Sunday, July 24, 2011

Rothbard on Monopoly Price on the Unhampered Market

Rothbard has a curious attitude to monopoly and cartel prices. Rothbard admits the possibility of monopolies and cartels arising on the completely free market, and defends their existence in these circumstances:
“So far we have established that there is nothing ‘wrong’ with monopoly price, either when instituted by one firm or by cartel; that, in fact, whatever price the free market (unhampered by violence or the threat of violence) establishes will be the ‘best’ price.”
(Rothbard 2009: 661).
Yet, since a monopoly or cartel will be a price setter, it is nonsense to talk about the monopoly price being the price the “free market establishes.” The charge that Rothbard exhibits a double standard on monopoly was also made by L. E. Hill (1963).

Rothbard’s views must be set within the framework of broader Austrian ideas on monopoly:
“Since Rothbard’s economic theories are generally within the Austrian economic tradition, it might be useful to compare his position on monopoly with those of Ludwig von Mises and Israel M. Kirzner. Mises held that monopoly could exist in a free market whenever the entire supply of a commodity was controlled by one seller or a group of sellers acting in concert. Such a situation was not necessarily harmful unless the demand curve for the commodity was inelastic. Then, according to Mises, the monopolist would have a perverse incentive to restrict production and create a monopoly price, and that price would be ‘an infringement of the supremacy of the consumers and the democracy of market.’ Kirzner has suggested that the monopoly ownership of some resource could have ‘harmful effects’ since it would create an incentive on the part of the resource owner to not employ the resource to ‘the fullest extent compatible with the pattern of consumer tastes’ in the market.” (Armentano 1988: 7).
Rothbard rejects the definition of monopoly as the control of the supply of a commodity, and thinks that there is no distinction between competitive and monopoly prices on a completely free market.

On pp. 662ff. of Man, Economy, and State, Rothbard engages in a tortuous and utterly unconvincing attempt to deny any difference between a small producer in a competitive market and a larger corporation with a large share of production. Rothbard’s eventual definition of monopoly only as a right of exclusive production granted by the state to some entity is a piece of legerdemain that allows him to argue that “monopoly can never arise on a free market” (Rothbard 2009: 670).

Moreover, Rothbard’s view is inconsistent, since elsewhere his view is that free markets are superior precisely because consumers set prices:
“On the free market, consumers can dictate the pricing and thereby assure the best allocation of productive resources to supply their wants. In a government enterprise, this cannot be done.”
(Rothbard 2009: 1261).
But, if on the unhampered market, cartels, oligopolies and monopolies could develop in product markets, and the prices of commodities were then set by price setters/price administrators, and not by the dynamics of supply and demand curves, then it is obvious that consumers are not dictating pricing. According to Rothbard’s argument here, unhampered free markets would not assure the best allocation of productive resources, with cartel and monopoly prices being present.

Of course, anyone who has read the specialist literature from modern marketing departments, which studies the empirical reality of how prices are set, knows that business prefers stable prices to the instability of fluctuating ones and disastrous price wars. In the real world, modern corporations are often prices setters, not price takers. Price setting has benefits overlooked by libertarian and free market ideologues.

There is another criticism that can be made. Rothbard thought free markets have a tendency to equilibrium, if not to reach an equilibrium state:
“Rothbard presumed that in individual markets, the law of one price dominated, and that market clearing happened rapidly and smoothly (124). Just as in conventional neoclassical economics, general equilibrium, the evenly rotating economy (ERE), was the direction in which the economy was headed. The pervasiveness of change made it unlikely that an economy would ever achieve the ERE, but nevertheless, like a dog chasing a mechanical rabbit, it at least could explain the direction of change (274). Although Rothbard warned against taking equilibrium too seriously given the world of constant change in which we live (277), it was nevertheless his underlying assumption that markets adjust quickly to new equilibrium positions. Indeed, his justification for the basic efficiency of markets was that ‘entrepreneurs will be very quick to leave the losing industry’ (466) when mistakes are made.” (Vaughn 1994: 97).
One of the elements that supposedly cause the basic efficiency of markets is the flexibility of prices. But with Rothbard’s recognition that cartels and monopolies could arise on a free market and set prices, there is actually less likelihood of price flexibility and market clearing.

Rothbard does not explain how an anarcho-capitalist society would deal with coercive monopolies arising on free markets.

A perfect example of how a competitive market in an anarcho-capitalist system could collapse into a coercive monopoly is protection and policing. Private protection firms would in fact have an incentive to victimise potential customers to increase market share. Violence of the type that already happens between private mafia groups might occur. A natural monopoly would probably develop as the most powerful firm drove its competitors out of business (or a cartel might become dominant), and one would be left with a de facto state, the very thing anarcho-capitalism sought to abolish.


BIBLIOGRAPHY

Armentano, D. T. 1988. “Rothbardian Monopoly Theory and Antitrust Policy,” in W. Block and L. H. Rockwell (eds), Man, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, Ludwig von Mises Institute, Auburn, Ala. 3–11.

Heck, V. C. 1963. “Review of Murray N. Rothbard, Man, Economy, and State,” American Economic Review 53.5: 460–461.

Holcombe, R. G. 2004. “Government: Unnecessary but Inevitable,” Independent Review 8.3: 325–342.

Hill, L. E. 1963. “Review of Murray N. Rothbard, Man, Economy, and State,” Southern Economic Journal 29.3: 252–254.

Rothbard, M. N. 2009. Man, Economy, and State, with Power and Market: The Scholar's Edition, Ludwig von Mises Institute, Auburn, Ala.

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge and New York.

14 comments:

  1. Those who live by historical anecdotes must die by historical anecdotes. First of all, those who are allegedly able to sell stuff at monopoly prices are the owners of whatever it is they sell. Second, the normal free market trend is away from monopoly and towards competition. The progressive era was one big power grab by big business per Gabriel Kolko.

    http://tinyurl.com/3z9v2ga

    Because competition and not monopoly are the natural problems of the market, big business always seeks sto have the government eliminate competition. That is why the big bankers instituted The Fed as bailer-outer of last resort. That is why big business and big banks want The Fed to create funny money to fund wars. Without central banking, there would have been no WWI. No WWI, no Hitler. The purpose of central banks is to hide wealth transfers from the victims. It’s all the inflationists fault, like everything else. Unemployment is not a market problem and neither is monopoly. Both problems are caused by the interventionist "cures".

    The only monopoly trend in the market is caused by IP which is nothing other than a government granted monopoly itself. Without IP and other forms of government help, monopoly is not the normal trend of the market. We can quibble about whether IP is necessary or about how long the granted monopolies should be, but that’s all the protects Microsoft’s market share.

    Further, Rothbard was always extremely concerned with the financial and business "monopolies" as they actually existed which is one reason he was so concerned with the big business monopoly called The Federal Reserve.

    http://www.lewrockwell.com/rothbard/rothbard66.html

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  2. "Without central banking, there would have been no WWI. No WWI, no Hitler."

    Two can play this game: without the insanity of austerity and deflationary depression (which Austrians urge as a alleged "solution") there would have been no Hitler:

    "Economic breakdown [sc. during the Great Depression] led to political upheaval which in turn destroyed the international status quo. Germany was the most striking example of this complex interaction. Without the depression Hitler would not have gained power. Mass unemployment reinforced all the resentments against Versailles and the Weimar democracy that had been smouldering since 1919. Overnight the National Socialists were transformed into a major party; their representation in the Reichstag rose from 12 deputies in 1928 to 107 in 1930. The deflationary policies of the Weimar leaders sealed the fate of the Republic” (Adamthwaite 1977: 34).

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  3. "First of all, those who are allegedly able to sell stuff at monopoly prices are the owners of whatever it is they sell. "

    A red herring. Nowhere above do I deny that monopolies own their commodities. The issue is whether they set prices in ways that are above what the price would be in more competitive markets, and how price setting activities in the real world lead to price rigidities.

    "Unemployment is not a market problem and neither is monopoly. Both problems are caused by the interventionist 'cures'."

    The belief that involuntary employment would disappear in a Rothbardian system is a fantasy: Say's law is a joke and there is always the possibility of failures of aggregate demand.

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  4. LK, what’s the Post Keynesian alternative narrative to this excellent Rothbard gem from the above-linked article?:

    American entry into World War I in April 1917 prevented negotiated peace between the warring powers, and drove the Allies forward into a peace of unconditional surrender and dismemberment, a peace which, as we have seen, set the stage for World War II. American entry thus cost countless lives on both sides, chaos and disruption throughout central and eastern Europe at war's end, and the consequent rise of Bolshevism, fascism, and Nazism to power in Europe. In this way, Woodrow Wilson's decision to enter the war may have been the single most fateful action of the 20th century, causing untold and unending misery and destruction. But Morgan profits were expanded and assured.

    The Fortuitous Fed

    The massive U.S. loans to the Allies, and the subsequent American entry into the war, could not have been financed by the relatively hard-money, gold standard system that existed before 1914. Fortuitously, an institution was established at the end of 1913 that made the loans and war finance possible: the Federal Reserve System. By centralizing reserves, by providing a government-privileged lender of last resort to the banks, the Fed enabled the banking system to inflate money and credit, finance loans to the Allies, and float massive deficits once the U.S. entered the war. In addition, the seemingly odd Fed policy of creating an acceptance market out of thin air by standing ready to purchase acceptance at a subsidized rate, enabled the Fed to rediscount acceptance on munitions exports.

    The Federal Reserve was the outgrowth of five years of planning, amending, and compromising among various politicians and concerned financial groups, led by the major financial interests, including the Morgans, the Rockefellers, and the Kuhn, Loebs, along with their assorted economists and technicians.

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  5. Also, I don't dispute your quote about the depression giving rise to Hitler in the short run. Of course, it was government that caused the depression.

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  6. "LK, what’s the Post Keynesian alternative narrative to this excellent Rothbard gem "

    How idiotic can you get. Post Keynesianism is about economics, not about counterfacturals in history, where moral judgements are involved. Nor does value-free Misesian praxeology deal in historical counterfacturals, where moral judgements are involved.

    You're asking a question about historians and philosophy of history.

    And there are many counterfacturals that could be imagined where WWI and WWII never took place:

    (1) in 1929-1933, nations around the world could have used Keynesian economics to prevent the takeover of some states by fascists;

    (2) in 1933-1939, Britain, the US and France could have avoided the moral disgrace of appeasement and intervened to end the madness of Nazi Germany;

    (3) Germany may never have been unified in 1871, if the US, Russia and Britain had stopped Bismark from provoking France into the Franco-Prussian war, and creating the imperial German state;

    (4) The liberal German Emperor Frederick III (1831-1888) may not have died from cancer in 1888, and instead taken Germany down a different path from Kaiser Wilhelm II, avoiding WWI and hence WWII;

    (5) Russia may have been politically liberalised in the 19th century, went down an entirely different path from Tsarist autocracy, been a much stronger state, and been a massive check to all forms of German aggression in the 20th century.

    And the list goes on and on.

    As for American entry into World War I, it may very well have prevented a peace deal - or if it did not happen may have led to the German conquest of Europe and the UK, leading to the enslavement of millions of people to statist German and Hapsburg imperialism, rather than the existence of more liberal and free nation states.

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  7. "Of course, it was government that caused the depression."

    No, it wasn't: it was unregulated financial markets, excessive private debt, asset price inflation, and then debt deflation.

    Government regulation and intervention was the solution.

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  8. The price inflation, excessive private debt, and debt deflation did not just "happen" all on its own it happened because the Fed increased the money supply.

    "The total of uncovered, or “counterfeited,” dollars increased
    from $42.1 to $68.8 billion in the eight-year period, an increase of
    63.4 percent contrasting to an increase of 15 percent in the gold
    reserve."- from Rothbard's AGD


    You cant regulate away a recession. The depression lasted so long precisley because of government and keynesianism. You're so wrong

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  9. "The depression lasted so long precisley because of government and keynesianism. "

    Keynesianism - the use of countercyclical fiscal policy to counteract GDP collapse - did not even exist in the US in the 1920s, and it was not until 1933/1934/1935 when Roosevelt was elected that was it tried in moderate form: the result was recovery and high GDP growth and falling unemployment right down to Roosevelt's diastrous turn to budget balancing in 1936.

    The assertion that the depression was caused by or prolonged by Keynesianism is utterly ridiculous.

    As for money creation, this occurs many times
    without causing depression: it was a largely unregulated financial sector that was the prime cause of lending and asset price speculation - the real culprit.

    And even if you had 100% commodity money, you could still get asset bubbles via foreign money flowing into your country via the capital account.

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  10. I think Rothbard is much more consistent than Mises here, even if he is somewhat confusing in his writings. We should never forget that he was a very strong ideologue, and thus he kept appraising capitalism for some features and downplaying its defects. Anyway, he is much more consistent because he says that, from the perspective of a "praxeologist", you cannot determine if a given firm is acting monopolistically or not. So, using the Misesian tools, one should necesarily arrive at Rothbard's conclusion. That doesn't mean it's right, of course; it only means that Mises's and Kirzner's solutions must necesarily be reached with another kind of reasoning.

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  11. "The issue is whether they set prices in ways that are above what the price would be in more competitive markets, and how price setting activities in the real world lead to price rigidities."

    How do you even know what the price would be in such-and-such condition? You don't. Prices change from day to day, place to place, time to time. They could be anything.

    You don't have any grounds to say how prices would be or could be lower. Perhaps a commission might order a demerger of a soft drink company that sells a particular brand of drinks for $1.50. And the price of the drink offered by one of the smaller demerged companies could still be $1.50. If there is a sudden sugar shortage after this demerger, its price could be $1.60. Or if the demerger leads to increased cost of raw materials, due to two smaller companies bidding against each other to buy those raw materials, then the price could still be higher. A million conditions could be possibly set out.

    Economists must stop wasting their time and energy speculating what would be the price of X good if X good were offered by a business of any arbitrary size in any arbitrarily large market. The only price that actually becomes a reality is the one that is offered. That is only price we know. There is no "price that could have been".

    No economist has the prescience or omniscience to determine what would be the price of anything if he changed market conditions to his desired preference.

    You - the radical subjectivist - should know better.

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  12. I think this is a subject you should spend more time on. Many Austrians claim that there would be no monopolies on a free market. However, they don't usually mention oligopolies. It would be interesting to hear their perspective on this subject. Also, people like Stefbot have convinced many of the fan boys on the subject of monopolies and many of them view this subject as their strength. I believe this is because almost every person's repsonse to free markets is that they wouldn't work because of the tendency toward monopoly. If their is a hole in their thinking, you should expose it.

    In The Elgar Companion to Post Keynesian Ecnomics (the chapter on Compeition) it states, "The perfect compeition idealized in ecnomics is far from ideal - it bankrupts firms and renders prices more volatile. The worst-performing markets of the economy are the ones that come closest to the perfectly competive markets of the economic texts, and it is because firms cannot operate under the price compeition of those commodity markets that they consolidate their industires and differentiate their products."

    The book lists 2 sources for this statements: "The Emergence of Oligopoly" by Eichner and Kaldor 1985. I don't own either book but if true, this would really put a hole in the Austrian perspective. The chapter basically says compeition as imagined by Austrians (I realize they don't believe in perfect compeition but I think the theory holds) are basically unstable. Hope that helps.

    I've checked my resources and appartenly, PKs don't really seem to have a theory on how and why monopolies come into existence. Do you have any links, books, or material on this subject?

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  13. On Post Keynesian theory of monopoly I would start with Steve Keen's "pragmatic" view:

    "The proper manner in which the issue of 'monopoly versus competition' should be approached is a case by case basis, where the merits of one form or the other of organising production can be dispassionately considered. The instinctive economic bias against monopoly should be replaced by something rather more intelligent.
    ...
    [sc. However,] The fact that there is no substance to the economic critique of monopolies does not mean that monopolies are good ..."

    See here:

    http://books.google.com.au/books?id=KdITT4ukfhoC&pg=PA108&dq=Steve+keen+%22monopolies%22&cd=1#v=onepage&q&f=false

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  14. This idea that Central Banking and "funny money" aka, simple nonconvertible fiat notes cause wars is just plain bullshit. Like stating that guns start wars and baseball bats kill people.
    Various societies were slaughtering, conquering, pillaging, and enslaving others throughout history well before notions like central banking arose. Plenty of wars and genocides were committed by states who were under the gold standard. Remember the conquistadors? Remember the british in India, in Africa et all?
    Furthermore it is absurd to blame tools such as bookkeeping methods for things like Hitler, WW1 and WW2. A man can use a hammer to put a nail in a board or he can use it to do harm to someone. Cyber-libertarians are equally zombie in thinking as the damned zombie economics they spew uncritically, despite the fact that a posteriori reasoning clearly destroys their a priori fairy tales about history, human behavior, and economic reality.

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