Bigger & Better: Celebrating Market Success

I wrote this essay after listening to Alex Epstein's lecture "The Monopoly Myth: The Case of Standard Oil".

The purpose of the essay was to condense and expand on the lecture, I highly recommend doing this after hearing a lecture to increase your own understanding. It was a rewarding endeavour.

Read it below, or as a PDF

Bigger & Better: Celebrating Market Success
 
Throughout western culture, success is a word that brings positive images to mind. Success reminds us of the climber who conquers Everest, the scientist who proves a new theory, the student who passes an examination, or the athlete who sets a new record. Success is the concept of achieving a value, yet there is one endeavour where success  is often detested with a poisonous and spiteful passion. Many people when confronted with the phrases “successful student” or “successful artist” will respond positively, yet when you utter the words “successful businessman” their enthusiasm may begin to dwindle. Start mentioning some other terms associated with business success, such as “profit”, “corporation” or “international market leader” and they may well be positively horrified! The concept invoked in those who react  negatively to success in business is overused, widely misunderstood and is often a thoughtless evasion of reality: monopoly.

A monopoly, the anti-capitalists argue, is the result of businesses operating unregulated. Left to their own devices in a free market, we are told, businesses will grow to dominate an industry or sector. It will engage in questionable tactics to wipe out the competition, leaving them free to charge limitless prices for shoddy goods. The thought process by which this conclusion is arrived at is easy to identify: businesses sell products and make money, then they expand enabling them to sell cheaper products (due to economies of scale), customers flock to the low prices, the competing enterprises go out of business leaving the successful business as the single market player: a monopoly free to jack up prices. The anti capitalists will describe an entrepreneurial practice known as predatory pricing, whereby a company lowers its prices to “unnatural”  levels in order to kill the competition. It can absorb the loss due to its size, then raise prices by astronomical amounts once it has become a monopoly. Again – without context – this can seem logical. The general consensus among the public is that big business is an obstacle to the lives of ordinary people, proponents of regulatory and anti-trust doctrines suggest that dominating businesses raise the price of living, destroy jobs, alienate workers and can act outside of the law. We are all familiar with these sentiments argued by the anti-capitalists in the socialist, nationalist, welfare statist and more recently the environmentalist movements, but how accurate are they? To what extent, if any, do large businesses harm our well being?

To begin with, we must examine an industry before a large business steps in, and discover what changes are made by the business, and finally evaluate the results. The favourite example of the anti-capitalists is Standard Oil, a company so large that the United States government eventually split it into 34 different pieces. Those hostile to Standard Oil will paint a scene of an idyllic diversity of hundreds of small oil producers, that simply could not survive due to the behemoth business of Rockefeller's Standard Oil. While it is true that there were hundreds of competitors, this was an unsustainable business model that can only work in a new market. Small, inefficient competitors profit in new markets because demand for the new product is much higher than the relatively small supply. As customers and industries are so keen to purchase the new product, it does not matter how efficient or safe the industry is, the product will be purchased at nearly any price (within reasonable limits). This is unsustainable, as more and more producers begin to create the product, supply will catch up with demand and the competitive edge will be held by the producer with a better quality product and a lower price. At this point of market normalisation, the efficiency of a competitor is the cornerstone of their success; which is precisely how Standard Oil became so large.

Rockefeller was a master of efficiency, through innovations in processing, transport and packaging he was able to drive the price of kerosene from 58 cents per gallon to just 26 cents per gallon in five years. The most hated “monopoly” in history was producing the best product of its kind ever seen, at prices which were previously impossibly low. An efficient industry means that high quality products could be sold at affordable prices while generating enormous profits.

It is untrue that Rockefeller engaged in “predatory pricing”, he maintained his low prices even when Standard Oil was the dominant market force. This is because the predatory tactics that dominant companies are accused of are the business plans of a madman. Even if it were true that Rockefeller's intention was to jack up prices after killing the competition, he could only do this until he hit the price of his product as it stood before he entered the market, otherwise his competitors could simply start selling again and undercut him – and that is assuming his competitors had not made a single improvement or innovation. It would make no sense for him to constantly fluctuate between selling at a low price, and selling at an unaffordable price – Rockefeller knew that the way to make the most profit was to consistently push for the best product at the lowest price, which in turn made him arguably the richest man ever to live. It is also untrue that he could afford to be complacent once he had reached market dominance, competition from Russia and the looming success of the electric light bulb meant that Rockefeller had to constantly adapt and be consistently progressive.

Through efficiency and innovation, big business in a free market raises the standard of living for everybody. Yet the anti-capitalists cry foul, and the masses swallow the message. What justification can they hold for this hatred? The concept of monopoly is, simply put, an excuse made by the driving forces of the various statist movements to use businessmen as a scapegoat. As demonstrated by Ayn Rand, the movers of the statist movement are driven by a thirst for political power, for regulatory control over industries they do not understand and for ownership over fortunes they could not produce. The venomous form of envy that Ayn Rand dubbed “hatred of the good for being the good”[1] is all but subtle within statist circles. They are able to get away with their demands largely because of a widespread premise implicitly held by many members of society: the idea of a zero-sum economy. This is the theory that when one man profits, another loses. That a penny in the account of a corporation is a penny taken from everybody else. This is simply untrue, as elaborated by Adam Smith[2], a business succeeds first by producing, and then by trading value for value. If a business did not exist, the wealth it owns would not be concentrated in the hands of the public, it simply would not exist. The exception to this rule is, of course, a government enterprise, or a “private-public partnership”, which accumulates wealth primarily coercively (through taxation).

In conclusion, big businesses in a free market are not only incredibly useful catalysts in the rise of the standard of living, they are also a noble and heroic way for individuals to succeed. To trade value for value is the essence of human existence in a free society. Businessmen should, like athletes, be lauded and celebrated for their achievements, as the hallmark and manifestation of progress.

1.Ayn Rand “The Age of Envy”, Return of the Primitive: The Anti-Industrial Revolution, 152.
2.Adam Smith “The Wealth of Nations”