The Greatest Lie Ever Sold

Remember learning in school how government was the great protector of the people from the evil monopolization of businesses? You were taught that without government regulating monopolies, businesses could reduce prices dramatically to drive out all their competitors then they could gouge their prices at the expense of the consumers. Except they left out one tiny detail, this can only happen through the force of the State.

From an Austrian economic standpoint, it is stressed that ultimately, businesses have no control over their prices. Sure, they can raise their prices, but only at the expense of selling less goods. The price is determined by individuals acting in their own self-interest in the market. If Company A raises the price of apples by $.30 above the market price, people will eventually realize that Company B is selling apples at the market price, and will buy their apples from Company B.

If businesses don’t have the ability to raise prices at will, then this theory of monopolies simply cannot exist in the real world, unless the State gets involved.

The State has a monopoly on the legitimacy of the use of force. This means they can use force with little to no repercussions because most people grant them the legitimacy to do as they please. Only wielding this use of force, can monopolies actually exist.

Assume there’s a world with no State interference into the economy. Without getting into too much detail, we can say that consumers control the prices by voting with their dollars. Obviously, this allows any business to lower prices as much as they want, as long as they remain profitable.

As one business, say, BicycleTown, lowers their prices, others businesses selling bicycles are pressured to lower their prices, or they will go bankrupt. This will lower the general market price for bicycles. People will expect to be able to purchase bicycles at the new, lower price.

Assume further that BicycleTown was able to increase their economies of scale so much that they were able to drive all competitors bankrupt because they can’t compete at these new lower prices. There’s only one business selling bicycles left, yet the market price is lower than it has ever been.

As soon as BicycleTown tries to raise their prices from the current, low market price, they will be met with new entrepreneurs entering into the market. As more businesses enter, the price will have to fall back down to the market price.

In other words, they cannot gouge the price and expect to hold their “monopoly”.

However, when the State gets involved into the economy, a monopoly is attainable. The State can put arbitrary conditions (e.g. a minimum wage, expensive regulations, etc.) onto the market, which can force newcomers from entering a specific market. If no new businesses are allowed to enter the bicycle market, BicycleTown can then raise prices without fear of new competition.

We were sold a lie that the only way to prevent monopolies from forming was to have the biggest monopoly, the State, dictate certain rules and regulations. Bogus.

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