A Final Word On Monopolies

About two weeks ago, we had quite a spirited debate here about the question of monopolies in a free market system, and specifically the question of whether Microsoft, or any other supposed monopoly was a problem that libertarians and classical liberals needed to concern themselves with. For a recap of those arguments, you should start here and then go here, and then here, then here, then here, and, finally, here. Be sure to read the comments along the way.

On several ocassions during our discussion I started, then stopped, writing a more detailed post discussing what a monopoly actually is in economic terms and whether a monopolist in a free market economy, should one exist, would be a problem worth worrying about. For many reasons, I never got around to it, and now it looks like someone has beat me to it.

Over at Liberty Corner, there’s an excellent post titled Monopoly And The General Welfare that puts the issues forward fairly succintly. The post goes into detail to explain why, in a free market economy, a monopolist would be no different than any other market player and would still be subject to the same free market forces that any other company would be, with the added benefit that the monopolist would not be able to appeal to the state for protection from competition.

The only kind of monopoly that harms consumers is a legal monopoly, one that is operated or regulated by government. Such a monopoly isn’t harmful per se, it’s harmful because the government’s operation or regulation of the monopoly ensures that it cannot and will not respond to price signals. A natural monopolist (like Jack the breadmaker) must bargain with his customers, and must be alert to the possibility that his customers will turn to substitutes and near-substitutes if he doesn’t bargain with them. But when government operates and regulates whole sectors of the economy (e.g., telecommunications and health care), price signals are practically meaningless — there is no bargaining — and substitutes are hard to come by (near-substitutes will be regulated, of course).

The only real monopoly, then, is one that is operated or regulated by government. It is that kind of monopoly — not Microsoft or Wal-Mart (for example) — which ought to be broken up or fenced in by the trust-busters.

As usual, the real harm comes from the state.