Mises Daily

A
A
Home | Library | Is Private Enterprise Predatory?

Is Private Enterprise Predatory?

June 29, 2000

Tags Big GovernmentCorporate WelfareLegal SystemU.S. EconomyMonopoly and Competition

After I had written an article pointing out that antitrust laws are bad for our economy, I received the following letter:

Mr. Anderson,

I read your column posted on Mises.org entitled "Economists and Antitrust." While your argument is sound in appearance, I would like for you to give me a brief explanation of how a privately/publicly held business, using the power of its superior economic resources, would not
become monopolistic and destroy the competitive atmosphere of a free enterprise market.

I have mixed emotions on the monopolistic tendency of companies approaching the leviathan size to control the market wherein their interests lie. I might also add that I oppose the breakup of the Microsoft Corporation as an attack on the ownership of private property. I just need more clarity on the benefits of the repeal of the Sherman Anti-Trust Act.

Bill


Dear Bill,

Thank you for your letter. Your concerns are voiced a thousand times daily in the press, government offices, and in the classroom. The imagined scenario goes as follows: Firm X, which begins as a small business, over time morphs into a giant. As Firm X becomes larger, it begins to gain more and more control over the market in which it sells.

At some time, unfortunately, this once-small business now has become a behemoth that dictates about everything to the consumers whom it once served. The transformation is now complete. The firm "controls" prices, output, and prices of resources that are pertinent to its market. At that point, unless the government steps in to stop this foolishness, the buying public will be at the mercy of Firm X.

The preceding state of affairs reminds me of something Will Rogers once said of Herbert Hoover: "Is isn’t what he doesn’t know that worries me, but what he knows that just ain’t so!" Time after time we believe that we have observed such actions from a firm, but, in reality, the truth is much different. I would now like to explain why that is so.

Economists Ludwig von Mises and Murray N. Rothbard, both of the Austrian School, pointed out many times in their writings and speeches that firms can only prosper in a free market if they serve their customers. A company that does not provide its customers what they want will look elsewhere, something that will soon show up on the offending firm's balance sheets.

Mises called this phenomenon "consumer sovereignty," but Rothbard gave the superior description, calling it "individual sovereignty." That is, individuals in a free market are free to make choices that satisfy their needs and wants.

However, you might add, what happens when a firm becomes so large that it "controls" the market in which it sells? In fact, the government uses that fear to justify its intervention into the market under the guise of antitrust action. Here, the government says that it is using its coercive powers to force competition in an economic situation in which monopoly would otherwise be the norm. I disagree, and I'll explain why.

First, let me challenge this idea that a firm can "control" a market. For example, take the fact that about 70 percent of all color televisions sold in this country are sold either through Wal-Mart or its Sam’s Club subsidiary. We can describe that phenomenon in one of the following two ways: (1) Wal-Mart controls 70 percent of the color television market in this country; (2) About 70 percent of Americans who buy color televisions freely choose to purchase them from Wal-Mart.

Both statements describe the same fact. However, which one more accurately describes the choices and habits of consumers. Wal-Mart, in reality, does not "control" any aspect of that market. Rather, people choose to buy more televisions from Wal-Mart than from its competitors because consumers perceive lower prices and better service, not to mention the convenience that Wal-Mart brings. Wal-Mart may have the largest share of the market at the current time, but that does not mean very much.

I remember when I was in high school and college, General Motors was the largest single seller of automobiles in the world. People spoke of GM as a monopoly, and even reacted in horror when the then-chairman of the firm declared, "What is good for General Motors is good for America." My teachers assured me that GM had a stranglehold on the rest of us and needed to be stopped by an all-nurturing state.

It seems that as long as GM produced automobiles that people wanted, GM was on top, but by the late 1970s, U.S. consumers declared that their preferences lay elsewhere, as they bought Japanese cars by the boatload. Suddenly, the U.S. auto firms were not monopolistic giants choking the lifeblood from the rest of us but rather represented an "ailing industry" beset by "predatory competition" from abroad. The auto industry needed our help in the form of tax breaks, import quotas, and requirements that government agencies purchase only domestic vehicles. It was reminiscent of George Orwell's 1984 in which Big Brother informed the citizens of Oceania that Goldstein had tricked them into believing they were at war with the wrong enemy.

Is it theoretically possible that one firm can "control" an entire market, however, and gobble up all of the resources that are needed for that market? That seems to be your question, and I can answer with a resounding No!

Once again, I appeal to Murray Rothbard, who observed that a firm that monopolized all of the relevant resources would face what Mises called the "socialist calculation problem." While some resources are specialized, others can be used for many purposes. In order for a firm to monopolize all resources in an industry, it would have to bid them away from competing uses. That scenario is highly unlikely because the bidding process would become quite fierce, forcing up factor prices to prohibitively high levels. The only way the firm could then be profitable would be for consumers to be willing to pay prices for the firm’s product that could cover all the factor costs. This would require a near-vertical demand curve, which would mean there would be absolutely no substitutes for the product in question.

To be honest, I know of no situation like the one just described. I may think of electricity as a necessity, but if I had to pay $1,000 a month for the privilege of burning electric lights in my tiny home, I must might want to burn candles instead, or just go to bed when it becomes dark.

If a monopoly firm were suddenly able to seize all relevant resources, it would still face the problem of pricing those factors of production. Without a factor market (which you implied in your letter would be the case), the firm literally is flying blind. Mises predicted that socialist countries would face this calculation problem, and he was right. His student, Rothbard, was able to see the final collapse of the socialist system, which fell under its own weight of economic incompetence.

Can a firm in the computer business become the pure predatory monopoly that you described? Think about this: the most important raw material in modern telecommunications is sand. The internet as we know it today would not be possible without fiber optics and the silicon computer chip, both of which are manufactured from that common stuff that gets into our shoes at the beach. Do you really think that one firm can monopolize all of the sand in the world?

Your political representatives are not interested in hearing these things, of course. Instead, they would like for you to believe that their intervention into market activities will result in better choices and lower prices for you and other consumers. I would hope that you would take their words with a grain of salt (or, more appropriately, with a sack of sodium chloride). Political intervention into free market activity cannot, by definition, increase competition and result in lower prices.

I hope that I have been able to answer your questions in a satisfactory manner. There are numerous economic myths out there, and I hope that I have done some damage to a couple of them.

Sincerely,

William L. Anderson
Department of Economics
North Greenville College


Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

Follow Mises Institute