Has the Invisible Hand Disappeared?
In his classic work, "The Wealth of Nations" Adam Smith states the invisible hand of competition guides prices. As sellers vie for a greater share of markets they will lower their prices to attract buyers. Price increases will result in buyers taking their business elsewhere, so they are only implemented when seller's costs rise as well.
In the second half of the 19th century, Robber Barons such as Rockefeller, Carnegie, Vanderbilt and others turned Smith's invisible hand into sleight of hand. They formed monopolies that eliminated competition. As the only seller of a product they could dictate prices to consumers. At the height of their power, Robber Barons controlled not only valuable commodities, but financial markets and government too.
The ability to control the supply of goods became such a powerful tool that special legislation was enacted to prevent businesses from engaging in this practice. Today, with the Sherman and Clayton Anti-Trust Acts, monopolies are illegal. No longer can one company build a trust to dictate the prices of an entire industry. Or so says the conventional wisdom.
During the 1980s the government did an about-face on anti-trust. The official line was to first determine if the monopoly did any damage to consumers and the economy. This attitude shift resulted in the greatest merger mania since the 19th century. It left many large industries like airlines, credit cards and publishing dominated by a few giant corporations.
In this business climate, corporations quashed competitors with their financial muscle rather than sleight of hand. Probably the most famous example is Bill Gates. In the 1990s, when Netscape's browser started making inroads on Microsoft's revenue, Gates logically went to his main advantage-control of the operating system. He used his control there to eliminate competition by bundling his browser, Internet Explorer, with the Window's operating system. By simply giving it away, Gates initially lost money, but by making it impossible for Netscape to sell their browser at a profitable price, he reaped a huge windfall when they dropped out of the market. It didn't matter that the Window's product was inferior because Netscape didn't have the resources to compete with Microsoft's monopoly power.
The deregulation also saw the return of many forbidden monopoly practices. For example, motion picture studios like Paramount were barred from owning cinemas since the 1940s. When these restraints were lifted, studios gobbled up private movie houses to form their own chains. This sent ticket prices to an all-time high. Many small theaters failed because they couldn't pay the high rates studios imposed for first run films.
So what is the best way for consumers to protect themselves from monopolies when their government won't?
One independent theater owner, in Tempe, Arizona, whose business I'll call Lone Star Cinema, found a way to fight back and benefit the consumer. His solution was to use a substitute product. He did this by capitalizing on the popularity of hit movies like "Schindler's List, Pulp Fiction" and "Fargo." He played them long after their initial run. Charging half the price of the studio chains, he attracted many audiences who missed the picture's first run or desired to see it for a second time.
On Tuesdays, normally the worst day for cinemas, he created Lone star's Nostalgia Nite. Showing classics like "Citizen Kane" "Casablanca" and "The Godfather" for 50 cents. Since the majority of his income came from the concessions anyway, Lone Star more than made a profit.
The key point to bear in mind when starting an enterprise--especially if it is a unique item or service-is how available are the necessary materials? Can you get them from a variety of sources at competing prices? If the answer is no, you must not enter that business. Because even in the best of circumstances the tendency toward monopoly will come into play. It is only natural to seek the most favorable conditions. In commerce, no matter how well business is going, the drive to improve is always there. If one company can gain an edge over its competition by controlling supplies, you can count on them doing it.
Adam Smith's "The Wealth of Nations" is often trumpeted as the rational unlimited free markets. Yet history shows that the first thing those at the top of the free market do is try to eliminate it. In the current pro-big business climate, consumers are at the mercy of a corporate plutocracy and the invisible hand has disappeared.
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