What is the telltale sign of economic illiteracy?
I’m starting to believe that the worst part is the claim that markets lead to monopoly and the accumulation of wealth in a few hands. Why? Because it doesn’t make sense at first glance and doesn’t have a logical explanation, so it’s indicative
of fundamental confusion and misunderstanding.
Certainly, many great thinkers have been fooled by this, including Joseph Schumpeter (the old pessimist, not the young optimist). It is nevertheless a fundamental error. This error does not lie in the fact that some, if not many, businessmen aspire to empire, that companies and businessmen would like and perhaps wish to have a monopoly, or that they seek the most profit, but confuse the objectives of individual actors for the mechanism they collectively understand. It is like determining the function of money in the economy by studying a dollar bill.
Little or nothing will come out of it, because the instance is not the function.
This difference is captured in the slogans “promarket, not pro-business” or “free market anti-capitalism”, which have similar meanings here. The heart of the market is voluntary exchange undertaken for private purposes. But in a voluntary (non-fraudulent) exchange, both parties, not one, anticipate a gain. There is no transfer of wealth, but an increase on both sides.
The market includes all voluntary trade and sees no barriers to entry other than scarcity – you can’t trade what you don’t have.
Markets alleviate the burden of scarcity on society by determining relative values (prices) and through them allocate resources to the most productive hands (from the consumers’ point of view, i.e. the creation of value ). In this situation, we can only accumulate wealth through production followed by an exchange that should benefit consumers, who are the last arbiter of value. Even if one monopolizes a precious resource, it is only of value when it is used
production. If I had to monopolize the meat, I could only use this situation to my advantage by selling the meat.
The typical counter-argument is that certain resources are needed for certain forms of production, so that the monopolist can derive rents from the rest of the economy. This is only true in a static world, however. In a world where we learn, discover and innovate, these resources do not exist.
In fact, a person’s lasting monopoly on a precious resource means two things: first, it is a great incentive for entrepreneurs to focus their efforts and their imaginations on finding alternatives (which are always possible because nothing in this world is not entirely specific), and, second, it makes the monopolist relatively poorer as long as he does not put the resource to good use.
Only by using the resource (i.e. using it for the benefit of consumers) does it become valuable and can generate income for the owner. In other words, it is by undermining their monopoly that the owner is best served. It is also by using (and therefore sharing) the resource that innovations that can undermine its value can be limited.
In fact, the more efficiently a resource is used to satisfy consumers, the more valuable it is. In addition, the less troublesome the monopoly, which means that innovation efforts are directed elsewhere, the better.
The market simply does not provide a mechanism for monopolists to exploit consumers. The value of any resource derives from the valuable contribution it offers to consumers, which means that capital and resources are valuable because consumers decide they are. The owner is a servant of consumers, not the other way around.
So why do we see monopolies in the “market economy”?
Why do we see immense inequality?
It is not the result of a voluntary exchange, because this mechanism benefits everyone by improving their positions – and society as a whole by producing a more advantageous allocation of resources. The only reasonable and logical explanation is that something skewed the voluntary exchange. Typically, it is the burden of regulations, which almost exclusively impose costs and limit the entry of competitors and thus indirectly protect incumbents, who no longer meet consumers on fully marketable terms.
In other words, the market mechanism is partially knocked out and therefore the result is also distorted. By not letting the market mechanism function fully, some of the most beneficial exchanges will no longer take place, which is a loss for these parties. As a result, some resources – especially those that are shielded from competition – become relatively overvalued and offer their owners more benefits than consumers justify. As long as they are protected from
(rather than subject to) the market mechanism, they can profit from the position.
This is the real problem of monopoly – not that someone is the sole seller or supplier of a resource, but that monopolists are artificially protected and therefore no longer subject to the benefits of consumers. Market logic no longer applies, which is why we see these problems. For this to happen, a market does not need to be fully nationalized or controlled by the government. It suffices to circumscribe the market mechanism, and thus to orient
entrepreneurs to activities that otherwise would not have been their first choice, in order to bring about very distorted results. The more the restrictions affect the market mechanism and limit the area of voluntary trade, the heavier the burden is on consumers.
The common misconception that voluntary exchange leads to monopoly and the accumulation of wealth is, therefore, the exact opposite of what follows from market logic.
More regulation cannot solve this problem, because regulation East the problem.
It is very unfortunate that so many do not ask themselves what mechanism could or must have caused the problems they observe. There is no conceivable way by which voluntary exchange can lead a producer to a position of ‘market power’, because production is only valuable because consumers think it is – and this is based on their opportunity costs: comparing the earned value versus what other value can be earned instead. A monopolist who drives up selling prices pushes customers elsewhere, prompts them to consider other options, and offers entrepreneurs increased profit incentives to find ways to serve consumers without involving the monopolist.
It is only by restricting these logical outcomes that the monopolist can gain market power. These restrictions are imposed on the market, usually by the government, but they are not part of the market.
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