On Monopolies, part 1

The excellent Matt Stoller — whose piece on the decline of antitrust enforcement among Democrats is excellent and remains required reading — recently engaged with Matt Bruenig on twitter on the topic of shareholder democracy. I use “engaged” here not as a euphemism for the kind of dirt-slinging brawl for which Twitter is known; both men remained civil throughout. One interesting offshoot of that discussion that I think deserves more attention was an exchange I had with Stoller on capital accumulation and monopoly.

Stoller is well known as a critic of too much aggregation: wealth, power, influence, he sees excessive concentration as inherently pernicious. In some areas, I agree with him, though I am not as axiomatically anti-concentration as he is. This is where we part ways politically: Stoller is not a socialist because the socialist requirement for state administration of industry, and the accompanying state monopolies, sit uncomfortably with him. He has acknowledged vaguely the need for some institutions to be publicly run. The Post Office is a classic example that often comes up in this context.

However, I think he misunderstands the origin of aggregation, and therefore his proposed solution amounts to little more than treating symptoms rather than a disease. Furthermore, I believe his analysis is insufficiently material, and therefore he cannot articulate clearly the problems with monopoly; because he cannot articulate these problems and tie them to the material concerns of people’s lives, his proposed policy solutions are ideological, and it is unclear how they will affect the lives of those materially harmed by monopoly.

Excessive concentration of wealth is harmful to individuals and dangerous to democracy. On an individual level, people suffer under monopoly as a monopoly allows a company to charge more.

This chart depicts the price/cost of producing a good compared to the quantity produced. The green line is market demand. Note that it slopes down: when producing a good at a certain price, some people can afford to buy it; the only way to increase demand is to lower the price. If ten people will buy a good for $20, maybe twenty people will buy it if it costs $15.

Marginal revenue is the additional revenue for making one additional unit. This is price minus cost. If it costs you $10 to make an additional unit, and you can sell it for $15, the marginal revenue is $5. However, you cannot sell more units without reducing your price, as stated above; everyone who can afford it is buying it. Reducing your price reduces your marginal profit, partially because you earn less for selling this new unit, but also because it reduces the price of every other unit you sell; you cannot sell for $50 to some people and $45 to others, at least not easily. Therefore the marginal profit curve slopes down inside the market demand curve, because as quantity increases, marginal profit for each additional unit declines faster than price.

Marginal cost increases because you cannot scale up production indefinitely. Inputs vary in price, and when you have purchased all the cheapest inputs, only successively more expensive ones remain. Therefore marginal cost is a curve that slopes up from the origin — the additional cost to you to produce one more unit goes up the more units you are producing. Where marginal revenue meets marginal cost, that is where you produce.

Normally this would be the market price. But the market demand price at any given quantity is actually higher than the marginal revenue, as shown above. So a monopolist can charge more.

My thesis is that monopolies and other vast aggregations of power and wealth are a natural consequence of a capitalist economy that prioritizes profits and, especially, shareholder returns over all other considerations. Since the 19th century, the U.S. government has sought to prevent excessive concentration through the Sherman Act. This Act, passed in 1890, allows the government to challenge monopoly concentrations of power in court and prevent excessive merging and agglomeration from creating monopolies.

As demonstrated above, monopolies allow the extraction of greater profit than competitive business. Pursuing a monopoly strategy will increase profits. Because in a capitalist system investors are driven to maximize their return on investment, they will naturally steer the policy of any company into which they invest in a profit-maximizing way, which will include monopolization if at all possible. The Sherman Act was a reaction to this: the natural tendency, in the absence of government intervention, for monopolies to form. Constant pushback is required to prevent this. It is not a matter of simply declaring that monopolies are wrong and everyone following your lead; the government had to bring suit under the Sherman Act, continuously, and be vigilant against the creation of more monopolies. It is a treadmill where you must constantly break trusts as new ones bubble to the surface.

The crux of my disagreement with Stoller comes from this one statement:

This is in response to my criticism that his view of monopolies as aberrations is ahistorical. I said that they are the natural result of market forces. Now, leaving aside the distinction of “natural result of market forces” vs. “result of natural market forces” (which is I think a distinction of more than semantic importance, but ultimately not dispositive), I described the rise of monopolies as an emergent behavior from thousands of individual shareholders each seeking to maximize their value, as discussed above. Stoller disagreed with this, which he described as “the Hobbesian premise of self-interested actors as the model of a society.”

But I think he has not demonstrated how, in a profit-maximizing environment, anything I said is incorrect. Monopolies increase profits relative to non-monopolies; investors seek maximized profits; investors have the ability to steer the market behavior of their investments.

What does Stoller consider “natural?” Obviously all actions undertaken in a market economy are undertaken by humans, for human goals. We are not frictionless spheres of uniform density. My use of the term “natural” was to indicate that, even if nobody enters the market a priori with the explicit goal of creating monopolies, they will still end up created by virtue of being the best strategy to achieve other goals. Concentration of capital is a political process, especially insofar as it requires the regulatory capture of the affected sphere in order to prevent government interference, but that is very much a negative requirement rather than a positive one. That is, would-be monopolists acquire political power to prevent the government stopping them from creating a monopoly, rather than to actively use government power to create one. This happens as well, of course, but it’s distinctly more difficult to do than, say, merely preventing Sherman Act prosecutions.

You could make the argument that monopolies are “artificial” or a “distortion” because they come about as a result of human activity. But if that activity is actively incentivized by the fundamental economic structure of society, then monopolies are an inevitable and, yes, natural consequence of that structure. Monopolies that arise through profit-maximizing mergers are not qualitatively different than monopolies that arise after a deliberate attempt to destroy competition in a sector. The fact that this process is controllable through regulation and litigation does not somehow make it exogenous to the system in which it occurs. After all, the process of controlling agglomeration requires constant vigilance and pushback. Indeed, I think it is fair to say that it is more distortionary to intervene continuously to prevent aggregation than to merely allow it to take its course.

Now, Stoller and I agree that monopolies are undesirable. But why? For me, the answer is twofold. First, monopolies exert an unreasonable amount of political and economic power, which they tend to use to block good legislation (such as tax increases to pay for social programs) and implement bad legislation (such as anti-compete contracts). Second, because monopolies increase the cost and decrease the quality of goods and services, which harms people and increases inequality. Notice that both of my reasons are material. As a socialist, I believe in material analysis. Classes are defined by their material conditions. Policies are evaluated based on their material impacts. Stoller, on the other hand, seems more moved by ideological concerns with monopoly.

He pays lip service to the material harm caused by loss of freedom, as below:

but he immediately undercuts the equality argument by disclaiming it as a goal:

The “perfect economic equality” canard is one many socialists are familiar with. It is not required for socialism that every person have the exact same resources as every other person. Equality is not mathematical, but social — equal access to the essentials of life, such as food, housing, and health care. A true ideological commitment to freedom would require some destributional component. After all, foreclosure of options due to low income is a loss of freedom. Stoller, however, has repeatedly disavowed redistributional programs as theft, and warned that they pave the way to autocracy.

I have decided to divide this article into two parts. In Part II I will discuss how our different views on the origins and harms of monopoly lead Stoller and I to different solutions, and why I believe his solutions fail to address the real problems.