by Marcel Claessen *

* Note: This article is the unabridged translation of the first chapter in my PhD thesis: M.S. Claessen, Enkele beschouwingen naar aanleiding van de vertaling van het artikel Monopolie en Monopolist door Condorcet [Remarks upon Monopoly and Monopolist by Condorcet, with a summary in English; dissertation University of Amsterdam], Dordrecht, 2002; pp.7-11. The original text contained a single footnote, at the end of the first sentence, linking it to the epochal essay in the preclassical history of economic thought on monopoly, by Raymond de Roover: Monopoly theory prior to Adam Smith: a revision, in: Quarterly Journal of Economics LXV (1951), pp.492-524.

In a well known story by Aristoteles about Thales of Milete, monopoly was the philosophers' trick to temporarily raise the price of olive presses so high, as was necessary to gain the admiration of idiots. The anecdote, still used sometimes to illustrate the historicity of the options trade, can be found in Politeia [book I, chapter 11], where the usefulness of science is defended against the classical version of the 'how come you ain't rich if you're so smart' argument: scientists were not rich because their ambitions lay elsewhere; meanwhile, their scientific knowledge profited its more trivial users as well as the public administration, which was considered to be of higher importance: the well-being and welfare of the general public. To the administrators the monopoly came in handy as an instrument to fill the till of the polis by means of a monopoly on the citizen's necessaries of life.

Aristoteles contemplated only the price enhancing effect of the trade monopoly, the quantity diminishing effect being left out of consideration. Because the monopoly price was - in principal - negotiated freely, or at least without the use of force, and because each party to an exchange expected to gain by it and no person would voluntarily seek a deficit for himself, this price was ethically justified by the transaction for both buyer and seller. This left unimpeded, however, that the parties individually were subjected to the ethical command of self-restraint, and that, in the last resort, the State was free to determine that a transaction's price was counter to the State's very reason of existence, the continued existence of society: a monopoly price could thus be an unjust price.

Although the Greek origin of the concept abhorred the Romans, the seditious sensation of hunger resulting from under-consumption remained a material impellation for both the condemnation of such an 'artificial scarcity', as well as for the public monopoly on salt, and for the regular provision of the Plebs with free bread, made from cereals collected by imposition throughout the Empire.

In the economy of the mediaeval cities, where strict reglementization guarded the collective and public monopolies on local production and interlocal trade, there was no place for individual monopolies.

When the growth of commerce in the latter Middle Ages made market prices co-dependent on the results of 'supply and demand' elsewhere, which could not be directly observed on the local market, trade profits resulting from price-fluctuations were considered to be the result of personal monopolies. In as far as such monopolies could not be curbed by local competition, Scholastic opinion knew no remedy but self-restraint in order to prevent that market participants would pay for their 'abuse of circumstance' with their terrestrial or celestial felicity.

The Reformation stimulated the venturous thought that the guilded society, that had put collective restraints to the diabolic propensity to monopolize considered to be 'private vice', was no longer a 'publick benefit'. During the seventeenth century, national wealth gained from the international separation of supply and demand in monopoly products of colonial trade and Royal manufacture, induced a change of the monopoly concept from a, mostly virtual, individual harm to the amoral, mercantilist profit-formula, that could be used - in the foreign trade - to temporarily disturb the natural order for one's own benefit. By the end of the eighteenth century, closer observations by the new science of economics showed that these monopoly profits were not a one-sided gain owed to monopoly, but a two-sided gain from the enlargement of the market, that was hampered, just so, by monopolies. Classical economists comprehended monopoly as the absence of competition, an 'unnatural' condition that needed the interference of government for its continuance. Their objection aimed especially at the governmental disturbance of the 'natural' tendency towards equilibrium of the market process; there was less objection to a monopoly, whether incorporated in a tax levy or not, that resulted in higher market prices without a considerable impediment of trade.

In the nineteenth century, the demolition of national monopolies brought about a free-trade framework for the enlargement of scale in production and for the division of labour, that enabled an industrial revolution in which commercial interests and scientific ingenuity, unbridled by ethics and protected by public and private law, could accumulate immense private capitals. Their exclusive ownership would, according to Marxist prophecy, lead to the pauperization of wageworkers, whereas the concentration of capital interests in one all-embracing monopoly would also spell the end of the market-economy. As indeed, a monopoly capitalism of extensive price dictating cartels and trusts emerged in new markets of homogeneous and capital intensive products and services, such as energy, steel, chemicals and railways.

In the downward markets from 1870 onwards, these cooperative organizations also proved useful for diversion of the pressure of ruinous price competition in established markets. In the United States, criticism by consumers and small-scale industry of the monopoly profits of large conglomerates induced the 1890 federal legislation, authorizing the dissolving of both collective and individual monopolies; and indeed some large conglomerates were dissolved. This anti-trust policy, coupled with an increase of foreign tariffs, was by no means supported by the still apologetically-liberal science of economics. Until then, it had paid a foremost theoretical attention to the monopoly phenomena, from the onset considering monopoly prices as arbitrary, thus scientifically uninteresting, prices of demand at a given, artificially restricted supply. In 1838 the first formal description of monopoly was given in a treatise on the maximum profit that could be drained from the market by the rational (profit maximizing) operation of one resp. two non-cooperative suppliers of mineral water; the duopoly resulted in an equilibrium price and quantity in between the values realized in full competition and in monopoly.

From 1874 onwards, a mathematical model for the general market equilibrium in full competition was constructed, build from utility maximizing behaviour of market participants and diminishing returns in production. In 1883 it was shown that duopoly should not be considered a distinct equilibrium, since price competition for a homogenous duopoly would result in the same nihil profits as were obtained in the case of perfect competition. For the only form of imperfect competition that was left, monopoly, from 1891 onwards the principles were set out that would lead the monopolist to the level of price, and thus the quantity of sales and the scale of production, that would result in a maximum profit. At the same time, new windows were opened on the disadvantages that the national economy suffered from monopoly, with a shift of the income distribution as the price-effect, and an inefficient application of factors of production as the volume-effect: allocative efficiency of allocation and - in this case natural - monopoly could only be unified in a market with ongoing economies of scale.

Neoclassical economic theory, in its beginnings, supplied governments with 'unusable' policy implications only, such as the notion that monopoly profits could be skimmed without objections - other than the monopolist's - by taxation, but that this would not repair the welfare loss. When such a levy obtained the character of a costprice enhancing tax, the suboptimal employment of the factors of production would even increase: its diminishing required a 'subsidy' of the monopoly with a costprice decreasing, consumer specific tax.

The insights of the science of economics were of little importance for political considerations of the advantages and disadvantages of legal or public monopolies, when, from the beginning of the twentieth century, public, not necessarily disclosed and often geographically bound monopolies were established on markets, whose spontaneous development was hindered because goods and services could not be individualized sufficiently, such as the postal, telegraphic and telephony services, radio broadcasting and the public utilities, or whose 'controlled' development was considered to be of a national interest. In general, the regulation of such monopolies was constricted to instruction of the monopolist to restrain profits, which made the monopoly less visible, but not necessarily less inefficient. During this period, nevertheless, microeconomic price theory was perfected in an exhausting system of market forms with monopoly, oligopoly and polypoly on the supply side, and monopsony, oligopsony en polyopsony on the demand side.

During the depression of the 1930's the theoretical insight arose that the market dynamics in industrial branches, where enlargement of scale in mass production on assembly lines enabled large scale industry to continually decrease the per unit cost of production, would not on their own accord result in an equilibrium inducing perfect competition, but in destabilizing monopoly or - using product differentiation - in monopolistic competition, which would necessitate governmental regulation, corporative guidance, or nationalization.

In order to maintain efficient market economies, from 1945 on, western welfare politics raised obstacles curbing the restrictions of entry in, and price setting on interior markets, that were set by monopolies and pseudo-monopolies of colliding companies. In spite of an ever increasing concentration in business, resulting in a 'natural' restriction of competition, structured regulation of private monopolies was hardly considered requisite, since the growing worldtrade, technological advances, persisting inflation and policies of conjunctural price restriction, likewise exercised a real pressure on the prices of the multi-nationalizing large scale industry.

Moreover, the theoretical insights that monopoly could be a stimulus as well as an obstacle to economic progress, still lacked the accessory set of instruments that could be used to defend such a regulatory intervention: in the refractory practise of competition policy, a decisive balance of the costs and the - innovative - benefits of monopolies turned out to be an impossible task, whereas the usual measure for the 'performance' in the market economy, the realized private profits, did not encompass the partially virtual public loss that was entangled in private and public monopoly profits. This was a fortiori the case for the mostly regional monopolies in the public 'non profit' sector, where government tried to measure itself without objective indicators.

In economic theory, during the rest of the twentieth century, the all encompassing equality of prices and marginal costs in full competition became the thight fitting logically balanced foundation for the neoclassical cathedral of the general equilibrium model, were no room was spared for monopolies, nor for market failure due to imperfect information, economies of scale, product differentiation and market segmentation, misdirected or undelivered collective goods, present and future advantageous and disadvantageous effects of production and of consumption for those directly involved and for outsiders, etcetera.

The 'classical' monopoly lost its exclusive position, and was reduced to being one of many 'imaginable' market conditions, which could, under strict conditions, including the rational expression of exogenously determined consumer preferences, in theory result in a substantial impairment of the distributive, allocative and innovative function of prices that is essential to an efficient market economy, which is to say: damaging to the operation of markets and thus to the market economy as a whole. The theoretical research in micro economic theory then turned to suboptimal equilibrium tendencies in various forms of incomplete competition, and - as game theory - to the dynamic behaviour of economic subjects in bilateral monopoly and oligopoly. Next social welfare theory gradually arose, where the inefficiency of monopoly not only depended on the misallocation of traditional factors of production, but also on the degree in which uncompensated or uncompensable external effects of monopoly were advantageous or disadvantageous to the realization of the social welfare function grounded in politics.

Meanwhile, when inflation had ebbed away at the end of the twentieth century, in practical reality monopoly prices were often impeded 'in the market' by sharpening competition, caused by the globalization of supply and demand that promoted the internationalization and scaling-up of large scale industry and the privatization of national, public monopolies, without, however, an impediment to a considerable and in many cases continuous growth of profits: the process of creative destruction in which these monopolies will undermine themselves, has clearly not yet been completed.

Considering his theoretical and practical appreciation of the monopoly question, the present, ideal-typical economist is a heterogoneous product:

- monopoly is a major theoretical and practical interest of the economist in the field of industrial organization, for whom the combat against, or regulation of this all present, extreme form of restricted competition yields a large societal utility;

- monopoly, as a theoretically handy form of market failure, is of some interest to the micro economist, when he develops new ideas for strengthening markets, as for instance the introduction of market elements in public monopolies, the auction of privatized public monopolies, the vertical or horizontal (regional) split of monopolies, and the periodic offering of tender for public monopolies or of its management of supervison;

- monopoly is both in theory and in practice of little interest for the ultra liberal or even anarcho capitalist economist of the Austrian School. This one doubts the factual, that is not mere imaginary, and lasting existence of private monopolies and in any case the possibility of an effective governmental action, culminating in the theoretical insight that in reality, public and private monopolies are established and confirmed by government policies measured in political coin and in (post-) official career perspectives. In its own domain, the governmental organization, with an unlegitimated originality, exercises a monopoly of force outmatching everything and everyone, that is used to fill the public treasury, circumventing the market, with unvoluntary contributions by the population and business; an 'achievement' that no other monopolist is capable of.

- monopoly is only of some practical interest to the more common colleague, who finds himself in the real world economy - in this connection - at best occupied or confronted with the appropriation of the consumer surplus through exhaustion of the spending power's demand, and for whom monopoly, short of a 'positive' completion, for the rest remains what it was in Milete, 2.500 years ago: a philosophical manoeuvre . . .

SOURCE: M.S. Claessen, Enkele beschouwingen naar aanleiding van de vertaling van het artikel Monopolie en Monopolist door Condorcet [Notices sur Monopole et Monopoleur de Condorcet; Remarks upon Monopoly and Monopolist by Condorcet with a summary in English], Dordrecht, 2002.

URL: www.condorcet.nl

LAST UPDATED: 2004-10-27 [minor corrections]