“Capitalism and Freedom” Summary, Chapter 8: Monopoly and Social Responsibility of Business and Labor

by Danny Fenster

This chapter is a free excerpt from Quicklet on Capitalism and Freedom.

Market competition is distinct from the common sense of personal rivalry. "The essence of a competitive market is its impersonal character." Monopoly is the antithesis of market competition.

Monopoly creates two problems; it limits voluntary exchange and raises the question of "social responsibility." Competitors, without power to drastically alter things, have no responsibility but to obey the law; monopolies, because of their power, do.

Competition is an ideal that never exists purely. All producers of goods have some effect on price. The question for policy is to determine if this is significant or negligible. "In almost any industry that one can mention, there are giants and pygmies side by side." Monopoly and competition are theoretic ideals, the truth always lying somewhere between.


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Market competition is distinct from the common sense of personal rivalry. "The essence of a competitive market is its impersonal character." Monopoly is the antithesis of market competition.

Monopoly creates two problems; it limits voluntary exchange and raises the question of "social responsibility." Competitors, without power to drastically alter things, have no responsibility but to obey the law; monopolies, because of their power, do.

Competition is an ideal that never exists purely. All producers of goods have some effect on price. The question for policy is to determine if this is significant or negligible. "In almost any industry that one can mention, there are giants and pygmies side by side." Monopoly and competition are theoretic ideals, the truth always lying somewhere between.

People believe there is far more monopoly than actually exists. While some companies grow large, their market may grow even larger, with more competitors. Additionally, monopoly is more newsworthy than competition. Lastly, the big is generally emphasized over the small.

Technological innovations that promote monopoly--mass production, etc.--are stressed over those that promote competition--transportation and communications developments, etc.

People similarly tend to overestimate the effects of monopoly in labor via unions. "Many unions are utterly ineffective," and powerful ones have a limited effect on wage structure. They are credited with wage increases they aren't responsible for.

But they're not negligible. They have driven up wages of workers from 10 to 15 percent at the cost of 85 to 90 percent of workers’ wages. By increasing top paid wages they shrink demand for those jobs, making more workers compete for jobs elsewhere, driving those wages down.

Monopoly in industry has not grown over the past half-century; in labor, it has. The distinction between the two is less dramatic than it seems.

Government-supported monopoly, not extensive in the US, is exemplified by the post office, electric power, highways, etc. With the growth of defense, space and research budgets, the government has also become the sole purchaser of entire industries.

"The use of government monopoly to establish, support and enforce cartel and monopoly arrangements among private producers has grown much more rapidly than direct government monopoly and is currently far more important." Examples include the ICC, agriculture industries, the FCC and the Federal Reserve Board, and proliferates on the state level too.

Patents and copyrights are a unique form of government created monopoly, demonstrating the general need to use government to define property. Without property rights inventors or writers have no incentive to produce. Still, there are "inventions"--ideas and concepts--that cannot be patented. "The 'inventor' of the supermarket, for example, conferred great benefits on his fellowmen for which he could not charge them."

These are brief comments and not answers on patents and copyrights, but they serve to illustrate the problems they raise as government monopolies.

There are three main sources of monopoly: technical, direct and indirect governmental assistance, and private collusion.

1. Refer to previous discussions in Chapter 2 on technical monopolies.

2. "Probably the most important source of monopoly power has been government assistance, direct and indirect." Direct assistance has been discussed at length already. Indirect assistance include those policies aimed at solving one alleged problem which inadvertently create monopolies: tariffs, tax laws, labor legislation, etc.

Corporate tax policy encourages corporations not to pay out earnings to shareholders, but to hold the cash and invest back in themselves, which is good for the shareholder as well, who is taxed less on income earned than on capital gains. This wastes capital and tends to favor large, established corporations.

"A major source of labor monopoly has been government assistance," like building codes, licensure provisions and legal rules favoring unions. "If men turn cars over, or destroy property … not a hand will be lifted to protect them from the legal consequences. If they commit the same acts in the course of a labor dispute, they may well get off scot free."

Private collusion is "generally unstable and brief" without government assistance. Price fixing provides incentives for outsiders to enter and undersell them, or allows colluders to opt out and undercut their competitors.

Anti-trust laws are effective against much of this. Of further help would be extensive tax law reform. "The corporate tax should be abolished. Whether this is done or not, corporations should be required to attribute to individual stockholders earnings which are not paid out as dividends."

People mistakenly believe corporate officials or labor leaders have a "social responsibly"; their responsibility is to serve the interest of their shareholders or union members while adhering to the rules of the game.

"Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible." How are they to define the social interest?

Corporations are instruments of their stockholders; were they to donate to charities, they would rob their stockholders of the right to decide on those actions.

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