The Long FAQ on Liberalism
A Critique of the Austrian School of Economics:

MONOPOLIES


Austrians believe that the government destroys the market process for several reasons. Rockwell writes:

"One obvious example… takes place at the Justice Department's antitrust division. There the bureaucrats pretend to know the proper structure of industry, what kind of mergers and acquisitions harm the economy, who has too much market share or too little, and what the relevant market is. This represents what Hayek called the pretense of knowledge.

"The correct relationship between competitors can only be worked out through buying and selling, not bureaucratic fiat. Austrian economists, in particular Rothbard, argue that the only real monopolies are created by government. Markets are too competitive to allow any monopolies to be sustained." (1)

The claim that governments cause monopolies defies the historical evidence. History actually shows the opposite: the more unregulated the market is, the worse the problem of monopolies.

However, the Austrian claim is not wholly without merit. Utilities are examples of monopolies run or regulated by the government (although they are natural monopolies, and privatizing them doesn't work, as Britain found out in the 80s). Often companies persuade governments to erect barriers of market entry to potential competitors. Sometimes government subsidies allow one company to overpower its competitors. But such cases are usually the result of money-based lobbying, which is a corruption of the system. Corruption in the public sector no more "refutes" its central principle than does corruption in the private sector. The solution to corruption is to eliminate it by enforcing better laws. European democracies offer broad practical evidence that this sort of corruption can be greatly reduced.

But this Austrian critique completely ignores another, more common type of monopoly: that which forms naturally on the unregulated market. There are many reasons for this tendency, ranging from "it takes money to make money" to the greater efficiency of large corporations. Without antitrust laws or some other countervailing market force, growing companies will not stop until they become monopolies or oligopolies.

The height of monopoly growth and abuse in the U.S. coincided with its greatest period of laissez-faire, or government nonintervention in the market. Known as the Gilded Age (the period between the Civil War and World War I), this period saw the phenomenal rise of the Robber Barons and their great trusts (monopolies). John D. Rockefeller monopolized oil under his Standard Oil Company; J.P. Morgan dominated finance; Andrew Carnegie, steel; James Hill, railroads. Historians have well chronicled the ruthlessness of these men -- Morgan once remarked that "I don't know as I want a lawyer to tell me what I cannot do. I hire him to tell me how to do what I want to do." Rockefeller's father once boasted that "I cheat my boys every chance I get, I want to make 'em sharp." These men lived for market conquest, and plotted takeovers like military strategy.

In the late 19th century, trusts formed also in wheat, fruit, meat, salt, sugar refining, lumber, electrical power, rubber, nickel, paper, lead, gypsum, iron, cottonseed oil, linseed oil, whiskey distilling, cord manufacture -- and many others. Once a trust emerged, it would raise its prices and drop its quality of service, as well as engage in unfair trading practices that drove other firms out of business. The abuses of these monopolies became so great that they became a national scandal. So deep was antitrust sentiment that when both houses of Congress passed the Sherman Antitrust Act in 1890, there was only a single dissenting vote! (2) But U.S. presidents did not bother to enforce it, and the monopoly problem continued to worsen.

The worst period of monopoly formation was between 1898 and 1902. Prior to this, there was an average of 46 major industrial mergers a year. But after 1898, this soared to 531 a year. (3) By 1904, the top 4 percent of American businesses produced 57 percent of America's total industrial production, and a single firm would dominate at least 60 percent of production in 50 different industries. (4) The power of these monopolies easily dwarfed the governments that oversaw them. As early as 1888, a Boston railroad company had gross receipts of $40 million, whereas the entire Commonwealth of Massachusetts had receipts of only $7 million. (5) And when Rockefeller, Carnegie and Morgan united in 1901 to create U.S. Steel, the result was an international sensation. Cosmopolitan magazine wrote:

"The world, on the 3rd day of March, 1901, ceased to be ruled by… so-called statesmen. True, there were marionettes still figuring in Congress and as kings. But they were in place simply to carry out the orders of the world's real rulers -- those who controlled the concentrated portion of the money supply." (6)

The role of government in all this was to stand back and let this market process happen. It wasn't until Teddy Roosevelt launched his great "trust-busting" campaign in 1902 that this process was reversed. Actual enforcement of the Sherman Act reduced monopolies until the Roaring 20s, when laissez-faire policies again returned to Washington. Over that decade, about 1,200 mergers swallowed up more than 6,000 previously independent companies; by 1929, only 200 corporations controlled over half of all American industry. (7) The New Deal era ushered in yet another era of antitrust policy, again reducing the percentage of monopolies. This was followed by the Reagan era, a period which saw both massive deregulation and another frenzy of mergers and takeovers. In 1988, Federal Trade Commissioner Andrew Strenio remarked: "Since Fiscal Year 1980, there has been a drop of more than 40 percent in the work years allocated to antitrust enforcement. In the same period, merger filings skyrocketed to more than 320 percent of their Fiscal Year 1980 level." (8)

Two objections are possible here. The first is that these growing corporations may have captured government and then used it as a tool to capture the market. Those familiar with the Golden Age and Roaring 20s know, however, that governments were basically bribed to stand back and do nothing. They passed very little legislation that actively prevented any firms from entering the market and competing. The Reagan era was different, in that corporate lobbyists began using government as a proactive agent to discourage competition. Nonetheless, the periods of government trust-busting show the proper role of government, and its effectiveness in restoring market competition.

The second objection is that a wave of mergers may result in a more natural and efficient equilibrium of larger players, and this could be beneficial for the economy. The result doesn't have to be a monopoly -- perhaps just an oligopoly. The problem is that at the top end, mergers become increasingly harmful to the economy, with monopolies merely representing the worst result. Even oligopolies engage in price-gouging and collaboration. A natural equilibrium hardly represents the best equilibrium -- as recessions and depressions show.

How do Austrians deal with the historical correlation between laissez-faire and monopolies? By denying it, of course. The presence of any government at all proves that their conditions of a free market were not met, so the entire correlation is rejected. This is like someone attempting to argue that not watering a plant will result in the fastest growth. And when you point out to him that there is a correlation between the amount of water given to a plant and its rate of growth, he dismisses these experiments on the basis that they all used water.

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Endnotes:

1. Llewellyn H. Rockwell, Jr. (president and founder of the Ludwig von Mises Institute), "Why Austrian Economics Matters," http://www.mises.org/why_ae.html.

2. Earl Kinter, An Antitrust Primer (New York: The Macmillan Company, 1964), p. 12.

3. S. Reid, Mergers, Managers and the Economy 38, 1968.

4. Sean Dennis Cashman, America in the Gilded Age (New York: New York University Press, 1984), p. 38.

5. E. Thomas Sullivan, The Political Economy of the Sherman Act (New York: Oxford University Press, 1991), p. 28.

6. Quoted in Cashman.

7. T.H. Watkins, The Great Depression (New York: Little, Brown & Company, 1993), p. 46.

8. "Wave of Mergers, Takeovers Is Part of Reagan Legacy," Washington Post, October 30, 1988.