A Brief Examination of Monopolies and Laissez-Faire

A Short Essay by Donovan A.

The idea that monopolies are consequences of laissez-faire is an economic fallacy that was promoted by Karl Marx and is still widely accepted today.[i] When people use the term monopoly, they typically are referring to a business that has established exclusive control over a specific field of production, operating without competition, and therefore able to charge arbitrary prices, produce poor quality goods and or services. On this point, I would like to stress that the key to the establishment of such business practices is not merely the absence of competition, but the impossibility of it.[ii]

Under Laissez-faire, there would be no laws to prevent already established, and or new businesses to enter into the same industry. By definition, coercive monopolies can only form under statism, i.e., through government intervention into the economy by: special franchises, licenses, subsidies, and legislative actions, which provide privileges to specific organizations, individuals or groups.[iii]

In the United States, utility companies (at various times) have been granted a franchise for exclusive distribution of electricity over specific territories.[iv] Pan Am airlines used political influence to prevent meaningful competition.[v]  In 1913, the American Bell Telephone Company was granted a government sanctioned monopoly.[vi]

In the late 1800s and early 1900s, various companies attempted to “corner the commodities market,” but the free market compelled these companies to give up their attempts at monopolization.[vii]

The monopoly theory is an attack against capitalism, and claims that:

Under laissez-faire, a large wealthy company will be able to eliminate its competitors by selling at a loss (temporarily), or by buying out its smaller competitors. Once the wealthy company defeats its competitors, it will then be able to start charging arbitrarily high prices and reduce its quality and service standards.[viii]

The problem with this argument is that even a very wealthy company would not be able to repeatedly recoup losses by undercutting its competition. If a company assumes deep losses in order to extinguish its competitors, and then began to charge high prices to regain its losses, the high prices would attract new competitors that would not have losses to recoup. The new competitors could easily charge lower prices which would force prices down to the market level again.

It should also be noted that most (if not all) companies have to compete with alternative products and substitute goods. The Airlines, for example, compete with the automotive, bussing, and rail industries.

I would like to add that if a company were able to establish a general monopoly under laissez-faire, that such a company deserves it. The principle of capitalism is respect for property rights, and the principle applies just as much to companies that are successful.

Finally, I’d like to briefly address the viciousness of the antitrust laws. Under antitrust, no businessman can objectively comply with the law. For example, if a businessman charges prices higher than his competitors, he can be tried for “price-gouging” or “intent to monopolize.” If he charges the same price as his competitors, he can be tried for “collusion.” If he charges less than his competitor, he can be tried for “unfair competition.” [ix]

Recommended Reading:
  • America's Persecuted Minority: Big Business by Ayn Rand, Printed in Capitalism The Unknown Ideal.
  • Antitrust by Alan Greenspan, Printed in Capitalism The Unknown Ideal.
  • Common Fallacies About Capitalism by Nathaniel Branden, Printed in Capitalism The Unknown Ideal. See also: The Basic Principles of Objectivism.

[i] Nathaniel Branden, The Vision of Ayn Rand, p.375
[ii] Ibid
[iii] Ibid, p.376
[iv] http://en.wikipedia.org/wiki/Public_Utility_Holding_Company_Act_of_1935
[v] http://en.wikipedia.org/wiki/Pan_Am
[vi] http://en.wikipedia.org/wiki/Bell_System
[vii] Nathaniel Branden, Capitalism The Unknown Ideal, p.74
[viii] Ibid., p. 74-75.
[ix]  Ayn Rand, Capitalism The Unknown Ideal, p.46