Part 1 – Antitrust Laws and Regulation
According to the Constitution’s Preamble of the United States, the federal government’s responsibility is to “form a more perfect union, establish Justice, insure domestic Tranquillity, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity”. In relation to the economy, it is not the government’s job to create jobs for people, tell people what to buy, or tell people what they cannot buy. This infringes on each individual’s right to their own decisions, and does not secure the “Blessings of Liberty”.
I believe that almost every citizen would agree with the former statement: that the government does not have a right to tell you, your family, or any fellow citizen what they can or cannot purchase. But when that exact sentence is put into government policy, suddenly it gains advocates.
A free economy would guarantee every right of choice to both the consumer and the seller. Yet a deep belief that seems to be held among most people is that a “laissez faire” economy always leads to monopoly domination and immoral wages. If the government doesn’t step in a regulate the market, big corporations will ultimately take over, price gouge, and rip-off the consumer while enticing them under their reign.
The government also runs on the idea that federal intervention, regulation and policy is what is protecting the consumer from these evil monopolies, which can be seen by the institution of the Sherman Antitrust Acts.
However, the truth is quite the opposite.
Before we dive into the main cause of monopolies, we must first define two types of monopolies. The first is a “coercive” monopoly. According to Adam Smith, a coercive monopoly is “a government grant of exclusive privilege.” The government must choose a corporation and grant it legal amnesty, permission and access to monopolize an available market. They do this by making it unavailable, too expensive, or just plain illegal for any other corporation aside from their chosen firm to do business in the chosen market.
We can see why this is considered a type of monopoly by looking at the original origin of the word. According to the seventeenth century jurist, Lord Choke, “A monopoly is an institution or allowance by the King, by his grant, commission, or otherwise… to any person or persons, bodies politic or corporate, for the sole buying, selling, making, working, or using of anything, whereby any person or persons, bodies politic or corporate, are sought to be restrained of any freedom of liberty that they had before, or hindered their lawful trade.”
One example of the government’s coercive monopoly was the United States Postal Service. It was illegal for anyone aside from UPS to deliver first class mail. Obviously with the invention of the internet, fax machines and email, consumers have been able to bypass this restriction.
In short summary, a coercive monopoly is government created, for without the government making way for a select firm, the firm would be subject to market competition. Which leads us to the second type of monopoly: an “efficiency” monopoly.
An efficiency monopoly is the monopoly term that most of us are more familiar with. This type has no government power to grow or dominate a market. They must do so by simply satisfying their customers and convincing them to purchase their product or service. The simple beauty of a free economy is that it by nature rewards businesses that provide entities that consumers want at the exact price of what it is worth without creating a surplus or shortage.
We will take a quick detour into microeconomics to understand the functions of supply and demand since they will further help us understand why monopolies do not need to be regulated.
Below you can see a basic graph that represents how much an item is worth versus how many people want it. Where the supply and the demand meet in relation to price and quantity, there you will find your equilibrium. Pricing your item at the price where the equilibrium is and producing the the quantity number where the equilibrium is will ensure you do not have any extra items left over after the demand depletes. If less people have a desire to purchase your product, your price will lower since your demand has. In the same way, if your demand increases, so will your price.
I know what you’re thinking – exactly what everyone was thinking if they paid attention during social studies in high school: that the Sherman Antitrust Act was signed into law (making monopolies illegal) to protect us (the consumers) from the big-bad businessmen such as business tycoons like John D. Rockefeller.
Rockefeller’s “Standard Oil” was one of the first victims to the Antitrust Laws by the U.S. Congress, causing Standard Oil to be broken into 34 separate companies that in turn had to compete with one another. Conveniently however, Congress added the “rule of reason”, claiming that not all monopolies are evil and it is up to the courts to make that determination. The Court ruled that in order for the company to be broken up, it had to somehow damage its economic environment in which it competes.
This ruling implies that Standard Oil was hurting its economic environment… which is exactly the opposite of what it was doing. During the 19th century, the United States was experiencing one of the largest economic growths in the history of the civilization. New inventions like steamboats, canals, railroads and oil refineries all contributed to this immense growth. For the first time, the young United States passed the United Kingdom in per capita ranking. And Rockefeller played a very important role.
So why do we continue to cite Standard Oil as a textbook example of why we need Antitrust Laws? We are taught that is it because Rockefeller achieved (almost) complete domination of the oil-refinery market, at 90%. Because of this, Standard could accomplish unfair market advantages such as private railroad rebates, put smaller competitors out of business through a practice of “predatory pricing”, and charge the consumer whatever it pleased.
Except that isn’t what happened. And economically speaking, none of these practices are actually feasible.
We’ll start with “predatory pricing”. Predatory pricing is the act of lowering all your prices below profit level in order to put your smaller competitors out of business. The predator will then immensely raise prices when their competition has gone out of business since they no longer have to compete.
On the surface, this looks like a very plausible act that larger corporations would be able to take advantage of. However, upon deeper analysis of the issue, predatory pricing simply isn’t economically possible.
Here is Lawrence W. Reed from the Foundation for Economic Education to explain seven reasons predatory pricing is not possible:
Price is only one aspect of competition. Firms compete in a variety of ways: service, location, packaging, marketing, even courtesy. For price alone to draw customers away from the competition, the predator would have to cut substantially—enough to outweigh all the other competitive pressures the others can throw at him. That means suffering losses on every unit sold. If the predator has a war-chest of “monopoly profits” to draw upon in such a battle, then the predatory price cutting theorist must explain how he was able to achieve such ability in the absence of this practice in the first place!
The large firm stands to lose the most. By definition, the large firm is already selling the most units. As a predator, it must actually step up its production if it is to have any effect on competitors. As Professor McGee in his Journal of Law and Economics observed, “To lure customers away from somebody, he (the predator) must be prepared to serve them himself. The monopolizer thus finds himself in the position of selling more—and therefore losing more—than his competitors.”
Consumers will increase their purchases at the “bargain prices.” This factor causes the predator to step up production even further. It also puts off the day when he can “cash in” on his hoped-for victory because consumers will be in a position to refrain from purchasing at higher prices, consuming their stockpiles instead.
The length of the battle is always uncertain. The predator does not know how long he must suffer losses before his competitors quit. It may take weeks, months, or even years. Meanwhile, consumers are “cleaning up” at his expense.
Any “beaten” firms may reopen. Competitors may scale down production or close only temporarily as they “wait out the storm.” When the predator raises prices, they enter the market again. Conceivably, a “beaten” firm might be bought up by someone for a “song,” and then, under fresh management and with relatively low capital costs, face the predator with an actual competitive cost advantage.
High prices encourage newcomers. Even if the predator drives everyone else from the market, raising prices will attract competition from people heretofore not even in the industry. The higher the prices go, the more powerful that attraction.
The predator would lose the favor of consumers. Predatory price cutting is simply not good public relations. Once known, it would swiftly erode the public’s faith and good will. It might even evoke consumer boycotts and a backlash of sympathy for the firm’s competitors.
In 1958, Professor John S. McGee when writing in the “Journal of Law and Economics” said that predatory pricing is “logically deficient” and concluded that he could find, “little evidence to support it.”
Additionally, during the “reign of Standard” between 1870 to 1885, the price of refined kerosene dropped 26 cents to 8 cents per gallon, according to economist D. T. Armentano. “In the same period, the Standard Oil Company reduced the [refining] costs per gallon from almost 3 cents in 1870 to 0.452 cents in 1885. Clearly, the firm was relatively efficient, and its efficiency was being translated to the consumer in the form of lower prices for a much improved product, and to the firm in the form of additional profits,” Professor Armentano reports.
But what about the other evils Standard Oil committed that inevitably led to its breakup? Buying out competitors! Conspiracy! Price-gouging! Greed! These are the reasons antitrust laws must be in place, even if predatory pricing isn’t possible.
Let us now address the accusation of Standard buying out competitors and why the government claims that these practices need regulation through antitrust laws. According to socialist historian Gabriel Kolko in his book “The Triumph of Conservatism”, “Standard attained its control of the refinery business primarily by mergers, not price wars, and most refinery owners were anxious to sell out to it. Some of these refinery owners later reopened new plants after selling to Standard.”
Again, to reference Lawrence W. Reed, “Buying out competitors can be a wise move if achieving economy of scale is the intent. Buying out competitors merely to eliminate them from the market can be a futile, expensive, and never-ending policy.“
To address conspiracy, prices of refined oil continued to drop throughout the end of the 1800s as referenced above. Even if we ignore the fact that oil prices were continuing to lower (due to competition and more efficient refinery processes), businesses colluding to fix a price above the price of its worth simply isn’t feasible. As Reed states, “Assuming a formula for restricting production is agreed upon, it then becomes highly profitable for any member of the cartel to quietly cheat on the agreement. By offering secret rebates or discounts or other ‘deals’ to his competitors’ customers, any conspirator can undercut the cartel price, earn an increasing share of the market and make a lot of money. When the others get wind of this, they must quickly break the agreement or lose their market shares to the ‘cheater.’ The very reason for the conspiracy in the first place—higher profits—proves to be its undoing!”
Again, everything that is done is with the consumer’s best interest in mind because that is how a company stays profitable in a free market. They must convince their customers to buy from them, whether that be with low prices (making price-fixing agreements is short lasting) or other means. Additionally, any company that is not in the “price-fixing agreement” has a tremendous advantage and opportunity to host lower prices and steal the fixed-priced company’s customers.
But what about railroad rebates from his friend Harriman of the Union Pacific Railroad. It doesn’t seem fair for Standard to get incredible discounts. This act would damage the economic environment, therefore validating Congress’s antitrust laws.
Except it doesn’t.
For one thing, this was just railroads is competition. Since Rockefeller owned a majority of the oil market, he transported the most oil which resulted in a bulkage discount. We can also just look at the foundation of how Standard operated and we can see that Rockefeller mostly relied on his own oil pipelines, not the railroad system.
The final accusation of Standard Oil was that Rockefeller could charge the consumers any price he wanted and the consumers would have no choice but to buy his oil at his price. However, for the third time, this is simply not the case.
To call reference to economist D. T. Armentano. “In the same period, the Standard Oil Company reduced the [refining] costs per gallon from almost 3 cents in 1870 to 0.452 cents in 1885.” The simple fact is that if Rockefeller (or any company) raised their prices above the market cost, that leaves a window for smaller companies to charge lower prices and therefore steal all of the larger firm’s customers. Since Standard was an “efficiency monopoly,” it had no government power to stop others from competing with it. This can be more easily seen since after 1899, Standard’s market share immensely declined due to new technology and easier competition practices.
To conclude the Standard Oil defense, we will again quote Reed on the factors of a free market that ensure no company can charge what they please:
Free entry. Potential competition is encouraged by any firm’s abuse of the consumer. In describing entry into the oil business, Rockefeller once remarked that “all sorts of people . . . the butcher, the baker, and the candlestick maker began to refine oil.”
Foreign competition. As long as government doesn’t hamper international trade, this is always a potent force.
Competition of substitutes. People are often able to substitute a product different from yet similar to the monopolist’s.
Competition of all goods for the consumer’s dollar. Every businessperson in competition with every other businessman to get consumers to spend their limited dollars on him.
Elasticity of demand. At higher prices, people will simply buy less.
Rockefeller was a man who was most definitely driven by money and profit. However, he realized (as any good entrepreneur does) that the best way to make a profit is not to cheat your customers, but to convince them to buy your product by fulfilling a need. Rockefeller did this. He created new ways to attain refined oil and did it more efficiently than any of his competition, driving down the prices and increased the quality of oil, which, in turn, benefited the consumers. Should he have chosen to price gouge, that would have opened his company up for smaller competitors to rob him of his current customers. Should he have chosen predatory pricing to put others out of business, he would have driven himself to the streets.
Ultimately, Standard Oil is just one example, however the same logic can be applied to any other company that is or was deemed a monopoly. Antitrust Laws hurt American businesses, which then hurt American (and world) consumers. It is not the government’s job to tell customers what to buy – as Ayn Rand famously claimed, “Capitalism is the only moral economic system” because it is the only system that allows complete freedom of choice. We must continue to fight the myths that monopolies are evil, for it is a slippery slope when we continue to yield our God-given freedoms to Washington.
Part 2 – Minimum Wage Laws
If we are to have a completely free market with no government intervention, we first to need to disprove why we don’t need government antitrust laws, which was shown in Part 1. The second way we need the government out of the market is by eliminating minimum wage laws. To first address what exactly minimum wage laws are, let us use Don Watkins from the Ayn Rand Center for Forbes.com’s insightful example:
“A few years ago, I was in need of some extra cash so I decided to sell my laptop on eBay. A few days later, I got an offer. It wasn’t great, but then neither was my laptop. But before the payment went through, I got a call from the government.
‘We have decided that the offer you got was too low. We’re not going to let you sell your laptop for anything less than three hundred dollars.’
‘But no one is willing to pay me three hundred dollars,’ I said. ‘I’d rather have two hundred bucks than nothing.’
‘Oh, no, you can’t do that,’ I was told. ‘That would be unfair to you.’
Far fetched? Maybe – it didn’t actually happen to me. But the fact is it happens to defenseless victims every single day, albeit in a somewhat different form: through enforcement of the minimum wage.”
What many people fail to realize is that employers are competing for employees just as they are competing for customers. A job should be a contract between the employee and the employer: “I will work this much for you for this amount of pay”. If both parties agree, you are employed.
“But if there are no minimum wage laws, all companies will just pay $0.01 an hour. Nobody can live on that.”People that make that claim are forgetting one of the most astonishing thing about capitalism: everybody is competing. Even the employees.
If the minimum wage was 1 cent an hour, a company could pay 2 cents an hour and in turn have the best employees out of any company. Now company three employes at 5 cents an hour and so on. This trend only stops when the non-skilled employee reaches their maximum pay potential, making it more beneficial for the company to employ a more qualified (stronger, younger, or more highly educated) employee.
Advocates for a higher minimum wage than what we already have also must answer one crucial question: where will the extra money come from? Obviously for large corporations, these extra funds will not be hard to find. But what about smaller businesses? If their payroll is legislatively doubled, they may not be able to simply pay more unless they do one of two things.
Their first option is to raise the prices of their products or services. This will generate more income to therefore translate to their employees. However, what good is it if everyone has more money but everything costs more? Also, what if customers no longer want to pay (or are unable to pay) for their higher prices?
The second option that small businesses have is to layoff some of their employees in order to cover payroll for the rest; raising unemployment.
It is easy to agree that in today’s day, an individual and even more so a family cannot survive on one, or even two minimum wage paying jobs (I would argue this could be because of government intervention as well, but that is for another article). However, the disagreement is how we solve that problem. While the solution may often be portrayed as “just give out more money” this is not economically feasible.
A far better solution would be to encourage higher skill sets to achieve higher paying jobs. Do a job that anyone else can do and you’ll be paid less. Do a job that not many people can do and you’ll be paid more. It’s really that simple.
According to Ron Haskins for the Brookings Institute, follow these three rules and you have a 98% chance of joining the middle class: Complete high school, work full time (at any job) and wait until you’re at least 21 to get married and have a baby. As reported by the U.S. Census data, only 2% of people that followed these rules remained or fell into poverty.
In conclusion, stripping an individual of the right to work for a certain amount or forcing an employer to pay a certain amount (at point of gun) infringes on everyone’s God-given individual rights to freedom. Furthermore, it is not economically sound.
Advocates for a minimum wage and especially ones for a higher minimum wage do so claiming they are looking out for low-paid individuals, without asking the question as to why are they low-paid.
Capitalism works, but if we continue to tinker with a proven system in granting the government more power, we may find ourselves in much more trouble in the future.