Competition, Monopoly and the Role of Government

Government’s job is done when it defends the right of competitive businessmen

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[Reprinted from Free Market Economics: A Basic Readercompiled by Bettina G. Greaves.]

The great monopoly problem mankind has to face today is not an outgrowth of the operation of the market economy. It is a product of purposive action on the part of governments. It is not one of the evils inherent in capitalism as the demagogues trumpet. It is, on the contrary, the fruit of policies hostile to capitalism and intent upon sabotaging and destroying its operation.
— 
Ludwig von MisesHuman Action

In the free society government keeps the peace, protects private property, and enforces contracts.

Government must do these things effectively, and it must do nothing else; otherwise, the conditions indispensable to personal freedom in society are absent. Whether or not a free society is attainable no mortal man can know; the limits of our knowledge are too narrow. But one thing we do know: that until at least the advocates of the free society are fully aware of the conditions necessary to its existence, it can never come about. For they must ever be on guard against new movements, ideas, and principles which would endanger its realization. And on the other hand, they must be sharply aware of existing impediments so that they may direct their energies intelligently to the removal of the causes of current imperfections.

I take up with considerable trepidation the task of arguing that government should quit trying to promote competition by means of the antitrust laws, especially since some proponents of the free society believe that vigorous enforcement of those laws is absolutely indispensable. Yet, antitrust laws are inconsistent with the basic principles of the free society, private property, and freedom of contract; they deprive persons of private property in some cases and outlaw certain contracts which would otherwise be valid. Moreover, they expand the role of government far beyond that envisaged by the theory of the free society and thus amount to an unconscious admission that the fundamental theory itself is incoherent; for antitrust policy implicitly accepts the Marxian premise that a laissez faire economy will result in the decay of competition and in the emergence of abusive monopoly. Finally, and this may be the most pressing reason for the present article, in their attempt to promote competition the antitrust laws may in fact be inhibiting it.

Vague and Uncertain Laws

One of the basic evils in the antitrust laws is the vagueness and uncertainty of their application. They have produced mainly confusion. Seventy some years ago the antitrust laws prevented the Great Northern Railway and the Northern Pacific from merging, although but a minor fragment of their respective lines overlapped in competition. But a few years later United States Steel was permitted to consolidate a vast preponderance of the steel production of the country under one management. Since then we have been off on another antimerger binge, and so Bethlehem and Youngstown have been enjoined from doing on a smaller scale what U.S. Steel did on a grand scale. Socony and other integrated oil companies were told that they might not buy up distress oil at prices set in competitive markets. But only a few years earlier the Appalachian Coals Association had been permitted to act as exclusive marketing agent for most of the coal production of an entire region. Forty years after its foresight, courage, and capital had been instrumental in developing the great General Motors productive complex, the du Pont Company was ordered to give up control of its G.M. stock because of a relatively picayune buyer-seller relationship between them. Only space limitations preclude an almost endless listing of equally contradictory and inequitable results of the unpredictable eruptions from the antitrust volcano. At present, the allegedly competitive policies of the Sherman Act are mocked by those patently anticompetitive components of the antitrust laws, the Robinson-Patman Act and the fair-trade laws.

Thus, to the careful and honest observer the antitrust laws appear to be a charter of confusion, rather than the “charter of economic liberty” which oratory calls them. They have been transmogrified by the political vagaries to which their vagueness makes them susceptible into an insult to the idea that laws should apply equally to all. Some may regard these consequences as merely unfortunate incidents of a generally praiseworthy program. Yet we need continually to remind ourselves that law is for the benefit of the citizenry, rather than for the sport of government and of the legal profession. The main function of law is to provide people with clear and sound rules of the game, so that they may pursue their affairs with a minimum of doubt and uncertainty.

While aggravating the existing uncertainties of life, the antitrust laws can make no demonstrable claim to improving competition, despite the contentions of enthusiastic trustbusters. I have heard it said that the result of breaking up large firms is to create competition among its fragments, and thus to contribute to social well-being. But a moment’s reflection will expose this as a bare and un-supportable assertion. Even though additional firms may be created by breaking up large businesses, the result is not necessarily in the social interest, nor does it necessarily create or improve competition. The social interest and competition are not automatically served by an increase in the number of firms. It is a commonplace that competition may be more vigorous and the service to society greater when an industry has few firms than when it has many. The question from the point of view of society is not how many firms there are, but how efficiently and progressively the firms—no matter how few or how numerous—utilize scarce resources in the service of the public. Maybe production will improve after a single large producer is split into fragments; but it is equally possible that it will not. No one can tell in advance, and it is also impossible to do so after the fact. The only thing that can be said with certainty about the breaking up of businesses is that government’s power has been used to deny property rights rather than to protect them. If we really believe that private property is the most valuable institution of the free society, and that in it lies the strength of the free society, then it is wrong to abrogate that institution on the basis of pure guesswork.

Monopoly Unionism

The antitrust approach to improving competition loses even more of its glamor when one understands that the most abusive and socially dangerous monopoly which exists today in this country is the direct product of special governmental privileges. Labor unions are today the most destructive monopolies in our system, and they are also the greatest beneficiaries of governmental special privileges.

First and foremost, there is the virtual privilege of violence, which trade unions alone enjoy. Neither individuals nor other organizations are so privileged. Memory is strangely short as regards union violence, and yet every big union in America has used it habitually, in both organizing and “collective bargaining.”

Of the men who resist union membership, many are beaten and some are killed. They have much more to fear than do persons who reject the blandishments of sellers of other goods or services. And this is true despite the fact that the right not to join a union is as firmly entrenched in legal theory and the theory of the free society as is the right to buy as one wishes or to refuse to buy when one so wishes.

In 1959, the United Mine Workers engaged in one of its periodic purges of the nonunion mines which spring up continually owing to the uneconomic wage forced upon the organized mines by the UMW. An Associated Press dispatch, dated April 10, 1959, reported that “one nonunion operator has been killed, five union members charged in the fatal shooting, and three ramps damaged by dynamite since the strike began March 9. It has made idle more than 7,000 men over the union’s demands for a $34.25 a day wage, a $2.00 increase.” The grimmest aspect of the dispatch lay in the news that Governor A. B. Chandler of Kentucky was threatening—after a full month of terror and pillage by the union—to order National Guardsmen into the coal fields.

This is no isolated case. On the contrary, violence and physical obstruction are standard features of most strikes, except where the struck employers “voluntarily” shut down their businesses, in accordance with the Reuther theory of enlightened management which I have described in Power Unlimited: The Corruption of Union Leadership (Ronald Press, 1959). A special dispatch to The New York Times, dated August 5, 1959, reported that “a siege was lifted today for 267 supervisory employees at the United States Steel Company’s Fairless Works here. . . . From now on the supervisory personnel will be allowed to enter and leave the plant at will for maintenance.” The dispatch is silent concerning the probable consequence of any attempt by the steel companies to maintain production. But the fact that supervisors were besieged because of maintenance operations suggests that rank-and-file workers who attempted to engage in production would be mauled. It is not out of order to infer that the siege of the supervisors, otherwise a pretty silly act, was intended to get across that message.

The careful student of industrial warfare will discern a pattern of violence which reveals an institutionalized, professional touch. Mass picketing, goon squads (or “flying squadrons” as they are known in the Auto Workers union), home demonstrations, paint bombs, and perhaps most egregious of all, the “passes” which striking unions issue to management personnel for limited purposes—these are the carefully tooled components of the ultimate monopoly power of unions.

As a matter of fact, we have become so befuddled by, and so weary of, the terror, destruction, and waste of the unions’ organizing wars that we view with relief and contentment one of the most prodigious contracts in restraint of trade ever executed—the celebrated “no-raiding pact” of the AFL-CIO. No division of markets by any industrial firm has ever achieved such proportions. The “noraiding pact” divides the whole organizable working force in accordance with the ideas of the union leaders who swing the most weight in the AFL-CIO. It determines which unions are “entitled” to which employees. The theory of modem labor relations law is that employees have a right to unions of their own choosing. Reversing that principle, the “no-raiding pact” asserts that the choice belongs to the union leadership. If any business group were so openly to dictate the choices of consumers, it would be prosecuted by sundry federal agencies and hailed before one or another, or perhaps many Congressional committees. It would not receive congratulatory telegrams from the chief politicians of the nation.

Government Intervention

The more one examines American labor law the more one becomes convinced of the validity of Professor Mises’ theory that no abusive monopoly is possible in a market economy without the help of government in one form or another. If employers were permitted to band together peacefully in order to resist unionization, as unions are permitted to engage in coercive concerted activities in order to compel unionization, it is probable that the purely economic (nonviolent) pressures of unions would not be as effective as they have been in increasing the size and power of the big unions. But the government has taken from employers all power to resist unionization, by peaceful as well as by violent means. At the same time it has permitted unions to retain the most effective methods of economic coercion. And so picketing, boycotts, and other more subtle modes of compulsory unionism are in many instances as effective in compelling unwilling membership—in the absence of countervailing economic pressures from employers—as sheer physical violence.

Monopoly unionism owes much, too, to direct and positive help from government. Consider the vigorous prohibition of company-assisted independent unions which has prevailed for over twenty years. Although such small unions might at times best serve the interests of employees, the early National Labor Relations Board practically outlawed all independent unions, and more recent decisions continue to favor the big affiliated unions.

The Majority-Rule Principle

But perhaps the most significant contribution of government to monopoly unionism is the majority-rule principle which makes any union selected by a majority of votes in an “appropriate bargaining unit” the exclusive representative of all employees in that unit, including those who have not voted at all, as well as those who have expressly rejected the union as bargaining representative. Majority mle is a monopolistic principle; it is always to be contrasted with individual freedom of action. But it is particularly prone to monopolistic abuse in labor relations. Determination of the “appropriate bargaining unit” is left to the virtually unreviewable discretion of the National Labor Relations Board. And that agency has in numerous instances felt duty-bound to carve out the bargaining unit most favorable to the election of unions. Indeed, politicians might learn something about gerrymandering from studying the unit determinations of the Labor Board.

Even if the gerrymandering could be eliminated, the majority-rule principle would remain a source of monopolistic abuse, based on monopoly power granted and enforced by government. A union may be certified exclusive representative in a 1,000-man bargaining unit on the basis of as few as 301 affirmative votes, for an election will be considered valid in such a unit when 600 employees participate. If a bare majority then votes in favor of the union, the remaining 699 are saddled with the union as their exclusive bargaining representative, whether or not they want it.

Competitive Safeguards

Society has nothing to fear from unions which without privileged compulsion negotiate labor contracts and perform other lawful and useful jobs for workers who have voluntarily engaged their services. For they are then but another of the consensual service associations or agencies which a free society breeds so prolifically. Moreover, the free society has demonstrated that its fundamental mechanism, free competition in open markets, is tough and resilient enough to defend against exploitation by any genuinely voluntary association. The critical problem arises when a man or an association destroys society’s chief defense mechanism by violent and coercive conduct, or when that mechanism is blacked out by special privilege from government. For then, without the checks and balances of free men vying against free men in civilized competition, society lies as prone to exploitation by the unscrupulous as a rich store would be without guards and burglar alarms.

When the sources and components of union monopoly are understood, it becomes clear that the antitrust laws cannot cure the problem. The fundamental source is to be found in failures and errors of government which the most elaborately conceived antitrust laws could not cure. The basic job of government is to keep the peace. It has not kept the peace in labor relations. Local, state, and federal governments have all failed to prevent labor goons and massed picket lines from interfering with the freedom of action of nonunion employees and of employers in bargaining disputes. (See my book, The Kingsport Strike, Arlington House, 1967.) A similar failure in organizing campaigns has permitted unions which would be pygmies, if they represented only workers who wanted them, to become giants. The antitrust laws would equally clearly do nothing to remedy the monopolistic consequences of the positive aids granted by government to the big unions, such as the majority-rule principle and the virtual outlawry of small independent unions.

I am convinced that the socially dangerous aspects of big unionism have been brought about by the errors and failures of government which we have been considering. Government has on the one hand been tolerating the violence and economic coercion by means of which the big unions have attained their present power, and it has, on the other hand, positively intervened in their support. Moreover for the last forty years or more, officers of the national administration have played a critical role in the key industrial disputes which have set the pattern of the so-called inflationary wage-cost push.

The latter is a much more important fact than it may seem at first view. It suggests that the checks and balances of free enterprise are adequate to protect the public even from the artificially constructed compulsory labor monopolies which we now know. Moreover, it is not unreasonable to infer that those checks will work even more effectively if politicians not only stay out of negotiations but also enforce the laws against compulsory organization. These considerations suggest that the logical first step for those concerned about union power is to insist that government remove the present special privileges which unions enjoy and then wait patiently, to see if the program will work itself out without further government intervention.

Government’s Limited Role, As Outlined by Mark Twain

I believe that the same approach should be taken in respect to businesses suspected of monopolistic abuses. Rather than following the hit-or-miss political vagaries of the antitrust approach, it would be better to make sure that all special privileges, such as tariffs, exclusive franchises, and other governmental devices for blocking access to markets are withdrawn. Repeal of the tax laws which unfairly prevent high earners from amassing the capital necessary to compete with existing firms would also help much more than antitrust prosecutions do in promoting competition. In short, if government would confine itself to protecting property and contract rights, and if it would desist from impairing those rights, it would be doing all that government can do to promote competition. And we should not need to be greatly concerned about monopolies and contracts in restraint of trade. For, as Mark Twain’s account of the career of the river-boat pilots’ monopoly in the nineteenth century demonstrates, the free enterprise system is in itself fully capable of destroying all abusive restraints upon competition which are not supported and protected by government.

In the years before the Civil War, Twain writes in Life on the Mississippi, the river steamboat pilots formed an association which was to become, as Twain put it, “the tightest monopoly in the world.” Having gone through many trials in building up its membership, a sudden increase in the demand for pilots gave the association its first break. It held members to their oath against working with any nonmember, and soon nonmembers began having difficulty getting berths. This difficulty was increased by the association pilots’ safety record, which grew out of an ingenious method evolved by the association for current reports on the ever-changing Mississippi channel. Since the information in these reports was confined to members of the association, and since nonmembers had no comparable navigation guide, the number of boats lost or damaged by the latter soon became obviously disproportionate. “One black day,” Twain writes, “every captain was formally ordered (by the underwriters) to immediately discharge his outsiders and take association pilots in their stead.”

The association was then in the driver’s seat. It forbade all apprentices for five years and strictly controlled their number thereafter. It went into the insurance business, insuring not only the lives of members but steamboat losses as well. By United States law the signature of two licensed pilots was necessary before any new pilot could be made. “Now there was nobody outside of the association competent to sign,” says Twain and “consequently the making of pilots was at an end.” The association proceeded to force wages up to five hundred dollars per month on the Mississippi and to seven hundred dollars on some of its tributaries. Captains’ wages naturally had to climb to at least the level of the pilots’, and soon the increased costs had to be reflected in increased rates. Then society’s checks and balances went to work. This is Twain’s summation:

As I have remarked, the pilots’ association was now the compactest monopoly in the world, perhaps, and seemed simply indestructible. And yet the days of its glory were numbered. First, the new railroad … began to divert the passenger travel from the steamers; next the war came and almost entirely annihilated the steamboating industry during several years … then the treasurer of the St. Louis association put his hand into the till and walked off with every dollar of the ample fund; and finally, the railroads intruding everywhere, there was little for steamers to do but carry freights; so straightway some genius from the Atlantic coast introduced the plan of towing a dozen steamer cargoes down to New Orleans at the tail of a vulgar little tugboat; and behold, in the twinkling of an eye, as it were, the association and the noble science of piloting were things of the dead and pathetic past!

The moral: government’s job is done when it defends the right of competitive businessmen or workers to take over functions which are being abused by monopolistic groups. The deeper moral is that monopolistic abuses rarely survive without a basis in one form or another of special privilege granted by government. The long steel, auto, and other big strikes we have suffered would not have lasted nearly so long if government had effectively protected the right of the companies to keep their plants operating and the right of employees to continue working during the strike.

Sylvester Petro (1917–2007) was a professor of law and the author of several books on the history of labor policy in the United States, including The Labor Policy of a Free SocietyThe Kohler Strike, and The Kingsport Press Strike. As professsor and director of the Wake Forest University Institute of Law and Policy Analysis, he taught generations of students about the history of labor unions, while defending free association and free contract as essential to the free and prosperous commonwealth. He was a member of the Mont Pelerin Society and a supporter of the Mises Institute.