Why does capitalism cause monopoly?

Readers question: Firstly, I wholeheartedly praise the magnificent work done by you in exhibiting economic knowledge and demystifying it to us, the mediocre audience. I seriously question one fact that you presented about capitalism and how it “inevitably causes monopoly”. I grew really surprised and perplexed the moment I read that in “The problems of Capitalism” of yours. If you reconsider, Capitalism with its competitiveness, equal free chances, and free markets with no intervention from a higher authority ( The government ) actually endeavour towards diminishing Monopoly.

A good example to understand how capitalism can cause monopoly power is to look at the Gilded Age 1870s-1900s in the US.

In this period there was very little, if any, government regulation of industries. But, in this period certain capitalists sought to dominate industries to maximise profit.

railways

For example, J.D. Rockefeller used his business acumen to gain monopoly power over oil and railroads. For example, Rockefeller would use tactics such as

  • Aggressive undercutting of rival firms. On selected occasions, he would sell oil at a loss – so other firms would go out of business. He would then buy up these former competitors to gain more market share. This enabled him to increase prices and make more profit. With more profit, he was in a stronger position to continue this tactic of aggressive price wars to make other rivals go out of business
  • Vertical integration. Another tactic Rockefeller used was to own the railroads. When competitors wished to transport oil by railroad (there were no alternatives in those days), he would charge them excessively high prices. Therefore, he made super-normal profits on the transport of oil. Prices of transport could be so high, competitors were forced out of business or had to sell up to Rockefeller, enabling him to gain more market share. As his oil business (Standard Oil) grew, becoming more powerful, it was increasingly hard to compete because he had the resources to undergo temporary losses.

Other firms gained monopoly power through the exploitation of economies of scale, e.g Andrew Carnegie gained monopoly power through a combination of exploiting economies of scale and also aggressive pricing tactics with competitors.

Monopsony power

Another aspect of monopoly power is that powerful firms are often able to make more profit by paying low wages.

Classical economics assuming labour markets are perfectly flexible, and if a firm pays a low wage, a worker can go and work somewhere where wages are higher. But, if you grow up in a town where 80% of jobs are at a local coal mine, you don’t have any alternative. Workers can’t easily move to London and hope to get a better-paid job. Therefore, they have to accept lower wages.

Modern-day monopolies

The modern-day monopolies are found in IT industry. Firms like Google, Apple and Microsoft, have created powerful positions of dominance in the industry, making it very difficult for any real competition in certain aspects. The success of these monopolies can be seen in the cash reserves.

Regulation of capitalism

After the excesses of the Gilded Age, the US slowly started to introduce regulations to prohibit monopoly power.

  • Standard Oil was broken up a decision of the Supreme Court.
  • Forcing rivals out of business through making a loss is prohibited
  • Collusion is illegal
  • Labour market regulations ensure minimum wages and minimum standards of safety at work

Problems of capitalism

I would argue capitalism doesn’t always lead to ‘competitiveness, equal free chances’

The best way to compete may be to force rivals out of business. Without government regulation, the most unscrupulous and powerful firms may do this.

Equal free chances. Another aspect of capitalism is that equal free chances is unlikely to occur.

Education depends on income of parents. So in the days before public education, education was usually the preserve of wealthy families. This enabled wealthy people to have better opportunities. Families who couldn’t afford education were resigned to working in unskilled jobs with limited opportunities.

Evaluation

It is possible capitalism doesn’t cause monopoly power, but this would require the most successful business to also have altruistic aims and to have both the profit motive and the desire to keep competition.

By on August 5th, 2016

12 thoughts on “Why does capitalism cause monopoly?

  1. I have to take issue with many of the claims made in the response to the original question.

    “…the Gilded Age 1870s-1900s in US. In this period there was very little, if any, government regulation of industries.”

    Actually not true.
    https://cei.org/blog/sad-early-history-railroad-regulation-subsidies-nationalization

    “Aggressive undercutting of rival firms. On selected occasions, he would sell oil at a loss – so other firms would go out of business. He would then buy up these former competitors to gain more market share. This enabled him to increase prices and make more profit. …”

    Not true again.
    https://fee.org/articles/john-d-rockefeller-and-the-oil-industry/

    Early on in the invention of any product, there is going to be an initial near monopoly by the originating company. What happens though, is that new inventions will often replace the old invention, and the monopoly the original company had. This is what the above author fails to mention. A free market capitalist society may have short term monopolies initially form, but they never last forever.

    1. Ronald, what’s to say monopolies can’t form again? When a capitalist’s goal is maximize return on investment, endgame to have the largest market share

    2. actually, monopolies will only get stronger without intervention. you can see it in the media industry which was deregulated by bill clinton in 96, there are now 6 companies running everything, soon to be 5.

      the “free market” does not resolve itself

    1. they’re workers…collusion with billion dollar and multi-million dollar companies harms the economy and destroys competition, creating monopolies. collusion with labor unions worth what, like hundreds of thousands of dollars maybe(?), is nothing compared to that done by corporations.

    2. Yeah, because there is no other possible way for an unskilled worker to have a fair negotiation with a multi-billion dollar business. Yeah it’s collusion, and maybe its unfair for the business, but so what? Look at UPS. Their entire workforce is unionized, and they made $6.3 billion last year. Their employees also make nearly double what anyone else in the industry makes and have excellent benefits at every level of service. I don’t see a problem here.

  2. The title of this post is disingenuous and misleading. The title assumes that capitalism is the cause of monopolies. Only government can create monopolies.

    As far as regulation, the government doesn’t level the playing field. In the 20th century, government gives out favors to the lobbyists, giving their beneficiaries an unfair advantage. So everyone lines up for an unfair advantage. This isn’t capitalism.

    Are monopolies really a problem today? Doesn’t technology, creativity, competition always devise a new solution. Yes. There are always options across markets. Apple and Microsoft didn’t become successful because of unfair practices, they became successful because of creativity and innovation. They need to be rewarded, not punished.

    1. “Only government can create monopolies.”
      laughably false. guess you paid no attention to this article or occurrences in today’s market?

      “As far as regulation, the government doesn’t level the playing field. In the 20th century, government gives out favors to the lobbyists, giving their beneficiaries an unfair advantage”
      not entirely the same…this is more about the problem of corruption and crony-capitalism. this does create monopolies, I suppose this is what you meant by only government can create monopolies. however, this is a symptom of a problem within capitalism itself that you are ignoring. billion dollar companies and highly lucrative businesses have the money to pay for lobbyists, which then lobby the government, which then creates an unfair playing field for competitors. still, this is a problem of unregulated capitalism. a lesser known company that doesn’t have the resources of those at the top DON’T have the money to pay for lobbyists.

      “Apple and Microsoft didn’t become successful because of unfair practices, they became successful because of creativity and innovation. They need to be rewarded, not punished.”
      he didn’t say they did. however, this still does not stop these companies from becoming monopolies in a market. I’m sure Rockefeller was seen as creative and innovative, didn’t stop him from creating a monopoly. he used Apple and Microsoft as examples of large businesses that dominate certain markets. funny you didn’t include Linux, because Apple and Microsoft dominate the market destroying Linux. and what punishment do you mean? paying taxes? like, giving money back to the country that allowed them to operate in the first place? does’t seem like much of a punishment to me. paying taxes to the government that can then be used for programs that benefit American citizens who bought their products in the first place? doesn’t seem like a punishment to me, seems more like returning the favor to the people who made you successful in the first place. Apple would be nowhere if there was nobody buying their products. Apple would be nowhere without the hundreds or thousands of employees they have that actually make the company run. do CEO’s do all that work by themselves? I don’t think so. and Apple goes years paying 0 taxes, so yeah, ridiculous argument to make

  3. What do you call it when a public utility, monopoly, who is the largest political donor in the state gets every piece of legislation they want and don’t want? In all cases keeps the free market from taking its course which keeps the state from benefiting by not creating jobs.

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