Tuesday, August 4, 2009

Natural Monopolies, 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.

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