There are thousands of articles and books written about monopolies – almost all of them about private monopolies. Here I am going to consider state-owned monopolies as well as privately owned ones.

As a matter of definition, when I say “state-owned”, I am referring to government ownership at any level (local through national government) and any legal structure. Similarly, when I say “private”, this is usually a corporation, but it includes all other legal structures as well.

Natural Monopolies

Many things can be considered natural monopolies, most of them fall under the heading of infrastructure. Think electrical distribution lines, railroad tracks, high-speed roads (freeways, motorways, autobahns or whatever they are called where you live), harbors, airports, telephone lines (remember landlines?), pipelines and so on. It is probably safe to say that no one wants to see our landscape filled with parallel and competing high-tension lines to distribute our electrical power (for example).

In most countries, the traditional answer was to build vertically integrated companies (private or state-owned). The electrical company owned the generating capacity, the distribution network, and provided the sole interface with customers. The telephone/telegraph company owed the lines, the switchboards, and had a monopoly on the customers. If they were private companies, the government usually form an organization to monitor and control pricing and service. This was probably the best solution when these were new technologies (and may still be when being deployed to a new area), but in most countries, this has become outmoded.

Many countries have split these monopolies into different companies; the success has been varied. The split may be geographic (as originally with AT&T in the US) or by function (e.g. power generation from distribution from serving the end customer). The original monopoly usually resists strongly and may even attempt to “poison the well” by recommending an irrational split structure. The transition is often not smooth, but usually results in cheaper and better service for the customer.

Temporary Monopolies

There are valid reasons for offering a company a temporary monopoly. It may be a way to encourage investment in a new industry or region of the country. The patent system is designed to encourage innovation by granting a time-limited monopoly. It can be argued that there is room for much improvement in this system (perhaps a future essay), but it serves a useful public purpose. In all cases, there must be political will to resist pressure to extend the time limit.

Other Monopolies

Most companies (private or state-owned) would love to be in a monopoly situation and, if they cannot reach that, may well be tempted to form an industry-wide cartel. They can set prices so that they receive the most total profit (if private). If state-owned, they can set service levels that are comfortable for management and workers; the customer is often an afterthought. In either case, they are free of the spur of competition

Types of monopolies

There are two basic types of monopolies: privately owned and state-owned.

Private monopolies

Private monopolies are usually constrained by a government agency to provide regulation and oversight. The common problem with this can be the agency gradually (or not) becoming more of a promoter than a controller of the monopoly. This is often accentuated by a “revolving door” between the industry and the government. The (correct) argument is that nobody understands the industry better than someone who has worked in it at a higher level of management.

There are two basic problems that must be controlled. First, the manager probably owns stock or other assets in the industry to be controlled. This can be minimized by have the person (and their family members) divest within a short period of the person taking office (no blind trusts). Second, the manager may, while a government employee, institute policies which greatly profit the industry and then return to the industry in an extremely rewarding position. This can be mitigated by having the person sign an agreement not to take such a position for a period of years (say 5) after leaving the government service. This agreement should include real penalties (heavy fines for example) for being broken without the expressed (and public) approval by the legislature. I am sure that there will be people who devise inventive ways around these controls, but public exposure will be a further deterrent.

Quasi monopolies

Now I have addressed true monopolies, but there are many ways to restrict competition without being a monopoly in the strictest sense.

I have mentioned cartel forming; companies working together to “stabilize” the market. This can take the form of price collusion (have you ever noticed that in some industries, prices rise in near unison?), coordinating the winning of bids (who gets what), or blocking the entry of new competitors (often by means of laws “to protect the consumer”).

Now the blocking or limiting of new competitors is not limited to companies. Many professions have worked with their legislators to limit the number competitors entering the market. The rationale is to protect the consumer from shoddy work. Now most of us would not welcome an unqualified “doctor” doing surgery on our gall bladder (but every once in a while one does read about someone getting away with working in a hospital for years without having been in medical school) and so we accept strict control of their certification. There are many other professions where poor work can result in loss of life or property – controls are accepted and wanted. For a vast number of other professions, the goal of licensing is to reduce the entry of competitors by raising the cost of entering the market.

State-owned monopolies

These are potentially (and often actually) the worst form of monopoly. The basic reason is that there is no concentrated outside control (at best diffuse citizen complaints). When the monopoly is important enough, even the elected political “head” nominally in charge, can often be obstructed until the next election or rendered ineffective by slow implementation of changes by the permanent staff.

Just to be clear, I am not talking about those activities which are normally considered proper functions of a government: military, foreign policy, criminal justice, and so forth. Now these can well be subject to a form or capture by an unelected (and unanswerable) bureaucracy, but competition within a country in these areas is not usually conducive to good government. I am too well aware that in the USA it sometimes seems that the Defense Department has an independent foreign policy role rather than a supporting one (among other sources of confusion).

Example – telephone system in Belgium

When we arrived in Belgium, the state-owned company, Belgacom, had the monopoly on the total telephone system (mobile telephones did not exist).

Obtaining a phone was neither easy nor inexpensive. I had an advantage (political) on obtaining a telephone as I was the commander of a US Air Force unit and we lived in a neighborhood which was well established and thus served by existing telephone lines. I received a phone line within a few days of moving in.

This was not the case for many of the airmen in the unit. There was no military housing, everybody rented (or in a few cases, bought) in the local communities. If they rented a house in a newish neighborhood, there was a good chance that none of the houses in the neighborhood had a telephone. I learned that the common practice was to wait until someone who absolutely needed a telephone had it installed. Why did they wait? Because the person who asked for the first phone in the neighborhood would have to pay for the laying of the cable into the neighborhood. Then the others could ask for a phone and then pay for the much shorter connection from their house to that cable. What did that mean for our military unit? When we had a real or practice recall, we had to use “runners” to go from house-to-house in the areas with no phone service.

Service in the event of problems with your line was usually slow and unfriendly. Most of our people could not speak Dutch and so had to use the service of our unit translator (he was good and effective). A week or more without service was considered normal. Repeat calling had little effect. When they did schedule a repair, you were only told the day, not the time of day; you had to plan on having someone at home the whole day. Once again, I had an advantage due to my position, thing happened quickly for me.

Having a phone was also hazardous to your financial health. The rates were high, especially for international calls. The base was just a few miles from the border with the Netherlands and our next level of command was in Germany. Of course, nearly all relatives and friends were in the USA. A family emergency at home may cause several, lengthy phone conversations (we encouraged them to come to base and use the military system – this was allowed for these cases, but not all listened). When the bill arrived, it was not only for the calls you made, but it was doubled based on the theory that this would be your normal usage and Belgacom needed to have a deposit equal to one month’s usage to prevent any losses due to non-payment. More than once our First Sargant needed to help arrange an emergency loan for someone who’s telephone bill was nearly equal to their monthly pay. This deposit was refundable after you paid your last bill (left the country). Naturally, interest was NOT paid.

Now this has all greatly improved. Not only do we have the technology of mobile phones, but the European Union required all member countries to allow competition in this sector. We now have several providers of telephone service who compete on rates and service. In one respect, the competition is freer here than in the USA. A phone locked to one provider is illegal here, that makes switching providers much easier.

Example – electrical system in Belgium

As with the telephone system, when we arrived in Belgium there was one, state-owned producer, distributor, and supplier of electricity. Compared to Belgacom, it was much better, but not without its problems.

Belgium had (and has) the most expensive electricity in the European Union. This can be largely ascribed to its tax structure (see my blog entry Living in a Socialist Country) and that it is a small market.

For the first decade that we lived here, it was also notoriously unreliable. Now reliability is somewhat relative; the power was not off for several hours every day, but we usually lost power a couple of time a month for a few hours each time, especially in winter. The powerlines are underground, so it was not a matter of wind and storms knocking down lines, but rather (so I heard) a consequence of under investing in maintenance – transformers became overloaded and failed. When you called for service their first response was always that it was a fault in your house. I had checked the electrical panel before I called them and (in the night) checked to see if the neighbors had power before I called them. They would eventually agree to send someone out to check, but of course, as with Belgacom, they could not (would not?) tell you when the repairman would arrive. I always had the feeling that I was a nuisance with my petty problems, not a valued client.

As with the phone system, this has greatly improved. The distribution network company concentrates on doing that well. Under pressure from the European Union, there are several, competing providers and you can easily change provider for a better price. Reliability has also improved greatly. The price is still higher than in surrounding countries. Competition does wonders, but it is still limited; I cannot buy electrical service from a Dutch or German company even though they are just a few kilometers away.

This is not to say that things are better in the States. Everywhere I have personal experience with, have local (or regional) monopolies. Some are state-owned and other privately owned, but they have been and are vertically integrated. How many of my California friends are for splitting PG&E up and allowing some competition?

Why Do Monopolies Fail Consumers?

They are too secure. Where else will the customers go? Sure, you can live without telephone service and electricity, we did that for tens of thousands of years, but most of us do not consider that a valid option. Yes, in modern times you can (with adequate investment) generate much of your own electricity but becoming totally autonomous is only an option for the rich. And of course, a phone without a network is just an expensive paperweight.

State-owned monopolies are worse for several reasons:

• They can always ask the government (via the taxpayer) for more support
• The employees usually have a job for life; barring gross malfeasance, they cannot be fired. A customer seeking service may well be interrupting an interesting conversation with their colleague.
  • This is not to say that there are no dedicated workers, there are.
  • This is to say that work in a state-owned monopoly tends to attract the less ambitious and their presence, plus a reward system that values time of service more than quality of service, tends to grind down the dedicated workers.
• In too many cases they become a method for political parties to pass out favors. Friends and allies are given a comfortable job, the workforce become more and more bloated, inefficient, and expensive.

Where Do We Need More Competition?

In the USA, I vote for schools. Historically, state-owned (this includes local communities) schools were the best solution to educate large numbers of students. They still are in many cases, but not all.

I know that this is a “hot button” issue for many, but I would argue for the need for competition in schools, especially kindergarten through high school (K-12). Now in the USA we have more competition in this area than in most European countries. Home schooling, religiously based schools, and secular private schools are not uncommon. A relatively recent addition is charter schools (these are privately owned and run, but receive public funding based on numbers of children enrolled). However, public (state-owned) schools educate most of our children.

Each State has its own public-school system; this is a varying mix of centralized (State) and local control. In the states I am familiar with, the tendency is towards more centralized control. The Federal Government has a relatively small influence, but the long-term tendency is growth of its influence and control.

There are benefits to centralization. Theoretically, all aspects of management and purchasing can be more efficient (in reality, you may get bloated administrations). Book publishers and other suppliers of school materials prefer this – it makes life simpler for them. Unions may also prefer this as there are less contracts to negotiate and teachers’ salaries and benefits can be standardized over wider areas. Others may like it as it brings higher positions which have more pay and power. More on the positive side, States can ensure that schools are at least meeting minimum standards and no students are not served.

In truth, no one size fits all, either in clothing or in education. Those who have sufficient funds to pay tuition at a private school (religiously based or not) do have the ability to choose what they believe is best for their child. Those who do not (too often Black Americans or immigrants), have only the local public school. In my perfect world, I would like to see a charter school option for all students. The starting place should be in the lowest income neighborhoods and communities.

I do not believe that all charter schools are better than their competing public schools. I do believe that differing educational philosophies and discipline regimes are better for differing students and that, given transparent information, the child’s parents are the best qualified to make the decision as to what is best for their child. I do also believe that competition for students will make both the public-owned and the charter schools better. In some cases, this may entail the elimination of the poorest performing schools (or an elimination of their present management).

A Summation

In almost all cases, the public is better served by competition than by monopolies or quasi-monopolies. A simplified anti-monopoly motto could be: “If it is too big to fail, it is too big to exist”. If you must choose between a state-owned monopoly or a privately owned one, chose the privately owned one. It may well become a source of corruption, but it is easier to fight (at least in a democracy) than a state-owned one as there is a countervailing power, the elected government.