In Praise of Monopolies

in praise of monopolies

Monopoly Has Become a Bad Word—This Needs to Change

Economists love words.  They have a word for just about everything, and if they don’t then they’ll make one up.  Economics is rife with jargon.

But some words you just can’t say—George Carlin was right.  There are bad words.  Dirty words.  Dangerous words.

Tariff!  That’s the big one.  It’s high energy, it’s raunchy, disrespectful—it’s the fuck of economic jargon.  Tariff is a bad word no matter what.  Try it out for yourself next time you’re in a room full of economists.  They’ll literally shudder when you say it.  It’s beautiful.

Here’s another one: monopoly.

Now, monopoly’s not quite as naughty—it’s like ass.  If you’re talking about a donkey, ass is fine.  Ass is in the Bible.  Context is what makes ass dirty.  Same thing with monopoly.

If you’re talking about how evil monopolies are, you’re fine.  But, use monopoly in a positive way and people give you the stink-eye.  Monopolies are bad, and if you disagree then monopoly is a bad word.

Enough’s enough.  It’s time we took the word back.  Monopolies should be praised.  They’re desirable.  They’re what separate the rich from the rich.

If we want to make America rich again, we need to embrace monopolies.

the Lost Vinlandsaga, or How to Monopolize a Bog

The year is 1000 AD.  You are aboard a Viking longship—one of three that set out from Greenland in search of resources.  Greenland is pretty sparse, and your fearless captain thinks there’s something better out there.  He’s right!

You spot land.  Lush land.  Fertile land.  You name it Vinland.

Vinland is full of trees, clay, iron—everything you’ll need to build a new Viking colony.  But the resources aren’t evenly distributed.  Some areas of this new world are heavily wooded, others have fertile black soils but contain no clay with which to build bricks.  Where do you settle?

One of the Viking captains takes his colonists to an area covered with trees: there were very few trees in Greenland, so he figures he’s hit the jackpot.  Another captain settles on a plain nestled between a ring of hills.  The black soil is perfect for growing wheat, and the hills will ensure his sheep have lots of fresh grass to eat.

Their settlement choices are pretty good—far better than anything in Greenland—but they have their drawbacks.  They are plentiful in one resource (timber, agricultural land), but not very well-balanced.  The colonists will have to trade for what they lack.

But your captain is no fool: he used to trade amber with Arab merchants along the shores of the Caspian Sea and knows well the value of scarcity.

In the Medieval Ages amber was found only in Scandinavia.  Vikings used to harvest the precious amber and ship it south along the Volga River—from Novgorod down to Astrakhan.  Viking traders even ended up as far south as Baghdad, which was the center of the slave trade (the word “slave” comes from Slav, the ethnic group most commonly traded).  Anyways, amber was scarce, and this scarcity (combined with a stable demand for amber) is what made it valuable.

The logic of scarcity doesn’t just apply to amber, it applies to everything—from apples to software.  Scarcity explains why water can be worth even more than gasoline during a natural disaster.

 Viking settlement at L'Anse aux Meadows
The Viking settlement at L’Anse aux Meadows, Newfoundland, Canada is surrounded by peaty soils—just the place where one can find bog iron.  Evidence of a working smelter has been found at the site, suggesting that the colonists repaired their iron goods, if not refined bog iron into tools.

Your captain knows this, and rather than settling in an area with lots of trees or open grassland (there’s plenty of that in Vinland), he steers your longship into an alluvial stream with marshy banks.

On the surface this area doesn’t look nearly as promising as the other colonies.  The soils are slightly acidic, which will make it tougher to grow wheat.  Likewise, the trees are stunted, making harvesting them for timber less efficient.  But the peaty soils are worth it because they hide a scarce, and therefore valuable, resource: iron.

Iceland’s Vikings did not mine iron ore—the volcanic rock contains no mineral deposits.  Likewise, the permafrost in Greenland prevented them from mining.  Instead, they harvested iron from meteorite impact sites, and from swamps, where marsh plants fixate iron into little balls in their roots.  This is called bog iron.  Marshes were the Viking’s chief source of iron.

Iron was valuable because it was both useful and scarce—you can graze sheep or cut down trees just about anywhere in the Viking world, but iron can only be found where the conditions are just right.  Iron is scarce.  Iron is valuable.

And better yet, your colony is the only one that can produce iron locally.  If the other colonies want iron, they must trade with you.  You have a monopoly on iron.  Monopolies are exceptionally lucrative for producers because monopolists lack competitors to undercut their prices—monopolists have free reign to gouge consumers.  Monopolies inflate prices, and profits.

Monopolies are good, if you’re the monopolist.

National vs Personal (Corporate) Monopolies

What about all that stuff you learned in school about monopolies being bad for consumers?

In some cases they are: it would be sub-optimal to allow a single individual or company to generate all of America’s electricity—prices would be artificially high, and both the people and the nation as a whole would suffer.  This is why the government (ostensibly) is obligated to breakup monopolies under anti-trust legislation.

However, there is a an important distinction that must be made between personal and national monopolies.  Personal monopolies, those owned by an individual or corporation, rightly deserve their bad reputation, since they distort prices in a way that undermines economic growth: national monopolies, when a nation as a whole has a monopoly on a resource, do not.

Going back to our Viking example.  A personal monopoly would be if a single Viking named Erik owned the marsh, and had a monopoly on bog iron.  This is contrasted with a national monopoly, which means that the only bog in Vinland is located in your colony—regardless of how many of your colonists own the bog.  In the first case, Erik gets rich at the expense of his fellow colonists, in the latter your colony benefits by selling iron at inflated prices to the other colonies.

Historically, national monopolies were one of the keys to getting rich.  Let’s look at a few examples.

Silk in the World’s Silver Sink

The first, and perhaps most famous historical example of a national monopoly, is China’s ancient silk monopoly.

According to legend, the Chinese first domesticated the silkworm sometime between 2,800 and 2,700 BC, during the reign of the Yellow Emperor.  The silkworm is a type of moth that lives exclusively on mulberry bushes.  The worms spin their incubation cocoons out of silk, which is harvested by workers (killing the worms).  Enough moths survive to breed and lay eggs to support the next generation of worms.  The cultivation of silk is known as sericulture.

Traditionally, weaving was a woman’s profession. This dates back to the legend of the Yellow Emperor—it was his wife who domesticated the silkworm.

For millennia, China was the only place in the world which produced silk, which was renowned for its softness and strength—layers of woven silk were even used as body armor in battle, as it was far more flexible than metal and afforded reasonable protection.

Importantly, silk made China rich.  Roman emperors imported the product at exorbitant costs along the silk road.  However, geographical distance and the difficulty of transported goods overland in ancient times prevented silk from becoming a major export industry.

This all changed in 1522, when Portuguese ships arrived off China’s southern coast.  For the first time direct trade between Europe and China was possible—it exploded.

The Europeans bought Chinese silk (as well as porcelain) in exchange for raw silver (the Chinese refused to purchase European goods on the basis that they would displace Chinese manufacturers).  In the second half of the 1500s, Europeans bought some 50 tons of silver’s worth of Chinese goods annually.  By the first half of the 1600s, this increased to 115 tons per year.

China made a fortune exporting silk because it was so scarce outside China—foreigners were willing to pay big bucks for it.  In fact, almost all of the silver mined in Spanish America (particularly from the great mine of Potosi, the “mountain of silver”) eventually ended up in China—China was the final destination for Europe’s colonial wealth.

During this period China’s economy flourished like never before, all because it had a virtual monopoly on silk.

Deus Vult, with a Side of Nutmeg

Today, Venice is an expensive holiday destination for love-stricken travelers, but for hundreds of years, from the Medieval to Baroque periods, Venice was the center of a rich and powerful maritime empire. It was a bustling metropolis, an emporium of exotic products, a factory.

Venice owed its wealth to its spice and pilgrim transport monopolies.

Venice’s story begins with its location.  The city was located on a stretch of boggy islands at the edge of a large lagoon, which protected it from the Islamic pirate raids that ravaged the Christian Mediterranean between the eight and twelfth centuries.  For this reason, it was one of the last ports left standing (along with its rival, Genoa), and became the chief conduit through which Levantine spices entered Western Europe.

This meant big profits—if Europeans wanted spice, they had to pay Venice’s high prices.

Even more lucrative was Venice’s monopoly on pilgrim transport monopoly.  Between 950 and 1150 AD Europe underwent a pervasive religious revival that led to a surge in pilgrimages.  Pilgrims traveled far and wide to pay homage, and pray (especially for healing) to the saints and apostles at holy sites.  Along the way they would see the sights (castles, cathedrals, Roman ruins), and pick up knick-knacks and “holy” relics—favorites included saint’s bones, pieces of the true Cross of the crucifixion, or bits of Christ’s robes.

While most pilgrims remained in Europe, where it was comparatively safe and cheap, an increasingly significant number began traveling to the Holy Land—Jerusalem was the ultimate pilgrimage site.  How did Venice profit?  They provided the ships.  In fact, they were for a time the only provider of ships.

Of Humpbacks & Roughnecks

Oil has been used as fuel since time immemorial.  The Bible itself is chock-full of miraculous references to oil lamps.  Olive oil is part of what made Ancient Athens rich in the first place—it was Athena’s mythological gift to the city.  Oil was godly.

But it was not until the Industrial Revolution began in the early 19th century that oil became absolutely crucial to economic growth.   Oil lamps kept the lights on and oil greased the new machinery.  Oil was indispensable.  Oil powered the modern world.

And where did oil come from?  Whales.  Big, blubbery whales.

This was a problem.  Whales lived in distant seas, were fairly hard to find, and there weren’t all that many of them—not when you consider how rapidly industry was expanding.  America, along with Great Britain, led the world in whaling, and reaped huge profits selling the relatively scarce resource to European factories.  For a time, Nantucket was one of America’s most prosperous cities.  Whaling made America wealthy.

But it was petroleum that made America rich.  Edwin Drake drilled the first successful petroleum oil well in Titusville, Pennsylvania (1859).  This started America’s first oil boom—and not a moment too soon, this was 13 years after the world hit “peak whale oil”.  Without the discovery of petroleum, the Industrial Revolution would have been stillborn.

Fortunes were made in oil.  Rockefeller became a household name (as it remains to this day).  The nineteenth century witnessed America’s rise as a world power.  And this was not just because oil was valuable, it’s because America was the only nation which produced oil in significant quantities.  America had a monopoly.

Of course European powers were quick to develop their own reserves, and conquer oil-rich territories, but there’s no denying that oil was crucial to America’s economic development.  Oil made America rich.

A Monopoly is Wasted Without Leverage

National monopolies are a big part of what made some countries richer than others throughout history—a point I continuously stress in my book, Bobbins, Not Gold.  But a monopoly alone isn’t enough to make you rich.  You also need leverage.

Let’s revisit our Viking example a final time.

One of the captains settled on some good farmland.  The other settled near an abundant source of timber.  Both settlements were highly specialized in that they could produce one thing (food or wood) exceptionally well, but lacked other resources.  This makes good economic sense: if they specialize in what they’re efficient at producing and trade for what they’re not, more will be produced overall, and both settlements will be richer.  This is the logic behind the theory of comparative advantage.

The problem is that efficiency doesn’t matter.  Leverage matters.

Recall how your Viking settlement not only has a monopoly on iron, but it can also produce everything else.  Mind you the farmland isn’t as good, and the trees are smaller—but you can get by without trading.  Your settlement is robust.  It has autarky (economic self-sufficiency).  You don’t need to trade for food, but the other colonies need to trade with you to acquire iron.  They are fragile.

This asymmetry gives your colony something called optionality: you have the option of trading, but you don’t have to.  Therefore, you will only be obliged to trade if the other colonies offer extra resources to “sweeten the deal”.  Self-sufficiency gives you leverage.  It allows you to reap the benefits of your monopoly.

This self-sufficiency also gives your colony optionality when other resources became temporarily scarce—if there’s a bad harvest in one colony, for example.  You can benefit by selling any resources when prices are high, but other colonies are limited by what they specialize in.  Your colony has more options.

This is why experienced stock traders always keep cash on hand: cash doesn’t provide yield like a bond or stock, but it does provide options—you can buy anything with cash, which is handy when stock prices plummet in a fire-sale.  When stocks crash, cash is king.  Or more technically, cash is optionality.

Leverage and optionality are what separate economists from businessmen—and they’re why economic theories often don’t translate into reality all that well.

National Monopolies are Good for the Economy

America’s economic policy is fundamentally flawed, because it operates under the assumption that monopolies are bad, without respect for what kind of monopoly we’re dealing with.  As such, the government is quick to surrender our monopolies by allowing the offshoring of key industries to foreign counties—countries which eventually become our competition.

A good example is the information technology (IT) industry.  America used to have a monopoly over silicon chip manufacturing and software design.  We sold our products to foreign countries, reaping artificially high monopoly prices.  However, this changed when we began to offshore our IT industry to Taiwan, Japan, and India.

Now America no longer makes silicon chips, and Indian technology startups compete with American firms.  What a dumb idea—we manufactured international competition, and are now paying the price.  A much better policy would have been to mimic the great nations that came before us, like Venice.

We should have protected our monopoly, and remained the world’s only true economic superpower.


About Spencer P Morrison 160 Articles
J.D. B.A. in Ancient & Medieval History. Writer and independent intellectual, with a focus on applied philosophy, empirical history, and practical economics. Author of "Bobbins, Not Gold," Editor-In-Chief of the National Economics Editorial, and contributor to American Greatness. His work has appeared in publications including the Daily Caller, the American Thinker, and the Foundation for Economic Education.