Public Virtues – Part 5 (Inherent Monopoly)

In Economic Planning, Economics, History and Politics, New Deal, Political Ideology, Politics of Policy, Progressivism, Public Policy, Public Sector, Regulation, Social Democracy, WPA on October 3, 2009 at 1:24 pm

Introduction:

(For previous parts in the series, see here)

In the public imagination, we often understand our current stage of capitalism through a single corporation that exemplifies the age, an institution that- we think of  as having a great power because of the sheer size of its workforce, or its overwhelming share of the market, or the immensity of its net worth. In the turn of the century, it might have been Standard Oil or U.S Steel; in the middle of the century, it would have been G.M; today, it may well be Wal-Mart.

But as large as these institutions get, we often overlook an institution that looms even larger. Wal-Mart may have 1.1 milion employees, but the public sector has 22 million. Exxon Mobil may take in $442 billion a year in revenues, but the public sector takes in over four and a half trillion a year.

And in economic terms, size matters.

Background:

The great issue of the late 19th century was the issue of monopoly. The great minds of the age all took the monopoly as their theme of study. The great Progressive theorist of government intervention Henry Carter Adams, in his The State and Industrial Action, argued that the state could turn the vices of monopoly into universal public benefits, as “it is the purpose of government to render services at the lowest price consistent with efficient services.” To John Bates Clark, the monopoly was the enemy of civilization, as “if nothing suppresses competition, progress will continue forever.” In the eyes of Richard Ely, the solution to the manifest economic inequality of the age was “non-competitive businesses should be owned and managed by the government.” To Herbert Croly, the question of monopoly was a question of democratic self-government – in a self-governing society, an institution that could dictate to the economy at large the price of vital goods could not be allowed to run unchecked, so that monopolies would have to be brought under the public’s control. To Edward Bellamy, the collapse of capitalism would come when, after the unchecked process of corporate mergers had lead to the consolidation of every industry into a single monopoly and then each monopoly into a single trust, the government simply nationalized the national trust and thereby peacefully established a socialist order.

And what emerged from this great ferment of intellectual and political debate was a richness of understanding of monopolies and the public sector that we lack today. On the intellectual side, many scholars of the late 19th century came to the understanding that traditional classical and the emerging neoclassical economics were wrong when they asserted that the forces of competition would always lead to the collapse of large corporations at the hands of smaller, nimbler competitors, thus preserving an economy where each participant was a price-taker and not a price maker (and therefore, an economy in which price is dictated by supply and demand). On the contrary, the Adamses and Elys argued that in industries with high capital costs (the railroad corporation being the best example at the time), larger firms would take advantage of efficiencies of scope and scale, which they viewed as legitimate since they derived from technological progress and organizational efficiency, to lower marginal costs and provide a larger supply at a (potentially) lower price. In that sense, the Adamses and Elys looked to the advent of corporate capitalism as a means of overcoming material scarcity and creating the potential for universal prosperity. However, they believed that in private hands, these “natural monopolies” would use their position to gain monopoly pricing power over an industry (which they viewed as an illegitimate rent-seeking behavior) and maintain artificially high prices, thus creating scarcity in the midst of plenty.

On the political side, activists from the Populists to the Knights of Labor to the Socialists to the Progressive Party argued that pricing power was a threat to republican self-government. In a genuinely free market, republicans could be satisfied that the economy would be one of equal participants and open to all, so that no force could ever acquire so much economic power as to dominate the others and reduce their economic independence. Moreover, no force then could exercise more power than the government itself. Yet with the existence of monopoly corporations that could dictate the price of necessities such as water or grain or fuel, the public’s welfare would be threatened. To that end, these activists argued such power could only ever be held in the public’s hands.

Public Monopolies:

Yet, in many ways, the public sector is itself a natural monopoly of a kind.

And when we think about the public sector as a kind of natural monopoly itself, the simplistic image of “huge, bloated bureaucracy” begins to disappear, and we begin to see how advantages of vertical integration emerge  For example, the Internal Revenue Service is essentially a large institution, specialized in billings and collections, which is normally engaged in collecting taxes, but can be employed for other purposes as well, given that the government is already employing these people (a classic advantage of vertical monopolies, leveraging one part of its business to aid another). Indeed, one of the advantages of the true public option, operated as a government program as opposed to an independent non-profit, was that the IRS could do the same kind of billing and collecting for the public option that it essentially does for Medicare, giving the public option a huge savings in terms of administrative costs. At the same time, given the large number of employees on the strength, the economy of scale of their services means that it’s cheaper on the margin to run a round of billings through the IRS than through outsourcing it to a private firm.

Similarly, the New Deal-era argument for “public yardsticks” as a form of regulation of private companies, is essentially the idea of pricing power turned to the public’s advantage. Given the enormous size of the Tennessee Valley Authority’s hydroelectric generating facilities, and the fact that the TVA didn’t have to earn a profit, the TVA was able to, for a large area of eight states, dictate the price of electricity and also possibly water. Whereas the pricing power of a U.S Steel or a Standard Oil would have been used to either eliminate competitors whose costs were higher, and thus who could not match the monopoly’s low price, and then thereafter to extract a monopoly rent from the consumer, the TVA would use their pricing power to ensure low and stable prices to the consumer, to prevent private utilities from exacting monopoly rents, and in a larger sense, to regulate the profit margin of the industry – which, given the critical importance of electricity or water to industry and agriculture, also to regulate the overall health of the economy, to protect it from the kind of crisis that the Enron corporation wreaked upon the California economy. It is this reason why the Public Utilities Holding Company Act was one of the crown jewels of the so-called “Second New Deal,” and why Roosevelt’s attempts to expand the TVA model to other watersheds (and thus to larger swathes of American industry and agriculture) in his second term was so fiercely resisted by newly-resurgent conservatives.

Again, the idea of a true public option would be to exercise the same power over the health care industry. With the power to dictate Medicare rates on health care, the public option would be able to force health care providers to moderate their prices. With no obligation to turn a profit, the public option would be able to charge a much lower (30% lower according to the Lewin Group) premium, and thus force competitor insurance companies to either lower their rates or lose market share. In this sense, both the conservatives who cry that the public option would mean the “government takeover of health care,” and the progressives who retort that it would merely introduce competition into the industry are wrong. The public option is not a takeover, in that unless the insurance industry is so completely inefficient and lacking in business sense that it cannot adapt to the most foreseeable change in the economy that deserves destruction on the field of the free market it will survive. But it is wrong to say that it will be a mere competitor – the public option will not be seeking profits and dealing with the same pressure to achieve 5% quarterly earnings growth or perish (nor, if designed correctly will it have to be a “price-taker” in relation to drugs companies, hospitals, doctors, and manufacturers of medical supplies), but it will become the industry’s regulator, the price-setter and the arbiter of profits.

A third area where we can see the advantages of internal efficiencies in the concept of the force account. It is no accident that one of the chief applications of the argument for the superior efficiency of the private sector is to argue, first that the construction projects should be contracted out to private entities instead of being done by public works departments, and then to argue for the privatization of public services, beginning with the natural monopolies of utilities and proceeding from there into the very heart of the public sector. And yet, the comparative record of the Works Progress Administration and the Public Works Administration should go to show that force account (i.e, work carried out with one’s own workforce and equipment) can and is often superior to private contracts, because of the internal efficiencies that can be generated from collaboration between government departments, and the lack of a profit margin. If nothing else, the decidedly mixed evidence on the merits of privatization suggest that the potential scope for force account is quite large.

Conclusion:

There is a special wonder in the Progressive minds of the late 19th and early 20th century, for they were the last generation of Americans who could have remembered a time before the advent of corporate capitalism. That experience gave them all, activists and intellectuals alike, a breadth of imagination that we can only aspire to, for their minds were free to imagine economic orders in which the very foundations of the economy could be replaced, reconstituted, or abolished outright. In our own time, we have no such experience to widen the circumference of our imaginations.

And yet, the object is there before us. Within the poor, despised public sector, we can glimpse the outline of what our predecessors in Progressivism knew: that the power of the natural monopoly is like a great stationary engine. It is there for use, the question is who shall exercise it, and for what ends. In the last thirty years, it has been given into the hands of a few for their profit.

But that can change.

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  1. [...] (For previous installments in this series, see here) [...]

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