This was originally posted as a series on Live Oaks in August 2009. Comments have not been migrated.
It is frequently argued that certain services–particularly utilities–are “natural monopolies”, which Wikipedia explains as:
In economics, a natural monopoly occurs when, due to the economies of scale of a particular industry, the maximum efficiency of production and distribution is realized through a single supplier.
Natural monopolies arise where the largest supplier in an industry, often the first supplier in a market, has an overwhelming cost advantage over other actual or potential competitors. This tends to be the case in industries where capital costs predominate, creating economies of scale which are large in relation to the size of the market, and hence high barriers to entry; examples include water services and electricity. [links removed]
This argument has plausibility, until one actually looks at reality. It is founded on economic fallacies and moral perversions.
Certainly it is true that many of the services considered “natural monopolies” require substantial investment in infrastructure. But so do many industries, such as Internet service providers, television, and retail chains. Yet, despite the investment required to launch a new business or expand one’s market, each of these industries has an abundance of competition.
The fact is, the investment required is seldom an impediment to providing a service or starting a new business that has the potential to make investors a lot of money. The capital markets–whose purpose is to identify promising business ideas–will gladly direct the necessary financing to any business that is judged to offer profits. A cursory examination of the Wall Street Journal demonstrates this fact almost daily.
There may be instances in which only one business provides a particular service in a specific geographic area–a small town that can only support one drug store is a common example. However, the threat of future competition acts as a regulator on what that business will charge. If it attempts to raise prices to an outrageous level, it will attract competitors. The same holds true of any product or service.
Economically, the “natural monopoly” argument amounts to: Since it costs a lot to build the necessary infrastructure in an industry, government will do everyone a favor and prohibit anyone from even trying. In short, government knows what is best. Rather than allow anyone to be innovative and act on his own judgment, government will declare the issue resolved once and for all.
If this is true of “natural monopolies”, why isn’t it true of other industries? If government can decree that some services are best provided by one entity, then what is to stop government from making a similar decree regarding all industries? The principle of economies of scale is not limited to power lines or water mains.
The enormous material prosperity enjoyed by Americans is the result of freedom—of men acting without interference from others. Thirty years ago, innovations like satellite television and cellular phones were unknown. Had the government decreed the infrastructure requirements for these industries to be too expensive, we would not enjoy the choices we have today.
The economic fallacies underlying the “natural monopoly” argument are not the most important reason for opposing government intervention. Tomorrow I will look at the moral premises that serve as the foundation for these violations of rights.
Part 2
Yesterday I addressed some of the economic fallacies underlying the “natural monopoly” argument. Today I will address the moral premises that “justify” this egregious violation of rights.
The “natural monopoly” argument holds that certain services—such as electricity or water—are best provided by one entity. In such instances, the government grants a monopoly in a particular area and then regulates the industry in the “public interest”. In granting the monopoly, the government prohibits competition.
No matter the judgment of entrepreneurs and businessmen, they cannot enter the industry. If they develop new technology or believe that they can operate more efficiently, they are prevented from offering their innovations. If they can raise the necessary capital and secure the voluntary agreement of all parties (such as property owners), government decree prohibits individuals from using their property as they choose.
At one time the “natural monopoly” argument was used to justify restrictions on telephone service and to award monopolies in cable service. Today, consumers have multiple options in both industries. New technology allowed the provision of these services in a manner that was not and could not be anticipated by government officials. Because men were left free to act on their own judgment, they were able to offer alternatives despite the claims of “natural monopoly” proponents.
One of the claims in defense of the regulation of “natural monopolies” is that a sole service provider could raise prices to an outrageous level, that is, become a “coercive monopolies”. Ayn Rand addressed such phenomenon:
A “coercive monopoly” is a business concern that can set its prices and production policies independent of the market, with immunity from competition, from the law of supply and demand. An economy dominated by such monopolies would be rigid and stagnant.
The necessary precondition of a coercive monopoly is closed entry—the barring of all competing producers from a given field. This can be accomplished only by an act of government intervention, in the form of special regulations, subsidies, or franchises. Without government assistance, it is impossible for a would-be monopolist to set and maintain his prices and production policies independent of the rest of the economy. For if he attempted to set his prices and production at a level that would yield profits to new entrants significantly above those available in other fields, competitors would be sure to invade his industry.
Even if a business were able to gain 100% of a market, it would still be subject to the threat of competition. It could not force consumers to purchase its goods and services. Ignoring this fact, government has responded to these fictitious coercive monopolies by establishing actual coercive monopolies.
In the process, the government violates the rights of consumers and businessmen. Consumers have no choice in their service provider—they are not free to contract with whom they choose. Businessmen are not free to act on their independent judgment. Both are strangled by regulations enacted in the “public interest”.
Since there is no such entity as “the public”–“the public” consists of all individuals—any appeal to the “public interest” ultimately means that the interests of some individuals are to supersede the interests of other individuals. Such appeals declare that some men must sacrifice their interests for the benefit of others, and that sacrifice will be enforced at the point of a gun. It is a gross perversion to believe that one man’s welfare can or should be achieved through coercion.
In the end, “natural monopolies” are anything but natural. They defy economic facts. More fundamentally, they defy man’s nature and his moral right to live according to his own rational judgment.
Part 3
Last week I wrote about a dispute between the city of Houston and CenterPoint Energy. One of the comments to that post defended the concept of regulated monopolies, arguing that the infrastructure costs would prevent competitors from entering the market. In addition, a new entrant into the industry would have to run power lines to each customer. What if property owners did not permit the new company to do this? What, it was wondered, would be my plan for addressing this issue.
There are several premises packed into this question, all of which are mistaken.
First, the assumption is that a new power company would attempt to service the entire city. This may or may not be true. There are many examples of companies entering a market in stages. As infrastructure is developed the company expands the area it services. As an example, Comcast has done this with service to businesses.
Second, the question implies that if one advocates a particular principle, one must also provide details of its practical implementation. The failure to do so, it is further implied, invalidates the principle.
This is a common error founded on the false alternative of skepticism or omniscience. If we do not know everything, then we cannot know anything. If I cannot provide specific, concrete details as to how a free market in electricity would operate then the entire principle of freedom is discarded.
The implementation of any principle can be highly complex. Many factors must be considered. In the case of electricity, factors such as the cost to generate power, the cost of running wires, projected market capture, and much more would need to be considered by a new power company. The new company would need to consider these factors in the context of its goals to determine how to act. Which brings me to my fourth point.
It is impossible to predict exactly what actions men will take when they are free. Unrestricted by arbitrary government regulations, innovation increases and previously unknown solutions are developed. In a regulated environment, electric providers are shielded from competition, and those who develop innovative solutions are prohibited from entering the market.
As one example, it has been suggested on HBL that small nuclear plants could be used to provide power for a neighborhood or community. By placing power generation close to the end user, many costs would be reduced. Such innovations are impossible in our current environment.
Finally, the question drops the context. Existing utilities have easements in which they can erect poles and run power lines. This fact would have to be considered in any transition to a free market in electricity. The rights of existing companies, property owners, and new companies would have to be identified, recognized, and protected.
The transition from regulation to freedom will not be as easy as throwing a switch. The process would likely need to be gradual, with some less than ideal steps along the way. As one example, and this is only an example, it might be necessary to require existing companies to share their poles with new companies, with compensation paid to the existing company.
The fact that I cannot provide specific details regarding a free market in electricity does not invalidate the principle that each individual has a moral right to his own life. Freedom allows individuals to act according to their own judgment, and I would not be so presumptuous as to claim that I know how others will act. But it sure would be fun to find out.