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Austrians vs. Neoclassicists on Monopolies

A monopoly is often seen as one of the gravest and most concerning manifestations of market failure. In the neoclassical tradition, the existence of a monopolist in a market is generally seen as sufficient justification for government intervention to put a halt to the monopolist’s exploitative ways. The Austrian tradition, however, has historically remained skeptical of this alleged problem of monopoly.

Two of the most prolific Austrian theorists, Murray Rothbard and Israel Kirzner, have themselves offered objections to the neoclassical perception of monopoly. While they attack the traditional conception of monopoly differently, their arguments are ultimately compatible and offer an alternative perspective on this important economic issue.

First, we should briefly discuss the neoclassical monopoly model in order to better understand Kirzner’s and Rothbard’s critiques. The standard classroom monopoly model posits a market that has only one producer of a good. Because of his position, this producer is able to raise the good’s price to a higher “monopoly price” and reap greater profits than he would have achieved on the competitive market.

In technical terms, instead of producing at the socially optimal point, where demand equals marginal cost, the monopolist raises his prices to the point where marginal revenue equals marginal cost. (In so-called perfect competition, demand equals marginal revenue.) As a result of this dastardly trick, his profits greatly increase while a deadweight loss is created, thus reducing aggregate social welfare.

The traditional prescription for the monopoly problem is for the government to force the monopolist to behave by instituting price ceilings, by nationalizing or municipalizing the monopolist in the case of a “natural monopoly,” or by smashing up the monopolist into smaller companies and creating a competitive market from the remnants.

What do the Austrians have to say in response to the picture of monopoly presented above? In his Competition and Entrepreneurship, Kirzner challenges the idea that a sole producer in a market is inherently a cause for concern:

Monopoly … in a market free of government obstacles to entry, means for us the position of a producer whose exclusive control over necessary inputs blocks competitive entry into the production of his product. Monopoly thus does not refer to the position of a producer who, without any control over resources, happens to be the only producer of a particular product. This producer is fully subject to the competitive market process, since other entrepreneurs are entirely free to compete with him.

Kirzner argues that the neoclassical view of monopoly leads to the following question: Why is a single producer of a good necessarily bad? After all, couldn’t it be that the monopolist in the neoclassical model was simply more efficient than every other producer on the market to the degree that he drove out all competition?

If this were the case, then why would we ever want the government to break up his firm or force him to operate his business differently? His cost effectiveness and productivity clearly benefit the consumer! If anything, the monopolist should be telling the government how to better run its operations! Breaking up such a company would surely be detrimental to the consumers and go against their preferences.

Kirzner’s point is that the neoclassical concerns over a monopolist acting in a socially inefficient manner are only a problem if the monopolist doesn’t face the fear of other competitors entering the market. If he doesn’t have exclusive ownership of all the necessary inputs for a product, then he can’t possibly raise his prices arbitrarily, as entrepreneurs would then enter the market to compete with him. Unless he has a monopoly over a good’s inputs, the monopolist is in no better position to achieve a monopoly price than any other producer in any other market.

Rothbard, however, takes an even harder line against the neoclassical model. In Man, Economy, and State, Rothbard calls into question the entire idea of a “monopoly price” distinguishable from a competitive market price:

Yet, if we analyze the matter closely, it becomes evident that the entire contrast is an illusion. In the market, there is no discernible, identifiable competitive price, and therefore there is no way of distinguishing, even conceptually, any given price as a “monopoly price.” The alleged “competitive price” can be identified neither by the producer himself nor by the disinterested observer.

Rothbard adds:

The critical question is this: Is the market price, 0P, a “competitive price” or a “monopoly price”? The answer is that there is no way of knowing. Contrary to the assumptions of the theory, there is no “competitive price” which is clearly established somewhere, and which we may compare 0P with.

Because there is no way to distinguish between a monopoly price and a competitive price, the entire notion of a monopoly price is functionally worthless. On the free market, there is only one price: the market price. The entire notion of a monopoly price as contrasted with a competitive price is ill defined, and as such should be discarded altogether.

These two approaches to monopoly take very different perspectives on the issue. Even so, they are perfectly compatible and reinforce one another. Both of the theories attack the neoclassical conception on different grounds. Kirzner’s counter is that even on the neoclassical model’s own terms, fears of a monopoly price are unwarranted. A monopoly in a market is only of concern if that sole producer also has exclusive control over the inputs necessary to create what he sells. Absent this monopoly over productive factors, any monopoly is ultimately no cause for concern.

Where Kirzner dismisses the neoclassical concerns about monopoly pricing, Rothbard undercuts the concept altogether. There is no definable monopoly price to contrast with a competitive price, as on the market there is only the market price. As such, the entire neoclassical picture of monopoly is incoherent from the start.

Combining these viewpoints results in a view of the neoclassical monopoly model as incoherent and functionally useless: its components are not clearly defined and cannot be applied to the real world, and even if they could be, fears over monopoly are not even necessarily present in the model’s formulation. Even if the model did make sense, concerns over a monopoly price are baseless absent exclusive control over the production. Consequently, the entire model should be discarded and left behind with the countless other economic fallacies of the past.

That said, the neoclassical theory of monopoly is perhaps not completely useless. It demonstrates clearly the impossibility of differentiating among the exchanges of the market economy. On the unhampered market, there is only exchange and prices, supply and demand. Given that all are free to trade as they please, there is only the market and its unending process of progressing and moving ever forward.