On Government as Monopoly

Perhaps Max Weber's most enduring contribution to economics was his definition of the state. It's become so widely referenced these days that it's becoming a cliché: governments divide territories and exert coercive monopolies within their sector. Hell, even anarchists and non-anarchists can agree on that much. The main difference between the former and the latter is that the former believe this monopoly is normatively bad; the latter consider it mainly descriptive.

I say "mainly" because, being a non-anarchist myself, I still feel Weber's monopoly has a certain normative component. We love to hate monopolies because they generally screw consumers. But some monopolies, like those given patent owners, are considered so consumer-benevolent that they're justified. The pivot point is behaviour, I think. Let me elaborate.

Monopolies aren't deterred by competition, so they never fully internalise surplus. They would if their market were open to more sellers, because then they'd forfeit control over supply. That they don't causes a disequilibrium between natural demand and price: demand is artificially inflated due to the supply shortage induced by the seller. So, the seller pays nothing for being inefficient. As the sole source, his surplus goes unchecked. In fact, he profits from inefficiency.

That's the incentive we try to limit. Whatever the social disadvantages to markets, their main advantage is the efficient allocation of utility. Whenever you get a consumer spending less than he'd have paid, the seller wastes profit. Whenever you get a supplier selling higher than he'd have asked, the buyer wastes resources. But the market generally sifts these things out: it's hard for producers to overprice and consumers to underbid when rivalries within each group force FMVs to converge at equilibrium. With monopolies (and monopsonies), though, the rules change. Almost every single sale a monopolist makes takes place at a price higher than he'd have taken. Almost every single purchase a monopsonist makes takes place on an offer cheaper than he'd have made. And with both, there's an incentive to keep it up: why cut surplus when it all falls to you? Why skim waste when you're the one immune? Society may be haemorrhaging utility like a sieve, but it's not in your best interests to clot the wound.

But monopolies can have their advantages. When you take them off the table completely, behaviours adapt. Yes, market participants behave efficiently, but market bystanders get cold feet. If you've got the next new cutting-edge treatment for AIDS, you might decide to scrap it. Why risk sinking all that R&D into a product when you'll just end up buying yourself into a market awash with cheaper, reverse-engineered generics?

So, monopolies can have their place. It's a limited place, of course: we're carving out the exception at the expense of utility. But the utility we sacrifice is diffuse. And in the case of the drug manufacturer above, it's a controlled flow: his patent rights are tightly confined to reign in the worst of excesses. That's really important. Because we a) limit the monopoly's lifespan, and b) set standards the monopolist must follow, he both won't and can't strap society with too much waste. His power lapses eventually, so he'll reinvest in being ready: keeping production slick, quality high, costs low, etc. That's really unlike a monopolist, for whom keeping rivals out of a market invariably takes priority over meeting them head-on. Your average monopolist buys barriers to entry; but our patent-holder buys competitiveness. In other words, his behaviour mimics a non-monopolist: his main concern is staying afloat. But further, he can't take his licence too far. His patent is limited, with the scope of his profits being defined by law.

But what about lawmaker? Are there grounds on which we can excuse governments from the presumption against monopoly? I think, as I've demonstrated here, it turns on behaviour. Monopolies leach utility because they crowd out supply; they crowd out supply because that, in turn, promotes their own utility. They acquire a relative gain at a universal loss. Yet, as we've seen, there are exceptions: a patent-holder's behaviour isn't totally monopolistic, and so neither is his impact. And the difference owes to motive: patent-holders just aren't calculating utility the same. Now consider governments (or at least representative ones): the utility of the public and the monopolist overlap! There's plenty room for disagreement, of course–how much they converge is always a matter of debate. But, if we accept the premise that not all monopolies act like it, and it's that action we find so objectionable, then monopolies are only as undesirable as they are likely to sap the public's utility by chasing their own. And unless our democratic impulses betray us, this leaves governments in the West looking pretty benign.