Video Transcript: Monopoly and Competition | Thomas J. DiLorenzo

Announcer - Okay, ladies and gentlemen, our next speaker is Dr. Thomas Di  Lorenzo, and he will be lecturing today on monopoly and competition. Tom,  

Dr. DiLorenzo - You shouldn't applaud before you hear what I have to say. You  might not like it. That's got things backwards. Monopoly and competition. Well, it  sounds like a pretty simple topic. Almost all of you have taken a course in  microeconomics, or at least read something about microeconomics and think  you know something about it. But what I'm going to do partly is talk about the  historical evolution of the idea of competition and monopoly, in a context of the  role the Austrian school has played, and I wrote up just a simple definition of  how Austrians think of competition, and this is a good short definition of  competition is a a dynamic, rivalrous, entrepreneurial discovery process, and  that's a short sentence. But I think it really says it all about how Austrians have  always thought of competition. It's dynamic, meaning it's it goes, it's ongoing,  never ending. It's evolutionary. It's rivalrous. Well, what does that mean? What  means competition includes price cutting, differentiating of products, mergers,  the the spinning off of of firms that were once merged, and it turns out that the  merger didn't work out, didn't cut costs, and make more money after all, that's a  part of the competitive process, and it's entrepreneurial. And you'll you've heard  from Peter Klein already about about entrepreneurship. And so, of course,  Austrians study entrepreneurship. Unlike the mainstream of the economics  profession, it usually says almost nothing about it. If you look at the  microeconomics books, and you look up entrepreneur or entrepreneurship in the in the the index. There's usually a paragraph or two, or maybe a picture of  somebody of Bill Gates or somebody like that, and that's about it. There's no  real serious studying about it, and it's a discovery process. And what is meant by this is that that the market is a process by which firms discover what works and  what doesn't, what consumers like and what they don't like. It's how consumers  discover what they like, what products will make their lives better, what are the  best deals for them, and and that's an important part of this definition because it  says that there's there's no expert, there's no central planner, there's no  economist who can tell us what's efficient for us. We discover these things. We  discover these things in the marketplace. For example, there's no there's no way for an economist or anybody to tell us what the the optimal or official efficient  organization of an industry is, what the size of an industry, you know, in terms of  economies of scale or anything like that. The market tells us that no one can  cannot guess the market. The market gives us this information, and so that's just a short definition of how the Austrians think of competition as an ongoing  process. And this this way of thinking started at least with Adam Smith in *The  Wealth of Nations* That's how Adam Smith thought of competition, and that  lasted for quite a long time. This the way of thinking about competition, and I  think I think I'll start giving you an example of there's an article that I wrote many

years ago, co-authored with Jack High, and it was published in a journal called  Economic Inquiry, and we were interested in what the economics profession had to say about the the subject of competition and antitrust, antitrust regulation, or  anti-monopoly regulation. At the time, the first U.S. government federal antitrust  law was enacted. This was the 1890 Sherman Antitrust Act, and so we wanted  to know well what what were professional economists saying at the time about  these antitrust laws, and and how did their view of competition form their  opinions of the anti-monopoly, this new anti-monopoly law, and what we found  was that one, we were able to survey the entire American economics profession, every single person who had a job as a as an economist, and it was really only  like a couple of dozen people. There weren't there were that many, you know.  Nowadays, it's much larger, but there was even an old article published in the  American Economic Review in 1960, I think it was called the American  Economics Club, something like that, by an author named Coats, C-O-A-T-S,  and and he wrote about this. It was like a very small club, the Americans who  had really degrees in economics and who had earned a living as an economist.  So. We were able to survey the entire population of the economics profession,  and we found that every one of them was opposed to the whole idea of antitrust  regulation as a matter of principle. They thought it was inherently incompatible  with competition as they understood it inherently. It wasn't just that the way it  had been implemented was bad and could be improved upon. They thought it  was inherently a bad idea and it could never be consistent with competition. I'll  give you just a few examples. The co-founder of the American Economic  Association, Richard T. Ely, who himself was a famous statist, he was a  progressive. If you've ever read any of Murray Rothbard's writings on the  progressives and their role in World War I, he says a lot of uncomplimentary  things about Richard T. Ely in there. But Ely was the co-founder of the American  Economic Association, and and by the way, the the founding statement of the  American Economic Association. This was, I think, it was 1885, the year 1885,  said that capitalism or laissez-faire is unsound in morals and unsafe in practice.  That was the founding statement of the American Economic Association, and  and and people criticize von Mises as being an extremist because he never  joined that organization, you know what an extremist he was, and so anyway,  even Richard T. Ely said this about it was the late 19th century, and and what is  happening is technology is changing. There there are for the first time ever there are large large industries with economies of scale producing steel and cement  and steel rails and all sorts of products, with the costs going down and down  and down, and prices going down and down and down. And there were  mergers, corporate mergers was another route to becoming larger and  achieving economies of scale, lower cost per unit of production. And this was  going on in the U.S. in the 1880s, and when this was founded, when the AEA  was founded, and here's what Ely said. He said, "Large-scale production is a 

thing which by no means necessarily signifies monopolized production.” The  other co-founder was John Bates Clark, whose name is up here on the wall  somewhere, and he wrote in 1888 “that the notion that industrial combinations  would be destroy competition should not be too hastily accepted,” and that was  that was sort of the mildest view we found. One of the founders of the University of Chicago economics program was a man named Herbert Davenport, and he  said that “only a few firms in an industry where there are economies of scale  does not require the elimination of competition.” Another sort of co-founder of  the Chicago School, James Lachlan, said that “even when a combination  merged companies is large, a rival combination may give the most spirited  competition.” And we the same things were said by Irving Fisher, Edwin R. A.  Seligman, who was another famous early 20th century economist, and and on  and on. And so, and we document all this from Yale to Princeton, the University  of Chicago, all the the major universities where economists were at the time.  They all said the same thing, and the reason for this was that they viewed  competition like the Austrians do. They viewed competition like Adam Smith did a dynamic, rivalrous process of entrepreneurship. So when they looked out  there and they saw all these mergers happening, they saw economies of scale  developing in steel and cement and other major industries. They weren't  alarmed by it. They didn't think, as Karl Marx predicted, that there would be one  giant corporation ruling over the entire planet. That was what Marx eventually  said: that there would be merger after merger after merger until finally there was only one corporation. That's the Marxian view. They they thought that was crazy. That sort of thing. Competition doesn't work like that, and so they're basically  Austrians. This all changed eventually. The this all changed beginning around  the 1920s or 30s, and the the idea of competition changed, and so rather than  this definition of competition essentially carrying the day, we had the the  definition of competition that you've all been exposed to if you've ever taken a  course in microeconomics, and it was an equilibrium definition. You see, this is a dynamic process. The Austrian view disequilibrium is more the normal state of  affairs in the world, but it wasn't too susceptible to mathematical modeling, and  so with the with the advent of the mathematization of the economics profession,  the profession apparently thought it would be more scientific looking to have a  different theory of competition, and that's when the so-called theory of perfect  competition was invented, and and and so what is competition? Mean under that theory, as of the 1930s, well, you've seen all these assumptions, such as  homogeneous products, many firms. Perfect information. I'll call it info. There  are different combinations of these: free entry and homogeneous prices, also.  Different textbooks might have a few different things, but those are you've all  seen some of these things: homogeneous products and prices. And so this this  was developed as the benchmark of competition in an equilibrium situation. Not  only are prices homogeneous; everyone charges the same thing, but they're all 

equal to marginal cost. And so, so for years and years and years, the  government regulators have gone on witch hunts trying to find a divergence  between price and marginal cost that lasts more than a short time. And if it does, then you may be the target of a of an antitrust lawsuit, you you know your  company, and it got it got to the extent that General Motors, for several decades, instructed its management to never ever get more than a 45 percent market  share, because they thought even if they got it by having the best cars and the  cheapest cars, that would be bad because they would probably be sued by the  federal government for violating the antitrust laws because they had too much of a market share, and and of course if people like their cars a lot, well you might  see long periods of time where they're able to charge a price above marginal  cost. But that's but that was the theory, and so this became the new benchmark, and it became this equilibrium condition. That in equilibrium, this is supposed to  be true, not not always, but but in equilibrium. And Hayek addressed this. As far  as reading goes on this, if you want to introduce yourself to the Austrian view of  competition, there's one essay that Hayek wrote entitled "The Meaning of  Competition, and it's in his little book *Individualism and Economic Order* which  is for sale downstairs. And it's one of the essays, and it's it's it's a good good  book to buy if you want to know the Hayekian view of the world. That that's the  book to buy first, I would think, because it has this famous essay, "The Use of  Knowledge in Society, in there, and that's what Hayek is most known for: is the  so-called knowledge problem and this view of competition here, the meaning of  competition, and also Israel Kirzner's book, "Competition and Entrepreneurship,  is a classic in the Austrian worldview, and also Murray Rothbard's Chapter 10 of  "Man, Economy, and state is a is a great technical exposition exposition of the  Austrian view of competition, and so well Hayek's commentary on in the  meaning of competition is an analysis of these this new theory new as of the  1930s, and I'll just read you one paragraph or a couple of paragraphs of what he says about this, he says this quote: "This theory throughout assumes that state  of affairs already to exist, which, according to the truer view of the older theory,  the process of competition tends to bring about, and that if the state of affairs  assumed by the theory of perfect competition ever existed, it would not only  deprive of their scope all the activities which the verb to compete describes, but  would make them virtually impossible.” So, in other words, under perfect  competition, there is no competition. It's all it's all done with. It's all it's all in  equilibrium. And the the second little passage I'll read to you from Hayek. He  says, "How many of the devices adopted in ordinary life to that end would still be open to a seller in a market in which so-called perfect competition prevails? I  believe that the answer is exactly none. Advertising, under price undercutting,  and improving or differentiating the goods and services produced are all  excluded by definition. Perfect competition means indeed the absence of all  competitive activities.” And so, beginning around the 1930s, the economics 

profession adopted a view of competition that ruled out competition, essentially,  and I'll give you an example from the horse's mouth. Paul Samuelson. Here, I  don't know. I don't know. You might not. You probably only the front row can read this, but so don't. But don't worry about it. I'll read it for you. This is a page from  Paul Samuelson. Samuelson's famous textbook, the 1958 edition that I pulled  off the shelf over here, I xeroxed it just so you don't think I'm just making this all  up, so you can actually see it's right. You know, you can go find it yourself. The  1958 edition, Samuelson's book was first published in 1948, and it was the  biggest selling economics textbook in the world for 40 years after that, and so to  the extent that people learn something about competition and the way  economists think about competition, this was overwhelmingly the book, and so  and this is a chapter where he talks about this, where he says “a perfect  competitor is one who can sell all he wishes at the going market price, okay, but  is unable in any appreciable degree to raise or depress the market price. And by definition, a perfectly competitive industry is one made up exclusively of  numerous perfect competitors. In all likelihood, it has some kind of organized  auction mechanism there.” And so then he goes on to say, "Well, how does this  fit with the real world? How competitive is the real world? And he says, you  know, notice how strict this definition is. Well, yeah, it is. It rules out all  competition, all real competition. And then he says, “did you ever hear of an  auction market for razor blades or toothpaste or cigarettes?” And so he's saying, well, no, we don't have. There's no like auction barn for razor blades, and  therefore it's not competitive. It's monopolistic. It must be by definition, and he  he goes on to produce a list of all sorts of products: razor blades, toothpaste,  cotton, natural gas, all these things, wheat. And then he goes down to the list  and he says, "Well, when you get on the list, quote I'm quoting. You'll find that  only potatoes, tobacco, wheat, and cotton come within our strict definition of  perfect competition,” and so in the American economy, you as a consumer,  you're safe if you're eating potatoes, smoking cigars, eating bread, and wearing  cotton blue jeans, but otherwise you're the victim of monopoly. Is sort of the the  the thing he's saying, and he even gets this wrong. Even gets even this is wrong because at the time he wrote this, the agricultural industries like potatoes,  tobacco, wheat were all cartelized by the U.S. Department of Agriculture with all  of its programs paying farmers for not growing tobacco and for and acreage  allotments that were started during the Great Depression and things like that  and so so these these were actually monopolistic industries they're all protected  by tariffs and so so in other words Samuelson totally misled generations of  students in terms of the definition of of monopoly and what this is, it's an  example of what I think it was Harold Demsetz who coined the phrase Nirvana  fallacy. This has nothing to do with that heavy metal band. Nirvana, the Nirvana  fallacy. The economist Harold Demsetz wrote an article in the Journal of Law  and Economics way back around 1970, 1969, around there, about this 

phenomenon of the nirvana fallacy, and what it is basically is that the practice by economists of taking this this model, the competitive model, and saying, well,  this is perfection, you know, a perfect world, many firms, free entry, and so forth,  and then comparing it to the real world, like Samuelson just did, and saying,  "Aha, the real world is not perfect. The markets fail,” and and of course, the  reason why it's a fallacy is because you know if you compare anything to  utopian perfection, anything is going to fail, of course. And so that's why I've  always thought that the whole study of competition by the mainstream of the  economics profession is is fraudulent. So the nirvana fallacy is just a gross fraud to to engage in this type of behavior, and and especially when you when you  look at yourself as a policy advisor advising governments to prosecute  companies because they're not perfect under just under a theory under this  theory and that went on for many many years and so if you look if you look at  some of these these assumptions of course homogeneous products this is not  taken as seriously anymore but remember I'm talking about this historically as  well as just for present day relevance, and so what's the significance of that?  Well, the significance of that was that when once this was developed, once this  model was developed, and homogeneous products were said to be the the one  of the benchmarks of competition, then the theories of monopolistic competition  were developed by Joan Robinson and Edward Chamberlain, and in those of  you, some of you are familiar with this. And so, monopolistic competition means  that well, yeah, you have many firms, so that that assumption holds. But they all  differentiate their products, don't they? And so, and no two products are exactly  alike, even if they are. Physically alike, they could be perceived as being  different by advertising. So the image of a product, even if the exact same black  tire for your car, the image might be different, and that's a differentiation. And so  the theory went: well, when you think about it, just about everything in the world  is monopolistic because it's all different in the eyes of the consumers, either  physically or mentally, it's different. And so, and and and I've read you know I've  read a lot of the articles in the economics literature from this time when this was  all being developed, and and it's very easy to get the impression of a lot of the  writers that they were gleeful about this, that they were that they they had been  sitting there for years just upset about the fact that they didn't have a weapon  with which to to beat on capitalism, and here it was. They finally found it. And  Joan Robinson and Edward Chamberlain were British statists, and so they so  they developed this whole apparatus of monopolistic competition, and and as a  result, you know, even the British government took this very seriously, and they  and they actually tried to force homogeneity and housing and in some other  industries in the world. And what this also led to was eventually in the  economics profession was suspicion of innovation, suspicion of innovation as  being antisocial or monopolistic, and the way in which this came about was: if  you look at this, is the standard mainstream textbook monopoly diagram here, 

and and the Nirvana fallacy was put into play here, and this is a standard  monopoly diagram with a downward-sloping demand curve. Here's marginal  revenue, and a constant cost industry with marginal cost and average cost being horizontal. And here's the monopoly price PM. And what does the monopoly?  What does the monopoly do according to the standard model? Well, they they  produce this level of output-that's the profit-maximizing level of output, which is  less than would be produced in this industry if there was competition. If there  was competition, then marginal cost. This would be the sum of the marginal cost curves of all the firms, or the supply curve. And so this would be the equilibrium  here, if there were competition. And so the story goes well. What do monopolies  do? They restrict output. That's that's a bad thing because there's a deadweight  loss. There's a loss of consumer surplus there, and and so how this was applied to to the homogeneous product assumption is that if there's an innovation, the  creation of a new product, for a while you're a monopoly. You're the sole sell by  definition. You're the sole seller of that of that product, and so you're restricting  output. And so there there were all sorts of recommendations, and some of them went through by the government to force innovators to share their secrets with  the competition. In fact, if any of you paid any attention several years ago, to the Microsoft antitrust case, that's exactly what the government wanted to try to  force Microsoft to do-to to give away its source code to you know put it online so that anybody could have it for Windows. Just just as it would be like forcing  Coca-Cola to to publish the recipe for Coca-Cola on the internet, you know, no  one has been able to figure it out all these years. But but these sorts of things  were actually proposed for a long, long time. And like I said, that was exactly  what the the government was trying to do with with Microsoft, force them to give  away their trade secrets in the name of efficiency, in the name of competition,  and and why this is a nirvana fallacy is that the way to look at this is you know  here we are without the innovation that created the new product it's zero so at  zero there's no consumer surplus at all because this product doesn't exist no  one benefits from it the inventor invents the product. The entrepreneur invents  the product, creates the product, puts it on the market, so and it sells this  quantity QM. So there's all this all this consumer surplus here that is benefiting  consumers, and so that's the real comparison. The real comparison is from zero, which is where you were, to the amount of trade that exists that benefits buyers  and sellers, okay. But the nirvana fallacy is to say, well, let's compare the actual  level of output Q to the level of output that would exist if everybody in the world  simultaneously had the idea of the inventor and put a 10,000 replicas of it on the market. Perfect competition, and and of course that's that's that comparing the  real world to utopia again, and and so that's why it's called a fallacy. It's a, and  so you know innovation and R and D are good things, by this view, and so this  kind of nonsense went on in government circles for a long time. Trying to crack  down on innovation, there was an economist named Dennis Mueller who used 

to be very big name in the field of industrial organization. He actually wrote a  paper in the Economic Journal, the British academic journal, recommending that the U.S. Congress create a new committee to to determine which types of R&D  should be permitted in the private sector and which should not, because he  thought he would be able to tell which type would lead to monopoly and which  would not lead to monopoly, and so and of course if that were to happen, this  crowd probably could guess pretty easily what would happen is that companies  would lobby Congress to prohibit their competitors' R and D and to allow their R  and D, and so that and that was was what would create monopoly power. That  would create monopoly power, and so and so anyway, that's that's one reason  why that couple of reasons why that's a bad idea, and this this is a again  probably nobody can read that. It's not it's too too light in here, but I'm just  putting this up again so that you know I'm not making these numbers up. This is  the annual report from the Dallas Fed, 1998, and they did. There's a there's an  economist at the Dallas Fed named Michael Cox, who's a pretty good free  market economist, and I like to think that he must be a spy for us. He works at  the Fed, and he's and and but he's done some really interesting research over  the years. That the Fed publishes it, then he's published a couple books out of it. And this was the annual report, and it was about what it was about is mass  customization, the integration of mass production in manufacturing with  computers, with the computer revolution, the high tech revolution, and how it's  now possible in today's world, and as of 1998, to make money in a lot of  products for companies to be very profitable, producing relatively low volume of  products for niche markets, whereas in the old days, 50 years ago, you know,  the way to make money in manufacturing was produce a zillion replicas of the  exact same thing and get economies of scale in your factory and low cost, and  that's how you make a lot of money in manufacturing. But the integration of  technology, computer technology, and manufacturing has made it this all a  different world. In other words, there's been an explosion in product  differentiation because of this. Any of you, I don't know, maybe some of you  have bought a car online. If you, if I wanted to buy a car after this class, I could  just go online, pick the car I want. I could pick all the all the the add-ons that I  want. Just click click here, then I could finance it online, put online, and it'd take  me about 15 minutes, and the factory will make it for me and deliver it in a week  or two. That's that was just unthinkable 30 or 40 years ago. But that's what this  is about, and and so what they did is in some of these tables, it just you know  vehicle models in the early 70s compared to the late 90s, 140 versus 260.  magazine titles 339 verses 790, even books 40,000 verses 77,000, even Pop  Tarts. There were only three brands of Pop Tarts in the early 70s. Could you  imagine that? And the sin one of the sins of capitalism, and then 29, you know,  thankfully by the late 1990s there were 29 mouthwashes, 15 to 66, and and they so they have numerous tables that that show this. This is all outdated. I think 

beer is in this one. Yeah, only 25 brands of beer in the in the 1980 versus 187 by 1998, it's probably 1,877 by now, or more than that. And so, so what this is  about is this mass proliferation of product variety. And why is this happening?  Well, it's happening because of competition. It's not happening. It's not  happening because the world is is becoming monopolistic. And so, and I think  this is one of the things that has softened the critiques of homogeneous, you  know, unhomogeneous products. And I don't think it's it's really ridiculous to see  a Dennis Mueller today or someone like him writing an article in an economics  journal calling for government regulation of product variety. Although you do see  sociologists, and I had my university hires a number of left-wing lawyers to teach businesses how to be socially responsible, and one of their speakers that they  brought into the campus a year or two ago just stood up there for 45 minutes  and whined and moan about how there are too many items on menus at  restaurants, and that's one of the failures of capitalism. Is there's too much stuff  on the we waste too much time trying to decide what food order at restaurants  or what cars to buy, and so this is all bad. This is all bad. Needs to be regulated  and be made socially responsible, and so and so. But but like I said, those. Are  lawyers, and so we expect that kind of idiocy from lawyers who talk about  economic subjects and try to justify their existence somehow at universities. But  but for an economist to say this in this day and age is truly ridiculous, as far as  that goes. And so that's homogeneous products. Now, the many firms  assumption of the model that that caused endless mischief because that meant  competition or monopoly, rather. The definition of monopoly historically meant  government created monopoly. It always meant that the whole common law  developed in Britain for for decades and decades, generations treated monopoly as a grant from the government, and that's that's how it was always thought of  until you know around the late 19th, early 20th century. All of a sudden, bigness  became a definition of monopoly, and then with the incorporation of this model,  the the perfect competition model, that well that enshrined the idea that the  number of firms is a measuring rod of competition. Remember the quotes I gave you from Richard T. Ely and John Bates Clark in the late 1800s, early 20th  century. They didn't see any problem with the fact that there were fewer firms  today in some industries than there were five years ago. Because what did they  see? Well, they saw costs going down and prices to consumers going down as a result. So what's the problem? It's competition, as they saw. It's it's evolutionary.  That all changed, of course, and and so this this assumption of many firms was  enshrined in the literature of economics in something called the market  concentration doctrine, and the market concentration doctrine made a simple  assumption. The assumption was that fewer firms makes it easier for collusion  to happen and for cartels to form. Therefore, fewer firms leads to monopoly, and  so just and so the government adopted all these measuring sticks of monopoly,  such as a four-firm concentration ratio, eight-firm concentration ratio, and these 

were such defined as the percentage of sales made by the four largest firms.  For example, that would be a four-firm concentration ratio. There was Abba  Lerner, the socialist who who debated Mises on on the socialist calculation  debate, he came up with an index, the Lerner index, which purported to  measure the extent to which price diverged from marginal cost, and that that's  another index that the government uses sometimes and has used to try to go on its hunts for monopoly, which are really hunts for deviations from nirvana, from  from perfect competition, and so and so this was the heart and soul of antitrust  regulation for many many years. This measuring rod of many firms, many firms  good, fewer firms bad. That's that's probably that's about the level of scientific  discussion on the at the Federal Trade Commission and the antitrust division of  the Justice Department, and this this held sway in policy circles from roughly the 1940s until the 1980s. But there was a bit of a revolution in economics, and the  way the the revolution took place is that there were some people at the Chicago  School who rediscovered the Austrian view of competition. Of course, they  never gave the Austrians any credit for it. They never called themselves  Austrians. They never quoted the Austrians. But every bit of it was thoroughly  Austrian in that it looked at competition as a dynamic, rivalrous process and  said, "Wait a minute. These antitrust policies are actually bad. They're actually  harming competition. And so, and they even gave it a name. The Chicago  Schoolers gave this a name called the New Learning, and although it wasn't, it  was the old learning. It was the rediscovery of the old Austrian view of  competition. But since they were competing for prestige within the economics  profession, they couldn't give credit to where it was really due. They just had to  say, "Well, this is our idea. What it really wasn't is Adam Smith's idea, you know,  really, and so so I brought one more table of numbers. I'm going to put it up, and you need to memorize all these numbers because it's going to be the first  question on the exam at the end of the week, and and whoever doesn't get them all right cannot go on to the oral exam. Okay, that's that's, But again, I guess the  front row can maybe read this, but I'll put this up so that you know I'm not  making numbers up. This is from a book, and this is one example I'm going to  give of this revolution I'm talking about, where the economics profession came  around to the Austrian view of competition by looking at it as a more as a more  dynamic rivalrous process rather than as an end state or an equilibrium state,  and this is a book by Yale Brozen, B R O Z E N. His first name is Yale, just like  Yale University, and the title of the book is Concentration Mergers and Public  Policy. It was written in the I think 1983. Around there, and it was a summary of  this Chicago School research, mostly his up to that point. And this this is an  example of the type of thing that really turned the economics profession around  and turned public policy around for years. It's gone back downhill now, but it  really was effective. And so what this is is there were all these studies, mostly  coming out of Harvard and Harvard economists, saying that industrial 

concentration, that is industries where there are fewer firms with a high market  share, leads to monopoly, and so they did all these statistical tests finding  correlations between industrial concentration on the one hand and high profits  on the other hand, higher than normal profits, and they assume that the cause,  the correlation was causation, under the theory that industrial concentration  makes the formation of cartels easier. Therefore, the cause of the higher  profitability is monopoly. Well, what does the you know your common  understanding of competition say? Well, it says well, if there's above average  profits being earned in one industry, entry will occur. People from all over the  world will start competing for those profits, and that will eventually drive down  the the level of profits. Competition. That's what competition does. If you look at  it over time, okay, dynamic, as I said. But if you look, if you take a snapshot, you  know, of course, at any one time, it's true that somebody's going to be the best.  Somebody's going to have a big market share in in just about every industry,  bigger than everybody else, and above average profitability. So if you take a  snapshot or equilibrium view. Yeah, you always find somebody's the best. You  know, the New Orleans Saints are the best in the NFL as of now. They won the  Super Bowl. Okay, but over time, you think the Saints are a pretty crappy team.  You know, you look at the you know their fans who just put paper bags over their heads. Literally, they they call them the Aints for years and years, they called  them the Aints, and so yeah. If you look at just just the year 2009, wow, that's  the greatest team. Who could ever beat the Saints? No one will ever beat the  Saints. Let's send the Federal Trade Commission in there to New Orleans, you  know, do something about this. But and that's basically what Brozen did with  American manufacturing. He took all the same industries that the Harvard  economists were looking at at a snapshot at a point in time and saying, "Aha!  There's monopoly here. Look at this. They're making above-average profits. And I'll read a few of these to show you what he's doing here. Like as I said, only  people in the front row can can see this probably. But what he has here is  percentage return on book net worth, on two peaks of the business cycle, 1948  and 1956. So he didn't want to have you know one set of data for a recession  and then another for a boom. You know he wanted to try to control best he could for general economic conditions, and so the first one he has listed is lumber  percentage return on net worth 29.3 down to 12.6, and then he ranks them. So  lumber, lumber in that year happened to be the number one profitable industry.  That's because of the post war housing boom, I assume. And so, but by 1956,  lumber went from first to 20th, and then appliances, the housing boom,  appliances, washing machines, and so forth, went from the second most  profitable to 25th, and then textiles went from third to 39th. You had automobiles went from fourth to 12th, and so forth. And so, and this is true in all these these  two tables of statistics. What generally happened during this relatively short  period of time is that the most profitable industries, their profit rates descended 

toward the median, and the less profitable industries ascended. They they  moved up and they ascended toward the toward the medium. And you can see  this, and he does it in the book also for different time periods, not just 1948 and  56, and he goes up to the 1970s and later on in the book, and so manufacturing, which had been condemned as as hopelessly monopolistic, you know, you  know, between all the product differentiation and all the the mergers, you know,  my God, is a monopolistic monster. Is what is what we learned from Paul  Samuelson at MIT and the Harvard economists who did all these concentration  studies. And but this this was like a big stink bomb right in Harvard Yard. This  this this this article from this book because it really you know I I used to teach  industrial organization at the Ph.D. level at George Mason, and in the days  when a lot of this was happening, and and I read all of this literature, and they  were in a panic. It was kind of fun to read some of these articles. They were  desperate to defend their human capital, but people like Harold Demsetz and  Yale Brozen just keep coming at them, and then Dom Armentet. Who's an  Austrian published his book Antitrust and Monopoly, where he demonstrated that the the top 55 federal antitrust cases in American history up to that point, early  80s, in every single case, companies were cutting costs, cutting prices, creating  new products, innovating, expanding output, doing all the opposite things of  what the standard theory says monopolists do. Every single one, all 55,  Armentano shows that in in this book, which I think there's an abridged version  of it for sale downstairs, and so that that's that's one of the things that Brozen  did, and and that it really did turn things around. But the key to it was looking at  competition dynamic over time, if you take if you take just a snapshot view, well,  of course, you're going to get that view. And here's another another thing that  that happened. I'll put this monopoly diagram back on. The economics  profession started trying to measure the cost of monopoly, the social cost of  monopoly. There's a big, big literature on that, and basically, much of it started  out trying to get statistical estimates of this triangle right here. This is called the  welfare triangle, and in the monopoly model, it's the loss of consumer surplus  due to the output restriction from here Q competition to Q monopoly, and so I  think the very first article was published by Arnold Harberger in the American  Economic Review in 1954, and he came up with 1/10 of 1% of GDP, and so  there were the big red panic button at Harvard University at the economics  department was pushed because they had spent careers developing market  failure models of monopolistic competition in every conceivable way in which  markets deviate from nirvana or utopia, and here comes Arnold Harberger at the University of Chicago saying, "Well, yeah, even if we believe all these models of  how awful industry is, it's only 1/10 of 1% of GDP, and that's probably not even  the amount of time economists spend studying monopolies. As far as so, what's  you know what's the problem? And so panic you know set in, had to set in, and  so and they they kept getting more and more papers published like this, and the 

the estimates went up to you know maybe five or 6% or something like that. But  as is true with all econometric work, it's endless. It's just endless. It it creates  careers for economists, but it rarely ever settles much of anything. Just endless  debates over omitted variables and all the all the hundreds of things you can  you can argue over in economics journals and make a career out of it without  ever learning anything or teaching anybody anything. It reminds me of my  colleague who I was so excited, best biggest day of his life. He had an article  accepted in the Journal of Finance, which if you if you're in the area of corporate finance in academe, that's the big journal, and I asked him, "Well, what will we  know about finance now that we did not know before your paper was published? He said, "Nothing. He said, "Nothing. I just tweaked an econometric technique  that somebody had else had developed and showed that it could be tweaked.  But but it really says nothing about finance per se, and so so and so that's how a lot of the careers are made in the field of economics and finance, but but but this whole technique, this whole technique, this all assumes equilibrium. This is an  equilibrium model, and so what these people did is they used data gathered by  the U.S. Commerce Department. That's who gathers data on on these  industries. They always use Commerce Department data. That means that they  assume that on the day the Commerce Department bureaucrat made a phone  call to IBM or whoever and and asked them what are you charging for your  computers today, they assume that everything was in long run equilibrium. Okay, and so they get all this data. The assumption is that all these prices and all this  cost data is long-run equilibrium costs and long-run equilibrium prices, and none of these markets are in disequilibrium. It has to be the assumption if you apply  that data to this model to measure to measure this, and and so anyway, an  economist who's an Austrian, Steve Littlechild, a British economist, he published an article in the Economics Journal, where he took a close look at the original  Harberger article, and I'd read this in graduate school, but I didn't catch this one  passage from it. I guess at least when I went to graduate school, they gave us  an overwhelming reading list. It was like humanly impossible for anybody to read all this stuff at one time, and so you had to try to economize. And this must have  been one of the areas where I economized. Didn't read that this particular  passage, but Harberger admitted in this paper, as did others in this this  literature, that you know he's trying to measure monopoly profits in his thing. He  assumed. He wrote right in the article that we have no way of knowing whether  these profits we're trying to measure are equilibrium profits or disequilibrium  profits. But we're going to assume that they're all equilibrium profits, and so of  course disequilibrium profits could just be well a product comes on the market  and it's very popular, it catches on, everybody wants it. There's no monopoly  there, but everybody wants it. It's a popular new product, and then competition  eventually comes in, and the price goes down, and and the profits go down. And but here is saying no. We're assuming that any profits we see that are above 

normal are are equilibrium monopoly profits. That way, we can increase the  estimate of our deadweight loss of monopoly and so forth, and profits of  Monopoly, and other authors did that too. They Steve Littlechild quoted Dennis  Mueller again, and Keith Kelling, who wrote another article in the Economic  Journal, saying the same thing. So it's just I wouldn't call it dishonest because  they admitted that they're what they were doing. They didn't hide this. They said  we we admit that we don't know what the hell we're talking about, and so they  were very honest about it. They did it. They did say that we don't know if we  hadn't the clue whether this is equilibrium or disequilibrium, and so these all  these studies are pretty much worthless. Although they did make many careers,  like my friend in the finance journal, they big long resumes from all these all  these guys who wrote these Homogeneous prices-that you know-that  assumption. Well, there are a lot of reasons why firms don't all charge the same  prices for things. Example I often sometimes give in a class would be when I  lived in downtown Baltimore for a while. I lived in a townhouse, and advertisers,  local businesses, would hire these guys. They're like SWAT teams. A van would  pull up in front of your house, and three or four guys would jump out the back,  and they're carrying paper sacks with advertising flyers for pizza joints. And they would go door to door and put all the flyers in your mailbox. So I'd get home at  night, and there'd be a giant pile of paper in front of my door with advertising  things like the newest pizza joint in town is is now open. Come and get a large  pizza, a 32 ounce Coke, and a sub sandwich for $5.99, or something ridiculous  like that. And so, and they would do that for the first couple of weeks just to get  people in the door because how do you compete when you're when you're new  in a business like that, you have to get people to come and try out your pizza.  Well, how do you do that? Well, you offer them a good deal. That's how you do  that. You you don't just put a sign up and say, "Boy, my pizza is much better than that guy down there. You know who says? Give them an incentive, and so that's  typically what would happen. So there are a lot of reasons why you see different  prices charged all the time, but according to the the standard model, though, this is a monopoly model. If price is ever above marginal cost, that's a no-no. That's  that's you know hit the hit the alarm button. That's a potential monopoly. Okay.  Well, maybe I'll I'll leave leave that for now, in in terms of you know the real the  real source of a monopoly has always been government, as I said, and even this this output restriction idea, Rothbard is is sort of entertaining as always when he talks about it in his chapter in Man Economy and State. When you look at the  output restriction idea, one one serious you know he's not not totally  entertaining, but but one really good point he makes is that okay, they're saying  welfare is reduced by output restriction. Well, if if this industry is using fewer  resources than it otherwise would because of this output restriction, those  resources are being put to work somewhere else. They'll be bid away by other  entrepreneurs, the labor and the materials and so forth to do other things. So 

this means that by definition there'll be an expansion of output somewhere else,  even though there's a reduction of output here. And so how could you say  unequivocally there's a reduction in welfare if there's an expansion somewhere  else? He just takes and then then there's sort of a reductio ad absurdum to all  this, how many of you watched Ultimate Fighting on TV? Some of the guys are  probably fans. Any women fans of Ultimate Fighting? How about Ultimate Mud  Wrestling? Anybody? Do they have that? That would be a good one. Maybe we  should. It's an entrepreneurial idea. But but but you know the Ultimate Fighting  guys-they they just beat each other's brains in. If you ever watched it, it's it's  much more vicious than the Muhammad Ali Frazier type of boxing. These guys  really, you know, kill break each other's arms, literally and legs, things like that.  And how often do these guys fight? Do you think? Who watches? Who's a fan?  We got a fan here. Who wants to take a guess? How often do they do this? It's  pretty brutal, and yeah, about yeah, you have to be in top condition. You have to be as strong as you can get, and because they really is a really grueling thing if  you watch it. So two or three times a year. Well, they're obviously restricting  output, aren't they? Two or three times a year. Why don't they fight like Brad Pitt  did? In that movie Fight Club, every night, every night they were down there  bare knuckles too, fighting, and you know that was a perfect, perfectly  competitive fight fight club there every single night, and so, and so you could  when you look at this whole idea of output restriction as a measuring rod of  monopoly, it can get really ridiculous, and and the policymakers have made it  ridiculous. Example, I probably will never forget this because it was just such a  caricature of the lunacy of this idea. There was a guy from the Federal Trade  Commission giving a talk at a conference in D.C. on antitrust, and he was  bragging about all the wonderful things they were doing. And he said in Detroit,  the automobile dealers were shutting down at 5 p.m. in the winter time in Detroit, all of them. So if you wanted to buy a car after work in the city of Detroit, and  this was 20 years ago, you couldn't. And there were, he said, the FTC was  investigating this because they thought they were colluding to restrict output by  closing down at 5 o'clock in the winter, in the winter time, and so and and I  asked him. I was the one. I stood up and asked him, "Does this does this mean  that forced labor is a prerequisite for economic efficiency? Because that's really  what you're saying. You know, what are they going to do? Tell these guys you  have to stay at work until 9o'clock. You know, that would be forced labor. That  would be slavery. You know, you want to-it's your business, you own it. You want to go home at 5o'clock and have dinner. No, the government says you got to  stay there till nine. What is that conscription? And so he had-he was just totally  silent. He-he never thought of that before, but he-he was so self-congratulatory  in his presentation. He, yeah, you know, not really thought about that, and so,  but that's but that's true. That would be true. It's a form of conscription if you if  you if you look at it that way. And another point that Rothbard makes in his 

analysis of this is you know most economists talk about consumer sovereignty  and the loss of consumer welfare from the output restriction, but Rothbard says,  well, he makes the case for individual sovereignty, and in other words, it's it's a  property rights approach, property rights based approach, because you know  here's a business owner, private business owner, and he he or she can do  whatever they want with their their property as long as they don't harm  somebody with it, and so you know who's to say that the well-being of the  consumer should always take precedence over the well-being of the business  owner, who's just doing with with his own property, trying to make as much  money as he can with his own property. You know why is the consumer always  the more important? And so, and that's that's a good example of how a bias  sneaks into economics under the guise of science, under the guise of positivism  and unbiased work, but that is about that. You are making a statement about  what you think the appropriate system of property rights is. You're saying that  the average consumer should have superior property rights to the average  business owner in here, even though it's not, it's never made explicit by  economists. Well, like I said, government has always been the source of  monopoly, and I'm teaching an online course on the road to serfdom right now  for the Mises Academy. And and by the way, if anyone wants to lose weight, do  what I did last night: go up to Marty Rockwell's office and sit there for about an  hour and a half at about 6 p.m. after the the heat has come through the skylight  all afternoon, right there, it's like a sauna up there. If you think it's cold in every  other every other room in this whole building, it's freezing, and where I go to  teach my class with the doors shut to keep the noise out, it must have been 120  degrees in there with the skylight, the sun beating down. But but anyway, but  anyway, here's Friedrich Hayek in his famous book, The Road to Serfdom. Talks about monopoly in a number of places, and he says this monopoly. This was  published in 1944. Monopolists regularly seek and frequently obtain the  assistance of the power of the state to make their control effective. Everybody  knows that he says the United States and Germany. He says the growth of  cartels and syndicates has since 1878 been systematically fostered by  deliberate policy. So he's talking about Germany and the United States, and he  says yes, there's there's been monopoly, but it's been deliberate policy. How has it been deliberate policy? Well, I can read to you how so-called natural  monopolies were created in the utilities industry. Here's an example of how  exactly natural monopolies came about. There was nothing natural about it.  There was nothing free market about it. There were many competitors in the  telephone industry, the electric power industry, natural gas, water supply-they  never did monopolize. But there's a book and an article of mine called "The  Myth of Natural Monopoly. I cited a book called "The Gaslight Company of  Baltimore, and believe it or not, Richard T. Ely has a lot to do with this. Richard  T. Ely was in Baltimore teaching at Johns Hopkins. And he wrote a whole bunch 

of articles on the electric power and the light industry of his time, and a lot of  these, a lot of this made it into this book that I that I dug up, and explained how  natural monopoly, so-called, came about. And here's how it came about: in  1890, a bill was introduced into the Maryland legislature, which called for an  annual payment to the city from the Consolidated Gas Company, it's now called  Baltimore Gas and Electric, of $10,000 a year and 3% of all dividends declared  in return for the privilege of enjoying a 25 year monopoly. End quote. And this is  what happened all over America, governments created 25 or 30-year  monopolies by law, and then, and of course, they allowed them to charge  monopoly prices, and then they split the loot with the politicians: 3% of all profits  plus a $10,000 a year signing bonus for the politicians for signing the law into  law, and so and that's how so-called natural monotheism. Not a the story that  that you were all miseducated in. If you took microeconomics, was that  economies of scale were were becoming prevalent, and one big firm was  dominating all these industries. Therefore, some politician, some local politician  of the mayor or the governor got on his big white horse and rode in and saved  the consumer from monopoly. That's not how it happened. That's a myth. Even  though you're taught that in your economics books, it's a myth. It never  happened like that. This is how it happened. And other examples, a few more  examples of you know the real source of monopoly in American history. Anyway, well, the railroad and trucking industries were monopolized for many, many  years through the Interstate Commerce Commission. The Interstate Commerce  Commission, the first head of it, was the president of a railroad corporation, and  guess what? They regulated prices at monopolistic levels for decades. The  same with the Civil Aeronautics Board. There were more airlines in America in  the 1930s, and there were in the 1970s, the Civil Aeronautics Board was a  regulatory agency that reduced the competition in airlines, and they they literally  made price competition illegal. The government set the prices for airfares. That's that's why they were eventually deregulated in the late late 70s. And one of the  rare good things that happened in American economic history, as far as  deregulation goes, but but the stories are legendary about how back in those  days in the 50s, the the main fly main people who flew on the airlines were  businessmen, mostly men. Very few women were. I've seen the statistics on  this, like business school graduates in 1970 versus 2010 or 2000, and it's like  3% versus 55%. So back in the 50s, there were very few women flying, and so it was illegal to compete by price. And so what the airlines did was they competed  by quality, and the type of quality was free booze and flight attendants dressed  like Playboy bunnies. It was like every airline was like Hooters Air, every every  single every single one of them. And I tried to I looked this up on the web once,  and there are there are whole books written about this with pictures of these  these women dressed like cheerleaders and things on you know flight  attendants. But that that's how they competed. So you so even government you 

know, government can never totally eliminate competition. No matter how hard it tries, somebody will get get around it. But they did this for many, many years.  But that's how it caused antitrust. I'm kind of running out of time. But one of my  articles that I published many years ago in the International Review of Law and  Economics is one where I looked at the origins of the Sherman Act because I  was an economics major in school, I got a Ph.D. I was teaching for a few years,  and it struck me that I never saw evidence of this story that there was monopoly  in the late 19th century to justify the Sherman Act. I'd heard, I'd seen it written  over and over and over and over again, but where's the evidence? And so, and I found out that no one had ever done this. No one had ever sought published  evidence anywhere, and so I just looked at the two most prevalent things that  economists talk about: what was happening to production output, and what was  happening to prices. And these industries are accused of being monopolies in  the decade prior to the Sherman Act, 1880 to 1890. And what I found was that in terms of outputs, GDP was expanding by I think it was seven or 8% during that  decade. Not seven eight more than that, maybe like 3% a year for a decade. It's  pretty good expansion, but these industries that were accused of being  monopolies expanded their output by 175% during the decade prior to the  Sherman Act, this was a period of price deflation. Prices went down on average  by 7% All of these industries, for a decade, were cutting their prices faster than  than the general economy. So these were the most rapidly expanding, dynamic,  vigorously price-cutting industries for decades, and they were targeted as being  monopolies. Which they weren't; they were just fierce competitors. They were  excellent competitors. John D. Rockefeller made his money by dropping the  price of refined kerosene down almost to nothing. That's how he made his  money. That's how you make big money in manufacturing. Figure out how to sell large volumes to the masses, and that's what these entrepreneurs did. And so  even even the the story of where the antitrust laws came from and why they  were necessary, I argue is false. And I write about this in my book also, how  capitalism saved America, which is for sale. And for an extra $10, you get my  autograph on on that downstairs. And time is up.