Economics of Public Policy Term Paper

Excerpt from Term Paper :

Monopolies and Trusts:

Appropriate Areas for Government Intervention?

Capitalism is the economic system that has dominated the United States virtually since the day of its independence. A social and economic system based on the recognition of individual rights; capitalism demands that owners' rights to control, enjoy, and dispose of their own property must be respected. In a capitalist system, the purpose of government is to protect individual economic rights, and to make sure that no one individual, or group may employ physical or coercive force upon any other group or individual. The success of capitalism is well evident. The surpluses that this system produces have enabled individuals to experiment; to create new products, and market new ideas. These private surpluses are traded in a free market in direct competition with other buyers and sellers. Such competition is best represented by the efforts of two or more parties acting independently to secure the business of a third party by offering the most favorable terms. Where competition exists in a market place, there exists a rivalry between the different sellers for the business of potential consumers. This brand of competition has improved our economy as a whole, and has created in capitalist nations, a higher standard of living than is to be found elsewhere. It has permitted the efficient and free allocation of resources; a considerable amount of innovation and technological advancement, as well as a timely and effective response to consumer needs and preferences. With so many benefits we would fear to risk the destruction of competition that any dismantling or inhibiting of the Capitalist system would entail.

Yet a monopoly is a threat to this competition, and to the natural structures of the marketplace. A single seller of a product controls the entire market for that product by ensuring that there are no substitutes for that product. In a monopoly, there is no competition; trade is as completely constrained as if it that trade were subject to the most stringent government laws and regulations. Monopolies are illegal in the United States. They are illegal because it is believed that they deprive consumers of the benefits of technological innovation, and set prices above the natural level of market equilibrium. Down through the years, monopolies have in fact been controlled in many different ways, the most common approach being through government antitrust laws. Antitrust laws such as the Sherman Act, the Clayton Act, and the Federal Trade Commission Act, are all designed to prevent the formation of monopolies. In case after case, these antitrust provisions have been used against monopolists: the railroads, Standard Oil, and Alcoa. Many believe that it was only through the strict application of these antitrust measures that free market competition was preserved. According to this view, government must continue to intervene in the interests of all.

Nevertheless, others oppose just this sort of government invention, believing its the worst poison that could befall any free market economy. Government, so they say, is the only true source of monopolic power. It is their conviction that antitrust laws support, create, and protect the very monopolies they were meant to prevent and dismantle. This paper will review these classic arguments, endeavoring to discover whether the antitrust laws were properly applied and enforced. We shall consider both sides of the issue, and in so doing, determine if indeed antitrust laws represent the nest possible official policy, or if they in fact create the very situations they were designed to prevent.

B. Philosophical/Constitutional Issues

Prior to the Civil War, Americans feared to allow their government too much arbitrary power. As government was the only entity possessed of the power to compel absolute obedience, it was not considered possible that private business might exercise anything like this kind of total authority. These views, however, changed immediately after the Civil War with the coming of age of the railroad industry. While in reality, the railroads did not possess any legal powers of coercion, to ordinary individuals, they often appeared as powerful and intractable as the government itself. Indeed, the farmers of the West saw railroads as intrusive forces possessed of almost limitless power; the kind of power they believed was proper and appropriate only to the federal government. To these farmers, the railroads seemed to be interfering with the laws of competition. They seemed to be able to charge just enough to keep farmers in seed grain, but not otherwise permit these same farmers to enjoy a profit. Yet it is our belief that the Western railroads were monopolies not because of the unrestrained activities of the marketplace, but rather because of governmental subsidies, restrictions, and other interference. Believing nonetheless, that they were victims of a marketplace run amok, the farmers protested, their protests eventually taking the form of the National Grange movement. Their persistence was to pay off in the form of new federal legislation, the Interstate Commerce Act of 1887. This was followed by the Sherman Act in 1890. The rational for these two major acts remains today -- that, if left unregulated, the marketplace will become a tyranny worse than that of government intervention.

These antitrust laws were passed to halt the spread of monopolies and to restore competition to the market economy. Many supported these antitrust laws, while many opposed them. As to the source of their power to regulate in matters of the marketplace, Legislators point to Article One Section Eight of the United States Constitution: "The Congress shall have the power to . . . regulate commerce with foreign nations and among the several states ...." (Constitution) We had already seen legislative exercise of this right in such cases as Munn vs. Illinois in 1877. Munn, and also Scott, were business partners who owned a private grain-storage facility. These two men argued before the Supreme Court that nothing could compel them to make their rates public, or to obtain a license from the state, or to abide by government-fixed price limits. The majority on the Supreme Court disagreed, declaring that private property, if used for the benefit of the public, is subject to public -- and thus governmental -- control. In the words of Chief Justice Waite, "[Such properties] must submit to be controlled by the public for the common good." (Armentano) The supporters of antitrust laws believed that if left alone monopolies would occur naturally in any free market, thereby slowing the process of innovation. They believed that monopolies would charge high prices, misallocate resources, take away jobs from the people, and pay them lower wages. Hilaire Belloc once said, "The control of the production of wealth is the control of human life itself."(Armentano) The Sherman Act of 1890 was the first of the antitrust laws. Its sole philosophical purpose was to prevent monopolies and free up competition.

But from a Natural Rights perspective antitrust laws are seen as more conservative than progressive. Believers in Natural Rights hold that antitrust laws are an outrage, and that they strip away private property rights. It is their firm belief that individuals possess as inalienable rights, the rights to life, liberty, and property, and that any individual can enter into any non-coercive trading agreement on any terms, to produce and to trade any good or service that he or she owns. Anyone has the right to use his or her property in any way he or she sees fit, so long as such usages do not infringe on the rights of any other individuals to the full enjoyment of their own property. Our Founding Fathers were followers of Adam Smith, whose monumental work, the Wealth of Nations appeared at the time of the American Revolution. Adam Smith opposed government restrictions on production and trade because he believed that to hold down capital gains, retarded the growth of a nation's wealth and was damaging to the general welfare. As well, Jeremy Bentham and the Philosophic Radicals believed "that interests reflected in the private, selfish economic activities of individuals were harmonious, and created a stable economic system ...." They supported free market capitalism because it provided the greatest good to the greatest number." The Philosophic Radicals rejected government intervention because they believed experience had shown that the benefits of this intervention rarely exceeded its costs.

C. Sources of Monopoly

According to Robert H. Frank, in his text book Microeconomics and Behavior, 5th Edition, there are five different sources of monopoly. The first source consists of the exclusive control over important inputs, or the condition wherein a seller has complete control over the supply of a product, as for example DeBeers' control over the supply of mined diamonds. Economies of Scale are another source of monopoly. Economies of Scale exist when, given fixed input prices, the long-run average cost curve is downward sloping. In this case it is always cheaper to serve the market by having one firm producing the product. Patents are issued by governments for the purpose of protecting intellectual property rights. By protecting these intellectual property rights, they encourage invention as…

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