One of the most common critiques I hear about anarcho-capitalism or just free markets in general is the idea that, without government, cartels will emerge to control certain sectors of the market and collude to keep out competition. This is funny to me as the only cartels I know have either been directly created by government (The Federal Reserve banking cartel, for starters), or have emerged amidst the violence of a black market created solely by government prohibition (the mafia and modern day drug cartels). Nonetheless, such myths can often be difficult to refute if one isn’t fully equipped with a good answer.
Enter Mr. Libertarian himself, Murray Rothbard. In this week’s edition of “Mondays with Murray”, we take a look at an excerpt from a Rothbard speech where he discusses this very myth, and effectively blows it out of the water. No cheating and skipping ahead now, take the 5 minutes to give it a listen!
Murray busts through this myth by actually discussing how some companies did attempt to create cartels in the late 19th Century, during an era where the economy was so free and robust that the prices of goods and services were falling across the board. This, of course, is a sign of a very healthy economy. But some of the less efficient companies instead began to merge and create cartels in attempts to fix prices and lock out competition. So it is true that the objector to anarcho-capitalism that companies may attempt to form cartels.
The problem with this theory? These attempts to cartelize were complete failures.
The free market always makes corrections itself. In the case of cartels a free market without barriers of entry allows new firms to immediately compete with the cartels or merged companies by coming in and offering lower prices and more efficient services. The lack of price signals and competition will always leave a cartel or large company extremely vulnerable to new competition, so it is quite simply impossible for the free market to create monopolies. On the flip side, cartels usually break up because certain cartel members will eventually want to undercut their own partners with lower prices in order to make greater profits through what Rothhbard calls “secret price cutting”. Of course, these secrets tend to get out in a free economy, leading to the disintegration of the cartel.
The myth of the “free market cartel” is one that can be dispelled easily because we have more than just theory to dispel it with. We need only look at recent U.S. history to see that cartels, while they may form in free markets, cannot actually succeed in obtaining monopoly control over a sector. This is also a good segue to point out how it is only through government mandates and regulation that cartels are able to maintain themselves. We can look all around and see cartels in today’s society, be they in the areas of money, health care, labor, or airline security to name a few. But where there is a cartel, you can be darn tootin’ that there is a government mandate or regulation that gave birth to it.
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