Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

In Defense of Monopoly

by rdf Sun Dec 14th, 2008 at 11:48:03 AM EST

One of the principle axioms of capitalism is that we get the best products and services when there are many firms competing for our business. But there is a downside to this which is hardly ever discussed; even when it is, it is treated in a positive light. The downside is the waste generated when those who are less successful fail. The economist Joseph Schumpeter called this "Creative Destruction".

This gets into another, unexamined, axiom: that there are sufficient raw materials and resources available and that the benefits from competition outweigh the costs of the waste. In fact, the entire capitalist system assumes that resources will always be available. When they are in short supply the price will rise and the cost of production will also rise. These costs will, eventually, be passed through to the final product so business can continue, just at a new level.

Capitalists don't favor competition, they know the risks of being on the losing side in any contest. This is why they expend great effort in reducing competition. The techniques are well known. They include, collusion or the creation of combines or shared monopolies, price fixing, bribing or otherwise influencing government officials, and making restrictive deals with suppliers and customers to limit competition. Some of these techniques are usually seen as illegal, but are widely engaged in anyway. The risks of being caught and paying a fine don't act as a real disincentive since the potential gains are so large.

I'm going to suggest that we reverse the way the economic system is supposed to work and see if an alternative wouldn't be more "efficient".

Benefits of Monopoly

The first thing to acknowledge is that the assumption that there are sufficient resources available so that we can afford the waste is no longer true. There are already serious shortages of key resources and it is projected that these conditions will only worsen. So each failed enterprise, or failed product, is not only a loss of the investor's capital, but of the resources that were consumed.

Rampant competition leads to a race where firms add features or introduce new products which are little different that the prior ones in order to beat out the other firms. A perfect example is the cell phone industry, where the standard has become that people replace their (perfectly good) phones as often as yearly. This means that something like 250 million phones are discarded each year. Even with improved recycling, many scarce resources like Tantalum end up in landfills.

When telecommunications was in the hands of state sanctioned monopolies, equipment was built to last for decades. Since most of it was owned by the firm there was no incentive to have it replaced often. If firms and consumers knew that present purchases were going to have to last for a decade they would be much more careful in how the equipment is built, the features it offers, and how often models are changed. Before new models were introduced firms would take time ensuring that they were really an improvement over the prior ones. Returning to a monopoly in this area would also ensure that equipment was interoperable and cut down on duplication of infrastructure like cell phone towers and the like.

Similarly in electric power generation the era of single providers was much more efficient. The firms controlled generation and distribution and could do long range planning based upon expected economic growth. They also had an incentive to keep maintenance cost low since any system failures cost them money. Now we see power generation facilities being built as a speculation, with the understanding that they can "sell" their power anywhere. Transmission is handled by others and the need for networking building and maintenance is "not their problem". The result has been overbuilding of plants in areas where environmental regulations are weak even though they are distant from potential markets. Returning to the era of single providers with interconnection primarily aimed at maintaining network redundancy in the case of failures would be much more "efficient".

By supporting monopolies explicitly the potential for abuse is eliminated. If a firm is the only player in a market it has no reason to buy political influence. What is to be gained, it has no competition that it wants to overcome through special government favors? Similarly as a single supplier there is no benefit to suppliers or customers in trying to get favorable deals, everyone gets the same treatment. The elimination of corruption makes the enterprise more "efficient" and restores the rule of law and the influence of the citizenry to the political process.

There will be claims that a lack of competition inhibits innovation, but we see that the reverse is also true. Too much competition creates false innovation. A good example is in the drug industry, where many new drugs are just "me too" offerings aimed at taking a slice of the market away from a firm whose products are already doing the job. Much real innovation comes from work done in academia and in government-funded research labs. The era where basic R&D was done by large industrial firms has generally passed. Even the few such facilities which still exist (IBM, Bell Labs, etc.) are now devoted to product development not fundamental research.

The world can no longer afford the waste of "creative destruction" nor the corrosive effect of big business on democratic governance. Having state sanctioned monopolies would make explicit what is now almost a reality in many industries and improve "efficiency".

In return for being allowed to be part of a monopoly or combine, the firms would be limited to a fixed rate of return. They would also be required to develop new products or services based upon discoveries done in government supported labs. With the risks removed investors would no longer be able to claim that they need "high" returns to compensate for the chances they are taking. In the days when AT&T was a monopoly its statutory profit rate and stable dividend was seen as desirable. Stocks like this were the backbone of investments for "widows and orphans". With the shift to personal retirement plans having firms like this which provide a known return would be a benefit for those in 401K and similar plans. As recent events have shown, betting on stocks in not a wise choice for those whose retirement income will depend upon the luck of the draw. We are all now becoming potential "widows and orphans" when it comes to needing a stable income stream.

The shift back to regulated monopolies doesn't mean that new firms with new products can't enter the market, or that innovation will cease. Most big firms do little innovation as it is. They enter new markets through acquisitions. Look at some of the biggest computer firms, IBM, Microsoft, HP and Oracle have all expanded by buying up smaller companies with innovative (or rival) products. There core businesses have remained pretty much as they were: Microsoft is still selling it's Intel-centric operating system, Oracle is still selling its database and IBM is still selling mainframes.

One of the defects of an earlier age can be remedied by appropriate legislation. This is the ability of monopoly firms to buy up smaller rivals (or potential rivals) and bury their products. For a long time before the introduction of the transistor there was an urban legend that someone had invented a replacement for the vacuum tube and that RCA had bought up the idea and buried it. Legislation that firms who buy rivals must keep the entity going or relinquish control after some period of time could be established which would prevent abuse.


State-sanctioned monopolies offer the following benefits:

  1. Elimination of waste of scarce resources
  2. Elimination of corruption and influence peddling
  3. Improvement in reliability of core infrastructure industries
  4. Stable earnings for investors
  5. Elimination of "me too" products and replacement by real innovation

I think you're on pretty thin ice here, rdf.

European Tribune - Comments - In Defense of Monopoly

1. Elimination of waste of scarce resources

You cannot be serious.

European Tribune - Comments - In Defense of Monopoly

Elimination of corruption and influence peddling

A change only in the nature of the corruption and influence peddling, I think.

European Tribune - Comments - In Defense of Monopoly

Improvement in reliability of core infrastructure industries

Now that I give you.

European Tribune - Comments - In Defense of Monopoly

Stable earnings for investors

With an adequate regulatory regime, I give you that, too.

European Tribune - Comments - In Defense of Monopoly

Elimination of "me too" products and replacement by real innovation

Me too products, yes.

Real innovation - not conducive to management progress up the food chain. Far easier to take no chances.

I believe that it is now possible to develop a hybrid partnership-based "Not for Loss" monopoly enterprise model which will in practice give the benefits you claim for state sanctioned monopolies.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Dec 14th, 2008 at 06:13:54 PM EST
So far not one person has "gotten" this essay. Satire is dead...

Policies not Politics
---- Daily Landscape
by rdf (robert.feinman@gmail.com) on Sun Dec 14th, 2008 at 07:58:58 PM EST
[ Parent ]
Too subtle for me,clearly... ;-)

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sun Dec 14th, 2008 at 08:41:02 PM EST
[ Parent ]

Go to: [ European Tribune Homepage : Top of page : Top of comments ]

Top Diaries