This is the essay for the 4th week of the Tom Woods Homeschool Government course. In this blog post, I will be discussing two things:
1. How the market economy is improving the standard of living.
2. How the fears of a free-market monopoly are misplaced.
The standard of living has risen tremendously during the last two centuries and so has government control. A lot of people like to claim that the standard of living has risen because of the increase in government control, but I would like to proclaim the opposite. If we suddenly lose all of the goods that helped us produce other goods, otherwise known as capital goods, then our standard of living would collapse. This is because we would be able to produce much less without capital goods and we wouldn’t even be able to produce some goods at all. To produce the same amount, we would have to work impossible hours and would thus have to settle with much fewer goods than before. Everything would become much more expensive because there are much fewer of them and it would take much longer to produce them in the first place.
How would this society I have imagined climb out of poverty? One idea is to spread the wealth from the rich people to the poor people. The result of this is that the wealth is spread so thin that the poor people wouldn’t even notice a difference. The actual solution is to produce more consumer goods because then prices will go down and people can afford and will have more goods. The problem is that this is difficult because of the insane work hours mentioned above. To combat this, it is necessary to produce more capital goods first so the production of goods is made easier. To produce capital goods you need to save some of your current profits for later so you can invest those profits into producing capital goods. Capital investment results in lower prices of goods that were already being produced but also a bigger variety of goods that are getting produced. This is because fewer people will be able to produce the same or more of a specific good than before and the people who aren’t producing that good anymore can now produce something else.
The market economy is able to increase the standard of living by having business owners that are free to save and invest however they please. The capital goods they invest in increase the production the economy is capable of. The increased production of the goods makes it so that prices fall relative to wage rates. The higher efficiency of the production of goods means that some laborers are now free to produce something else and it results in a higher variety of goods than before. Nowadays you don’t see prices falling in most sectors because governments are printing money and because of the increasing money supply prices fall less than they would’ve otherwise, stay stagnant or even increase in price. However, prices still fall relative to wage rates but less than it would’ve without government intervention.
When a business is a monopoly that means that they all or almost all the market share in a specific industry. The argument that is usually derived is that these businesses can sell their goods or services at any price they want because consumers can’t buy them anywhere else. Then the government says that there should be antitrust laws so these monopolies can be prevented in the free market. Before we start dissecting these arguments we need to make an important distinction between a political entrepreneur and a market entrepreneur. A political entrepreneur gains their wealth by having the government create laws to harm competitors, this results in a monopoly that hurts consumers. A market entrepreneur on the other hand gains their wealth by providing consumers with products and/or services that they want at prices that they can afford. They stay in business by constantly innovating and responding to consumers.
The profits that are gained from monopolies come from increasing prices and lowering supply. If we look at 19th-century entrepreneurs who are accused of doing this, we find it’s simply not true. This is what economist Thomas Dilorenzo did in his book International Review of Law and Economics. For example, John D. Rockefeller lowered the price of refined petroleum from 30 cents to 5.9 and he even increased production. These are the exact opposite characteristics of what a monopoly has. The way that theorists propose that monopolies are formed is by using predatory pricing. Predatory pricing works by having a company with a majority market share sell their products at a loss, so their prices are lower than all their competitors and eventually, all the competitors will go out of business. Then the company jacks up the prices and because all other competitors are out of business, consumers have nowhere else to go.
In theory, it sounds plausible, but in reality, it is a suicidal business practice. First, the company that is using predatory pricing is losing the same amount as its competitors, because almost everyone is buying from them. This means that the extra capital that they have over their competitors, doesn’t make a difference. Even if the predatory company does manage to drive all other competitors out of business, then it would take them a long time to make back all the money they lost. This is because consumers would buy a lot more of their products while they are cheap than when they are expensive. Another problem is that if entrepreneurs see high profits in an industry, they would want to join in as well, to get a share of those profits. This means that the predatory company wouldn’t be able to enjoy their high profits for long before they have to start the cycle all over again for the new businesses that have joined. These new businesses also have a lower cost to startup, as they bought a lot of their equipment from the old businesses that were going bankrupt at cheap prices. The final nail in the coffin for predatory pricing is that if predatory pricing does somehow manage to succeed even with all these hurdles then consumers will obviously be worse off, but also the suppliers of the goods to the predatory pricing company. The supplier will sell fewer of their products because they are sold at high prices by the company. The solution is to have a minimum- or maximum-resale-maintenance agreement. This prevents the company from selling the supplier’s products below or above the set thresholds if they don’t want to go to court. This shuts down the possibility of a predatory pricing strategy before it even begins.