By Insula Qui
The main disagreement between Rothbardian and Misesian monopoly theory is the theoretical possibility of monopolies on the free market. This is the most wonkish topic possible as the disagreement is extremely slight. Mises believed that monopolies are only sustainable with state aid while Rothbard denied the existence of monopolies without the state outright. What will make the article even more technical is that I will be finding a middle ground between the two very close positions as I think both missing a very slight possibility that could change our view of monopoly theory.
The crux of Misesian monopoly theory is that it is possible to become the sole owner of a singular factor of production. Thus, when a particular capitalist is the only person who owns a factor of production, he can charge a higher price due to not having competition in regards to producing a certain good. And if we adopt some neo-classical terminology, we can characterize it as a disparity between perfect competition and monopolistic competition.
The objection Rothbard has to this theory is that there is no proper definition of monopoly as factors of production are either always monopolized and perfectly competitive. This is because there are substitutes for every good, which would leave every factor of production perfectly competitive. And if substitutes do not constitute competition, then everything is monopolized as there can be no perfect duplicates of any factors of production. Thus, a monopoly can only be defined as a state-given exclusive grant.
But we need to consider a possibility found in one of Rothbard’s throwaway lines in “Man, Economy, and State” in his discussion about monopolies (One that I cannot find at the present moment due to the immense size of that volume.). He posits that if a person owned two factors of production at the same time, he could control the price of both. He disregards this as an implausibility due to the fact that specialization is profitable and the fact that the calculation problem also applies to business. Thus, Rothbard never finds the immense theoretical value in exploring this possibility any further.
This value is not in the fact that a person could own both a farm and a store, both of these forms of production are so far removed from one another that the overlap is minimal enough to discredit the possibility of having a monopoly by owning both factors. However, we can consider that one could possibly own a road and the necessary tunnels under that road. This means that one could charge extra rents from customers of different utilities due to owning a road which is also, by far, the most efficient location for any tunnels for electrical, water, and gas systems in an urban environment. This is just one example, so it does very little good to expound on the theory behind this specific incident, but the general principle can be explained as follows:
Person A has exclusive control of good A in some area, this does not allow him to sustainably charge extra prices for the use of good A due to the nature of both competition and consumer demand. The only way we can imagine charging an excessive price is if a very large scale operation owned good A to the extent that no other company could even consider producing good A. This is unlikely as large companies are generally less efficient than small ones, in large part due to the immense inefficiency in calculation that always affects the optimal size of the firm. There are countless other reasons why monopolies are not sustainable, many of which I have written about in the past. (My second book, “Capitalism Works” has a very extensive chapter about monopoly theory.).
However, if good A is necessary for the production of good B and person A had a territorial monopoly over goods A and B, he could charge a surplus for good B. To out-compete the double factor monopolist one would have to produce both goods A and B. Producing good A on its own might not be profitable as the person who controls both goods A and B cannot overcharge for the use of good A. This means that to produce good B, the person aiming to introduce competition would have to first produce good A. The monopolist does not desire competition and would have no reason to let any other person produce good B using his good A.
This leaves any potential competitor only with the option to find another source for good A or to create one himself. And here is the only situation where the proponents of natural monopoly theory have a good point. If good A belongs in a category of natural monopoly, it has a fairly large barrier to entry, this is usually not a problem in the long run by itself, if the company overcharges for the good, it will be outcompeted. But if there’s a large barrier to entry for producing an unprofitable good which facilitates profits for another good, there is very little possibility for any competition for the production of good B.
This is my concept of double factor monopoly and the reason why I differ from both Mises and Rothbard on the issue of monopoly theory. When the monopolistic good is alienated from all competition by two steps, it becomes hard to argue that there really are no monopolies on the free market. And when the good is a natural monopoly in the sense that the demand for it is very vertical and the barrier to entry is immense, it can sustain itself for long periods of time and will always be a minor inefficiency in a completely free market. But this does not mean that state intervention will necessarily solve it, which is why we need a proper conclusion before we can put this issue to rest.
The first thing that alleviates the problem is a systematic incentive to not create such monopolies, it’s almost always more efficient to have multiple companies manage multiple goods. This solves the issue of electrical grids and other similar goods as the people who own the generators do not need to own the grid itself. This is more efficient for both the company and the consumer of the particular good and will usually provide better results. However, this does not avoid the fact that there are corner cases where free market organization is theoretically inefficient.
But this inefficiency is relatively minor when we consider that government ownership of a particular good is always a monopoly and is an even worse example of all of these problems. The only solution to this is to create a voluntaryist mode of governance where owners of property band together to make decisions without the government owning any property itself. This would allow for the only proper use of anti-monopolistic action in separating the entities that provide both goods, which eliminates any concern for this kind of monopoly. However, the inconvenience is so slight and unseen that most people would not bother creating a covenant to fix this issue and the issue may ultimately be better left unsolved.
This is the same scenario as with the monopolies in social media created by the fact that the value of free platforms only lies in that many who use them. A new platform is unable to provide a userbase and is less valuable than the old platform. In this sort of monopolistic structure, the demand is the supply with no proper solution to remove this monopoly other than the natural perpetual change in a market economy. And this is what we ultimately have to accept, there are minor inconveniences in all market economies and no degree of government action can change those inconveniences without creating worse ones. We can theorize about a better market economy but we can never create such an economy. Capitalism works, although it’s occasionally imperfect.