http://livinginamadhouse.wordpress.com/?p=569
The logical end of a truly free market, that is, a market without any state interference, is monopoly .The reason is obvious: competition tends to reduce the number of competitors through the natural process of success and failure and the takeover of one firm by another. In some trades this does not create an obvious serious anti-competitive difficulty because the initial capital investment is small and entry to the trade within the reach of many. But entry to a considerable and growing number of areas of manufacturing and service provision is too expensive for all but a few.
In a significant minority of trades starting a business from scratch is practically impossible for any one individual or even a group of private investors. The car industry is a first rate example, the number of companies now being small (and becoming smaller) compared with the number of even 40 years ago. Moreover, many of the car companies which do still exist do so only because of state subsidy and protection.
Because the natural end of a truly free market is monopoly the self-proclaimed laissez faire believers have introduced the most potent of state interferences into the market, namely, anti-monopoly laws. However, anti-monopoly laws operate within the constraints of other laissez faire sanctioned interferences with the market such as patent rights and limited liability and widely differing national taxation and social welfare schemes. In addition, anti-monopoly legislation generally only effectively attacks the problem from one end. A company can be prevented from growing its market share by taking over other companies but there is normally no meaningful restriction on a company growing its market share simply by expanding the existing company. Microsoft and the domination of Windows is a classic example. Those limitations alone means anti-monopoly laws are limited in what they can achieve and situations of oligopoly if not monopoly commonly arise.
But even where expansion is by takeover or merger, experience shows that those charged with applying the legislation allow very large parts of a market โ 25% or more โ to be held by a single company. The consequence is that a market which would seem to be an obvious candidate for competition, for example, food and domestic supplies retailing, can easily come to be dominated by three or four major players (as is the case in Britain).
There are also those products which are either natural monopolies because of the physical location of their infrastructure โ railways, roads, the utilities such as gas โ or which are inevitably going to have few entrants in the field because of reasons of cost, for example, aerospace, motor cars, ship building. Finally, there are those rare markets which are dominated by one company simply because of the nature of their business. The classic example of this is Microsoft and their Windows operating system.
The upshot of anti-monopoly laws, state-granted privileges such as patents and the failure of anti-monopoly laws in practice is an economic ideology which is incoherent and a practical situation of markets which are neither free in the sense of being without state control or free in the sense that there is meaningful competition.
Microsoft and Windows โ a natural monopoly
In South Park: The Movie, there is a glorious scene where, under martial law, Bill Gates is executed for falsely promising that Windows 98 would be โfaster, easier to use and more reliableโ. Many long-suffering Windows users doubtless wish that life had imitated art in that instance. Yet despite widespread dissatisfaction Windows remains the overwhelming dominant operating system.
At first glance it might seem that operating systems should be just the type of product which is open to fierce competition because software is a market which potentially has low entry costs. It is true that most areas of programming are competitive โ within the constraint of the dominant operating system (OS) – but operating systems are the odd man out. The reason is simple. Once a single OS gained dominance, the chances of any other system effectively competing were very small. This is because the weight of programs available to run under the dominant OS soon became much greater than those which could be run under any other OS. Thus, it becomes inefficient to choose any other OS. That in turn means most of the software is written in a way to make in โfriendlyโ to the dominant OS systemsโ users. This further excludes OS competitors and the software to run under them because users, especially employers, do not want to spend the time training their employees on completely new systems, converting data etc.
The consequence is that Microsoft still has a stranglehold on the pc market. Moreover, if anyone wants to write any other software, they are constrained by the practical need for it to run under the Microsoft OS if they wish to reach the mass computer user market.
The near monopoly has lasted a long time. It has done this despite considerable attempts by both rivals and the US government to diminish their market position. Windowsโ dominance looks secure for the foreseeable future.
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It’s half-baked thinking.
Remove the state sanctioned/enforced restrictions and privileged protection and let people get on with it.
Diversity will flourish.
Sure, car manufacture takes a lot of start up capital. And as things stand at the moment there are major hurdles to achieving very much. Even so, it still can be done by some bright/vicious/ruthless/charismatic/ whatever, people.
Henderson is thinking from the perspective of established effective monopolies.
If restrictions began to be removed and free enterprise truly permitted (not state operations franchised out, or worse given to state owned limited liability companies) then people would start doing what they do: become profitable.
If one operation becomes too big and flattens all the opposition, well, you get what happened to the USSR (the biggest of them all?).
It implodes in its own inefficiency and a competitor takes over the debris.
RH is railing against monopolies which don’t have not really been proven to harm the interests of consumers. As crap as Microsoft is, there is a school of thought which says that Microsoft invented PCs, and therefore is perfectly entitled to have a monopoly in them, in the same way that Sky invented pay TV/satellite TV therefore is entitled to have a monopoly in it.
The main monopoly we ought to concern ourselves with are those which ONLY arise because of government protection, being primarily land ownership (which is a widely fragmented monopoly, or a cartel, but the prices which tenants or purchasers have to pay are dictated as if by a monopoly). Problem is, the right of individuals or businesses to exclusive possession (aka ‘owership’) of land is a very good thing indeed, but the circle can be squared if people who want to ‘own’ land simply reimburse the rest of society for them being excluded.
Turning back to Sky, for sure, Sky should pay to the government for the value of the government protecting its exclusive right to broadcast at certain frequencies, and the patent office people shouldn’t hand out patents to Microsoft willy nilly (thus stifling competition), but hey. Ditto landing slots at airports.
You are asking for a response to a load of crap.
The idea that a free market place leads to monopoly makes no sense whatsover, either in reality or in the convulted ‘reasoning’ of this article.
Why bother posting such rubbish?
But entry to a considerable and growing number of areas of manufacturing and service provision is too expensive for all but a few.
To what extent is this in the nature of the kinds of manufacturing involved, and to what extent is it due to government intervention? The distinction is important, is it not?
In a significant minority of trades starting a business from scratch is practically impossible for any one individual or even a group of private investors.
Is this in itself a Bad Thing? Surely, the key question, as Mark Wordsworth pointed out, is to what extent this limits consumer choice?
The car industry is a first rate example, the number of companies now being small (and becoming smaller) compared with the number of even 40 years ago. Moreover, many of the car companies which do still exist do so only because of state subsidy and protection. ! I thought monopolies were the inevitable result of laissez-faire capitalism?! You’re contradicting yourself, Mr. Henderson.
Because the natural end of a truly free market is monopoly the self-proclaimed laissez faire believers have introduced the most potent of state interferences into the market, namely, anti-monopoly laws.
The one does not follow from the other. Mr. Henderson does not provide evidence that “the most potent of state interferences” was introduced by TRUE (as opposed to “self-proclaimed”) laissez-faire believers. And note how the word “believers” suggests that laissez-faire folk are irrational beings to whom this economic principle is a quasi religion. Hitting below the belt, somewhat, Mr. Henderson? Mises.org provides evidence on a weekly basis (albeit mostly from the US) of anti-monopoly laws being used to favour certain groups, none of whom are the actual consumers, and in most cases, consumers cannot be proven to have been harmed by the so-called monopoly.
The consequence is that a market which would seem to be an obvious candidate for competition, for example, food and domestic supplies retailing, can easily come to be dominated by three or four major players (as is the case in Britain). And that’sssssssss… bad? Some positive results of this domination are
a) chains or branches of outlets can be found almost anywhere, even in “the sticks”;
b) brand recognition: people know what they are getting, so save time trying out different retailers whose quality may be unknown to the consumer;
c) low prices and reliability.
Many long-suffering Windows users … Why “long-suffering”? If they don’t like the product, why continue to use it?
I agree there is something disquieting about so few major players in key industries, but a) Mr. Henderson has not put his finger on exactly what the evil is (no mention of GM seeds, for instance), and
b) Mr. Henderson has not pointed out how government intervention plays a role in reducing the number of players and in raising the cost of entry.
Oh dear! Where to begin? Perhaps Mr. Henderson’s biggest single hidden assumption in the first paragraph is the idea that economic change and development always occurs in a constant way. If I understand him correctly, Mr. Henderson seems to imagine that:
1. technical innovation mostly or only ever gets more expensive to implement on a unit cost basis and renders nothing obsolete
2. hitherto successful business owners and managers rarely or never make significant business mistakes or become complacent, and
3. would-be customers spend their time and money grinding their way through static personal lists of immutable spending priorities.
Nor do matters improve with Mr. Henderson’s use of the over-regulated, highly-subsidised car industry as an illustration of laissez faire economics in action. Such an illustration is at best inappropriate and at worst mendacious. If he thinks otherwise, no wonder the poor man believes he’s living in a madhouse.
Mr. Henderson then advances the idea that “anti-monopoly” laws are a tool of free marketeers intended to prevent the rise of “natural monopolies” in key areas of economic life. This is a classic example of reading the label instead of looking inside the tin.
Even the briefest examination of industries characterised by such legislation (oil, transport, power generation, and media broadcasting to name but a few) reveals the true purpose of such laws is to try to protect de facto cartels from internal competition. Members use mutually agreed, politically sanctioned compliance costs and political lobbying to try to suppress the rise of external competition – not exactly free market practices by any stretch of the imagination.
As for Mr. Henderson’s supposed killer example of Microsoft, all is not as it might seem. As both a former professional computer programmer on UNIX systems and a Microsoft computer user, I use MS at home because – surprise, surprise – MS was developed for home computing and UNIX never was.
Other programmers no doubt beg to differ, but personally I’d hate to try to use UNIX or one of its derivatives in a home environment without some sort of friendly graphical user interface on top. Any one who thinks they can challenge the market share of MS with a more secure and stable system need only ensure it’s capable of running existing Windows applications as easily as one may do so in the various MS versions, and let the world know (if MS is really as bad as Mr. Henderson wishes us all to assume with him).
Insofar as my proposed response to MS is hampered by the politically enforced patent monopolies granted to MS and many others (a practice which disincentivises original developers to find and work with third-party innovators in order to retain and even increase market share), again I don’t think it appropriate to point fingers at the so-called “free” market.
IP is a thorny issue, and I don’t claim even to have worked out my own views completely on the matter, but I will say that the usual proposed “choice” between the current, increasingly unenforceable web of patents and copyrights and a free-for-all in which innovation drowns in a sea of everybody stealing everybody else’s work seems like a false choice in many areas.
I suspect there are genuine business advantages to be gained in a number of areas by collaborative ventures between businesses, especially when followed by cross-branding endorsements and joint sales campaigns. In any case, at present I see no compelling reason why laws of commercial contract and confidentiality can’t cover many or even all such matters.
John B is unconsciously imitating those Marxists who say Communism never failed because it was never tried.
Mark Wadsworth is so enthrall to the god of property that he believes inventing something sanctifies a potentially permament property. He signally fails to explain why a government monopoly is harmful and one in private hands benificent.
C H Ingoldby put his fingers in his ears and shouted la,la,la…I can’t hear you.
Marco Polo goes down the ideological purity line by classifing those who accept state interferences such as limited liability as false laissez faire believers. This ignores the facts of social life which make the pure libertarian ideal an asperation not a practical possibility. I also had a wry smile at his willing acceptance of reduced competition provided it is caused by private business.
Christopher Houseman’s “hidden assumption in the first paragraph ” is so well hidden as to be non-existent, as are his three assumptions in the same paragraph. All I am doing, based on what has actually happened in the past, is point out the increasing number of industries which have little competition because of the costs of entry.
As for natural monopolies, how else other than by state interference, would utilituies such as railways, water and gas be efficiently run and provide universal coverage? Would you want every railway company to have its own track or every gas supplier its own pipes?
Thanks for your reply Mr. Henderson. I know how much effort it can take to write at any length on a subject, and how trying it can be to receive little but criticism in return.
You mention that all you’re doing is pointing out “the increasing number of industries which have little competition because of the costs of entry”. I don’t think that’s entirely true: you also seem to be arguing that the state has an indispensable role in maintaining the existence of competition between businesses, and that private enterprise can only survive at all in the context of a mixed economy.
Your use of the utilities to illustrate your point is, however, again somewhat misplaced. When gas pipelines first began to appear in British cities, each gas company did indeed have its own pipeline, and likewise before the railways were nationalised, each railway company had its own tracks.
Just as you see the potential perils and inefficiencies in such a situation, so did the businessmen of that era. It didn’t take them very long to work out that it was in all their best interests to standardise gas pipe fittings in one industry and agree to use a particular gauge to transport freight and passengers in the other.
Having a natural monopoly on building either might once have looked like a ticket to everlasting prosperity, surely something worth fighting for (in a commercial sense) – but then along came the electricity companies, the motor vehicle and the aircraft. Within a few years, any natural monopoly in either gas or the railways would no longer have seemed so appealing. And so it is with just about any technology you care to name – unless the government agrees to legislate barriers to entry at the behest of existing big players within a given market.
I hope this you an idea why some of us don’t share your belief that the state is needed to keep private competition in being – and it doesn’t change the fact that, as I mentioned, a number of your examples didn’t seem to be well chosen. That said, though, I have to agree that there are far too few genuinely free markets to use as examples in a discussion like this.
Robert Henderson, when you started prattling onabout Microsoft being a natural monopoly you showed yourself to be a dullard. Microsoft operates in an area of constantly evolving and changing technology. It is no more of a natural monopoly than IBM was in the 1960’s.
When you used the car industry as an example of declining competition you showed yourself to be an ignoramus. New car companies are coming into being as developments of larger industrial concerns diversifying so your argument that the start up costs are too great is false. The facts disprove what you state.
Your argument is illogical and wrong on the facts.
So, yes, it is a load of crap that really, self evidently doesn’t need refuting.
Christopher Houseman
Have no fear, I take no umbrage at criticism or disagreement. I am that genuine rarity, someone who actually relishes debate rather thanwishing simply tp recite an ideological catechism.
As for my putting forward the idea that the state is necessary to maintain competition, that is self-evident in industries where a dominant position can be achieved. Moreover, if anti-monopoly laws were not required, it is a little difficult to see why they are so universal in advanced economies. You might argue that they are not effective in all instances , but they manifestly cannot assist those who wish to reduce competition and unless they are deemed completely ineffective, must maintain it at a higher level than would occur without such laws. As competition is the touchstone of market economics, anti-monopoly laws must be an inherent part of laissez faire unless you wish laissez faire to be taken literally, i.e. with no state involvement, direct or indirect.
Your argument on utilities such as gas companies and railways carries no force because (1) there was a great deal of wasteful duplication when private companies were involved ; (2) nothing approaching universal provision was achieved and (3) many public utilities before nationalisation were provided by municipalities not private companies.
It should also be remembered that in the case of railways government and parliament played a considerable role, because any large development required an Act of Parliament to override the objections of landowners to having rails running over their land.
C H Ingoldby still has his fingers in his ears whilst yelling la, la, la ….
Well, some good answers here already that rightly trash Henderson’s primitive understanding of economics. I’ll just add an important point about Windows.
Windows isn’t very important. That is because operating systems are not very important. A smal number of geeks think they are important. These people are technology hobbyists, and care about things that most other peolpe don’t care about; in the same way that steam railway geeks care about reducing valves and water-tubed boilers, and which type is better, and nobody else does so long as their train gets them from A to B.
So they are mystified as to why something “under the hood” that they consider inferior to something else dominates the market. But the reality is, to most computer users the OS isn’t important, as long as it works, which Windows does. So there is no significant pressure for an alternative in the marketplace.
Ask yourself, who wrote the software that runs your washing machine? Do you care? The software in your car engine? Do you care? No, you don’t. It works, that is all that matters.
So it’s really an extremely bad example of monopoly. OSs just aren’t very important to most consumers, just so long as they can run the software they want to run. Which Windows does.
Oh dear, I’m afraid IanB has disqualified himself from serious consideration because he believes unsupported abusive assertion serves as meaningful argument. However, his position on Microsoft, Windows and computer programming in general is so bizarre I will offer a few thoughts.
People may not know the inner details of programs but they do understand the limitations imposed when the programs fail to work, namely, they are, in most cases, utterly helpless.
As for Microsoft and Window, if either or both are unimportant, it is jolly strange that 80% approximately of pcs run Windows, Bill Gates is the richest man in the world and Microsft has a market value of hundreds of billions of dollars..
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