Monopoly Theory

Having dealt with the theory of class struggle, Mises turned to exhibit B in the Marxist case for the historical inevitability of socialism: monopoly theory. To do so, he examined not only the Marxist doctrine that capitalism produces ever more economic concentration, but also the emerging neo-classical theory of monopoly prices, which had been widely used as an indictment of the market economy and as a prima facie justification for government intervention in the form of anti-trust policies.

Beginning with the Marxist tenets, Mises observed that the available statistical material contradicted the Marxist contention that there was a higher concentration of capital in private hands.³⁸ On the other hand, it was clear that industrial production was increasingly organized in large plants. The Marxist case seemed to rely on a conflation of very different types of concentration. Mises therefore set out to distinguish and analyze three types of concentration: production plants (establishments), enterprises, and individual fortunes. He showed that there is indeed a marked tendency toward the concentration of plants, but stressed that this was merely an offshoot of the division of labor: larger plants can serve larger markets. For similar reasons, there might also be concentrations of enterprises. But, Mises emphasized, there was no concentration of individual fortunes, especially of fortunes derived from profitable industrial enterprise. The main reason was that, contrary to widespread assumption, capital investment does not guarantee profits. It is an essentially risky venture that thrives on successful speculation, but is ever exposed to complete ruin. Few families had more than two or three generations of successful entrepreneurs. The accumulated riches were then either invested in landed property, or lost in further speculations.

This analysis reconciled the observations on which the persuasiveness of the Marxist case relied (concentration of plants and enterprises) with the statistical evidence against any marked concentration of individual fortunes. Ever-larger plants were owned by ever-larger groups—of stockowners and bondholders. The beneficial concentration in industry, which allowed for production at ever-lower unit costs, did not necessarily go in hand with a concentration of wealth.

This result was directly in line with the position that Max Weber and Friedrich Naumann had defended before World War I, when in the meetings of the Verein für Socialpolitik they confronted the champions of anti-trust policies. Economic concentration could be a very beneficial phenomenon. It might even be necessary to provide for the needs of a growing population. By 1922, Weber and Naumann had died. Now Mises's discussion of economic concentration in Socialism made him the most prominent advocate of their cause.³⁹

During the 1920s, he confronted the anti-trust movement in Austria in his double capacity as a writer and as a secretary of the Vienna Kammer, in which Austria's big industrialists and bankers had a forum. He opposed the promotion of the handicrafts by subsidies, not because he disliked small firms or because he ignored their virtues, but because the case for these subsidies was untenable from any larger social point of view. The handicrafts had difficulties because they could not compete against big industry. But it was wrong to jump from this fact to the conclusion that the competition from the big firms was unfair.⁴⁰

Could economic concentration on a free market ever be harmful? Mises answered this question in the affirmative, distinguishing two types of harmful “monopoly” as distinct from beneficial concentration. The first type of monopoly was given when one market participant provided a service that was indispensable, unique, and without substitute. But this case seemed to be a mere theoretical possibility. To which concrete goods would it apply? To air and water? These were certainly indispensable goods, but in most cases they were not economic goods at all. Mises argued that this form of monopoly was indeed exceedingly rare:

Perhaps the nearest approach to such a monopoly was the power to administer grace to believers, exercised by the medieval Church. Excommunication and interdict were no less terrible than death from thirst or suffocation. In a socialist community the State as organized society would form such a monopoly. All economic goods would be united in its hands and it would therefore be in a position to force the citizen to fulfill its commands, would in fact confront the individual with a choice between obedience and starvation.⁴¹

Mises turned to the second type of monopoly, which was an offspring of the theory of prices. A case of “price monopoly” was given when a seller could restrict his production to increase his price and obtain higher total selling proceeds because the demand for his product was sufficiently inelastic. Of course this could work only in the absence of competitors, because any competitors in the field would expand their production and bid down the price as soon as our would-be monopolist set out to restrict his production. But Mises emphasized that, besides the absence of competition, a second condition had to be given, namely, a relative inelasticity of demand.

These circumstances brought about an anomaly on the market. Whereas under competitive conditions, each producer had an incentive to produce as much as possible, thus providing for the best possible satisfaction of consumer needs, under conditions of “price monopoly” the monopolist had the incentive to restrict his production.

The one and only peculiarity of monopoly is that, assuming a certain shape for the demand curve, the maximum net profit lies at a higher price than would have been the case in competition between sellers... monopoly under such conditions has three results: the market price is higher, the profit is greater, both the quantity sold and the consumption are smaller than they would have been under free competition.⁴²

However, this argument was vulnerable to the objection that the restriction of production in one firm or industry must not be equated with a reduced overall production in society. When the “price monopolist” restricted his production, he automatically freed up factors of production that henceforth could be used to produce other goods and services. The reduced supply of the monopoly good thus entails a larger supply of some other good. And if this is so, then what is wrong with “price monopoly”? Where is the harm? Price monopoly is certainly detrimental to the interests of the consumers of the monopoly good, but it benefits the producers and consumers of other goods. Can purely factual analysis strike a balance between these conflicting individual interests? Mises thought it could. He very clearly saw that “against the smaller production of the monopolized goods one must set the increased production of other goods.” Yet he introduced another consideration:

But these [other goods], of course, are less important goods, which would not have been produced and consumed if the more pressing demands for a larger quantity of the monopolized commodity could have been satisfied. The difference between the value of these goods and the higher value of the quantity of the monopolized commodity not produced represents the loss of welfare which the monopoly has inflicted on the national economy. Here private profit and social productivity are at variance. A social[ist] society under such circumstances would act differently from a capitalist society.⁴³

No other writer had even come far enough to see the problem.⁴⁴ Many years later he said about the significance of his contribution:

All those who have dealt with the monopoly problem have emphasized that the limitation of the total consumption of the monopoly good reduces the welfare of the persons concerned. Now in that passage of Gemeinwirtschaft... I deal with the extension of production that eventually must result from the liberation of non-specific factors of production formerly bound up in the production of the monopoly good. I explain that this extension of production can only concern less important goods (of course, from the point of view of the consumers). They are less important because they “would not have been produced and consumed if the more pressing demands for a larger quantity of the monopolized commodity could have been satisfied.”... There is no proof for the welfare-reducing effect of monopoly prices other than the one I propose.⁴⁵

Mises's devotion to the facts, as he perceived them, was greater than his political inclinations. Certainly he would have been happy to find that the market process always caters to consumers in the best possible way. But he did not find this to be the case, and he insisted on what he did find. Mises would uphold his argument even when his American disciple Murray Rothbard, many years later, reformulated monopoly theory in a way that completely exculpated the free market.⁴⁶

While Mises conceded the theoretical possibility of monopoly prices, he stressed that in practice, virtually all cases of monopoly were artificial creations of government intervention.⁴⁷ On a free market, monopoly is unlikely to occur in any field other than primary production. “Mining, in the widest sense of the word, is their true domain.”⁴⁸ But even in this case, monopoly prices are not as harmful as they appear under monopoly theory, because the restricted exploitation of mines means that irreplaceable natural resources are used with greater thrift.