The Fear of Monopoly
Whenever we talk to people about the idea of a free market,
most of them tend to express fears of what might happen if a free market actually appeared.
Now, what we mean by a free market, of course, is a market that could be called laissez-faire,
that is, one in which there is no government intervention of any kind for any reason.
Any Reason. That is to say, the government would not help anybody, it wouldn't subsidize
anybody, it wouldn't protect anybody, and of course, it would not intervene to tax anyone
or regulate anyone. The market would behave as the individual participants in the market
would cause it to behave by virtue of their independent actions. This is essentially what
is meant by a free market. Incidentally, this does not exclude the area of protection. Protection
Protection is something that falls into a separate category, and certainly it would
be important that the market and the persons in it, including the private property and
so on, be protected.
But we are not talking about protection, we are talking about government, and these are
two different things.
Protection of course is certainly something that we want in the market.
Whether or not government should be in there is really an overall question.
And so we are now talking in terms of a free market and what would eventuate if we had
a really free market. And as I've indicated, usually when this thought is suggested, people
express various fears. Now, one of the fears that is very often brought forward is the
fear that if we had a free market to it, one in which there was no intervention at all
by Government, that monopolies would eventuate. In other words, there is a very popular notion
that given a free market without government intervention, there would be a tendency for
various industries to have fewer and fewer competitors in them, the result being that
1 or maybe 2, a very limited number or possibly just one industry or one businessman in a
given area would emerge as the total dominating factor in that area. He would have all of
that particular type of business. He would dominate the field. And of course the result
of this would be, and this is usually the fear expressed, that having obtained such
In such a monopoly, then he could charge any price he wanted to, because there would be
no competition. It is recognized here tacitly that if there is competition, well of course
then he wouldn't be able to raise his prices as he pleased. But assuming that you had a
free market, what would prevent one businessman or one industrialist from becoming exceptionally
The General Fear of a High Price Made Possible by a Monopoly Made Possible by the Skills of a particular Businessman
They express the fear that just a monopolist would have too much power. If they really
were worried about a monopoly as such, they would certainly not ask the government to
come in to intervene, because government is a monopoly. And the idea that you could avoid
whatever competitive factors that exist in the market by really turning things over to
an existing monopoly in an effort to escape monopoly is, of course, an absurdity. Clearly
And there would be no point in doing that. But people really aren't afraid of monopoly
as such. They really don't worry about what businessman is doing what. They really don't
care about that. What they care about is how this is going to affect them personally. And
they see this effect as coming to them in the form of high prices, and they are very
much afraid of high prices.
Now the thing then that we would have to examine would be what would happen in a market assuming
a free market? What would be the natural conditions that would tend to develop? Are there natural
factors in a free market that would inevitably move us toward monopoly, and consequently
monopoly price? The argument of those who favor government intervention at this point
is that that is the case. Given a free market, they will tell you, the market will inevitably
move toward the emergence of a very limited number of competitors. Probably a single monopolist
will appear and then of course we will be at his mercy. So what we have to do is to
examine the conditions that would eventuate in a free market. Keep in mind that what we
We have in this country today is not a free market. We have a market today into which
the government intervenes constantly. So we do not have what we think of as a laissez-faire
marketplace. We have to now imagine such a thing because we are not dealing with that,
in fact. But we can, by using our brains and by employing logic, arrive at the kind of
This is a fascinating area to me. It's particularly fascinating when I take into consideration some of the things that I have run into in my personal experience here.
I got engaged a while ago with a young professor at one of the universities back east who wanted
to debate with me in a letter as to what a monopoly was and whether or not a free market
would lead into it. I think what had happened was that he had read something I had written
in which I made the statement that given a free market we did not have to worry about
Monopoly because in a free market a harmful monopoly could not appear. He took exception
to that remark and challenged me in a letter, and wanted to know if perhaps there wasn't
a typographical error, and that I couldn't possibly have intended to say what I had said.
Well, I wrote back and assured him that I had intended to say what I had said, that
it was not a typographical error, and that I would stand on that statement to it, that
that given a free market there is no reason to fear a harmful monopoly. Well, he responded
in due course and an exchange occurred between us that went on for a number of months. And
everything I said to him in our correspondence turned out to be an argument that he would
then convert to show that what I was talking about to it, the conditions in a free market,
would inescapably lead into a monopoly condition. And every time I gave him an instance of competition
happening in the market, he replied, well, this was really proof of monopoly. Well, after
we exchanged enough letters in this area, I began to wonder if we were defining our
terms properly because, of course, if you define your terms differently, you're just
Well, he responded in due course that, of course, this is where he was standing. He
was taking the government's position here, that the government has in its various antitrust
measures and subsequent legislation ever since the first Antitrust Act of 1890, the Sherman
Antitrust Act, he had been operating on the basis that the definitions of monopoly as
They appear in this welter of law that we have would be valid and that this is where
he was arguing.
Well, now it just so happened that I had an attorney in my employ and I asked him to check
out the law relating to antitrust so that we could get a good understanding in this
area.
Now, I am not an attorney and if you want to check it with your attorney, please do
So, but here is what my attorney reported to me. We have, of course, beginning in 1890
with the passage of the Sherman Antitrust Act, we have a vast library of law and rulings
that have descended from the law that covers this field. In fact, it almost, you could
It blankets and smothers the field. It is probably one of the most contradictory and
prolific areas of law that we have in the country. For instance, there is one part of
the law—I cannot tell you specifically which part of which law it is. As I say, you can
check that with your attorney. I am not an attorney. He can tell you. But there is one
One part of the law that specifies that if you are in business and you are selling a
good or service at a price that is higher than that of your competition, and at the
same time you are able to maintain as much as 8% of the market, that is defined as monopoly
Monopoly per se. In other words, if your price is higher than your competition and you still
are able to have 8% of the business, that is monopoly per se. The only reason, you see,
in the government judgment, back of the law, that you could charge more than your competition
and at the same time keep as much as 8% is because there are other factors at work that
make you essentially a non-competitor. You're just in a class by yourself, and therefore
under the law the government can cite you as a monopolist, take you into court, try
you and convict you, after which you can be fined, imprisoned or both. Now that's one
part of the law. However, there is another part of the law that specifies that if you
If you charge less than your competition, never mind how much of the business you have,
if you charge less than your competition, that is defined as a monopoly practice. Because
the only reason that you are charging less is because you hope to put your competition
out of business. Therefore you are seeking a monopoly and you are guilty under the law.
You can be cited here, taken into court, tried, convicted, fined, imprisoned, or both. But
But now there's still a third part of the law, which says that if you are charging the
same price as your competition, that is collusion and conspiracy, and you are guilty of a felony,
and you can be cited under the law, arrested, taken to court, tried, convicted, fined, imprisoned,
or both.
In other words, the way the laws are written, it specifies that if you are charging more
more than your competition and still have 8% of the business, or if you are charging less
than your competition, never mind how much business you are enjoying, or if you have
the same price as your competition, you are guilty under the law.
I had the interesting opportunity a few years ago to actually send a reporter to cover a
A speech given by a man from the Justice Department, who happened to be in my part of the country
at the time, who was talking about the activities of the antitrust provisions and the Justice
Department in enforcing the antitrust provisions, and this man from the Justice Department stated
flatly that if the Justice Department had the finances and the personnel, they could
arrest and convict every successful businessman in the United States, because there is already
So this was the thing I now played back to the professor on the East Coast. I said, if this is the way you are defining competition, then I have to give up. We can't talk anymore. Because if you are going to say that when the price is higher, that's monopoly. When it's lower, that's monopoly. And when it's the same, that's monopoly.
Monopoly, there aren't any other places for prices to go. And therefore if putting a price
on an item is monopoly, let's quit. There isn't any point in discussing anything. Well,
he admitted that this is what he was doing. And of course if you're going to define every
business action as a monopoly practice, we can of course stop talking. There is no point
in Discussing it. But, of course, this is really an absurdity. Obviously, the word monopoly
is an abstract term. And to understand what we mean by monopoly, we have to introduce
a word that means the opposite of monopoly. And the opposite of monopoly is the word competition.
Now what we have to find out is if there is such a thing as competition, if not, there
is no point in having a word monopoly. To create an abstract that doesn't tell you
The Theory of Money and Credit
Meaning to the same man in the same situation to refer to monopoly or competition. The words
are meaningless. They have no application to a situation. To have application, to create
an abstraction, you create the abstraction because you want to show that it is opposite
of another abstraction. So here we have two abstractions, the concept of monopoly on the
one hand and the concept of competition on the other, and these are mutually exclusive
So let me set that forth at the outset. Competition and monopoly are opposites. If you have one,
it means that you do not have the other. To wit, if competition exists, that means the
absence of monopoly. If monopoly exists, that means the absence of competition. So let's
get our terms straight to begin with. Now, the question is, what happens in a market
Assuming a free market, does a free market tend toward monopoly or does it tend toward competition?
We should be advised, I suppose historically, to keep in mind that the word monopoly came into
practice during the Middle Ages because kings granted monopolies. This is how it was done.
When a businessman wanted to go into business back in these early days, and of course all
business activity is risky, the businessman would probably be afraid of going into business
unless he had some kind of guarantee that he wouldn't have to face too much competition.
And so he would go to the king and say to him, Your Majesty, I would like to open such
in such and such a business, in such a location, and I will pay you a sum—sometimes the sum
was quite large—if you will grant me an exclusive monopoly to operate in that area.
And if the king was pleased with the sum that was offered, or could raise it to a sum that
he would finally agree to, why the king would issue an edict guaranteeing to this man that
But he would have the exclusive right to operate that particular business in that particular
location. And that is a monopoly. That's where the word comes from. It is a kingly
grant of exclusion to a party willing to pay a fee. Now why would businessmen do that?
Why would they be willing to go and pay a fee? Since there weren't any laws prohibiting
Competition. Why were they worried about it, if there isn't such a thing in a free market?
Clearly these businessmen were asking for government intervention right at the outset
in order to give them a guarantee. But if a free market moves toward monopoly anyway,
why didn't they just go into business? They would have easily obtained a monopoly. They
didn't think so. They thought the minute they got into business they would face competition,
and therefore they wanted an extra market activity to come in to keep that business
out so that they would have clear sailing. Now that's where the word monopoly came
from and that's where the concept came from. It is certainly obvious that if a free market
tends toward monopoly, that whole exercise would be one of futility. They would automatically
have a monopoly. If they didn't have it at the outset, they'd soon get it. Somebody
Nobody would get a monopoly, because it would tend toward monopoly. So the logical thing
for the businessman to do would have been simply to go into business. And as the first
man in business, having an advantageous position right at the outset, he would have had no
necessity for paying a big fee to the king in order to guarantee what the market would
do for him anyway. Clearly, in the minds of these early businessmen, the free market didn't
lead into monopoly. It led into competition, and that's what they were afraid of. So that's
Were these early businessmen correct in fearing competition? They were certainly correct in
realizing that given a free market, that's what they'd have to face. Competition is
going to be the logical condition, the natural condition, in a free market in which the government
does not intervene. In fact, let me point out to you that one of the basic items of
of Competition is price. Assuming a free market, whether your price is higher than, lower than,
or the same as your competition, that is a factor in competition and not an indication
of monopoly, providing you are free to try to move the price. As long as you have a free
market and the price can be moved, that is a factor in competition. So you can put down
It is often on your list that the pricing factor, instead of being a monopoly factor, as the government would have you believe, it is actually a factor in competition, a primary factor in competition, and would remain so if there is no intervention.
Another constant factor in competition would be quality. It happens that when businessmen
get into the same business, supplying more or less the same type of good or service,
they tend to find that their prices will equal out. It costs about so much to manufacture
a ton of steel or to manufacture a kilowatt of electricity or to provide a lady's dress
The amount of cost involved is only going to fluctuate fractions of pennies between one entrepreneur and another.
They will very quickly find that they're on a head-on collision insofar as prices are concerned.
Do what they will. Their prices are going to trend downward to the lowest possible level,
and then you just can't go below that.
And you don't dare go above it because if you do, your competitor gets the advantage.
Advantage. So prices will trend downward and then they'll level off there. So the businessman
seeking competition now turns around and introduces the element of quality. If he can't beat
his competition on the basis of price, perhaps he can beat him on quality. He can add something.
He can give green stamps. Or he can deliver. Or he can give you convenient credit terms.
Or he can paint his widgets blue, and the others are just pink, and maybe some people
prefer blue to pink, or something.
He introduces some variation.
He tries to come up with better quality, lighter weight, more durable merchandise, etc., etc.,
in an effort to become more competitive.
Assuming the government doesn't regulate the quality, well, quality then becomes a factor
in competition.
Incidentally, most places where governments begin to intervene in the economy is at the
level of price or quality. And actually, I could point out that a regulation that regulates
quality has exactly the same effect in the market as a price regulation. If you are required
to put out so much of something in order to sell it, it is the same as being compelled
to sell it at such a price for so much. In every exchange you've got a good and money,
or a service and money. And whether you regulate the money side of it, which is the price side,
or the good side of it in relation to the money, the same effect occurs. Given a free
market, price and quality are both active factors in competition. As long as the businessman
is free without any law or government intervention, to try to beat his competition, then he can
manipulate his prices, and the normal process of manipulation would be this, he will constantly
endeavor to manipulate his prices downward, because that's where he gets his advantage,
and he will constantly try to manipulate his quality upwards, because that's where he
gets his advantage, assuming the market is free.
In a free market, quality trends upward and prices trend downward. But now those are only
two factors in competition. There are many more. I will get into some other factors here,
and we have to examine a number of them before we see what we really have to deal with. But
In the area of price and quality, governments are most active. They enter the field arguing
that by so doing, they are protecting the consumer. In actual fact, they are not protecting
the consumer. The consumer will pay an ever higher price and he will pay it for less and
and less quality. The effort will be made not to improve the quality, but to figure
out how to do the same thing cheaper. And therefore you continue to have a downgrading
of merchandise and an upgrading of pricing once the government gets into the field of
regulation. Certainly that should be a matter that we are all aware of at the present time.
The quality of certain types of merchandise where government has primarily intervened
steadily tends to deteriorate. And the price of these same items where government regulates
steadily tends to increase. We figure out how to get substitutes, how to make things
cheaper, not how to make them better. Because we are limited on the basis of government
regulation, respecting the numbers of persons who can enter the field, the licensing fees,
the requirements for how you operate, the standards and so on that are imposed upon
all, only the very best can survive under these conditions, and thus the number of entrepreneurs
engaged in a given area tend to be reduced with the passing of time.
However, let's go into some of the other areas where competition is also a fact if
If we are talking about a free market, let me just quickly name these, and then I'll
get into them in detail in another lecture. The various areas of competition that I want
to examine will include direct competition, parallel competition, dollar competition,
and what we call market competition. These four areas, in addition to price and quality,
make up the six fundamental areas where competition will exist given a free market. The major
enemy of competition has always been the government, and yet the illusion exists, and it is an
An illusion in the minds of many people that the government helps to preserve competition,
when in point of fact it does precisely the opposite. So we'll want to take a good look
at this and be sure you get to hear the next lecture. Thank you very much.