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A question about Hoppe's 'The Economics of World Government'

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Meistro posted on Sun, Mar 10 2013 11:01 PM

"From the point of view of a producer, a monopoly is always great and competition is always terrible."

 

Is this really true?  The producer can only experience monopoly gains in certain industries - like energy, for example - where consumers cannot switch to a different substitute for this good.  Are monopoles in fact always great?  Or are they often mediocre, even from the point of view of the producer?

 

... just as the State has no money of its own, so it has no power of its own - Albert Jay Nock

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A monopoly producer simply can't dictate the price of their product and assume it will clear. Ultimately the the clearing price is determined by what the aggregate of consumers are willing to pay.

One of the main reasons why it is advantageous to be a monopoly producer is that the customers are purchasing the product from you and not some other producer.

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The Austrian definition of monopoly differs from the mainstream one.

Wikipedia on monopoly:

A monopoly (from Greek monos μόνος (alone or single) + polein πωλεῖν (to sell)) exists when a specific person or enterprise is the only supplier of a particular commodity...Monopolies are thus characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods.[2] The verb "monopolize" refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power, to charge high prices.

AE defines monopoly the way Wikipedia in the article define a legal monopoly:

A government-granted monopoly or legal monopoly, by contrast, is sanctioned by the state... Patents, copyright, and trademarks are sometimes used as examples of government granted monopolies... The government may also reserve the venture for itself, thus forming a government monopoly.

According to Austrians, as long as there are no laws preventing free entry of anyone who so wishes into a particular market, there is no monopoly in that market. They also argue that the power to charge prices not in keeping with the laws of supply and demand will not exist as long as there is free entry. And this is true even if no one at all actually enters, [except for one company that is the only one in the market].

In the old days, there were plenty of energy companies in competition with each other. It was the govt that granted a monopoly to certain companies.

As for the question if monopolies are always great, or can they be mediocre, the answer, according to Mises in HA, is that they can indeed be mediocre. See Chapter 16, section 6, Monoply Prices. Here's a small quote from there:

Monopoly is a prerequisite for the emergence of monopoly prices, but it is not the only prerequisite. There is a further condition required, namely a certain shape of the demand curve. The mere existence of monopoly does not mean anything. The publisher of a copyright book is a monopolist. But he may not be able to sell a single copy, no matter how low the price he asks. Not every price at which a monopolist sells a monopolized commodity is a monopoly price. Monopoly prices are only prices at which it is more advantageous for the monopolist to restrict the total amount to be sold than to expand his sales to the limit which a competitive market would allow.

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Wheylous replied on Mon, Mar 11 2013 10:19 AM

Legal monopolies in specific industries are nice, especially when you get government to place barriers to entry on substitute goods as well. Even better if the government can force the public to buy your product.

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Clayton replied on Mon, Mar 11 2013 11:56 AM

A bird in the hand is better than two in the bush. Even if you could theoretically operate at a higher profit in a free market (which you probably couldn't), you're better off having a smaller guaranteed profit than a higher profit which may be lost to bankruptcy due to being out-competed by more efficient producers.

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Wheylous replied on Mon, Mar 11 2013 12:02 PM

While this result is likely to hold for monopolies in a single industry, it probably does not hold when you look at the entire free market. If there is a monopoly of all production under one agency, then the inefficiencies created could very well overshadow the monopoly profits the agency could earn.

For example, if a person in ancient Greece was given monopoly control over everything, projecting this monopoly over an extended amount of time would likely wreak such economic damage that it could negate the monopoly profits.

Hm... now that I think about it, though, this might only be true in the long term (hundreds of years). Otherwise, socialist dictators must be downright stupid.

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@Wheylous: I think you're touching on the central thesis of Mises' impossibility argument: socialism is impossible because the pan-monopolist cannot calculate. In the process of implementing the pan-monopoly, he destroys the very basis of calculation, which is exchange. It's not just about monetary calculation, either, since it is possible to roughly calculate in terms of barter goods... certainly, two sheep are better than one sheep, ceteris paribus. Rather, it's about the destruction of the requisite conditions for exchange: that it be a revelation of the preferences of the individual.

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Jargon replied on Mon, Mar 11 2013 3:13 PM

EDIT: Nevermind

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It's not just about monetary calculation, either, since it is possible to roughly calculate in terms of barter goods... certainly, two sheep are better than one sheep, ceteris paribus.

The calculation problem is about how to produce at a profit, and once the economy is complex enough, two sheep are better than one won't begin to solve the problem.

Laid out here:

https://smilingdavesblog.wordpress.com/2012/08/11/mises-calculation-problem-in-simple-language/

https://smilingdavesblog.wordpress.com/2012/08/11/mises-calculation-problem-in-simple-language-part-two/

https://smilingdavesblog.wordpress.com/2012/08/11/mises-calculation-problem-in-simple-language-part-three/

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Reply to OP:

1. They can be mediocre. Very specific conditions have to be met for a monopoly to make more money than under free market conditions.

The quote from HA, Chapter 16, section 6:

Monopoly is a prerequisite for the emergence of monopoly prices, but it is not the only prerequisite. There is a further condition required, namely a certain shape of the demand curve. The mere existence of monopoly does not mean anything. The publisher of a copyright book is a monopolist. But he may not be able to sell a single copy, no matter how low the price he asks. Not every price at which a monopolist sells a monopolized commodity is a monopoly price. Monopoly prices are only prices at which it is more advantageous for the monopolist to restrict the total amount to be sold than to expand his sales to the limit which a competitive market would allow.

Details in section 6.

2. BTW, the Austrian definition of monopoly is different than the mainstream one. Wikipedia on Monopoly uses the mainstream definition. The Austrian one is what Wikipedia calls "legal monopoly". The reason is because Austrians claim that all the bad effects of a monopoly do not exist if there is free entry into a market. It does not matter if in actuality there is only one supplier, as long as free entry is allowed by law.

 

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Thinking of world governemnt as a monopoly of some type is sophomore.  World governance will be much more than some monolithic world state.  it will never look like a world state, ever.

"The Fed does not make predictions. It makes forecasts..." - Mustang19
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Have to revise what I wrote, based on new info [to me] contained in this thread:

http://mises.org/community/forums/t/27715.aspx

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"From the point of view of a producer, a monopoly is always great and competition is always terrible."

 

Is this really true?  The producer can only experience monopoly gains in certain industries - like energy, for example - where consumers cannot switch to a different substitute for this good.  Are monopoles in fact always great?  Or are they often mediocre, even from the point of view of the producer?

Of course it's an exaggeration.

Any abstract representation of a real world phenomenon cannot "always" be true.

Even for the best established laws of physics break under certain circumstances, and even if they never broke or changed, you could never really know, since you cannot possibly test them under all possible circumstances.

So this kind of quest for "absolute truth" is completely pointless.

Instead of asking whether something is "always true" like some sort of religious dogma, you should be asking what does the author really meant when he said that.

Some people will use exaggerated language and talk in terms of "absolutely certifiable knowledge"  to make a rethorical point, but this is generally due to the limitations of our language to convey precise meaning, and not due to some sort of divine revelation.

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