Wednesday, September 4, 2013

Mises on Monopoly

In my brief encounter with the Austrian school, I commonly observe that the charge of monopoly against capitalism is immediately dismissed as a product of interventionism. The problem is most people I know are unaware about the existence of interventionism. The only system they know that is guilty of monopoly is capitalism. 

So I decided to study monopoly on my own to gain familiarity about the subject. I was able to find at least five sources from the web. These five sources include Ludwig von Mises' "Monopoly and Its Effects" taken from his book "Socialism: An Economic and Sociological Analysis", Hans F. Sennholz' "The Phantom Called 'Monopoly' ", Damien Manier's "Monopoly and Competition: Government Intervention and Its Effects on the Free Market", Sudha R. Shenoy's "The Source of Monopoly" and D. T. Armentano's "A Critique of Neoclassical and Austrian Monopoly Theory". 

Synthesizing these five sources would take longer time and so I decided to take one source at a time. At this point, I will go for Mises first.

In dealing with Mises' material, I rearrange the order of content according to the sequence I have in mind. I observe that for him, monopoly has two kinds. He also argues that among the fields in the study of economics, misunderstanding monopoly theory is widespread.

What is Monopoly?

It is popularly believed that a monopolist can do whatever he likes in fixing the price of a specific commodity. For Mises, this idea is false for it assumes that the monopolist is not subject under the law of the market. 

Others also believe that monopoly is good for it eliminates the waste of resources due to unnecessary competition. And since a monopolist could also maximize the division of labor, it is believed that this would result into cheaper production and commodity. 

Monopoly Under Capitalism

To understand monopoly, one must investigate first the condition that made monopoly price possible in the first place. The same law applies in determining both the monopoly price and the competetive price. The fact is, the monopolist cannot set the price that he wants simply because this will influence the market and the attitude of the consumers. Consumers respond to this, which affects the demand of the commodity. It will either increase or reduce depending on the price and the monopolist cannot escape this economic reality as any other producer and seller. 

Unlike other Austrian economists, Mises thinks that monopoly under capitalism is a reality that is difficult to deny. However, he qualifies this type of monopoly as limited to "specific primary production". In particular, he refers to mining. He accepts that monopoly can exist in this field even without government intervention. Other industries like oil, mercury, zinc and nickel, Mises thinks that monopoly can occasionally happen if the owners of these enterprises form an alliance. 

However, there are at least setbacks to this type of monopoly. One, when the income of mine owner increases, "production and consumption of their product fall" (p.392). And then, "A quantity of capital and labour which would otherwise have been active in this branch of production is diverted to other fields" (ibid.). Another setback is that the increase of income in a branch of world economy under monopoly would correspond to the decline of income in the remaining branches. 

This type of monopoly is normal under capitalism and still tolerable. What people usually blame as the monopoly inherent in capitalism is actually the result of government intervention. 

Monopoly Under Interventionism

Only through government interference that a monopolist is protected from both competition and the existence of substitute commodities. This type of monopoly is a common economic phenomenon among countries where socialistic policies protect the monopolist through the power of the State. 

Mises describes the impact of government intervention where the monopolist could derive "maximum net profit" from a higher price of a specific commodity even though the quantity of sales would be reduced. So such interference would result to a higher market price or monopoly price, greater profit, lower number of sold items and smaller consumption. But in order to do this, the monopolist must resort either to the withdrawal or the destruction of the surplus products in order to avoid the impact of the excess quantity on market prices. And so monopoly under interventionism leads to the reduction of wealth and people's welfare. This is the kind of monopoly attacked in these days. This could never happen under the free market

This type of monopoly enjoys special legal privileges such as tariffs and patents. Most cartels and trusts would never have existed in the first place "had not the governments created the necessary conditions by protectionist measures" (p. 390). Mises further states, "Manufacturing and commercial monopolies owe their origin not to a tendency immanent in capitalist economy but to governmental interventionist policy directed against free trade and laissez-faire" (pp. 390-391). 


This study helps me a lot by clarifying the distinction between two types of monopoly. It is now clear to me that from Mises' point of view, monopoly under a capitalist economy is much smaller and tolerable whereas under interventionism, monopoly results into the reduction of wealth and deprivation of the consumers' welfare.