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CREATING MONOPOLIES THAT CONTROL US |
In the last few chapters, we've seen how the aggression of licensing laws restricts the number of service providers. The disadvantaged individual, no longer able to get medical training through night school or apprenticeship, finds obtaining a medical license arduous, if not impossible. Small pharmaceutical firms find it increasingly difficult to meet the costs of FDA requirements. Well-to-do individuals and businesses move toward a monopoly on wealth creation. This aggression-through-government has other fallout too.
The rich not only get richer, they also have more power over our choices
-and our lives. In trying to control selfish others, we find ourselves controlled
by those hired to protect us! Like a fly caught in the spider's web, further
aggression only entraps us more. When we add a layer of aggression in the form of licensing
laws or regulations, some goods and services are outlawed by the licensing
agencies. As a result, First Layer goods and services are not as broad and
wide as the Base. Prices go up as availability goes down. Consumers' choices
are limited to licensed items or those they can provide themselves. Licensing is exclusive when all but a single monopoly provider is stopped-at gunpoint, if necessary-from serving consumers. When this Second Layer of aggression is added to the First, costs go up further as the choice of goods and services becomes even narrower. Consumers must buy the monopoly service, do without, or provide their own. Utilities are the most common example of Second Layer aggression. Later in this chapter, we'll see how giving utilities an exclusive monopoly has created our energy dependency. With every layer of aggression, those privileged by the licensing laws gain more control over our choices. A Third Layer of aggression is added to the Pyramid when those people who don't use the Second Layer monopoly service are forced-at gunpoint, if necessary- to subsidize those who do. Usually, such services are provided by a government department rather than a private firm. Part of their cost is subsidized by the taxpayer. Public services usually cost twice as much as those provided by a private firm, for reasons we'll explore shortly. Even if consumers choose to do without or provide their own service, they must still subsidize the mono-poly! The most devastating effect of Third Layer aggression, its environmental impact, is detailed in the next chapter. The Fourth Layer of aggression is added to the Pyramid
when consumers are forced- at gunpoint, if necessary- to use the
subsidized monopoly service. Doing without or providing their own is no
longer an option. With every layer of aggression, consumers have fewer choices
until finally they have no choice at all! Chapters 9 (Banking on Aggression)
and 10 (Learning Lessons Our Schools Can't Teach) show how our
desire to control others creates the Pyramid of Power, giving others control
over every aspect of our lives! In spite of its prominence, Standard Oil was unable to raise prices without encouraging fledgling competitors to lure customers away by selling for less. The marketplace ecosystem, free from the aggression of licensing laws, protected the consumer from being overcharged. Rockefeller tried to organize independent oil refiners to keep the price of oil high (9) in much the same way that Southern landowners had colluded to pay slave wages to blacks after the Civil War. Just as some landowners found they could profit by paying their workers a little more than anyone else, refiners who lowered their prices were able to attract more business. Without the help of government enforcement to make the oil refiners cooperate, Rockefeller found that the marketplace ecosystem, when free from aggression, regulated his attempts to exploit his customers. Having failed to fix prices, Rockefeller tried to buy out his competitors. Since he did not have the help of government to force them to sell, he had to make them an offer they would not refuse. Encouraged by Rockefeller's story of rags to riches, young hopefuls tried to gain part of the giant's market share by offering to take less profit so customers would be attracted by their lower prices. Naturally, many consumers were willing to take a chance on a new refiner that offered them a better deal than Standard Oil would. Barely four years after attaining 90% of the market, Standard Oil's competitors had doubled their volume.8 In 1884, almost 100 refineries were processing 23% of the crude. (10) Competition also began to stiffen on the international front. In 1882, Standard refined 85% of the world's oil; by 1888, Russian oil had cut Standard's world market share to 53%. (11) In the early 1900s, natural gas also began to be used as a substitute for kerosene. (12) Without the aggression of licensing laws to prevent competition and innovation, Rocke-feller could keep his monopoly only as long as he served consumers better than anyone else. Obviously, few companies can accomplish this feat for extended periods of time. Of course, being large gave Rockefeller certain advantages. The railroads gave Rockefeller special shipping rates because of the volume and steadiness of his business. Although his competitors objected, the railroads offered the same discounts to any other firm who could give them as much business. (13) No other companies could match the volume of Standard or get the discount. Price wars to undersell competitors were also easier for the industry giant. They were not entirely successful, however. Rockefeller stopped letting the public know when he acquired an independent firm, since some consumers had begun to shun Standard Oil because they did not wish to further the mammoth's influence. (14) Without permission from the American citizenry to use law enforcement agents to stop his competitors - at gunpoint, if necessary - Rockefeller was unable to maintain his monopoly - even if he practiced deception. By 1911, Standard refined only 64% of the available petroleum in contrast to the 90% it refined 32 years earlier. The competition included Gulf, Texaco, Union, Pure, and Shell.15 More and more consumers turned to natural gas and electricity. The marketplace ecosystem, free from the aggression of licensing laws, ensured that Rockefeller could keep his monopoly only as long as he could serve consumers best. Like other natural ecosystems, the marketplace ecosystem is self-regulating. The antitrust conviction in 1911 against Standard Oil, paid for with our tax dollars, was rather redundant. Consumers had already chosen to give a large share of their business to other firms with new technologies, possibly in response to Rockefeller's own unsavory tactics. As Rockefeller's monopoly rose and fell, Bell Telephone, which eventually evolved into AT&T, learned a lesson from Standard Oil. Instead of trying to serve consumers best, Bell asked American consumers to use aggression against its competitors. Before 1894, Bell Telephone's patents protected it from competition by other firms. Its growth averaged 16% per year; annual profits approached 40% of its capital. (16) Bell catered primarily to the business sector and the wealthy. When the patents expired, other companies began providing affordable telephone service to the middle class and rural areas.17 The independents charged less since customers could call only those serviced by the same company. Consumers were evidently pleased to make such a tradeoff; by 1907, some 20,000 independents controlled half of all the new telephone installations. The number of phones zoomed from 266,000 in 1893 to 6.1 million in 1907. The independents matched Bell's monopoly market share in 14 short years. (16,18) Competition from the independents had caused annual Bell profits to plummet from 40% to 8%16 as many consumers chose the independents who served them best. The marketplace ecosystem was again protecting consumers from monopoly profits. As telephones went from a curiosity to a standard household utility, the independents began developing a plan for sharing each other's lines to avoid duplication and to increase the number of phones each customer could call. (19) The marketplace ecosystem was again working to promote cooperation for the benefit of the consumer, without aggression. Service providers voluntarily sought to give the customer better service because they would, in turn, be rewarded by more business and the positive feedback of profit. Aggression Disrupts the Marketplace Ecosystem Theodore Vail, Bell's new chairman, was determined to regain a monopoly market. He asked Americans to use the aggression of exclusive licensing against the independents that had served them so well. He claimed that competition caused duplication and penalized the customer (i.e., telephone service was a "natural" monopoly). (19) Had this been true, the independents would never have been able to lure customers from the established Bell monopoly in the first place! If our neighbor George asked us to stop - at gunpoint,
if necessary-everyone other than himself who tried to provide services to
willing customers, we'd probably be very suspicious of his motives. Nevertheless,
by 1910, Americans were persuaded to accept Bell's proposal. The government
of each local community would allow only one telephone company to operate
in that region. Other companies would be stopped-at gunpoint, if necessary-from
providing service to willing customers. Since Bell was the largest single
company, it was in the best position to lobby the state utility commissions
effectively and was almost always chosen over the independents. During the depression of the 1930s, AT&T stock continued to pay handsome dividends. (21) If subscribers didn't like subsidizing AT&T's new ventures and investor portfolios, they were not free to choose another telephone company whose prices didn't reflect such extras. People could protest only by not having phone service. Evidently, many people elected to do just that. From 1914 to 1934, annual growth rate slowed to less than 5% compared to 27% between 1894 and 1907 when the marketplace ecosystem was less dominated by aggression. (22) Since there was only one phone per ten people, this lower growth rate probably reflected consumer choice, rather than market saturation. (23) Our aggression cost more than excessive charges for phone service. As the wealth of AT&T increased and its research had an impact on other industries, the Justice Department brought antitrust suits with our tax dollars to keep AT&T out of radio, television, and movies. (24) In addition to paying higher prices, Americans paid taxes to regulate the monopoly (estimated costs of $1.1 billion per year). (25) In the marketplace ecosystem free from aggression, none of these expenses would be necessary. In 1984, an antitrust suit, paid for with our tax dollars, eliminated AT&T's 75-year monopoly in long-distance service. As new long-distance companies served the consumer better for less, rates plummeted 30% over the next five years. (26) The marketplace ecosystem protected consumers well when aggression was outlawed. However, the cost of local service, still monopolized by exclusive licensing, went up 50% during the same period! (27) Seven of the "Baby Bells," which were split off from AT&T by the antitrust ruling, earned 25% more than the top 1,000 U.S. firms in 1987. (28) Why? Local phone companies were allowed to charge extra fees as compensation for loss of AT&T's long distance monopoly! (28) Not only do we pay higher prices to the local phone monopoly, we also pay for its regulation, for antitrust suits to break it up, and compensation for no longer getting monopoly status! Is this consumer protection? Although other companies cannot sell local phone service, they are allowed to bypass AT&T's network by using their own phone lines, microwave routing, or satellite systems. By the late 1980s, more business phones were serviced through private exchanges than by conventional phone lines. (29) Businesses find these systems more economical, suggesting that once again the consumer is being overcharged by the local telephone monopoly. Even the Federal Communications Commission, the government agency in charge of regulating AT&T, bypasses the local phone network! (30) What a shame that the aggression of licensing laws keeps the average consumer from taking advantage of the cost savings of these innovative technologies! The telephone industry is just one example of a natural monopoly that is not so natural after all. If an industry profits by being large, smaller companies will find it in their best interest to merge or cooperate with each other as the independent telephone companies did. The aggression of monopoly licensing is neither necessary nor desirable. When consumers are not allowed to vote with their dollars for the service provider that pleases them the most, customer-pleasing goes down and costs go up. The regulator of the marketplace ecosystem, the consumer, is bypassed. Even when we lower the guns of government just enough to
permit one other choice of service provider, the consumer is empowered.
Quality service costs less. For example, in the few cities that license
two power companies instead of one, prices are lower than regions where
only one company is permitted to provide service. (31) Unfortunately, higher
costs are only a small part of the price we pay for our aggression. Monopoly-by-aggression has contributed greatly to our dependence on fossil fuels. In the early 1900s, for example, several paper companies used cogeneration to produce cheap electricity from steam. These efficient producers were told they would be stopped- at gunpoint, if necessary from selling their electricity because of the monopoly licensing bestowed on public utilities. (34) Small plants using alternative energy sources were also banned. Centralized energy production was best accomplished by
fossil fuels. Utilities had no incentive to conserve on fuel or develop
alternative energy methods because their profit was determined by politicians,
not by the consumers they served. Adding that Second Layer of aggression carries some hefty costs in terms of selection, cost, and environmental quality. As we'll see in the next chapter, however, adding Third Layer aggression makes Second Layer environmental insults look like tender loving care! |
Monopoly: A right granted by a government, giving exclusive control over a specified commercial activity to a single party. - AMERICAN HERITAGE DICTIONARY, 1982.
Bureaucratic Rule of Two: Removal of an activity from the private to the public sector will double its unit cost of production. - Thomas Borcherding, BUDGETS AND BUREAUCRATS: THE SOURCES OF GOVERNMENT GROWTH
We must ever remember we are refining oil for the poor man and he must have it cheap and good. - John D. Rockerfeller
...the richest people in the world are those who've done best at pleasing others, especially the common man... Henry Ford became richer than Bentley; Ford made cars for the common man... The pursuit of profits is the activity most consistent with human needs. - Walter Williams, ALL IT TAKES IS GUTS
...economists have long known that business (that is, non-governmental) monopolies are short-lived. - Peter Drucker, INNOVATION AND ENTREPENEURSHIP
It has been in periods of untidy, tumultuous competition that products have been democratized and have gone through their most rapid rate of growth and innovation. - Peter Samuel, UNNATURAL MONOPOLIES
Firms receive their income, in the final analysis, from serving consumers. The more efficiently and ably the firms anticipate and serve consumer demand, the greater their profits; the less ably, the less their profits... - Murray Rothbard, Professor of Economics, University of Nevada
The dominant fact of American political life at the beginning of this century was that big business led the struggle for the federal regulation of the economy. - Gabriel Kolko, THE TRIUMPH OF CONSERVATISM
Monopoly favors the rich (on the whole) just as competition (on the whole) favors the poor. - George Watson, Journal of Economic Affairs |