The democratic socialists are back, and, as always, they’re spouting promises to make things better and more affordable by turning them into public utilities! We are all supposed to be happy that more things will be administered with the enthusiasm and efficiency of the post office or the DMV.
However, when the state takes control of an industry, it almost never makes things better. While socialists argue that public utilities avoid wasteful duplication, undermine natural monopolies, and make the utilities more accountable to the people, they aren’t telling you the downsides.
Rothbard’s Insight
Before Rothbard, the classical theory of monopolies was at a standstill. Mises described in Human Action how monopoly works in the classical framework: If a monopolist drops production below the market-clearing quantity, he may charge a higher price to the smaller number of buyers who want the product more urgently. If the demand curve is sufficiently inelastic, he makes extra profits compared to if he had produced the market-clearing quantity and sold them at the market-clearing price. The consumers lose compared to the competitive case, because they either overpay for the product or are unable to buy it.
Mises correctly observed that monopoly alone isn’t destructive; only if the monopolist actually can restrict production and sell his stock at a higher price does he profit at the expense of the consumer.
But Rothbard realized something even more significant. Nobody actually knows where the demand curve is, and therefore, it is extremely difficult to determine if a producer is charging monopoly prices in a market where competition is not restricted.
All of our evidence is extremely time-limited. Demand curves move around, and producers can only gain information by changing their production numbers and prices and seeing what happens. If profits exceed those in other industries, entrepreneurs and capitalists flock to the more profitable industry until profits reach equilibrium. This is the same mechanism that every new industry experiences. Merely making above-average profits isn’t proof of a monopoly price!
Rothbard concluded that, in a free market, even companies with a near-total market share will not know whether they can charge a monopoly price. In fact, they will have trouble determining whether or not they are charging a monopoly price! The only way they can be sure is to suppress competition, which carries its own set of problems.
Socialists point to the famous “robber barons,” but Rothbard observed that the data often don’t support their conclusions. For instance, while Standard Oil had its “monopoly” from 1863 through the mid-1890s, the price of kerosene fell from $0.45/gal to $0.06/gal (start at about 12:00). When socialists suggest that prices would have fallen faster or further with more competition, they are relying on unfalsifiable counterfactuals.
When the State Makes Monopolies
In contrast, when the state uses its monopoly on coercion to deliberately create a monopoly, all of the classical problems reappear. The new monopoly can charge higher prices and produce less, since the state forbids its subjects from purchasing from competitors.
Moreover, high prices are not the only downside. For instance, they can neglect innovation and infrastructure, since no one else is allowed to outperform them. The monopolized good will, in the long run, be provided less efficiently and with fewer helpful features than would be found on a market. Insulated state bureaucracies discourage responding to changes in demand. Bad customer service, inconvenience, and slow fixes become the norm.
The “Natural” Monopoly Problem
The democratic socialist, desperate to keep the moral high ground, assures us that many “natural” monopolies exist, which use their exclusive access to overcharge their customers. The consumers have nowhere else to turn.
The thing about natural monopolies is that they aren’t as permanent or common as the socialists pretend. For example, a desert town with only one well seems like a natural monopoly as long as it costs more to bring in water from outside. However, when the state takes over the well and forces everyone to purchase water from them, they discourage innovation toward new methods which might break the monopoly.
Consider, as an example, how the Starlink network created a new way to distribute internet service. How badly has state meddling stunted the distribution of other goods and services? Bastiat would remind us that these effects of intervention are among the unseen.
Another issue is that state boundaries are usually more static than those between competing private producers. Tax-funded infrastructure is a sunk cost which discourages people from looking for outside providers. It solidifies the division between those who use the state’s services and those who seek alternative sources. If the state forbids competition at the edges, it prevents alternative suppliers from rising up at all. A natural monopoly that could be eliminated by innovation is instead cemented into place by law.
False Natural Monopolies
Further, many of the so-called “natural” monopolies identified by the socialists are not natural monopolies at all. They rely upon other preexisting state monopolies. For instance, socialists often claim that one company must have a natural monopoly on underground water pipes because it is impractical to tear up the streets every time a new service provider shows up.
This is one state intervention making another seem necessary. The state owns the streets, which destroys the price signals that would help estimate the costs of tearing it up. So the state makes up a price. Tearing up the streets is a net inconvenience at this price; the obvious conclusion is that the asking price is too low. But rather than increase the price, the state chooses one winner and undercharges them—a massive subsidy.
Thus, the state stifles innovation toward new street designs that are easier to lift and replace. Similarly, the subsidy discourages the supplier from innovating in ways to more efficiently bury pipes.
The state ownership of the street makes the underground pipes look like a natural monopoly when they aren’t. If we accept this logic, the state can take over the whole economy, one piece at a time.
One More Trick Up Their Sleeve
Oddly enough, there are cases where the state appears to deliberately undercharge for utilities. This seems at first to contradict the purpose of a monopoly. But just because overcharging is bad doesn’t mean undercharging is good.
For instance, politicians use their ability to subsidize monopolies with taxes to hoodwink the public. Most people only see the lowered retail prices; they miss the extra taxes that make up the difference. This helps pro-monopoly politicians on the campaign trail: “I reduced your electric bill by five percent compared to what those greedy businessmen wanted you to pay!”
Artificially-low prices encourage consumption. This has two major effects. First, it results in persistent shortages, which the government can use as propaganda that they need more funding and control. Second, it draws in and subsidizes large-scale consumers—a stealthy handout to big business.
When new technology appears on a free market, competing firms decide whether to move in based on their free capital and evaluation of the risks of early adoption. When the government artificially lowers the prices of the necessary factors, we instead get a rapid, reckless rush to adopt the new technology and take advantage of those artificially low prices.
This phenomenon is part of why data centers have suddenly become such a huge issue. Tech companies see artificial intelligence as a profitable new way to consume electricity and water. The opportunity to grab huge amounts of artificially-cheap electricity and water and build artificially-profitable data centers encourages firms to enter the industry more recklessly than they otherwise would. Government-dictated prices are stickier than privately-determined prices, too, which ensures that the hidden subsidies last longer than they would in a market.
Conclusion
Democratic socialists want to create coercive monopolies to address what they see as market failures. However, Rothbard’s keen insight showed how coercive monopolies satisfy the conditions that allow them to exploit the consumer, while private organizations have a much harder time. The only sure way to have a monopoly is for the state to give you one, which is exactly what the socialists are advocating.
Coercive monopolies are unfazed by market pressures. They do not need to adjust, innovate, or provide good service. They create shortages and leverage them into a demand for even more political control over the economy. Bureaucracies insulate producers from consumers’ complaints. In a democratic system, politicians use their power to bribe consumers and gather votes.
The democratic socialists want you to believe that things will get better when the government seizes control of industry. However, the conclusions of sound economic analysis are precisely the opposite.
