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A favorite canard of the anti-capitalists, statists, marxists, liberals, and looting classes is that unfettered competition will lead to the creation of enormous monopolies, who kill off any competition, gouge their customers, reduce the quality of their products, and exploit their workers (since if they are a monopolist, workers will have no other choice of firms to seek work at). Rather than a single blog post dedicated to the topic, I will be creating a long series of posts. This is the first of what I will call the Economic Aphorisms. This aphorism is that competition is good for consumers.

If the anti-capitalists were correct, then we should see, over time, as markets have become freer (they are certainly freer than they were in pre-Industrial Revolution times) a concentration in the number of firms, and rising prices. The classic villains are the “Robber Barons,” who supposedly pillaged America during the Gilded Age through their monopolistic practices. One of the “worst” offenders, if you read your AP History textbooks carefully, was Cornelius Vanderbilt.

Here is an example of his monopolistic indiscretion (from Folsom’s Myth of the Robber Barrons):

Moving to New York, Vanderbilt decided to compete against the Hudson River Steamboat Association, whose ten ships probably made it the largest steamboat line in America in 1830. It tried to informally fix prices to guarantee regular profits. Vanderbilt challenged it with two boats (which he called the “People’s Line” wintercow: note how different the meaning of people was for Vanderbilt than it is for, say, modern Chinese government officials) and cut the standard New York to Albany fare from three dollars to one dollar, then to 10 cents, and finally to nothing.

That’s right, the cost of the trip was competed down to … nothing. Why?

Vanderbilt figured it cost him $200 per day to operate his boats; if he could fill them with 100 passengers, he could take them free if they would each eat and drink two dollars worth of food (Vanderbilt later helped invent the potato chip). Even if his passengers did not eat that much, he was putting enormous pressure on his wealthier competitors. Finally, the exasperated Steamboat Association literally bought Vanderbilt out: they gave him $100,000 plus $5,000 a year for ten years if he would promise to leave the Hudson River for the next 10 years. Vanderbilt accepted, and the Association raised the Albany fare back to three dollars. Such bribery may be wrong in theory, but it had little effect in practice. With no barriers to entry, other steamboaters came along and quickly cut the fare. They saw that it could be done for less, and they saw what happened to Vanderbilt for doing it.

The Association tried to buy out all of the subsequent competitors … of course to no avail.

The next time someone tells you that unfettered capitalism will degenerate into destructive monopoly, ask them two questions. First, what happened to prices in the “monopolistic” industries you have in mind? Second, what economic evidence would you point to in order to support your claim? Remember that the only true monopoly is the government monopoly on force. If you see indiscretion, theft, exploitation, high prices, discrimination, etc. it is probably a good idea to ask what role the institutionalized looters have played first. In future posts, we will examine this issue in far more detail.

2 Responses to “Economic Aphorisms: Competition Helps Consumers”

  1. Speedmaster says:

    Good stuff, looking forward to the rest of this series.

    Did you ever see the 10 part Economics For The Citizen from Walter Williams. A GREAT primer for student and Senators alike. 😉
    http://econfaculty.gmu.edu/wew/misc/EconomicsForTheCitizen.pdf

  2. Harry says:

    Speedmaster–Read it.

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