A Conversation from Tom Woods’ Day 4 Morning Speech at Mises University

The conversation occurred in the live chat as the live YouTube video of the speech occurred, regarding natural monopoly:

Jay Son

I would like to hear what woods would say about Economies of Scale being the barriers to entry regarding a free market

John Vandivier

sure that would be interesting. As a historian I would think he would argue that historically they haven’t lead to natural monopoly as some claim

ComradeChristov

the firm that produces a given good at the lowest cost will be the most successful. econs of scale are useless if your largeness isn’t efficient

John Vandivier

yes but given two equally efficient firms, one of which is larger, economies of scale will give an advantage

ComradeChristov

i actually wanted to ask TW about natural monopoly when i heard him speak, but he didn’t take questions 🙁

Jay Son

I was discussing single payer health care with my economics professor and he was saying that because of economies of scale that is why a single payer system could be more effective then the market

Jay Son

Ah but if you acknowledge that economies of scale can become a barrier to entry, what prevents these efficient business to raise prices once out competing competitors?

John Vandivier

in theory, nothing. I agree natural monopoly exists in theory.

Curt Howland

So the “small producer” can make profits in their niche no matter how small that niche is, even in the face of some huge producer making their mass production cheaper by the unit.

Porphyrogenitus

“economies of scale” doesn’t scale – Rothbard addressed the whole “if bigger is better then biggest is best” theory of scale being a barrier, when discussing this same period Woods is.

John Vandivier

But that’s the problem 😉

John Vandivier

It exists in theory, not history.

Porphyrogenitus

I highly recommend the recordings of Rothbard’s lectures on The American Economy and the End of Laissez Faire available on the Mises site. It addresses the questions raised here.

To surmise the conversation, with additional points:

  • Many mainstream economists argue that economies of scale, which exist naturally, can create a natural barrier to entry and therefore a natural monopoly.
  • Unfortunately for them, historically this has never been observed. Perhaps the theory of natural monopoly is incorrect? As a matter of fact this is the subject of widespread criticism of neoclassicals. Some sources of such academic criticism were mentioned above.
  • Monopolies can even be seen as good things under this view. In theory, they can create efficiencies greater than a free market even could. I agree that such cases are possible in theory. Moreover, while I don’t think we have ever historically seen a natural monopoly, I do agree we have seen a planned monopoly operate at greater than expected free market efficiency in rare cases, although this may be due to a problem with the expectation rather than the market performance.
  • One direct criticism is the argument from monopolistic competition. Real economies operate under monopolistic competition where even slight differentiation of products will result in breaking a monopoly.
  • Next, the idea that unsustainably pricing out competitors is largely a wrong idea. I heard that a competitor once tried to unsustainably undersell Vanderbilt. I will cite the story if I can find it. I think it was in one of Tom Woods’ speeches from Mises University this year. It might even be the one the conversation above is from, I forget. Anyway, the story goes that Vanderbilt simply bought his competitor’s product and re-sold it. Genuine underselling is great. We call that increased productivity. It’s not a market problem, it’s a market benefit.
  • I would also note that the advent of crowdsourcing makes most of these worries irrelevant. While I don’t think it was a problem to begin with, if a super-rich corporation being able to take advantage of a natural barrier to entry ever was a worry then crowdsourcing allows us to stop worrying.
  • Finally, most barriers to entry are either able to be overcome through innovation (the natural kind) or are only entrenched for political reasons (regulations and so forth). I have never seen a monopoly which wasn’t the latter kind. The former kind, to the extent they exist, are extremely fleeting. For example, an inventor may have a temporary natural monopoly. But these temporary natural monopolies are far from the enduring natural monopolies of neoclassical theory. Far from being something to worry about, these short-run natural monopolies are merely another way of describing entrepreneurial and technological incentive.
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