WEBVTT NOTE Factor Prices Under Monopoly 1 00:00:00.000 --> 00:00:25.000 So the starting point of this study is an observation, namely that Mises and Rothbard's analysis of interventionism is characterized, among other things, by the fact that labor factors typically find themselves on both sides of the redistributive process implied in interventions among the winners and the losers, that is. 2 00:00:25.000 --> 00:00:55.000 There are of course good reasons for that, namely that Contra marks, we know that there is nothing exploitative per se in labor contracts, at least since Boehm-Bawerk, we know that there are good economic reasons why there would be a gap between the price of the product and the price of labor factors, namely that there is an inter-temporal exchange between 3 00:00:55.000 --> 00:00:58.360 between wage earners and the capitalists. 4 00:00:58.360 --> 00:01:04.760 And we also know from a legal point of view that there is nothing aggressive in a labor 5 00:01:04.760 --> 00:01:08.720 contract. 6 00:01:08.720 --> 00:01:14.240 So that's why exploitation is not involved in a labor contract. 7 00:01:14.240 --> 00:01:20.840 However, we could still wonder if some interventions might make wage earners gather on the side 8 00:01:20.840 --> 00:01:27.320 of Losers, while at least some capitalists would gain in the process. 9 00:01:27.320 --> 00:01:32.920 This paper basically provides an answer to that question. 10 00:01:32.920 --> 00:01:42.240 So the first thing I did to find any kind of answer was to check my favorite book, Human 11 00:01:42.240 --> 00:01:47.460 Action, to see what Mises had to say. 12 00:01:47.460 --> 00:01:50.380 I found that Mises' claims, I quote, 13 00:01:52.500 --> 00:01:55.180 the employers would be in a position enabling them 14 00:01:55.180 --> 00:01:58.460 to lower wage rates by concerted action 15 00:01:58.460 --> 00:02:01.860 only if they were to monopolize a factor indispensable 16 00:02:01.860 --> 00:02:04.100 for every kind of production 17 00:02:04.100 --> 00:02:06.500 and to restrict the employment of this factor 18 00:02:06.500 --> 00:02:08.500 in a monopolistic way. 19 00:02:08.500 --> 00:02:11.700 As there is no single material factor indispensable 20 00:02:11.700 --> 00:02:13.900 for every kind of production, 21 00:02:13.900 --> 00:02:15.260 they would have to monopolize 22 00:02:15.260 --> 00:02:22.100 All material factors of production, this condition would be present only in a socialist community. 23 00:02:22.100 --> 00:02:31.340 So this implies, well, of course, that there could be no such thing as labor factors paid 24 00:02:31.340 --> 00:02:38.020 under their marginal productivity in a free market, at least not temporarily, but also 25 00:02:38.020 --> 00:02:46.980 in a hampered market society, since he says only in a socialist community such a combination 26 00:02:46.980 --> 00:02:52.740 of employers could succeed in bringing lower wages. 27 00:02:52.740 --> 00:02:55.340 So this is Mises' thesis. 28 00:02:55.340 --> 00:03:07.180 However, well, I will not quarrel with Mises on the idea that what he described, described 29 00:03:07.180 --> 00:03:12.180 regarding the effects of a state-owned economy. 30 00:03:14.780 --> 00:03:19.780 Where I would beg to differ is on the implied idea 31 00:03:20.320 --> 00:03:25.320 that this cannot happen under interventionism, 32 00:03:25.500 --> 00:03:28.860 that is, in a hampered market society. 33 00:03:31.240 --> 00:03:34.000 So I want to show here that there is no need 34 00:03:34.000 --> 00:03:36.140 to monopolize all factors of production 35 00:03:36.140 --> 00:03:39.440 to bring about an overall relative lowering of prices 36 00:03:39.440 --> 00:03:43.100 for original factors, in particular labor factors, 37 00:03:43.100 --> 00:03:47.300 compared to what would prevail in a free market environment. 38 00:03:47.300 --> 00:03:52.040 I want to explain how grants of monopolistic privileges 39 00:03:52.040 --> 00:03:54.620 to capitalists in a hampered market economy 40 00:03:54.620 --> 00:04:00.600 can be sufficient to lower labor and land factor prices. 41 00:04:00.600 --> 00:04:04.060 I also want to explain how this conclusion can 42 00:04:04.060 --> 00:04:10.060 can be viewed as an implication of Rothbard's own work on monopoly theory. 43 00:04:10.060 --> 00:04:16.620 So in order to do so, I will first recall the basic tenets of Rothbard's theory, and 44 00:04:16.620 --> 00:04:22.900 then I will draw the implications regarding factor pricing. 45 00:04:22.900 --> 00:04:28.540 So first, Rothbard's monopoly price theory in a nutshell. 46 00:04:28.540 --> 00:04:35.820 There are basically, in order for a monopoly price to emerge, according to Rothbard, there 47 00:04:35.820 --> 00:04:38.980 are basically three requirements. 48 00:04:38.980 --> 00:04:43.500 The first is one needs a monopoly, of course. 49 00:04:43.500 --> 00:04:54.060 Monopoly is here defined as, and Rothbard quotes a 17th century lawyer named Lord Coke. 50 00:04:54.060 --> 00:05:01.220 What is the institution or allowance by the king, by his grant, commission or otherwise, 51 00:05:01.220 --> 00:05:07.220 to any person or persons, bodies, politic or corporate, for the sole buying, selling, 52 00:05:07.220 --> 00:05:13.660 making, working or using of anything whereby any person or persons, bodies, politic or 53 00:05:13.660 --> 00:05:19.220 corporate, are sought to be restrained of any freedom or liberty that they had before 54 00:05:19.220 --> 00:05:23.860 or hindered in their lawful trade? 55 00:05:23.860 --> 00:05:32.340 This is also valid in the Rothbardian framework, it does not necessarily have to be a king 56 00:05:32.340 --> 00:05:41.540 who would grant the privilege, or a king or a democratic ruler, it can also be granted 57 00:05:41.540 --> 00:05:50.780 through private threats of aggression, the relevant criterion is the presence of an aggressive 58 00:05:50.780 --> 00:05:54.820 behavior that hamper the competitive process. 59 00:05:57.860 --> 00:06:01.980 Second thing, despite the fact that the definition is large 60 00:06:01.980 --> 00:06:04.460 and includes not only restriction on selling 61 00:06:04.460 --> 00:06:07.540 but restrictions on buying, Rothbard 62 00:06:07.540 --> 00:06:13.020 focuses on what we call monopoly of supply, so monopoly 63 00:06:13.020 --> 00:06:18.420 selling, which brings me to the second requirement 64 00:06:18.420 --> 00:06:21.980 for monopoly price to emerge. 65 00:06:26.380 --> 00:06:30.020 The second requirement is that the market demand 66 00:06:30.020 --> 00:06:35.020 for the considered good has to be inelastic, 67 00:06:35.060 --> 00:06:40.060 which simply means that above the free market price, 68 00:06:41.420 --> 00:06:46.420 buyers would be ready to buy less units, of course, 69 00:06:46.420 --> 00:06:54.100 units of course, but they would be ready to spend more money. 70 00:06:54.100 --> 00:07:01.260 The third requirement is that there would be one seller, only one seller, or an agreement 71 00:07:01.260 --> 00:07:10.140 between sellers, that is they would agree so that they would act as if they were only 72 00:07:10.140 --> 00:07:11.440 one. 73 00:07:11.440 --> 00:07:17.440 and they would be in a position to profit from the second requirement, inelasticity of the money. 74 00:07:18.440 --> 00:07:20.440 What are the consequences? 75 00:07:21.440 --> 00:07:33.440 Simple, monopoly price implies that consumers are hurt because of the higher price they have to pay for a lower available supply of the product 76 00:07:34.440 --> 00:07:38.440 and because of the corresponding misallocation of factors in the economy. 77 00:07:38.440 --> 00:07:49.440 This is pretty straightforward, and it has been stated a hundred times, not only in Mises and Rothbard, but in practically every work on the issue. 78 00:07:49.440 --> 00:07:59.440 However, neither Rothbard nor Mises, for that matter, are very explicit regarding factor pricing under these monopolistic conditions. 79 00:07:59.440 --> 00:08:09.440 And as far as distributive effects and incomes are concerned, Rothbard only stresses the monopoly gain accruing to the holder of the privilege. 80 00:08:09.440 --> 00:08:16.440 And this additional net income seems to be entirely extracted from people as consumers. 81 00:08:16.440 --> 00:08:29.960 So, starting from there, let's see what are the implications for factor pricing that Rothbard 82 00:08:29.960 --> 00:08:32.960 did not explicit. 83 00:08:32.960 --> 00:08:39.360 I believe there are two key elements to take into consideration. 84 00:08:39.360 --> 00:08:47.800 First, when coercion bars existing or would-be capitalists to sell a product, this ipso facto 85 00:08:47.800 --> 00:08:55.360 bars them from renting or buying the factors required in its production, and vice versa. 86 00:08:55.360 --> 00:09:01.620 In other words, we do not only have here a monopoly of supply for the product, we also 87 00:09:01.620 --> 00:09:08.080 have a monopoly, what economists were calling monopoly of demand for its factors. 88 00:09:08.080 --> 00:09:13.560 and today it's usually called monopsony. 89 00:09:13.560 --> 00:09:21.620 What I claim here is that when we focus on producers who buy and sell, that is when we 90 00:09:21.620 --> 00:09:29.120 focus on capitalists, monopoly of supply and monopoly of demand are the two sides of the 91 00:09:29.120 --> 00:09:31.560 same monopoly coin. 92 00:09:31.560 --> 00:09:40.040 Murray Wieser hinted at this in his treatise, Social Economics, when he stated that, I 93 00:09:40.040 --> 00:09:46.240 quote, it seems impossible to imagine a combination of circumstances where a demand monopoly does 94 00:09:46.240 --> 00:09:48.880 not also amount to a monopoly of supply. 95 00:09:48.880 --> 00:09:57.600 And he also gives an example which shows it works also the other way around. 96 00:09:57.600 --> 00:10:04.680 Now, what is the direct implication from that? 97 00:10:04.680 --> 00:10:11.920 It should be clear that all this implies a downward pressure on factor prices in the 98 00:10:11.920 --> 00:10:15.400 monopolized sector. 99 00:10:15.400 --> 00:10:27.580 The reason is since some buyers of the services are excluded from the market, the monopolies 100 00:10:27.580 --> 00:10:40.260 lists would be able to pay them below their marginal productivity level. 101 00:10:40.260 --> 00:10:51.700 To contemplate why this should be the case, we can think about the condition that would 102 00:10:51.700 --> 00:10:55.020 be required for it not to be the case. 103 00:10:55.020 --> 00:11:02.020 The condition would be that the supply schedule of the factor would be purely elastic. However, 104 00:11:02.020 --> 00:11:07.740 we know, thanks to Rothbard again, that this is impossible. This is only in the neoclassical 105 00:11:07.740 --> 00:11:15.620 land of pure and perfect competition that we find this. Since pure and perfect competition 106 00:11:15.620 --> 00:11:23.620 If an intervention cannot exist, it means that the supply schedules have to be elastic. 107 00:11:23.620 --> 00:11:31.620 As a consequence, it allows the monopolist to obtain a lower price for the factor. 108 00:11:31.620 --> 00:11:41.620 The second key insight is that when a monopolist takes advantage of an inelastic demand for the good itself, 109 00:11:41.620 --> 00:11:47.620 This implies lower spending from its buyers on other goods. 110 00:11:47.620 --> 00:11:57.620 I refer here to Rothbard's discussion in Man Economy and State, I think it's chapter 4, on the interdependence between markets. 111 00:11:57.620 --> 00:12:03.620 If someone buys more somewhere necessarily, he has to spend less elsewhere. 112 00:12:03.620 --> 00:12:18.620 and the monopoly price, the monopoly situation implies that the buyers spend more on the monopolized goods so they have to spend less elsewhere. 113 00:12:18.620 --> 00:12:29.620 So the direct consequence is that the price of these goods for which the demand shrinks will be lowered. 114 00:12:29.620 --> 00:12:43.620 And then it means that the marginal productivity schedule of the factors which help in its production will fall too, and then their prices will fall too. 115 00:12:43.620 --> 00:12:55.620 So here we have the two legs of my argument. Overall, the pressure on factor prices coming from inside and outside of the monopolized sector is downward. 116 00:12:55.620 --> 00:13:05.620 There are differences depending on the specificity of each factor, their position in the whole structure of production. 117 00:13:05.620 --> 00:13:20.620 I will not tell you about all the details because it's quite complicated, but it's in the paper, so if you're interested, you can ask me and I will send you a copy. 118 00:13:20.620 --> 00:13:26.620 Okay, so, other implications. 119 00:13:26.620 --> 00:13:35.620 First, the monopoly gain of the holder of privilege does not come only from the consumers, 120 00:13:35.620 --> 00:13:39.620 but also from the factor he employs, including capital goods. 121 00:13:39.620 --> 00:13:46.620 However, capitalist net returns in earlier stages of production do not have to decrease. 122 00:13:46.620 --> 00:13:53.460 As with the sales tax shifted backward, the lower prices for capital goods will translate 123 00:13:53.460 --> 00:13:58.860 into lower demands and prices for original factors involved in their production, and 124 00:13:58.860 --> 00:14:02.020 the margins could stay the same. 125 00:14:02.020 --> 00:14:07.500 So I refer here to Rothbard's discussion about the sales tax in power and market. 126 00:14:07.500 --> 00:14:10.020 This is exactly the same effect. 127 00:14:10.020 --> 00:14:14.740 Lower prices for capital goods are imputed backward to original factors of production, 128 00:14:14.740 --> 00:14:17.740 Land and Labor Factors. 129 00:14:17.740 --> 00:14:29.740 Now, I told you about this idea of an overall downward pressure, but there might be an objection which is correct. 130 00:14:29.740 --> 00:14:38.740 It is not true that each and every factor must see its price diminish. 131 00:14:38.740 --> 00:14:46.740 The reason is that the monopolists, the gain of the monopolists will be spent too. 132 00:14:46.740 --> 00:14:52.740 And this could make some factor prices rise in the sector where he spends. 133 00:14:52.740 --> 00:15:05.740 The other reason is that there are some sectors expanding because of the factors displaced from the monopolized sector 134 00:15:05.740 --> 00:15:10.740 and factors that are complementary to these displaced factors 135 00:15:12.360 --> 00:15:13.980 would then be in higher demand, 136 00:15:13.980 --> 00:15:16.220 so they could have a higher price. 137 00:15:17.100 --> 00:15:19.060 But these are exceptions. 138 00:15:19.060 --> 00:15:23.900 And in any case, there can be, there can hardly be any doubt 139 00:15:23.900 --> 00:15:27.360 about the aggregate impact on original factor prices. 140 00:15:28.660 --> 00:15:30.340 We know from Rothbard again, 141 00:15:30.340 --> 00:15:33.780 the discussion, macroeconomic discussion in the chapters 142 00:15:33.780 --> 00:15:43.860 on the Structure of Production, we know that net income in the economy over a period of 143 00:15:43.860 --> 00:15:51.580 time equals consumption spending for this period. Given time preferences and demand 144 00:15:51.580 --> 00:15:57.480 and supply schedules for money which have no reason to change, aggregate consumption 145 00:15:57.480 --> 00:16:03.480 Investment Spending stays the same with or without the monopoly grants, but then, for 146 00:16:03.480 --> 00:16:08.200 the monopolist to gain an additional net monetary income compared to what he would earn on the 147 00:16:08.200 --> 00:16:18.080 free markets, other incomes have to be curtailed in the same process of production or in other. 148 00:16:18.080 --> 00:16:25.600 The thing is, the originary interest rates and the investment spending do not need to 149 00:16:25.600 --> 00:16:27.160 to be altered. 150 00:16:27.160 --> 00:16:30.280 Therefore, interest income is unaltered, 151 00:16:30.280 --> 00:16:33.760 and land and labor factors must bear the brunt. 152 00:16:33.760 --> 00:16:37.120 Though some of them may gain in the process, true. 153 00:16:37.120 --> 00:16:39.280 Aggregate land and labor income must 154 00:16:39.280 --> 00:16:42.600 be reduced as a counterpart to the existence of a monopoly 155 00:16:42.600 --> 00:16:44.240 gain somewhere. 156 00:16:44.240 --> 00:16:46.720 And since the stock of labor and land 157 00:16:46.720 --> 00:16:49.120 has no reason to be different, this 158 00:16:49.120 --> 00:16:53.320 implies an overall tendency toward lower 159 00:16:53.320 --> 00:16:56.120 prices for these factors. 160 00:16:56.120 --> 00:16:59.120 Finally, there is an empirical consideration 161 00:16:59.120 --> 00:17:03.960 that we also know from Rothbard, which 162 00:17:03.960 --> 00:17:08.720 is that labor factors tend to be non-specific compared 163 00:17:08.720 --> 00:17:09.960 to land factors. 164 00:17:09.960 --> 00:17:13.400 The implication in the context of this discussion 165 00:17:13.400 --> 00:17:16.960 is that the downward pressure on original factor prices 166 00:17:16.960 --> 00:17:21.600 might be more widespread for labor factors. 167 00:17:21.600 --> 00:17:45.600 So, I think I will conclude there the general implication I want to stress in the spirit of Hans Hoppe's article that was called Marxist and Austrian Class Analysis, which has been republished, I think, in his book, Economics and Ethics of Private Property. 168 00:17:45.600 --> 00:17:58.600 In this spirit, it should be clear that, insofar as Austrian criticisms of the Marxist theory of surplus value are correct, 169 00:17:58.600 --> 00:18:05.600 it does not follow that one should throw out the exploitation of labor maybe with the Marxist bathwater. 170 00:18:05.600 --> 00:18:14.600 Under monopoly, land and especially labor can indeed be exploited in the sense that they can be paid under their free market level 171 00:18:14.600 --> 00:18:27.600 as a consequence of coercion. And the corresponding redistribution in favor of some capitalists implies in turn a relative proletarianization of some workers. 172 00:18:27.600 --> 00:18:37.600 These are basically the laborers whose lower wages are not compensated by higher incomes coming from some investments in the privileged sectors. 173 00:18:37.600 --> 00:19:01.080 I think a sociological insight follows. 174 00:19:01.080 --> 00:19:07.560 With a lower total monetary income, workers are less likely to present themselves as investors 175 00:19:07.560 --> 00:19:15.560 The investors on the time markets and the distribution of catalytic functions among people tends to become more rigid. 176 00:19:15.560 --> 00:19:21.560 So laborers stay laborers, capitalists stay capitalists. 177 00:19:21.560 --> 00:19:36.560 Last thing I want to mention is about the further researches that could be valuable, starting from what I've just said. 178 00:19:36.560 --> 00:19:46.140 First, to do some applied economics or history in the field, I think it would be necessary 179 00:19:46.140 --> 00:19:52.720 to have an analysis of interactions between these monopolistic grants and other interventions 180 00:19:52.720 --> 00:19:58.320 in the market that may conceivably compound their effects or counteract each other to 181 00:19:58.320 --> 00:19:59.920 some extent. 182 00:19:59.920 --> 00:20:14.920 And with such a big picture, big theoretical picture, we would then be able to make an empirical assessment of how far monopoly and exploitation of original factors went in the real world, past and present. 183 00:20:14.920 --> 00:20:16.920 Thanks for your attention.