“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 setter, 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.
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.