The narrative of ‘the monopolist jacking up prices to exploit its customers’ only applies to government-granted monopolies, such as the postal service or many utilities.

I recently attended a talk about innovation by a well-known former CEO of a successful Canadian company. His remarks were mostly sensible at first: innovations are made by companies, not by governments, and it’s best if governments leave companies alone and let markets pick the winners. Then he conceded that governments can play a supporting role after innovations have been made and “get in front of the parade,” possibly giving tax credits and facilitating commercialization (although what “leading the parade” would mean, was not clear).

It got worse from there. In the Q & A session, an audience member asked what the speaker thought of government’s role in innovation. The questioner wanted to know whether it wouldn’t be better for the government to step back and let innovators, such as Uber and AirBnB, innovate and create wealth, for the benefit of everybody participating in the sharing economy, rather than try to restrain them with regulations and taxes.

The speaker’s response (I’m paraphrasing, based on  my notes): “Capitalism, left on its own, pushes to monopoly … that would be great for shareholders, but not so good for anyone else, such as clients. … With capitalism, we would lose the ‘Canadian magic’ [apparently the Canadian welfare state] … Capitalism must push back at the government, and the government must push at capitalism …”

This was a stunning response from someone who was involved in developing a successful publicly traded company with a market capitalization of billions of dollars (and without government handouts). It is not clear what exactly he meant by ‘pushing back’ and ‘pushing,’ but to suggest that capitalism leads to monopolies reveals astonishing ignorance about capitalism and economics. (Such ignorance is another contributor to people’s fear of capitalism, which I wrote about recently, and to fantasies of the “Canadian magic.”).

Everybody is of course free to say whatever they want, but such fallacies as capitalism causing monopolies (that need to be restrained by government regulation), need to be countered by facts. (Unfortunately, the Q&A session ended before I had a chance to do so directly).

Capitalism, as defined by Ayn Rand, “is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.” In such a system—which doesn’t exist today but was approximated by the United States in the 19th century—monopolies can form, as there is no regulations against them. However, such natural monopolies are good, not just for the shareholders, but for everyone else as well. Why?

Natural monopolies are good, because they cannot be ‘coercive.’ In the absence of government coercion, a company can only achieve a monopoly position by being the most efficient competitor: achieving the lowest costs and therefore, being able to offer the lowest prices. How are the lowest prices not good for the customers? The lowest prices attract customers, and combined with the lowest costs, create value for the shareholders.

Alcoa, The Aluminum Company of America, is the classic example of a natural monopoly. It gained that position due to its discovery of a particularly rich and pure source of bauxite ore, which allowed it to lower its production costs below those of its competitors. However, while Alcoa was benefiting from its discovery of bauxite and low costs, it kept lowering aluminum prices, not increasing them. Had Alcoa jacked up its prices, as the fallacious thinking of monopolies would suggest it should have done, competitors would have been able to match the prices, and Alcoa would have quickly lost its monopoly. (It did lose it eventually, when the rich source of bauxite was depleted).

The narrative of ‘the monopolist jacking up prices to exploit its customers’ only applies to government-granted monopolies, such as the postal service or many utilities. Only such monopolies can be, and are, coercive, as they are protected from competition by government force and therefore don’t need to worry about losing market share to competitors.

But such coercive monopolies cannot exist under capitalism, because the government’s only role in such a system is to protect the individual rights of its citizens. Government does not intervene in the economy—including granting monopolies to select businesses. It merely penalizes those that initiate physical force or fraud against others, including companies that attempt to use such means to achieve monopolies.

Government is needed, not to “push back against capitalism,” but to protect our freedom, including the right to trade freely, against the initiation of physical force and fraud.