WEBVTT NOTE The Myth of Natural Monopoly 1 00:00:00.000 --> 00:00:15.700 Okay, well what I'm going to do today is a continuation of what was started yesterday when we sort of shifted gears a little bit from history and in some economics to mostly economic analysis of a number of myths that I've been mentioning to you. 2 00:00:15.700 --> 00:00:28.000 The first myth was the myth of antitrust, and keep in mind, this whole series, I'm going to have four lectures on all together on these myths, is the theme is how over the years, 3 00:00:28.000 --> 00:00:42.000 This market failure, the idea of market failure has been bandied about but with very little substance in a lot of cases and with just downright falsehoods in quite a few cases like with antitrust yesterday. 4 00:00:42.000 --> 00:00:54.000 So today the topic is the myth of natural monopoly and then this afternoon I'm going to talk about labor market myths and then the myth of the New Deal is the next one. 5 00:00:54.000 --> 00:01:04.000 and, of course, the purpose of all these myths is to attack the free market and to generate support for interventionism in bigger government. 6 00:01:04.000 --> 00:01:12.000 And since not everybody here is an economics student, a lot of you have had economics, 7 00:01:12.000 --> 00:01:16.000 I wanted to explain, simply as I can, what natural monopoly is. 8 00:01:16.000 --> 00:01:21.000 And there's a story that, if you have taken an economics course, you've heard this story. 9 00:01:21.000 --> 00:01:38.000 And the story is, in the late 19th century, when manufacturing was being developed and becoming more and more advanced, there were a lot of industries that had heavy fixed costs before they could even go into business, like electric power, for example. 10 00:01:38.000 --> 00:01:47.000 A company would spend many, many millions of dollars just for the infrastructure, for the power plant and the distribution network, before having a single customer. 11 00:01:47.000 --> 00:02:17.000 and so but then once they were up and running the cost of serving each customer is very low next to zero think of a power company today one more customer is running a line from the street to your house cost next to nothing and so what they had was their their cost per unit cost per unit of the unit one might have been kilowatts of electricity let's say or telephone service it declined very sharply initially was very 12 00:02:17.000 --> 00:02:47.000 This was very high because they had all these costs, these fixed costs, construction of the plant and so forth, but then as they had 100,000 customers or 200,000 customers, a cost per kilowatt approached zero, and so you had, in all the economics textbooks, talk about this, you have a graph looking something like this depicting economies of scale declining cost per unit over the long run, 13 00:02:47.000 --> 00:03:17.000 The story that was told about this, about natural monopoly, why are they called natural, is that supposedly, one big company would get here first, one big company would achieve the minimum cost point, and if it could do that, it could under-price everybody, and everybody would leave the market because they couldn't compete with the one big company, and therefore, 14 00:03:17.000 --> 00:03:26.000 It's sort of similar to the unicorn of economic theory that I talked about yesterday, predatory pricing, sort of similar to that whole idea. 15 00:03:26.000 --> 00:03:42.000 And so the theory goes that since this is bound to happen, we might as well take advantage of the low cost, but regulate the price. 16 00:03:42.000 --> 00:04:12.000 and so the story goes the government stepped in wisely and benevolently and created a monopoly by law it gave monopoly franchise to these companies and said well you're going to be a monopoly anyway because of the free market is the failure of the free market supposedly so we might as well give you a legal monopoly it's illegal to compete but we're not going to let you charge some monopoly price which may be up here my finger is we're going to make 17 00:04:12.000 --> 00:04:17.720 Make sure you charge a price enough to make a profit, but not so high that it's the same 18 00:04:17.720 --> 00:04:21.680 price that a profit-maximizing monopolist would charge. 19 00:04:21.680 --> 00:04:26.040 And in a nutshell, that's the natural monopoly theory. 20 00:04:26.040 --> 00:04:33.480 And what I'm going to have to say about this today is that it's basically all bunk. 21 00:04:33.480 --> 00:04:36.840 It never happened this way. 22 00:04:36.840 --> 00:04:40.600 The economists never had this theory at the time. 23 00:04:40.600 --> 00:04:45.480 This theory was made up after the fact. If you take an economics class, you probably 24 00:04:45.480 --> 00:04:52.040 get the impression that wise and learned economists advised the government about this and explained 25 00:04:52.040 --> 00:04:57.600 this economy as a scaled business to the politicians and made the case for regulation. It didn't 26 00:04:57.600 --> 00:05:04.840 happen that way. This was all after the fact, and it became an ex post rationale for regulation 27 00:05:04.840 --> 00:05:19.840 In fact, in some of my research, I did a survey of what economists were saying at the time about large-scale production. 28 00:05:19.840 --> 00:05:30.840 And as I said yesterday when I was talking about antitrust, I surveyed just about everybody that had anything at all to say about large-scale production and its implication for monopoly. 29 00:05:30.840 --> 00:05:36.680 and I'll read you a few of them. Richard T. Ely was one of the founders of the 30 00:05:36.680 --> 00:05:43.000 American Economic Association. This was in 1900. He wrote this, large-scale 31 00:05:43.000 --> 00:05:47.120 production is a thing by which no means necessarily signifies monopolized 32 00:05:47.120 --> 00:05:52.960 production and keep in mind Ely was a self-described socialist and so and even 33 00:05:52.960 --> 00:05:55.920 he admitted that this is nothing to worry about. The co-founder of the 34 00:05:55.920 --> 00:05:59.520 of the American Economic Association was John Bates Clark. 35 00:05:59.520 --> 00:06:02.200 In 1888, he wrote that combinations, 36 00:06:02.200 --> 00:06:05.200 he's meaning mergers, companies that merge and become big 37 00:06:05.200 --> 00:06:07.520 and can achieve economies of scale like this, 38 00:06:07.520 --> 00:06:09.240 he said that combinations are to play 39 00:06:09.240 --> 00:06:12.060 an increasingly important part in economic affairs 40 00:06:12.060 --> 00:06:15.080 is altogether probable, but that competition 41 00:06:15.080 --> 00:06:18.920 is to a corresponding extent, or that competition 42 00:06:18.920 --> 00:06:22.180 is to be to a corresponding extent destroyed 43 00:06:22.180 --> 00:06:24.280 should not be too hastily accepted. 44 00:06:24.280 --> 00:06:28.240 So he wasn't buying the fact that this is going to destroy competition. 45 00:06:28.240 --> 00:06:34.960 Herbert Davenport was from the University of Chicago, a well-known economist at the time. 46 00:06:34.960 --> 00:06:40.500 He said that large firms imply obviously a smaller number of competitors, but do not 47 00:06:40.500 --> 00:06:43.360 require the elimination of competition. 48 00:06:43.360 --> 00:06:49.240 James Laughlin of Yale said that even when the combination is large, a rival combination 49 00:06:49.240 --> 00:06:52.360 may give the most spirited competition. 50 00:06:52.360 --> 00:07:02.360 And if anyone wants to follow up on this, I can give you the article of mine from Economic Inquiry that I'm quoting from, if you'd like to look at it or use it in your own research. 51 00:07:02.360 --> 00:07:12.360 But that was basically the consensus of the economics profession, that large scale production like this is really nothing to worry about. In fact, it's a natural evolution of the competitive process. 52 00:07:12.360 --> 00:07:16.200 and they basically all thought of competition at the time like the 53 00:07:16.200 --> 00:07:21.760 Austrians do. It's a dynamic ongoing process of rivalry, price-cutting, 54 00:07:21.760 --> 00:07:27.000 entrepreneurship, product differentiation and even the fact that one firm seemed 55 00:07:27.000 --> 00:07:31.240 to have most of the market at one point in time doesn't mean there's little or 56 00:07:31.240 --> 00:07:34.980 no competition. There's always somebody out there who's going to try to undercut 57 00:07:34.980 --> 00:07:40.600 that person one way or another and that was their thinking and so their thinking 58 00:07:40.600 --> 00:07:46.600 wasn't the natural monopoly story, that was a story that came around later. 59 00:07:48.440 --> 00:07:54.760 And so the question becomes, well, just how natural were these monopolies? I mean, what was, 60 00:07:54.760 --> 00:07:59.480 what was in fact going on? Was, is there any evidence that this story was being played out, 61 00:07:59.480 --> 00:08:04.280 that there was one big company evolving in industry after industry? Now, there were mergers 62 00:08:04.280 --> 00:08:34.280 in the late 19th century. But they weren't creating one single monopoly anywhere. And even if they did, that is not even necessarily a bad thing. That's not necessarily a bad thing for consumers, because you still have competition. You still have the threat of competition, even if at any one point in time, you have one single company. As long as there's not a law preventing entry, you're going to have competition. That's the real monopoly problem, if it's illegal to enter the industry. 63 00:08:34.280 --> 00:08:38.480 An economist named Harold Dempsetz, who you guys probably know because you're graduate 64 00:08:38.480 --> 00:08:39.480 students. 65 00:08:39.480 --> 00:08:44.080 So these are the hardcore over here, but you're not all graduate students in economics, graduate 66 00:08:44.080 --> 00:08:45.560 students in other fields. 67 00:08:45.560 --> 00:08:50.200 But Harold Dempsetz was a professor at UCLA for many years. 68 00:08:50.200 --> 00:08:53.640 He was one of my favorite authors when I was a graduate student because I was interested 69 00:08:53.640 --> 00:08:59.480 in this whole area, industrial organization, and I've met Harold, he retired now. 70 00:08:59.480 --> 00:09:05.120 But he did a lot of writing on this whole issue, natural monopoly, utility regulation. 71 00:09:05.120 --> 00:09:10.680 And here's something he wrote about that was actually going on in the late 19th, early 72 00:09:10.680 --> 00:09:11.680 20th century. 73 00:09:11.680 --> 00:09:13.880 I'm going to quote Demsatz. 74 00:09:13.880 --> 00:09:19.320 He said, six electric light companies were organized in one year of 1887 in New York 75 00:09:19.320 --> 00:09:20.320 City. 76 00:09:20.320 --> 00:09:26.080 Forty-five electric light enterprises had the legal right to operate in Chicago in 1907. 77 00:09:26.080 --> 00:09:32.340 Prior to 1895, Duluth, Minnesota was served by five electric lighting companies, and Scranton, 78 00:09:32.340 --> 00:09:34.440 Pennsylvania had four in 1906. 79 00:09:34.440 --> 00:09:39.740 During the latter part of the 19th century, competition was the usual situation in the 80 00:09:39.740 --> 00:09:42.160 gas industry in this country. 81 00:09:42.160 --> 00:09:47.440 He's meaning gas lights, he's not meaning gasoline. 82 00:09:47.440 --> 00:09:51.660 Before 1884, six competing companies were operating in New York City. 83 00:09:51.660 --> 00:09:55.000 Competition was common and especially persistent in the telephone industry. 84 00:09:55.000 --> 00:09:59.000 That's something different, isn't it? Competition in the telephone industry. 85 00:09:59.000 --> 00:10:10.000 Baltimore, Chicago, Cleveland, Columbus, Detroit, Kansas City, Minneapolis, Philadelphia, Pittsburgh, and St. Louis, among the largest cities, had at least two telephone services in 1905. 86 00:10:10.000 --> 00:10:19.000 And so what he's saying is that if you actually look at what was happening, as opposed to the theory that's in textbooks, there wasn't any monopoly being created. 87 00:10:49.000 --> 00:10:54.000 and the library was the warmest place to be in the wintertime, so I stayed there a lot. 88 00:10:54.000 --> 00:11:05.000 But I found this book called The Gaslight Company of Baltimore, which was a history of utility regulation of gas and electricity in Baltimore. 89 00:11:05.000 --> 00:11:16.000 And it has implications for the whole nation because it relies somewhat on the research of Richard T. Ely himself, who was at Johns Hopkins at the time, 90 00:11:16.000 --> 00:11:22.000 and studying this whole issue and he wrote a long series of articles for the Baltimore Sun at the time 91 00:11:22.000 --> 00:11:28.000 and this old book published in 1936 mentioned this. 92 00:11:28.000 --> 00:11:35.000 And wouldn't you know it, I had an opportunity a couple weeks ago, there's a big issue about this in Baltimore right now in Maryland 93 00:11:35.000 --> 00:11:43.000 about the deregulation of electricity and there's a new newspaper in Baltimore called the Baltimore Examiner 94 00:11:43.000 --> 00:12:13.000 circulation of 260,000 and it's funded by a billionaire who's funded about 12 or 15 of these around the country, San Francisco, D.C. and elsewhere and they put me on the editorial board and they published Walter Williams and so I've been having fun creating heartburn in Annapolis for these politicians but I had an opportunity to actually quote this book in one of my op-eds in this new newspaper, The Gaslight Company of Baltimore because what's going on right now is 95 00:12:13.000 --> 00:12:24.000 The state of Maryland passed a law in 1999 imposing price controls on electricity at 1993 prices for the next six years. 96 00:12:24.000 --> 00:12:35.000 Smart, huh? And guess what they called that law? Deregulation law. They called it electric utility deregulation. 97 00:12:35.000 --> 00:12:40.760 and you know and so I was invited to write a column for this newspaper and so 98 00:12:40.760 --> 00:12:45.240 I'm always looking for ways to stick it to the politicians in Annapolis 99 00:12:45.240 --> 00:12:51.480 somehow and for a month I read in the Baltimore Sun front page deregulation has 100 00:12:51.480 --> 00:12:56.360 failed deregulation because the law is up it's I think June 30th is the end of the 101 00:12:56.360 --> 00:13:00.160 law and so the price can be set at whatever the market will set the price 102 00:13:00.160 --> 00:13:17.160 But for the last six years, we've been paying 1993 prices for power, for electric power, and so anyway, the politicians have been saying, well, deregulation has failed because no competition has entered. We thought competition would enter. 103 00:13:17.160 --> 00:13:23.280 think about that you pass a law saying you can charge only 1993 prices for the 104 00:13:23.280 --> 00:13:27.480 next six years you're a corporate executive contemplating spending a 105 00:13:27.480 --> 00:13:33.160 billion dollars or so entering this big market Maryland the DC suburbs to 106 00:13:33.160 --> 00:13:37.400 compete with a constellation energy which has been there forever it'd be 107 00:13:37.400 --> 00:13:42.600 Baltimore gas and electric is the what the gas light company of Baltimore used 108 00:13:42.600 --> 00:13:55.600 would you invest all this money if you thought your price was going to be controlled by the most anti-business legislature in America? It's lunacy. 109 00:13:55.600 --> 00:14:11.600 So I wrote an article called What Deregulation? Just pointing out in the first sentence that regulating, I've emphasized regulating the price of electricity for six years is regulation, not deregulation. 110 00:14:11.600 --> 00:14:41.600 and like the radio talk show guys in town, so hold, you know that, you know he's right about that because they've been, this mantra, this mantra was repeated every day, every day, deregulation failed, deregulation failed and so I thought I was on all the talk radio and even like a week later I heard these guys that are still talking about this because they were sort of embarrassed that they sort of went along with this language of deregulation and they got duped by it themselves, even some conservative talk show hosts who are usually wouldn't, are very suspicious 111 00:14:41.600 --> 00:14:49.600 in Baltimore of this stuff. One of them, an old friend of mine, Ron Smith, he was kind of embarrassed that he fell for this business. 112 00:14:49.600 --> 00:14:59.600 So I had the opportunity to quote this book and that impressed everybody because they thought I must be a real scholar because I can quote books published in 1936. 113 00:14:59.600 --> 00:15:09.600 So that's my background story on this book. But this book tells a story of how this happened in Baltimore anyway. 114 00:15:09.600 --> 00:15:20.600 And like I said, it does have national implications, not just Baltimore, because a lot of the information did come from Ely, who was studying electric utilities all over. 115 00:15:20.600 --> 00:15:28.600 He wasn't just studying electric utilities in Baltimore. He was, after all, the founder of the American Economic Association, quite the big shot. 116 00:15:28.600 --> 00:15:32.600 And here's some of the things that are said in this book. 117 00:15:32.600 --> 00:15:39.400 In his book, from its founding in 1816, this gaslight company constantly struggled with 118 00:15:39.400 --> 00:15:40.880 new competitors. 119 00:15:40.880 --> 00:15:46.440 Its response was not only to try to compete in the marketplace, but to lobby state and 120 00:15:46.440 --> 00:15:51.900 local government authorities to refrain from granting corporate charters to its competitors. 121 00:15:51.900 --> 00:15:56.760 So it was a rent seeker in the language of modern economics. 122 00:15:56.760 --> 00:16:01.000 And he goes on to say that here's the bad economics in the book. 123 00:16:01.000 --> 00:16:08.400 The author says gas companies and other cities were exposed to ruinous competition, and then 124 00:16:08.400 --> 00:16:13.200 he talks about how these same companies may be operating in Boston, let's say, they're 125 00:16:13.200 --> 00:16:15.480 suffering from ruinous competition. 126 00:16:15.480 --> 00:16:19.600 They were all bidding to enter the Baltimore market so they could ruin themselves even 127 00:16:19.600 --> 00:16:21.920 more, supposedly. 128 00:16:21.920 --> 00:16:26.420 So you read things like this and, well, if they're being ruined in Boston and New York, 129 00:16:26.420 --> 00:16:29.320 why do they want to come and have more ruination in Baltimore? 130 00:16:29.320 --> 00:16:45.320 And of course the answer is they weren't being ruined, they were competing. And sometimes they competed successfully and made money in these places. Maybe they didn't make as much money as they could if they were monopolies, but they were making money, so much so that they saw the Baltimore market and they wanted in on that too. 131 00:16:45.320 --> 00:16:53.820 And so this book is typical, it goes on and talks about excessive competition and how destructive it can be. 132 00:16:53.820 --> 00:17:01.820 And this was a thinking at the time, that excessive competition is destructive, but of course it is destructive to those who can't compete. 133 00:17:01.820 --> 00:17:12.820 Excessive competition is destructive to the Tennessee Titans, let's say, in football, or the Miami Dolphins, if it's too excessive, 134 00:17:12.820 --> 00:17:17.980 Because the Pittsburgh Steelers are so much better than they are, but but that's a good thing, you know 135 00:17:17.980 --> 00:17:24.420 It induces the Miami Dolphins and the Tennessee Titans to get better if they want to succeed and the same is true in business 136 00:17:24.620 --> 00:17:28.660 If they you want to succeed do better. I tell my students 137 00:17:28.660 --> 00:17:31.860 I have an old article from the Wall Street Journal that I use in a lot of my classes 138 00:17:31.860 --> 00:17:34.020 it's probably 10 years old now and 139 00:17:34.820 --> 00:17:36.820 the title of it is 140 00:17:36.980 --> 00:17:39.340 If you like your new American-made car 141 00:17:39.340 --> 00:17:53.340 Thank your neighbor with the 12 year old Honda is the title. And of course, the theme of the article is the reason why the American made cars are so much better now than they were 20 years ago, is they were forced to get better by Honda, Toyota, and the rest. 142 00:17:53.340 --> 00:18:01.340 And that was excessive competition is a good thing. It forces them to get better. And that's what was going on here. 143 00:18:01.340 --> 00:18:06.660 and so anyway this the interesting story about this company was there were three 144 00:18:06.660 --> 00:18:11.660 competing gas companies in Baltimore and they were trying to merge and create one 145 00:18:11.660 --> 00:18:15.820 company and create that they thought they could have a monopoly although they 146 00:18:15.820 --> 00:18:20.580 were foiled by Thomas Edison at that very time they finally merged and said 147 00:18:20.580 --> 00:18:24.540 we're in a catbird seed now we're gonna we're a monopoly Thomas Edison came 148 00:18:24.540 --> 00:18:29.300 around and in the electric light industry was invented and so there were 149 00:18:29.300 --> 00:18:54.700 In 1890, a bill was introduced into the Maryland Legislature, which called for an annual payment to the city from the consolidated gas company of $10,000 a year, and 3% of all dividends declared in return for the privilege of enjoying a $25,000 150 00:18:54.700 --> 00:19:01.840 3% of all dividends declared in return for the privilege of enjoying a 25-year monopoly." 151 00:19:01.840 --> 00:19:05.960 So they were like criminals sharing the loot. 152 00:19:05.960 --> 00:19:11.580 The politicians said, okay, we will give you a 25-year monopoly, but every year you have 153 00:19:11.580 --> 00:19:17.340 to give us $10,000 and 3% of all dividends, us being the legislature so that we can spend 154 00:19:17.340 --> 00:19:18.680 it how we want to spend it. 155 00:19:18.680 --> 00:19:19.680 And that's how it came about. 156 00:19:19.680 --> 00:19:20.980 It didn't come about like this. 157 00:19:20.980 --> 00:19:27.020 There was no free market evolution creating a monopoly and the regulators in white suits 158 00:19:27.020 --> 00:19:30.140 on white horses came around and saved the day. 159 00:19:30.140 --> 00:19:34.300 That's the typical corny story you're told in the economics books. 160 00:19:34.300 --> 00:19:36.100 It didn't happen that way. 161 00:19:36.100 --> 00:19:43.540 It's kind of funny to read this book, this guy, he's an advocate of regulation. 162 00:19:43.540 --> 00:19:44.540 I don't know why he is. 163 00:19:44.540 --> 00:19:49.900 He tells you stories, he's an advocate of utility regulation and then he says, I don't 164 00:19:49.900 --> 00:20:19.900 I don't know what his tone of voice would have been if he was saying this rather than writing it but he talks about what happened next, what happened after they did establish this electric power monopoly in Baltimore and he said people felt that the negligent manner in which their interests were being served by the legislative control of gas and electric prices resulted 165 00:20:19.900 --> 00:20:25.100 Monopoly Privileges. What a shocker, what a surprise. And so, and then he says, the 166 00:20:25.100 --> 00:20:30.340 development of utility regulation in Maryland typified the experience of other states, the 167 00:20:30.340 --> 00:20:37.580 whole country. And so, if you read somebody who actually did some statistical or empirical 168 00:20:37.580 --> 00:20:44.180 research on what happened, as opposed to spinning theories, what happened was there may have 169 00:20:44.180 --> 00:20:47.900 been attempts to merge by these companies, and that, even if they had merged, they wouldn't 170 00:20:47.900 --> 00:21:15.320 In the early part of the 20th century, not all the economists were fooled by this. Another 171 00:21:15.320 --> 00:21:20.360 Another one of the nuggets of gold that I dug up in my scrounging around the libraries 172 00:21:20.360 --> 00:21:25.280 was an old article by a man named Horace Gray, and it's in a journal called the Journal of 173 00:21:25.280 --> 00:21:27.440 Land and Public Utility Economics. 174 00:21:27.440 --> 00:21:30.720 Today it's called the Journal of Land Economics. 175 00:21:30.720 --> 00:21:36.800 It's a pretty decent journal if you ever study issues regarding cities and urban issues, 176 00:21:36.800 --> 00:21:40.560 externalities, land development, it's pretty decent. 177 00:21:40.560 --> 00:21:46.640 But this was a February 1940 issue of this journal, and here's what Horace Gray said 178 00:21:46.640 --> 00:21:47.640 about this. 179 00:21:47.640 --> 00:21:52.320 He said, during the 19th century, it was widely believed that the public interest would 180 00:21:52.320 --> 00:21:56.820 be best promoted by grants of special privilege to private persons and to corporations in 181 00:21:56.820 --> 00:21:58.480 many industries. 182 00:21:58.480 --> 00:22:03.440 This included patents, subsidies, tariffs, land grants to railroads and monopoly franchises 183 00:22:03.440 --> 00:22:04.920 for public utilities. 184 00:22:04.920 --> 00:22:09.080 This was all a version of mercantilism, which we talked about the other day. 185 00:22:09.080 --> 00:22:13.400 The final result was monopoly, exploitation, and political corruption. 186 00:22:13.400 --> 00:22:14.600 Imagine that. 187 00:22:14.600 --> 00:22:17.600 And so with regard to public utilities, 188 00:22:17.600 --> 00:22:21.000 he said, between 1907 and 1938, 189 00:22:21.000 --> 00:22:25.560 the policy of state-created, state-protected monopoly became firmly established over a 190 00:22:25.560 --> 00:22:27.520 significant portion of the economy 191 00:22:27.520 --> 00:22:31.720 and became the keystone of modern public utility regulation. 192 00:22:31.720 --> 00:22:34.800 And then here's the good line. He said, from that time on, 193 00:22:34.800 --> 00:22:36.000 and I'm quoting, 194 00:22:36.000 --> 00:22:42.000 The public utility status was to be the haven of refuge for all aspiring monopolists who 195 00:22:42.000 --> 00:22:47.160 found it too difficult, too costly, or too precarious to secure and maintain monopoly 196 00:22:47.160 --> 00:22:52.540 by private action alone or profits, and he talks about how this included the radio industry, 197 00:22:52.540 --> 00:23:00.240 the real estate business, milk, air transport, coal, oil, farming, and all that. 198 00:23:00.240 --> 00:23:05.940 Once this happened in electricity, just about everybody, dairy farmers, said, I'm a public 199 00:23:05.940 --> 00:23:34.940 The role of economists is, they created, quote, a confused rationalization for the sinister forces of private privilege and monopoly. 200 00:23:34.940 --> 00:23:37.740 He's referring to this theory of natural monopoly. 201 00:23:37.740 --> 00:23:39.660 Those of you who have taken microeconomics, 202 00:23:39.660 --> 00:23:42.820 I bet that chapter on natural monopoly 203 00:23:42.820 --> 00:23:45.020 where they explain this theory is not caused, 204 00:23:45.020 --> 00:23:47.260 not called a confused rationalization 205 00:23:47.260 --> 00:23:50.220 for the sinister forces of monopoly privilege, 206 00:23:50.220 --> 00:23:51.980 but that's what it is. 207 00:23:51.980 --> 00:23:54.560 So, and if you haven't taken that course, 208 00:23:54.560 --> 00:23:56.860 beware that that's what you're gonna be taught. 209 00:23:58.580 --> 00:24:01.540 You know, it took the economics profession a long time. 210 00:24:01.540 --> 00:24:09.540 It took them about 50 or 60 years to begin looking at the truth about this. 211 00:24:09.540 --> 00:24:17.540 I mentioned yesterday that I take the credit for being the first economist to look at the actual reality of the origins of the Sherman Act. 212 00:24:17.540 --> 00:24:26.540 I still haven't heard anybody dispute that claim in print. They actually looked at the real data involved in the so-called monopolies of the 1880s. 213 00:24:26.540 --> 00:24:40.540 But I think it was probably the late George Stigler who first seriously examined, well, what was going on at this time, apart from Horace Gray and people like that who wrote short articles about it. 214 00:24:40.540 --> 00:24:54.540 But Stigler first became, in fact, when he won the Nobel Prize in Economics, which I think was around 1983, something like that, one of the things they cited was his early statistical research on public utilities. 215 00:24:54.540 --> 00:25:03.540 Electric Utilities is one of the things, because it led to this whole economic analysis of regulation that the Chicago School of Economics became famous for. 216 00:25:03.540 --> 00:25:13.540 This was some of the earliest studies of regulation that all determined that, well, regulation usually benefits the regulated industries at the expense of the consumer. 217 00:25:13.540 --> 00:25:23.540 And anyway, he did some statistical studies of electric utilities, and he found that after regulation, prices either stayed the same or went up. 218 00:25:23.540 --> 00:25:27.540 They didn't go down like they were supposed to. That's what he found. 219 00:25:27.540 --> 00:25:32.540 Then more, you know, after that, there were other studies by an economist named Greg Gerald, among others. 220 00:25:32.540 --> 00:25:40.540 He was a pretty well-known economist at the time, who concluded that 25 states substituted state-for-municipal regulation 221 00:25:40.540 --> 00:25:46.540 at one point between 1912 and 1917, so they sort of centralized it at the state level, 222 00:25:46.540 --> 00:25:57.540 The effects of which were to raise prices by 46% on average and profits went up by 38% on average, while reducing the level of output by 23%. 223 00:25:57.540 --> 00:26:13.540 And so, not only were they regulated and they were created as monopolies, but when they became more centralized at the state level, they became even more severe monopolies in terms of price gouging and monopolistic pricing at the state level. 224 00:26:13.540 --> 00:26:27.540 It kind of makes sense if you have the mayor in charge of regulating your electric power bill and it's a relatively small town, he's going to run into constituents who are going to complain to his face about the high prices and the rising prices. 225 00:26:27.540 --> 00:26:38.540 But if you have to walk all the way to Montgomery, Alabama, or the state capital of your state, not walk, but get there, to complain to who? Who are you going to complain to? 226 00:26:38.540 --> 00:26:41.540 I'm a bureaucrat who you can't find at the State Regulatory Commission. 227 00:26:41.540 --> 00:26:46.540 It's much less likely that the people are going to provide political opposition to that 228 00:26:46.540 --> 00:26:49.540 if it's centralized at the state level, and especially at the federal level. 229 00:26:49.540 --> 00:26:55.540 How many of you have any hope of going to Washington, D.C. and having any influence with anybody there? 230 00:26:55.540 --> 00:26:59.540 Well, if you bring a knapsack full of cash, you might. 231 00:26:59.540 --> 00:27:05.540 But other than that, the average consumer doesn't do that. 232 00:27:05.540 --> 00:27:35.540 Well, the next claim that was made in defense of the so-called natural monopolies, which are unnatural, was that, well, we have to have monopolies because all this excessive duplication will cause problems with all the wires running everywhere, digging up the streets too much, and we can't have six phone companies, that's not going to work, but Demsetz again, Harold Demsetz, spelled D-E-M-S-E-T-Z, by the way, he hit the nail on the head 233 00:27:35.540 --> 00:27:49.320 The problem of excessive duplication of distribution systems is attributable to the failure of 234 00:27:49.320 --> 00:27:54.020 communities to set a proper price on the use of these scarce resources. 235 00:27:54.020 --> 00:27:59.220 The right to use publicly owned thoroughfares is the right to use a scarce resource. 236 00:27:59.220 --> 00:28:03.620 The absence of a price for the use of these resources, a price high enough to reflect 237 00:28:03.620 --> 00:28:13.620 The opportunity cost of such alternative uses as the servicing of uninterrupted traffic and unmarred views will lead to their over-utilization. 238 00:28:13.620 --> 00:28:18.620 And of course, the real reason is that the government owns all the roads and the streets. 239 00:28:18.620 --> 00:28:26.620 And so as long as the roads and the streets are socialized and government-owned and are for free, they're an unpriced resource. 240 00:28:26.620 --> 00:28:29.620 So therefore, that's the root of the problem. 241 00:28:29.620 --> 00:28:32.620 The root of the problem is socialist roads. 242 00:28:32.620 --> 00:28:52.620 And those of you who have come to Mises University or are planning on coming in the future, you'll meet, we do have a Rhodes Scholar on the faculty, his name is Walter Block, and he's spelled R-O-A-D-S, Rhodes Scholar, he's written quite a lot about Rhodes Socialism, he's our own Rhodes Scholar. 243 00:28:52.620 --> 00:29:12.620 Murray Rothbard said the same thing in Man Economy and State. He said the fact that government must give permission for the use of its streets has been cited to justify stringent government regulations of public utilities, in quotes, many of which must make use of the streets. 244 00:29:12.620 --> 00:29:18.420 The regulations are then treated as a voluntary quid pro quo, but to do so overlooks the fact 245 00:29:18.420 --> 00:29:24.180 that the governmental ownership of the streets is itself a permanent act of intervention. 246 00:29:24.180 --> 00:29:28.460 Regulation of utilities or of any other industry discourages investment in these industries, 247 00:29:28.460 --> 00:29:31.640 thereby depriving consumers of the best satisfaction they want. 248 00:29:31.640 --> 00:29:37.100 So he pinpointed the same thing, that's the real problem with regard to excessive duplication. 249 00:29:37.100 --> 00:29:43.140 And in fact, there's been a solution to this, if it is a problem, the problem of multiple 250 00:29:43.140 --> 00:29:49.660 phone companies with too many wires that people think are unsightly or things like that, and 251 00:29:49.660 --> 00:29:57.820 it existed, it has been known ever since 1859, an economic writer named Edwin Chadwick wrote 252 00:29:57.820 --> 00:30:05.420 about a system whereby you could have competitive bidding for the right to be a monopoly. But 253 00:30:05.420 --> 00:30:12.060 The thing is, if the bidding is competitive, the winner, if it's an honest bidding process, 254 00:30:12.060 --> 00:30:15.420 the winner would have to promise to charge a competitive price. 255 00:30:15.420 --> 00:30:19.420 That's how you would win the bid and charge the lowest price, just like on a construction 256 00:30:19.420 --> 00:30:20.420 project. 257 00:30:20.420 --> 00:30:23.020 The lowest bidder gets the bid. 258 00:30:23.020 --> 00:30:25.540 So in theory, you could do that. 259 00:30:25.540 --> 00:30:29.640 There's been research in economics on how the French water supply system is like that. 260 00:30:29.640 --> 00:30:34.820 They might have, in a lot of the French cities, one supplier, but it's up for bid every couple 261 00:30:34.820 --> 00:30:41.820 And so you have to hold your costs and prices down if you want to compete and keep that contract to be the water supplier. 262 00:30:41.820 --> 00:30:44.820 And Dempsets, again, wrote about that also. 263 00:30:44.820 --> 00:30:52.820 And in fact, here in the United States, it's worked in Jersey City, New Jersey, when Brent Schundler was the mayor. 264 00:30:52.820 --> 00:30:57.820 I recall reading about how the city water department was horrible in that place. 265 00:30:57.820 --> 00:31:00.820 The water lines were rotting away. 266 00:31:00.820 --> 00:31:03.820 They were losing millions of gallons of water from leaks. 267 00:31:03.820 --> 00:31:33.820 The water leaks, it was very expensive, the water bills were going up, so he just put the whole thing out for a three-year contract, the water supply, and there are some really good, high-tech private water companies in America that all bid for this, and the one that got the contract did it, fixed everything up very quickly, and the water rates went down towards the lower rates, and Schundler kept reminding these guys that this is only a three-year contract, and if you don't do a good job, 268 00:31:33.820 --> 00:31:43.820 Competition doesn't always have to be between 10 competitors or 15 competitors. 269 00:31:43.820 --> 00:31:49.820 There are different kinds of competition. This is called competition for the field in economics literature. 270 00:31:49.820 --> 00:31:54.820 That's another way of taking care of this problem. 271 00:31:54.820 --> 00:32:02.820 One final thing I want to do here is to talk about how there's a lot of research in economics by skeptics, 272 00:32:02.820 --> 00:32:20.820 I'm not the only one. One of the reasons I am a skeptic is back when I was in graduate school, I was reading a lot of the work of an economist named Walter Primo, 273 00:32:20.820 --> 00:32:29.140 P-R-I-M-E-A-U-X, Walter Primo, and he was publishing all these articles in these top 274 00:32:29.140 --> 00:32:34.100 economics journals on the electric utility industry, which I kind of had an interest in at the time. 275 00:32:35.460 --> 00:32:41.860 And what he found was there were dozens of cities in America who never did establish a monopoly 276 00:32:41.860 --> 00:32:47.780 franchise in electric power. They allowed competition, and it wasn't a monopoly sharing 277 00:32:47.780 --> 00:32:57.780 in the spring situation, it wasn't like, we'll give you a monopoly franchise for this half of Auburn, Alabama, and then this company, you get the franchise, you serve the other half of Auburn, Alabama. 278 00:32:57.780 --> 00:33:08.780 It was, it was, they were, they both competed for all of Auburn, Alabama, for example, and so there was direct, in fact, his book is called Direct Utility Competition, The Natural Monopoly Myth. 279 00:33:08.780 --> 00:33:18.780 And Chad tells me that I could push a few buttons here and make it so that you could read some of this stuff. 280 00:33:18.780 --> 00:33:22.780 Chad doesn't always tell the truth, as we all know. 281 00:33:22.780 --> 00:33:27.780 Oh yeah, there it is. It's getting a little bigger. I don't know if you can read it. 282 00:33:27.780 --> 00:33:35.780 And this is just a list of some of the conclusions of Professor Primo. He taught at the University of Illinois for many years. 283 00:33:35.780 --> 00:33:45.780 And so he studied and he published in the Review of Economics and Statistics, which is a prestigious economics journal, places like that, of what he found. 284 00:33:45.780 --> 00:33:52.780 Direct rivalry between two competing firms that existed for a long time, over 80 years in some cities, you know, who ever heard of that? 285 00:33:52.780 --> 00:33:57.780 The rival electric utilities compete vigorously. What a shocker. 286 00:33:57.780 --> 00:34:07.780 Customers have gained substantial benefits from the competition. Contrary to natural monopoly theory, costs are lower where there are two competing firms operating. 287 00:34:07.780 --> 00:34:12.780 There is no more excess capacity under competition than under monopoly. 288 00:34:12.780 --> 00:34:18.780 And he says the theory of natural monopoly fails on every count here in this sample of several dozen cities. 289 00:34:18.780 --> 00:34:26.780 Competition exists. Price wars are not, quote, serious, he said. It's price competition. It's not ruinous. 290 00:34:26.780 --> 00:34:32.420 about ruinous, there is better consumer service and lower prices with competition, competition 291 00:34:32.420 --> 00:34:38.020 persists for very long periods of time and guess what, consumers themselves prefer competition 292 00:34:38.020 --> 00:34:42.180 to regulated monopoly, who would have thought. 293 00:34:42.180 --> 00:34:46.940 Any consumer satisfaction problems caused by dual power lines are considered by consumers 294 00:34:46.940 --> 00:34:52.780 to be less significant than the benefits from competition and those are basically the main 295 00:34:52.780 --> 00:34:57.780 The President has been doing a lot of research on electric power competition. 296 00:34:57.780 --> 00:34:59.780 You never do hear about this. 297 00:34:59.780 --> 00:35:05.780 Back in Baltimore when I left, I published my article about this several weeks ago. 298 00:35:05.780 --> 00:35:15.780 What's going on now since then was every politician in the state, the governor, all the legislators, the mayors, the mayor of Baltimore, 299 00:35:15.780 --> 00:35:19.780 they all have their plan for what the price ought to be for electric power. 300 00:35:19.780 --> 00:35:25.140 The Mayor says it ought to go up only by 20% this year and then 35% next year. 301 00:35:25.140 --> 00:35:29.780 The Governor says, no, no, it should go up by 30% this year and then 29.5% next year. 302 00:35:29.780 --> 00:35:33.860 But every one of them advocates price controls. None of them have said, 303 00:35:34.660 --> 00:35:39.060 gee, this has created quite a mess. Maybe we should just let the market set the price. 304 00:35:39.060 --> 00:35:42.180 So what's going to happen there is that there's going to be some kind of 305 00:35:42.180 --> 00:35:47.860 re-regulation and they're going to call it deregulation again, probably. But it's a horrible 306 00:35:47.860 --> 00:36:01.860 The same thing is true of cable TV. Even a lot of the textbooks in economics when they talk about this, if they use exhibit A of a franchise monopoly, will point to the cable TV industry. 307 00:36:01.860 --> 00:36:11.860 But the same thing is true of cable as has been true of electric utilities. There have been dozens of cities in America who did not have a cable monopoly. 308 00:36:11.860 --> 00:36:41.860 Monopoly. They allowed direct competition in cable services for years, although most cities did establish a monopoly franchise. And how this happens, I can recall reading when I was at George Mason University some years ago. Washington, D.C. did not have cable TV. And the suburbs all around had cable TV. And the people who lived in D.C. were kind of upset about this. You know, why don't we have cable? The nation's capital. You know, can't even watch this. This was even before CNN became 309 00:36:41.860 --> 00:36:53.860 I'm reading about this in the Washington Post and elsewhere, and what was going on was they took bids for about 10 or 12 years. 310 00:36:53.860 --> 00:36:59.860 This was when Marion Barry was the mayor, the guy who went to prison for snorting coke with a prostitute on television. 311 00:36:59.860 --> 00:37:07.860 You saw him on the video. You never heard about that? Well, you're from Serbia. I don't expect you to know about this. 312 00:37:07.860 --> 00:37:17.860 This is before your time anyway. He was videotaped snorting cocaine with a prostitute in a hotel room and went to jail for that. 313 00:37:17.860 --> 00:37:26.860 And then he was re-elected after he got out of jail. His campaign theme was, felons should be given the right to vote. 314 00:37:26.860 --> 00:37:33.860 But anyway, his administration took about 12 years to give out the monopoly franchise. 315 00:37:33.860 --> 00:37:37.420 And you're reading about this, why did they take so long? 316 00:37:37.420 --> 00:37:41.420 Well, all the cable companies in the country 317 00:37:41.420 --> 00:37:43.700 were whining and dining and financing 318 00:37:43.700 --> 00:37:47.180 the political careers of Barry and all his associates. 319 00:37:47.180 --> 00:37:48.660 And that's what they were doing. 320 00:37:48.660 --> 00:37:51.500 And as long as they could do this year in and year out 321 00:37:51.500 --> 00:37:55.420 and being sent to expensive resorts with all expenses paid 322 00:37:55.420 --> 00:37:57.980 with your wife and or your girlfriend or your mistress 323 00:37:57.980 --> 00:38:02.860 or whatever, and campaign contributions, 324 00:38:02.860 --> 00:38:13.860 When they finally gave the franchise to one company, all of the mayor's political advisors were all given stock in the company, and so they made out pretty well. 325 00:38:13.860 --> 00:38:23.860 And I did read a few years ago, just a couple years, about two years ago, that some of these people held on to the stock for seven or eight years and cashed it in for $12, $15 million. 326 00:38:23.860 --> 00:38:30.860 So this was a pretty good gift to these politicians who were all around Mary and Barry, and so that's the way it worked. 327 00:38:30.860 --> 00:38:40.860 They just held back. On one hand, they wanted to sit back and collect all these bribes as long as they can, but on the other hand, the people were beginning to revolt about this. 328 00:38:40.860 --> 00:38:54.860 They must have decided, well, we've hit the margin here, where the marginal benefit of collecting bribes is roughly equal to the marginal cost of losing votes from no cable in D.C., a third world country, why don't we have cable? 329 00:38:54.860 --> 00:39:00.860 of Cable, so they finally gave out the monopoly bid, you know, thanks a lot, you know, from 330 00:39:00.860 --> 00:39:06.460 the people of Washington, D.C. They went from having no cable to having to pay monopoly 331 00:39:06.460 --> 00:39:12.940 prices for crappy service for cable. I guess that's an improvement. But the point is, it 332 00:39:12.940 --> 00:39:17.500 doesn't have to happen this way because it hasn't happened this way in dozens of cities 333 00:39:17.500 --> 00:39:22.020 in America. It's only some cities that have done this. And the final example I want to 334 00:39:22.020 --> 00:39:25.020 So what we're going to offer here is telephone services. 335 00:39:25.020 --> 00:39:38.020 AT&T was the first telephone company, but AT&T had patents on telephone services, but they expired in 1893. 336 00:39:38.020 --> 00:39:43.020 And what happened was dozens of phone companies propped up. 337 00:39:43.020 --> 00:39:52.020 And I'm quoting here an article by Adam Theurer in the Cato Journal, fall 1994, about the telephone monopolies. 338 00:39:52.020 --> 00:39:59.020 He says, by the end of 1894, over 80 new independent competitors had already grabbed 5% of the total market share. 339 00:39:59.020 --> 00:40:06.020 After the turn of the century, over 3,000 competitors existed. So AT&T had 3,000 competitors. 340 00:40:06.020 --> 00:40:36.020 and Competitors. Then World War I came, and the government nationalized the telephone industry for national security purposes. Just like Lincoln censored all the telegraph during his administration, with the new technology, the government censored all the telephone, Congress wanted to, and now with the Bush administration, they're doing the same thing, aren't they, with the domestic spying. That seems to be the trend there. But anyway, the war ended, and so there was no longer a national 341 00:40:36.020 --> 00:40:41.520 National Security excuse for nationalizing the telephone industry. 342 00:40:41.520 --> 00:40:45.220 But they didn't move back to competition, which is where they started from. 343 00:40:45.220 --> 00:40:50.500 They moved back to a situation where AT&T, which had been lobbying vigorously, as you 344 00:40:50.500 --> 00:40:56.340 can imagine, for a franchise monopoly, was given a franchise monopoly operated by each 345 00:40:56.340 --> 00:40:57.340 state. 346 00:40:57.340 --> 00:41:02.060 Each state ran a monopoly within that state and regulated the monopoly. 347 00:41:02.060 --> 00:41:07.460 And so, and the same arguments were made, competition is duplicative, it's destructive, 348 00:41:07.460 --> 00:41:15.980 it's excessive, it's wasteful, and he quotes one politician as saying, there is nothing 349 00:41:15.980 --> 00:41:18.980 to be gained by competition in the local telephone business. 350 00:41:18.980 --> 00:41:24.260 Now, that was the conclusion of a congressional hearing, nothing to be gained by AT&T, that's 351 00:41:24.260 --> 00:41:28.100 true, but a lot to be gained by the consumers. 352 00:41:28.100 --> 00:41:32.980 And so that's how we came to have a monopoly in telephone services until recently. 353 00:41:32.980 --> 00:41:39.940 They finally deregulated much of the telephone services in the last 15 years or so, but that's 354 00:41:39.940 --> 00:41:41.740 why AT&T was a monopoly. 355 00:41:41.740 --> 00:41:44.640 Again, it was a government-franchised monopoly. 356 00:41:44.640 --> 00:41:48.940 And so the final thing I'm going to say before taking questions or comments or brilliant 357 00:41:48.940 --> 00:41:54.700 commentaries, I keep asking for brilliant commentaries, haven't had any yet, but don't 358 00:41:54.700 --> 00:42:00.700 I don't feel badly, I asked my classes for that for 14 weeks sometimes, and I still never get any from it. 359 00:42:00.700 --> 00:42:03.700 No, we've had some brilliant commentaries here. 360 00:42:03.700 --> 00:42:11.700 I want to conclude by quoting old Horace Gray again, the guy who wrote the article in the Journal of Land Economics, 361 00:42:11.700 --> 00:42:18.700 by summarizing his summary of this whole thing, which I think is exactly right, and so I can't do any better than this. 362 00:42:18.700 --> 00:42:31.700 He says, by a soothing process of rationalization, men are able to oppose monopolies in general, but to approve certain types of monopolies. 363 00:42:31.700 --> 00:42:40.700 Since these monopolies were, quote, natural, and since nature is beneficent, it followed that they were good monopolies. 364 00:42:40.700 --> 00:42:47.700 Nature is good. Government was therefore justified in establishing good monopolies, end quote. 365 00:42:47.700 --> 00:42:57.700 He's sort of ridiculing this word, natural, mother nature, the goddess Gaia approves of this, it's sort of an early environmentalism. 366 00:42:57.700 --> 00:43:05.700 That's also, by the way, my theory of why environmentalists hate styrofoam, but not paper. 367 00:43:05.700 --> 00:43:11.700 They prefer you to use plastic bags and not paper bags at the grocery store. 368 00:43:11.700 --> 00:43:36.700 paper comes from Mother Nature, it comes from trees, plastic bags, man-made, they don't like styrofoam, but that's not related to natural monopolies, but that's what this reminds me of, and so that's his conclusion, I think I'll stop there, I don't like to talk more than 45 minutes, because I see a few people dozing off there, but him especially. 369 00:43:41.700 --> 00:43:46.980 I heard a rumor there was beer in the dormitory last night, so we know where it came from, I guess. 370 00:43:46.980 --> 00:43:50.980 Well, that's all I'm going to say for now, but questions or comments from anybody? 371 00:43:52.980 --> 00:43:57.540 Tom, has there been any improvement in the textbook over time? 372 00:43:58.580 --> 00:44:02.900 Well, some of them, as far as introductory textbooks, 373 00:44:02.900 --> 00:44:07.700 Gortney and Stroop is one of the better mainstream market-oriented textbooks, 374 00:44:07.700 --> 00:44:15.700 And they talk a lot about the bad side effects of the process of regulation in there. 375 00:44:15.700 --> 00:44:25.700 And they talk about how technology has rendered moot, franchise monopolies in a lot of areas, satellites replacing cable and all that. 376 00:44:25.700 --> 00:44:33.700 But I don't know if anybody has incorporated some of this stuff and said, and questioned the whole theory of natural monopoly to begin with. 377 00:44:33.700 --> 00:44:38.700 I haven't seen any, so I don't think they've been improved in that regard. 378 00:44:38.700 --> 00:44:49.700 The ones I've seen still all give the standard story and then tell the story that, well, the regulators mess up a lot and they create all these inefficiencies. 379 00:44:49.700 --> 00:44:58.700 And sometimes politics comes in and the politicians and the industry controls the regulatory agencies and they input price controls and that creates shortages. 380 00:44:58.700 --> 00:45:10.700 So they document all the bad effects of regulation, but then I'm not familiar with anybody who questions the whole theory, the fundamental theory that we have to have regulation. 381 00:45:10.700 --> 00:45:21.700 Just like with my antitrust stuff, as you know the Chicago School has written millions of pages on how misguided antitrust regulation has been for a hundred and some years. 382 00:45:21.700 --> 00:45:24.700 But they still won't say therefore we should scrap it all. 383 00:45:24.700 --> 00:45:33.700 They still tend to say, well, we need smarter regulators or regulators that are better informed by us smart Chicago School economists and things like that. 384 00:45:33.700 --> 00:45:38.700 Maybe there is one out there, but I haven't seen any, and I'm not sure why. 385 00:45:38.700 --> 00:45:43.700 I know a lot of economists make a lot of money as consultants to the utility industries. 386 00:45:43.700 --> 00:45:45.700 Maybe old George Stigler is right. 387 00:45:45.700 --> 00:45:50.700 When George Stigler wrote an article about why so many economists came to embrace antitrust regulation, 388 00:45:50.700 --> 00:45:56.860 Regulation. The way he put it, I can paraphrase as I did yesterday, that they caught on to 389 00:45:56.860 --> 00:46:02.860 the fact that they could earn significantly more than the minimum wage as antitrust consultants. 390 00:46:02.860 --> 00:46:07.620 And that probably has something to do with why they aren't too harsh in their criticisms 391 00:46:07.620 --> 00:46:14.860 of utility regulation either. Plus, you know, there aren't that many who are willing to 392 00:46:14.860 --> 00:46:20.100 challenge these fundamental concepts. You're the skunk at the garden party if you challenge 393 00:46:20.100 --> 00:46:28.100 This is something that's been incorporated into all the textbooks, because you're going to force all these people to change all their textbooks, and who wants that? 394 00:46:28.100 --> 00:46:32.100 And so I think there's a lot of resistance to this sort of thing. 395 00:46:32.100 --> 00:46:41.100 But I think we can make some progress by doing more of this kind of, you know, seriously looking at all these market failure claims, 396 00:46:41.100 --> 00:46:50.100 and informed by Austrian economics and the knowledge that you need to look at, dig for the facts, don't buy these theories. 397 00:46:50.100 --> 00:46:56.100 And to the students out there doing research, like I said yesterday, I was amazed when I started researching antitrust 398 00:46:56.100 --> 00:47:05.100 that no economist had ever actually looked into the notion that the trusts of the late 19th century were actually restricting or expanding output. 399 00:47:05.100 --> 00:47:10.100 I couldn't find any book, I looked at hundreds of sources and I couldn't find any data at all. 400 00:47:10.100 --> 00:47:12.740 So it was just an assumption that was thrown out there. 401 00:47:12.740 --> 00:47:16.900 So when you read things like this, always look for the evidence, and if there's none, 402 00:47:16.900 --> 00:47:21.540 you should be suspicious of that and look for it yourself. 403 00:47:21.540 --> 00:47:22.540 Other questions, comments? 404 00:47:22.540 --> 00:47:52.540 I have another comment about a lot of the things you're talking about in terms of rate gearing, the analysis that Chicago's run, and it seems to be almost all focused on price, the price of the product, the rate that they're going to be able to charge, and you know, frankly with metromonopoly, the price is not the thing that bugs me the most, it's the service that you don't get, and you typically get from a competitive industry, and I don't know if 405 00:47:52.540 --> 00:48:06.540 Electrician should be 5.1 cents or 5.3 cents, but I do know that if my power goes out for four or five days in a row, you know, what kind of impact that has on your life. And they always seem to be more of a circle. 406 00:48:22.540 --> 00:48:31.540 They'll sort of mention a few things here about non-price competition, but I think that's where the model focuses on, doesn't it? Price competition. 407 00:48:31.540 --> 00:48:42.540 And it's hard to model, create an economic model of how trees fall down and break the power lines, and it takes them two weeks to come out and fix them. 408 00:48:42.540 --> 00:48:49.540 It's hard to devise a fancy looking mathematical model of that, but that's what happens when you don't have competition. 409 00:48:49.540 --> 00:48:58.540 Yeah, the same with me. I live in Maryland, which is sort of right on the cusp between the northern cold winters and the more mild southern winters. 410 00:48:58.540 --> 00:49:04.540 And so that means we get lots of ice storms. It's not cold enough to snow, not warm enough to rain, so we get ice. 411 00:49:04.540 --> 00:49:17.540 And so it'll ice for two hours, and all it takes is one branch, and you'll have 15, 20 square miles out of power, because it'll just knock over one big wire. 412 00:49:17.540 --> 00:49:21.340 and it'll take them some three or four days to come out there and you know 413 00:49:21.340 --> 00:49:24.020 people are always asking well why don't they come out and cut down some of these 414 00:49:24.020 --> 00:49:27.860 branches you know during the summer why don't they come out and cut the wall 415 00:49:27.860 --> 00:49:30.900 they don't have to there's no competition why should they do that 416 00:49:30.900 --> 00:49:35.580 when I can just pocket the money and let you sit in the cold that's true this 417 00:49:35.580 --> 00:49:39.660 happened one time we went five days without power and I ended up going out 418 00:49:39.660 --> 00:49:43.940 and buying two gas stoves and putting them in with propane because you don't 419 00:49:43.940 --> 00:49:52.940 We need electricity for these propane gas stoves and things like that, but yeah, you're right. 420 00:50:00.940 --> 00:50:02.940 It's like the DMV. 421 00:50:13.940 --> 00:50:21.700 and they said, well, we can't make it out this afternoon, but we'll be out there tomorrow after. 422 00:50:21.700 --> 00:50:28.580 I said, tomorrow is Sunday. They said, yeah, we'll be out there on Sunday because now they have some competitions. 423 00:50:28.580 --> 00:50:34.340 Yeah, all right, yeah. Yeah, well, yeah, that's, I don't know, like I said, I think economists don't 424 00:50:34.340 --> 00:50:39.380 study that because it's hard to model, but Austrian economists do. That's, you know, 425 00:50:39.380 --> 00:50:42.980 we do a different type of analysis. We don't just rely on these pure models 426 00:50:43.940 --> 00:50:48.020 Like Joseph Salerno was saying yesterday when he was talking about his seminar for next week, 427 00:50:49.140 --> 00:50:52.980 Mises and the rest, they always did applied research. They were theorists, but they always did, 428 00:50:54.020 --> 00:50:59.220 especially Murray Rothbard. He always did, his whole career, he did a lot of really, his dissertation 429 00:50:59.220 --> 00:51:06.660 was on the Panic of 1819, which is applied Austrian economics. And so the Austrians are 430 00:51:06.660 --> 00:51:13.540 doing some of this, but not the big shots who pull down all the big bucks advising the 431 00:51:13.540 --> 00:51:43.540 from the regulatory agencies I guess. I've had quite a few MBA students. For years I've been teaching executive MBA students at my school and quite a few of them work at BG&E, Baltimore Gas and Electric and they just laugh, you know, we talk about these things and of course they're the recipients of all this largesse with their big travel budgets and their bloated salaries and all this and they just laugh and tell me how much money they make and how many trips to Hawaii they go for conferences on electricity. 432 00:51:43.540 --> 00:51:58.540 and they tell me how easy it is to recruit people too because they've got just unlimited loads of cash. If they really want to hire somebody, money is not an object. They don't really compete in the labor market for executives. 433 00:51:58.540 --> 00:52:04.540 It's easy to get an inside view like that. Yes sir? 434 00:52:04.540 --> 00:52:25.540 I think that was atypical. I think that was longer than the usual thing. Let me give you, if anybody's interested, I have a good reference. 435 00:52:25.540 --> 00:52:32.500 My old friend Tom Hazlett spent most of his academic career publishing about this, telecommunications 436 00:52:32.500 --> 00:52:40.260 in general, but cable especially. He's quite the expert on that, and it's helped him buy a very big 437 00:52:40.260 --> 00:52:47.460 house in Potomac, Maryland, and a very big boat on the Potomac River. One of his articles is in 438 00:52:47.460 --> 00:52:54.340 the Yale Journal of Regulation in 1990 called Duopolistic Competition in Cable Television, 439 00:52:54.340 --> 00:53:14.840 And it's one of the first articles I know of that documented the competition, direct competition in cable, you know, and there's a book called Unnatural Monopolies edited by Bob Poole, Robert Poole from the Reason Foundation that has a whole series of essays on these issues. 440 00:53:14.840 --> 00:53:19.840 And so those are two good references if those of you who are interested in this business. 441 00:53:19.840 --> 00:53:25.840 But I think the point was that Washington, D.C. was exceptionally bad because of Mayor Barry. 442 00:53:25.840 --> 00:53:33.840 Thoroughly corrupt. Thoroughly, totally corrupt, even more than most. 443 00:53:33.840 --> 00:53:55.840 The one question I'm going to ask is, with SBC communications buying up of the other regional belts and ours, buying up AT&T, a lot of people are thinking, well, the AT&T monopoly is going to get back together again, it's going to be unregulated, and we're not going to be able to afford full service in the region. 444 00:54:03.840 --> 00:54:33.840 capital investment, this whole idea that capital investment was a buried entry had a lot of appeal to a lot of people because you had to build an automobile plant to compete with General Motors but that doesn't seem to be a hindrance hardly at all nowadays because the capital markets are so sophisticated worldwide if somebody has the potential to earn monopoly profits in the state of Alabama I would expect competition to be drawn in from all over the place and the real problem would be do they need to get a government license? 445 00:54:33.840 --> 00:54:40.840 to be able to compete like that. I don't know the details about this, but that would seem to me to be the biggest barrier to entries. 446 00:54:40.840 --> 00:54:47.840 Do they have to get a government license, and will this company effectively lobby against a governmental license of that sort? 447 00:54:47.840 --> 00:54:52.840 I know that Constellation Energy in Baltimore, it's like walking distance from where I live. 448 00:54:52.840 --> 00:55:01.840 In fact, my next-door neighbor is the assistant treasurer at Constellation Energy, which owns BG&E, and they spend a lot of time politicking. 449 00:55:01.840 --> 00:55:11.840 He doesn't get home from work until 11 o'clock midnight every night because he's always at some dinner with the mayor or the governor or something like that. 450 00:55:11.840 --> 00:55:16.840 So I assume what they're doing is making sure that the competition doesn't come into the state of Maryland. 451 00:55:16.840 --> 00:55:21.840 You know, why so many dinners with politicians? That's the way they... 452 00:55:21.840 --> 00:55:24.840 So that would be the biggest barrier, I would think. 453 00:55:24.840 --> 00:55:30.840 This is more of a comment on the whole issue of monopoly in my home state of Indiana where I live. 454 00:55:30.840 --> 00:55:36.840 Insight is the local provider of grand monopoly power over the area. 455 00:55:36.840 --> 00:55:43.840 And right before I left to come here I saw a couple advertisements on the TV by Insight 456 00:55:43.840 --> 00:55:51.840 urging its customers to vote on upcoming referendum to determine if Insight should retain monopoly power. 457 00:55:51.840 --> 00:55:59.840 No, well if they vote yes, I'd say they deserve it. 458 00:55:59.840 --> 00:56:08.840 Unfortunately, because of the nature of democracy, the people who voted no will also get screwed also by this. 459 00:56:08.840 --> 00:56:10.840 What did you say there at the end? 460 00:56:10.840 --> 00:56:22.840 Well, I mean, I just thought it was interesting that the government gave them subsidies not only to have the monopolies out, but in fact there were subsidies to advertise with customers. 461 00:56:40.840 --> 00:57:03.160 The average citizen can't imagine what competition would be like. 462 00:57:03.160 --> 00:57:07.960 I think it was Murray Rothbard who once gave the example of if the government had taken 463 00:57:07.960 --> 00:57:15.080 over the shoe industry 150 years ago and then all of a sudden they privatize the shoe industry. 464 00:57:15.080 --> 00:57:19.240 You can bet your life people would say, well, that's preposterous. Everybody knows you need 465 00:57:19.240 --> 00:57:23.320 government to make shoes. The private sector could not possibly make shoes, but that's 466 00:57:23.320 --> 00:57:28.600 the way it is with these so-called utilities. It's been a government-run monopoly scam for 467 00:57:28.600 --> 00:57:36.680 so long that economists can understand what was likely to happen if you open up the competition. 468 00:57:36.680 --> 00:57:41.920 That's why you should be studying economics, but the average citizen, they'll fall for 469 00:57:41.920 --> 00:57:42.920 this sort of thing. 470 00:57:42.920 --> 00:57:46.920 They might like, well, the security of, what is it, Insight, is that the name of the company? 471 00:57:46.920 --> 00:57:52.920 Yeah, so they might like the security of that more than, of course, they'll be making threats 472 00:57:52.920 --> 00:57:59.280 about the upcoming monopoly if you allow competition, right, is that what their argument is? 473 00:57:59.280 --> 00:58:01.840 Don't allow competition, it'll lead to monopoly. 474 00:58:01.840 --> 00:58:06.280 It's excessive duplication, they're going to tear up all your streets. 475 00:58:06.280 --> 00:58:10.280 Well, yeah, sure, why wouldn't they? 476 00:58:10.280 --> 00:58:17.280 If I was a monopoly economics professor, I wouldn't prepare for class at all. 477 00:58:17.280 --> 00:58:23.280 Why should I? If I had a government monopoly in teaching economics at my school, 478 00:58:23.280 --> 00:58:28.280 I'd be just as big a scoundrel as these guys. 479 00:58:58.280 --> 00:59:03.280 and the ability to add more to the income structure, so in the winter you have one black box. 480 00:59:03.280 --> 00:59:14.280 So it just means that if you go out there, there's a situation where the economy's not free market yet, it's not, you're still too much economy yet, and people cancel the whole part of the economy. 481 00:59:58.280 --> 01:00:27.280 In India, there was a man who ran a textile plant and hired several hundred people somewhere in India, and he had horrible problems with electric power, since you mentioned underdeveloped countries, and with a textile mill, if the power goes off for one second, that screws everything up. 482 01:00:57.280 --> 01:01:09.280 In the same is true with Russia. If you're thinking of Russia, people from anywhere in the world come in there and compete to serve these customers, and you don't have to have a giant market anymore. 483 01:01:09.280 --> 01:01:20.280 This story I'm talking about with power, it wasn't a huge market. It was a small town in India, but it was enough to make a profit to this American power company, and they were willing to go there. 484 01:01:20.280 --> 01:01:30.280 The real problem would probably be Vladimir Putin giving permission to foreigners to come in and compete to provide power. 485 01:01:30.280 --> 01:01:37.280 Or if he chooses to try to solidify his political power through mercantilism, 486 01:01:37.280 --> 01:01:42.280 that is giving grants of monopoly privilege to whoever owns the infrastructure now, 487 01:01:42.280 --> 01:01:46.280 that's not going to happen. You're not going to have competition and the benefits of competition. 488 01:01:46.280 --> 01:01:51.280 So you're going to have Putin being responsible for this mess that they're in. 489 01:01:51.280 --> 01:01:54.280 But how would you deal with the traditional credit, right? 490 01:01:54.280 --> 01:01:58.280 The people aren't giving enough money because they don't throw money into the market prices. 491 01:01:58.280 --> 01:02:02.280 Eventually, you know, the folks are going to get everything both here and there if they can. 492 01:02:02.280 --> 01:02:06.280 It's not like maybe a year or two where they're simply not... 493 01:02:06.280 --> 01:02:10.280 Well, what I'm saying is that price controls aren't going to help them. 494 01:02:10.280 --> 01:02:15.280 It's going to create shortages, and then if you want the energy, you're going to have to pay higher black market prices. 495 01:02:15.280 --> 01:02:32.280 Black Market Prices or none at all. So that's really not a desirable option to do that and who ends up getting the short supply is usually who is best able to bribe the suppliers and that's usually the more affluent people who do have the money. 496 01:02:32.280 --> 01:02:39.280 So the people without the money, they're going to be worse off under price controls than under allowing the market to work. 497 01:02:39.280 --> 01:02:45.280 Besides, it will give them an incentive to work harder and drink less vodka, I suppose, if they can't afford it now. 498 01:02:45.280 --> 01:02:52.280 You can look at the example of post-war Germany, the famous example of how at the end of World War II, 499 01:02:52.280 --> 01:03:01.280 when the Americans came in and controlled the German economy, they admired the Nazi fascist economic regulations. 500 01:03:01.280 --> 01:03:07.280 They didn't like the Nazis in general, but they really liked all the price controls and the planning, so they kept it in. 501 01:03:07.280 --> 01:03:15.780 They kept it all in for a couple of years after World War II when the U.S. government essentially ran Germany as an occupied country. 502 01:03:15.780 --> 01:03:23.780 And then the economic minister named Ludwig Erhard, who was given a lot of latitude in setting economic policy, 503 01:03:23.780 --> 01:03:34.780 he waited until a Sunday when the Americans were off work and issued a decree on television that all wage and price controls were to be abolished the next day. 504 01:03:34.780 --> 01:03:56.780 and that's credited with the German economic miracle and so it wasn't a miracle, it was just getting rid of the fascist economic planning that was so enthusiastically endorsed by all these new dealers who were still in the Truman government and who kind of liked all these economic controls and so he went over their heads. 505 01:03:56.780 --> 01:04:04.220 In one of my articles on Mises.org, I think it was called 4,000 Years of Price Controls, 506 01:04:04.220 --> 01:04:10.980 I quoted a book that quoted an interview with Hermann Göring, the famous Nazi, who was 507 01:04:10.980 --> 01:04:14.020 interviewed by an American journalist after the war. 508 01:04:14.020 --> 01:04:18.140 And here's Hermann Göring, the Nazi, saying, you know, you're an economist, ought to come 509 01:04:18.140 --> 01:04:21.980 over here and study what happened here in Germany when we were in charge, we the Nazis 510 01:04:21.980 --> 01:04:22.980 were in charge. 511 01:04:22.980 --> 01:04:26.980 And he's essentially saying, we really screwed everything up badly with price controls. 512 01:04:26.980 --> 01:04:30.180 And your economists think this is a good idea now? 513 01:04:30.180 --> 01:04:33.860 That's craziness. Don't take us as your model. 514 01:04:33.860 --> 01:04:39.100 And so they had an American journalist being lectured by Herman Gehring to get rid of price controls. 515 01:04:39.100 --> 01:04:43.100 And so, too bad Herman is not still alive. 516 01:04:43.100 --> 01:04:49.420 He could go to Russia and advise Putin on his economics with regard to price controls, I suppose. 517 01:04:49.420 --> 01:04:59.420 But the poorer people are always the most, harm the most by price controls because of the shortages, and they can't bribe their way in the shortages. 518 01:04:59.420 --> 01:05:05.420 It's the more affluent people who bribe their way in to get enough fuel or whatever is necessary. 519 01:05:05.420 --> 01:05:13.420 In New York City for a long, long time, that bribery in the housing market is called key money. 520 01:05:13.420 --> 01:05:30.420 The rent will be great. It will be like $800 a month for a big two-bedroom apartment overlooking Central Park or something, but it will cost you $20,000 for the landlord to hand you the key. 521 01:05:30.420 --> 01:05:36.420 And so if you've got the 20 grand, you get a great apartment at a low rate, and that's typically how it works. 522 01:05:36.420 --> 01:05:37.420 How It Works. 523 01:05:37.420 --> 01:05:41.500 A classmate of mine in college had got one of those. 524 01:05:41.500 --> 01:05:46.100 She fortunately had an uncle who was a vice president at Citibank and could stake her 525 01:05:46.100 --> 01:05:47.100 with key money. 526 01:05:47.100 --> 01:05:50.620 So she got a nice apartment when she went to NYU Law School. 527 01:05:50.620 --> 01:05:56.420 But if you didn't come from an affluent family like that, you live in a closet somewhere 528 01:05:56.420 --> 01:05:57.420 in Brooklyn. 529 01:05:57.420 --> 01:06:01.020 Any other questions or comments? 530 01:06:01.020 --> 01:06:06.020 We've had all brilliant commentary so far, but not so many questions. 531 01:06:06.020 --> 01:06:10.020 Okay, well we'll wrap it up then and go drink coffee.