The Many Ways Governments Create Monopolies

by
Murray N. Rothbard
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[From Power and Market, Chapter 3.]

Instead of making the product prohibition absolute, the government may prohibit production and sale except by a certain firm or firms. These firms are then specially privileged by the government to engage in a line of production, and therefore this type of prohibition is a grant of special privilege. If the grant is to one person or firm, it is a monopoly grant; if to several persons or firms, it is a quasi-monopoly or oligopoly grant. Both types of grant may be called monopolistic. It is obvious that the grant benefits the monopolist or quasi monopolist because his competitors are barred by violence from entering the field; it is also evident that the would-be competitors are injured and are forced to accept lower remuneration in less efficient and value-productive fields. The consumers are likewise injured, for they are prevented from purchasing their products from competitors whom they would freely prefer. And this injury takes place apart from any effect of the grant on prices.

Although a monopolistic grant may openly and directly confer a privilege and exclude rivals, in the present day it is far more likely to be hidden or indirect, cloaked as a type of penalty on competitors, and represented as favorable to the “general welfare.” The effects of monopolistic grants are the same, however, whether they are direct or indirect.

The theory of monopoly price is illusory when applied to the free market, but it applies fully to the case of monopoly and quasi-monopoly grants. For here we have an identifiable distinction—not the spurious distinction between “competitive” and “monopoly” or “monopolistic” price—but one between the free-market price and the monopoly price. For the free-market price is conceptually identifiable and definable, whereas the “competitive price” is not.1 The monopolist, as a receiver of a monopoly privilege, will be able to achieve a monopoly price for the product if his demand curve is inelastic, or sufficiently less elastic, above the free-market price. On the free market, every demand curve to a firm is elastic above the free-market price; otherwise the firm would have an incentive to raise its price and increase its revenue. But the grant of monopoly privilege renders the consumer demand curve less elastic, for the consumer is deprived of substitute products from other would-be competitors.

Where the demand curve to the firm remains highly elastic, the monopolist will not reap a monopoly gain from his grant. Consumers and competitors will still be injured because of the prevention of their trade, but the monopolist will not gain, because his price and income will be no higher than before. On the other hand, if his demand curve is now inelastic, then he institutes a monopoly price so as to maximize his revenue. His production has to be restricted in order to command the higher price. The restriction of production and the higher price for the product both injure the consumers. In contrast to conditions on the free market, we may no longer say that a restriction of production (such as in a voluntary cartel) benefits the consumers by arriving at the most value-productive point; on the contrary, the consumers are injured because their free choice would have resulted in the free-market price. Because of coercive force applied by the State, they may not purchase goods freely from all those willing to sell. In other words, any approach toward the free-market equilibrium price and output point for any product benefits the consumers and thereby benefits the producers as well. Any movement away from the free-market price and output injures the consumers. The monopoly price resulting from a grant of monopoly privilege leads away from the free-market price; it lowers output and raises prices beyond what would be established if consumers and producers could trade freely.

We cannot here use the argument that the restriction of output is voluntary because the consumers make their own demand curve inelastic. For the consumers are fully responsible for their demand curve only on the free market; and only this demand curve can be treated as an expression of their voluntary choice. Once the government steps in to prohibit trade and grant privileges, there is no longer wholly voluntary action. Consumers are forced, willy-nilly, to deal with the monopolist for a certain range of purchases.

All the effects that the monopoly-price theorists have mistakenly attributed to voluntary cartels do apply to governmental monopoly grants. Production is restricted and factors misallocated. It is true that the nonspecific factors are again released for production elsewhere. But now we can say that this production will satisfy the consumers less than under free-market conditions; furthermore, the factors will earn less in the other occupations.

There can never be lasting monopoly profits, since profits are ephemeral, and all eventually reduce to a uniform interest return. In the long run, monopoly returns are imputed to some factor. What is the factor that is being monopolized in this case? It is obvious that this factor is the right to enter the industry. In the free market, this right is unlimited to all; here, however, the government has granted special privileges of entry and sale, and it is these special privileges or rights that are responsible for the extra monopoly gain from the monopoly price. The monopolist earns a monopoly gain, therefore, not for owning any productive factor, but from a special privilege granted by the government. And this gain does not disappear in the long run as do profits; it is permanent, so long as the privilege remains, and consumer valuations continue as they are. Of course, the monopoly gain will tend to be capitalized into the asset value of the firm, so that subsequent owners, who invest in the firm after the privilege is granted and the capitalization takes place, will be earning only the generally uniform interest return on their investment.

This whole discussion applies to the quasi monopolist as well as to the monopolist. The quasi monopolist has some competitors, but their number is restricted by the government privilege. Each quasi monopolist will now have a differently shaped demand curve for his product on the market and will be affected differently by the privilege. Those quasi monopolists whose demand curves become inelastic will reap a monopoly gain; those whose demand curves remain highly elastic will reap no gain from the privilege. Ceteris paribus, of course, a monopolist is more likely to achieve a monopoly gain than a quasi monopolist; but whether each achieves a gain, and how much, depends purely on the data of each particular case.

We must note again what we have said above: that even where no monopolist or quasi monopolist can achieve a monopoly price, the consumers are still injured because they are barred from buying from the most efficient and value-productive producers. Production is thereby restricted, and the decrease in output (particularly of the most efficiently produced output) raises the price to consumers. If the monopolist or quasi monopolist also achieves a monopoly price, the injury to consumers and the misallocation of production will be redoubled.

Since outright grants of monopoly or quasi monopoly would usually be considered baldly injurious to the public, governments have discovered a variety of methods of granting such privileges indirectly, as well as a variety of arguments to justify these measures. But they all have the effects common to monopoly or quasi-monopoly grants and monopoly prices when these are obtained.

The important types of monopolistic grants (monopoly and quasi monopoly) are as follows: (1) governmentally enforced cartels which every firm in an industry is compelled to join; (2) virtual cartels imposed by the government, such as the production quotas enforced by American agricultural policy; (3) licenses, which require meeting government rules before a man or a firm is permitted to enter a certain line of production, and which also require the payment of a fee—a payment that serves as a penalty tax on smaller firms with less capital, which are thereby debarred from competing with larger firms; (4) “quality” standards, which prohibit competition by what the government (not the consumers) defines as “lower-quality” products; (5) tariffs and other measures that levy a penalty tax on competitors outside a given geographical region; (6) immigration restrictions, which prohibit the competition of laborers, as well as entrepreneurs, who would otherwise move from another geographical region of the world market; (7) child labor laws, which prohibit the labor competition of workers below a certain age; (8) minimum wage laws, which, by causing the unemployment of the least value-productive workers, remove their competition from the labor markets; (9) maximum hour laws, which force partial unemployment on those workers who are willing to work longer hours; (10) compulsory unionism, such as the Wagner-Taft-Hartley Act imposes, causing unemployment among the workers with the least seniority or the least political influence in their union; (11) conscription, which forces many young men out of the labor force; (12) any sort of governmental penalty on any form of industrial or market organization, such as antitrust laws, special chain store taxes, corporate income taxes, laws closing businesses at specific hours or outlawing pushcart peddlers or door-to-door salesmen; (13) conservation laws, which restrict production by force; (14) patents, where independent later discoverers of a process are debarred from entering a field production.2^,3

• 1. See Man, Economy, and State, chapter 10, for a refutation of monopoly theories on the free market.
• 2. For an interesting, though incomplete, discussion of many of these measures (an area largely neglected by economists), see Fritz Machlup, The Political Economy of Monopoly (Baltimore: Johns Hopkins Press, 1952), pp. 249–329.
• 3. Subsidies, of course, penalize competitors not receiving the subsidy, and thus have a decided monopolistic impact. But they are best discussed as part of the budgetary, binary intervention of government.