monopoly.