Government-Created Monopolies Are Everywhere
Ludwig von Mises and other free market economists have argued correctly that monopoly results from government intervention. However, they have largely ignored the prevalence of monopolies (including oligopolies). Throughout American history, politicians have incessantly awarded preferential policies (e.g., “corporate welfare”) to special interests that has allowed them to create monopolies dominating virtually every major market.
Pro-regulation economists have falsely blamed markets for creating monopolies. But their view has been common, perhaps because they have better recognized the pervasiveness of monopolies. Monopolies have created wealth disparity by: increasing incomes and profits for certain politically-favored groups while blocking opportunities for other businesses; decreasing wages by reducing the competition for workers; and especially increasing prices on consumers and others.
Politicians have doomed capitalism by imposing monopolies within so many major markets. The impositions have actually led to perverse forms of authoritarian economies: mercantilism until the 1890s, then socialism until the 1970s and corporatism since.
Mercantilism involved a strong federal government regulating markets through favored monopolies, especially in banking, manufacturing and transportation. Government sought to maximize domestic production, profits and trade surpluses, without concern for wealth disparity.
During the Colonial period in the 16th century, Britain formed the first large-scale mercantilist economy. Meanwhile, the British Empire established colonies, including in America. By the 1660s, they were imposing mercantilism on their colonies, as captive markets. Merchants based in England were granted monopolies through preferential regulations, subsidies and trade barriers. Rich Englishmen received land grants to establish plantations in America’s south and monopolize export agriculture. The Bank of England monopoly was established to finance mercantilism including war. In 1776, Scottish economist Adam Smith published “The Wealth of Nations” which extolled the virtues of free markets and free trade. However, Smith also started a tradition among economists of ignoring monopolies. Wealth disparity caused by monopolies helped lead to America’s Revolutionary War against Britain from 1776 to 1783.
During the Federalist era from 1789 to the 1820s, America had been considered to be adopting capitalism even while the Federalist Party created monopolies similar to those of British mercantilism. The Federalists, led by first President George Washington’s treasurer Alexander Hamilton, advocated for a strong federal government that promoted economic growth through monopolies manufacturing machinery in the northeast, especially for sale to the agricultural industry in the south. Monopolies were awarded through preferential policies, including patents, import tariffs, subsidies and loans. The loans were provided by the First Bank of the United States, a banking monopoly established in 1791. The third President, Thomas Jefferson of the Democratic-Republican Party, led the belief that freedom from monopolies is a fundamental human right, and that the “monopoly of a single bank is certainly an evil.” He was influenced by European classical economists, like Smith, since there were few American economists before 1900. However, Jefferson, like Smith, lacked the courage of his convictions and wealth disparity was pervasive.
During the misnamed Free Banking era from the 1830s until the 1860s, European classical economists gained political influence, especially under Democratic President Andrew Jackson. However, the mercantilists retained significant clout. After Jackson dismantled the Second National Bank in 1836, the states chartered banks with continued monopolization and cronyism from 1837 to 1864. Jackson compromised by starting a period of declining import tariffs, but the South opposed even those tariffs favoring domestic northern manufacturers. Jackson also opposed federal subsidies for railroads, but state and local governments assumed they were needed for development and provided them to favored railroad monopolies. During the 1840s, socialist economist Karl Marx falsely blamed capitalism for monopolies and wealth disparity. In the late 1850s, the mercantilists, led by economist Henry Charles Carey of the mis-named American School of capitalism, led the restoration of high import tariffs (that helped lead to the Civil War). In the early 1860s, the mercantilists, led by Republican President Abraham Lincoln, re-chartered national banks and created transcontinental railroad monopolies with federal subsidies.
The Gilded Age of capitalism — from the 1870s until about 1900 — was known for rapid growth tarnished by wealth disparity. It was mis-characterized as capitalism because European neoclassical economists dominated economic thought. However, the majority Republican Party sold the country on the need to continue the mercantile monopolies of banking, manufacturing and the railroads. The material needs of the railroads, and the need to ship the materials, helped create other big industries that became monopolized through cronyism with the government-established railroad monopolies. Because the railroad monopolies were provided subsidies that were discontinued, competitors were unable to find or build competing railroads. New America’s Barry Lynn claims: “The most famous monopolies of that era were John D. Rockefeller’s Standard Oil and Andrew Carnegie’s steel company ….. were leveraged off the railroad monopolies.” Other emerging industries were monopolized by patents, including the telephone until 1893, auto until 1903, electricity until the early 1900s and aluminum until 1909. Communist leader Vladimir Lenin calculated the growth in the numbers of large companies to provide evidence for the Marxist theory still used today that falsely blames capitalism for monopolies and wealth disparity.
The Turn to Near-Socialism
Socialism involved an even stronger central government that used nationalization to create public-sector monopolies and tight regulation of privately-owned monopolies that were created with preferential government policies. Antitrust enforcement was used to break up some monopolies, but accomplished little. Monopoly profits were taxed for redistribution to the public, which reduced wealth disparity at the expense of economic growth.
During the Progressive era from the 1890s to the 1920s, politicians led by Republican President Theodore Roosevelt and Democrat President Woodrow Wilson incited public fears about capitalism leading to monopolies to garner support for creating many of today’s government-regulated monopolies. The new monopolies were awarded preferential policies including: Federal Reserve (Fed) favoritism for big banks, quotas for oil and gas producers, prison labor for U.S. Steel, import tariffs for Aluminum Company of America, exclusive territories for electricity and natural gas utilities, nationalization of telephone and education, cartel of airlines, zoning for real estate, legalized unions for labor, restrictive licensing for medical professionals, and patents for pharmaceuticals. Fed manipulation of interest rates helped cause the depression of 1920-1 and Great Depression of 1929-39 (that helped lead to World War II). The depressions led to manufacturing monopolies by bankrupting many competitors, including those of the Big Three automakers. The 16th Amendment legalized the income tax. A few American socialist economists, like Thorstein Veblen, had a minor and mostly post-facto role in policymaking.
During the New Deal era from 1933 to 1945, Democratic President Franklin D. Roosevelt (FDR) led the nation the closest to socialism. He falsely blamed capitalism for the Great Depression while his Democrats strengthened government-institutionalized monopolies, and increased taxes and government spending. They created monopolies with government takeovers of electricity and gas utilities, home mortgages, telephone, air travel and automakers, and by restricting supply within cartels formed in trucking, farming, oil, medicine and labor. FDR also supported the nationalization of foreign oil industries. Finally, economists gained political influence behind pro-regulation economist John Maynard Keynes of Britain. However, even FDR admitted the depression only ended by “Winning-the-War.”
During the mis-characterized Golden Age of capitalism from 1950 until the 1970s, the U.S. enjoyed a post-war boom with low wealth disparity, aided by reduced regulation, especially lower import tariffs. However, trade surpluses resulted mainly because every other major economy had been severely damaged during World War II. The Big Three automakers were favored over domestic competition by government-sanctioned unions and the Securities and Exchange Commission (SEC). Starting in 1965, the U.S. government caused skyrocketing medical cost inflation and federal deficits by increasing health care demand with the passage of the subsidized Medicare and Medicaid buyer monopolies while restricting the supply of doctors and later hospitals. Most economists theorized that increased supply couldn’t force the medical monopolies to compete, but Frank Sloan, a Vanderbilt University health care economist, found no evidence to support their theories.
Corporatism has controlled markets through political partnerships with mostly privately-owned monopolies created by preferential government policies. Corporatism increased wealth disparity again and appears to be leading to fascism, a far-right form of corporatism and nationalism led by a strong leader promising to end the cronyism.
During the Deregulation era from about 1978 to 2000, Republican President Ronald Reagan, along with Democratic Presidents Jimmy Carter and Bill Clinton, promoted capitalism but actually paved the way for corporatism. Nobel Prize winning free market economist George Stigler of the Chicago school said: "most important enduring monopolies or near monopolies in the United States rest on government policies.” Stigler's theory of “regulatory capture” explained that governments regulate at the behest of producers who control regulation to thwart competition. But economists mostly ignored “deregulatory capture” as politicians allowed regulated monopolies to write the deregulation rules. Partially deregulated monopolies retained preferential regulations including: airport favoritism for airlines, bailout for an automaker, control over transmission lines for electricity, natural gas and telecommunication utilities, subsidies favoring traditional farm crops and higher education, laws encouraging buyer monopolies for health care, overly-generous intellectual property protections for pharmaceuticals and technology, and Fed favoritism for big banks.
Through it all, politicians have rationalized the need for government interventions, including those that have created monopolies, by blaming market failure. But politicians must impartially analyze whether market failures have actually existed and, if so, formulate policies that can increase efficiencies without creating monopolies.
This article is adapted from a draft report published by Americans Against Monopolies.