Regulation and Anti-Trust Laws | Basic Economics by Thomas Sowell | Ch. 8
In this chapter, we continue (from the previous chapter) to take a look at government regulation on big businesses, and its economic effects.
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There are a few ways governments can deal with monopolies and cartels. While specific laws (called anti-trust laws) can certainly be enacted, a lot of times, a regulatory commission is created to control them. Regulatory commissions are basically government agencies that have been tasked with controlling the prices charged by monopolists.
The task for regulatory commissions, however, isn't as simple as many may think. This is because we have no way to know what prices should be in any given market, since, as explained in previous chapters, the cost to produce something is always changing. Just looking at simple varying electricity costs, it may be 100 times greater of a cost during peak usage than low demand times. After all, electricity isn't free, and is dependent on other fuels for generation. And that's just a single pricing cost.
Then, there's the issue of public support. Because politicians are incentivized through pleasing their voters, they have a high incentive to step in and control prices when the public complains about a price that is too high for them to pay. Furthermore, politicians' accountability is not normally measured by effectively enacting economically beneficial laws, but their agreement with a majority of the public.
And this is often the problem when politics mixes with economic realities. As politicians clamp down on business practices in which they have no understanding, those businesses hire firms to represent them to the government in order to survive. Thus, we have lobbyists and interest groups that try to get the government to give them benefits (i.e. regulate other competing industries), even if only for their small portion of the economy. Thus more money is spent inefficiently, businesses that were meant to die live far longer than necessary, and customers get a decrease in quality of service, because the money businesses spend is on fighting government control, rather than improving customer service or even product quality.
When these regulatory commissions are done away with, the result is that costs usually decrease, product or service quality increases, and while some businesses do die, others rise to take their place. This can be seen in almost any industry, from cargo transportation to airlines.
If regulatory commissions are often established to keep prices under a certain amount, in an interesting way, anti-trust laws are often used because prices are too low, and competitors can't enter a market to compete with such low prices.
It's important to point out the difference between competitors and competition. Competitors are various entities, while competition is a condition in the market. Thus, making sure that competition can flourish is different from making sure that competitors aren't hurt.
We know, from previous chapters, that economies of scale tend to make things cheaper. Thus, big chain stores like Target and Walmart are able to get lower prices than smaller grocery chains. These big businesses also need to be profitable, and thus their low prices are a reflection of how they can accommodate such cheap prices. When these big businesses are sued, they are forced to try to prove through gross numbers (since the governments can't be bothered to know the details of those numbers) that they don't have price differences from their competitors (basically an impossible thing to do).
This brings to mind the famous European anti-trust cases against Microsoft a couple decades ago. Basically, these anti-trust cases ruled that Microsoft had “abused its operating system monopoly by incorporating its Media Player...into Windows. That shut out rivals, like RealPlayer.” Microsoft was forced to accommodate its competitors' software builds in its operating system. But is this actually providing an environment of competition to flourish? Or is it trying to protect dying competitors? Does anyone even remember RealPlayer today?
Because true monopolies are actually quite rare, many firms and businesses have given themselves the job to try to find such environments in order to justify their jobs. This has led to some very creative definitions of monopolies, including using percentage of sales of a company as the share of the market it is supposedly controlling. Historically, more often than not, the companies that have been broken up have very little in its share of actual market exposure.
This is because a government's definition of a market can be wrong in the face of what a specific business is really competing against. A good example is Alcoa (Aluminum Company of America), which was the only producer of a specific type of aluminum in the United States at one point. Despite making barely any profit, and the decreasing prices of aluminum across years, they were convicted of anti-trust. Why was the price of aluminum going down under such a 'monopoly'? Because Alcoa wasn't competing against other aluminum businesses, but rather businesses which produced steel, tin, wood, and plastics — each of which could be used in substitution for aluminum in many products. Examples like this, among many many others, show us that regulatory bodies often have no idea which industries any given business is competing against.
We can turn once again to the Microsoft anti-trust case, in which the lawsuit defined its market so incredibly narrowly (i.e. computer operating systems for personal computers using Intel chips), that it was almost impossible for Microsoft to fight against such a case, despite Apple, Linux and other operating systems existing. Thus, regulation is generally unhelpful, and a complete waste of money.
When we consider that resources have multiple uses, we understand that the production of one resource doesn't eliminate competing resources that can serve the same function. Furthermore, resources of entirely different natures can often compete. For example, if golf resorts jack up their prices for some reason, people may choose to go to different resorts (e.g. Disneyland) for their vacation time. It doesn't matter that golf resorts and Disneyland aren't using the same materials and resources, they still compete. The question of regulation is not whether business monopolies are bad, but rather if the government or any regulatory body is able to truly understand the market in which any business has a supposed monopoly.
In this way, it's much better to let the market decide whether a business should be protected or diminished. While anti-trust lawsuits can take decades to decide, the market often decides what kinds of businesses stay or go much faster. It is quickly adaptable, while regulations are often not.
What about predatory practices, where a big business lowers their prices so much that their competitors are priced out, and then increase their prices once a monopoly exists?
Sowell has found that there isn't an actual historical case where such a thing has been prove to happen. Even in real anti-trust cases, predatory practices were never proven. In the case of Microsoft, their Internet browser is now one of the most obscure. Furthermore, this idea of predatory practice is quite unsound. After all, if a business lowers their prices, that assures them only that they will lose profit in the short term. It doesn't guarantee that they will gain profit in the long term, nor that future competitors won't come in once they begin to heighten their prices.
Sowell ends this chapter with the example of India, where stringent anti-trust laws were implemented before being eventually repealed in 1991. Before the repeal, most Indian businesses placed their capital and efforts outside of the country. However, once it was gone, the country's economy began to boom, and even foreign investments came in. While their 1991 Monopolies and restrictive Trade Practices Act was intended to control big businesses, all it actually did was prevent competition from keeping such businesses accountable, and thus smaller players looked elsewhere to invest. But once those laws were repealed, India's economy was “revolutionized by competition”.
In today's world, especially considering Big Tech, the ideas of monopoly and anti-trust seems to be under the surface of everyone's talking points. I think what Sowell presents here is an interesting and thoughtful take on it all.
Most people who think of monopolies these days will think of the likes of Google, Facebook, and Amazon. Each of these are the definition of big businesses, and are known to have used the economies of scale to their advantage to get where they are, currently. Today, Facebook has an average monthly user count higher than any country in the world, while Google's share of search is over 90%.
In a fight over censorship, especially in today's politically tense world, has led many to begin calling for the dismembering of these large companies. But in light of what's explained above, there may be no way to do so without hurting people.
A lot of people believe a social media site like Facebook is a monopoly. What they may not understand is that Facebook's primary customer is not the average person. Rather, we are its product. Instead, Facebook's customers are advertisement agencies and companies. In light of this, it would be inappropriate to break up Facebook into separate companies (e.g. Instagram, Facebook, WhatsApp — all as separate companies), as doing so would not actually break those media companies' hold on the average user. Even if broken up, they would not necessarily be in competition with each other. After all, advertisers can spend ad-dollars on multiple platforms at a time. Users don't only use a single platform at a time.
A similar thing can be leveraged against Google. Many may believe that Google's search share is effectively a monopoly, but the reality is that Google's search is not competing against other search engines (e.g. Bing, Duckduckgo, etc.), but rather other services that include advertising as its main source of funding. This actually includes services like Hulu, television companies, and of course, as given above, Facebook. The problem is that no user only uses Google search as opposed to Facebook, or only Youtube as opposed to Instagram. Most people would use all of these services simultaneously.
Given such a state, how would government regulation ever actually keep these companies from doing what they are already doing — whether it's censorship or simply a huge service with a large user base?
I think the market is currently speaking. With services like Coil's web monetization and Brave's crypto-rewarding browser, we are actually seeing a free market react to the oppressive actions of Big Tech, and in this way, much faster than any government regulation has been able to thus far. The insane censorship of places like Twitter and Facebook, in my opinion, is backfiring, and places like Parler or Bitchute are rising to take their place.
And so, while there are times when I see and am angered by the actions of current Big Tech, in the end, like Sowell, I believe the market will fix malpractice far better than government regulators who have no idea how any of this stuff works.