WEBVTT NOTE Monopoly and Competition 1 00:00:00.000 --> 00:00:05.740 We're entering the wonderful world, the wild wonderful world of monopoly and competition 2 00:00:05.740 --> 00:00:12.820 to sum up, like I said last time, what's happened is that the words monopoly and competition 3 00:00:12.820 --> 00:00:15.520 have been changed. 4 00:00:15.520 --> 00:00:20.720 They originally meant, I mean from the 17th, 18th century, 19th century, and also in the 5 00:00:20.720 --> 00:00:25.000 minds of the ordinary person, the average person in the public, what competition means 6 00:00:25.000 --> 00:00:26.000 is competing. 7 00:00:26.000 --> 00:00:34.220 In other words, rivalry, competing, offering a, trying to offer a better product or a cheaper 8 00:00:34.220 --> 00:00:39.560 price than the other guy, the next guy in the industry, so it means competing, means 9 00:00:39.560 --> 00:00:45.320 active competing and as I say what the average person thinks of and what businessmen think 10 00:00:45.320 --> 00:00:47.320 of when they see competition. 11 00:00:47.320 --> 00:00:51.520 Also competition can be potential as well as active, very important point, even if you 12 00:00:51.520 --> 00:00:57.240 If you have one firm in an industry, it could still suffer or be subjected to the rigors 13 00:00:57.240 --> 00:01:02.440 of competition because if it raises prices and cuts production, another firm might come 14 00:01:02.440 --> 00:01:06.240 in and not compete it, and then it's stuck with the other firm forever, very important 15 00:01:06.240 --> 00:01:07.240 point. 16 00:01:07.240 --> 00:01:11.480 In other words, the competition can be potential as well as active. 17 00:01:11.480 --> 00:01:15.200 And business firms, what business firms hate more than anything else is to bring in other 18 00:01:15.200 --> 00:01:16.200 competitors. 19 00:01:16.200 --> 00:01:17.200 They don't like other competitors. 20 00:01:17.200 --> 00:01:23.320 And if they put production and raise prices to enjoy what's known as monopoly price, they 21 00:01:23.320 --> 00:01:28.720 will then bring in where their higher profits will attract more or other capitalists will 22 00:01:28.720 --> 00:01:35.960 come in with new equipment and new plants, more modern equipment than this firm has. 23 00:01:35.960 --> 00:01:39.880 So potential competition is just as powerful as actual competition in the minds of the 24 00:01:39.880 --> 00:01:40.880 businessmen. 25 00:01:40.880 --> 00:01:50.640 have competing, either actual or potential or both. Monopoly meant from the 17th century 26 00:01:50.640 --> 00:01:57.960 on meant a grant of exclusive privilege by the government. It means exclusive to either 27 00:01:57.960 --> 00:02:09.080 one person or one firm or several firms. So, for example, the King of England gave to John 28 00:02:09.080 --> 00:02:14.880 John Smith, the monopoly of production of world playing cards in the Kingdom of England. 29 00:02:14.880 --> 00:02:22.200 So anybody else who produced cards was shot with the state of illegality, in other words. 30 00:02:22.200 --> 00:02:23.200 Why did he do this? 31 00:02:23.200 --> 00:02:28.640 It means that John Smith benefits and the consumers suffer and potential competitors 32 00:02:28.640 --> 00:02:29.640 suffer. 33 00:02:29.640 --> 00:02:32.560 In other words, if somebody else wants to go into the playing card business, here's 34 00:02:32.560 --> 00:02:36.520 price and quantity, say, for playing cards, decks of cards. 35 00:02:36.520 --> 00:02:42.640 If you say that only John Smith can produce it, it means you're shipping a supply curve 36 00:02:42.640 --> 00:02:49.740 to the left and you're forcing consumers to pay more for a lower product or a smaller product 37 00:02:49.740 --> 00:02:53.960 and you're keeping out all other competitors, people who will want to produce cards if they're 38 00:02:53.960 --> 00:02:54.960 allowed to do it. 39 00:02:54.960 --> 00:02:59.800 So in other words, what happens is John Smith benefits the monopolist at the expense of 40 00:02:59.800 --> 00:03:02.120 who, in other words, from a monopoly, who benefits? 41 00:03:02.120 --> 00:03:06.020 You should ask yourself this in all cases of government interference anyway. 42 00:03:06.020 --> 00:03:11.960 Who benefits and who pays? Who whom? In other words, who's screwing whom in any act of 43 00:03:11.960 --> 00:03:19.860 government whatsoever. The beneficiaries are John Smith, the monopolist of playing cards. 44 00:03:19.860 --> 00:03:26.220 The losers are the consumers and the competitors, the people who would have competed, the excluded 45 00:03:26.220 --> 00:03:31.980 competitors, in other words. Also benefiting is the king and his bureaucracy because what 46 00:03:31.980 --> 00:03:35.560 the king does in the old days, the king would simply sell the monopoly privilege to John 47 00:03:35.560 --> 00:03:42.600 John Smith. In other words, John Smith wouldn't make a deal with a king. John Smith gets the 48 00:03:42.600 --> 00:03:45.920 monopoly privilege of producing playing cards for 20 years or something. The king gets paid 49 00:03:45.920 --> 00:03:52.960 for it. He pays the king a certain amount. And also the king of the government builds 50 00:03:52.960 --> 00:03:57.960 up a bureaucracy and builds up political allies with John Smith. This of course is happening 51 00:03:57.960 --> 00:04:03.480 all the time, not just with monopoly but also with cost plus contracts, any contract. Take 52 00:04:03.480 --> 00:04:08.640 for example, the New York City Scandal right now, the famous parking violation scandal. 53 00:04:08.640 --> 00:04:16.920 I had a question, who should get the computer? They wanted to sell computerized parking ticket 54 00:04:16.920 --> 00:04:24.640 violator search machines to search for parking violator. Two companies competed for the contract, 55 00:04:24.640 --> 00:04:37.640 Metrosum, Motorola, an old distinguished computer company, an obscure little app called CitySource, 56 00:04:37.640 --> 00:04:44.480 CompuSource, nobody ever heard of, CompuSource gets the contract, CompuSource has no money 57 00:04:44.480 --> 00:04:50.680 and no computers yet, why do they get the contract, because Stanley Friedman, distinguished 58 00:04:50.680 --> 00:04:58.280 The British head of the Bronx Democracy, the Bronx Democratic Party, was the lobbyist for 59 00:04:58.280 --> 00:04:59.280 the contract. 60 00:04:59.280 --> 00:05:03.560 Stanley Freeman had no money, but as a return for getting the contract, he received a majority 61 00:05:03.560 --> 00:05:05.040 shareholdership of the company. 62 00:05:05.040 --> 00:05:10.880 In other words, he got a million and a half dollars in shares as a legal fee. 63 00:05:10.880 --> 00:05:18.120 McCain, the majority shareholder of the previously non-existent company, which was formed only 64 00:05:18.120 --> 00:05:19.800 for the purpose of getting the contract. 65 00:05:19.800 --> 00:05:25.120 Okay, so this sort of thing, in other words, who benefits the recipient of a privilege, 66 00:05:25.120 --> 00:05:29.520 monopoly privilege or contract, and the government official, in this case, Lindenauer or all 67 00:05:29.520 --> 00:05:33.120 the other guys, Friedman, all these guys were on the take. 68 00:05:33.120 --> 00:05:37.560 So whether it's the king that does it, or some city official does it, it really doesn't 69 00:05:37.560 --> 00:05:39.240 make much difference. 70 00:05:39.240 --> 00:05:43.760 The government is in a position of selling monopoly privileges, and the people are then 71 00:05:43.760 --> 00:05:45.460 buying it. 72 00:05:45.460 --> 00:05:51.660 When gambling is outlawed, for example, which it is, except for government OTB efforts, 73 00:05:51.660 --> 00:05:57.820 if roulette wheels are outlawed, then if a police captain allows a certain roulette wheel 74 00:05:57.820 --> 00:06:02.180 establishment to operate his district, and it gets on the tape from the company that 75 00:06:02.180 --> 00:06:07.340 does it, then the police captain is selling monopoly privileges, the monopoly privilege 76 00:06:07.340 --> 00:06:13.280 of operating a roulette wheel in that district to whatever family is operating it. 77 00:06:13.280 --> 00:06:20.280 So this sort of thing is going on all the time. This is essentially known as the government-industrial complex, I guess. 78 00:06:20.280 --> 00:06:29.280 In the defense area, it's called the military-industrial complex. It's wider than that. It's the government-industrial complex, the government-business complex. 79 00:06:29.280 --> 00:06:32.280 Also known as government-business partnership. 80 00:06:32.280 --> 00:06:42.280 Okay, so this is, and we'll see various examples of exclusive privilege, the taxi industry, the airlines, the 4D regulations, et cetera, et cetera, et cetera. 81 00:06:42.280 --> 00:07:12.280 Now monopoly, the American Revolution was fought largely against monopoly. In other words, against the British government, which had given to the East India Company, which had a monopoly of all trade with the Far East Corporation, gave them exclusive privilege to import tea in the United States through America, and all the Americans rose up against it and dumped the tea in Boston Harbor, the so-called Boston Tea Party. This was an attack not only on the tax, but also on the monopoly privilege. 82 00:07:12.280 --> 00:07:18.200 When the first states were created, the American states, they put in their constitutions outlawing 83 00:07:18.200 --> 00:07:19.200 monopoly. 84 00:07:19.200 --> 00:07:22.720 What they meant, of course, was not outlawing what is now meant by monopoly in the textbooks. 85 00:07:22.720 --> 00:07:26.120 They meant no grants of monopoly privilege by the government. 86 00:07:26.120 --> 00:07:31.720 This, of course, is a dead letter, basically, but at least it was in the state constitution 87 00:07:31.720 --> 00:07:37.040 to express the fact that the American Revolution was an anti-monopoly revolution as well as 88 00:07:37.040 --> 00:07:38.040 an anti-tax. 89 00:07:38.040 --> 00:07:42.560 And this was the definition of competition monopoly until the 1930s, basically, to simplify 90 00:07:42.560 --> 00:07:43.560 this situation. 91 00:07:43.560 --> 00:07:50.120 In the 1930s, a crazy new theory of microeconomics was coined, and about the same slightly earlier, 92 00:07:50.120 --> 00:07:51.920 in Keynesianism and macroeconomics. 93 00:07:51.920 --> 00:07:57.720 So what we've had in the last 50 years, essentially 30 years, is a process of rollback by which 94 00:07:57.720 --> 00:08:03.040 Keynesianism is getting increasingly discredited in macroeconomics, and it's gone too soon, 95 00:08:03.040 --> 00:08:07.400 and also increasing discredit on this new competition theory, which is still, however, 96 00:08:07.400 --> 00:08:17.400 in the textbooks. In other words, it's been rolled back quite a bit. It's not taken as seriously as it used to in the 30s, but it's still there, the alleged ideal competition. 97 00:08:17.400 --> 00:08:31.400 Competition, so in the 1930s, competition and monopoly were redefined, keeping the old terms, because keeping the old value connotation everybody kept on. 98 00:08:31.400 --> 00:08:36.640 It was a favor of competition against monopoly, the American public, economists, intellectuals, 99 00:08:36.640 --> 00:08:42.880 everybody agreed competition was good and monopoly was bad, or in the so-called scientific 100 00:08:42.880 --> 00:08:46.600 terms competition is efficient and monopoly is inefficient, but basically it's good and 101 00:08:46.600 --> 00:08:49.680 bad, and for obvious reasons. 102 00:08:49.680 --> 00:08:53.360 So the same value, they redefined the words competition and monopoly and then applied 103 00:08:53.360 --> 00:09:00.360 the same old value judgments of the emotional baggage these terms had to a new set of definitions, 104 00:09:00.360 --> 00:09:16.360 Competition was defined as a state of, not competing, but a condition of so-called perfection, purity, perfection and purity. 105 00:09:16.360 --> 00:09:23.360 Monopoly was a state of imperfection, monopolistic, imperfect and impure. 106 00:09:23.360 --> 00:09:31.360 And notice the terms here. It's supposed to be value-free scientific terms. Who does not prefer perfection to imperfection? 107 00:09:31.360 --> 00:09:37.360 I mean the very terminology gets you to be in favor of perfect. Who doesn't prefer pure to impure? 108 00:09:37.360 --> 00:09:42.360 Who doesn't prefer competition to monopolistic? So this is also called monopolistic. 109 00:09:42.360 --> 00:09:52.360 And the redefinition was as follows. Competition meant a situation where each firm, not the industry but the firm, faces a horizontal demand curve. 110 00:09:52.360 --> 00:10:01.920 The infinitely elastic demand curve, and monopoly is a situation, monopolistic, impure, imperfect, 111 00:10:01.920 --> 00:10:09.400 all the same jazz, is defined as a situation where each firm faces a falling demand curve. 112 00:10:09.400 --> 00:10:12.400 That's it. 113 00:10:12.400 --> 00:10:13.400 This is really the definition. 114 00:10:13.400 --> 00:10:18.560 You cut through all the jargon, all the junk, and there's many chapters in the textbooks. 115 00:10:18.560 --> 00:10:23.600 Fortunately, Miller has less of it than most other textbooks, but essentially what it means 116 00:10:23.600 --> 00:10:29.680 is that a firm is monopolistic or monopoly or impure, imperfect, it's all the same thing, 117 00:10:29.680 --> 00:10:35.120 if it faces a falling demand curve, it's only perfect and pure if the firm faces a horizontal 118 00:10:35.120 --> 00:10:36.120 demand curve. 119 00:10:36.120 --> 00:10:39.560 Well, I've already proved, it took me several weeks to demonstrate, that all the demand 120 00:10:39.560 --> 00:10:40.560 curves are falling. 121 00:10:40.560 --> 00:10:42.560 Where do we get this horizontal demand curve from? 122 00:10:42.560 --> 00:10:48.480 You get it in this way, if each firm in an industry is very, very tiny, say the model 123 00:10:48.480 --> 00:10:59.040 If Hiram Jones has 100 acres of wheat in Iowa, if Hiram Jones has a very, very tiny proportion 124 00:10:59.040 --> 00:11:02.360 of the total wheat industry, then whatever he does on the wheat farm doesn't make any 125 00:11:02.360 --> 00:11:03.360 difference to the price. 126 00:11:03.360 --> 00:11:06.880 In other words, if he increases the production by 20%, it's not going to make a hell of a 127 00:11:06.880 --> 00:11:08.880 big dent in the total supply. 128 00:11:08.880 --> 00:11:13.160 So he can therefore assume, according to the theory, that he's facing a horizontal man 129 00:11:13.160 --> 00:11:14.160 curve. 130 00:11:14.160 --> 00:11:16.960 In other words, he can increase the supply by 20%. 131 00:11:16.960 --> 00:11:23.480 and you can sell it at the same price because it makes a very tiny dent on the total. 132 00:11:23.480 --> 00:11:29.440 Well, in other words, the model, the ideal which every industry is supposed to face is 133 00:11:29.440 --> 00:11:33.960 where every firm is so tiny that it can't affect its price, whether it goes out of business 134 00:11:33.960 --> 00:11:36.720 or triples its production, will have no effect on price. 135 00:11:36.720 --> 00:11:39.600 This is supposed to be ideal situation. 136 00:11:39.600 --> 00:11:44.560 Everything else is imperfect and impure and monopolistic, and of course, each one of us 137 00:11:44.560 --> 00:11:48.320 This is a monopolist, by the way. Each one of us faces a falling demand. We're all monopolists, 138 00:11:48.320 --> 00:11:53.240 every one of us, if we're engineers or economists or whatever, because if you go out in the 139 00:11:53.240 --> 00:11:58.200 engineering labor market and you insist on a higher wage rate, a very high wage rate, 140 00:11:58.200 --> 00:12:02.320 you're going to see a falling off of the man for your services. If, for example, you insist 141 00:12:02.320 --> 00:12:06.760 that you won't work for IBM for less than $500,000 a year, you'll probably get disemployed 142 00:12:06.760 --> 00:12:12.220 very fast. So this is, in other words, everybody, we're all monopolists. What kind of a crazy 143 00:12:12.220 --> 00:12:26.180 The next point is to try to figure out why it is that competition is better than so-called 144 00:12:26.180 --> 00:12:27.180 monopoly. 145 00:12:27.180 --> 00:12:31.300 What's so great about a horizontal man curve anyway? 146 00:12:31.300 --> 00:12:36.700 And by the way, the result of this is that all during the 1930s and 1940s, the antitrust 147 00:12:36.700 --> 00:12:41.240 division, which is influenced by these economists who have this view, was trying to break up 148 00:12:41.240 --> 00:12:48.240 There's a lot of big business in the small parts, so that to duplicate the small wheat farm situations. 149 00:12:48.240 --> 00:12:55.240 In other words, it's like taking General Motors and Ford and breaking them up into two million teeny little blacksmith shop-sized automobile plants. 150 00:12:55.240 --> 00:13:08.240 And of course, if you had a million small plants, originally the automobiles used to be made in blacksmith shops and bicycle shops when it first got started in 1900. 151 00:13:08.240 --> 00:13:15.360 Bicycles were used to wheel and axle technology, so they'd start producing cars in bicycle 152 00:13:15.360 --> 00:13:16.880 shops or blacksmith shops. 153 00:13:16.880 --> 00:13:21.280 I think Henry Ford's original was a blacksmith shop or a bicycle shop, forget which, but 154 00:13:21.280 --> 00:13:26.400 they're very small, grinding out two cars a month or something, or two cars a year. 155 00:13:26.400 --> 00:13:31.240 That's what these guys, the ideal that they're setting forth to go back to that kind of situation. 156 00:13:31.240 --> 00:13:34.960 Every firm has a tiny, teeny size compared to the whole industry. 157 00:13:34.960 --> 00:13:35.960 Why is this supposed to be better? 158 00:13:35.960 --> 00:13:43.880 Okay, I will now give you the full schtick, the full argument about why this is better, 159 00:13:43.880 --> 00:13:48.680 why a fully demand curve is supposed to be evil. 160 00:13:48.680 --> 00:13:56.360 Here's the, I'm going to set forth for you now a series of insane assumptions, none of 161 00:13:56.360 --> 00:14:02.600 which are realistic, all of which are flawed, deeply flawed, which wind up with the conclusion 162 00:14:02.600 --> 00:14:04.380 that competition is better than monopoly. 163 00:14:04.380 --> 00:14:12.380 The definition of the sense of horizontal demand curve is better than monopoly in the sense of a fulling demand curve. 164 00:14:12.380 --> 00:14:20.380 First of all, we're getting out of the concept that Professor Hoppe has already mentioned to you before, 165 00:14:20.380 --> 00:14:26.380 final equilibrium, long run equilibrium. 166 00:14:26.380 --> 00:14:32.380 A long run equilibrium is different from what I've been talking about, supply and demand every day to day. 167 00:14:32.380 --> 00:14:38.660 is this, if you're going along with lots of stuff going on in business, lots of changes 168 00:14:38.660 --> 00:14:43.800 taking place in values and resources and technology, if the angel Gabriel came to the earth and 169 00:14:43.800 --> 00:14:49.020 froze everything, like a freeze frame operation, froze all value scales, so no value scales 170 00:14:49.020 --> 00:14:55.580 are changing anymore, froze all resources, supply, labor, land, etc., froze all technology, 171 00:14:55.580 --> 00:15:00.980 so no new technology, freeze everything, then if you did that in a few years you'd wind 172 00:15:00.980 --> 00:15:05.540 end up with every corporation making the same long-run interest rate. 173 00:15:05.540 --> 00:15:10.140 In other words, there would be no pure profits, no pure losses. 174 00:15:10.140 --> 00:15:11.980 Because everything would be the same all the time. 175 00:15:11.980 --> 00:15:16.220 Everybody would know that the world would remain the same forever, like an ant heap. 176 00:15:16.220 --> 00:15:21.940 So this would mean if data were frozen, you'd wind up after a few years with every firm 177 00:15:21.940 --> 00:15:28.180 making 6% interest return, no extra profits beyond the regular time preference or interest 178 00:15:28.180 --> 00:15:29.460 rate, and no losses, of course. 179 00:15:29.460 --> 00:15:32.100 If you can foresee everything, you're not going to make any losses. 180 00:15:32.100 --> 00:15:35.420 If you can predict everything in the future, because everything will always be the same 181 00:15:35.420 --> 00:15:40.460 as it has been in the last 20 years, you'd wind up with no profits and no losses. 182 00:15:40.460 --> 00:15:44.260 In other words, you'd wind up with an interest return only for every firm. 183 00:15:44.260 --> 00:15:50.180 So a firm which is now making heavy profits, firms with capital will pour into that industry. 184 00:15:50.180 --> 00:15:53.140 Computers, let's say, you wind up with an usual 6%. 185 00:15:53.140 --> 00:15:56.060 Industries which are making losses, firms would leave it. 186 00:15:56.060 --> 00:15:59.180 You wind up after this kind of shuffling back and forth after a few years with everybody 187 00:15:59.180 --> 00:16:04.480 making 6%, no more, no less, 4%, whatever the interest rate is. 188 00:16:04.480 --> 00:16:15.620 So geometrically you'd have a tangency situation, in other words, geometrically you'd have something 189 00:16:15.620 --> 00:16:25.980 like total cost tangent to total revenue at whatever the production point is. 190 00:16:25.980 --> 00:16:35.540 In the average cost diagram, you have a U-shaped average cost curve and you have an average 191 00:16:35.540 --> 00:16:38.540 revenue curve. 192 00:16:38.540 --> 00:16:41.340 It will have to be tangent and final equilibrium. 193 00:16:41.340 --> 00:16:44.660 Remember final equilibrium does not exist, never can exist, never has existed, never 194 00:16:44.660 --> 00:16:45.660 will exist. 195 00:16:45.660 --> 00:16:49.180 Remember this because life is not, you don't freeze the data. 196 00:16:49.180 --> 00:16:51.100 The data are always changing. 197 00:16:51.100 --> 00:16:55.140 Values are changing, value scales are changing, fashions are changing, preferences are changing, 198 00:16:55.140 --> 00:16:59.140 technology changes, investment changes, labor changes, lots of stuff is changing all the time. 199 00:16:59.140 --> 00:17:01.140 So you never get to long run equilibrium. 200 00:17:01.140 --> 00:17:06.140 The important thing about long run equilibrium is to try to tell you to analyze profits and interests, 201 00:17:06.140 --> 00:17:11.140 to show you that profits and losses are a matter of forecasting and interest is a matter of time, time preference. 202 00:17:11.140 --> 00:17:15.140 It's really an analysis of where the economy is going. 203 00:17:15.140 --> 00:17:19.140 It should not be taken seriously as an existing situation because it never has existed and never will. 204 00:17:19.140 --> 00:17:23.140 But what happens in microeconomics, unfortunately, since the 1930s, 205 00:17:23.140 --> 00:17:31.140 Long-run equilibrium has been taken seriously as a not only existing, but something which is existing and should exist. 206 00:17:31.140 --> 00:17:34.140 If it did exist, it shouldn't. We all would be in miserable shape. 207 00:17:34.140 --> 00:17:39.140 We'd be in a state of stasis. Nothing would ever improve, nothing would ever change. 208 00:17:39.140 --> 00:17:42.140 We'd be pretty miserable. It's not like an ant heap or a beehive. 209 00:17:42.140 --> 00:17:44.140 We'd be pretty miserable in existence. 210 00:17:44.140 --> 00:17:48.140 Anyway, this is supposed to be the ideal situation. 211 00:17:48.140 --> 00:17:53.780 Okay, given a U-shaped average cost curve, we've already seen it's not really U-shaped, 212 00:17:53.780 --> 00:17:54.980 I forgot about that. 213 00:17:54.980 --> 00:18:02.360 Given that, and following the man curve for the firm, the man curve of the firm can only 214 00:18:02.360 --> 00:18:10.540 be tangent in this area, once you assume a U-shaped average cost curve and a linear demand 215 00:18:10.540 --> 00:18:20.820 demand curve, it can only be tangent say here, this in other words is the tangency of this 216 00:18:20.820 --> 00:18:26.900 firm, this business firm, if it's quote monopolistic unquote, in other words if the faces are following 217 00:18:26.900 --> 00:18:27.900 a man curve. 218 00:18:27.900 --> 00:18:32.100 On the other hand if the demand curve is horizontal, if it's in a situation where it's a teeny 219 00:18:32.100 --> 00:18:38.540 fraction of the entire industry, then it can only be tangent on this point here, given 220 00:18:38.540 --> 00:18:42.000 Given the same average cost curve, remember that, given the average cost curve as being 221 00:18:42.000 --> 00:18:48.220 the same, you then have this kind of situation, in other words, if the demand curve for the 222 00:18:48.220 --> 00:18:59.740 firm is horizontal, you're tangent here, therefore, conclusion, just as we conclude with a monopoly 223 00:18:59.740 --> 00:19:06.100 privilege that the government excludes firms, you have a smaller product at a higher price, 224 00:19:06.100 --> 00:19:08.060 by Screwing the Consumers. 225 00:19:08.060 --> 00:19:13.580 So these people conclude about the free market, or the market in general, that a firm facing 226 00:19:13.580 --> 00:19:18.860 a falling demand curve will, the output will be smaller and the price will be higher than 227 00:19:18.860 --> 00:19:26.860 a firm with a horizontal demand curve, just from this diagram here, that's the conclusion. 228 00:19:26.860 --> 00:19:32.520 That's it, that's the whole shtick, this is it, that the entire case for the horizontal 229 00:19:32.520 --> 00:19:41.840 In the entire case, given the same average cost curve, given a tangency in the final 230 00:19:41.840 --> 00:19:45.680 long-run equilibrium, and given the shape of the u-shape of the average cost curve, 231 00:19:45.680 --> 00:19:56.160 given the rest of it, the linear shape, you wind up with an output smaller, under so-called 232 00:19:56.160 --> 00:20:05.360 monopoly under monopolistic and a price higher. 233 00:20:05.360 --> 00:20:09.360 Inclusion is therefore the consumers are being strewed by monopoly and therefore the antitrust 234 00:20:09.360 --> 00:20:13.480 divisions are coming in and break every firm up into teeny parts so as to get to the bottom 235 00:20:13.480 --> 00:20:15.360 of the average cost curve. 236 00:20:15.360 --> 00:20:24.160 Now, the many, say the many problems with this is it's putting it kindly. 237 00:20:24.160 --> 00:20:34.160 One question is, how big is this anyway? If you're going to the trouble of breaking out firms, is this like 1.5% or is it really important? Nobody knows. 238 00:20:34.160 --> 00:20:37.160 Remember, all laws and economics are qualitative. 239 00:20:37.160 --> 00:20:43.160 Apart from that, you might be going through all this headache, a very small fraction of return. 240 00:20:43.160 --> 00:20:51.160 As a matter of fact, some economists have tried to estimate what this percentage is, something like 2% or something, even at best, 2% difference. 241 00:20:51.160 --> 00:20:54.160 But, anyway, that's the least of the problems here. 242 00:20:56.160 --> 00:21:01.160 One thing is, who says that the U-shaped course curve, as we've already seen, is not really U-shaped? 243 00:21:01.160 --> 00:21:07.160 It's, in most cases, the course curve goes down like this and is flat. 244 00:21:07.160 --> 00:21:11.160 In a flat, flat toe, none of this works. This whole thing is out the window. 245 00:21:11.160 --> 00:21:20.160 Because, first of all, the intersection point is now the whole business, not just one point. 246 00:21:20.160 --> 00:21:21.160 point. 247 00:21:21.160 --> 00:21:25.800 We have a whole range at which marginal cost and average cost are equal, and there's nothing 248 00:21:25.800 --> 00:21:31.480 to say, I mean supposing you have a, this would be a flat demand curve like this, the 249 00:21:31.480 --> 00:21:36.040 falling demand curve could easily be like that, could easily hit, see at this point 250 00:21:36.040 --> 00:21:37.040 go down like that. 251 00:21:37.040 --> 00:21:42.360 Don't forget there's nothing that says that it has to be linear, can be a little gap in 252 00:21:42.360 --> 00:21:47.200 the line here, and so you can easily twist it around a little bit and have the thing 253 00:21:47.200 --> 00:21:54.200 All of these things coincide at the same point as the falling demand curve, the falling and the linear and the horizontal. 254 00:21:54.200 --> 00:22:03.200 As long as your math can even have it here, you can twist it around a little bit, like that, and you can hit it at the bottom point. 255 00:22:03.200 --> 00:22:08.200 Remember, the linear part is purely for simplification purposes. Nobody knows that it's a straight line. 256 00:22:08.200 --> 00:22:16.200 All we know is that it's falling. So if it's falling, it can easily cut around like that, and simply nip in there and intersect at the same point. 257 00:22:16.200 --> 00:22:25.200 As I say, with this thing here, with a flat bottom, the intersection point is pretty extensive. 258 00:22:25.200 --> 00:22:31.200 There's even more room to nip in and nip around and get in there. 259 00:22:31.200 --> 00:22:38.200 So, this really only works if you're committed to a straight line at all times, there's no reason for that. 260 00:22:38.200 --> 00:22:41.200 If you're committed to one single cross point, there's no reason for that. 261 00:22:41.200 --> 00:22:44.200 In fact, there's a reason for the opposite. 262 00:22:44.200 --> 00:22:53.200 Second of all, it only works in equilibrium. In other words, the rest of the time, in the real world, when there is no long run equilibrium, none of this applies. 263 00:22:53.200 --> 00:23:00.200 There's no way you can say that output is smaller or price higher in a so-called monopolistic situation. 264 00:23:00.200 --> 00:23:06.200 Then you have something like this. You have this, so you have a point like that, you have something like that, a point like that. 265 00:23:06.200 --> 00:23:12.200 There's no way to show the price is higher or the output is smaller. You can only show that in long run equilibrium. 266 00:23:12.200 --> 00:23:22.200 and Equilibrium. Since there never is long-term equilibrium, never exists, this whole thing is pointless because this situation, this tangency never exists in real life, never can exist, never will exist. 267 00:23:22.200 --> 00:23:38.200 So this whole situation, this whole thesis applies only, at best, to tangencies where you jimmy up the things, this has to be linear and this has to be one point, neither of which is true. 268 00:23:38.200 --> 00:23:46.200 And secondly, it only exists in long-term equilibrium, which doesn't really exist anywhere in the real world, purely artificial construction. 269 00:23:46.200 --> 00:23:53.200 We'd be in bad shape if it did exist. There's nothing great about long-run equilibrium. 270 00:23:53.200 --> 00:24:00.200 Also, and finally, and probably the most important point here, is that who says that the course curve remains the same in this situation? 271 00:24:00.200 --> 00:24:03.200 Who said? Where is it written? In fact, it's just the opposite. 272 00:24:03.200 --> 00:24:33.200 If we took the General Motors of Ford and broke it up into 500,000 or whatever teeny plants, each were the size of a blacksmith shop, you might get a hit at the bottom, it's true, but on the other hand you'd be way up on the 10th floor, the non-existent 10th floor, the cost curve would be extremely high because each plant would be very inefficient, you wouldn't capture the advantages of large scale production, so you might get 5 million dollars per car, 273 00:24:33.200 --> 00:24:36.920 only a few millionaires can afford to ride, which is by the way what happened in the early 274 00:24:36.920 --> 00:24:42.300 days of the automobile, it was a toy for the rich, and only when Henry Ford and the Theory 275 00:24:42.300 --> 00:24:46.800 of Mass Production came in did he say, no, no, we can have the average person ride, just 276 00:24:46.800 --> 00:24:50.680 have a mass production, interchangeable parts, because before that the cars were beautiful 277 00:24:50.680 --> 00:24:54.600 except they were very expensive, only millionaires could ride around, Diamond Jim Brady or whatever 278 00:24:54.600 --> 00:24:56.220 could ride around in it. 279 00:24:56.220 --> 00:25:01.960 So in other words, we could be at the bottom, but the consumers would have the thrill of 280 00:25:01.960 --> 00:25:06.000 knowing that each firm would be at the bottom of the cost curve, you tap, eliminate the 281 00:25:06.000 --> 00:25:07.000 so-called monopoly here. 282 00:25:07.000 --> 00:25:10.200 On the other hand, of course, you'd be paying five million dollars a car, because each cost 283 00:25:10.200 --> 00:25:14.640 curve would be infinitely higher than the cost curve on a large-scale production. 284 00:25:14.640 --> 00:25:19.800 So the rub is to say that the cost curve is equal, cost curves are never equal, and the 285 00:25:19.800 --> 00:25:23.480 reason for large-scale production is precisely because the cost curve is lower, because when 286 00:25:23.480 --> 00:25:27.000 you get to the large-scale production, you can tap the indivisibility of the large-scale 287 00:25:27.000 --> 00:25:29.920 production and get down to a much lower cost. 288 00:25:29.920 --> 00:25:34.440 So the fact you'd be up here somewhere, happily the bottom of the cost curve is not going 289 00:25:34.440 --> 00:25:39.600 to give us much consolation if we pay the five million bucks per car. 290 00:25:39.600 --> 00:25:47.600 So all this, I think, demonstrates the egregious fallacies of this whole concept, whole idea 291 00:25:47.600 --> 00:25:54.800 that somehow purifying competition is better than so-called monopolistic, there's nothing 292 00:25:54.800 --> 00:25:56.320 evil about a falling to man curve. 293 00:25:56.320 --> 00:25:57.320 It's not true. 294 00:25:57.320 --> 00:26:02.540 Foley Mankers are great, also they exist everywhere, we always have them, and we're able to tap 295 00:26:02.540 --> 00:26:06.740 large scale production here, so you're much better off than you would be even at the bottom 296 00:26:06.740 --> 00:26:10.520 of a close curve of way up on the 10th floor, in other words if it's 5 million bucks per 297 00:26:10.520 --> 00:26:12.600 car outside. 298 00:26:12.600 --> 00:26:18.480 So the question is how does this whole thing arise, and it's interesting, it was probably 299 00:26:18.480 --> 00:26:25.740 generally the anti-business climate of the 1930s where this kind of doctrine became popular. 300 00:26:25.740 --> 00:26:30.660 So what's been happening over the years in the economics profession has been slowly rolling 301 00:26:30.660 --> 00:26:35.140 backward from this commitment to this crazy perfect competition doctrine, but it's still 302 00:26:35.140 --> 00:26:36.140 there as an ideal. 303 00:26:36.140 --> 00:26:41.260 It's still listed as the ideal, somehow as an ideal situation. 304 00:26:41.260 --> 00:26:49.100 And it'll take quite a while before that gets blasted loose, I'm afraid. 305 00:26:49.100 --> 00:26:50.100 So there we have it. 306 00:26:50.100 --> 00:26:55.900 That's the full argument for the perfection of the desirability of perfect competition 307 00:26:55.900 --> 00:26:58.460 and alleged undesirability of falling demand curves. 308 00:26:58.460 --> 00:27:05.900 And to say that it's pretty feeble, of course, is being very kind to it. 309 00:27:05.900 --> 00:27:10.140 So what's happening now is economists have essentially stopped endorsing the idea of 310 00:27:10.140 --> 00:27:15.300 breaking up old businesses into tiny little blacksmith shop size, but they're still somehow 311 00:27:15.300 --> 00:27:20.060 intellectually committed to this alleged ideal, largely because, you see, you can use tangency 312 00:27:20.060 --> 00:27:25.860 and equations and differential calculus here, because if you start talking about something 313 00:27:25.860 --> 00:27:31.860 like this, the math has to drop out, but if everything is tangent and finally lower in 314 00:27:31.860 --> 00:27:36.780 equilibrium and it curves smoothly arcing and so forth, you can have all sorts of beautiful 315 00:27:36.780 --> 00:27:41.420 equations and tangencies and graphs are great, and as soon as you drop that and bring in 316 00:27:41.420 --> 00:27:47.460 the real world, the graphs and equations either have to be modified or have to be eliminated, 317 00:27:47.460 --> 00:27:52.460 which reduces the alleged science, the alleged hard science of economics. 318 00:27:52.460 --> 00:27:58.420 Of course, the hard science is only alleged, obviously the whole thing is an issue of fabrication 319 00:27:58.420 --> 00:27:59.420 of alleged science. 320 00:27:59.420 --> 00:28:12.380 So, at any rate, that's the setup and part of the argument you see is that in order to 321 00:28:12.380 --> 00:28:16.820 have so-called competition, every firm has to be very tiny. 322 00:28:16.820 --> 00:28:20.860 Goods are given. The good is quote given unquote. I mean, you can't have any improvement because 323 00:28:20.860 --> 00:28:26.260 then any improved product becomes quote monopolistic unquote because there's only one firm that 324 00:28:26.260 --> 00:28:33.660 comes out with a new product or a new invention. So according to this doctrine, say Polaroid 325 00:28:33.660 --> 00:28:38.460 is the first firm that comes out with a Polaroid camera, Polaroid process, it makes it monopolistic 326 00:28:38.460 --> 00:28:44.140 right away because you only have a million firms, each one very small. But monopoly is 327 00:28:44.140 --> 00:28:47.780 is good in that sense because without that you wouldn't have any improvement at all. 328 00:28:47.780 --> 00:28:51.860 Every firm would be like a small wheat farm, no firm would be able to get out there and 329 00:28:51.860 --> 00:28:54.260 invent a new product or a new process or whatever. 330 00:28:54.260 --> 00:28:58.540 There wouldn't be any computers, there wouldn't be any Xerox, there wouldn't be Polaroid, 331 00:28:58.540 --> 00:29:02.540 there wouldn't be no calculators because everybody would be stuck in their own wheat farm kind 332 00:29:02.540 --> 00:29:07.300 of thing where no one firm can do anything and one firm can be even active as a competing 333 00:29:07.300 --> 00:29:09.900 force much less as doing anything else. 334 00:29:09.900 --> 00:29:15.340 So anyway, what I'm trying to say here is that the whole alleged ideal is a lot of hocus 335 00:29:15.340 --> 00:29:16.340 pocus. 336 00:29:16.340 --> 00:29:22.580 It's mumbo jumbo based on a whole series of crazy assumptions, tangency, the given cost 337 00:29:22.580 --> 00:29:28.460 curve, the tangency which only exists in long run equilibrium in a peculiar shape, a linear 338 00:29:28.460 --> 00:29:42.460 Shapes and the U-shape point, so in real life, again, the real problem of monopoly is not 339 00:29:42.460 --> 00:29:45.980 following the man curve, nothing wrong with following the man curve, nothing inefficient 340 00:29:45.980 --> 00:29:50.140 or unethical or anything of the sort, the problem of monopoly is once again the same 341 00:29:50.140 --> 00:29:55.980 problem we had in the 17th, 18th century and 19th century, namely, government grants of 342 00:29:55.980 --> 00:30:00.780 have exclusive privilege, either for one firm or for several firms, that's really the situation 343 00:30:00.780 --> 00:30:02.100 where monopoly comes in. 344 00:30:02.100 --> 00:30:09.700 Cost plus or exclusive contracts or keeping out different parts of the industry and thereby 345 00:30:09.700 --> 00:30:15.780 shifting the supply curve to the left, raising prices, keeping out competitors, that sort 346 00:30:15.780 --> 00:30:19.860 of thing which always has existed, always has been the problem of monopoly, still is, 347 00:30:19.860 --> 00:30:23.900 despite the redefinition of monopoly being a falling demand curve, monopoly is still 348 00:30:23.900 --> 00:30:25.900 by the government. 349 00:30:25.900 --> 00:30:28.900 Okay, let's see how this works. 350 00:30:28.900 --> 00:30:33.900 The, for example, before deregulation of airlines, 351 00:30:33.900 --> 00:30:35.900 I mean from the 1930s until a couple of years ago, 352 00:30:35.900 --> 00:30:37.900 we had the Civil Aeronautics Board, 353 00:30:37.900 --> 00:30:39.900 a beloved institution, 354 00:30:39.900 --> 00:30:46.900 which was put in by the large airlines, 355 00:30:46.900 --> 00:30:50.900 United Pan Am in the 1930s, 356 00:30:50.900 --> 00:30:56.500 These serve as a cartelizing device, in other words as a monopolizing device. 357 00:30:56.500 --> 00:31:03.260 The CAB was put in a lobby form of the big airlines with staff, essentially people from 358 00:31:03.260 --> 00:31:04.260 the big airlines. 359 00:31:04.260 --> 00:31:12.340 The idea was to exclude airlines and assign monopoly routes and also to regulate the rates 360 00:31:12.340 --> 00:31:14.180 so the rate would keep going up. 361 00:31:14.180 --> 00:31:19.900 For example, in New York to Boston, I think only Eastern Airlines could do that route 362 00:31:19.900 --> 00:31:24.540 in those days. If anybody else tried to fly from New York to Boston, they were shot. In 363 00:31:24.540 --> 00:31:29.580 other words, they were considered illegal. They were excluded by the CAB. The CAB gave 364 00:31:29.580 --> 00:31:34.340 certificates of convenience and necessity, I think it was called, to any airline on any 365 00:31:34.340 --> 00:31:38.100 route. The CAB said, no, you can't fly on that route. You couldn't do it. There was 366 00:31:38.100 --> 00:31:43.660 no free market, in other words, no free enterprise in the airline industry. I think at one point, 367 00:31:43.660 --> 00:31:47.820 Pan Am had the entire Pacific locked up. All routes in the Pacific had to be Pan Am. Nobody 368 00:31:47.820 --> 00:31:57.820 I think it was only, I forget now, which I think Pan Am was a Republican airline and TWA was Democratic, I think, or vice versa, I think, yeah, I think that's what it is. 369 00:31:57.820 --> 00:32:14.820 When Democrats came in, they allowed TWA to fly in that route. So, and there still is, by the way, a very powerful international airline cartel, IATA, International Airline Something Association, Transport Association, something like that, which has a lock up on all the European flights. 370 00:32:14.820 --> 00:32:44.820 And those of you who've ever flown to Europe will see that to your horror, it's more expensive to fly from London to Frankfurt than this from the United States to New York to London because the intra-European flights in Europe are locked up by a very powerful intergovernmental cartel which used to be, which the United States has now finally busted, has been busted inside the United States from American Airlines. So in other words, you have a rationing situation 371 00:32:44.820 --> 00:32:51.540 You assign routes, you exclude everybody except one or two airlines from each route. 372 00:32:51.540 --> 00:32:56.020 You lock up particularly the major routes, the most profitable routes, and jack up the 373 00:32:56.020 --> 00:32:57.020 price. 374 00:32:57.020 --> 00:33:03.020 Now originally, I think as late as the 1950s, there was no such thing as first class and 375 00:33:03.020 --> 00:33:04.020 tourist. 376 00:33:04.020 --> 00:33:05.380 All classes were first class. 377 00:33:05.380 --> 00:33:07.900 Everything was very extremely expensive. 378 00:33:07.900 --> 00:33:10.860 What you had then was heroic little airlines. 379 00:33:10.860 --> 00:33:21.220 They have names like Transamerica and Transcontinental, Transcontinental. 380 00:33:21.220 --> 00:33:23.380 They were competing and there were small airlines. 381 00:33:23.380 --> 00:33:28.740 Another thing you have to realize which will emphasize this course too, a big company doesn't 382 00:33:28.740 --> 00:33:32.920 necessarily out-compete a small one, sometimes small competitors are more efficient. 383 00:33:32.920 --> 00:33:37.720 And so in this case the small airlines came in, they started out-competing the big ones 384 00:33:37.720 --> 00:33:40.540 by offering cheaper service and a no-frill service. 385 00:33:40.540 --> 00:33:46.500 This is the days before People's Express, and immediately the CAB and the rest of the 386 00:33:46.500 --> 00:33:50.220 airlines comes in and puts them, prohibits them from scheduling their flights. 387 00:33:50.220 --> 00:33:54.620 In other words, it says, okay, from now on, you guys, there's no safety problem, by the 388 00:33:54.620 --> 00:33:55.620 way. 389 00:33:55.620 --> 00:33:58.620 Safety is the FAA, Federal Aviation Administration. 390 00:33:58.620 --> 00:34:05.420 CAB was purely in charge of economic monopoly, part of the airline business. 391 00:34:05.420 --> 00:34:08.820 And these guys, they had a very good safety record, much better than the big airlines 392 00:34:08.820 --> 00:34:17.180 per mile flown, but the CAB said, well, you guys are unfair competitors, we won't allow 393 00:34:17.180 --> 00:34:21.020 you to schedule your flights, in other words, they couldn't have any timetables, they had 394 00:34:21.020 --> 00:34:27.980 to sit there on the runway until they filled up, so they could only say, well, we're flying 395 00:34:27.980 --> 00:34:31.180 on Tuesday, they couldn't say we're flying Tuesday at 11 a.m., they're prohibited by 396 00:34:31.180 --> 00:34:34.060 the law, by the CAB from doing that. 397 00:34:34.060 --> 00:34:38.380 Even so, they were called the non-scheduled, the non-scheduled airlines. 398 00:34:38.380 --> 00:34:40.420 Even as non-scheduled, they were able to out-compete. 399 00:34:40.420 --> 00:34:45.220 They were able to fly people from New York or L.A., I'd say, for half the price of United 400 00:34:45.220 --> 00:34:46.220 or American or PWA. 401 00:34:46.220 --> 00:34:47.220 They were very good. 402 00:34:47.220 --> 00:34:48.220 Yeah? 403 00:34:48.220 --> 00:34:58.220 Yeah, it affects how much the consumers are willing to go for, right, and there was a 404 00:34:58.220 --> 00:35:02.420 cut down on the consumer demand, obviously, for, you know, they don't know when you're 405 00:35:02.420 --> 00:35:09.620 But even so, even with the non-sked repression by the CAB, they were still out competing, 406 00:35:09.620 --> 00:35:11.380 they were doing very well. 407 00:35:11.380 --> 00:35:15.060 They were cutting the price literally in half, a fair, and it's true there were no frills. 408 00:35:15.060 --> 00:35:21.980 Some of these out-bits used to weigh you along with the luggage, there's a maximum weight 409 00:35:21.980 --> 00:35:22.980 of you plus the luggage. 410 00:35:22.980 --> 00:35:26.300 For those of us who are on the heavyset side, we felt it was kind of discrimination. 411 00:35:26.300 --> 00:35:27.300 Nation. 412 00:35:27.300 --> 00:35:30.540 Still in the law, you're paying as a trade-off, in other words, you're in term for getting 413 00:35:30.540 --> 00:35:37.020 the ignominy of getting weighed, you also, you know, cost you a lot less. 414 00:35:37.020 --> 00:35:42.300 I remember my wife flew from Los Angeles to New York on a non-scare, I think it was Transamerica, 415 00:35:42.300 --> 00:35:48.300 and it was very cheap, it was kind of scary in the sense that they said, well, at one 416 00:35:48.300 --> 00:35:53.300 point they announced, please everybody go to the back of the plane, that sort of thing. 417 00:35:53.300 --> 00:35:55.940 It didn't give you a feeling of great confidence. 418 00:35:55.940 --> 00:35:59.540 So at one point there was a leak in the, it was raining outside, there was a leak in the 419 00:35:59.540 --> 00:36:04.300 ceiling of the plane, the stewards were very, a great aplomb went up there and took a Band-Aid 420 00:36:04.300 --> 00:36:05.300 and put it on the leak. 421 00:36:05.300 --> 00:36:10.060 So it was kind of a raffish, a raffish airline, it didn't give you great security, on the 422 00:36:10.060 --> 00:36:15.100 other hand they had a very good safety record, had no crashes, as I remember, and they forced, 423 00:36:15.100 --> 00:36:18.660 they were the ones, it was a competition of trans-American, trans-continentalists, forced 424 00:36:18.660 --> 00:36:25.220 the big five, finally create a coach section along with the first class section, cut their 425 00:36:25.220 --> 00:36:29.540 Fair in the rear of the plane in half. That was in the 1950s. It was them that did it. 426 00:36:29.540 --> 00:36:35.380 The heroic battle competition of these little airlines that forced America and United Airlines 427 00:36:35.380 --> 00:36:43.140 and TWA and so forth to finally create a second-class fair system. Finally, what the CAB did is 428 00:36:43.140 --> 00:36:45.940 they simply put them out of business. They forced them out of business. From now on, 429 00:36:45.940 --> 00:36:49.700 you can't fly anymore. That was the end of that. The end of poor trans-American, trans-continental 430 00:36:49.700 --> 00:36:56.180 and the rest of it. There was another plane that went to Europe, I forget the airline, 431 00:36:56.180 --> 00:37:02.820 friends of mine used to go on when they were students. They would fly to Iceland and Luxembourg 432 00:37:02.820 --> 00:37:06.500 and it would land in the United States, it would land somewhere on a field in New Hampshire 433 00:37:06.500 --> 00:37:12.100 and you make your way to New York by train or bus or something. Again, very cheap, much 434 00:37:12.100 --> 00:37:17.780 cheaper than official fares in that period. So what happens is, in other words, these 435 00:37:17.780 --> 00:37:23.300 These planes had minimum, their rates were kept up, they were set by the CAB, a very 436 00:37:23.300 --> 00:37:24.300 high rate. 437 00:37:24.300 --> 00:37:28.740 Also, there's all sorts of ways to compete. 438 00:37:28.740 --> 00:37:31.600 Now, if you can't compete on the basis of price, you compete on the basis of quality 439 00:37:31.600 --> 00:37:33.700 of service, of thrills. 440 00:37:33.700 --> 00:37:44.580 And so, you start giving better food or swankier portions, prettier stewardesses, these became 441 00:37:44.580 --> 00:37:46.820 the methods of competition rather than price. 442 00:37:46.820 --> 00:37:56.820 At one point, Iata cracked down and said, from now on, no more meals, no more hot meals on transatlantic flights. 443 00:37:56.820 --> 00:38:00.820 You can only have sandwiches, no more hot meals, no more, you know, real dinners. 444 00:38:00.820 --> 00:38:08.820 And so what the individual airline started to do in order to break the cartel, they started having, okay, we're only having sandwiches. 445 00:38:08.820 --> 00:38:13.820 They had open-faced sandwiches. They'd take the whole beef bourguignon and put them on a piece of bread and call it a sandwich. 446 00:38:13.820 --> 00:38:18.140 and this way getting around the crazy cartel regulation. 447 00:38:18.140 --> 00:38:24.660 So economic history by the way, history of government and economy is essentially a history 448 00:38:24.660 --> 00:38:28.500 of the government versus the market, the government puts on crazy regulations, the market tries 449 00:38:28.500 --> 00:38:31.640 to get around it, we've seen the price control and so forth. 450 00:38:31.640 --> 00:38:36.900 Same thing is working here with monopoly privileges, you put on a regulation, you have to keep 451 00:38:36.900 --> 00:38:43.700 the price up, then the airlines start competing in things like better meals, then the cartel 452 00:38:43.700 --> 00:38:47.700 The phallocytes are cracked down on the meal and say, no, you can only serve sandwiches, only serve open-faced sandwiches. 453 00:38:47.700 --> 00:38:51.700 The whole meal on top of a piece of bread and call it a sandwich. 454 00:38:51.700 --> 00:39:01.700 What finally began to happen in the airlines is they became, if you're a monopoly, you get a very high profit. 455 00:39:01.700 --> 00:39:08.700 But eventually, in the long run, the profit gets competed away to higher costs. 456 00:39:08.700 --> 00:39:13.400 In other words, what then happens is, in other words, you have a high demand curve, high 457 00:39:13.400 --> 00:39:18.860 profits, then increase your demand curve for workers, for raw material, for whatever, and 458 00:39:18.860 --> 00:39:23.460 the prices start going up, and what happens is you have a very high salary, for example, 459 00:39:23.460 --> 00:39:28.340 for pilots and stewardesses, much higher for these big airlines than anybody else, from 460 00:39:28.340 --> 00:39:36.140 the on-schedule types, very high costs, plush offices, and enormous amount of inefficiency. 461 00:39:36.140 --> 00:39:39.980 We wound up after about 40 years of this with the airlines losing money anyway, even though 462 00:39:39.980 --> 00:39:42.980 they were monopolistic, even though they were restricted and so forth and so on, they're 463 00:39:42.980 --> 00:39:43.980 still losing money. 464 00:39:43.980 --> 00:39:49.300 This, by the way, was what happened with the trains and railroads in general. 465 00:39:49.300 --> 00:39:50.300 Railroads were overbuilt. 466 00:39:50.300 --> 00:39:52.940 They were then regulated. 467 00:39:52.940 --> 00:39:55.700 Their fares were kept up. 468 00:39:55.700 --> 00:39:57.620 Rates were kept up by the Interstate Commerce Commission. 469 00:39:57.620 --> 00:40:00.900 And finally, after many decades of this, they started losing money, even though they were 470 00:40:00.900 --> 00:40:05.220 getting privileged by the ICC, losing money as monopolists, because monopolists tend to 471 00:40:05.220 --> 00:40:13.220 and so you wound up with these airlines losing money anyway and finally when the move for 472 00:40:13.220 --> 00:40:18.860 deregulation came in the late years of the Carter administration in 1978, the airlines 473 00:40:18.860 --> 00:40:23.420 were almost ready for it, they had to try something new and so they more or less went 474 00:40:23.420 --> 00:40:27.860 along with it even though reluctantly because monopoly just wasn't working finally, they 475 00:40:27.860 --> 00:40:31.580 were just losing money anyway and they began to realize maybe we'd do better under deregulation 476 00:40:31.580 --> 00:40:38.580 Even though they weren't happy about it, their love for monopoly had more or less withered away after 40 years of this. 477 00:40:38.580 --> 00:40:42.580 As a result of deregulation, you have tremendous changes in the airline industry. 478 00:40:42.580 --> 00:40:48.580 Some lines went bankrupt, other lines popped up as new and effective competitors like People's Express. 479 00:40:48.580 --> 00:40:51.580 Again, with People's Express, it's much cheaper. 480 00:40:51.580 --> 00:40:57.580 On the other hand, you have to realize that you're not quite sure when they're going to take off, because they might sit there loading up, etc. 481 00:40:57.580 --> 00:41:03.060 So, and you realize that and you pay for the difference. 482 00:41:03.060 --> 00:41:07.300 So various outfits have been involved, a lot of reshuffling in the airline industry, plus 483 00:41:07.300 --> 00:41:11.220 the invention of the hub and spoke thing, which came about only by market, began to 484 00:41:11.220 --> 00:41:15.660 realize it's more efficient in hub cities like Denver, let's say. 485 00:41:15.660 --> 00:41:19.980 So instead of having a lot of non-stop flights, say from New York to Los Angeles, you stop 486 00:41:19.980 --> 00:41:25.980 at Denver, you stop at Houston, you have a lot of airlines coming in from other cities, 487 00:41:25.980 --> 00:41:27.340 coming into Denver and then going out again. 488 00:41:27.340 --> 00:41:30.980 only could have predicted in advance this is what would happen, this only came about 489 00:41:30.980 --> 00:41:34.980 as a result of the market forces, or turned out that this is the most efficient way of 490 00:41:34.980 --> 00:41:35.980 doing it. 491 00:41:35.980 --> 00:41:41.580 So, at any rate, this is, so in the long run even the monopolists begin to lose out in 492 00:41:41.580 --> 00:41:46.580 this situation, but it often takes you know half a century to do that, okay that's enough 493 00:41:46.580 --> 00:41:47.580 for today. 494 00:41:47.580 --> 00:42:00.580 Keep you up on the news, since the term has started, you might have noticed if you had 495 00:42:00.580 --> 00:42:07.900 Time Magazine, the current issue of Time Magazine has a front cover, it says, oil price, cheap 496 00:42:07.900 --> 00:42:14.660 oil, good news, and underneath has a headline, cheap oil, bad news, and then has a typical 497 00:42:14.660 --> 00:42:19.380 time type discussion, which is very middle of the road, having quotes from both sides 498 00:42:19.380 --> 00:42:22.900 saying cheap oil are good, cheap oil are bad. 499 00:42:22.900 --> 00:42:30.620 The latest political flap is Vice President Bush, who is indeed a Texas oil man, who came 500 00:42:30.620 --> 00:42:35.740 out in favor of raising the price of oil, quote, stabilizing it, thereby violating the 501 00:42:35.740 --> 00:42:41.140 current principles of the Reagan administration, there's a big flap on that. 502 00:42:41.140 --> 00:42:45.500 So here we have a situation, the price of oil has magnificently fallen from 30 bucks 503 00:42:45.500 --> 00:42:49.820 a barrel, 35 dollars a barrel several years ago to about 10 dollars a barrel now, something 504 00:42:49.820 --> 00:42:50.820 like that. 505 00:42:50.820 --> 00:42:59.220 In real terms, since the prices in general have tripled in the last 20 years, this means 506 00:42:59.220 --> 00:43:04.580 it's the equivalent of about 3 dollars a barrel in 1967 or so. 507 00:43:04.580 --> 00:43:10.420 So it's more or less, in real terms, corrected for inflation, it's more or less what it was 508 00:43:10.420 --> 00:43:15.820 before the OPEC Arab oil explosion in the early 70s, a little bit higher, but more or 509 00:43:15.820 --> 00:43:16.820 less the same. 510 00:43:16.820 --> 00:43:22.740 So what happens with any price change is hysteria hits, in other words, whether the price is 511 00:43:22.740 --> 00:43:27.580 going up or down, most of the establishment, most of the media is attacking it. 512 00:43:27.580 --> 00:43:32.420 Terrible thing will cause inflation or depression or whatever the heck it is, and it can't 513 00:43:32.420 --> 00:43:33.420 both be right. 514 00:43:33.420 --> 00:43:38.820 It couldn't have been a terrible thing to raise the price of oil from $3 to $35, and 515 00:43:38.820 --> 00:43:40.820 And it's also terrible to go down to 10. 516 00:43:40.820 --> 00:43:43.820 I mean, you can't have it both ways. 517 00:43:43.820 --> 00:43:49.820 Unless you take a position, any change whatsoever is bad, which needs to be an idiotic position to take. 518 00:43:49.820 --> 00:43:53.820 So what's the real story here? It's true that the Texans don't like the fact... 519 00:43:53.820 --> 00:43:55.820 Texans love the fact that the price of oil is $35. 520 00:43:55.820 --> 00:44:01.820 If you're a Texas oil man, you'll love the $35 an ounce of barrel, excuse me, $35 an ounce... 521 00:44:01.820 --> 00:44:06.820 $35 a barrel crude oil price. 522 00:44:06.820 --> 00:44:09.260 You don't like it going down to ten. 523 00:44:09.260 --> 00:44:11.220 On the other hand, who cares about Texas oil man? 524 00:44:11.220 --> 00:44:16.940 Why should they set the standard for how we decide something, how we judge it? 525 00:44:16.940 --> 00:44:18.700 The standard of all these things should be judged. 526 00:44:18.700 --> 00:44:23.140 The way to look at it, you don't go take Gallup polls and ask a Texas congressman and ask 527 00:44:23.140 --> 00:44:24.140 a New England congressman. 528 00:44:24.140 --> 00:44:27.660 What you do is you figure out where the consumers stand on this thing. 529 00:44:27.660 --> 00:44:31.980 In other words, the whole point of production, the whole point of an economy in general is 530 00:44:31.980 --> 00:44:32.980 for consumption. 531 00:44:32.980 --> 00:44:36.780 The whole point of producing oil so that eventually it gets to the consumer in the form of kerosene 532 00:44:36.780 --> 00:44:45.700 And so the whole point of production is that over time, from the days of the caveman until 533 00:44:45.700 --> 00:44:49.460 the present, more and more consumer wants are being satisfied, because standard of living 534 00:44:49.460 --> 00:44:51.300 keeps going up. 535 00:44:51.300 --> 00:44:55.540 Everything gets cheaper and more abundant, the choices available to the consumer keep 536 00:44:55.540 --> 00:45:01.380 improving and increasing, and the new products come on the market and old products get cheaper. 537 00:45:01.380 --> 00:45:03.980 That's the whole point of production. 538 00:45:03.980 --> 00:45:08.620 production. That's what increased standard of living means. The consumer can get more 539 00:45:08.620 --> 00:45:16.100 and more goods and services. So we know, then, how to judge any change, up or down, of a 540 00:45:16.100 --> 00:45:21.580 dollar and prices, whatever. Namely, cheaper is better, period. Of course, if you have maximum 541 00:45:21.580 --> 00:45:25.780 price control, you screw everything up. So I'm talking about cheaper on the free market. 542 00:45:25.780 --> 00:45:30.660 Cheaper is an expression of increased supply, of breaking cartels. Cartels are breaking 543 00:45:30.660 --> 00:45:38.860 I'm going to cartels today. Cartels deliberately restrict production and raise prices. Breaking 544 00:45:38.860 --> 00:45:42.100 up of a cartel is what's been happening in the last couple of years with OPEC. It means 545 00:45:42.100 --> 00:45:48.500 the consumers are enjoying the benefit of cheaper oil and lower prices. Cheaper is better. 546 00:45:48.500 --> 00:45:54.860 And that solves the problem. It's better to have computers on your lap for whatever it 547 00:45:54.860 --> 00:46:01.700 is, $35 rubber computers, and they have it plug into a mainframe of $2 million or whatever. 548 00:46:01.700 --> 00:46:06.100 So it's better, cheaper is better, that's what you hold in your heart, which is of course 549 00:46:06.100 --> 00:46:08.580 what the average person's reaction is anyway. 550 00:46:08.580 --> 00:46:11.420 What you find in economics is that basically the average person's immediate reaction is 551 00:46:11.420 --> 00:46:12.420 usually correct. 552 00:46:12.420 --> 00:46:17.620 Unfortunately, the average person's reaction is often overlauded with phony economics and 553 00:46:17.620 --> 00:46:21.940 bad advice they get from the media. 554 00:46:21.940 --> 00:46:26.060 So cheaper is better, cheaper gasoline is better, cheaper fuel is better, all the rest 555 00:46:26.060 --> 00:46:30.220 of it. Notice some of the phony arguments you get. Well, the trouble with cheaper oil 556 00:46:30.220 --> 00:46:33.780 is that people use a lot of it and then it will get more expensive. Well, and then we 557 00:46:33.780 --> 00:46:39.380 worry about it after that. You take each thing a day at a time. You don't say you have to 558 00:46:39.380 --> 00:46:43.420 jack up the price of oil now, reestablish the cartel, which is essentially what Bush 559 00:46:43.420 --> 00:46:47.700 wants to do, and raise the price of oil so that it will avoid an increase in the price 560 00:46:47.700 --> 00:46:52.620 The Price of Oil 10 years from now. The whole concept is nuts. I mean, looking at it as 561 00:46:52.620 --> 00:46:58.620 a logical argument, the whole thing is full of prunes. And the only reason people advance 562 00:46:58.620 --> 00:47:02.540 the argument is not because they believe it. Nobody can believe it. No rational person 563 00:47:02.540 --> 00:47:06.260 can believe it. What we should do is to force the price of oil up now, because eventually 564 00:47:06.260 --> 00:47:11.720 in 10 years it might go up by itself. That's an argument so ridiculous, nobody can really 565 00:47:11.720 --> 00:47:15.780 hold it. These arguments are advanced for sinister economic interests. By sinister, 566 00:47:15.780 --> 00:47:20.460 against the public interest, for those who want to reestablish the cartel, jack up the 567 00:47:20.460 --> 00:47:27.940 price of oil and cut the supply, which Texas oil people want to do, of course. 568 00:47:27.940 --> 00:47:31.500 So it's not a middle situation, you don't have to be in the middle of a rotor on this 569 00:47:31.500 --> 00:47:36.060 thing, you don't have to take gallop polls from everybody, it should be crystal clear 570 00:47:36.060 --> 00:47:37.780 that cheaper is better. 571 00:47:37.780 --> 00:47:44.820 And finally the oil people are finally getting their comeuppance, the OPEC types. 572 00:47:44.820 --> 00:47:48.260 And the classic method by which cartels always get comeuppance, okay, let's get into that. 573 00:47:48.260 --> 00:47:55.740 The cartel is a situation where suppliers of any sort, and we're going to go through 574 00:47:55.740 --> 00:48:02.060 various examples of this, suppliers of medical services, suppliers of taxi service, suppliers 575 00:48:02.060 --> 00:48:03.860 of oil, doesn't really make any difference. 576 00:48:03.860 --> 00:48:09.620 They try to band together, here's the supply and here's the man, to restrict the supply 577 00:48:09.620 --> 00:48:13.980 and raise the price, taking advantage of an alleged inelastic demand curve. 578 00:48:13.980 --> 00:48:16.460 Let's assume that the man curve of the industry is inelastic. 579 00:48:16.460 --> 00:48:22.460 We know, of course, the man curve of every firm is elastic, it's fairly flat. 580 00:48:22.460 --> 00:48:26.460 So they can't, in each individual, if Wonder Bread, let's say you want to have a bread 581 00:48:26.460 --> 00:48:30.500 cartel, if Wonder Bread try to raise the price to two bucks a loaf, nobody's going to buy 582 00:48:30.500 --> 00:48:34.320 it except a couple of Wonder Bread, very wealthy Wonder Bread fanatics, everybody else will 583 00:48:34.320 --> 00:48:39.180 shift the Pepperidge Farm or Silver Tasty Bread or whatever, but if all the bread firms 584 00:48:39.180 --> 00:48:43.660 get together and try to raise the price, they're trying to go up their industry to man curve 585 00:48:43.660 --> 00:48:47.740 curve and thereby increase the alleged, let's assume we have an inelastic demand curve, 586 00:48:47.740 --> 00:48:52.180 it doesn't have to be inelastic, but in those industries where the demand curve is inelastic, 587 00:48:52.180 --> 00:48:56.180 firms are tempted to try to restrict production and raise the price thereby benefiting each 588 00:48:56.180 --> 00:48:59.340 firm and screwing the consumer. 589 00:48:59.340 --> 00:49:04.220 Now most people think that it's easy to have a cartel, most people think, I think the average 590 00:49:04.220 --> 00:49:08.420 person, in this case the average person has the wrong instincts, but the, let's say General 591 00:49:08.420 --> 00:49:12.540 National Electric and Westinghouse, which is essentially a two-person, a two-firm electrical 592 00:49:12.540 --> 00:49:15.820 industry, a major firm in the electrical industry. 593 00:49:15.820 --> 00:49:18.740 And the vice president of each gets together over at a union league club or something and 594 00:49:18.740 --> 00:49:21.980 they're having a cocktail and they're saying, well, and one says to the other, hey, Jim, 595 00:49:21.980 --> 00:49:24.180 why don't we increase our price by 20%? 596 00:49:24.180 --> 00:49:28.700 And we'll both do it and we'll have an inelastic demand curve, we'll have an increased profit 597 00:49:28.700 --> 00:49:32.340 and Jim says, that's a great idea, Joe, and at the end of it, it's not the end of it. 598 00:49:32.340 --> 00:49:35.660 It's very difficult to establish a quartile, even with that, even with that, forgetting 599 00:49:35.660 --> 00:49:38.420 and many antitrust laws. 600 00:49:38.420 --> 00:49:43.140 The reason is this, it's easy for both Westinghouse and General Electric to say, hey, let's raise 601 00:49:43.140 --> 00:49:44.140 the price. 602 00:49:44.140 --> 00:49:45.140 That's great. 603 00:49:45.140 --> 00:49:49.820 But in order to have a viable rise in price, in order to be able to do it, they have to 604 00:49:49.820 --> 00:49:50.820 cut production. 605 00:49:50.820 --> 00:49:57.020 In other words, whatever it is, 10%, 15, whatever it is, each one has to agree to cut production 606 00:49:57.020 --> 00:49:59.960 in order to have this joint rise in price. 607 00:49:59.960 --> 00:50:01.540 Every businessman hates to cut production. 608 00:50:01.540 --> 00:50:05.420 They hate in their gut to cut production, what they want to do is increase production. 609 00:50:05.420 --> 00:50:08.700 Every business man wants to expand his operation, he doesn't want to cut them. 610 00:50:08.700 --> 00:50:11.340 And so this is a goal in the heart of every business man. 611 00:50:11.340 --> 00:50:17.340 So the former cartel is a very difficult process, causing a great deal of negotiations, even 612 00:50:17.340 --> 00:50:20.900 when it's legal, even when there's no antitrust problem. 613 00:50:20.900 --> 00:50:23.620 Months of negotiation, well, we have to cut production, how much do we cut production? 614 00:50:23.620 --> 00:50:28.940 And each one, let's say, you have to have a base year, okay, let's say 1985 was the 615 00:50:28.940 --> 00:50:29.940 base year. 616 00:50:29.940 --> 00:50:33.820 Let's say both parties or two or three firms in the industry, they each agreed to cut production 617 00:50:33.820 --> 00:50:40.340 Well, they can do that, but you see, over time, and the time doesn't have to be very 618 00:50:40.340 --> 00:50:43.660 long, a year or so, each one will think, Jesus, why am I restricted to 1985? 619 00:50:43.660 --> 00:50:45.540 1985 is getting to be obsolete. 620 00:50:45.540 --> 00:50:48.540 I've got new machines, I've got better equipment, I've got new products. 621 00:50:48.540 --> 00:50:52.780 Why should I be bound by 1985 when I could, I know darn well if I expand production, I 622 00:50:52.780 --> 00:50:56.280 can out-compete these guys now, I can get a bigger share of the market. 623 00:50:56.280 --> 00:50:59.500 Each firm has to believe that, because if you're in business, you have to be an optimist, 624 00:50:59.500 --> 00:51:01.140 to be an entrepreneur. 625 00:51:01.140 --> 00:51:08.140 You're spending a lot of money, investing a lot of money, and pessimists don't last long in business, so most businessmen are optimistic. 626 00:51:08.140 --> 00:51:13.140 And most businessmen are chafing in the bit. Why should I be restricted by 1985, which is now three years ago? 627 00:51:13.140 --> 00:51:19.140 And so the cartel quotas tend to be busted. In other words, each businessman, they tend to renegotiate. 628 00:51:19.140 --> 00:51:23.140 They say, well, I've got a better product, I want to increase my production this year. 629 00:51:23.140 --> 00:51:26.140 And the other guy says, no, you can't do that, you're violating a quota. 630 00:51:26.140 --> 00:51:30.140 And often the quota then breaks up, the whole agreement breaks up in mutual recrimination and hatred. 631 00:51:30.140 --> 00:51:32.660 of Hatred, and you're back down again. 632 00:51:32.660 --> 00:51:38.220 So this is, it's very difficult to maintain sustained quotas of this sort over time. 633 00:51:38.220 --> 00:51:42.700 And also, in addition to that, each firm has a tremendous temptation to cheat. 634 00:51:42.700 --> 00:51:46.820 Here they are, they've restricted production by 15%, they have a higher price, each banking 635 00:51:46.820 --> 00:51:52.660 better higher profits, each one says, boy, if I can only pick up, if I can cut my price 636 00:51:52.660 --> 00:51:59.120 to suppliers secretly, I can pick up enormous increase in product, go down my firm demand 637 00:51:59.120 --> 00:52:05.080 Curve and make millions. So he goes to a supplier and the other guy says, look Jim, I'll give 638 00:52:05.080 --> 00:52:10.480 you a secret discount, rebate of 15% or 20%. You don't tell a listing house about it, whatever. 639 00:52:10.480 --> 00:52:15.760 Because we have this cartel agreement. The key price is up and cut production. So each 640 00:52:15.760 --> 00:52:20.240 firm has a temptation to cheat. The temptation is enormous. And they cheat and they have 641 00:52:20.240 --> 00:52:25.920 a secret rebate. I don't mean an illegal rebate in the sense of the manager stealing from 642 00:52:25.920 --> 00:52:26.920 in the Company. 643 00:52:26.920 --> 00:52:30.800 I mean, it's simply a rebate where you say, look, I'll send you this product, though, 644 00:52:30.800 --> 00:52:35.400 electrical product, whatever it is, for 15% less, but don't tell anybody. 645 00:52:35.400 --> 00:52:40.040 So because I don't want to violate my agreement with General Electric or Westinghouse or whatever. 646 00:52:40.040 --> 00:52:41.040 So each one cheats. 647 00:52:41.040 --> 00:52:44.200 It takes, you know, after about six months, everybody spies on everybody else, and they 648 00:52:44.200 --> 00:52:48.520 find out the other guy cheats, and the whole cartel breaks up in mutual hatred, and they're 649 00:52:48.520 --> 00:52:52.040 back down again, except now they hate each other. 650 00:52:52.040 --> 00:52:58.920 So this is a tremendous pressure on every cartel to cheat and to break up in general, to break 651 00:52:58.920 --> 00:53:01.440 up the code of agreements and to cheat as time goes on. 652 00:53:01.440 --> 00:53:06.240 In many cases in railroads, when railroads was a big business in the 19th century, one 653 00:53:06.240 --> 00:53:11.680 guy would own two railroads, and he couldn't get any form of pool or cartel, let's say 654 00:53:11.680 --> 00:53:14.720 the three railroads, two of which was owned by the same guy. 655 00:53:14.720 --> 00:53:20.720 He couldn't get his own managers not to cheat, because the vice president in charge of sales, 656 00:53:20.720 --> 00:53:25.320 His whole life is devoted to increasing sales. He hates, like hell, to cut sales. So each 657 00:53:25.320 --> 00:53:28.480 guy was competing against the other railroad, even though there was one tycoon who owned 658 00:53:28.480 --> 00:53:33.120 both of them. They still cheated. They still busted the cartel. So even when one guy owns 659 00:53:33.120 --> 00:53:37.560 both companies, it's very difficult to get your sales managers or sales vice presidents 660 00:53:37.560 --> 00:53:41.160 to go along with the idea of restricting sales. 661 00:53:41.160 --> 00:53:48.560 So as a result, cartels break up from internal pressure, number one. There are two things 662 00:53:48.560 --> 00:53:51.600 One of the things which break out of every cartel, one is internal pressure, this sort 663 00:53:51.600 --> 00:53:56.420 of pressure, to cheat, to violate, to go down your firm demand curve, here you have making 664 00:53:56.420 --> 00:54:01.720 big profits, boy, if I can only cut my, secretly cut prices by 20% I can pick up enormous business. 665 00:54:01.720 --> 00:54:07.560 And the second reason is, here you have two or three firms get together and raise production, 666 00:54:07.560 --> 00:54:11.520 cut production and raise prices and increase profits, there's a lot of loose capital around, 667 00:54:11.520 --> 00:54:15.760 a lot of capitalists in the world who have a lot of money they like to invest, and looking 668 00:54:15.760 --> 00:54:18.960 Making your way out from profitable investments, they see, hey, this industry here, electrical 669 00:54:18.960 --> 00:54:23.240 machinery or railroads, whatever it happens to be, or sugar refining, the industry's making 670 00:54:23.240 --> 00:54:26.760 high profits, they've got this little cartel going, let's go in and bust it, let's go in 671 00:54:26.760 --> 00:54:30.960 and put in a new plant, new equipment, and undercut the cartel. 672 00:54:30.960 --> 00:54:36.000 So a new capitalist come in, they have a new railroad or a new plant, and the old firms 673 00:54:36.000 --> 00:54:41.080 are now confronted with this new plant with better equipment, because it's starting from 674 00:54:41.080 --> 00:54:43.880 scratch, they're going to use all the modern equipment. 675 00:54:43.880 --> 00:54:46.400 And then they're faced with the question, either they have to cut these guys into the 676 00:54:46.400 --> 00:54:50.400 cartel, the new firm, which means they have to cut their own production by 30% or something, 677 00:54:50.400 --> 00:54:55.840 or else the whole cartel gets busted, you're back down again to square zero. 678 00:54:55.840 --> 00:54:56.840 This is external pressure. 679 00:54:56.840 --> 00:55:04.320 In other words, new firms coming in with brand new factories and all that to break up the 680 00:55:04.320 --> 00:55:06.640 cartel, external pressure. 681 00:55:06.640 --> 00:55:11.760 And when you have an external pressure, when a new sugar refining plant comes in or a new 682 00:55:11.760 --> 00:55:17.960 The New Firm is there permanently. In other words, here are the two or three firms in 683 00:55:17.960 --> 00:55:22.080 the industry. They cut production and raise prices. The result is a new firm comes in 684 00:55:22.080 --> 00:55:25.800 with better equipment, outcompeting them. They're back down to square zero except they 685 00:55:25.800 --> 00:55:30.360 got a fourth firm which is outcompeting them and driving them to the wall. So no firm likes 686 00:55:30.360 --> 00:55:36.080 to do this. No industry likes to have an umbrella, a high-profit umbrella to invite new unwelcome 687 00:55:36.080 --> 00:55:40.840 competitors into the industry. So external pressure, internal pressure, broken up, every 688 00:55:40.840 --> 00:55:46.080 Every cartel in the history of the world has broken up on the free market, very quickly 689 00:55:46.080 --> 00:55:47.080 broken up. 690 00:55:47.080 --> 00:55:50.240 It doesn't take very long either, a year or two. 691 00:55:50.240 --> 00:55:51.400 Cartel tends to break up. 692 00:55:51.400 --> 00:55:56.400 The only thing which can sustain a cartel is government intervention to compulsory cartels 693 00:55:56.400 --> 00:56:01.280 to keep external, keep the price up, keep production limited and keep new firms from 694 00:56:01.280 --> 00:56:02.280 coming in. 695 00:56:02.280 --> 00:56:06.680 This is when the government comes in and enforces a cartel, that's the essence of what we're 696 00:56:06.680 --> 00:56:07.680 living under right now. 697 00:56:07.680 --> 00:56:15.680 or the Welfare State or the Welfare, Warfare State, whatever you want to call it, is essentially a cartilaging state where government intervenes to try to cartilage different industries.