Austrian Economics Forum Spring 2011 #5--Intro. to Austrian Monopoly Theory

The final session of our Austrian Economics Forum took place at Dr. Cordato's house.  He and his wife, Dr. Karen Palasek, made a really nice dinner for us, but the ground rules were that we had to talk economics before anything else.  (Were they afraid we wouldn't talk economics while eating?  Clearly an unfounded fear!)

This session's reading was "A Critique of Neoclassical and Austrian Monopoly Theory" by Dominic Armentano, found here http://oll.libertyfund.org/title/106/6041.  This is a chapter in the book New Directions in Austrian Economics edited by Louis Spadaro (1978).

The Armentano reading was a straight forward, introductory article to monopoly theory from an Austrian perspective.  Cordato added several personal comments about Armentano.  The one anecdote that struck me was that Armentano had formulated much of his criticism of the Neo-Classical Monopoly Theory long before he became (or even really studied) Austrian(ism).

The major, traditional Austrian criticism of standard Monopoly Theory rests upon the definition of the market.  Monopolies are defined as a single seller without any close substitutes.  However according to Austrian theory, a substitute can only be defined in the mind of the user of the goods.  When Saran Wrap first came out there was nothing else like it.  So were there any substitutes?  Actually yes, there were many because the relevant market was "What can I put my sandwich in so I can take it to school/work?"  The substitutes were wax paper, tin foil, aluminum foil, paper bags or even Tupperware.  None of them look like Saran Wrap, but they are all substitutes.  Or an example I use in my class is that helicopters and closed-circuit cameras are substitutes.  Of course, physically they are nothing alike.  However, if we are trying to learn about traffic congestion during our morning commute, then they are substitutes.

Furthermore when it comes to defining the market, we can define it in such a way that we are all monopolists.  I am the only one who supplies my labor.  Or if we broaden the definition, then there is no such thing as a monopolist. 

At the end of our abbreviated discussion (we were hungry), we agreed that the Rothbardian definition of monopoly was the best.  Rothbard uses the old definition of a government created monopoly privilege.  If there is a law, legal restriction, etc. that forcibly prevents others from competing, then that is a monopoly.  Otherwise, there is no monopoly.  There are two objections to this.  The first is a natural resource monopoly.  I find this problematic.  If there was such a monopoly, as soon as it sells some to anyone else, there arises a potential competitor.  From this point we start to get into some rather strangely concocted hypothetical situations.  "Suppose under the following circumstances...blah, blah, blah."  If we need to resort to such narrow assumptions, then we are not really describing the world around us and have started to play mental games.  There's nothing wrong with mental games.  In fact most of the leading economic journals are full of such things.  Just please don't waste my time on them.

The second objection is that of a natural market monpoly where a firm is so good at what it does, no other firm can compete.  To which I ask, "What's the problem with that?"  From a consumer's point of view this is great!  They offer better prices, better quality, better locations, better service, etc.  On every single vector of competition, this firm is better.  If it lags in any one of these areas, then a niche market can arise. 

Neo-Classical economic theory relies far too much on counting the number of firms that are competing.  To them "competition" is a state of being.  It is a noun.  Austrian Theory rejects this view and says that competition is a rivalrous process.  The only way that relative scarcities (prices) can be discovered and determined is through competition--real competition.  It only takes one producer and an open market for there to be competition.  The supposed monopolist must compete against potential competitors, otherwise, they will soon appear.  Leonard Read once said that trying to stop competition in a free market is like standing in a river with a broom, trying to sweep the water away.  For an instant, the water is brushed aside, but then it comes rushing back in.

Austrians view competition differently.  We view it in the same way that sports teams do.  In order to know the outcome, we need to play the game.  This is why Austrian Economics has been gaining so much attention in other business fields like Strategic Management.

Cordato is hoping that the next semester (Fall) will follow the course of more Microeconomic stuff.  I'm thinking that we should look at Mises's Theory of Money and Credit so that we can finish it in 2012, the 100th anniversary of its publication.  I don't know the direction, but I am sure that it will be a fun ride.