Antitrust and Monopolies

The Objectives of Antitrust Intervention

Public opinion believes that the societal apparatus of compulsion and coercion, the government, should protect individuals from monopolies: Monopolies restrict the supply of products and harm the welfare of the common man. The government has to step in and put and end to this injustice. Its intervention is supposed to foster free enterprise and fair competition and protect the poor and hapless from powerful corporations.

The term monopoly needs to be defined more precisely here. There are two types of monopolies which have completely different implications.

The supporter of antitrust enforcement by the government does not make a distinction between the two and hence arrives at flawed conclusions.

There are the Coercive Monopoly and the Market Monopoly.

The Coercive Monopoly is a business which is protected from competition by the government. It is not the monopoly that needs to be discussed here. It is, indeed, a monopoly that harms the consumers and benefits those who are protected. All that would need to happen to end this type of monopoly would be for the government to withdraw itself.

The type of monopoly in question is the ‘Market Monopoly’: Antitrust proponents claim that an unhampered free market produces market monopolies and that it is the government’s job to prevent this from happening.

The Market Monopoly

The market monopoly is a business that operates on a voluntary market. A business in that environment is comprised of a group of people that jointly works towards withdrawing factors of production (raw materials, labor, etc.) from the market in voluntary contracts, and combines them in lines of production where they create goods that are, from the consumer‘s point of view, worth more than where the factors were employed prior to withdrawal, aiming for an entrepreneurial profit.

This in itself is nothing but the schoolbook definition of a business on the free market, seeking to make a profit. The particular thing about a business that holds a market monopoly is that there is no other one that sells the same good.

But this does not change the fact that, based upon the law of marginal value preference, the market monopoly business has to set its price based upon consumer response. It cannot charge an infinite price for its goods. It also does not change the fact that it has to produce a useful product that satisfies a consumer demand. It also does not change the fact that this whole process is completely voluntary and peaceful on the part of the seller, as well as on the part of the buyer. It also does not change the fact that capitalists always stand ready to provide capital to entrepreneurs who are completely free at any time to identify cheaper processes and sell at cheaper prices and/or better quality, outstripping the previous monopoly, and ultimately reaping a profit to satisfy the profit-seeking capitalists, while at the same time improving the consumer’s situation.

Yet, for the sake of the antitrust proponents’ argument, we shall pass in silence all these facts and inquire as to what effects the government’s antitrust intervention will have regardless.

The Antitrust Intervention

What antitrust proponents now ultimately suggest is that the government decree a maximum number of goods to be sold by this monopoly business, and step in with police force if the business dares to satisfy more consumers than allowed by its decree. The fact that the business, as well as the consumers, are merely acting voluntarily towards what they consider to be their best choice, does not interest the antitrust proponents: In their minds, the fact that the people, in their role as consumers with every penny and every dollar, are casting a conscious vote, by choosing to purchase the product they seek, is a mere expression of the ignorance and the gullibility on the part of the public. The government is omniscient, its will supreme. Its decree has to be followed and enforced when violated. How dare the consumers make the decision who to buy from!

The government employs market share statistics, based on the revenue generated from the products in question. It decrees, for example, that company XYZ, is not allowed to sell more than the equivalent of 40% market share worth of its, say, operating system software ABC. Why exactly 40%? Why not 39.95% Why not 40.1%? The approach is, without the slightest doubt, completely arbitrary.

The Consequences of Antitrust Intervention

After the government steps in and limits the supply of the goods in question, who ultimately suffers? The marginal consumers, who would have purchased the additional unit of the product whose supply has been cut off. The objective of protecting the average consumer from overpriced or bad products obviously fails. In fact, the policy attains the exact opposite.

After the government has intervened, sooner or later a new entrepreneur will step in and fill the gap with a similar good. However, he will not be under any pressure from from the previous market monopoly company. He merely stepped in to fill the gap, because the police intervened and outlawed by aggression any more sales from the market monopoly business. At this point, his position is not threatened at all. Due to his inexperience and lack of competitive pressure, his goods will most likely be inferior and more expensive than the previous market monopoly’s goods. It will take him much longer to get to a point where his product can measure up to the previous market monopoly business’s product. Economies of scale will set in at a much later stage for this entrepreneur, so as he increases production, his prices will not drop as fast as previously. Marginal consumers will have to do with his inferior, higher priced product.

The fact that a new entrepreneur steps in to fill the gap will not in the slightest make the market more competitive or fair. Quite the opposite: The coercive intervention creates a less competitive environment with less competitive pressure for the new business, since it doesn’t have to fear competition from the previous market monopoly business, and the consumers ultimately suffer.

The intervention sends out the message that as an entrepreneur you shouldn’t strive for perfection when selling to consumers. For if your product becomes too popular your output might be restricted by the government.

Furthermore, it encourages the entrepreneur to attain a good standing in government, and thus to allocate funds toward bribing the politically connected in the form of campaign contributions, rather than invest in factors of production that would increase the output of consumer goods in the future.

Thus the policy doesn’t help the consumer at all and is bound to fail at attaining the stated objective.

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Imagine

“Imagine a world in which everybody were free to live and work as entrepreneur or as employee where he wanted and how he chose, and ask which of these conflicts could still exist.

Imagine a world in which the principle of private ownership of the means of production is fully realized, in which there are no institutions hindering the mobility of capital, labor, and commodities, in which the laws, the courts, and the administrative officers do not discriminate against any individual or groups of individuals, whether native or alien.:

Imagine a state of affairs in which governments are devoted exclusively to the task of protecting the individual’s life, health, and property against violent and fraudulent aggression. In such a world the frontiers are drawn on the maps, but they do not hinder anybody from the pursuit of what he thinks will make him more prosperous. No individual is interested in the expansion of the size of his nation’s territory, as he cannot derive any gain from such an aggrandizement. Conquest does not pay and war becomes obsolete.

(Mises, Human Action, Chapter 14, Section 5)

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“It is what you do that defines you.”

An important axiom came up in the movie Batman Begins:

“It’s not what you are inside, but what you do, that defines you.”

When analyzing an economic system, it is first and foremost relevant to analyze the actual actions of the actors who fulfill economic functions in that system and the actions that the government takes. All labels that are attached to groups or individuals need to be stripped off and cast aside. It is in particular imperative not to rely on what government officials are saying, but to take a close look at what they are actually doing.

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Marketing

“It is generally admitted that the average man displays poor taste. Consequently business, entirely dependent on the patronage of the masses of such men, is forced to bring to the market inferior literature and art. (One of the great problems of capitalistic civilization is how to make high quality achievements possible in a social environment in which the “regular fellow” is supreme.)

It is furthermore well known that many people indulge in habits that result in undesired effects. As the instigators of the great anti-capitalistic campaign see it, the bad taste and the unsafe consumption habits of people and the other evils of our age are simply generated by the public relations or sales activities of the various branches of “capital”,β€” wars are made by the munitions industries, the “merchants of death”;dipsomania by alcohol capital, the fabulous “whiskey trust,” and the breweries.

This philosophy is not only based on the doctrine depicting the common people as guileless suckers who can easily be taken in by the ruses of a race of crafty hucksters. It implies in addition the nonsensical theorem that the sale of articles which the consumer really needs and would buy if not hypnotized by the wiles of the sellers is unprofitable for business and that on the other hand only the sale of articles which are of little or no use for the buyer or are even downright detrimental to him yields large profits. For if one were not to assume this, there would be no reason to conclude that in the competition of the market the sellers of bad articles outstrip those of better articles.

The same sophisticated tricks by means of which slick traders are said to convince the buying public can also be used by those offering good and valuable merchandise on the market. But then good and poor articles compete under equal conditions and there is no reason to make a pessimistic judgment on the chances of the better merchandise. While both articles, the good and the bad, would be equally aided by the alleged trickery of the sellers, only the better one enjoys the advantage of being better.”

(Mises, Money, Method, and the Market Process, Chapter 14)

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History of Money

The history of money doesn’t need to be confined to one specific country or time period. It is rather expedient to outline the role money has played and the changes it has gone through in virtually all countries over time. Some events might have occurred earlier or later in one nation or another. However, the general trend to date has been the same. Understanding this trend is of major importance when it comes to understanding money today. This article describes the imaginary story of a country that went from no money at all to a fiat money, paper money. It is conceptually applicable to any country on earth.

The demand for money arose with the appearance of division of labor, when individuals began producing for others rather than for themselves. This was of course a direct outcome of the law of comparative advantage and the corresponding specialization of labor. If individual A transforms land and produces a good that individual B demands, but B has nothing to offer that A demands for consumption, A might still consider receiving a product M in exchange that he can then give to individual C. C happens to demand B’s product for consumption AND offers something that A also demands for consumption. In this case, from A’s point of view M is a medium of exchange, a money.

With division of labor spreading, different goods would be used as money, such as tea, coffee, beans, salt, or cattle. There are numerous accounts of the usage of these goods as money in history. However, there are goods that are better and goods that are worse than others for usage as a medium of exchange. A medium of exchange needs to fulfill criteria such as durability, divisibility, homogeneity, measurability, sufficient but limited availability and broad acceptance. The metals gold and silver emerged as goods that best fulfilled these criteria when used on the market.

Consumers, entrepreneurs, capitalists, landowners, and workers dug up and/or used gold and silver as money in exchange and credit transactions on the market. Decentralized, competing gold mines would channel gold into the market, part of which was used as money. For a fee, some entrepreneurs began offering the service of depositing money in warehouses, also known as deposit banks, so the owners of the money wouldn’t have to carry it with them. They would issue receipts for the money deposited. Soon the receipts themselves, rather than the deposited gold, would be used as money, hence gaining value as media of exchange.

Some of the gold would not be redeemed but rather stay in the warehouses. Thus the entrepreneurs issuing the receipts started offering their own receipts in exchange and credit transactions which were not backed by their own gold. However, they had to be careful not to issue too many uncovered receipts. Because as the price of their additional receipts would drop, their customers would begin redeeming them in exchange for gold again. If there were too many uncovered receipts issued, the warehouse would ultimately lose all its deposits and hence go out of business.

Thus in the long run those deposit banks who managed their deposits most prudently would be the most successful and profitable ones.

But some of the depositors had loaned receipts to the government and hence accumulated public debt. When they faced the threat of going out of business, due to a massive drain upon their gold reserves they sought help with the government.

The government used its police force in order to prevent the deposit banks from having to redeem their customers’ receipts for gold. It declared the receipts of the banks a legal tender, which means that they became a fiat money, a money that people are forced to accept or face government force if they don’t. The operations of different banks were consolidated within one central bank and numerous fractional reserve banks with the exclusive authority to produce fiat money. In addition, the government forcefully confiscated private gold holdings and declared private ownership of gold illegal.

This central bank was no longer under the constraints that the deposit banks used to face. It didn’t depend upon gold deposits and it could inflate the money supply at will. Without voluntary competition within the country, the result was that the quality of the money produced was low. Inflation became a common phenomenon.

Just as seen in the example of the production of cars in the Soviet Union, the more monopolized and centralized the production of a good, the less competition exists, and the less the consumer is given a choice, the lower the quality of the good produced will be from the point of view of those consuming the good.

Roughly, this has been the History of Money and Banking in the United States and the course of events that led to the establishment of the Federal Reserve Bank.

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