One of the most controversial areas in Austrian economics is monopoly theory. The differences are not merely semantic, nor are they confined to detail or some minor theoretical implication. Rather, there are major and fundamental disagreements: wholly different theories concerning the definition of monopoly, the origins of monopoly, and the supposed effects of monopoly on consumer sovereignty and efficient resource allocation. FULL ARTICLE
Source link: http://archive.mises.org/3514/a-critique-of-neoclassical-and-austrian-monopoly-theory/
A Critique of Neoclassical and Austrian Monopoly Theory
Previous post: Rothbard’s History of Money and Banking (US), now in hardcover
Next post: Libertarianism of a sort
{ 24 comments }
“if the world contained zombie-like consumers with homogeneous tastes,”
That’s exactly what the world contains. Blocks of consumers with homogeneous tastes.
The problem with any pre WW2 economic theory is that they describe a world where 80% of one’s life energy is spent staying alive. These days in the USofA and most civilized countries 80% of our life energy is used to obtain non-necessities, optional purchases. No one “needs” anything sold in the typical mall.
Was written “These days in the USofA and most civilized countries 80% of our life energy is used to obtain non-necessities, optional purchases. No one “needs” anything sold in the typical mall.”
How do you know that? Ever heard of values being subjective?
This article is a nice overview of Austrian theories of monopoly. However, I’m not sure if it does justice to neo-classical monopoly theory. The neo-classical model shows pretty conclusively that monopoly pricing will result in an overall “deadwight” lost to society. Given this model, it’s hard to argue that monopolies can never be a problem. It may be that in a truly free market — with zero tariffs, deep capital markets, and no legal barriers to entry — monopolies will be rare and shortlived, and thus of little concern to the public. But these are empirical questions — and Austrians, alas, have never been strong on empirical questions.
Bruce:
The article does support the argument that monopoly pricing presents a deadweight loss to society and that monopolies are a problem. However, as you allude to, it argues monopolies are of little concern in a truly free market. But why this is the case is what is interesting: The only useful and logical definition of monopoly is one that arises from state coercion. In a free market, there is no valid Austrian criterion that allows us to distinguish between a monopolist, and any other market participant; they behave the same way. This is why the article concludes with “…any and all state restrictions are “monopolistic,” competition reducing, and destructive of consumer satisfaction vis-à -vis alternative free-market situations” and that “…this particular theory of monopoly is the only theory that meets all the standard critical objections and remains entirely consistent with the general Austrian methodology.”
Paul, thanks for your comment. My only quibble is with the notion that “monopoly” should be defined/defined in terms of state coercion. That virtually rules out a priori any resort to antitrust laws to curb practices that would clearly be against the public interest (assuming they exist — which is an empirical question). Maybe this just reflects broader problems with Austrian approaches: Austrians seem to resolve all economic questions in terms of first principles or “logic” or definitions. This makes for tidy theorizing but falls flat in the face of real-world policy issues, which invariably have a strong empirical component. This may be one reason why Austrians remain so marginalized in the economics profession. I’d be interested in your thought on this.
Bruce, you can expand the definition of monopoly to include coercion by individuals as well as state coercion. But that does not invalidate the original definition: to the extent that the state is the guarantor of our safety, the failure of the state to consistently oppose individual coercion can be laid at its feet. Just remember to restrict yourself to the narrow definition of coercion: the use of force or the threat of force. There is a tendency to expand it for political reasons to include vague things like “economic coercion”.
You said you don’t like that Austrians seem to resolve all economic questions in terms of first principles or “logic” or definitions. Now, how can you disparage the use of logic? Are you saying there exists a statement X such that X is false BECAUSE IT RELIES ON LOGIC?
With or without the use of logic, you should try to accurately define the terms you use. Terms such as “monopoly”, “public interest”, “falls flat” and “real-world policy issues”. The more you try, the easier it will be for you to see the fallacies. Then read Chapter 10 of Rothbard’s “Man, Economy, State” on Monopoly and Competition — we’ll make an Austrian of you yet.
Austrian economics, by limiting itself to logically consistent theories, is less useful for policy prescriptions. And that is a good thing. As with Copernicus, being marginalized is irrelevant, being correct is not.
Hi Bruce, You have a point regarding why the Austrians were and are on the outside with respect to the establishment. They insisted and still insist on holding to conclusions that are consistent with sound economic principles and the accurate application logic. This Austrian approach is entirely inconsistent with the approach and aims of the establishment, which is to tax and spend, inflate and regulate and offer special privileges to favored groups of people. This also explains the great success that Keynes had in presenting his ideas, which were not new, but gave a new legitimacy to what the government wanted to do and had been doing all along.
What this article is saying to me is this: (Harmful) Monopoly is solely a creation of the state. To curb it at all, one must curb the state. State initiated antitrust laws will not solve the problem, but more likely, as state solutions tend to do, exacerbate it, or create new ones, or both; free markets are the only solution to the nastiness of monopoly. Even if people are unwilling or unable to recognize these facts, does not diminish them in any way.
Brent, I think your last paragraph — about the difficulty of applying Austrian economics to public policy issues — confirms my point. You know the textbook analysis of monopoly: if a firm can change the market price by varying its output, then profit-maximizing behavior will create a “deadweight” loss to society. Coercion may not be involved — but there is clearly an issue for public policy. Or do Austrians deny that “deadweight” loss is an issue for policy? My point here is not to rehearse undergraduate economics but to question whether an a priori Austrian approach has much to offer to practical policymakers, at least in the area of antitrust.
Brent, Paul: Probably one thing we can agree on is that the lowering of tariffs and import barriers over the last 40 years has reduced the extent of monopoly in the economy — however we define “monopoly.” That’s reason for Austrians and neo-classicals alike to celebrate. Thanks for the discussion.
There are two market prices in your example, Bruce: one the day before the firm varied its output and one the day after it varied its output. If both are coercion-free, why is one valid and the other invalid from the point of anti-trust? All buyers are willing. All sellers are willing.
If you try to compare those two real world cases to show your deadweight loss, you will not be able to isolate just the effect of the firm’s actions, the rest of the world acted that day as well. But I will grant that you can estimate it. What does that get you? A number approximating the difference an action made on the firm’s profits. Implied is that the same number represents the difference the action made on the consumer’s pocketbooks.
The policy prescription no doubt would be to force the firm to sell at the original price. The result is that the consumers make more efficient use of their money in buying the firm’s product and *the firm makes less efficient use of their product in buying money*. To suggest that one is better or more legitimate than the other is to make a value judgement that Austrians will not accept as a logical truism.
So yes, I believe that Austrians would deny that deadweight loss is an issue for government policy. You are right to question whether Austrian economics has much to offer practical policymakers — in the way of providing excuses for state intervention.
Brent, maybe I misunderstood your last posting, but the neoclassical view is NOT that monopoly is bad because it transfers wealth from consumers to monopolistic firms. The “deadweight” loss of monopoly is the NET wealth loss to society after transfers take place between consumers and firms. You could argue that, in practice, monopoly isn’t much of a problem in a truly free market economy. But why shouldn’t the possibility of net wealth loss to society be a legitimate concern of public policy? Why do Austrians define the problem out of existence? This seems more like metaphysics or ideology than economics.
A voluntary trade, that both parties believe is to their benefit, cannot result in a “net wealth loss to society.” On the contrary both parties acted because the trade would increase their personal wealth. They traded something they valued less for something they valued more, so they are wealthier after the trade. To say otherwise is to say that their measure of wealth is wrong.
Rather than defend the Austrian school for defining “net wealth loss to society” out of existence, I would accuse the neoclassical school of defining it into existence by assuming that wealth is measured with a single yardstick. Somewhere in the neoclassical calculation, two apples are being added to two foot massages to get four units of wealth.
If this sounds more like philosophy than econometrics, it is because the Austrian school and neoclassical school disagree on the basic assumptions underlying the graphs and calculations, not on their details. We can agree that 2+2=4, we just think you’re cheating and using that to prove that 2x+2y=4z.
Bruce, I know this is probably not what you wanted to hear. All I can suggest is that if you post (or link to) a lemonade stand example of the “net wealth loss to society” caused by a monopoly, someone will take a poke at exposing the differences between the schools.
Regarding the value of an Austrian viewpoint to practical policymakers, I would say the Austrian view would be good for finding the forgotten man, for unearthing side effects of a policy that may not be obvious.
Bruce, here is the answer to your question whether and why for Austrians completely neglect “deadweight loses” as the public policy problem. Yes, they certainly neglect it because the very notion of DWL is impossible to define independently from the current market operations. In the famous Robert Bork’s example, antitrust regulators should compare net effects of DWL and cost savings deriving from economy of scale, and decide so as to maximize overall welfare. But, problem is here, how you can calculate costs (“deadweight” or any other) independently from the market. If regulators know those data ex ante, than very existence of the free market is the scandal from the point of view of “efficiency”. You must make the chioce – whether voluntary buing form the consumer side is the paramount way of allocating resources, or it is the regulatory decission made by government or judges independently from the market,i.e. free will of consumers. If you choose later, you must advocate central planing, because your prudent regulator or judge knows all necessary economic data ex ante, so very market becomes unnecessary.
I guess it was inevitable that someone would accuse me of advocating central planning. When debating Austrians, that’s usually a good sign to bring the debate to an amicable close. But interested readers should know that the neoclassical theory of monopoly is virtually canonical and can be found in any basic college economics text or antitrust law book. Austrians should check them out and compare them with the relevant sections of Human Action or Man, Economy, and State. It’s a fascinating field.
For one Bruce, you explicitly advocate central planning. As to the metaphysics, clearly it is the “deadweight loss” claim that nonsensical. “Society” cannot exist in any real sense, and because value subjective, society cannot hold “values” such that it could suffer a loss. Deadweight loss is just a silly artifact generated by stupid penciling of graphs. It may make for tidy theorizing, but has no relationship with reality.
As far as looking things up in a “standard textbook”, anyone who has knows there is not much useful information contained in such.
As to why Austrian Economics is marginalized, it is because it cannot be monkeyed with to fit “policy goals” in the way interventionists would want.
“I guess it was inevitable that someone would accuse me of advocating central planning. When debating Austrians, that’s usually a good sign to bring the debate to an amicable close. But interested readers should know that the neoclassical theory of monopoly is virtually canonical and can be found in any basic college economics text or antitrust law book. Austrians should check them out and compare them with the relevant sections of Human Action or Man, Economy, and State. It’s a fascinating field.”
Do you advocate central planning? I’m just curious.. most Austrians are notoriously hostile to suggestions of central planning, for obvious reasons; the growth of government is probably monitored in the Austrian movement more than others.
Austrian economics doesn’t advocate policy goals in that some things are too subjective to advocate any real policy – such as wage rates and prices, for example. This is why Austrians seem to shy away from making policy descriptions.
On another train of thought, what do you think is the proper realm of economics? Policy goals, or mostly theoretical work, or empirical?
While I think you probably took the debate to its end, Pete, I totally agree. Is this a case of the good ‘ol reductio ad statism?
As to this “deadweight loss”. You know, there is an argument to be made that DWL qua a falling short of “society” producing the maximum possible stock of goods is a pretty scary principle. Why stop at something vaguely recognized as “monopoly”? Why not go further? Are there not many, many other impedements which occlude maximum material growth of wealth? Come up with a list in your head right now. It isn’t hard. I’m just saying…
–Adam
Alex, no, I don’t advocate central planning. In fact, I don’t know how anyone could possibly interpret what I said as pro-central planning — let alone as “explict” advocacy. Perhaps Mr. Canning regards antitrust laws as tantamount to central planning. That would be idosyncratic but consistent with some Austrians’ approaches to polemics. ‘Nuff said. On to the next article.
Bruce,
It is a fact that antitrust laws are interventionism. Perhaps the better accusation would be that you advocate the State interfering with voluntary interactions between individuals.
I guess I just have a funny definition of central planning. What do you call it when the government (a central authority) makes decisions (plans) about what is best for you?
Here is an Article on the deadweight loss of Christmas.
“Deadweight loss consists of the net loss in social welfare on account of benefits differing from the foregone opportunity cost. Usually, this is some combination of lost consumers’ surplus and lost producers’ surplus.”
The Austrian argument for Christmas is simple: the only purchase involved is the initial purchase by the gift-giver. He expects that by giving the gift his happiness will be increased, whether by receiving a reciprocal gift or by the satisfaction of performing a good deed or by the look on his niece’s face when she unwraps a big ol’ cow kidney. [I guess you had to be there for that one]. You cannot say that some other use of that kidney would be better without making an interpersonal value judgement. [The look was priceless, the niece will certainly think twice before passing along any more urban legends about waking up in a bathtub full of ice missing a body part, and she may very well be a vegetarian now].
To compare what the niece says she would have paid for a cow’s kidney to what her uncle actually paid for it and conclude that there is a “loss to society” is ridiculous. If you accept that there exists this loss, is the loss to society borne the moment the gift is purchased or the moment it is given? Neither the number of dollars in society nor the number of [kidneys] in society has changed.
Every seller has a monopoly and no seller has a monopoly. It all depends on how you define the specific market, because only then can we determine what the substitutes are.
For instance, I am a monopoly seller of all manual labor which comes from my own body. But I’m not a monopoly seller of manual labor. There is no substitute for my specific labor if the market is for my specific labor — for instance, suppose my name is Babe Ruth and fans want to pay to see me specifically. Then there is no substitute. But if we define the market in such a way that fans want to see someone bash homeruns, then we’ve got substitutes.
And since substitutes exist for everything if we just define markets that way, monopoly theory is trash and pointless.
There’s a spell-checking error towards the end of the article. It says “choke” one place where it should say “choice” I believe. As in consumer choke.
I enjoyed the introduction to various theories of monopoly. Good article for the most part.
Tracy
Thanks for the interesting information that ipicked up!
Comments on this entry are closed.