The Market for Liberty
Linda & Morris Tannehill
[Online Editor: Despite falling in love with this book, I wound up with various points of contention with the Tannehills, and as such, choose to spell out these points of disagreements by placing Post-it notes on various pages. What you find below chapter three of this fantastic work; but also you will find, in pale yellow, my comments, clarifications, and disagreements therewith.]
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Page numbers appear in blue: 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31
[16] Chapter 3.
The Self-Regulating Market
Government bureaucrats and their allies among the currently influential opinion-molders have made a practice of spreading misinformation about the nature of a free market. They have accused the market of instability and economic injustice and have misrepresented it as the origin of myriads of evils from poverty to “the affluent society.” Their motives are obvious. If people can be made to believe that the laissez-faire system of a free, unregulated market is inherently faulty, then the bureaucrats and their cohorts in classrooms and editorial offices will be called in to remedy the situation. In this way, power and influence will flow to the bureaucrats . . . and bureaucrats thrive on power.
The free-market system, which the bureaucrats and politicians blame so energetically for almost everything, is nothing more than individuals trading with each other in a market free from political interference. Because of the tremendous benefits of trade under a division of labor, there will always be markets. A market is a network of voluntary economic exchanges; it includes all willing exchanges which do not involve the use of coercion against anyone. (If A hires B to murder C, this is not a market phenomenon, as it involves the use of initiated force against C. Because force destroys values and disrupts trade, the market can only exist in an environment of peace and freedom; to the extent that force exists, the market is destroyed. Initiated force, being destructive of the market, cannot be a part of the market.)
Trade is an indispensible [sic] means of increasing human well-being. If there were no trade, each person would have to get along with no more than what he could produce by himself from the raw materials he could discover and process. Obviously, without trade most of the world’s population would starve to death, and the rest would be reduced to a living standard of incredible poverty. Trade makes a human existence possible.
When two people make a trade, each one expects to gain from it (if this were not so, the trade wouldn’t be made). And, if each trader has correctly estimated how much he values the things being [17] traded, each does gain. This is possible because each person has a different frame of reference and, therefore, a different scale of values. For example, when you spend 30¢ for a can of beans, you do so because the can of beans is more valuable to you than the 30¢ (if it weren’t, you wouldn’t make the purchase). But, to the grocer, who has 60 cases of canned beans, the 30¢ is more valuable than one can of beans. So, both you and the grocer, acting from your different frames of reference, gain from your trade. In any trade in which the traders have correctly estimated their values and in which they are free to trade on the basis of these values without any outside interference, both buyer and seller must gain.
Of course, if some outside influence—such as a gangster or a politician—prohibits the traders from doing business or forces them to trade in a manner which is unacceptable to one or both, either the buyer or the seller (or both) will lose. This happens whenever laws control prices, quality of goods, time and place of purchase (liquor laws), shipment of goods over borders (interstate commerce, tariffs, international trade restrictions), or any other aspect of trade. Only a voluntary trade can be a completely satisfactory trade.
Money is used because it makes trading easier and increases the number and type of trades possible. If you wanted to get rid of a motorcycle and to get in exchange a six months supply of groceries, three pairs of pants, several records, and a night on the town with your girlfriend, you’d find it pretty hard to make the trade without the use of money as a medium of exchange. By using money, you can sell that motorcycle to anyone who will buy it and use the cash to buy whatever you want. Because the use of money makes it no longer necessary for the buyer to have an assortment of the exact goods the seller wants, many more and better trades can be made, thus increasing the satisfaction of everyone.
Money also acts as the means of calculating the relative worth of various goods and services. Without money, it would be impossible to know how many phonographs a car was worth, or how many loaves of bread should be exchanged for the service of having a tooth pulled. Without a standard medium of exchange to calculate with, the market couldn’t exist.
To the extent that voluntary trade relationships are not interfered with (prohibited, regulated, taxed, subsidized, etc.), the market is free. Since governments have always made a practice of interfering with markets, and indeed depend on such interferences in the form of taxes, licenses, etc., for their very existence, there has never been a sizable and well-developed market which was totally free.
[18] The United States of America, though theoretically a free country, suffers from an almost unbelievable amount of market regulation.1 Though often called a capitalistic country, the U.S.A. actually has a mixed economy—a mixture of some government-permitted “freedom,” a little socialism, and a lot of fascism. Socialism is a system in which the government owns and controls the means of production (supposedly for “the good of the people,” but, in actual practice, for the good of the politicians). Facism [sic] is a system in which the government leaves nominal ownership of the means of production in the hands of private individuals but exercises control by means of regulatory legislation and reaps most of the profit by means of heavy taxation. In effect, facism [sic] is simply a more subtle form of government ownership than is socialism. Under fascism, producers are allowed to keep a nominal title to their possessions and to bear all the risks involved in entrepreneurship, while the government has most of the actual control and gets a great deal of the profits (and takes none of the risks). The U.S.A. is moving increasingly away from a free-market economy and toward fascist totalitarianism.
Fascism is an ideology that holds that all human value proceeds from the state (or the nation); in effect, that the state is “god.” Fascism may employ this economic model, or a model closer to that of the U.S.S.R., or other economic models—so long as the state has ultimate control. Historically, fascism has tended to employ the economic model described here in this book. A more-appropriate name for the economic model described is mercantilism or neo-mercantilism. It’s worth adding that the state often forces the tax-payers to assume the risks involved in entrepreneurship.
It is commonly believed and taught, particularly by those who favor the present “Establishment,” that the market must have external controls and restraints placed upon it by government to protect helpless individuals from exploitation. It is also held that governmental “fine tuning” is needed to prevent market instability, such as booms and busts. A vast amount of governmental action is based on the theory that the market would speedily go awry without regulation, causing financial suffering and economic havoc.
When politicians and so-called economists speak of “regulating the market,” what they are actually proposing is legislation regulating people—preventing them from making trades which they otherwise would have made, or forcing them to make trades they would not have made. The market is a network of trade relationships, and a relationship can only be regulated by regulating the persons involved in it.
An example of government regulation of the market is “price control.” A price is the amount of money (or other value) which sellers agree to take and buyers agree to give for a good or a service. A price isn’t a conscious entity and couldn’t care less what level it is set at or what controls it is subjected to. But the buyers and sellers care. It is they who must be controlled if the price is to be held at an artificial level. Price control, like all other political controls and regulations imposed on the market by legislative force, is . . . people control!
[19] Of course, such people-regulation can only be imposed by the initiation of the threat and use of physical force. If people were willing to trade in the manner prescribed by the government planners, they would already have been doing so and the market-regulating “services” of the planners would be unnecessary. Only by forcing unwilling buyers and sellers to act differently from what they would have if left free can government regulate or “fine tune” the economy.
This initiation of force against peaceful buyers and sellers inevitably causes them to act against their best interests, or at least what they believe to be their best interests [sic] When they act against their interests, they inevitably suffer a loss of value. It is a commonly held myth that government bureaucrats know far better than the rest of us “how things ought to be run,” so that it is actually good for the public as a whole if some people are forced to act against their selfish interests. But this myth of “the wise government planner” ignores two important facts. First, you are in a far better position to know how to manage your affairs, including your business and professional life, than is some far-off, politically selected bureaucrat. And this truth is just as applicable to every other person operating honestly and peacefully in the market, especially those whose market transactions are extremely complex and important. You may make mistakes in your market dealings, but the bureaucrat’s isolation from direct and immediate information about your situation and his lack of a strong personal interest in your affairs absolutely guarantee that he will make a lot more and bigger mistakes, even if he’s honestly trying to help. Besides, when a bureaucrat makes a mistake in regulating your affairs, he doesn’t receive any feedback, in the form of economic losses, to alert him to his error. You receive all the feedback, but you aren’t in a position of control, so you can’t correct the error.
The second important fact ignored by the myth of “the wise government planner” is that the individuals who are being forced by government regulation to act against their interests are a part of the very public which is supposed to benefit from these governmental controls. Therefore, a loss of value by those who are controlled is also a loss of value for “the public.” And, because a market consists of a network of highly interconnected relationships, a loss to any person dealing in the market tends to diffuse to those doing business with him, and from them to their business contacts, etc.
For example, suppose the government were to pass a law requiring all washing machines in laundromats to have a washing cycle at least 45 minutes long, to protect customers from insufficiently washed clothes. The laundromat owners, being unable to serve as many customers per washing maching [sic] as before, would take in [20] less money. This would prevent them from buying more and newer washers and driers, which would hurt the manufacturers of these products, who would then be unable to buy as much steel and porcelain, etc., etc. At the other end of the line, the customers of laundromats would also be hurt as a shortage of available washing machine time developed, due to the original 45-minute regulation plus the laundromat owners’ inability to buy new machines and replace wornout [sic] ones. (At this point, some government bureaucrat is sure to call for federal action to deal with the crisis in the laundromat industry caused by “the excesses of an unregulated market!”)
In this way, people who were naturally already doing business in the most profitable way, for both seller and buyer (remember, we’re talking about a free, competitive market), are forced by government regulation of the market to act differently, which causes them losses. Advocates of government regulation usually accept the idea of imposing some losses on those who are regulated, but they fail to take into account the fact that those losses will inevitably diffuse throughout the economy like ripples spreading in widening circles over a pond. They also fail to recognize that a society with government regulation is dangerous to every individual person, because anyone may be the next victim, directly or indirectly, of government controls.
But even though government regulation of the market necessitates the initiation of force and causes widespread losses, many people still feel it is necessary to force some sort of order on the seeming chaos of the market. This belief stems from a complete misunderstanding of the way in which the market functions. The market is not a jumble of distorted and unrelated events. Instead, it is a highly complex but orderly and efficient mechanism which provides a means for each person to realize the maximum possible value and satisfaction commensurate with his abilities and resources. A brief examination of the workings of the market will illustrate this point. (A complete proof of it would require several hundred pages of economic analysis.2)
The price of any good on the market (including such things as a doctor’s fees and the rates of interest on borrowed money) is determined by the supply of the good available relative to the demand for it.3 Within the limits of available resources, the supply is controlled by the demand, since producers will produce more of a good in order to increase their profits when customers demand more and [21] are thus willing to spend more for it. So it is consumer demand which really calls the tune in a free market.
Consumer demand is the aggregate result of the economic value-judgments of all the individual consumers. Thus, it is the values of individuals, expressed through their demand for various products, which cause the market to be what it is at any given time.
The price of any good on the market will tend to be set at the point where the supply of that good (at that price) is equal to the demand for it (at that price). If the price is set below this equilibrium point, eager buyers will bid it up; if it is set above, the sellers will bid it down until it reaches equilibrium. At the equilibrium price, all those who wish to buy or sell at that price will be able to do so without creating surpluses or shortages. If, however, the price is artificially lowered by a government price-control, more buyers will be attracted while sellers will be unwilling to sell, creating a shortage with its attendant problems of rationing, queues, and black markets. On the other hand, if government sets the price higher than the equilibrium price, there will be a surplus of the good, bringing financial ruin to those who are unable to sell their excess stock. A specialized example of this occurs in the labor market whenever government (or government-privileged unions) forces a minimum wage higher than the equilibrium wage, leading to a surplus of labor and so causing unemployment problems and an increase in poverty (and this is only one way in which government causes unemployment and poverty).
Thus, the market has a built-in self-regulating mechanism which continually adjusts the price of products (and, similarly, their quantity and quality) to the supply of available resources and to the amount of consumer demand. It works like a complex signal system, visible to all and reliable if not interfered with. The signals are given by consumer value choices. They are transmitted to the sellers (businessmen and entrepreneurs) by means of profit and loss. A profit tells the businessman that consumers are pleased with his product and that he should continue or even increase the level of production. A loss shows him that not enough consumers are willing to buy his product at the price he is asking, so he should either lower his price or redirect his money and effort into some other line of production.
This signal system keeps the market constantly moving toward equilibrium even as new data enter and upset the previous balance. For example, suppose that Eastern Electric begins manufacturing a newly invented TV tube which shows the picture in three dimensions. As consumers hear of the new 3D TV (via news reports and advertising), demand for it skyrockets. The number of 3D TVs [22] Eastern Electric can produce is limited, so the large demand and small supply result in an extremely high price and high profit margins for Eastern Electric. But this same high profit, which may seem at first to be an instance of market imbalance and unfairness, is the signal which moves the market toward equilibrium. Eastern Electric’s high profits stimulate other firms to do research on 3D TV so that they may enter the field with new and better models and share in the profits. Soon, half a dozen firms are selling competing 3D TVs and the increased supply satisfies the demand. This brings the price down until high profits disappear and earnings in the 3D TV industry are about the same, percentagewise, [sic] as in every other industry. At this point, new firms stop entering the field, as there is nothing more to attract them. The whole market levels off and, barring another new input of data, remains stable. Thus, when the market is unhampered, any new input of data immediately sends out profit or loss signals which set in motion factors which maintain market equilibrium. The market is a self-regulating mechanism. (It should be noted that the high initial profit realized from a new product is also a just process in which the innovator is rewarded for his investment of time, money, and mental labor.)
Individual self-interest is the basis for the whole market system, which is why it works so well. The consumer acts in his self-interest when he buys things at the lowest prices and with the best quality he can find. The producer acts in his self-interest in trying to make the highest profit possible. Both consumer and producer attempt to profit from their market transactions; if either side didn’t expect to gain, no trade would take place. This double utilization of the profit motive results in maximum consumer satisfaction and rewards entrepreneurial efficiency.
Government effects the economy in three major ways—1) by taxation and spending, 2) by regulation, and 3) by control of money and banking. Taxation is economic hemophilia. It drains the economy of capital which might otherwise be used to increase both consumer satisfaction and the level of production and thus raise the standard of living. Taxing away this money either prevents the standard of living from rising to the heights it normally would or actually causes it to drop. Since productive people are the only ones who make money, they are the only ones from whom government can get money. Taxation must necessarily penalize productivity.
Some people feel that taxation really isn’t so bad, because the money taken from the “private sector” is spent by the “public sector,” so it all comes out even. But though government spends tax money, it never spends this legally plundered wealth the same way as it would have been spent by its rightful owners, the taxpaying victims. [23] Money which would have been spent on increased consumer satisfaction or invested in production, creating more jobs and more products for consumers, may be used instead to subsidize welfare recipients, controlling their lives and, thus, discouraging them from freeing themselves in the only way possible—through productive labor. Or it may be used to build a dam which is of so little value to consumers and investors that it would never have been constructed without the force of government intervention. Government spending replaces the spending which people, if free, would do to maximize their happiness. In this way, government spending distorts the market and harms the economy as much or more than taxation.
If taxation bleeds the economy and government spending distorts it, governmental regulation amounts to slow strangulation. If a regulation requires businessmen to do what consumer desires would have caused them to do anyway, it is unnecessary. If it forces businessmen to act against consumer desires (which it almost always does), it harms the businessman, frustrates the consumer, and weakens the economy—and the confused consumer can usually be propagandized into blaming the businessman. By forcing businessmen to act against consumer desires, government regulation increases the cost of the regulated products (which, in our present economy, includes just about everything) and so lowers living standards for everyone and increases poverty.
Government regulation not only hurts the poor indirectly, by raising prices, but directly as well, by denying them opportunities to move up and out of their poverty. Suppose a black man who couldn’t get a decent job decided to support his family by making sandwiches and selling them to the men on local construction projects. First, he would have to apply, in proper legal language and procedure, for licenses and permissions from all the branches and departments of government which required them. He would probably need licenses from city and state, permitting him to make sales. Then he would have to be regularly inspected and certified under pure food and drug laws. If he managed to comply with all this without going broke or giving up in despair, he would still be faced with the problem of keeping extensive records to enable the city, state, and Federal tax collectors to take part of his earnings and to be sure he paid his “fair share.” This would require an extensive knowledge of bookkeeping, which he probably wouldn’t have. Suppose he decided to hire his brother-in-law, who knew a little bookkeeping, to keep his records. Then he would have to comply with all the laws which harass other employers, including income tax and social security deductions from his employee’s earnings, sales tax, minimum wage laws, and working condition standards. With [24] such powerful barriers to success, no wonder the poor get poorer!
Not only does government regulation prevent enterprising individuals from going into business for themselves, it also helps freeze many employees into an 8-to-5 grind unnecessarily. There are a large and increasing number of jobs in our automated world which require, not that a specified set of hours be put in at an office, but that a certain amount of work be accomplished, regardless of how long it takes or where it is done. As long as an employee in this kind of job gets his work done, it shouldn’t matter to the company if he does it in one hour a day and works only in his own kitchen between the hours of 2 and 3 a.m. And yet, employers, caught in the fascism of government regulation and red tape, become increasingly inflexible and insist that employees put in an 8-hour day, even if five of those hours are spent sitting at a desk doing nothing but trying to look busy. Without government regulation, businesses would be freer to innovate and would have to compete harder for labor, due to the economic boom created by freedom. This would mean much less rigid working conditions for employees.
Economic freedom is important to large businesses, but it’s just as important to the ordinary man in the street, to the poor man, to the college student. In the long run, busybody regulations, usually aimed at helping special interest groups, harm everyone.
Add to this the disaster of governmental monetary control, with its inevitable inflation, depressions, balance of payments problems, gold drains, unsound currencies, and eventual monetary breakdowns and one begins to realize how much damage governmental meddling does to the marvelously efficient and productive mechanism of the market, and how much higher the standard of living would be if the market were free. In view of the poverty created by government’s interferences with the economy, governmental anti-poverty programs would be laughable if they weren’t so tragic.
Any governmental interference with the market, no matter how well-meaning, distorts the market and misdirects the vital signals, which misdirection further distorts the market and prevents it from moving toward stability. Government bureaucrats’ “fine tuning” of the economy resembles the activities of a bunch of lunatics, armed with crowbars, “adjusting” the workings of an automated electronics plant.
The unregulated market has often been accused of creating unemployment, and the poverty of the masses in England during the Industrial Revolution is cited as an example. But the market’s critics fail to point out that the poor were in an even worse condition before the Industrial Revolution when the infant mortality rate was [25] almost 75% and periodic famines swept the land, killing off the “excess population.”4
As a free market matures into full industrialization, the productivity of workers increases (due to increasing investment in capital goods—that is, the tools of production) so that workers’ incomes rise. This is because the only source of prosperity is value-production. Production depends on tools—the more and better tools with which the worker is equipped, the greater his productive capacity. Industries continually improve the tools (machines) their workers use in an effort to increase production and profits. The workers’ wages then rise as industries bid against each other for labor. In a free market, wages would rise because management’s increased investment in tools increased the productivity of workers. Powerful unions and costly strikes would be unnecessary, since wages would always rise to market level (which is the highest level the employer could afford to pay).
Along with the rise in wages in a market free of government strangulation, unemployment drops until there is employment for everyone who wants to work. Labor is and always has been relatively less abundant than both people’s demands for goods and the natural resources necessary to fill these demands. This will hold true unless and until we reach a point of overpopulation where the supply of labor exceeds the supply of raw materials, at which point there will be mass starvation. This means that (barring massive overpopulation) there will always be enough jobs in a well-developed free market.5
Unemployment in a fully developed industrial society is a sign of an unhealthy economy, weakened by government parasitism. The major cause of unemployment is government’s interferences with the economy, minimum wage rates being a particular example. All of government’s activities siphon money out of the market, leaving less to hire workers and pay them good wages. Having injured labor by injuring the market, government poses as the friend of labor and “helps” by imposing minimum wage requirements (either directly by legislation or indirectly by giving strongly preferential treatment to labor unions.) Since business has only so much capital which can be allocated to wages, when wage rates are artificially set above market level, the balance must be kept by laying off the least productive workers. This creates a class of jobless poor who [26] are supported by government welfare. It also decreases the amount of goods that can be produced, which increases their price and so lowers the standard of living for everyone.
Instead of government being recognized as the culprit, automation has frequently gotten the blame. But automation can’t cut down on the total number of available jobs, simply because there is no limit to people’s economic wants. No matter how many wants are filled by machines, there will still be an unlimited number of new wants left unfilled. Automation doesn’t reduce the number of jobs, it merely rearranges the pattern of demand for labor, as, for example, from the industry which is being automated to the industry which is manufacturing the automated machinery. If automation were as dreadful as its foes assert, we would be wise to scrap all steamshovels in favor of hand shovels . . . or, better yet, teaspoons, to be assured of “full employment!”
The unregulated market has also been accused of the miseries of the “affluent society.” Poverty and unemployment are the products of government intervention, but the free market certainly is responsible for affluence. If critics object to market-provided comforts and conveniences, they are quite free to do heavy labor with crude implements from dawn to dusk, sleep on a dirt floor, and suffer a high mortality rate . . . so long as they don’t try to impose their way of “life” on more sensible people.
One of the reasons the bureaucrats frequently give for governmental tinkering with the economy is that if the market were left alone it would alternate between inflation and depression, or boom and bust. But just what is it that causes this dreaded “business cycle”—is this instability intrinsic in the market, or is there some external cause?
Suppose that a counterfeiter succeeded in flooding a small town with worthless bills. The inflow of new “money” would cause an artificial prosperity—a boom. Townspeople, with plenty of money on their hands, would invest heavily in new and speculative ventures. But as soon as the boom had run its course, it would become apparent that the economy couldn’t support these new ventures. New businesses would fold, investors lose their money, unemployment skyrocket—a bust would have set in.
In a business cycle, the government plays much the same role as that counterfeiter. A business cycle begins when the currency is inflated because money substitutes (paper “money,” coins made of low-value metal, such as the “sandwich” coins, etc.) are pumped into the economy. These money substitutes are, in reality, substitutes for nothing, since they are not backed by real monetary value (such as gold and silver); they are, therefore, worthless or very nearly so. [27] It is government which issues currency and government which inflates the supply of money substitutes.6 The government-inflated currency stimulates an artificial boom which misdirects the market’s signal system. Entrepreneurs, thinking they are more prosperous than they really are, make malinvestments and overinvestments. The boom breaks when the nature and extent of the malinvestment is discovered. The ensuing depression is actually the market’s only means of recovering from the inflation-caused malinvestment.7 Thus, the business cycle, which has so often been blamed on laissez-faire capitalism, is actually the cold steel of the knife of government intervention in the market’s vitals—free trade8.
In spite of the fact that the free market is completely self-regulating, and that government intervention is the cause rather than the cure of market imbalance, many still fear a totally unregulated market. They contend that a free market would promote the economic exploitation of helpless individuals by powerful interest groups. It isn’t enough, they feel, for individuals to be free of force and fraud—they must also be defended against the selfish predations of “Big Business,” monopolies, cartels (which are actually tentative monopolies), and the rich in general. These economic bugaboos are all similar and can all be dispelled by examining the most extreme of them—monopoly.
When market freedom is advocated, one thought which springs to many minds is the fear of unchecked monopolies running amuck, trampling the rights of “the little fellow” and ruthlessly driving any would-be competitors to the wall. It is widely held that without strict government control such monopolies would proliferate and virtually enslave the economy.
Theoretically, there are two kinds of monopoly—market monopoly and coercive monopoly. A coercive monopoly maintains itself by the initiation of force or the threat of force to prohibit competition, and sometimes to compel customer loyalty. A market monopoly has no effective competition in its particular field, but it can’t prevent competition by using physical force. A market monopoly can’t gain its ends by initiating force against anyone—its customers, competitors, [28] or employees—because it has no legal power to compel people to deal with it and to protect itself from the consequences of its coercive actions. The initiation of force would frighten away business associates and alarm customers into seeking substitute products, doing without altogether, or, in the case of entrepreneurs, setting up a competing business to attract other dissatisfied customers. So the initiation of force by a market monopoly, far from helping it to attain its ends, would give it a quick push onto the short, downhill road to oblivion.
Because it does not initiate force, a market monopoly can only attain its monopoly status by excellence in satisfying consumer wants and by the economy of its product and/or service (which necessitates efficient business management). Furthermore, once it has attained this monopoly position, it can only hold it by continuing to give excellent service at economical prices (and the freer the economy, the more this rule holds true). If the managers of the monopoly become careless and raise their prices above market level, some other entrepreneur will see that he can undersell them and still make tremendous profits and will immediately move to enter their field. Then their potential competition will have become actual competition.9 Large and well established companies are particularly likely to offer such competition, since they have large sums to invest and prefer to diversify their efforts into new fields in order to have a wide financial base. In a free society, where large companies were not plundered of what bureaucrats like to think of as their “excess profits” via heavy taxation, any monopoly which raised its prices above market level or became careless about the quality of its service would be virtually creating its own competition—competition too strong for it to drive out. As is always the rule in an unhampered market, the illness would create its own cure—the market is self-regulating.
Not only are market monopolies no threat to anyone, the whole concept of monopoly, as commonly held, is in error. A monopoly is supposed to be a business which has “exclusive control of a commodity or service in a given market, or control that makes possible the fixing of prices and the virtual elimination of free competition.”—Webster A market monopoly cannot prevent competition from entering its field because it cannot use coercion against would-be competitors, [29] and thus it can never have that “exclusive control . . . that makes possible the fixing of prices.” Nor can such a monopoly be said to be free of competition, even while it has exclusive control of its market—its product must still compete for the consumer’s money with every other good and service. For example, suppose a manufacturer of travel trailers has a complete monopoly over the travel trailer industry. He still must compete for the “recreation dollar” with the motel industry, and, in a broader sense, with the manufacturers of pleasure boats, swimming pools, table tennis sets, etc. Nor does his competition end there. Because the consumer may choose to spend his money for something other than recreation, our travel trailer monopolist must compete indirectly with refrigerator companies, clothing manufacturers, colleges, etc., ad infinitum. There is no industry so basic that a monopolist in that industry could manage “the virtual elimination of free competition.” Even the steel industry must compete in the building materials field with lighter metals, wood, plastic, concrete, brick, and now even newly developed glass products.
In considering the concept of monopoly, it is also useful to remember that it is not the absolute size of the firm which counts, but the size of the firm relative to its market. In the 1800s, the little country grocery store had a far firmer control of its market than does the largest chain of big-city supermarkets today. Advances in ease and economy of transportation continually decrease the relative size of even the most giant firm, thus making even temporary market monopoly status vastly more difficult to attain. So the free market moves toward the elimination, rather than the encouragement, of monopolies.10
Since a market monopoly can never eliminate tree competition or fix prices in defiance of the law of supply and demand, it actually bears no resemblance at all to the common notion of “the ruthless and uncontrolled monopoly” so many people have been taught to fear. If the term “market monopoly” can have any meaning at all, it can only be understood as a company which has gained a position as the only supplier of its particular good or service because customer-wants are well satisfied and its prices are so low that it is not profitable for competitors to move into that particular field. Its monopoly position will most likely not be permanent, because eventually someone else will probably “build a better mousetrap” and go into competition with it. But during the period of its market power, it is never free of competition or of the law of supply and demand in regard to prices.
[30] It is easy to see that a market monopoly, because it cannot initiate force, poses no threat to either individual persons who deal with it or to the economy as a whole; but what about a coercive monopoly?
A coercive monopoly has exclusive control of a given field of endeavor which is closed to and exempt from competition, so that those controlling the field are able to set arbitrary policies and charge arbitrary prices, independent of the market. A coercive monopoly can maintain this exclusive control which prohibits any competition only by the use of initiated force. No firm which operated in a free-market context could afford the initiation of force for fear of driving away its customers and business associates. Thus, the only way that a business firm can sustain itself as a coercive monopoly is through government intervention in the form of special grants of privilege. Only government, which is itself a coercive monopoly, has the power to force individuals to deal with a firm with which they would rather not have anything to do.
The fear of ruthless, uncontrolled monopolies is a valid one, but it applies only to coercive monopolies. Coercive monopolies are an extension of government, not a product of the free market. Without governmental grants of special privilege, there could be no coercive monopolies.
Economic exploitation by monopolies, cartels, and “Big Business” is a non-existent dragon. In a well-developed market which is free of government interference, any advantage gained from such exploitation will send out signals calling in competition which will end the exploitation. In a free market, the individual always has alternatives to choose from, and only physical force can compel him to choose against his will. But the initiation of force is not a market function and cannot be profitably employed by firms operating in an unregulated market.
Force, in fact, is penalized by the free market, as is fraud. Business depends on customers, and customers are driven away by the exploitation of force and fraud. The penalizing of force and fraud is an inherent part of the self-regulating mechanism of the free market.
The market, if not hampered by government regulation, always moves toward a situation of stability and maximum consumer satisfaction—that is, toward equilibrium. Government intervention, far from improving society, can only cause disruptions, distortions, and losses, and move society toward chaos. The market is self-regulating—force is not required to make it function properly. In fact, the imposition of initiated force is the only thing which can prevent the market from functioning to the maximum possible satisfaction of all.
[31] If men aren’t free to trade in any non-coercive way which their interests dictate, they aren’t free at all. Men who aren’t free are, to some degree, slaves. Without freedom of the market, no other “freedom” is meaningful. For this reason, the conflict between freedom and slavery focuses on the free market and its only effective opponent—government.
Back to Chapter Two
Forward to Chapter Four
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1 See TEN THOUSAND COMMANDMENTS, by Harold Fleming; 1951; PRENTICE-HALL, INC., N.Y.
2 For a most excellent treatise on economic principles, see Murray N. Rothbard’s 2-Vol. MAN, ECONOMY, AND STATE (D. Van Nostrand Company, Inc.).
3 The belief that prices are set by the cost of production is erroneous. Actually, in the context of the total market, the prices of the various factors of production are determined by the return which their products are expected to earn. For a complete analysis of this subject, see Dr. Rothbard’s MAN, ECONOMY, AND STATE.
4 See the article, “The Effects of the Industrial Revolution on Women and Children,” by Robert Hessen, in Ayn Rand’s CAPITALISM: THE UNKNOWN IDEAL (published in paperback by The New American Library, Inc., N.Y.).
5 While overpopulation is a theoretical possibility, it isn’t the immediate menace it is usually pictured to be. As Robert Heinlein pointed out in his science fiction novel, THE MOON IS A HARSH MISTRESS, the earth isn’t overpopulated, it’s just badly mismanaged . . . by politicians.
6 Banks may also inflate by holding only fractional reserves against demand deposits—for example, by making loans against checking accounts. If they weren’t protected by special laws, however, banks could not indulge in fractional reserves, because this practice is too risky. In a totally free market, any bank which did not hold 100% reserves would be driven out of business by its more financially wise and sound competitors.
7 The depression phase of the business cycle may be postponed for a long time by continued inflation, but such a policy only makes the inevitable depression more catastrophic when it does occur.
8 See the minibook, DEPRESSIONS: Their Cause and Cure, by Murray N. Rothbard (Published by Constitutional Alliance, Inc., Box 836, Lansing, Mich. 48904).
9 From 1888 to 1940, Alcoa had a total monopoly on the manufacture of aluminum in the U.S.A. It maintained this monopoly by selling such an excellent product at such low prices that no other company could compete with it. During its monopoly period, Alcoa reduced aluminum prices from $8 to 20¢ a pound (!) and pioneered hundreds of new uses for its product. The book, TEN THOUSAND COMMANDMENTS, by Harold Fleming, describes the action the government took against this “ruthless monopoly” which had been guilty of maintaining its monopoly status by continual and successful efforts to satisfy its customers.
10Rogge, Benjamin A., Long Playing Record Album #9, IS ECONOMIC FREEDOM POSSIBLE? The Foundation for Economic Education, N.Y.
Copyright © 1970 by Morris and Linda Tannehill
All Rights Reserved
I’ve provided this free online-text of the Tannehills’ book, despite the copyright status, because it is, in my opinion, such a great primer on the functions of the stateless society. I felt comfortable making this chapter available in .html format because the Ludwig von Mises Institute has already made the entire book available in .pdf format, and has made the third chapter also available here. If the copyright-holder contacts me with the demand I remove this chapter from the site, I will comply.
