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.
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.
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.
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.
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.