WEBVTT NOTE 10.03. The Illusion of Monopoly Price 1 00:00:00.000 --> 00:00:05.000 3. The Illusion of Monopoly Price 2 00:00:05.000 --> 00:00:26.000 So far we have established that there is nothing wrong with a monopoly price, either when instituted by one firm or by a cartel, that in fact, whatever price the free market, unhampered by violence or the threat of violence, establishes, will be the best price. 3 00:00:26.000 --> 00:00:27.000 Price. 4 00:00:27.000 --> 00:00:34.280 We have also shown the impossibility of separating monopolizing from efficiency considerations 5 00:00:34.280 --> 00:00:41.640 in cartel actions, or of separating technology from profitability in general, and we have 6 00:00:41.640 --> 00:00:46.280 seen the great instability of the cartel form. 7 00:00:46.280 --> 00:00:49.680 In this section we investigate a further problem. 8 00:00:49.680 --> 00:00:55.560 Granted that there is nothing wrong with monopoly prices, how tenable is the very 9 00:00:55.560 --> 00:01:03.480 Concept of Monopoly Price on the Free Market. Can it be distinguished at all from competitive price, 10 00:01:03.480 --> 00:01:09.960 its supposed polar opposite? To answer this question, we must explore what the theory of 11 00:01:09.960 --> 00:01:15.800 monopoly price is all about. A. Definitions of Monopoly 12 00:01:16.920 --> 00:01:24.120 Before investigating the theory of monopoly price, we must begin by defining monopoly. 13 00:01:24.120 --> 00:01:34.720 Despite the fact that monopoly problems occupy an enormous quantity of economic writings, little or no clarity of definition exists. 14 00:01:34.720 --> 00:01:39.120 The same confusion exists in the laws concerning monopoly. 15 00:01:39.120 --> 00:01:50.920 Despite constitutional warnings against vagueness, the Sherman Anti-Trust Act outlaws monopolizing actions without once defining the concept. 16 00:01:50.920 --> 00:02:00.420 To this day, there has been no clear legislative decision concerning what constitutes illegal monopolistic action. 17 00:02:00.420 --> 00:02:05.160 There is, in fact, enormous vagueness and confusion on the subject. 18 00:02:05.160 --> 00:02:12.160 Very few economists have formulated a coherent, meaningful definition of monopoly. 19 00:02:12.160 --> 00:02:20.820 A common example of a confused definition is monopoly exists when a firm has control over its price. 20 00:02:20.820 --> 00:02:25.120 This definition is a mixture of confusion and absurdity. 21 00:02:25.120 --> 00:02:33.420 In the first place, on the free market, there is no such thing as control over the price in an exchange. 22 00:02:33.420 --> 00:02:40.420 In any exchange, the price of the sale is voluntarily agreed upon by both parties. 23 00:02:40.420 --> 00:02:44.820 No control is exercised by either party. 24 00:02:44.820 --> 00:02:50.720 The only control is each person's control over his own actions. 25 00:02:50.720 --> 00:03:05.120 Stemming from his self-sovereignty, and consequently his control will be over his own decision to enter or not to enter into an exchange at any hypothetical price. 26 00:03:05.120 --> 00:03:12.420 There is no direct control over price because price is a mutual phenomenon. 27 00:03:12.420 --> 00:03:25.420 On the other hand, each person has absolute control over his own action, and therefore over the price which he will attempt to charge for any particular good. 28 00:03:25.420 --> 00:03:36.420 Any man can set any price that he wants for any quantity of a good that he sells. The question is whether he can find any buyers at that price. 29 00:03:36.420 --> 00:03:43.220 Similarly, of course, any buyer can set any price at which he will purchase a certain 30 00:03:43.220 --> 00:03:44.220 good. 31 00:03:44.220 --> 00:03:48.180 The question is whether he can find a seller at that price. 32 00:03:48.180 --> 00:03:55.460 It is this process, indeed, of mutual bids and offers that yields the daily prices on 33 00:03:55.460 --> 00:03:57.220 the market. 34 00:03:57.220 --> 00:04:03.380 There is an all too common assumption, however, that if we compare, say, Henry Ford and a 35 00:04:03.380 --> 00:04:10.660 The small wheat farmer, the two differ enormously in their respective powers of control. 36 00:04:10.660 --> 00:04:16.980 It is believed that the wheat farmer finds his price given to him by the market, while 37 00:04:16.980 --> 00:04:21.780 Ford can administer or set his own price. 38 00:04:21.780 --> 00:04:28.320 The wheat farmer is allegedly subject to the impersonal forces of the market, and ultimately 39 00:04:28.320 --> 00:04:36.040 to the Consumer, while Ford is, to a greater or lesser extent, the master of his own fate, 40 00:04:36.040 --> 00:04:39.200 if not indeed the ruler of the consumers. 41 00:04:39.200 --> 00:04:46.380 Further, it is believed that Ford's monopoly power stems from his being large in relation 42 00:04:46.380 --> 00:04:54.360 to the automobile market, while the farmer is a pure competitor because he is small compared 43 00:04:54.360 --> 00:04:56.840 to the total supply of wheat. 44 00:04:56.840 --> 00:05:03.960 Usually, Ford is not considered an absolute monopolist, but someone with a vague degree 45 00:05:03.960 --> 00:05:06.820 of monopoly power. 46 00:05:06.820 --> 00:05:13.000 In the first place, it is completely false to say that the farmer and Ford differ in 47 00:05:13.000 --> 00:05:15.840 their control over price. 48 00:05:15.840 --> 00:05:22.200 Both have exactly the same degree of control and of non-control. 49 00:05:22.200 --> 00:05:29.040 That is, both have absolute control over the quantity they produce and the price which 50 00:05:29.040 --> 00:05:36.820 they attempt to get, and absolute non-control over the price and quantity transaction that 51 00:05:36.820 --> 00:05:39.120 finally takes place. 52 00:05:39.120 --> 00:05:45.560 We are, of course, not considering here particular uncertainties of agriculture resulting from 53 00:05:45.560 --> 00:05:47.520 climate, etc. 54 00:05:47.520 --> 00:05:54.040 The farmer is free to ask any price he wants, just as Ford is, and is free to look for 55 00:05:54.040 --> 00:05:56.340 a buyer at such a price. 56 00:05:56.340 --> 00:06:02.380 He is not in the least compelled to sell his produce to the organized markets if he can 57 00:06:02.380 --> 00:06:04.420 do better elsewhere. 58 00:06:04.420 --> 00:06:11.260 Every producer of every product is free in a free market society to produce as much as 59 00:06:11.260 --> 00:06:41.260 The Theory of Money and Credit 60 00:06:41.260 --> 00:07:09.060 For this is precisely the action of everyone in the economy – the small wheat farmer, 61 00:07:09.060 --> 00:07:22.060 Charging whatever the traffic will bear is simply a rather emotive synonym for charging as high a price as can be freely obtained. 62 00:07:22.060 --> 00:07:36.060 Who officially sets the price in any exchange is a completely trivial and irrelevant technological question, a matter of institutional convenience rather than economic analysis. 63 00:07:36.060 --> 00:07:48.060 The fact that Mises posts its prices each day does not mean that Mises has some sort of mysterious control of its price over the consumer. 64 00:07:48.060 --> 00:08:03.060 Similarly, that large-scale industrial buyers of raw materials often post their bid prices does not mean that they exercise some sort of extra control over the price obtained by the growers. 65 00:08:03.060 --> 00:08:14.360 Rather than acting as a means of control, in fact, posting simply furnishes needed information to all would-be buyers and or sellers. 66 00:08:14.360 --> 00:08:23.160 The process of price determination through the interaction of value scales occurs in precisely the same way, 67 00:08:23.160 --> 00:08:30.060 regardless of the concrete details and institutional conditions of market arrangements. 68 00:08:30.060 --> 00:08:35.660 Each individual producer, then, is sovereign over his own actions. 69 00:08:35.660 --> 00:08:42.460 He is free to buy, produce and sell whatever he likes, and to whoever will purchase. 70 00:08:42.460 --> 00:08:49.660 The farmer is not compelled to sell to any particular market, or to any particular company, 71 00:08:49.660 --> 00:08:56.060 any more than Ford is compelled to sell to John Brown if he does not wish to do so, 72 00:08:56.060 --> 00:08:59.420 say, because he can get a higher price elsewhere. 73 00:08:59.420 --> 00:09:07.980 But as we have seen, insofar as a producer wishes to maximize his monetary return, he does submit 74 00:09:07.980 --> 00:09:15.900 himself to the control of consumers, and he sets his output accordingly. This is true of the farmer, 75 00:09:15.900 --> 00:09:23.980 of Ford, or of anyone else in the entire economy. Land owner, laborer, service producer, product 76 00:09:23.980 --> 00:09:32.660 Owner, etc. Ford, then, has no more control over the consumer than the farmer has. 77 00:09:32.660 --> 00:09:39.100 One common objection is that Ford is able to acquire monopoly power or monopolistic 78 00:09:39.100 --> 00:09:46.220 power because his product has a recognized brand name or trademark, which the wheat farmer 79 00:09:46.220 --> 00:09:52.980 has not. This, however, is surely a case of putting the cart before the horse. The brand 80 00:09:52.980 --> 00:10:13.980 The brand name and the wide knowledge of the brand come from consumers' desire for the product attached to that particular brand, and are therefore a result of consumer demand, rather than a pre-existing means for some sort of monopolistic power over the consumers. 81 00:10:13.980 --> 00:10:24.980 In fact, Farmer Hiram Jones is perfectly free to stamp the brand name Hiram Jones Wheat on his product and attempt to sell it on the market. 82 00:10:24.980 --> 00:10:33.980 The fact that he has not done so signifies that it would not be a profitable step in the concrete market condition of his product. 83 00:10:33.980 --> 00:10:45.980 The chief point is that in some cases, consumers and lower order entrepreneurs consider each individual brand name as representing a unique product. 84 00:10:45.980 --> 00:11:00.980 While in other cases, purchasers consider the output of one firm, one product owner or set of product owners operating jointly, as identical in use value with products of other firms. 85 00:11:00.980 --> 00:11:08.980 which situation will occur is entirely dependent on the buyer's valuations in each concrete case. 86 00:11:08.980 --> 00:11:20.980 Later in this chapter we shall analyze in greater detail the tangled web of fallacies involved in the various theories of monopolistic competition. 87 00:11:20.980 --> 00:11:26.980 At this point we are attempting to arrive at a definition of monopoly per se. 88 00:11:26.980 --> 00:11:36.980 To proceed, there are three possible coherent definitions of monopoly. One is derived from its linguistic roots, 89 00:11:36.980 --> 00:11:46.980 monos, only, and polin, to sell, that is, the only seller of any given good, definition one. 90 00:11:46.980 --> 00:11:52.980 This is certainly a legitimate definition, but it is an extraordinarily broad one. 91 00:11:52.980 --> 00:12:03.980 It means that, whenever there is any differentiation at all among individual products, the individual producer and seller is a monopolist. 92 00:12:03.980 --> 00:12:10.980 John Jones, lawyer, is a monopolist over the legal services of John Jones. 93 00:12:10.980 --> 00:12:17.980 Tom Williams, doctor, is a monopolist over his own unique medical services, etc. 94 00:12:17.980 --> 00:12:24.980 The owner of the Empire State Building is a monopolist over the rental services in his building. 95 00:12:24.980 --> 00:12:34.980 This definition therefore labels all consumer distinctions between individual products as establishing monopolies. 96 00:12:34.980 --> 00:12:45.980 It must be remembered that only consumers can decide whether two commodities offered on the market are one good or two different goods. 97 00:12:45.980 --> 00:12:50.980 This issue cannot be settled by a physical inspection of the product. 98 00:12:50.980 --> 00:12:56.980 The elemental physical nature of the good may be only one of its properties. 99 00:12:56.980 --> 00:13:05.980 In most cases, a brand name, the goodwill of a particular company or a more pleasant atmosphere in the store 100 00:13:05.980 --> 00:13:11.980 will differentiate the product from its rivals in the view of many of its customers. 101 00:13:11.980 --> 00:13:17.420 The products then become different goods for the consumers. 102 00:13:17.420 --> 00:13:23.520 No one can ever be certain in advance, least of all the economist, whether a commodity 103 00:13:23.520 --> 00:13:30.820 sold by A will be treated on the market as homogeneous with the same basic physical good 104 00:13:30.820 --> 00:13:37.240 sold by B. Economists have often charged, for example, that consumers who will pay a 105 00:13:37.240 --> 00:13:43.380 a higher price for the same good at a store with a more pleasant atmosphere are acting 106 00:13:43.380 --> 00:13:45.880 irrationally. 107 00:13:45.880 --> 00:13:52.460 Actually they are by no means doing so, since consumers are buying not just a physical can 108 00:13:52.460 --> 00:13:59.700 of beans, but a can of beans sold in a certain store by certain clerks, and these factors 109 00:13:59.700 --> 00:14:03.600 may or may not make a difference to them. 110 00:14:03.600 --> 00:14:09.600 Businessmen are far less motivated by such non-physical considerations, although good 111 00:14:09.600 --> 00:14:16.880 will affects their purchases too, not because they are more rational than consumers, but 112 00:14:16.880 --> 00:14:24.160 because they are not concerned, as consumers are, with their own value scales in deciding 113 00:14:24.160 --> 00:14:25.720 their purchases. 114 00:14:25.720 --> 00:14:32.260 As we have seen above, businessmen are generally motivated purely by the expected revenue that 115 00:14:32.260 --> 00:14:35.300 Goods Will Bring on the Market. 116 00:14:35.300 --> 00:14:41.820 Professor Lawrence Abbott, in one of the outstanding theoretical works of recent years, demonstrates 117 00:14:41.820 --> 00:14:49.080 also that as civilization and the economy advance, products will become more and more 118 00:14:49.080 --> 00:14:53.420 differentiated and less and less homogeneous. 119 00:14:53.420 --> 00:15:00.020 For one thing, greater differentiation occurs at the consumer than at the producer level, 120 00:15:00.020 --> 00:15:07.020 And the expanding economy takes over an increasing proportion of goods once made by the consumer 121 00:15:07.020 --> 00:15:14.540 himself, and therefore supplies more finished goods than raw materials to the consumer than 122 00:15:14.540 --> 00:15:21.140 formerly, bread rather than flour, sweaters rather than wool yarn, etc. 123 00:15:21.140 --> 00:15:25.540 Thus, there is greater opportunity for differentiation. 124 00:15:25.540 --> 00:15:36.540 Furthermore, to the familiar charge that business advertising tends to create differentiation in the consumer's mind that is not really there, 125 00:15:36.540 --> 00:15:51.540 Abbott replies incisively that the reverse is more likely to be true, and that advancing civilization increases the consumer's perception and discrimination of differences of which he was previously ignorant. 126 00:15:51.540 --> 00:15:58.700 Writes Abbott, As man becomes more civilized, he develops greater powers of perception with 127 00:15:58.700 --> 00:16:06.420 regard to quality differences. Subjective homogeneity may exist even when objective 128 00:16:06.420 --> 00:16:14.160 homogeneity does not, due to the inability or unwillingness of buyers to perceive differences 129 00:16:14.160 --> 00:16:19.800 is between almost identical products and discriminate between them. 130 00:16:19.800 --> 00:16:26.560 As a society matures and education improves, people learn to develop more acute powers 131 00:16:26.560 --> 00:16:28.400 of discrimination. 132 00:16:28.400 --> 00:16:31.220 Their wants become more detailed. 133 00:16:31.220 --> 00:16:39.640 They begin to develop a preference, say, not simply for white wine but for 1948 Chablis. 134 00:16:39.640 --> 00:16:45.680 People generally tend to underestimate the significance of apparently trivial differences 135 00:16:45.680 --> 00:16:48.640 in fields in which they are not expert. 136 00:16:48.640 --> 00:16:55.040 An unmusical person may be unwilling to concede that there is any difference in tone between 137 00:16:55.040 --> 00:17:01.080 a Steinway and a chickering piano, being unable himself to detect it. 138 00:17:01.080 --> 00:17:07.280 A non-golfer is more likely than a habitual player to believe that all brands of golf 139 00:17:07.280 --> 00:17:27.280 are virtually alike. Hence, there is hardly any way that definition one of monopoly can be successfully used, for this definition depends on how we choose a homogeneous good, and this can never be decided by an economist. 140 00:17:27.280 --> 00:17:35.200 What constitutes a homogeneous commodity, that is, an industry, neckties, bowties, bowties 141 00:17:35.200 --> 00:17:40.140 with polka dots, etc., or bowties made by Jones? 142 00:17:40.140 --> 00:17:47.640 Only consumers will decide, and they, as different consumers, will be likely to decide differently 143 00:17:47.640 --> 00:17:50.280 in each concrete case. 144 00:17:50.280 --> 00:17:56.480 Use of definition one, therefore, will probably reduce to the barren definition of monopoly 145 00:17:56.480 --> 00:18:05.980 as each man's exclusive ownership of his own property, and this absurdly would make every single person a monopolist. 146 00:18:05.980 --> 00:18:17.980 Oddly, despite the reams of literature on monopolies, very few economists have bothered to define monopoly, and these problems have therefore been overlooked. 147 00:18:17.980 --> 00:18:25.480 Joan Robinson, in the beginning of her famous Economics of Imperfect Competition, saw the difficulty, 148 00:18:25.480 --> 00:18:29.640 and then evaded the issue throughout the rest of the book. 149 00:18:29.640 --> 00:18:35.400 She concedes that under careful analysis, either a monopoly would be defined as every 150 00:18:35.400 --> 00:18:42.240 producer's control over his own product, or monopoly could simply not exist on the 151 00:18:42.240 --> 00:18:44.560 free market at all. 152 00:18:44.560 --> 00:18:50.840 For competition exists among all products for the consumer's dollar, while very few 153 00:18:50.840 --> 00:18:54.320 articles are rigorously homogeneous. 154 00:18:54.320 --> 00:19:01.080 Mrs Robinson then tries to evade the issue by falling back on common sense and defining 155 00:19:01.080 --> 00:19:08.240 monopoly as existing where there is a marked gap between the product and other substitutes 156 00:19:08.240 --> 00:19:10.380 the consumer may buy. 157 00:19:10.380 --> 00:19:12.640 But this will not do. 158 00:19:12.640 --> 00:19:18.420 Economics in the first place can establish no quantitative laws, so that there is nothing 159 00:19:18.420 --> 00:19:22.120 we can say about sizes of gaps. 160 00:19:22.120 --> 00:19:24.920 When does the gap become marked? 161 00:19:24.920 --> 00:19:32.340 Secondly, even if such laws were meaningful, there would be no way to measure the cross-elasticities 162 00:19:32.340 --> 00:19:38.480 of demands, the elasticity of substitution between the products, etc. 163 00:19:38.480 --> 00:19:45.760 These elasticities of substitution are changing all the time, and could not be measured successfully 164 00:19:45.760 --> 00:19:52.520 even if they all remained constant, since supply conditions are always changing. 165 00:19:52.520 --> 00:19:58.800 No laboratory exists where all economic factors may be held fixed. 166 00:19:58.800 --> 00:20:04.960 After this point in her discussion, Mrs. Robinson practically forgets all about heterogeneity 167 00:20:04.960 --> 00:20:07.760 of product. 168 00:20:07.760 --> 00:20:12.300 Definition 1, then, is coherent, but highly inexpedient. 169 00:20:12.300 --> 00:20:18.700 Its usefulness is very limited, and the term has acquired highly charged emotional connotations 170 00:20:18.700 --> 00:20:22.660 from past use of quite different definitions. 171 00:20:22.660 --> 00:20:29.100 The term monopoly has sinister and evil connotations to most people. 172 00:20:29.100 --> 00:20:31.460 Monopolist is generally a word of abuse. 173 00:20:31.460 --> 00:20:38.000 To apply the term monopolist to at least the vast majority of the population, and perhaps 174 00:20:38.000 --> 00:20:43.640 to Every Man would have a confusing and even ludicrous effect. 175 00:20:43.640 --> 00:20:49.320 The second definition is related to the first, but differs very significantly. 176 00:20:49.320 --> 00:20:55.680 It in fact was the original definition of monopoly, and the very definition responsible 177 00:20:55.680 --> 00:20:59.640 for its sinister connotations in the public mind. 178 00:20:59.640 --> 00:21:05.960 Let us turn to its classic expression by the great 17th century jurist, Lord Cook. 179 00:21:05.960 --> 00:21:13.520 A monopoly is an institution or allowance by the king, by his grant, commission or otherwise, 180 00:21:13.520 --> 00:21:22.120 to any person or persons, bodies politic or corporate, for the sole buying, selling, making, 181 00:21:22.120 --> 00:21:29.940 working or using of anything, whereby any person or persons, bodies politic or corporate, 182 00:21:29.940 --> 00:21:36.720 are sought to be restrained of any freedom or liberty that they had before, or hindered 183 00:21:36.720 --> 00:21:39.500 in their lawful trade. 184 00:21:39.500 --> 00:21:46.540 In other words, by this definition, monopoly is a grant of special privilege by the state, 185 00:21:46.540 --> 00:21:53.180 reserving a certain area of production to one particular individual or group. 186 00:21:53.180 --> 00:21:59.360 Entry into the field is prohibited to others, and this prohibition is enforced by the gendarmes 187 00:21:59.360 --> 00:22:22.360 This definition of monopoly goes back to the common law and acquired great political importance in England during the 16th and 17th centuries, when an historic struggle took place between libertarians and the crown over the issue of monopoly as opposed to freedom of production and enterprise. 188 00:22:22.360 --> 00:22:33.360 Under this definition of the term, it is not surprising that monopoly took on connotations of sinister interest and tyranny in the public mind. 189 00:22:33.360 --> 00:22:46.360 The enormous restrictions on production and trade, as well as the establishment by the state of a monopoly cast of favorites, were the objects of vehement attack for several centuries. 190 00:22:46.360 --> 00:22:56.360 The onrush of monopoly grants by Queen Elizabeth I and Charles I provoked resistance from even the Crown's subservient judges, 191 00:22:56.360 --> 00:23:08.360 and in 1624, Parliament declared that all monopolies are altogether contrary to the laws of this realm and are and shall be void. 192 00:23:08.360 --> 00:23:15.240 This anti-monopoly spirit was deeply ingrained in America and the original Maryland Constitution 193 00:23:15.240 --> 00:23:21.240 declared that monopolies were odious and contrary to principles of commerce. 194 00:23:22.440 --> 00:23:28.920 That this definition was formerly important in economic analysis is clear in the following 195 00:23:28.920 --> 00:23:33.640 quotation from one of the first American economists, Francis Wayland. 196 00:23:33.640 --> 00:23:41.520 A monopoly is an exclusive right granted to a man, or to a monopoly of men, to employ 197 00:23:41.520 --> 00:23:46.240 their labor or capital in some particular manner. 198 00:23:46.240 --> 00:23:52.720 It is obvious that this type of monopoly can never arise on a free market, unhampered by 199 00:23:52.720 --> 00:23:54.960 state interference. 200 00:23:54.960 --> 00:24:02.920 In the free economy then, according to this definition, there can be no monopoly problem. 201 00:24:02.920 --> 00:24:09.040 Many writers have objected that brand names and trademarks, generally considered as part 202 00:24:09.040 --> 00:24:15.000 of the free market, really constitute grants of special privilege by the state. 203 00:24:15.000 --> 00:24:21.880 No other firm can compete with Hershey Chocolates by producing its own product and calling it 204 00:24:21.880 --> 00:24:23.620 Hershey Chocolates. 205 00:24:23.620 --> 00:24:27.920 Is this not a state-imposed restriction on freedom of entry? 206 00:24:27.920 --> 00:24:33.160 And how can there be real freedom of entry under such conditions? 207 00:24:33.160 --> 00:24:39.960 This argument, however, completely misconceives the nature of liberty and of property. 208 00:24:39.960 --> 00:24:46.960 Every individual in the free society has a right to ownership of his own self and to 209 00:24:46.960 --> 00:24:51.080 the exclusive use of his own property. 210 00:24:51.080 --> 00:24:57.440 Included in his property is his name, the linguistic label which is uniquely his and 211 00:24:57.440 --> 00:25:05.840 is identified with him. A name is an essential part of a man's identity and therefore of his property. 212 00:25:05.840 --> 00:25:12.480 To say that he is a monopolist over his name is saying no more than that he is a monopolist 213 00:25:12.480 --> 00:25:18.720 over his own will or property, and such an extension of the word monopolist to every 214 00:25:18.720 --> 00:25:25.040 individual in the world would be an absurd usage of the term. The governmental function 215 00:25:25.040 --> 00:25:45.040 The definition of defense of person and property, vital to the existence of a free society so long as any people are disposed to invade them, involves the defense of each person's particular name or trademark against the fraud of forgery or imposture. 216 00:25:45.040 --> 00:25:51.640 is the outlawing of John Smith's pretending to be Joseph Williams, a prominent lawyer, 217 00:25:51.640 --> 00:25:57.880 and selling his own legal advice after stating to clients that he is selling that of Williams. 218 00:25:57.880 --> 00:26:04.560 This fraud is not only implicit theft of the consumer, but it is also abusing the property 219 00:26:04.560 --> 00:26:11.140 right of Joseph Williams to his unique name and individuality, and the use by some other 220 00:26:11.140 --> 00:26:16.380 Another chocolate firm of the Hershey label would be an equivalent perpetration of an 221 00:26:16.380 --> 00:26:20.420 invasive act of fraud and forgery. 222 00:26:20.420 --> 00:26:26.220 It might be objected that these concepts are vague and give rise to problems. 223 00:26:26.220 --> 00:26:29.060 Problems do arise, but they are not insuperable. 224 00:26:29.060 --> 00:26:35.540 Thus, if one man is named Joseph Williams, does this preclude anyone else from having 225 00:26:35.540 --> 00:26:55.820 In short, it is not so much the name per se, which an individual owns, but the name as 226 00:26:55.820 --> 00:26:59.460 an affiliate of his person. 227 00:26:59.460 --> 00:27:05.300 Before adopting this definition of monopoly as the proper one, we must consider a final 228 00:27:05.300 --> 00:27:13.480 Alternative, The Defining of a Monopolist as A Person Who Has Achieved a Monopoly Price, 229 00:27:13.480 --> 00:27:14.740 Definition 3. 230 00:27:14.740 --> 00:27:20.700 This definition has never been explicitly set forth, but it has been implicit in the 231 00:27:20.700 --> 00:27:25.420 most worthwhile of the neo-classical writings on this subject. 232 00:27:25.420 --> 00:27:31.460 It has the merit of focusing attention on the important economic question of monopoly 233 00:27:31.460 --> 00:27:35.180 price, its nature and consequences. 234 00:27:35.180 --> 00:27:41.260 In this connection we shall now investigate the neoclassical theory of monopoly price 235 00:27:41.260 --> 00:27:48.620 and inquire whether it really has the substance it seems at first glance to possess. 236 00:27:48.620 --> 00:27:50.420 b. 237 00:27:50.420 --> 00:27:55.000 The Neoclassical Theory of Monopoly Price 238 00:27:55.000 --> 00:28:00.700 In previous sections we have referred to a monopoly price as one established either by 239 00:28:00.700 --> 00:28:05.340 by a monopolist or by a cartel of producers. 240 00:28:05.340 --> 00:28:09.060 At this point, we must investigate the theory more closely. 241 00:28:09.060 --> 00:28:14.740 A succinct definition of monopoly price has been supplied by Mises. 242 00:28:14.740 --> 00:28:20.980 If conditions are such that the monopolist can secure higher net proceeds by selling 243 00:28:20.980 --> 00:28:27.900 a smaller quantity of his product at a higher price than by selling a greater quantity of 244 00:28:27.900 --> 00:28:44.140 The monopoly price doctrine may be summed up as follows. 245 00:28:44.140 --> 00:28:50.740 A certain quantity of a good, when produced and sold, yields a competitive price on the 246 00:28:50.740 --> 00:29:05.740 A monopolist or a cartel of firms can, if the demand is inelastic at the competitive price point, restrict sales and raise the price, to arrive at the point of maximum returns. 247 00:29:05.740 --> 00:29:19.740 If on the other hand the demand as it presents itself to the monopolist or cartel is elastic at the competitive price point, the monopolist will not restrict sales to attain a higher price. 248 00:29:19.740 --> 00:29:21.260 and higher price. 249 00:29:21.260 --> 00:29:27.780 As a result, as Mises points out, there is no need to be concerned with the monopolist 250 00:29:27.780 --> 00:29:31.300 in the sense of definition one above. 251 00:29:31.300 --> 00:29:36.940 Whether or not he is the sole producer of a commodity is unimportant and irrelevant 252 00:29:36.940 --> 00:29:39.400 for catalactic problems. 253 00:29:39.400 --> 00:29:46.100 It becomes important only if the configuration of his demand enables him to restrict sales 254 00:30:16.100 --> 00:30:37.980 If he learns about the inelastic demand after he has erroneously produced too great a stock, 255 00:30:37.980 --> 00:30:42.900 the monopolist must destroy or withhold part of his stock. 256 00:30:42.900 --> 00:30:49.760 After that, he restricts production of the commodity to the most remunerative level. 257 00:30:49.760 --> 00:30:56.820 The inelastic demand giving rise to an opportunity to monopolize may present itself either to 258 00:30:56.820 --> 00:31:04.100 a single monopolist of a given product, or to an industry as a whole, when organized 259 00:31:04.100 --> 00:31:07.540 into a cartel of the different producers. 260 00:31:07.540 --> 00:31:14.540 In the latter case, the demand as it presents itself to each firm is elastic. 261 00:31:14.540 --> 00:31:21.780 At the competitive price, if one firm raises its price, the customers preponderantly shift 262 00:31:21.780 --> 00:31:24.660 to purchasing from its competitors. 263 00:31:24.660 --> 00:31:31.540 On the other hand, if the firms are cartelized, in many cases the lesser range of substitution 264 00:31:31.540 --> 00:31:39.540 by Consumers would render the demand as presented to the cartel inelastic. 265 00:31:39.540 --> 00:31:47.700 C. Consequences of Monopoly Price Theory 1. The Competitive Environment 266 00:31:47.700 --> 00:31:53.740 Before engaging in a critical analysis of the monopoly price theory itself, we might 267 00:31:53.740 --> 00:31:59.360 explore some of the consequences which do or do not follow from it. 268 00:31:59.360 --> 00:32:05.440 In this section, we for the moment assume that the monopoly price theory is valid. 269 00:32:05.440 --> 00:32:11.860 We are devoting space to analysis of monopoly price theory and its consequences because 270 00:32:11.860 --> 00:32:19.320 the theory, though invalid on the free market, will prove very useful in analyzing the consequences 271 00:32:19.320 --> 00:32:22.640 of monopoly grants by government. 272 00:32:22.640 --> 00:32:28.680 In the first place, it is not true that the monopolist, used here in the sense of Definition 273 00:32:28.680 --> 00:32:36.000 Section 3, an Obtainer of a Monopoly Price, is removed from the influence of competition 274 00:32:36.000 --> 00:32:40.680 or has the power to dictate to consumers at will. 275 00:32:40.680 --> 00:32:46.720 The best of the monopoly price theorists admit that the monopolist is as subject to the forces 276 00:32:46.720 --> 00:32:50.040 of competition as are other firms. 277 00:32:50.040 --> 00:32:56.560 The monopolist cannot set prices as high as he would like, being limited by the configurations 278 00:32:56.560 --> 00:32:58.640 of consumer demand. 279 00:32:58.640 --> 00:33:05.880 By definition, in fact, the demand as presented to the monopolist becomes elastic above the 280 00:33:05.880 --> 00:33:08.280 monopoly price point. 281 00:33:08.280 --> 00:33:15.760 By definition, the monopoly price point is that which maximizes the firm's or the cartel's 282 00:33:15.760 --> 00:33:16.760 income. 283 00:33:16.760 --> 00:33:23.680 Above that price, any further restriction of production and sales will lower the monopolist's 284 00:33:23.680 --> 00:33:25.920 monetary income. 285 00:33:25.920 --> 00:33:33.960 This implies that the demand will become elastic above that point, just as it is also elastic 286 00:33:33.960 --> 00:33:40.360 above the competitive price point when that is established on the market. 287 00:33:40.360 --> 00:33:46.900 Consumers make it elastic by their power of substituting purchases of other goods. 288 00:33:46.900 --> 00:33:52.460 Many other goods compete directly in their use value to the consumer. 289 00:33:52.460 --> 00:33:58.900 If some firm or combination of firms should, for example, achieve a monopoly price for 290 00:33:58.900 --> 00:34:05.820 cake soap, housewives can shift to detergents and thus limit the height of the monopoly 291 00:34:05.820 --> 00:34:06.820 price. 292 00:34:06.820 --> 00:34:13.220 But in addition, all goods without exception compete for the consumer's dollar or gold 293 00:34:13.220 --> 00:34:14.400 ounce. 294 00:34:14.400 --> 00:34:21.340 If the price of yachts becomes too high, the consumer can substitute expenditure on mansions, 295 00:34:21.340 --> 00:34:25.980 he can substitute books for television sets, etc. 296 00:34:25.980 --> 00:34:32.860 As Mises warns, it would be a serious blunder to deduce from the antithesis between monopoly 297 00:34:32.860 --> 00:34:40.940 price and competitive price that the monopoly price is the outgrowth of the absence of competition. 298 00:34:40.940 --> 00:34:45.980 There is always catalactic competition on the market. 299 00:34:45.980 --> 00:34:52.980 Competition is no less a factor in the determination of monopoly prices than it is in the determination 300 00:34:52.980 --> 00:34:55.140 of competitive prices. 301 00:34:55.140 --> 00:35:02.100 The demand that makes the appearance of monopoly prices possible, and directs the monopolist's 302 00:35:02.100 --> 00:35:08.380 conduct, is determined by the competition of all other commodities competing for the 303 00:35:08.380 --> 00:35:10.100 buyer's dollars. 304 00:35:10.100 --> 00:35:16.100 The higher the monopolist fixes the price at which he is ready to sell, the more potential 305 00:35:16.100 --> 00:35:20.420 buyers turn their dollars toward other vendable goods. 306 00:35:20.420 --> 00:35:26.580 On the market, every commodity competes with all other commodities. 307 00:35:26.580 --> 00:35:33.340 Furthermore, as the market advances, as capital is invested and the market becomes more and 308 00:35:33.340 --> 00:35:41.140 and more specialized, the demand for each product tends to become more and more elastic. 309 00:35:41.140 --> 00:35:47.980 As the market develops, the range of consumers' goods available increases enormously. 310 00:35:47.980 --> 00:35:53.960 The more consumers' goods are available, the more goods can be purchased by consumers. 311 00:35:53.960 --> 00:36:00.640 And the more elastic, setterus paribus, the demand for each good will tend to be. 312 00:36:00.640 --> 00:36:07.320 As a result, the opportunities for the establishment of monopoly prices will tend to diminish as 313 00:36:07.320 --> 00:36:11.320 the market and capitalist methods develop. 314 00:36:11.320 --> 00:36:13.080 2. 315 00:36:13.080 --> 00:36:18.280 Monopoly Profit vs. Monopoly Gain to a Factor 316 00:36:18.280 --> 00:36:24.260 Many monopoly price theorists have declared that establishment of the monopoly price means 317 00:36:24.260 --> 00:36:30.240 that the monopolist is able to attain permanent monopoly profits. 318 00:36:30.240 --> 00:36:37.760 This is then contrasted with competitive profits and losses, which, as we have seen, disappear 319 00:36:37.760 --> 00:36:41.040 in the evenly rotating economy. 320 00:36:41.040 --> 00:36:47.320 Under competition, if one firm is seen to be making great profits in a particular productive 321 00:36:47.320 --> 00:36:53.680 process, other firms rush in to take advantage of the anticipated opportunities, and the 322 00:36:53.680 --> 00:36:55.640 profits disappear. 323 00:36:55.640 --> 00:37:01.740 But in the case of the monopolist, it is asserted, his unique position allows him to keep making 324 00:37:01.740 --> 00:37:04.660 these profits permanently. 325 00:37:04.660 --> 00:37:10.940 We are not discussing here the generally conceited point that monopoly profits are capitalized 326 00:37:10.940 --> 00:37:15.880 in capital gains to the shares of the firm's stock. 327 00:37:15.880 --> 00:37:22.540 To use such terminology is to misconceive the nature of profit and loss. 328 00:37:22.540 --> 00:37:28.620 Profits and losses are purely the results of entrepreneurial activity, and that activity 329 00:37:28.620 --> 00:37:33.640 is the consequence of the uncertainty of the future. 330 00:37:33.640 --> 00:37:39.120 Entrepreneurship is the action on the market that takes advantage of estimated discrepancies 331 00:37:39.120 --> 00:37:44.100 between selling prices and buying prices of factors. 332 00:37:44.100 --> 00:37:49.900 The better forecasters make profits, and the incorrect ones suffer losses. 333 00:37:49.900 --> 00:37:56.340 In the evenly rotating economy where everyone has settled down to an unchanging round of 334 00:37:56.340 --> 00:38:04.540 activity, there can be no profit or loss because there is no uncertainty on the market. 335 00:38:04.540 --> 00:38:07.200 The same is true for the monopolist. 336 00:38:07.200 --> 00:38:16.200 In the evenly rotating economy, he obtains his specific monopoly gain not as an entrepreneur, 337 00:38:16.200 --> 00:38:23.560 But as the owner of the product which he sells, his monopoly gain is an added income to his 338 00:38:23.560 --> 00:38:31.040 monopolized product, whether for an individual or for a cartel, it is this product which 339 00:38:31.040 --> 00:38:36.400 earns more income through restriction of its supply. 340 00:38:36.400 --> 00:38:43.460 The question arises, why cannot other entrepreneurs seize the gainful opportunity and enter into 341 00:38:43.460 --> 00:38:48.900 to the production of this good, thereby tending to eliminate the opportunity. 342 00:38:48.900 --> 00:38:55.180 In the case of the cartel, this is precisely the tendency that will always prevail and 343 00:38:55.180 --> 00:38:59.540 lead to the breakup of a monopoly price position. 344 00:38:59.540 --> 00:39:05.880 Even if new firms entering the industry are bought off by being offered quotal positions 345 00:39:05.880 --> 00:39:12.940 in the old cartel, and both the new and the old firms have been able to agree on allocations 346 00:39:12.940 --> 00:39:19.940 In such situations, the pressure will become greater and greater for the more efficient firms to cut losses. 347 00:39:19.940 --> 00:39:35.940 For new firms will be tempted to acquire a share in the monopoly gains, and ever more will be created until the entire cartel operation is rendered unprofitable, there being too many firms to share the benefits. 348 00:39:35.940 --> 00:39:51.940 In such situations, the pressure will become greater and greater for the more efficient firms to cut loose from the cartel and to refuse further to provide a comfortable shelter for the host of inefficient firms. 349 00:39:51.940 --> 00:39:59.220 In the case of a single monopolist, either his brand name and unique goodwill with the consumers 350 00:39:59.220 --> 00:40:05.540 prevents others from taking away his monopoly gains, or else he is a recipient of special 351 00:40:05.540 --> 00:40:12.260 monopoly privilege from the government, in which case other producers are prevented by force 352 00:40:12.260 --> 00:40:19.300 from producing the same good. Our analysis of monopoly gain must be pursued further. 353 00:40:19.300 --> 00:40:25.300 We have said that the gain is derived from income from the sale of a certain product. 354 00:40:25.300 --> 00:40:29.300 But this product must be produced by factors. 355 00:40:29.300 --> 00:40:38.300 And we have seen that the return to any product is resolved into returns to the factors which produce it. 356 00:40:38.300 --> 00:40:44.300 Such imputation in the market must also take place for monopoly gains. 357 00:40:44.300 --> 00:40:53.300 Let us say for example that the Staunton washing machine company has been able to achieve a monopoly price for its product. 358 00:40:53.300 --> 00:41:02.300 It is clear that the monopoly gain cannot be attributed to the machines, the plant, etc., which produce the washers. 359 00:41:02.300 --> 00:41:06.300 If the Staunton company bought these machines from other producers, 360 00:41:06.300 --> 00:41:36.300 The Theory of Money and Credit 361 00:41:36.300 --> 00:41:42.900 Income, except time income could accrue to the owner of a capital good, because every 362 00:41:42.900 --> 00:41:48.860 capital good must, in turn, be produced by higher order factors. 363 00:41:48.860 --> 00:41:56.800 Ultimately, all capital goods are resolvable into labor, land and time factors. 364 00:41:56.800 --> 00:42:03.060 But if the Staunton washing machine company cannot itself achieve a monopoly gain from 365 00:42:03.060 --> 00:42:10.060 The Theory of Money and Credit The Theory of Money and Credit 366 00:42:33.060 --> 00:42:39.060 A defined name, for example, a certain kind of labor factor is being monopolized. 367 00:42:39.060 --> 00:42:48.060 A name, as we have seen, is a unique identifying label for a person or a group of persons acting cooperatively, 368 00:42:48.060 --> 00:42:53.060 and is therefore an attribute of the person and his energy. 369 00:42:53.060 --> 00:43:00.060 Considered generally, labor is the term designating the productive efforts of personal energy, 370 00:43:00.060 --> 00:43:22.060 A brand name, therefore, is an attribute of a labor factor, specifically the owner or owners of the firm, or considered catallactically, the brand name represents the decision-making rent accruing to the owner and his name. 371 00:43:22.060 --> 00:43:33.060 If a monopoly price is achieved by the baseball prowess of Mickey Mantle, this is a specific monopoly gain attributable to a labor factor. 372 00:43:33.060 --> 00:43:42.060 In both of these cases, then, the monopoly price stems not simply from the unique possession of the final product, 373 00:43:42.060 --> 00:43:50.060 but more basically from the unique possession of one of the factors necessary to the final product. 374 00:43:50.060 --> 00:43:56.760 A monopoly gain might also be imputable to ownership of a unique natural resource, or 375 00:43:56.760 --> 00:43:58.260 land factor. 376 00:43:58.260 --> 00:44:04.820 Thus, a monopoly price for diamonds may be attributable to a monopoly of diamond mines, 377 00:44:04.820 --> 00:44:09.060 from which diamonds must be ultimately produced. 378 00:44:09.060 --> 00:44:16.380 Under the analysis of monopoly price, then, there cannot be, in the evenly rotating system, 379 00:44:16.380 --> 00:44:19.700 any such thing as monopoly profits. 380 00:44:19.700 --> 00:44:27.460 There are only specific monopoly income gains to owners of labor or land factors. 381 00:44:27.460 --> 00:44:32.700 No monopoly gain can accrue to an owner of a capital good. 382 00:44:32.700 --> 00:44:39.420 If a monopoly price has been imposed because of a grant of monopoly privilege by the state, 383 00:44:39.420 --> 00:44:45.740 then obviously the monopoly gain is attributable to this special privilege. 384 00:44:45.740 --> 00:44:51.620 To attain a monopoly price, the factor owner must meet two conditions. 385 00:44:51.620 --> 00:44:57.580 A. He must be a monopolist, in the sense of definition one, over the factor. 386 00:44:57.580 --> 00:45:04.380 If he were not, the monopoly gain could be bid away by competitors entering the field. 387 00:45:04.380 --> 00:45:12.380 And B. The demand for the factor must be inelastic above the competitive price point. 388 00:45:12.380 --> 00:45:22.380 3. A World of Monopoly Prices? Is it possible, within the framework of monopoly price theory, 389 00:45:22.380 --> 00:45:30.460 to assert that all prices on the free market may be monopoly prices? This is the underlying 390 00:45:30.460 --> 00:45:37.820 assumption in Mrs. Joan Robinson's Economics of Imperfect Competition. Can all selling 391 00:45:37.820 --> 00:45:45.580 There are two ways in which we may analyze this problem. 392 00:45:45.580 --> 00:45:49.900 One is by turning our attention to the monopolized industry. 393 00:45:49.900 --> 00:45:56.620 As we have seen, the industry with a monopoly price restricts production in that industry, 394 00:45:56.620 --> 00:46:04.020 either by a cartel or a single firm, thereby releasing non-specific factors to enter other 395 00:46:04.020 --> 00:46:06.280 fields of production. 396 00:46:06.280 --> 00:46:12.440 But it is evidently impossible to conceive of a world of monopoly prices, because this 397 00:46:12.440 --> 00:46:18.760 would imply a piling up of unused nonspecific factors. 398 00:46:18.760 --> 00:46:25.960 Since wants do not remain unfulfilled, labor and other nonspecific factors will be used 399 00:46:25.960 --> 00:46:33.480 somewhere, and the industries that acquire more factors and produce more cannot be monopoly 400 00:46:33.480 --> 00:46:35.360 price industries. 401 00:46:35.360 --> 00:46:44.160 We may also consider consumer demand. 402 00:46:44.160 --> 00:46:50.560 We have seen that a necessary condition for the establishment of monopoly price is a consumer's 403 00:46:50.560 --> 00:46:56.000 demand schedule inelastic above the competitive price point. 404 00:46:56.000 --> 00:47:03.540 Obviously, it is impossible for every industry to have such an inelastic demand schedule. 405 00:47:03.540 --> 00:47:11.100 For the definition of inelastic is that consumers will spend a greater total sum of money on 406 00:47:11.100 --> 00:47:14.280 the good when the price is higher. 407 00:47:14.280 --> 00:47:21.620 But consumers have a certain given total stock of money assets and money income, as well 408 00:47:21.620 --> 00:47:28.180 as a given amount at any one time which they may allocate to consumption spending. 409 00:47:28.180 --> 00:47:34.020 If they spend more on a certain good, they have less to spend on other goods, therefore 410 00:47:34.020 --> 00:47:43.460 they cannot spend more on every good, and not all prices can be monopoly prices. 411 00:47:43.460 --> 00:47:51.900 There can never, then, be a world of monopoly prices, even assuming monopoly price theory. 412 00:47:51.900 --> 00:47:58.980 Because of the fixity of consumers' monetary stock, and the employment of displaced factors, 413 00:47:58.980 --> 00:48:06.900 monopoly prices could not be established in more than approximately half of the economy's industries. 414 00:48:06.900 --> 00:48:10.860 4. Cutthroat Competition 415 00:48:10.860 --> 00:48:18.700 A popular theme in the literature is the alleged evil of cutthroat competition. Curiously, 416 00:48:18.700 --> 00:48:25.500 is linked by critics to the achievement of a monopoly price. 417 00:48:25.500 --> 00:48:33.540 The usual charge is that a big firm, for example, deliberately sells below the most profitable 418 00:48:33.540 --> 00:48:37.220 price, even to the extent of suffering losses. 419 00:48:37.220 --> 00:48:43.960 The firm acts so peculiarly in order to force another firm producing the same product to 420 00:48:43.960 --> 00:48:46.300 cut its price also. 421 00:48:46.300 --> 00:48:52.400 The stronger firm, with the capital resources to endure the losses, then drives the weaker 422 00:48:52.400 --> 00:48:57.900 firm out of business and establishes a monopoly of the field. 423 00:48:57.900 --> 00:49:02.040 But first, what is wrong with such a monopoly? 424 00:49:02.040 --> 00:49:03.240 Definition 1. 425 00:49:03.240 --> 00:49:08.480 What is wrong with the fact that the firm more efficient in serving the consumer remains 426 00:49:08.480 --> 00:49:13.760 in business, while consumers refuse to patronize the inefficient firm? 427 00:49:13.760 --> 00:49:20.080 A firm's suffering losses signifies that it is not as successful as other firms in serving 428 00:49:20.080 --> 00:49:22.520 consumer desires. 429 00:49:22.520 --> 00:49:26.600 Factors then shift from the inefficient to the efficient firms. 430 00:49:26.600 --> 00:49:33.000 A firm's going out of business harms no owner of any factor it employs and injures only 431 00:49:33.000 --> 00:49:38.560 the entrepreneur who miscalculated in his advance production decisions. 432 00:49:38.560 --> 00:49:44.720 A firm goes out of business precisely because it suffers entrepreneurial losses. 433 00:49:44.720 --> 00:49:50.740 That is, its monetary revenues in sales to consumers are less than the money it paid 434 00:49:50.740 --> 00:49:54.120 out previously to owners of factors. 435 00:49:54.120 --> 00:49:58.100 But so much money had to be paid out for factors. 436 00:49:58.100 --> 00:50:05.240 That is, costs were so high because these factors could earn as much money elsewhere. 437 00:50:05.240 --> 00:50:11.700 If this entrepreneur cannot profitably employ the factors at their given prices, the reason 438 00:50:11.700 --> 00:50:16.520 is that factor owners can sell their services to other firms. 439 00:50:16.520 --> 00:50:22.860 Insofar as factors may be specific to the firm and to the extent that their owners will 440 00:50:22.860 --> 00:50:29.400 accept a reduced price and income as the price of the firm's product is reduced, total 441 00:50:29.400 --> 00:50:35.680 All money costs can be reduced, and the firm can be maintained in operation. 442 00:50:35.680 --> 00:50:43.700 Therefore, failure by business firms is due solely to entrepreneurial error in forecasting, 443 00:50:43.700 --> 00:50:50.040 and to entrepreneurial inability to secure the factors of production by outbidding those 444 00:50:50.040 --> 00:50:54.540 firms more successful in serving the consumer. 445 00:50:54.540 --> 00:51:00.780 Banking takes place among numerous firms in various industries, not only among firms in 446 00:51:00.780 --> 00:51:02.180 the same industry. 447 00:51:02.180 --> 00:51:08.620 Thus, the elimination of inefficient firms cannot harm factor owners or lead to their 448 00:51:08.620 --> 00:51:15.100 unemployment, since their failure was due precisely to the more attractive competing 449 00:51:15.100 --> 00:51:22.240 bids made by other firms, or in some cases, to the alternatives of leisure or production 450 00:51:22.240 --> 00:51:24.060 outside the market. 451 00:51:24.060 --> 00:51:31.680 Their failure also helps consumers by transferring resources from wasteful to efficient producers. 452 00:51:31.680 --> 00:51:37.700 It is largely the entrepreneurs who suffer from their own errors, errors incurred through 453 00:51:37.700 --> 00:51:41.900 their own voluntarily adopted risks. 454 00:51:41.900 --> 00:51:47.860 It is curious that the critics of cutthroat competition are generally the same as those 455 00:51:47.860 --> 00:52:05.860 For those who complain about the market's subversion of consumer sovereignty, for selling a product at very low prices, even at short-term losses, is a bonanza to the consumers, and there is no reason why this gift to the consumers should be deplored. 456 00:52:05.860 --> 00:52:11.620 Furthermore, if the consumers were really indignant about this form of competition, 457 00:52:11.620 --> 00:52:17.700 they would scornfully refuse to accept this gift, and instead continue to patronize the 458 00:52:17.700 --> 00:52:21.080 allegedly victimized competitor. 459 00:52:21.080 --> 00:52:27.040 When they do not do so, and instead rush to acquire the bargains, they are indicating 460 00:52:27.040 --> 00:52:30.860 their perfect contentment with this state of affairs. 461 00:52:30.860 --> 00:52:36.460 From the point of view of consumer's sovereignty or individual sovereignty, there is nothing 462 00:52:36.460 --> 00:52:40.640 at all wrong with cutthroat competition. 463 00:52:40.640 --> 00:52:47.380 The only conceivable problem is the one usually cited, that after the single firm has driven 464 00:52:47.380 --> 00:52:54.420 everyone else out of business through sustained selling at very low prices, then the final 465 00:52:54.420 --> 00:53:01.100 All monopolists will restrict sales and raise its price to a monopoly price. 466 00:53:01.100 --> 00:53:06.620 Even granting for a moment the tenability of the monopoly price concept, this does not 467 00:53:06.620 --> 00:53:09.100 seem a very likely occurrence. 468 00:53:09.100 --> 00:53:16.460 In the first place, it is time enough to complain after the monopoly price is established, especially 469 00:53:16.460 --> 00:53:23.260 monopoly since we have seen that we cannot consider monopoly per se, definition one, 470 00:53:23.260 --> 00:53:24.540 as an evil. 471 00:53:24.540 --> 00:53:30.980 An amusing instance of this concern is this argument for compulsory legal cartelization 472 00:53:30.980 --> 00:53:38.920 by West German industrialists, that the so-called unrestricted competition would produce a catastrophe 473 00:53:38.920 --> 00:53:46.380 in which the stronger industries would destroy the weaker and establish themselves as monopolies. 474 00:53:46.380 --> 00:53:54.180 Create an Inefficient Monopoly Now to Avoid an Efficient Monopoly Later 475 00:53:54.180 --> 00:54:01.300 Secondly, a firm will not always be able to achieve a monopoly price, in all such cases 476 00:54:01.300 --> 00:54:09.060 including a. where not all the other firms in the industry can be driven out, or b. where 477 00:54:09.060 --> 00:54:16.300 the demand is such that the monopolist cannot achieve a monopoly price, the cutthroat competition 478 00:54:16.300 --> 00:54:21.100 Human is then a pure boon with no harmful effects. 479 00:54:21.100 --> 00:54:27.300 Incidentally it is by no means true that the large firms will always be the strongest in 480 00:54:27.300 --> 00:54:29.220 a price-cutting war. 481 00:54:29.220 --> 00:54:35.860 Often, depending on the concrete conditions, it is the smaller, more mobile firm, not burdened 482 00:54:35.860 --> 00:54:42.340 with heavy investments, that is able to cut its costs, particularly when its factors are 483 00:54:42.340 --> 00:54:49.860 are more specific to it, such as the labor of its management, and out-compete the larger firm. 484 00:54:49.860 --> 00:54:55.260 In such cases, of course, there is no monopoly price problem whatever. 485 00:54:55.260 --> 00:55:00.980 The fact that the lowly pushcart peddler for centuries has been set upon by governmental 486 00:55:00.980 --> 00:55:08.160 violence at the behest of his more lordly and heavily capitalized competitors bears witness 487 00:55:08.160 --> 00:55:20.320 What of the allegedly vast financial power of a big firm rendering it impervious to cost? 488 00:55:20.320 --> 00:55:25.820 In a brilliant article, Professor Wayne Lehman has pointed out that a larger firm will also 489 00:55:25.820 --> 00:55:33.360 have larger volume and will therefore suffer greater losses when selling below cost. 490 00:55:33.360 --> 00:55:36.840 Having a larger volume, it has more to lose. 491 00:55:36.840 --> 00:55:43.720 What is relevant, therefore, is not the absolute size of the financial resources of the competing 492 00:55:43.720 --> 00:55:50.720 firms, but the size of their resources in relation to their volume of sales and expenditures, 493 00:55:50.720 --> 00:55:54.160 and this changes the conventional picture drastically. 494 00:55:54.160 --> 00:56:01.440 Suppose, however, that after this lengthy and costly process, a firm has finally been 495 00:56:01.440 --> 00:56:19.440 What is there to prevent this monopoly gain from attracting other entrepreneurs who will try to undercut the existing firm and achieve some of the gain for themselves? 496 00:56:19.440 --> 00:56:26.440 What is to prevent new firms from coming in and driving the price down to competitive levels again? 497 00:56:26.440 --> 00:56:34.440 Is the firm to resume cutthroat competition and the same deliberate losing process once more? 498 00:56:34.440 --> 00:56:43.440 In that case, we are likely to find that consumers of the good will be receiving gifts far more often than facing a monopoly price. 499 00:56:43.440 --> 00:56:53.440 After investigating conditions in the retail gasoline industry, one particularly subject to allegedly cutthroat competition, 500 00:56:53.440 --> 00:56:56.440 and Human Action, economist Harold Fleming declared, 501 00:57:23.440 --> 00:57:44.440 Professor Lehmann has pointed out that the smaller firm, driven out by cutthroat competition, may simply close down, wait for the larger firm to reap its expected gain of a higher monopoly price, and then reopen. 502 00:57:44.440 --> 00:57:58.440 More important, even if the small firm is driven into bankruptcy, its physical plant remains intact, and it may be bought by a new entrepreneur at bargain prices. 503 00:57:58.440 --> 00:58:06.440 As a result, the new firm will be able to produce at very low cost and damage the victor firm considerably. 504 00:58:06.440 --> 00:58:18.440 To avoid this threat, the big firm would have to delay raising its price for the very long time required for the small plant to wear out or become obsolete. 505 00:58:19.440 --> 00:58:28.440 Lehman also demonstrates that the big firm could not keep new small firms out by a mere threat of cutthroat competition. 506 00:58:28.440 --> 00:58:36.120 For A, new firms will probably interpret the high price charged by the monopolist as a 507 00:58:36.120 --> 00:58:44.560 sign of inefficiency, providing a ripe opportunity for profits, and B, the monopolist can demonstrate 508 00:58:44.560 --> 00:58:51.960 his power satisfactorily only by actually selling at low prices for long periods of 509 00:58:51.960 --> 00:59:01.560 of Time, hence only by keeping its costs down and its prices low, that is, by not extracting 510 00:59:01.560 --> 00:59:07.040 a monopoly price, can the victor firm keep out potential rivals. 511 00:59:07.040 --> 00:59:13.520 But this means that the cutthroat competition, far from being a route to a monopoly price, 512 00:59:13.520 --> 00:59:18.800 was a pure gift to consumers and a pure loss to the victor. 513 00:59:18.800 --> 00:59:21.600 A leading oil executive told Lehman, 514 00:59:21.600 --> 00:59:26.280 We have invested too much in plant and equipment in this area 515 00:59:26.280 --> 00:59:32.960 to want to invite in a host of competitors under an umbrella of high prices. 516 00:59:32.960 --> 00:59:38.760 But what of a standard problem brought forward by critics of cutthroat competition? 517 00:59:38.760 --> 00:59:42.880 Cannot the big firm check the entry of efficient small firms 518 00:59:42.880 --> 00:59:48.320 by simply buying up the new rival's plant and putting it out of production? 519 00:59:48.320 --> 00:59:55.280 Perhaps a short period of cutthroat price-cutting will convince the new small firm of the advantage 520 00:59:55.280 --> 01:00:03.120 of selling out, and will permit the monopolist to avoid the long periods of losses just mentioned. 521 01:00:03.120 --> 01:00:09.000 No one seems to realize, however, the high costs such buying will entail. 522 01:00:09.000 --> 01:00:14.760 Lehman points out that the really efficient small firm can demand such a high price for 523 01:00:14.760 --> 01:00:19.960 for its assets as to make the whole procedure prohibitively expensive. 524 01:00:19.960 --> 01:00:25.960 And further, any later attempt by the large firm to recoup its losses by charging the 525 01:00:25.960 --> 01:00:33.000 monopoly price will only invite new entry by other firms and redouble the expensive 526 01:00:33.000 --> 01:00:37.120 buying-out process again and again. 527 01:00:37.120 --> 01:00:43.640 Buying-out competitors, then, will be even more costly than simple cutthroat competition, 528 01:00:43.640 --> 01:00:46.720 which we have seen to be unprofitable. 529 01:00:46.720 --> 01:00:52.480 Lehman points out in a striking refutation of one of the myths of our age that this is 530 01:00:52.480 --> 01:00:56.600 precisely what happened to John D. Rockefeller. 531 01:00:56.600 --> 01:01:03.000 According to a widely accepted view, he softened up small competitors in the oil business by 532 01:01:03.000 --> 01:01:10.080 a period of intensive price competition, bought them out for a song and then raised prices 533 01:01:10.080 --> 01:01:13.240 to consumers to make up his losses. 534 01:01:13.240 --> 01:01:19.400 Actually the softening up process did not work, for Rockefeller usually ended up paying 535 01:01:19.400 --> 01:01:26.680 so handsomely that the sellers, often in violation of promises made, proceeded to build another 536 01:01:26.680 --> 01:01:34.400 plant for its nuisance value, hoping again to collect a reward from their benefactor. 537 01:01:34.400 --> 01:01:39.880 Rockefeller after a time got tired of paying blackmail and decided that the best way to 538 01:01:39.880 --> 01:01:47.060 To hold the dominant position he wanted was to keep profit margins small all the time. 539 01:01:47.060 --> 01:01:54.280 Lehman concludes quite correctly that large rather than small firms dominate many markets 540 01:01:54.280 --> 01:02:02.340 not as a result of victorious cutthroat competition and monopolistic pricing, but by taking advantage 541 01:02:02.340 --> 01:02:21.860 A final argument against the doctrines of cutthroat competition is that it is impossible to determine 542 01:02:21.860 --> 01:02:25.060 whether it is taking place or not. 543 01:02:25.060 --> 01:02:31.460 The fact that a monopoly might ensue afterward does not even establish the motive, and is 544 01:02:31.460 --> 01:02:35.900 is certainly no criterion of cutthroat procedures. 545 01:02:35.900 --> 01:02:43.660 One proposed criterion has been selling below costs, most cogently, below what is usually 546 01:02:43.660 --> 01:02:51.420 termed variable costs, the expenses of using factors in production, assuming previously 547 01:02:51.420 --> 01:02:54.500 sunk investment in a fixed plant. 548 01:02:54.500 --> 01:02:56.980 But this is no criterion at all. 549 01:02:56.980 --> 01:03:04.660 As we have already declared, there is no such thing as costs, apart from speculation on 550 01:03:04.660 --> 01:03:10.780 a higher future price, once the stock has been produced. 551 01:03:10.780 --> 01:03:17.560 Costs take place along the path of decisions to produce, at each step along the way that 552 01:03:17.560 --> 01:03:22.460 investments of money and effort are made in factors. 553 01:03:22.460 --> 01:03:29.740 The allocations, the opportunities for gone, take place at each step, as future production 554 01:03:29.740 --> 01:03:34.380 decisions must be taken and commitments made. 555 01:03:34.380 --> 01:03:40.540 Once the stock has been produced, however, and there is no expectation of a price rise, 556 01:03:40.540 --> 01:03:48.560 the sale is costless, since there are no advantages for gone by selling the product. 557 01:03:48.560 --> 01:03:54.720 in making the sale being here considered negligible for purposes of simplification. 558 01:03:54.720 --> 01:04:00.840 Therefore, the stock will tend to be sold at whatever price is obtainable. 559 01:04:00.840 --> 01:04:08.340 There is no such thing, then, as selling below costs on stock already produced. 560 01:04:08.340 --> 01:04:15.040 The cutting of price may just as well be due to inability to dispose of stock at any higher 561 01:04:15.040 --> 01:04:22.040 D. The Illusion of Monopoly Price on the Unhampered Market 562 01:04:45.040 --> 01:04:54.940 and that it constitutes no infringement on any legitimate interpretation of individual's sovereignty or even of consumer's sovereignty. 563 01:04:54.940 --> 01:05:07.480 Yet there has been a great deficiency in the economic literature on this whole issue, a failure to realize the illusion in the entire concept of monopoly price. 564 01:05:07.480 --> 01:05:14.840 If we turn to the definition of monopoly price, we find that there is assumed to be a competitive 565 01:05:14.840 --> 01:05:23.000 price to which a higher monopoly price, an outcome of restrictive action, is contrasted. 566 01:05:23.000 --> 01:05:30.280 Yet if we analyze the matter closely, it becomes evident that the entire contrast is an illusion. 567 01:05:30.280 --> 01:05:45.280 In the market, there is no discernible, identifiable competitive price, and therefore there is no way of distinguishing, even conceptually, any given price as a monopoly price. 568 01:05:45.280 --> 01:05:54.280 The alleged competitive price can be identified neither by the producer himself nor by the disinterested observer. 569 01:05:54.280 --> 01:05:59.280 Let us take a firm which is considering the production of a certain good. 570 01:05:59.280 --> 01:06:09.280 The firm can be a monopolist in the sense of producing a unique good, or it can be an oligopolist among a few firms. 571 01:06:09.280 --> 01:06:21.280 Whatever its position, it is irrelevant, because we are interested only in whether or not it can achieve a monopoly price as compared to a competitive price. 572 01:06:21.280 --> 01:06:30.280 This, in turn, depends on the elasticity of the demand as it is presented to the firm over a certain range. 573 01:06:30.280 --> 01:06:42.280 The producer must decide how much of the good to produce and sell in a future period, that is, at the time when this demand will become relevant. 574 01:06:42.280 --> 01:07:04.280 He will set his output at whatever point is expected to maximize his monetary earnings, other psychic factors being equal, taking into consideration the necessary monetary expenses of production for each quantity, that is, the amounts that can be produced for each amount of money invested. 575 01:07:04.280 --> 01:07:18.280 As an entrepreneur, he will attempt to maximize profits, as a labor owner to maximize his monetary income, as a landowner to maximize his monetary income from that factor. 576 01:07:18.280 --> 01:07:30.280 On the basis of this logic of action, the producer sets his investment to produce a certain stock, or as a factor owner to sell a certain amount of service. 577 01:07:30.280 --> 01:07:36.940 Assuming that he has correctly estimated his demand, the intersection of the two will establish 578 01:07:36.940 --> 01:07:40.280 the market equilibrium price. 579 01:07:40.280 --> 01:07:48.600 The critical question is this, is the market price a competitive price or a monopoly price? 580 01:07:48.600 --> 01:07:53.560 The answer is that there is no way of knowing. 581 01:07:53.560 --> 01:07:59.400 Contrary to the assumptions of the theory, there is no competitive price which is clearly 582 01:07:59.400 --> 01:08:29.400 The Theory of Money and Credit 583 01:08:29.400 --> 01:08:44.400 How is anyone, including the producer himself, to know whether or not this market price is competitive or monopoly? 584 01:08:45.400 --> 01:08:52.400 Suppose that the producer decides that he will make more money if he produces less of the good in the next period. 585 01:08:53.400 --> 01:08:58.400 Is the higher price to be gained from such a cutback necessarily a monopoly price? 586 01:08:59.400 --> 01:09:06.240 Why could it not just as well be a movement from a subcompetitive price to a competitive 587 01:09:06.240 --> 01:09:07.560 price? 588 01:09:07.560 --> 01:09:16.400 In the real world a demand is not simply given to a producer but must be estimated and discovered. 589 01:09:16.400 --> 01:09:23.560 If a producer has produced too much in one period and in order to earn more income produces 590 01:09:23.560 --> 01:09:53.560 The Theory of Money and Credit 591 01:09:53.560 --> 01:10:01.960 to a competitive price also involves a restriction of production of this good, coupled, of course, 592 01:10:01.960 --> 01:10:07.560 with an expansion of production in other lines by the released factors. 593 01:10:07.560 --> 01:10:15.000 There is no way whatever to distinguish such a restriction and corollary expansion from 594 01:10:15.000 --> 01:10:19.340 the alleged monopoly price situation. 595 01:10:19.340 --> 01:10:25.620 If the restriction is accompanied by increased leisure for the owner of a labor factor, rather 596 01:10:25.620 --> 01:10:31.820 than increased production of some other good on the market, it is still an expansion of 597 01:10:31.820 --> 01:10:35.900 the yield of a consumer's good, leisure. 598 01:10:35.900 --> 01:10:42.440 There is still no way of determining whether the restriction resulted in a monopoly or 599 01:10:42.440 --> 01:10:49.840 A Competitive Price, or to what extent the motive of increased leisure was involved. 600 01:10:49.840 --> 01:10:56.880 To define a monopoly price as a price attained by selling a smaller quantity of a product 601 01:10:56.880 --> 01:11:03.880 at a higher price is therefore meaningless, since the same definition applies to the competitive 602 01:11:03.880 --> 01:11:08.520 price as compared with a subcompetitive price. 603 01:11:08.520 --> 01:11:16.600 There is no way to define monopoly price because there is also no way of defining the competitive 604 01:11:16.600 --> 01:11:21.160 price to which the former must refer. 605 01:11:21.160 --> 01:11:27.280 Many writers have attempted to establish some criterion for distinguishing a monopoly price 606 01:11:27.280 --> 01:11:29.960 from a competitive price. 607 01:11:29.960 --> 01:11:38.000 Some call the monopoly price that price achieving permanent long-run monopoly profits for a 608 01:11:38.000 --> 01:11:47.000 This is contrasted to the competitive price, at which, in the evenly rotating economy, profits disappear. 609 01:11:47.000 --> 01:11:59.000 Yet, as we have already seen, there are never permanent monopoly profits, but only monopoly gains to owners of land or labor factors. 610 01:11:59.000 --> 01:12:14.000 Money costs to the entrepreneur who must buy factors of production will tend to equal money revenues in the evenly rotating economy, whether the price is competitive or monopoly. 611 01:12:14.000 --> 01:12:21.000 The monopoly gains, however, are secured as income to labor or land factors. 612 01:12:21.000 --> 01:12:28.840 There is, therefore, never any identifiable element that could provide a criterion of 613 01:12:28.840 --> 01:12:32.120 the absence of monopoly gain. 614 01:12:32.120 --> 01:12:36.200 With a monopoly gain, the factor's income is greater. 615 01:12:36.200 --> 01:12:38.040 Without it, it is less. 616 01:12:38.040 --> 01:12:44.040 But where is the criterion for distinguishing this from a change in the income of a factor 617 01:12:44.040 --> 01:12:48.460 for legitimate demand and supply reasons? 618 01:12:48.460 --> 01:12:55.580 How to Distinguish a Monopoly Gain from a Simple Increase in Factor Income 619 01:12:55.580 --> 01:13:01.820 Another theory attempts to define a monopoly gain as income to a factor greater than that 620 01:13:01.820 --> 01:13:05.300 received by another, similar, factor. 621 01:13:05.300 --> 01:13:11.540 Thus, if Mickey Mantle receives a greater monetary income than another outfielder, that 622 01:13:11.540 --> 01:13:17.960 difference represents the monopoly gain resulting from his natural monopoly of unique 623 01:13:17.960 --> 01:13:25.000 The Crucial Difficulty with this approach is that it implicitly adopts the old classical 624 01:13:25.000 --> 01:13:32.580 fallacy of treating all the various labor factors, as well as all the various land factors, 625 01:13:32.580 --> 01:13:35.060 as somehow homogeneous. 626 01:13:35.060 --> 01:13:42.400 If all the labor factors are somehow one good, then the variations in income accruing to 627 01:13:42.400 --> 01:13:49.520 to each must be explained by reference to some sort of monopolistic or other mysterious 628 01:13:49.520 --> 01:13:50.520 element. 629 01:13:50.520 --> 01:13:58.280 Yet a good with a homogeneous supply is only a good if all its units are interchangeable, 630 01:13:58.280 --> 01:14:01.200 as we saw at the beginning of this work. 631 01:14:01.200 --> 01:14:06.160 But the very fact that Mantle and the other outfielder are treated differently in the 632 01:14:06.160 --> 01:14:12.920 in the market signifies that they are selling different, not the same, goods. 633 01:14:12.920 --> 01:14:19.520 Just as in tangible commodities, so in personal labor services, whether sold to other producers 634 01:14:19.520 --> 01:14:27.640 or to consumers directly, each seller may be selling a unique good, and yet he is competing 635 01:14:27.640 --> 01:14:35.160 with more or less close substitutability against all the other sellers for the purchases of 636 01:14:35.160 --> 01:14:38.660 of Consumers or Lower Order Producers. 637 01:14:38.660 --> 01:14:44.760 But since each good or service is unique, we cannot state that the difference between 638 01:14:44.760 --> 01:14:51.040 the prices of any two represents any sort of monopoly price. 639 01:14:51.040 --> 01:14:57.920 Monopoly price vis-à-vis competitive price can refer only to alternative prices of the 640 01:14:57.920 --> 01:14:59.840 same good. 641 01:14:59.840 --> 01:15:07.240 Ricky Mantle may indeed be a person of unique ability and a monopolist, as is everyone else, 642 01:15:07.240 --> 01:15:12.760 over the disposition of his own talents, but whether or not he is achieving a monopoly 643 01:15:12.760 --> 01:15:19.860 price, and therefore a monopoly gain from his service, can never be determined. 644 01:15:19.860 --> 01:15:23.600 This analysis is equally applicable to land. 645 01:15:23.600 --> 01:15:29.280 It is just as illegitimate to dub the difference between the income of the site of the Empire 646 01:15:29.280 --> 01:15:36.140 State Building and that of a rural general store, a monopoly gain as to apply the same 647 01:15:36.140 --> 01:15:39.980 concept to the additional income of Mickey Mantle. 648 01:15:39.980 --> 01:15:46.360 The fact that both areas are land makes them no more homogeneous on the market than the 649 01:15:46.360 --> 01:15:52.960 fact that Mickey Mantle and Joe Dokes are both baseball players, or, in a broader category, 650 01:15:52.960 --> 01:15:54.600 both laborers. 651 01:15:54.600 --> 01:16:01.680 The fact that each is remunerated at a different price and income signifies that they are considered 652 01:16:01.680 --> 01:16:04.000 different on the market. 653 01:16:04.000 --> 01:16:11.000 To treat differential gains for different goods as instances of monopoly gain is to 654 01:16:11.000 --> 01:16:15.720 render the term completely devoid of significance. 655 01:16:15.720 --> 01:16:23.340 Neither is the attempt to establish the existence of idle resources as a criterion of monopolistic 656 01:16:23.340 --> 01:16:26.540 Withholding of Factors Anymore Valid 657 01:16:26.540 --> 01:16:33.820 Idle labor resources will always mean increased leisure, and therefore the leisure motive will 658 01:16:33.820 --> 01:16:40.700 always be intertwined with any alleged monopolistic motive. It therefore becomes 659 01:16:40.700 --> 01:16:47.660 impossible to separate them. The existence of idle land may always be due to the fact 660 01:16:47.660 --> 01:16:53.220 of the relative scarcity of labor as compared with available land. 661 01:16:53.220 --> 01:16:59.420 This relative scarcity makes it more serviceable to consumers and hence more remunerative to 662 01:16:59.420 --> 01:17:04.380 invest labor in certain areas of land and not in others. 663 01:17:04.380 --> 01:17:11.380 The land areas least productive of potential earnings will be forced to lie idle, the amount 664 01:17:11.380 --> 01:17:15.340 depending on how much labor supply is available. 665 01:17:15.340 --> 01:17:23.520 We must stress that all land, that is, every nature-given resource, is involved here, including 666 01:17:23.520 --> 01:17:29.140 urban sites and natural resources as well as agricultural areas. 667 01:17:29.140 --> 01:17:35.700 The allocation of labor to land is comparable to Crusoe's having to decide on which plot 668 01:17:35.700 --> 01:17:41.420 of ground to build his shelter, or in which stream to fish. 669 01:17:41.420 --> 01:17:47.360 Because of the natural, as well as voluntary, limitations on his labor effort, that area 670 01:17:47.360 --> 01:17:54.380 of land on which he produces the highest utility will be cultivated, and the rest will be left 671 01:17:54.380 --> 01:17:55.480 idle. 672 01:17:55.480 --> 01:18:02.320 This element also cannot be separated from any alleged monopolistic element, for if someone 673 01:18:02.320 --> 01:18:09.640 objects that the withheld land is of the same quality as the land in use, and therefore 674 01:18:09.640 --> 01:18:15.500 For that monopolistic restriction is afoot, it may always be answered that the two pieces 675 01:18:15.500 --> 01:18:23.540 of land necessarily differ in location if in no other attribute, and that the very fact 676 01:18:23.540 --> 01:18:29.700 that the two are treated differently on the market tends to confirm this difference. 677 01:18:29.700 --> 01:18:36.960 By what mystical criterion, then, does some outsider assert that the two lands are economically 678 01:18:36.960 --> 01:18:38.080 identical? 679 01:18:38.080 --> 01:18:44.760 In the case of capital goods, it is also true that the limitations of available labor supply 680 01:18:44.760 --> 01:18:51.920 will often make idle those goods which are expected to yield a lesser return, as compared 681 01:18:51.920 --> 01:18:55.800 with other capital that can be employed by labor. 682 01:18:55.800 --> 01:19:03.160 The difference here is that idle capital goods are always the result of previous error by 683 01:19:03.160 --> 01:19:04.640 producers. 684 01:19:04.640 --> 01:19:12.520 It's no such idleness would be necessary if the present events, demands, prices, supplies, 685 01:19:12.520 --> 01:19:16.940 had all been forecast correctly by all the producers. 686 01:19:16.940 --> 01:19:23.280 But though error is always unfortunate, the keeping idle of unremunerative capital is 687 01:19:23.280 --> 01:19:25.680 the best course to follow. 688 01:19:25.680 --> 01:19:32.680 It is making the best of the existing situation, not of the situation that would have obtained 689 01:19:32.680 --> 01:19:35.360 if foresight had been perfect. 690 01:19:35.360 --> 01:19:41.500 In the evenly rotating economy, of course, there would never be idle capital goods. 691 01:19:41.500 --> 01:19:48.360 There would be only idle land and idle labor, to the extent that leisure is voluntarily 692 01:19:48.360 --> 01:19:50.960 preferred to money income. 693 01:19:50.960 --> 01:19:58.720 In no case is it possible to establish an identification of purely monopolistic withholding 694 01:19:58.720 --> 01:19:59.720 action. 695 01:19:59.720 --> 01:20:08.220 A similar proposed criterion for distinguishing a monopoly price from a competitive price runs as follows. 696 01:20:08.220 --> 01:20:13.220 In the competitive case, the marginal factor produces no rent. 697 01:20:13.220 --> 01:20:24.220 In the monopoly price case, however, use of the monopolized factor is restricted, so that its marginal use does yield a rent. 698 01:20:24.220 --> 01:20:36.220 We may answer in the first place that there is no reason to say that every factor will, in the competitive case, always be worked until it yields no rent. 699 01:20:36.220 --> 01:20:46.220 On the contrary, every factor is worked in a region of diminishing but positive marginal product, not zero product. 700 01:20:46.220 --> 01:20:53.340 Indeed, as we have shown, if the value product of a unit of a factor is zero, it will not 701 01:20:53.340 --> 01:21:01.340 be used at all. Every unit of a factor is used because it yields a value product, otherwise 702 01:21:01.340 --> 01:21:07.500 it would not be used in production, and if it yields a value product, it will earn its 703 01:21:07.500 --> 01:21:14.380 discounted value product in income. It is clear further that this criterion could never 704 01:21:14.380 --> 01:21:18.140 Never be applied to a monopolized labor factor. 705 01:21:18.140 --> 01:21:23.420 What labor factor earns a zero wage in a competitive market? 706 01:21:23.420 --> 01:21:31.420 Yet many monopolized, definition one, factors are labor factors, such as brand names, unique 707 01:21:31.420 --> 01:21:36.260 services, decision-making ability in business, etc. 708 01:21:36.260 --> 01:21:43.980 Land is more abundant than labor, and therefore some lands will be idle and receive zero rent. 709 01:21:43.980 --> 01:21:50.680 Even here, however, it is only the sub-marginal lands that receive no rent. 710 01:21:50.680 --> 01:21:57.140 The marginal lands in use receive some rent, however small. 711 01:21:57.140 --> 01:22:04.480 Furthermore, even if it were true that marginal lands received zero rent, this would be irrelevant 712 01:22:04.480 --> 01:22:06.100 for our discussion. 713 01:22:06.100 --> 01:22:13.820 It would apply only to poorer or inferior as compared with more productive lands. 714 01:22:13.820 --> 01:22:21.600 That a criterion of monopoly or competitive price must apply not to factors of different 715 01:22:21.600 --> 01:22:25.380 quality but to homogeneous factors. 716 01:22:25.380 --> 01:22:33.100 The monopoly price problem is one of a supply of units of one homogeneous factor, not of 717 01:22:33.100 --> 01:22:39.300 various different factors within the one broad category, land. 718 01:22:39.300 --> 01:22:46.060 In this case, as we have stated, every factor will earn some value product in a diminishing 719 01:22:46.060 --> 01:22:49.540 zone and not zero. 720 01:22:49.540 --> 01:22:56.420 In the case of depletable natural resources, any allocation of use necessarily involves 721 01:22:56.420 --> 01:23:03.600 the use of some of the resource in the present, even considering the resource as homogeneous 722 01:23:03.600 --> 01:23:08.800 and the withholding of the remainder for allocation to future use. 723 01:23:08.800 --> 01:23:16.700 But there is no way of conceptually distinguishing such withholding from monopolistic withholding, 724 01:23:16.700 --> 01:23:21.140 and therefore of discussing a monopoly price. 725 01:23:21.140 --> 01:23:27.580 Since in the competitive case, all factors in use will earn some rent, there is still 726 01:23:27.580 --> 01:23:34.380 no basis for distinguishing a competitive from a monopoly price. 727 01:23:34.380 --> 01:23:40.300 Another very common attempt to distinguish between a competitive and a monopoly price 728 01:23:40.300 --> 01:23:45.740 rests on the alleged ideal of marginal cost pricing. 729 01:23:45.740 --> 01:23:53.500 Failure to set prices equal to marginal cost is considered an example of monopoly behavior. 730 01:23:53.500 --> 01:23:56.900 There are several fatal errors in this analysis. 731 01:23:56.900 --> 01:24:04.240 In the first place, as we shall see further, there can be no such thing as pure competition 732 01:24:04.240 --> 01:24:12.080 that hypothetical state in which the demand for the output of a firm is infinitely elastic. 733 01:24:12.080 --> 01:24:18.280 Only in this never-never land does price equal marginal cost in equilibrium. 734 01:24:18.280 --> 01:24:26.440 Otherwise, marginal cost equals marginal revenue in the ERE, that is, the revenue that a given 735 01:24:26.440 --> 01:24:30.300 increment of cost will yield to the firm. 736 01:24:30.300 --> 01:24:37.100 Only if the demand were perfectly elastic would marginal revenue boil down to average 737 01:24:37.100 --> 01:24:39.580 revenue or price. 738 01:24:39.580 --> 01:24:46.660 There is now no way of distinguishing competitive from monopolistic situations, since marginal 739 01:24:46.660 --> 01:24:52.620 cost will, in all cases, tend to equal marginal revenue. 740 01:24:52.620 --> 01:24:59.600 Secondly, this equality is only a tendency that results from competition. 741 01:24:59.600 --> 01:25:03.460 It is not a precondition of competition. 742 01:25:03.460 --> 01:25:10.600 It is a property of the equilibrium of the ERE that the market economy always tends toward 743 01:25:10.600 --> 01:25:12.640 but never can reach. 744 01:25:12.640 --> 01:25:19.640 To uphold it as a welfare ideal for the real world, an ideal with which to gauge existing 745 01:25:19.640 --> 01:25:26.560 conditions as so many economists have done, is to misconceive completely the nature of 746 01:25:26.560 --> 01:25:29.560 of the Market and of Economics itself. 747 01:25:29.560 --> 01:25:39.560 Thirdly, there is no reason why firms should ever deliberately balk at being guided by marginal cost considerations. 748 01:25:39.560 --> 01:25:43.560 Their aiming at maximum net revenue will see to that. 749 01:25:43.560 --> 01:25:50.560 But there is no one simple determinate marginal cost, because, as we have seen, 750 01:25:50.560 --> 01:25:58.300 There is no one identifiable short-run period such as is assumed by current theory. 751 01:25:58.300 --> 01:26:05.680 The firm faces a gamut of variable periods of time for the investment and use of factors, 752 01:26:05.680 --> 01:26:12.800 and its pricing and output decisions depend on the future period of time which it is considering. 753 01:26:12.800 --> 01:26:18.980 Is it buying a new machine, or is it selling old output piled up in inventory? 754 01:26:18.980 --> 01:26:24.620 The marginal cost considerations will differ in the two cases. 755 01:26:24.620 --> 01:26:30.740 It is clear that it is impossible to distinguish competitive or monopolistic behavior on the 756 01:26:30.740 --> 01:26:32.300 part of a firm. 757 01:26:32.300 --> 01:26:37.820 It is no more possible to speak of monopoly price in the case of a cartel. 758 01:26:37.820 --> 01:26:43.320 In the first place, a cartel, when it sets the amount of its production in advance for 759 01:26:43.320 --> 01:26:49.640 for the next period is in exactly the same position as the single firm. 760 01:26:49.640 --> 01:26:55.680 It sets the amount of its production at that point which it believes will maximize its 761 01:26:55.680 --> 01:26:57.460 monetary earnings. 762 01:26:57.460 --> 01:27:03.960 There is still no way of distinguishing a monopoly from a competitive or a sub-competitive 763 01:27:03.960 --> 01:27:04.960 price. 764 01:27:04.960 --> 01:27:11.000 Furthermore, we have seen that there is no essential difference between a cartel and 765 01:27:11.000 --> 01:27:17.680 and Merger or between a merger of producers with money assets and a merger of producers 766 01:27:17.680 --> 01:27:24.960 with previously existing capital assets to form a partnership or corporation. 767 01:27:24.960 --> 01:27:31.340 As a result of the tradition, still in evidence in the literature, of identifying a firm with 768 01:27:31.340 --> 01:27:38.820 a single individual entrepreneur or producer, we tend to overlook the fact that most existing 769 01:27:38.820 --> 01:27:45.340 Funding Firms are constituted through the voluntary merging of monetary assets. 770 01:27:45.340 --> 01:27:52.020 To pursue the similarity further, suppose that Firm A wishes to expand its production. 771 01:27:52.020 --> 01:27:58.500 Is there an essential difference between its buying new land and building a new plant, 772 01:27:58.500 --> 01:28:02.740 and its purchasing an old plant owned by another firm? 773 01:28:02.740 --> 01:28:09.840 Yet the latter case, if the plant constitutes all the assets of Firm B, will involve in 774 01:28:09.840 --> 01:28:13.140 fact a merger of the two firms. 775 01:28:13.140 --> 01:28:19.860 The degree of merger or the degree of independence in the various parts of the productive system 776 01:28:19.860 --> 01:28:26.340 will depend entirely upon the most remunerative method for the producers concerned. 777 01:28:26.340 --> 01:28:32.660 This will also be the method most serviceable to the consumers, and there is no way of distinguishing 778 01:28:32.660 --> 01:28:51.660 It might be objected at this point that there are many useful, indeed indispensable theoretical concepts which cannot be practically isolated in their pure form in the real world. 779 01:28:51.660 --> 01:28:58.660 Thus, the interest rate, in practice, is not strictly separable from profits, and the various 780 01:28:58.660 --> 01:29:05.340 components of the interest rate are not separable in practice, but they can be separated in 781 01:29:05.340 --> 01:29:06.680 analysis. 782 01:29:06.680 --> 01:29:14.060 But these concepts are each definable in terms independent of one another, and of the complex 783 01:29:14.060 --> 01:29:16.380 reality being investigated. 784 01:29:16.380 --> 01:29:23.380 Thus, the pure interest rate may never exist in practice, but the market interest rate 785 01:29:23.380 --> 01:29:28.060 is theoretically analyzable into its components. 786 01:29:28.060 --> 01:29:34.020 Pure interest rate, price expectation component, risk component. 787 01:29:34.020 --> 01:29:41.140 They are so analyzable because each of these components is definable independently of the 788 01:29:41.140 --> 01:29:48.800 the complex market interest rate, and, moreover, is independently deducible from the axioms 789 01:29:48.800 --> 01:29:50.800 of praxeology. 790 01:29:50.800 --> 01:29:57.160 The existence and determination of the pure interest rate is strictly deducible from the 791 01:29:57.160 --> 01:30:01.760 principles of human action, time preference, etc. 792 01:30:01.760 --> 01:30:08.420 Each of these components, then, is arrived at a priori, in relation to the concrete market 793 01:30:08.420 --> 01:30:15.900 interest rate itself, and is deduced from previously established truths about human action. 794 01:30:15.900 --> 01:30:22.540 In all such cases, the components are definable through independently established theoretical 795 01:30:22.540 --> 01:30:24.040 criteria. 796 01:30:24.040 --> 01:30:31.460 In this case, however, there is, as we have seen, no independent way by which we can define 797 01:30:31.460 --> 01:30:37.100 and distinguish a monopoly price from a competitive price. 798 01:30:37.100 --> 01:30:42.780 There is no prior rule available to guide us in framing the distinction. 799 01:30:42.780 --> 01:30:49.020 To say that the monopoly price is formed when the configuration of demand is inelastic above 800 01:30:49.020 --> 01:30:56.100 the competitive price tells us nothing because we have no way of independently defining the 801 01:30:56.100 --> 01:30:58.800 competitive price. 802 01:30:58.800 --> 01:31:05.660 To reiterate, the seemingly unidentifiable elements in other areas of economic theory 803 01:31:05.660 --> 01:31:10.860 are independently deducible from the axioms of human action. 804 01:31:10.860 --> 01:31:18.500 Time preference, uncertainty, changes in purchasing power, etc. can all be independently established 805 01:31:18.500 --> 01:31:25.580 by prior reasoning and their interrelations analyzed through the method of mental constructions. 806 01:31:25.580 --> 01:31:32.200 The evenly rotating economy can be seen as the ever-moving goal of the market through 807 01:31:32.200 --> 01:31:35.720 through our analysis of the direction of action. 808 01:31:35.720 --> 01:31:42.860 But here, all that we know from prior analysis of human action is that individuals cooperate 809 01:31:42.860 --> 01:31:49.580 on the market to sell and purchase factors, transform them into products, and expect to 810 01:31:49.580 --> 01:31:55.760 sell the products to others, eventually to final consumers, and that the factors are 811 01:31:55.760 --> 01:32:02.920 are sold and entrepreneurs undertake the production in order to obtain monetary income from the 812 01:32:02.920 --> 01:32:04.860 sale of their product. 813 01:32:04.860 --> 01:32:11.380 How much any given person will produce of any given good or service is determined by 814 01:32:11.380 --> 01:32:19.200 his expectations of greatest monetary income, other psychic considerations being equal. 815 01:32:19.200 --> 01:32:25.920 But nowhere in the analysis of such action is it possible to separate conceptually an 816 01:32:25.920 --> 01:32:33.460 alleged restrictive from a non-restrictive act, and nowhere is it possible to define 817 01:32:33.460 --> 01:32:40.000 competitive price in any way that would differ from the free market price. 818 01:32:40.000 --> 01:32:47.200 Similarly, there is no way of conceptually distinguishing monopoly price from free market 819 01:32:47.200 --> 01:32:48.440 price. 820 01:32:48.440 --> 01:32:56.020 But if a concept has no possible grounding in reality, then it is an empty and illusory 821 01:32:56.020 --> 01:32:59.040 and not a meaningful concept. 822 01:32:59.040 --> 01:33:06.060 On the free market there is no way of distinguishing a monopoly price from a competitive price 823 01:33:06.060 --> 01:33:14.440 or a subcompetitive price, or of establishing any changes as movements from one to the other. 824 01:33:14.440 --> 01:33:18.960 No criteria can be found for making such distinctions. 825 01:33:18.960 --> 01:33:26.200 The concept of monopoly price as distinguished from competitive price is therefore untenable. 826 01:33:26.200 --> 01:33:31.160 We can speak only of the free market price. 827 01:33:31.160 --> 01:33:37.520 Thus we conclude not only that there is nothing wrong with monopoly price, but also that the 828 01:33:37.520 --> 01:33:40.360 entire concept is meaningless. 829 01:33:40.360 --> 01:33:46.520 There is a great deal of monopoly in the sense of a single owner of a unique commodity or 830 01:33:46.520 --> 01:33:52.820 service, definition one, but we have seen that this is an inappropriate term, and further 831 01:33:52.820 --> 01:33:55.900 that it has no catallactic significance. 832 01:33:55.900 --> 01:34:02.500 A monopoly would be of importance only if it led to a monopoly price, and we have seen 833 01:34:02.500 --> 01:34:09.500 that there is no such thing as a monopoly price or a competitive price on the market. 834 01:34:09.500 --> 01:34:13.500 There is only the free market price. 835 01:34:13.500 --> 01:34:20.500 E. Some problems in the theory of the illusion of monopoly price. 836 01:34:20.500 --> 01:34:23.500 1. Location monopoly. 837 01:34:23.500 --> 01:34:28.500 It might be objected that in the case of location monopoly, 838 01:34:28.500 --> 01:34:34.500 a monopoly price can be distinguished from a competitive price on a free market. 839 01:34:34.500 --> 01:34:37.500 Let us consider the case of cement. 840 01:34:37.500 --> 01:34:42.060 There are cement consumers, say, who live in Rochester. 841 01:34:42.060 --> 01:34:50.660 A cement firm in Rochester could competitively charge a mill price of X gold grams per ton. 842 01:34:50.660 --> 01:34:57.000 The nearest competitor is stationed in Albany, and freight costs from Albany to Rochester 843 01:34:57.000 --> 01:35:00.380 are 3 gold grams per ton. 844 01:35:00.380 --> 01:35:08.100 The Rochester firm is then able to increase its price to obtain X plus 2 gold grams per 845 01:35:08.100 --> 01:35:11.500 ton from Rochester consumers. 846 01:35:11.500 --> 01:35:15.840 Does its locational advantage not confer upon it a monopoly? 847 01:35:15.840 --> 01:35:19.940 And is not this higher price a monopoly price? 848 01:35:19.940 --> 01:35:28.040 First, as we have seen, the good that we must consider is the good in the hands of the consumers. 849 01:35:28.040 --> 01:35:33.800 The Rochester firm is superior locationally for the Rochester market. 850 01:35:33.800 --> 01:35:40.860 The fact that the Albany firm cannot compete is not to be blamed on the Rochester firm. 851 01:35:40.860 --> 01:35:43.600 Location is also a factor of production. 852 01:35:43.600 --> 01:35:51.120 Furthermore, another firm could, if it wished, set itself up in Rochester to compete. 853 01:35:51.120 --> 01:35:57.880 Let us, however, be generous to the location monopoly theorists and grant that, in a sense, 854 01:35:57.880 --> 01:36:06.920 Definition 1 This monopoly is enjoyed by all individual sellers of any good or service. 855 01:36:06.920 --> 01:36:14.680 This is due to the eternal law of human action, and indeed of all matter, that only one thing 856 01:36:14.680 --> 01:36:18.360 can be in one place at one time. 857 01:36:18.360 --> 01:36:25.380 The retail grocer on 5th street enjoys a monopoly of the sale of groceries for that street. 858 01:36:25.380 --> 01:36:32.060 The grocer on 4th Street enjoys a monopoly of grocery service for his street, etc. 859 01:36:32.060 --> 01:36:38.340 In the case of stores which all cluster together in the same block, say radio stores, there 860 01:36:38.340 --> 01:36:45.660 are still a few feet of sidewalk over which each owner of a radio store exercises a location 861 01:36:45.660 --> 01:36:47.500 monopoly. 862 01:36:47.500 --> 01:36:54.100 Location is as specific to a firm or plant as ability is to a person. 863 01:36:54.100 --> 01:36:59.860 Whether this element of location takes on any importance in the market depends on the 864 01:36:59.860 --> 01:37:07.020 configuration of consumer demand, and on which policy is most profitable for each seller 865 01:37:07.020 --> 01:37:09.260 in the concrete case. 866 01:37:09.260 --> 01:37:15.920 In some cases, a grocer, for example, can charge higher prices for his goods than another 867 01:37:15.920 --> 01:37:19.240 because of his monopoly of the block. 868 01:37:19.240 --> 01:37:25.880 In that case, his monopoly over the good eggs available on 5th Street has taken on such 869 01:37:25.880 --> 01:37:31.960 a significance for the consumers in his block that he can charge them a higher price than 870 01:37:31.960 --> 01:37:36.520 the 4th Street grocer and still retain their patronage. 871 01:37:36.520 --> 01:37:42.440 In other cases, he cannot do so because the bulk of his customers will desert him for 872 01:37:42.440 --> 01:37:46.640 the neighboring grocer if the latter's prices are lower. 873 01:37:46.640 --> 01:37:54.240 Now, a good is homogeneous if consumers evaluate its units in the same way. 874 01:37:54.240 --> 01:38:00.940 If that condition holds, its units will be sold for a uniform price on the market, or 875 01:38:00.940 --> 01:38:05.660 rapidly tend to be sold at a uniform price. 876 01:38:05.660 --> 01:38:15.400 If now, various grocers must adhere to a uniform price, then there is no location monopoly. 877 01:38:15.400 --> 01:38:21.300 But what of the case where the fifth street grocer can charge a higher price than his 878 01:38:21.300 --> 01:38:22.400 competitor? 879 01:38:22.400 --> 01:38:28.840 Do we not have here a clear case of an identifiable monopoly price? 880 01:38:28.840 --> 01:38:34.320 Can we not say that the fifth street grocer who can charge more than his competitor for 881 01:38:34.320 --> 01:38:41.360 the same goods has found that the demand for his products is inelastic for a certain range 882 01:38:41.360 --> 01:38:43.920 above the competitive price? 883 01:38:43.920 --> 01:38:50.460 The competitive price being taken as that equal to the price charged by his neighbor. 884 01:38:50.460 --> 01:38:56.920 Can we not say this even though we recognize that there is no infringement on consumers 885 01:38:56.920 --> 01:39:03.760 sovereignty in this action, since it is due to the specific tastes of his consuming customers? 886 01:39:03.760 --> 01:39:06.480 The answer is an emphatic no. 887 01:39:06.480 --> 01:39:13.620 The reason is that the economist can never equate a good with some physical substance. 888 01:39:13.620 --> 01:39:21.340 A good, we remember, is a quantity of a thing divisible into a supply of homogeneous units, 889 01:39:21.340 --> 01:39:28.900 and this homogeneity, we repeat, must be in the minds of the consuming public, not in 890 01:39:28.900 --> 01:39:31.160 its physical composition. 891 01:39:31.160 --> 01:39:37.420 If a malted milk consumed at a luncheonette is the same good in the minds of consumers 892 01:39:37.420 --> 01:39:43.080 as the malted at a fashionable restaurant, then the price of the malted will be the same 893 01:40:13.080 --> 01:40:15.080 The Theory of Money and Credit 894 01:40:43.080 --> 01:40:49.640 As long as the bulk of the consumers regard them as different goods, then they are different 895 01:40:49.640 --> 01:40:53.120 goods, and their prices will differ. 896 01:40:53.120 --> 01:40:59.060 Similarly, goods may differ physically, but as long as they are regarded by consumers 897 01:40:59.060 --> 01:41:03.840 as the same, they are the same good. 898 01:41:03.840 --> 01:41:10.360 The same analysis applies to the case of location, where the 5th Street consumers regard groceries 899 01:41:10.360 --> 01:41:15.760 Groceries at 5th Street as a significantly better good than groceries at 4th Street so 900 01:41:15.760 --> 01:41:21.580 that they are willing to pay more rather than walk the extra distance, then the two will 901 01:41:21.580 --> 01:41:24.540 become different goods. 902 01:41:24.540 --> 01:41:29.680 In the case of location, there will always be a tendency for the two to be different 903 01:41:29.680 --> 01:41:34.760 goods, but very often this will not be significant on the market. 904 01:41:34.760 --> 01:41:41.380 For a consumer may and almost always will prefer groceries available on this block to 905 01:41:41.380 --> 01:41:47.200 groceries available on the next block, but often this preference will not be enough to 906 01:41:47.200 --> 01:41:51.520 overcome any higher price for the former goods. 907 01:41:51.520 --> 01:41:58.080 If the bulk of the consumers shift to the latter good at a higher price, the two, on 908 01:41:58.080 --> 01:42:05.480 The Market will be the same good, and it is action on the market, real action, that we 909 01:42:05.480 --> 01:42:12.160 are interested in, not the non-significant pure valuations by themselves. 910 01:42:12.160 --> 01:42:19.760 In praxeology, we are interested only in preferences that result in, and are therefore demonstrated 911 01:42:19.760 --> 01:42:26.200 by, real choices, not in the preferences themselves. 912 01:42:26.200 --> 01:42:33.160 A good cannot be independently established as such apart from consumer preference on the 913 01:42:33.160 --> 01:42:34.640 market. 914 01:42:34.640 --> 01:42:41.240 Groceries on 5th Street may be higher in price than groceries on 4th Street to the 5th Street 915 01:42:41.240 --> 01:42:42.240 consumers. 916 01:42:42.240 --> 01:42:48.120 If so, it will be because the former is a different good to the consumers. 917 01:42:48.120 --> 01:42:55.520 In the same way, Rochester cement may cost more than Albany cement in Albany to Rochester 918 01:42:55.520 --> 01:43:02.520 The Theory of Money and Credit The Theory of Money and Credit 919 01:43:25.520 --> 01:43:33.360 There is no theoretical criterion by which we can distinguish simple locational income 920 01:43:33.360 --> 01:43:39.880 to sites from alleged monopoly income to sites. 921 01:43:39.880 --> 01:43:46.040 There is another reason for abandoning any theory of locational monopoly price. 922 01:43:46.040 --> 01:43:52.760 If all sites are purely specific in locational value, there is no sense to the statement 923 01:43:52.760 --> 01:43:54.760 The Theory of Money and Credit 924 01:44:22.760 --> 01:44:29.760 is idle, but the idle sites necessarily differ in location from the sites in use, and are 925 01:44:29.760 --> 01:44:35.820 therefore idle because their value productivity is inferior. 926 01:44:35.820 --> 01:44:42.740 They are idle because they are sub-marginal, not because they are monopolistically withheld 927 01:44:42.740 --> 01:44:47.460 parts of a certain homogeneous supply. 928 01:44:47.460 --> 01:44:53.700 The Locational Monopoly Price Theorist, then, is refuted whichever way he turns. 929 01:44:53.700 --> 01:45:00.260 If he takes a limited view of Locational Monopoly, in the sense of Definition 1, and confines 930 01:45:00.260 --> 01:45:07.800 it to such examples as Rochester vs. Albany, he can never establish a criterion for Monopoly 931 01:45:07.800 --> 01:45:15.580 Price, for another firm can enter Rochester, either actually or potentially, to bid away 932 01:45:15.580 --> 01:45:19.580 The Theory of Money and Credit 933 01:45:45.580 --> 01:45:54.420 In talking of monopoly price, for a, the price of a product at one location cannot be precisely 934 01:45:54.420 --> 01:46:02.860 compared with another because they are different goods, and b, each site is different in locational 935 01:46:02.860 --> 01:46:11.920 quality and therefore no site can be conceptually split up into different homogeneous units, 936 01:46:11.920 --> 01:46:28.920 2. 937 01:46:28.920 --> 01:46:29.920 Natural Monopoly 938 01:46:29.920 --> 01:46:37.800 A favorite target of the critics of monopoly is the so-called natural monopoly, or public 939 01:46:37.800 --> 01:47:06.800 A typical case is the water supply of a city. It is supposed to be technologically feasible for only one water company to exist for serving a city. No other firms are therefore able to compete, and special interference is alleged to be necessary to curb monopoly pricing by this utility. 940 01:47:06.800 --> 01:47:16.800 In the first place, such a limited space monopoly is just one case in which only one firm in a field is profitable. 941 01:47:16.800 --> 01:47:23.800 How many firms will be profitable in any line of production is an institutional question, 942 01:47:23.800 --> 01:47:30.800 and depends on such concrete data as the degree of consumer demand, the type of product sold, 943 01:47:30.800 --> 01:47:40.800 The Physical Productivity of the Processes, the Supply and Pricing of Factors, the Forecasting of Entrepreneurs, etc. 944 01:47:40.800 --> 01:47:45.800 Spatial limitations may be unimportant, as in the case of the grocers. 945 01:47:45.800 --> 01:47:54.800 The spatial limits may allow only the narrowest of monopolies, the monopoly over the portion of sidewalk owned by the seller. 946 01:47:54.800 --> 01:48:01.280 on the other hand conditions may be such that only one firm may be feasible in 947 01:48:01.280 --> 01:48:07.400 the industry but we have seen that this is irrelevant monopoly is a meaningless 948 01:48:07.400 --> 01:48:14.080 appellation unless monopoly price is achieved and once again there is no way 949 01:48:14.080 --> 01:48:19.920 of determining whether the price charged for the good is a monopoly price or not 950 01:48:19.920 --> 01:48:27.040 and this applies to all circumstances including a nationwide telephone firm, a 951 01:48:27.040 --> 01:48:33.240 local water company or an outstanding baseball player. All these persons or 952 01:48:33.240 --> 01:48:39.600 firms will be monopolies within their industry and in all these cases the 953 01:48:39.600 --> 01:48:46.360 dichotomy between monopoly price and competitive price is still an illusory 954 01:48:46.360 --> 01:49:16.360 The Theory of Money and Credit The Theory of Money and Credit 955 01:49:16.360 --> 01:49:23.720 No case, therefore, on the free market can a monopoly price be conceptually distinguished 956 01:49:23.720 --> 01:49:26.160 from a competitive price. 957 01:49:26.160 --> 01:49:30.760 All prices on the free market are competitive. 958 01:49:30.760 --> 01:49:35.160 As Mises writes, prices are a market phenomenon. 959 01:49:35.160 --> 01:49:41.680 They are the resultant of a certain constellation of market data, of actions and reactions of 960 01:49:41.680 --> 01:49:44.500 the members of a market society. 961 01:49:44.500 --> 01:49:50.700 It is vain to meditate what prices would have been if some of their determinants had been 962 01:49:50.700 --> 01:49:51.700 different. 963 01:49:51.700 --> 01:49:56.620 It is no less vain to ponder on what prices ought to be. 964 01:49:56.620 --> 01:50:02.660 Everybody is pleased if the prices of things he wants to buy drop and the prices of the 965 01:50:02.660 --> 01:50:05.720 things he wants to sell rise. 966 01:50:05.720 --> 01:50:13.380 Any price determined on a market is the necessary outgrowth of the interplay of the forces operating, 967 01:50:13.380 --> 01:50:16.460 That is, demand and supply. 968 01:50:16.460 --> 01:50:23.140 Whatever the market situation which generated this price may be, with regard to it, the 969 01:50:23.140 --> 01:50:27.780 price is always adequate, genuine and real. 970 01:50:27.780 --> 01:50:34.220 It cannot be higher if no bidder ready to offer a higher price turns up, and it cannot 971 01:50:34.220 --> 01:50:40.320 be lower if no seller ready to deliver at a lower price turns up. 972 01:50:40.320 --> 01:50:47.380 Only the appearance of such people ready to buy or sell can alter prices. 973 01:50:47.380 --> 01:50:54.000 Economics does not develop formulas which would enable anybody to compute a correct price 974 01:50:54.000 --> 01:51:00.520 different from that established on the market by the interaction of buyers and sellers. 975 01:51:00.520 --> 01:51:04.200 This refers also to monopoly prices. 976 01:51:04.200 --> 01:51:12.100 No alleged fact-finding and no armchair speculation can discover another price at which demand 977 01:51:12.100 --> 01:51:15.140 and supply would become equal. 978 01:51:15.140 --> 01:51:22.200 The failure of all experiments to find a satisfactory solution for the limited space monopoly of 979 01:51:22.200 --> 01:51:25.880 Public Utilities clearly proves this truth.