The Free Market Hates Monopolies

The other night I was talking to some friends about the free market. One of the objections that they brought up (and that is often brought up when discussing the free market) is "but what about monopolies?" This is a valid question, and a concern that many share. The answer that I gave at the time seemed unsatisfactory to me, which was to just assert without much backing the statement, "Monopolies cannot be sustained without the help of the State." This is my belief and my intention in this post is to defend it with actual arguments.

Let us consider the case of Jan. Jan is stupendously rich. She has decided that she wants to have a monopoly on potatoes to enable herself to raise their price and exploit all the people who want potatoes. Thereby, she hopes to expand her vast fortune to even more lofty heights and eventually to be able to bathe in molten, potato-fueled gold.

The free market presents a host of steep obstacles to stand in the way of Jan's goal.

Obstacle 1: Supply and Demand
The first obstacle that stands in Jan's way is basic supply and demand. This law of economics states (among other things) that when demand for a thing increases, the price of that thing will increase and the supply of that thing will increase [1].

What this means is that as Jan begins to purchase potato farms in bulk, she is drastically increasing the demand for potato farms. This will increase the price of the farms, and consequently will give large incentives to people that own land to turn that land into potato farms; because that will enable them to sell their land for inordinate sums of money to Jan.

This is a huge barrier for Jan, since each potato farm she buys will be more expensive than the last, and the number of potato farms will skyrocket as people realize that Jan will buy them for crazy sums of money. This makes it very unlikely that Jan will be able to buy enough potato farms to make it matter before she runs out of money, no matter how much money she started with. It also makes it unlikely that the mountains of gold that she expends on purchasing potato farms will ever be returned via the means of their exploitation.

Obstacle 2: The Competitor
The second obstacle that stands in Jan's way is her competitors.

Let's say that Jan has managed to largely overcome the "Supply and Demand" barrier, and has bought enough potato farms that she has a huge majority market share. She is now using her evil market-share superpower to increase the price of potatoes dramatically, causing money to flow like the liquid gold of Erebor [2] into her pockets. With this new influx of wealth, she is attempting to buy out any farm that threatens to compete with her before it can become a problem.

This situation is extremely unstable, and won't last for long. Here's why: As the price of selling potatoes is rises far above the price of producing potatoes, and as Jan begins to enjoy this massive influx of wealth, other people will see this. It will create further incentive to create new potato farms (which will further aggravate the "Supply and Demand" barrier), and it will create a huge incentive to undercut her.

Because potatoes from Jan's empire are very overpriced, a competitor that has a small market share will have a massive opportunity to increase his market share and profits by offering potatoes for a more reasonable price. All it would take for her paradise of exploitation to start it's inevitable decline into dust is for one competitor to refuse to sell his farm to her and instead insist on undercutting her. And many will want to do so as the opportunity to carve massive market shares for themselves out of the lumbering, gold-filled corpse of Jan's potato empire is just too tempting.

Obstacle 3: The Substitute
Let's say that Jan has managed to overcome both of the aforementioned obstacles. She has either out-competed, bought out, or allied with every other potato producer in the world to create the ultimate potato cartel. Let's even say that this cartel owns every acre of land that could be used to produce potatoes, so there is no opportunity for new potato farms to appear.

No potato is created without Jan's say-so. No potato is sold without her signature on the contract. She has declared herself the Potato King and has scheduled her first molten gold bath. Surely such a cartel cannot be undermined! Surely there must be intervention, for no more perfect potato monopoly could exist!

Not so! Introducing, an amazing substitute, the radish [3]! You have no more need for potatoes, for you can now eat these amazing roots. Cook them and you will find that they are indistinguishable from potatoes for most uses. And only 1/2 the price!

Or perhaps feast your eyes upon the Potatonator 5000! This specialized device allows potatoes to be grown for 1/2 the going price in environments that were formerly inhospitable to them!

... You get the point. Even an extremely unlikely monopoly such as this one is unstable. As potatoes rise in price, people will have strong incentives to find or invent substitutes for them, and to find or invent new innovative ways to get potatoes.

This is another thing that is dictated by the law of Supply and Demand. As the price rises, the demand falls. It falls because less people can afford potatoes, and more people buy substitutes. These substitutes and new technologies will be able to out-compete the potato cartel unless the cartel starts selling potatoes at competitive prices. This very phenomenon is currently in progress in NYC, as Uber is out-competing the existing taxicab monopoly [4].

But what about the historical examples?
Most historical "monopolies" that you learned about in school gained tremendous market share by out-competing their competitors. These so called "monopolies" drove prices down into the floor, and didn't raise them back up again. The only monopolies that have been able to successfully drive prices up have been backed by State power [5].

As you can see, in a free market it is very hard for a monopoly to form and remain stable for any significant amount of time. The obstacles are just so ... vast. And even if a monopolistic firm does arise, it will be short lived.



Footnotes and Resources

1- If you are unfamiliar with the concepts of markets, supply, and demand, I recommend this video by crash course as a decent introduction.

They also mention market failures in the last part of the video. Market failures are not an economic law like supply and demand, but rather an opinion about whether the result of the free market is the most desirable result. Obviously, different people desire different things, making the concept of market failures a highly subjective matter. This puts market failures into a different category from supply and demand (which are just descriptions about how reality works), and I find it unfortunate that they included it in the video. However, I don't know of a better resource to direct you to if you are unfamiliar with supply and demand.

To get another perspective on a kidney market (mentioned in the crash course video), and markets in general, see this video hosted by economist Brian Caplan. The accompanying playlist is also enlightening.

For more about economics (it's important guys) I recommend Economics in One Lesson by Henry Hazlitt. Available online here.

Additionally, a huge library of amazing econ literature compiled by Tom Woods can be found here.

2- This is obviously a Hobbit reference, as the vast wealth of Erebor (also known as the Lonely Mountain) was legendary.

3- Potato substitutes exist! One such substitute is radishes. Apparently.

4- This video and this other video by Reason go into more detail as to the specifics of the rise of Uber. It is a pretty intriguing story.

5- There has been much written about the subject of historical monopolies. The historical examples of monopoly actually follow the trend of either supreme customer service, or supreme state backing.

Links!
    The Misplaced Fear of “Monopoly” - Article by Tom Woods. This article is focused on refuting "Predatory Pricing", and does contain some mention of historical "monopolies"
    Big Business, Monopoly, and Predatory Pricing - Speech Excerpt by Tom Woods which is entertaining and touches on the historical "Robber Barons".
    The Robber Barons and Monopoly - Podcast by Tom Woods. This podcast goes through in great detail many of the "Robber Barons" stories. As well as many stories about State backed monopolies and subsidized industries.
    Fear of Monopoly - Article by Edmond S. Bradley. This article makes a very similar case to the one that I have made, but couched in some "too hard to enter" industries: Automobiles, Airplanes, and Electric Power.

Minimum Wage Destroys Jobs

A three point argument:

1- There exists jobs that are worth less than minimum wage to perform. 2- There exists employers that will not pay employees more than the job is worth to perform it. 3- Some jobs from 1 that would exist because of the employers from 2 do not currently exist because of minimum wage laws.

Short and sweet.

On Discrimination

In this post I am going to give my thoughts about discrimination. Let us define the term discrimination. This definition is from google, and seems pretty well consistent with the definition that I've come to know.

1. Discrimination is treatment or consideration of, or making a distinction in favor of or against, a person or thing based on the group, class, or category to which that person or thing belongs rather than on individual merit.

Ok. Using this definition, I can show that everybody discriminates all the time.

Concerning "based on the group, class, or category ...": let's list some groups, classes, or categories by which people might be classified. The ones that are usually discussed include these: race, gender, sexual orientation, nationality, or religion. However, people can also be classified in the following ways: my friends, my family, me, people inside of my house, people with brown hair, people whose names start with 'h', people whose names I chose from out of a hat... etc. You probably get my point by now, which is that there are an indefinite number of ways to classify people.

If that isn't bad enough, "individual merit" is equally non-helpful. When discussing merit, we have to keep in mind the following 2 facts. Firstly, merit is highly subjective. What's important to you about a person may not be important to me. For example, I work in the software industry, and to some, having a college degree in computer science is very important for a developer. However, in my view, the degree is far far less important than having a passion for software. A self taught programmer is (in my opinion) better than a degree'd one. Other people think differently than me on this. Is one of these ways of thinking "correct" and the other "wrong"? Depends on your opinion.

Secondly, the merits required to perform any given job vary wildly depending on the job to perform. For example, the merits of a construction worker might include being strong enough carry heavy loads around the construction site, or being fit enough to work long hard hours (ableism!). The merits of a friend might include getting along with you, or having known you for a long time (it's all about who you know!). The merits of a model might include being the correct sex (sexism!), being good looking, or being the correct weight (lookism!).

So, since any arbitrary group of people can be defined by anybody, and the merits of a job are very changeable both by the job being performed as well as by the person who's measuring them, this essentially means that the only solid thing we have to measure discrimination by is our own personal preference.

Everyone Discriminates by Some Measurement

One could say that a merit to take in to account when deciding who to hang out with would be "how much fun will you have?" or perhaps "how long have you known this person?" or maybe "how well do you get along?" "how many interests do you have in common?". By any (all in fact) of these measures, I should hang out with my friends every time, and never hang out with my children. Yet, I choose to hang out with my children many times anyway. Does this mean that I'm discriminating against my friends? Using the definition above and the merits listed, YES.

My point is, we all discriminate, all the time. If you think you're not discriminating, I just have to define a group of people and a set of merits and WHAM! Discrimination!

There is no "objective and correct" definition of merit that will account for every situation or even any situation. We each have our preferences about what merits are important, and thereby we discriminate incorrectly by the measure some other person's preferences.

Discrimination in Business

I have two points to make here. The first is to reiterate that the merits required for any given job are highly subjective. Take, for example, the job of Rock Star. There is (and can be) no objective measure of the merits of a rock star that make him successful. We might be able to measure the pure, technical singing ability, or the pure, technical guitar skill. But most of what makes the Rock Star successful is the subjective tastes of the audience. A rock star's salary is essentially set by the number of people that buy the music.

Another example is this: many companies advertise to potential employees that they have a great work environment. Having had a fair number of jobs myself, I can say that great work environments are mostly caused by having co-workers that you get along with and that are fun to be around. I don't think that many people would list "the boss / employees get along with him" or "the boss / employees think he is fun" as merits for any given job. Yet when looking for a job, if one gets multiple job offers, the deciding factor may be whether you like the people you'll be working with/for. So hiring somebody slightly less qualified on paper because you think they'll fit in better is not actually unreasonable. Additionally, since "fitting in" is entirely based on the existing employee's preferences and since preferences vary wildly from one person to the next, this means that this particular reasonable merit is completely subjective and will vary from workplace to workplace.

The second point is that in accepted norms, the employees and customers are always allowed to discriminate, whereas the employer / business is not. For instance, if you are racist and don't want to work with a black guy, then you don't have to. You can go in for the job interview, notice the black guy, and then turn down the job. Nobody will ask twice; people are allowed to turn down jobs. However, if you are racist and don't want to work work with a black guy and you own your own business, you're SOL if a black guy interviews.

The customer/business relationship is no less one-sided. If you are racist and don't want to buy something from a black guy, then you don't have to. You can walk in to the store, see the black guy, and then walk right back out. However, if you are just as racist but now you own the store, if a black guy walks in, you are forced to sell to him.

Doesn't this seem unfair? In each case the guy was just as racist, the only difference is whether he owned his own business or not. Are we really okay with discriminating in this way against people who own businesses? Remember, if nobody owned a business, then nobody would have a job.

Conclusion

We all discriminate and we all approve of the ways that we individually discriminate (e.g. you don't disapprove of your own discrimination). Therefore, we should not make laws against discrimination. Other people might find your discriminatory behavior in whatever situation unsatisfactory. Some people might even be offended by the ways that you discriminate! Should those people be able to come with the police and force you to pay them for discriminating in what they view as the wrong way? Additionally, will outlawing certain kinds of discrimination change the opinion of the discriminators?

Justice should not be discriminatory based on anything but deeds, but laws and the people who enforce them are. That's one of the reasons why there should be as few laws as possible.

I put it forth that rather than outlawing the kind of discrimination that you don't like, you should feel free to discriminate against the discriminators. If discrimination is as life destroying a force as is supposed and if most people discriminate like you do, the discriminators will soon have to change their ways. And all this without the need for any action on the part of police or politicians!