HOW SOCIALIST REGULATION MAKES MONOPOLIES
Socialists long ago discovered that it wasn’t always necessary to own the means of production; a system of pervasive government regulation can, in theory, be just as effective in controlling an economy but without the ordeal of actually confiscating—and figuring out how to operate—factories and other businesses. This was the brand of socialism known as fascism that was adopted in Italy and Germany in the early twentieth century. In leftist circles, fascism, though it no longer goes by that name, is making a comeback as progressivism and the regulatory state.
After the worldwide collapse of socialism in the Soviet Empire in the late 1980s and early 1990s, the American socialist economist Robert Heilbroner famously admitted in The New Yorker magazine (September 10, 1990) that “Mises was right” all along about the impossibility of a socialist economy. He did not, however, endorse capitalism and markets.1 Quite the contrary: he concluded his essay by recommending that his fellow socialists turn to regulation—specifically, environmental regulation—as a means of centrally planning the U.S. economy under the guise of “saving the planet.” Regulation, he said, could be just as effective as government ownership of the means of production.
For leftists, regulation is a gift that keeps on giving, because there is always another reason to increase the reach of the regulatory state—even to compensate for previous failures of the regulatory state, such as the Great Recession of 2008, which was a direct result of the policies of the Federal Reserve Board, the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and Congress. One can never, after all, regulate enough. Machiavellian socialists understand that capitalism can be strangled through regulation. The goal can be either deconstruction of a free-market society or simply making business owners subservient to bureaucrats.
Most socialists aren’t so much Machiavellian as utopian. They have a vision of benevolent “public servants” who will regulate businesses “in the public interest.” This is what is taught in the public schools and universities; it’s called the “public interest theory of regulation.”2 It is a theory that has never been associated with reality.
REGULATION FOR THE REGULATED
The reality is that, historically, regulation is usually the result of lobbying by industry (and sometimes unions) to stifle or eliminate competition.
An early example of regulation-for-the-regulated is the “public utilities” industry. The standard story is that around the beginning of the twentieth century, water, electricity, natural gas, and telephone services were evolving into giant “natural” monopolies. In order to protect consumers from these monopolies, state and local governments stepped in and established a system of public utility regulation (or socialized the industries outright). Utility companies became “franchise monopolies.” Government-run public-utility commissions would ensure the companies earned reasonable but not monopolistic profits. That’s the standard story of public utility “natural monopolies.” None of it is true.
Economist Harold Demsetz studied the history of the public utilities industries and found that, contrary to the folklore of “natural” monopolies in the free market, there was in fact very vigorous competition and no evolution toward monopoly. For example:
Six electric light companies were organized in the one year of 1887 in New York City. Forty-five electric light enterprises had the legal right to operate in Chicago in 1907. Prior to 1895, Duluth, Minnesota, was served by five electric lighting companies, and Scranton, Pennsylvania, had four in 1906. . . . During the latter part of the nineteenth century, competition was the usual situation in the gas industry in this country. Before 1884, six companies were operating in New York City . . . competition was common and especially persistent in the telephone industry. . . . Baltimore, Chicago, Cleveland, Columbus, Detroit, Kansas City, Minneapolis, Philadelphia, Pittsburgh, and St. Louis, among other larger cities, had at least two telephone services in 1905.3
The real story of how the “public utilities” became government-sanctioned monopolies was told in 1936 by an economist named George T. Brown in his book, The Gas Light Company of Baltimore. 4 The history of the Gas Light Company of Baltimore is similar—even identical in many ways—to the history of dozens of other “public utility” companies. The company constantly struggled with new competitors all through the nineteenth century, from its founding in 1816. It competed, but it also lobbied the Maryland state legislature to deny corporate charters to its competitors. By 1880 there were three competing gas light companies in Baltimore, and they attempted to form a cartel by merging into one company, but their plans were foiled when “Thomas Alva Edison introduced electric light which threatened the existence of all gas companies,” wrote Brown.5
When monopoly did appear, it was the result of government regulation, not “natural” free-market competition. In 1890 a bill was introduced into the Maryland legislature that called for granting the Consolidated Gas Company (the new name of the Gas Light Company of Baltimore) a twenty-five-year monopoly (the contract was renewable) in exchange for an annual payment to the city of $10,000 and 3 percent of the company’s dividends.6 “[T]he development of utility regulation in Maryland typified the experience of other states,” wrote George T. Brown.7 It was all a matter of corporations sharing monopoly profits with government.
Economist Horace M. Gray researched the history of the “public utility concept” and concluded that “the public utility status was to be the haven of refuge for all aspiring monopolists who found it too difficult, too costly, or too precarious to secure and maintain monopoly by private action alone.”8 Virtually every aspiring monopolist wanted the government to designate him as a “natural monopoly,” said Gray. This included the radio, real estate, milk, airline, coal, oil, and agriculture industries, to mention just a few.
HOW FDR LINED THE POCKETS OF CRONY CAPITALISTS
Horace Gray also wrote that “the whole NRA experiment may be regarded as an effort by big business to secure legal sanction for its monopolistic practices.”9 NRA in this instance means the “National Recovery Act,” the cornerstone of the first two-and-a-half years of Franklin D. Roosevelt’s “New Deal.” The NRA empowered the federal government to fix the prices of hundreds of manufactured goods and to establish “codes of fair competition.” As a rule of thumb, whenever governments use the phrase “fair competition,” just substitute the word “no” for “fair” and you will understand the true meaning of the phrase.
The antitrust laws prohibiting “combinations in restraint of trade” were abandoned as the Roosevelt administration dictated monopoly prices in more than 700 industries covering 95 percent of all industries in America.10 As economist Robert Higgs explained, “Big businessmen dominated the writing and implementing of the [price code] documents . . . the codes . . . generally aimed to suppress competition in any form it might take.”11 This included minimum prices and mandatory advance notice of price changes.
Many of these same businessmen had tried for years to form private cartels that would squelch competition, but cartels often fall apart when members cheat; increasing their sales by cutting prices. If government, however, acts as a cartel enforcer, cheating can be eliminated, as it was with the NRA price codes, creating the perfect monopoly scheme—at least until the U.S. Supreme Court ruled the National Recovery Act to be unconstitutional in 1935.
The NRA not only set monopoly prices for corporations, it limited imports and put quotas on oil production, both of which drove up prices and increased corporate profits. To the Roosevelt administration, a competitive free market amounted to nothing more than “economic cannibalism.” Businessmen were “industrial pirates,”12 conservative businessmen were “social Neanderthals,” and businessmen who tried to sell more by cutting prices were denigrated as “chiselers,” “cutthroats,” and, ironically, practitioners of “monopolistic price slashing.” On the other hand, monopolistic conspiracies in restraint of trade were labeled as “cooperative” or “associational” activities.13 Massive NRA rallies in favor of higher prices reminded one historian of “the chauvinistic extravaganzas staged by the Nazis in Germany.”14
The Roosevelt administration was under the misapprehension that low prices had caused the Great Depression, when in fact the Great Depression had caused low prices and artificially raising prices only increased people’s hardship.
Every economics textbook teaches that cartels and monopolies profit by restricting supply and raising prices. Restricting supply means fewer workers are needed, so unemployment goes up. NRA regulation actually made unemployment worse and helped prolong the Great Depression. UCLA economists Harold Cole and Lee Ohanian estimated that if the NRA had never existed, the Great Depression would have ended in 1936, instead of after World War II.15
FDR’S FEAR OF FLYING
In 1938 the federal government’s Civil Aeronautics Board (CAB) began regulating prices, routes, admission of new airlines, and just about every other aspect of the airline industry. For the next forty years, the CAB administered a monopolistic cartel that benefited corporate airlines rather than consumers.
The CAB severely restricted competition in the domestic airline industry by allowing no new airlines after 1938 when there were sixteen airline companies operating in the United States. Several airlines became defunct, so that by 1978 there were only ten remaining, operating under a monopolistic route-sharing scheme.16 Because airlines could not compete on prices or on routes, both of which were set by the CAB, they competed in other ways, such as offering “free” alcohol and food. In response, the CAB began regulating the size of sandwiches that could be offered!
Government-enforced monopolies are very effective tools of corporate welfare. In 1974, it cost $1,442 to fly from New York to Los Angeles. In 1978, after the industry was finally deregulated, the same route cost $268. This is a typical example of how “regulation in the public interest” isn’t.
Once the CAB monopoly was broken, the number of airlines increased; competition blossomed; and air fares plummeted. Airports themselves, however, are run by state and local governments; privatizing them would greatly reduce travel delays.
From 1935 until 1980 the trucking industry in the United States was also operated as a government-enforced cartel, in this instance by the Interstate Commerce Commission (ICC).17 The ICC established government-mandated routes and prices and imposed regulations that restricted trucking services (prohibiting trucks, for instance, from making a delivery and then picking up another delivery for the drive back).
After trucking was finally (partially) deregulated by the Motor Carrier Act of 1980, trucking prices fell by 25 percent in the first five years (and consumers benefited from lower prices for goods that were trucked); competition thrived; and more non-union truckers were hired. It wasn’t just airlines and trucking where regulation benefited the regulated. Business historian Gabriel Kolko proved in his book, The Triumph of Conservatism, that the “progressive era” (1900-1916) regulatory forms, such as the creation of the Fed and the Federal Trade Commission, and the regulation of the meat industry, were in fact promoted by big business interests themselves.18 Bankers wanted a national bank that could expand their lending abilities; large corporations favored the Food and Drug Act because of their (correct) belief that regulatory requirements would impose a disproportionate burden on their smaller competitors and deter others from entering the business in the first place; and antitrust laws have always been used to harass and punish companies that are too successful in meeting consumer demand.19 Large corporations sought these regulatory institutions as a means of stifling competition, just as they did in the “public utilities” industries.
Socialists might claim to hate big business, but their regulatory state is one of the greatest defenders of big business ever created.