Government is the Real Engineer of Market Monopolies

In The Wealth of Nations, Adam Smith, the founding father of modern economics, praised economic liberalism as the true engineer of economic and social advancement. In his 900-page book, the Scottish philosopher and economist argued that it is through the pursuit of our self-interests that we end up serving society as a whole and making it better in the process. This assertion is verifiable by the example of the captains of industry in nineteenth-century America during the Gilded Age.

Source: Maddison Project Database 2020

The robber barons were infamous for being ruthless and greedy businessmen (according to many Left-leaning scholars). While there is some truth in it, they, however, also significantly improved the standard of living of ordinary Americans by innovating key sectors of the American economy. They innovated important sectors of the economy not because they were altruistic, but because they wanted to make profits. And this pursuit of profit made them wealthy in the process, and the American working-class much richer than the European working-class. Adam Smith, however, warned us about the downside of economic liberalism. And the major downside of economic liberalism is the rise of monopolies.

Fundamentally, monopolies generally occur because one company outperforms its competitors in its industry. This outperformance is done by applying horizontal and vertical integrations. Horizontal integration is the process of a company increasing the production of goods or services at the same part of the supply chain. A company may do this via internal expansion, acquisition, or mergers. Vertical integration, on the other hand, is a strategy that allows a company to streamline its operations by taking direct ownership of various stages of its production process rather than relying on external contractors or suppliers. In other words, vertical integration cuts off the middleman. For example, both business techniques [horizontal and vertical integration] were practiced by John D. Rockefeller, Cornelius Vanderbilt, and Andrew Carnegie.

These two business techniques lead to the formation of monopolies. In this very context, a monopoly is formed strictly by market means. Such a monopoly is generally short-termed because it does not control a global market; only a domestic market. On a global scale, a competitor may emerge in a different geographical location, doing the very same thing that the domestic monopoly is doing, and eventually outperforming that monopoly. John D. Rockefeller certainly monopolized the oil market, but his monopoly was only on the domestic oil market; not internationally because countries of the Arabian peninsula and North African countries, did also have an abundance of oil reserves that created an oil market that Rockefeller did not have full access to.

Political monopoly is when the government subsidizes and regulates markets to protect corporations. This type of monopoly is dangerous for two reasons: (1) the government implements laws that prevent healthy competition. This is presently the case with pharmaceutical corporations and technology corporations. The government passes laws that make it very difficult for small business owners to genuinely compete with those big corporations. As a result, these corporations retain a monopoly over their respective industries. For example, it is very difficult today for the owner of a small bookstore to compete with Amazon since everyone is buying books online. And Amazon is subsidized by the federal government. (2) It encourages corruption. The federal government gets to bail out certain major corporations, which normally deserve to fail. This is problematic because when a company that deserves to fail is not being let go, it makes it impossible for new companies that perform much better to emerge to provide innovative solutions to the market. Big corporations make political donations in exchange to be protected against competition from emerging companies that could potentially disrupt the status quo of the industry. As a result, the government engineers the perpetuation of a monopoly. The role of the government is not to select winners and losers in the economy, but to safeguard the rules of healthy competition to make capitalism fair and accessible to all. When government acts as an actor in the economy rather than a mere referee to protect and further its own interest, that’s not free-market capitalism; that’s crony capitalism.