Another fallacy of capitalsim

Capitalism is prone to monopoly

The third objection to capitalism is that it is prone to monopoly. The representative of this opinion, Karl Marx propagates that: In a society of laizzez-faire capitalism, what would prevent the formation of powerful monopolies able to gain control over the entire economy. The opponents of capitalism don’t regard competition, the essence of capitalism, as a stimulation of production and exchange; instead, they argue that competition squeezes out small companies and makes big ones setting prices at will: “In capitalism, there’re certainly some big and powerful companies, who will lower their prices and eliminate their competitors. At last, this company will become the only seller in the market and thus can set prices at will. Capitalism is certainly the best soil for these bastards because capitalism merely cares about profit. ” Finally they conclude, “We need socialism, in which a strong government will punish these big companies and we will be better off.”

If capitalism was really the heaven of monopoly, then the top 500 companies should remain unchanged in a long time. But the truth is that between 2001 and 2002, 36 businesses dropped off the list of the Fortune 500 largest companies. (Thomas Sowell, Basic Economics page 96) In theory, a company which wants to monopolize in certain area should lower their prices and squeeze the profit of its competitors. But it’s actually hard to apply in reality. First, the company has to endure a short term loss, and the more competitors it has, the more loss it has to suffer. Second, even if it has almost forced all the competitors out of the market, there maybe a buyer using a low price to buy the company and competes again. Besides, the change of technology and customers’ preference can also hamper the existence of monopoly. Just as Fortune magazine concludes: Failure is part of the natural cycle of business. Companies are born, companies die, capitalism moves forward. Capitalism actually eliminates the existence of monopoly and it’s socialism that will cause monopoly.

In the book, Capitalism: the unknown ideal, author Ayn Rand says that the government grants a company a franchise for exclusive territory. In World War Two, for example, two telegraph companies, Western Union and Postal Telegraph were ordered into one monopoly. (Page 74) So we can see that a necessary condition for monopoly is the support of government, which is not quite possible in capitalism.

In a free market, a company, however big and powerful it is, cannot monopolize because any field is open to any one who wants to enter and compete. The reason why big corporations get huge profit lies in the fact that they try hard not to be replaced by their competitors. For example, McDonald’s succeeds globally because it spends millions of dollars doing researches on how to make better potatoes, produce more delicious hamburgers and be more efficient. No government protects McDonald’s, the reason it keeps profitable is that it keeps vigilant in case being caught up by competitors. Just as Alan Greenspan summarizes in his article “The assault on integrity”, “Reputation, in an unregulated economy, is thus a major competitive tool.” (Capitalism, an unknown ideal page 127) With no subsidy from government, companies have to maintain a high quality, whether in hard values, such as good products, or soft ones like friendliness to employers and customers. In contrast, the only airplane company in Soviet Union, Aeroflot, treated customers badly because with the support of government, there’s no competitor at all. When the market is regulated by the government, there’s no cost for a company to lose customers.