Gian Piero de Bellis
Polyarchy : a Paradigm
(2002 - 2012)
From rulers’ monopolies to users’ choices
A monopoly is defined by Webster's Third New International Dictionary (1981) in the following way:
“Ownership or control that permits domination of the means of production or the market in a business or occupation usually for controlling prices and that is achieved
- through an exclusive legal privilege (as a government grant, charter, patent, or copyright)
- or by control of the source of supply (as ownership of a mine)
- or by engrossing a particular article or commodity (as in cornering the market)
- or in combination or concert of action.”
From this lexical definition it emerges clearly that special state funding (grants) and legal privileges (charters, patents, copyrights) are considered the first cause in the formation of monopolies.
As for the other causes, it must be said that, in order to have a monopoly, the control of the source of supply should be total with respect to the good or service supplied, and this is generally possible only if a company obtains exclusive rights (of exploitation, of commercialization) from a state ruler and if those “rights” are strictly enforced. This can be done by forbidding or severely limiting the access of outside supplies of that good or service to the territory controlled by the ruler, otherwise the basic aim of the monopoly, i.e. that of controlling the selling price, would not be achieved.
The same applies to the case when the producer succeeds in "cornering the market," that is in getting control of such a large share of a commodity as to almost dictate its price. This can happen only if we are in the presence of rules introduced by the political power restricting trade or access to a certain area of production. In fact, in a situation of freedom of enterprise, many traders or producers are bound to emerge whenever there are opportunities for making a profit; and certainly a good number of them from all over the world would jump at the chance of trading in an area where extraordinary profits might be made (even if only for a short while).
With regard to the combination or concert of action between the producers of a certain commodity (e.g. cartels), history shows that, usually, this does not hold for very long (see the continuous squabbles of the oil cartel) due to the diversity of interests; moreover, if the prices are pushed too high the likely result would be a contraction of sales (disrupting the profits of the weakest sectors of the cartel) as consumers seek alternative ways to satisfy those needs.
The only fairly successful monopolistic cartel that has ever existed without state support is the diamond cartel. But here we are in a very special case where a drop in prices, allowing diamonds to become an article for the masses, would satisfy neither the seller nor the buyer. In fact, it would kill not only the diamond cartel but the diamond itself as a very precious stone. And this is something that no one interested in that shiny object wants.
From what has been said so far, it is apparent that the only way to really generate and maintain a monopoly is by "exclusive legal privilege" in all its forms, that is through a political ruler dominating the economic game, favouring some people shamelessly and obstructing other mercilessly. As a matter of fact, the original meaning of the term monopoly (1596) was: “an exclusive privilege (conferred by the sovereign or the state) of selling some commodity or trading with a particular place or country.” (from the Oxford English Dictionary, Third Edition).
And this is what has happened in the course of history as will be highlighted in this essay, which aims to offer a brief analysis of some monopolistic realities past and present and to explore possible ways to overcome them in the future.
Feudal monopolies (^)
The dawn of the first millennium presented, at least in Europe, many small territorial fiefdoms, each one under the control of a ruler.
A fief was a sort of licence granted by the strongest or most dominant ruler (the king or the emperor) to a vassal in exchange for obedience and assistance, allowing him to enjoy possession of a certain territory and to extract services from its inhabitants.
The people living in the territory became, then, dependent on the assigned master and obliged to perform certain duties.
In the course
of time the feudal master, in order to assure himself of enough
resources for remaining comfortably in power, devised various sources of
This he did by monopolizing people and means of production.
The feudal master introduced and exerted various types of monopoly:
- Monopoly over labourers. The peasants were considered as objects bound to the soil and, like the soil, the property of the ruler and obliged to spend part of their time and energy cultivating the ruler's fields. They had no right to leave the fiefdom, not even to get married outside it (forismariago), without the express authorization of the master, who did not want to lose any labourer.
- Monopoly over producers. The peasants were obliged to use tools and equipment that belonged to or were given in concession by the feudal master under condition of monopoly. In other words, the peasants had to bring their grain to the master's flour-mill, their olives to the master's olive-press, their dough to the master's oven and had to pay (in goods or money) for the use of this and other equipment according to the rate of charge imposed by the monopolist master. What was particularly burdensome and loathsome in the monopoly of equipment (mills and ovens) was the fact that, quite often, the peasants had to cover long distances over terrible roads with their raw products only to discover that they had to wait days because the mill was busy or out of order. And sometimes they had to accept badly-ground meal or half-baked bread without the slightest possibility for complaint or choice.
Feudal history records several cases where the bailiffs of the master entered houses in order to remove and destroy millstones that had been made in order to overcome the ruler's monopoly.
- Monopoly over dwellers. The people inhabiting the fiefdom were subject to the feudal master who took upon himself the exclusive administration of justice and law and order. Clearly, in case of external attack, the burden of fighting the invaders fell in large measure also onto the peasants, but they had no voice in administrative and military matters.
From these brief remarks it emerges that the reality of the fief was made up of a series of rigid monopolistic practices that imprisoned the life of the peasants and blocked their personal development.
It was only when the rural serfs started running away from the fief, becoming merchants and establishing small settlements that attracted more rural serfs, that the monopolistic hold of the feudal masters started to loosen and was finally broken altogether. The first free towns were, supposedly, thus established.
Unfortunately, as soon as the free men in the free towns acquired some wealth and power, they started imposing, in their turn, old and new forms of monopoly.
Town monopolies (^)
The artisans and merchants who gathered to live in the towns very soon associated themselves into protective bodies known as corporations or guilds which linked those belonging to the same trade.
What was, at the start, a union for the support of its members became, at a certain point, a very close, exclusive group of associates, opposed to the interests of all those outside it (the peasants, the artisans of other trades). All these organized bodies of producers and traders, from Venice to Genoa to the Hanseatic League, tried to monopolize the production and exchange of goods and the routes of trade.
In particular the following monopolistic aspects increasingly came to characterize the behaviour of the members of the corporations in the towns:
Work. Stringent regulations and wide-ranging restrictions were imposed:
- Juridical rules. Neither foreigners nor servants nor people born out of wedlock could be members of the corporation.
- Financial rules. Admittance into the corporation was subject to the payment of a fee, generally quite high. At the same time it was forbidden to remunerate the workers with what were considered excessive wages.
- Professional rules. In order to gain the title of master the apprentice had to work 7 years in the workshop and had to produce, at the end of that period, a so-called "masterpiece" (chef d'oeuvre, capolavoro).
Production. The corporations fixed the number of workers, working days and workshops allowed in a town; the aim was to keep under control the amount produced in order to avoid overproduction and a fall in sale prices. Moreover, it was forbidden to set up workshops in the countryside; this prohibition compelled the peasants to come to the town to make their purchases and gave to the towns the monopoly in craft production.
Technology. It was forbidden to use certain tools and machinery that could lead to excessive production; to avoid this, checks were also carried out as to the number of machines employed in the workshop.
Trade. It was forbidden to sell below a certain minimum price. Under pressure from the masters' guilds, the town regents issued prohibitions on anyone selling goods from other regions except on specific market days. The peasants who were under the jurisdiction of the town were required to bring their produce to the town market to be sold at controlled prices. They could not sell it to foreign merchants before a certain delay of time.
All these rules were intended to give a permanent trading advantage to the corporations by limiting the number of artisans in each trade in such a way as to keep the level of production permanently below the level of demand. In other words, the town monopolies aimed at a craft market controlled by (restricted) supply. This allowed them to fix the highest possible price, especially with respect to the peasants who, being dispersed producers, did not have the bargaining power of the town guilds. Country people and foreigners were also subject to taxes and tolls on trade from which the town dwellers were totally or partially exempt.
The result was that resources got channelled toward the towns, which became rich centres endowed with magnificent buildings, at the expense of the large populations living in the countryside. However, monopolism breeds the seeds of economic ruin, and those regions in which the most wealthy towns were located (Italy, France) would either fall into decline or move straight from town monopolies to crown monopolies in the attempt to promote an illusory industrial development.
Crown monopolies (^)
From the XIV and XV centuries onwards the more powerful of the feudal lords in Europe started setting up an administrative network upon which the central state of later times would be built.
This is especially evident in France where the king relied, for the imposition of his will, on the intendants des provinces, people often recruited from the merchant class who gave up their trade and became crown servants.
Their task was to administer and regulate social life,
focusing especially on the economic aspects of production and trade,
out of which the crown and also the intendants extracted the means
to live and operate.
In order to draw out an income for the crown and for the emerging state apparatus, the intendants suggested the introduction of measures dealing with the entire spectrum of economic opportunities and endeavours, considering them as concessions and privileges only to be granted by the ruling power at a price.
Clearly, craftsmen and traders were willing to pay for those concessions
and privileges provided that exclusive rights were attached to
them. In that case, enjoying a monopolistic position, they could
pass the extra cost down to the consumers and still be assured of a steady
flow of fat profits thanks to the lack of any competitors.
This situation was made possible through royal acts or royal letters that, in many cases, simply confirmed and sanctioned the restrictive practices of the guilds. The overall aims of this collusion between the rising central power, represented by the king, and the corporations were the usual ones of:
Inhibiting competition, by
- fixing the trading price, for instance with respect to the sale of every piece of cloth throughout the realm, or the maximum wage-rates for journeymen;
- fixing the quantity of produce, for instance, by enjoining producers to reduce the number of wheels in a pottery shop or the number of looms in a cloth shop.
Suppressing competition, by
- giving state patents to the inventor of a new device and so granting him, for a certain length of time, an officially sanctioned monopoly, in the use and commercialisation of his discovery;
- assigning to some individuals monopolistic rights to perform some economic activity (e.g. grinding grains, exploiting mines, producing certain wares) within a certain territory or over the entire realm;
- reserving to the king's factories exclusive rights of intervention and administration especially in industries and products related to war (e.g. the making of munitions as a royal monopoly).
The income gained by those involved in these monopolistic practices was, in some cases, enormous. If we examine the salt monopoly held by the kings of France alone, the revenue in 1523 amounted to around 460,000 livres tournais. In 1607 all the revenues from salt were more than 6 million livres; in 1641 they had risen to the huge sum of almost 20 million livres tournais. If we include other sources of monopolistic income, at the end of the reign of Louis XIII (1643) the total annual revenues of the king seem to have reached the figure of 80 million livres. (see: John U. Nef, Industry and Government in France and England, 1540-1640, First Edition 1940).
To have an idea of what monopolistic practices can bring to the coffers of the state it is appropriate to compare these figures with those of the English kingdom where the rulers did not have at their disposal a state machinery like that in France, able to monopolize resources and sell them at a very high price or to assign them, on payment of a fixed amount, to the highest bidder or to friends and cronies who behaved in the same exploitative way.
During the 1630-1640 decade the annual revenues of the English king were around £660,000, equivalent to nearly nine million livres tournais. Even accounting for the fact that England and Wales had around a third of the inhabitants of the French kingdom, it is evident that monopolistic practices were much more extensive in France, since they procured an income to the crown three times higher, proportionately speaking.
Having said that, even in England according to one estimate of
1621, there were around 700 royal monopolies instituted by the
Stuarts, with the result of pushing up the price of many goods
(like candles, coal, soap, leather, salt, pepper) and draining
resources towards the king. (see: Christopher Hill, Century of Revolution
1603-1714, Second Edition 1980).
The more money went to the crown, the less was available for non-monopolistic entrepreneurs to start new ventures or for consumers to satisfy needs in a more adequate and convenient way.
However, in contrast to what was happening in France, the business and commercial interests that had a voice in the English Parliament already in 1640 had cancelled almost all industrial monopolies. It is fair to say that in XVII century England the general climate of opinion, from the common person to the members of the House of Commons and throughout the judiciary, was increasingly against any interference by the king in people’s economic affairs.
That is why the Industrial Revolution did not take place in France:
the essential pre-requisite, i.e. freedom of enterprise and trade,
was largely absent there.
In England, by contrast, the people had succeeded in assembling the cultural and material conditions for displacing monopolies and also giving to the common person some freedom of action. The result would be that those people in England would become, at least as long as the conditions remained in place, the most industrious and prosperous on earth.
A respite from monopolies (^)
From the XVII century up to almost the end of the XIX century the English kingdom was a region where monopolies and monopolistic practices were not supinely accepted. As remarked by Max Weber, the royal policy of monopolistic favouritism was opposed for decades by the Puritans under the Long Parliament and afterwards "under the war cry 'down with the monopolies'." (Max Weber, General Economic History, 1919-1920). That does not mean that monopolies ceased to exist in England. As a matter of fact in 1694 what was to become the most monopolistic economic organization of the realm was set up in the form of the Bank of England. Besides that, there was the East India Company who, in the course of its long history, received monopolistic or semi-monopolistic trading powers between India and England.
However, on the whole, freedom of production and freedom of trade prevailed in such measure that a new industrial society was able to emerge, with new opportunities and also new challenges. The difference, from previous ages and from other regions, was that now the field was open, to an extent never previously achieved, to practically everybody with initiative and energy. Once these qualities were present, financial resources would most likely be found.
This is, for instance, the exemplary case of Richard Arkwright, the barber, who had the ingenuity and drive to put the spinning frame to industrial use and managed profitably the investments that converged on that application, becoming in the process one of the richest men in England. His attempt at patenting the spinning frame failed in the end because of the opposition of other manufacturers and due to the fact that the machine was not his own invention but, as is almost always the case, the result of many minds and hands, each one improving on previous attempts and then finding economic applications and financial capital for productive exploitation.
So, the lack of support from the ruling power and the absence of popular sympathy for monopolies made possible the activation of a process of continuous personal and social development that was directed mainly to two major endeavours:
- Exploiting opportunities for enterprise. The possibility of starting a business without being impeded by those in power resulted in a flurry of activities aimed at satisfying, as far as material and technological constraints would allow, the needs of the people. This is the time when, besides manufacturing enterprises started by one person, individuals also formed associations to build railway lines, canals and new roads for the transport of goods and passengers. And when electricity and gas became available to town dwellers, many companies were set up offering these utility services. Over in the United States, in New York City by 1884 there were six gas companies competing against each other and in 1887 six electric light companies were established. Entrepreneurs were also active in postal services, and even the lighthouses were erected and run as a business, with the fees paid by the ships that entered the harbour.
- Solving problems of social life. Industrial production gave rise to also problems like the bad sanitary conditions of the people crowding into urban quarters. Moreover, town life and the expansion of written information required a degree of literacy for almost everybody. To tackle these problems, both single individuals and associations founded hospitals, opened schools, established friendly societies providing medical care, moral and cultural betterment, financial support and even human relief. The growing wealth also permitted the allocation funds for old age, reached by an increasing number of people. In other words, many individuals were willing to set aside money, energy and time for the solution of all sorts of problems.
In general, not only was it not considered necessary to wait for the state but it was also deemed inappropriate for the state to intervene. The only task reserved to it was that of watchman against attack on people's life and liberty; and even that was not accepted by everybody: when Robert Peel introduced in 1829 a state financed police force for the city of London (The London Metropolitan Police), opposition to the idea was quite strong.
However, just as the free towns had succumbed in the past to the allurement of the king and had traded internal freedom for commercial privileges over a wider territory, so now, it was the turn of the entrepreneurs to give up their freedom to produce and trade on the world market (laisser-faire and laisser-passer) in exchange for the assurance of protective barriers on the national market. And, after that, it was time for workers to demand laws protecting wages, employment and conditions of work, against newcomers (i.e. immigrants and young workers).
These requests, which once would have been considered corporative
privileges, were now seen as legitimate rights that the nation
state should promote.
So, towards the end of the XIX century the short respite from monopolies was coming to an end and a strong revival of monopolistic practices was under way.
The revival of monopolies: state-run monopolies (^)
It is very striking, if easy to explain, how the same historical pattern repeats itself as soon as the engines of innovation become forces of conservation. Once the self-emancipated artisans who established free towns had become rich and powerful, they started to defend their wealth by way of rules (town or crown regulations) limiting competition and installing themselves as monopolistic producers or traders.
The same thing happened with the entrepreneurs
of the Industrial Revolution. The bold free spirits of the first
phase of English industrialization became, slowly but inexorably, the rich
men who were afraid of competition from other newly industrializing regions
They found receptive politicians who, with the extension of the political franchise, relied more and more, for being elected, on the favour of the national subjects and, especially, of the most organized groups, namely the industrialists, the traders, the financiers, and the nation’s workers marshalled in their Trade Unions.
Adam Smith had remarked that: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." (The Wealth of Nations, Book I, Chapter X).
He therefore advised the state rulers not to facilitate in any way the formation of trade associations. He was, for instance, against the keeping of public registers that specifically listed all those dealing in a certain sector.
The reality is that the rulers not only promoted but made compulsory the registration of those associations of businessmen in public registers; and that practice was later extended to workers associations. In the end, Big Business and Big Labour allied themselves (together or separately) to Big Government and made monopolies and monopolistic practices the accepted rule.
The revival of monopolies, at least in England, started not in
the industrial sector but in the field of the so-called public
services (health, education, social security, transport) and
public utilities (gas, electricity and, later on, telephone,
radio and television). It would be carried on for decades starting from
the end of the XIX century up to the moment where practically all of them
would become state monopolies.
The strange fact that has been generally swept under the carpet by state-servile historians is that those services and utilities, which had been set up by associations such as mutual societies or by individuals such as philanthropists, social activists or just ordinary entrepreneurs, were not only functioning pretty well considering the resources and the technology of the time, but were going from strength to strength. The way they were organized and run was making everybody more and more autonomous and self-reliant, in so far as individuals were directly participating in building their own supporting agencies with their own funds.
The story must be briefly recounted. In 1877 there were in England 2.7 million members of registered friendly societies taking care for the provision of social security services. In 1897 the membership had reached 4.8 million. By 1910 the figure had gone up to 6.6 million. If we include the members of unregistered voluntary insurance associations it emerges that at least 9 million were covered by social security (out of a population of 36 million and around 8 million families or separate occupiers) and the number was growing every year, on average, by more than one hundred thousand members. At that point, in 1911, the "liberal" government of Lloyd George introduced, against the opposition of the working class, the then unpopular National Insurance Act that made social insurance compulsory for 12 million people. (see: David G. Green, Reinventing Civil Society, IEA, 1993). It is fair to say, then, that the state intervened just when the voluntary associations were already on the way to achieving the same results that the state imposed by law.
The same thing happened with education and health provision services.
During the XIX century Education became one of the focuses of intervention by many people, from socialist utopians like Robert Owen to scientists like the Reverend Richard Dawes and many social activists and philanthropic benefactors. Dame schools, charitable schools, commercial schools, Quaker schools, Anglican schools, workers' colleges, mechanics institutes and so on and so forth sprouted everywhere in England to satisfy the demands of a population hungry for literacy and knowledge. The first comprehensive survey of education made in 1818 showed that 7% of the entire population was attending some form of school. Within ten years, a second survey recorded a doubling of the number of pupils. In 1861 the Newcastle Commission, after investigating how many children were formally educated, arrived at the figure of 95.5% in England. A similar picture emerges in the United States, where literacy in the North rose to over 90% of the population towards the middle of the XIX century.
Even in the presence of such a trend towards voluntary universal education the state considered it necessary to intervene and monopolize the field by setting up state schools supported through compulsory taxation and instituting diplomas certified by the state as the only valid certificate for most occupations. It led to the end of any commercial or charitable school other than the so-called public school for the offspring of the rich and powerful. The children of everybody else had to enrol in a state-run state-oriented school.
As for Health services provision, throughout history religious and charitable institutions had catered for the poor on a voluntary basis, receiving donations to that purpose from wealthy benefactors. During the XVIII century five new hospitals were built in London through the financial support of some rich families (such as the Buxtons, the Barclays, the Cherringtons, the Hanburys) and with the aid of the so-called 'five-guinea subscribers'. Other hospitals were founded in a similar way in other English towns during the same century, but nothing in comparison with what happened during the following century: in London alone thirty-six hospitals were built in the nineteenth century (more than half the present number), founded by public subscription or by dedicated wealthy individuals. (see: James Bartolomew, The Welfare State we're in, 2006).
With respect to medical care outside hospital, there was an articulated system according to the specific choices and possibilities of the individual. Some people paid a fee to the doctor according to their ability to pay (with income assessed by the amount of rent paid). Some received free assistance through the intervention of charities. Some were covered by pre-payment schemes that were like insurance, with a fixed annual fee paid by instalments. In this way the medical profession was an independent profession and its members prospered according to the quality of the services rendered. And the doctors were chosen by patients who, through direct or indirect payment, supported the profession and scrutinized the competence, honesty and responsiveness of its members. (see: David Green, Reinventing Civil Society, 1993).
With the intervention of the state and the monopolistic take-over
of education and health, teachers and doctors became employees
of the state, secure in their jobs whatever the quality (or lack
of quality) of their service.
What followed was that all the friendly and voluntary associations catering for those needs were either disbanded or absorbed by the state, which became the monopolistic provider through bodies like the National Health Service in the United Kingdom. This destroyed not only the possibility of choice but also the possibility of learning to become a responsible human being, capable of allocating resources in the most sensible way. That was to become a task reserved to the politicians, with results that will be seen shortly.
The revival of monopolies affected not only the public services but also the public utilities. The various companies providing competitive services in a town started to be municipalized and put under the control of the city council. To understand how things developed we can refer to the documented case of the Gas Light companies of Baltimore (USA). In 1880 there were three competing gas companies but in 1890 a bill was introduced by the Maryland legislators giving to the Consolidated Gas Company a 25 year monopoly in the provision of gas to the city in return for a payment to the council of $10,000 a year and 3% of all dividends. How the consumers could benefit from the institution of such a monopoly is hard to see. This was like going back to feudalism and to the predatory practices of the French and English kings of a bygone age.
With the rise of the national state these types of interventions
multiplied in a crescendo that resulted, practically all over
the world and in less than a century, in state owned or state
controlled monopolies of all utilities (gas, electricity, water,
mail, phone, rail).
In parallel to that, monopolistic practices were also making their way into any and every type of business, industrial and agricultural. And something must be said about the deceitful way in which that process was implemented.
The extension of monopolies: state-made monopolies (^)
An irrational and fallacious fear grew during the second half of the XIX century, fuelled by those who were advocating statism, presented as socialism; and the fear was that the free market would inevitably end up being dominated by a few monopolistic enterprises.
Those who held those views were simply confusing the enlargement of firms seeking possible technological and commercial advantages related to economy of scale with the existence of monopolies. The fact is that the dimension of companies may change according to a series of variables related to parameters like the size of the market in which they operate and the technology available at the time. In any case, it is advisable not to fall prey to two mistakes:
- to think that a modern firm must inevitably be a big firm;
- to think that a big firm must inevitably be a monopolistic firm.
It is a truly big misconception to equate bigness with modernity and monopoly. It reveals sheer ignorance of socio-economic dynamics.
Actually, the size per se is by no means a necessary and sufficient sign that the firm is economically viable or that we are in the presence of a monopoly. Regarding monopolism, we could very well have big firms fiercely competing on the world market and relatively small firms monopolizing the national market behind the shield of state tariffs or state concessions.
However, like small children impressed more by appearance than substance, politicians, journalists and state intellectuals started campaigning against big firms, in most cases receiving financial support from those business companies who were feeling the brunt of what they called "excessive" or cut-throat competition, arising from the emergence of more dynamic and innovative organizations.
In fact, some highly competitive firms were cutting costs and cutting prices at the expense of other firms and for the benefit of the consumers. Certainly they were doing so in order to survive and succeed; and in a market open to competition this is what every company is supposed to do if it wants to stay in business, given the fact that new entrants, with better products at a cheaper price, are a constant and potential threat. This is why no single firm can ever dominate an entire sector for a long span of time just on the basis of better prices because somebody, somewhere, will come to outsell it with more appealing products. This is the historical experience, unless there are state laws that reduce or eliminate competition - which is what many half-baked firms were asking for and what the state delivered.
The economist Gabriel Kolko, in a highly celebrated but not well circulated book, has stressed this very aspect, calling it “political capitalism” (Gabriel Kolko, The Triumph of Conservatism 1900-1916, 1963). According to Kolko, “despite the large number of mergers, and the growth in the absolute size of many corporations, the dominant tendency in the American economy at the beginning of this [i.e. XX] century was toward growing competition.” This was not at all what the big corporations wanted and that is why they looked to the intervention of the Federal state to ‘regulate’ the market in a way conducive to their long term survival and prosperity. So, “contrary to the consensus of historians it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it.” (Gabriel Kolko, The Triumph of Conservatism 1900-1916, 1963).
In fact, practically all state interventions in the economy
had the effect of producing monopolies and favouring monopolistic
practices - even those which were presented as measures against
Let us take for instance the Sherman Act (1890) in the USA. The professed intention was to fight collusion in the fixing of prices by many separate firms operating in the same sector. What it led to in reality was that, in order to avoid falling foul of the law, many firms regrouped and consolidated under one roof. And so more and more big trusts emerged in order to do easily and in full legality what was done before awkwardly and not always successfully, i.e. the setting up of a common selling price.
A simple solution to the problem would have been to open the American market up to overseas firms (actual and potential) making it an impossible task to fix prices on a world scale. But the very opposite happened, for reasons that will be shortly explained.
The Sherman Act, besides giving a big push towards large-scale consolidations (i.e. the combinations of small or medium-size firms into large trusts), made it clear to the business community that there was something to gain for the promoters and underwriters of those consolidations. The gain for the financiers operating for the establishment of new trusts "often amounted to from 20 to 40 per cent of the total amount of the stock issued." (see: Harold Faulkner, The Decline of Laissez-Faire 1897-1917, 1951). It is in the wake of these extraordinary returns that at the end of the XIX century the industrialists (those who set up enterprises and traded goods) either metamorphosed into or came to be dominated by the financiers (those who controlled liquid assets and sold shares).
Under this new scenario made of trusts and
financiers, monopolies arrived as soon as the missing elements
indispensable for their emergence and survival were introduced by the state,
namely tariffs (import taxes) and patents.
This is a point that should be very clear to anybody: a trust unprotected by tariffs and patents is a business like any other, even if it is the only one on earth producing a certain good or providing a certain service. Its absolute supremacy, if this is ever possible for a long period of time, derives from the fact that it is the best in terms of value for money, consumer confidence and brand appeal. In that case its position is deserved and cannot be defined monopolistic, provided that there are no institutional barriers to the entry of new producers. To use the term monopoly in that specific case would be like calling Frank Sinatra or Luciano Pavarotti monopolists because they had a unique voice and their records sold in huge numbers.
Examining the situation in the USA, some of the trusts became monopolies within the internal market or within many of its segments when the federal state introduced, the same year as the Sherman Act, the McKinley tariff (1890).
The McKinley Tariff Act raised the average level of tariffs to 50%, with high duties on textiles, iron, steel and agricultural goods. That Tariff was followed by the Wilson-Gorman Tariff Act (1894), which lowered the tariffs to an average level of 40%, only to be replaced very soon by the Dingley Tariff Act (1897) which pushed the tariffs to incredible new heights (57% on average) (see: A.G. Kenwood and A.L. Lougheed, The Growth of the International Economy 1820-2000, 1992).
It was around that time that Henry O. Havemeyer, president of the American Sugar Refining Company, came out with his famous remark that: "The mother of all trusts is the custom tariffs bill .... Economic advantages incident to the consolidation of large interests in the same line of business are a great incentive to their formation, but these bear a very insignificant proportion to the advantages granted in the way of protection under the custom tariff." (Industrial Commission, Report, I, 9, Washington, 1900-1902).
The fact that a statement like this comes from an industrialist who was himself profiting from protectionism and so had a vested interest in minimizing its importance, should give us food for thought also with respect to why tariffs were introduced and are so persistently upheld. Tariffs were a very good source of income for the state, representing, in 1900, more than one third of all state receipts ($233,000,000 out of $669,595,000). As pointed out by an economic historian with reference to the Dingley Tariff: "No possible excuse for this could be advanced, except a Treasury deficit during the previous four years." (Harold Faulkner, The Decline of Laissez-Faire 1897-1917, 1951). The fact that tariffs also favour the formation of national monopolies is for the territorial nation states either an irrelevant detail or even a positive outcome if the political objective is national supremacy supposedly achieved through the existence of monopolistic national firms.
The imposition of tariffs by one state gives propaganda ammunition to other state rulers to impose protectionist barriers in their turn, and this is what happened in Europe after the introduction of the Dingley Tariff, with most European governments raising import taxes, with the exception of the English, Danish and Dutch.
The Tariffs Acts, coupled with the concession of patents, gives producers the legal means to impose monopolistic prices, something that could never happen in a system of free trade and open access to the manufacturing of any good. It should then come as no surprise to hear the statement by the economist Fritz Machlup that "our government [the reference is to the USA federal government] has done much more to create monopoly than to destroy monopoly. I need refer only to the tariff laws, to the corporation laws, to the patent laws, to the large numbers of franchises and licence laws in the States and in the municipalities. There are features in our tax law which foster concentration." (U.S. Senate, Hearings on Administrative Prices, 1959).
It could be added that
the awarding of many and massive Government contracts to a few
firms or the transferral of Government funds for research to a handful of
companies introduces unacceptable privileges and favours the emergence of
With reference to this latter aspect, the Chairman of the Subcommittee on Antitrust and Monopoly, senator Estes Kefauver, remarked that "in 1959, 100 large corporations received 80% of the research funds even if they accounted for only 41% of total sales within their respective categories." (Estes Kefauver, In a few Hands, 1965).
All this makes perfectly clear that free
and fair competition is not on the agenda of the Federal Government
or, it could be added without exaggerating or being far from the truth,
of almost any state government on earth.
The bandwagon of those interested in monopolistic practices was so strong and organized, and could count on so many people in their different roles, that it was practically unstoppable. It included:
• the state rulers interested in the income from tariffs (import taxes) and in the power over other states through a policy of beggar-thy-neighbour.
• the financiers interested in the extraordinary gains to be had from conducting mergers (consolidations)
• the trade unions interested in a protected labour market (restrictions to immigration)
• the industrialists interested in a protected market of goods (tariffs and quotas on imports) and in exclusive privileges with reference to certain products (patents)
• the national intellectuals and jingoist journalists interested in attracting a vast audience cheaply with emotional messages of economic patriotism centred on the proclaimed defence of the downtrodden.
The monopolistic practices engendered by Big Government in association with Big Business and Big Labour had the result of creating cycles of booms and busts that were conducive to even more imbalances and, paradoxically, to even stronger demands for state intervention and thereby to the deepening of monopolistic practices.
This is what happened when the Great Depression
arrived, leading to the full emergence, in the USA and in Europe,
of an economic system of ultra nationalist and protectionist states dominated
by monopolistic actors. It was the apotheosis of corporatism.
The end of laissez-faire, depicted and advocated by Keynes in a famous essay (1926), had finally arrived, and was celebrated with joyous rapture by statist intellectuals. In actual terms it was nothing other than the full dominance of the national economy by national monopolies under the protection of the nation state. The First and the Second World Wars expanded to the utmost the role of the state, to the point that the existence of state-run state-made monopolies was accepted as a normal and permanent fixture of modern economic life. In Great Britain "this process was aided by the elaborate system of economic controls, designed for wartime but preserved well into the fifties, which limited the role of the market as a guide to the allocation of resources. It was supplemented by the concentration of five basic industries or public utilities into nation-wide and nationally owned corporations. In both these respects Government was an agent of monopoly, as it had been before the war." (Peter Goldman, Preface to Estes Kefauver, In a Few Hands, 1965).
Not only had the consumers and their interests disappeared from the scene but they had become hostages of big colluding dinosaurs (state-business-unions) who were openly conspiring against the public in order to impose their monopolistic demands behind the shield of the law. Adam Smith, who was quite cynical about businessmen, could have never imagined to what appalling levels of open deception the industrial and commercial actors would stoop, while still calling themselves advocates of free enterprise and free market. The only specious freedom they knew about was how to restrict the freedom of others by asking for privileges and subsidies.
The promoters of monopolies could justify acting in this way only through the dissemination of fallacies by pseudo-intellectuals in their service. Let us then examine briefly the theoretical justifications put forward by state economists for the alleged necessity of monopolies.
The justifications for monopolies (^)
All the justifications for the existence of monopolies were elaborated and presented many decades after the emergence of current monopolistic practices. It is then fair to say that they are more post-hoc rationalizations of what happened than serious explanations of what was inevitable or necessary according to rational economic principles.
Starting from the end of the XIX century or later, depending on the economic and cultural reality of each country, the justifications for monopolies grew out of a general climate of mistrust towards the working of the so-called free market. This is quite a strange fact considering that a real free market has never existed anywhere on earth. Nevertheless, the more the state interfered with the economic activities by manipulating the currency, by restricting trade, by imposing rules on production, the more the pretended free market came under heavy criticism because it was considered responsible for all the imbalances that were, in fact, caused by the state.
This confusion of responsibilities was favoured by intellectuals
who, because of their academic position in state universities,
were more sympathetic to state power, from which they derived their
income, than to the realities of production and trade, which they considered
vulgar, feeling disdain for manual work and business activities, and from
which they distanced themselves more and more.
In short, the idea of market failure or the existence of basic imperfections in the working of an unregulated market became the accepted dogma of the congregation of economists. It was associated with the other dogma, that the state was the deus ex machina whose interventions would put things right in every field of personal and social life, the economy included.
The fact is that, as previously pointed out, not only has a free
market never been fully in operation anywhere but that the very
concept of "market" is a misnomer. The "market" does not exist; what exist in real life are exchanges amongst individuals. In fact, "the market" is only a convenient term that replaces the long expression: "multiple and generally impersonal exchange relationships between individuals concerning goods and services."
If we frame the matter in this way, it is clear that imperfections and failures are a fact of life of every individual, resulting from essential human aspects like:
• the absence of perfect information
• the presence of personal tastes.
These are features that cannot be eliminated in practice and cannot be ignored in theory if we are to remain within a scientific economic discourse. In fact, it should be obvious to all rational and moral beings that:
• no one (not even a central planner to whom all economic data are supposed to be channelled under conditions of total accuracy and transparency) will ever have perfect knowledge of all goods and services existent at every moment in time and the ability to make calculations concerning prices, costs, technical factors and all that is necessary to take objectively ideal economic decisions. And even if that was miraculously possible at a certain moment in time, the decisions taken would be immediately superseded by changes that happen all the time in the multiple dynamic phases of industry and commerce, which it is impossible to keep track of in real time.
• the tastes of individuals affecting their life should not be a matter of recrimination and so should not constitute a reason for declaring the market imperfect. Moreover, if my tastes (i.e. my choices) lead me to make bad economic decisions, it is very likely that I will learn in the process. That is why the so-called “market failures” (which are, in reality, bad individual decisions in economic matters) are the necessary aspect of personal and social development. They cannot be eliminated because they are the indispensable means through which each individual learns and on the basis of which socio-economic relations improve and develop.
Nevertheless, the strange idea emerged that market failures could and should be corrected by political intervention. This conviction was based on inconsistent premises, namely:
- that people would make the best choice in selecting political representatives to promote the common good while they are unable to make sensible choices to promote their personal economic good (underlying assumption: perfect political process).
- that the elected politicians possess complete capability and total determination to make the right economic choices for all, while the rest of us do not possess this with respect to our own concerns as participants in the economic process (underlying assumption: imperfect economic market).
How it is possible that elected representatives have perfect knowledge of reality and enlightened wisdom on which to base universally satisfactory decisions is something that no one can explain, unless we introduce a magical political formula according to which an enlightened few are destined to lead and decide for the benighted many. And, to add insult to injury, we call this unpalatable view: democracy.
Anyway, putting aside these perplexities, let us examine what are the specific justifications for the supposed necessary intervention of the state in economic matters.
They are based on the proclaimed existence of:
Natural Monopolies. Natural monopolies are said to exist when the cost of entry and the economies of scale in a specific sector are overwhelmingly in favour of a very large producer of goods or provider of services. This situation was thought to exist, for instance, with respect to utilities (gas, electricity, telephone, etc.) where the existence or the emergence of a single provider was considered the natural outcome of sound economic practices. According to this view, the nature of the commodities provided dictates that every utility service should be set up and run as a monopoly by a monopolist (usually the state), thereby avoiding un-economic duplications of effort and realizing economies of scale to the advantage of the customers in the form of cheap tariffs.
Public or Collective Goods. Public goods are defined as those which can be enjoyed by everybody or by a large public, even by individuals who do not pay for them, without reducing their overall availability. The classic example is public security, provided to everybody, at least in theory, irrespective of their financial contribution or lack of it. According to political economists, such goods would not be supplied in a free market situation because nobody would pay for them, preferring to free ride on somebody else’s payment. That is why, on the basis of this view, it is asserted that they must be monopolistically provided by an entity like the state who can finance their provision by imposing a compulsory payment on everybody in the form of taxes.
Positive Externalities. Positive externalities are defined as those beneficial outcomes that result from the provision of public goods or from services that benefit everybody (e.g. education, sanitation, etc.) even those who would not pay any contribution for them. According to political economists, there must exist a monopolistic actor that collects from everybody a compulsory payment in order for positive externalities to continue to exist and operate.
To these theoretical justifications for the existence of state-run and state-made monopolies we must add another conviction that leads to monopolistic practices, namely that the state should grant a patent to inventors, otherwise nothing innovative will ever see the light of the day. However, inventions were made before the idea of patents came to light and unpatented inventions were produced afterwards by people like Benjamin Franklin, who dismissed the idea, suggested to him by Governor Thomas, of patenting his newly perfected stove saying that: "as we enjoy great advantages from the invention of others, we should be glad of an opportunity to serve others by the invention of ours; and this we should do freely and generously." (Writings of Benjamin Franklin, 1907). As a matter of fact, patents discourage creativity and restrict the coming into being of new inventions as they freeze the possibility of universal contribution to specific research problems.
up, state economists started by introducing theoretical justifications
for state intervention in the economy (the proclaimed failure of the pretended
free market) and, from that basis, ended up justifying the existence
of monopolies in collective utilities and public goods and stimulating their
growth in various economic sectors behind the shield of tariffs
and patents. And, astonishing as it might appear, the defence against monopolies
is delegated to the most monopolistic institution of all, the territorial
So, the majority of people, while still opposing monopolies in theory, are very willing to accept in practice the existence of a monopolistic actor (the state) that intervenes in every economic relation, eliminating or subverting freedom of production and exchange. This is a clear sign of how much the minds of ordinary people can be perverted by the continuous propaganda of self-proclaimed experts, even when they uphold sheer nonsense.
In order to start changing this gullible acceptance it is indispensable to show that these justifications are not only fallacious with respect to historical reality but are also spurious pretexts that favour those monopolistic practices. This unmasking of fallacies is all the more necessary as monopolies have shown their moral and material bankruptcy and are leading us into all sorts of trouble.
The bankruptcy of monopolies (^)
Monopolies are now bankrupt under many aspects. The justifications put forward for their existence appear now, more than ever, as empty pretexts, based on false premises and leading to appalling results. Let us then examine briefly the false premises and the appalling results that, together, unmask the bankruptcy of monopolies.
The false premises are:
Historical fallacies: the invention of natural monopolies.
As has been shown previously, during the XIX century many companies entered the utilities market and vied for customers. It was only subsequently that local municipalities or the central state monopolized these services and declared them natural monopolies. It is quite typical of state historians to re-write history according to the demands of power; the fact remains that the theoretical notion of natural monopolies is based on an historical fallacy and so it is devoid of any scientific basis. Moreover, throughout history any monopolistic power has always favoured and justified monopolistic practices; and so, to think that the supreme monopolist, the territorial central state, would be different, is not just naïve but intellectually dishonest.
Economic fallacies: the invention of public goods.
One of the main tenets of science is Occam razor which requires not complicating the analysis with unnecessary distinctions and additions (entia non sunt multiplicanda praeter necessitatem). The separation between public goods and private goods appears to be one of those superfluous differentiations, considering that some so-called ‘public’ goods are ‘privately’ bought (e.g. security with ‘private’ guards, education with ‘private’ teachers) and some so-called ‘private’ goods are enjoyed by the public at large (a ‘private’ building, a ‘private’ museum, a ‘private’ garden like those protected by the National Trust which is a ‘private’ organization in the U.K. looking after the ‘public’ environment). Many other examples could be listed that negate or cast serious doubt on the validity of this supposed dichotomy, and so it should be abandoned as unnecessary.
Anthropological fallacies: the invention of externalities.
The political economist is a strange person. In order to explain this strangeness a social scientist (Robert Frank, Passions Within Reason, 1988) has put forward the thesis that either the economic profession attracts people with materialistic inclinations or that it develops in them materialistic attitudes by always stressing, in any human action, the aim of maximum material gain. It is then understandable why economists see the human being as a cash register and why, on that basis, they have invented the funny notion of externalities, which pretends that any benefit deriving from somebody's action should be reflected in market prices or in charges for those who enjoy these so-called externalities. In the absence of that, political economists think that the economic system would stop working, with everybody free-riding on those who generate positive externalities. What they seem incapable of realizing is that all the time human being do things that benefit others (e.g. voluntary assistance) or that benefit themselves in view of benefiting others (e.g. personal education) or that benefit themselves and indirectly benefit others (e.g. tending the front garden, redecorating the front of the house) without being motivated by any direct economic gain, which either is inexistent or could be hard to come by. The concept of externality is, then, a silly idea devoid of any practical use other than justifying state taxation.
To these false premises we have to add the appalling results of monopolies, such as:
Moral sleaze. State-run and State-made monopolies are the repository of managers elected on the basis of political allegiance and of workers hired in order to please friends and cronies or just to satisfy the political demand for full employment. The result of this is that economic principles do not apply to these monopolies, which can then charge monopolistic prices under the protection of the law.
Technological backwardness. Shielded from competition, these industries have no incentive to devise and introduce technological improvements, but are content to simply repeat the same processes, sure that nothing will displace them other than a political upheaval.
Financial debacle. All over the world state companies have accumulated huge losses that have always been covered by taxpayers money. The lack of economic competition has meant that there was no need to behave sensibly in financial matters but only servilely in political terms.
For the consumer, at whose service the productive system should be, the practical consequences of the existence of monopolies have been:
Overcharge. The best time for monopolies was when the prices in many economic sectors (agriculture, auto, steel, etc.) were fixed by the state (the so-called "administered prices") according to the demands of Big Business and Big Labour, taking into consideration only the exigencies of the producers, even those who were backward and grossly inefficient. Also in the state-run utilities the prices charged were far in excess of actual cost. Since privatization and the restoration of a certain amount of competition they have gone down, but we are still a long way from free and full choice and so from the mythical consumers' sovereignty. In fact, even after the de-nationalization of state monopolies the price of a train ticket for a relatively short journey could be higher than the price of a plane ticket for a much longer one. And the reason has to do with the absence of full competition and the presence of distorting mechanisms.
Bad services. A tale is recounted in an Eastern European country that, when taxis were a state monopoly, people queued up to wait for them; now, after the fall of state communism and the end of the most atrocious form of monopoly, taxis are once again waiting for customers, and this is how it should be. Bad service has been the rule in many monopolistic state utilities, and not just in Eastern Europe. In Italy people had to wait ages before having a telephone connected and some small towns in Southern Italy did not have electricity until the 1970's.
Lack of choice. Under monopolies there is no variety and no personalization in the services provided or in the goods sold. All this is in tune with the idea of a mass society inhabited by mass consumers that are then treated as milk cows in the hands of the monopolist and had to conform, for the benefit of those who profit from passive mass consumers and docile mass subjects.
The fact that the consumer has not rebelled sooner against this appalling state of affairs has to do not only with the power of cultural indoctrination but also with a series of other reasons that combine to explain the perverse persistence of monopolies, and especially of the mother of all monopolies, the state. They relate especially to two other roles played by many consumers of goods and services:
• Consumers as protected workers. The huge number of people occupied in monopolistic companies has provided a bulwark against any change. Under the noble excuse of protecting the workers the Trade Unions have promoted and practiced monopolism, becoming in the process one of the worst monopolistic agents of statism and disregarding, whenever possible, any rights of individuals as consumers.
• Consumers as free riders. Monopolies are the paradise of free riders in so far as they institutionalise privileges, i.e. free riding, under the protection of the state. Monopolistic utilities and monopolistic agencies have distributed income to people for non-existent working contributions or for efforts that are not remotely commensurate with what is drawn out (welfare income, unemployment benefits). This has generated within affluent industrial societies a scramble for free riding unparalleled in history, and qualified with the noble name of welfare state.
In short, a large constituency of consumers have been bribed into supporting a system of privileges and inequities by sharing with them part of the spoils.
We could even say that the state itself has become more and more the free-rider par excellence considering that, for instance in the USA, there are more personal security guards paid directly by the people than state policemen and in the UK the voluntary and charitable sector covers many needs and funds many projects that the state, according to its own ideology, is supposed to cater for through taxation. These are just two examples of state free-riding that are multiplying in parallel with the rising of taxes and the falling in quantity and quality of state services.
However, this situation cannot last forever because, sooner or later, the reality of moral, technological and financial problems has the nasty habit of catching up and destroying illusions. After decades of fashionable statism and monopolies presented as a necessary fact of economic life, now the cultural climate has changed. Competition is no longer a dirty word. We are still surrounded by monopolistic practices but they are no longer regarded as a result of progressive measures. Nevertheless, what has not yet emerged is a systematic critical analysis of monopolies and corporatism in every sphere of life, which would constitute the only way to finally go beyond monopolies.
Beyond monopolies (^)
On the basis of what has been said so far, going beyond monopolies means going for the abolition of all privileges bestowed by the state (or by any monopolistic organization) upon any producer/provider of goods or services.
The history of the development of freedom is closely intertwined
with the fight against monopolies. The independence of India from
British rule started with the struggle led by Gandhi against the salt monopoly
maintained by the British Government.
Clearly, if somebody feels voluntarily bound, for any reason whatsoever, to a certain producer/provider and he wants to keep him as his sole supplier of certain goods/services, this is perfectly acceptable as long as he doesn't want to impose his choices on anybody else.
The reality of monopoly is strictly linked to the presence of compulsion
and to the correlated aspect of lack of choice, absolute or partial.
For this reason a discourse on monopolies, in order to be exhaustive in theoretical terms and effective in concrete results, must bear on all the areas of monopolistic practices.
To go beyond monopolies means then to go beyond
Territorialism (political monopolies)
Problem: the state and its cronies as racketeers monopolizing a certain territory and plundering resources, enjoying privileges and allocating booties. Solution: end of the territorial state and of territorial borders.
Corporatism (economic monopolies)
Problem: the state and its cronies as monopolistic economic actors within a certain territory. Solution: abolition of state licensures, cancellation of the patent system, no blocks to the free circulation of people and goods.
Nationalism (cultural monopolies)
Problem: the state and its cronies as national sects that monopolize the means of propaganda and indoctrination. Solution: end of state national languages and of state national mono-cultures, end of compulsory financing of state media and state schools.
Only when these three aspects of compulsory social organization are totally undermined will we be finally free from monopolism. At that moment other concepts and practices that have already emerged are likely to develop in full, namely
Spatialism. The possibility of moving and settling anywhere on earth or remaining wherever one is, associating (or not associating), giving allegiance (or not giving allegiance) to whatever institutions or organization one feels like. In social discourse this is called panarchy.
Pluralism. The possibility of starting social or economic ventures individually or in association with others without any "legal" obstacle whatsoever and with only the general provision (universal principle) that no harm is intended or done to people nor any damage to natural resources.
Cosmopolitanism. The possibility of living by universal principles without any type of monopolistic restriction as to territory, means of payment, juridical norms other than those of voluntariness (live and let live) and reciprocity (give and receive).
In the sphere of socio-economic relationships this means a world characterized by free contacts - free contracts, without any interference by any monopolistic agent. This will probably result in new ways of organizing the production of goods and the provision of services that already exist to a certain extent but are not yet widely practiced. We can imagine for instance enterprises and utilities which are:
Consumer-managed. The close association or even fusion between consumers and producers could lead to some resources being managed directly by the citizens (see for instance the National Trust in the U.K. managing historic buildings and areas of environmental beauty). With the expansion of time free from work obligations, it is quite possible that some people would show an interest in running businesses and utilities in which they also have a role as consumers and users.
Consumer-driven. The direct link between producers and consumers can be based on good circulation of information, reliable post-sale assistance and could reach the point of full customization and production on demand. This is how the system of free enterprise and consumer choice would have evolved if it had not been led astray by the sirens of monopolism (protectionism and corporatism).
Consumer-supported. Any business should prosper or fail only in so far it remains capable of satisfying consumer demands at affordable prices. Even the Chairman of the Senate Committee on Antitrust, Estes Kefauver, acknowledged that the best way to fight monopolies is to let the mechanism of free exchanges function undisturbed and this "constitutes a form of representative government. It allows the massive aggregate of ... consumers to vote their preferences by extending or withholding their custom." (Estes Kefauver, In a few hands, 1965). And this consumer option is the only rational and equitable way to promote good producers and to demote bad ones.
Some of this is nothing new because, in fact, within any free economic system the consumers are the backbone of any business enterprise, which can survive and prosper, in the final instance, only because satisfied customers keep coming back. However, what will be new is this total reorientation towards free users’ choices and away from rulers’ coercive decisions. It is this radical change of route that marks the new paradigm and heralds a future of autonomous human beings instead of monopolized state subjects.