Monopoly

MONOPOLY

MONOPOLY. Monopoly and competition are diametric terms used to describe complex relations among firms in a single industry. Simply put, monopoly is the exclusive control by one firm or group of firms of the means of producing or selling a commodity or service. As sole supplier, the monopolist can set any price, provided the sales generated are acceptable. Generally that price will be beyond production costs, and it will return profits in excess of normal return on investment.

When Adam Smith (1723–1791) wrote his sustained attack on monopolies in An Inquiry into the Nature and Causes of the Wealth of Nations (1776), he did not have single-firm monopolies in mind. These are relatively rare, except for those established by state policy or subject to state regulation. Rather, Smith directed his criticism toward multifirm industries with statutory protection, like medieval guilds.

MEDIEVAL COMPETITION

The medieval economy appears to have had a positive aversion to competition, which occurs in a free or atomistic form when the number of producers or sellers in a single industry is so large that each seller's share of the market is too small to affect the market share or income of any competitor. Thus, each seller must adjust output and price to reflect established market conditions. These conditions are affected, in turn, by the ease of entry into the industry, the concentration of sellers in the industry, and the degree of product differentiation in the industry. Given the widespread medieval presumption of fixed resources and limited growth, where pure competition would lead to failure and suffering, these conditions had to be regulated. So, medieval polities opted for monopolistic structures.

Monopoly constituted a form of political protection in most sectors of the medieval economy. Manorial agriculture relied on the guaranteed tenure of peasants on the land and the guaranteed rights of landlords, both of which were types of monopoly. Guilds strictly regulated access to markets and differentiation of products, thus establishing monopolies in most medieval industries. Shipping corporations exercised monopoly rights over transportation along certain routes, such as the Alpine passages. Merchant companies received extraction-and-purchase monopolies for metal ores from mines in certain regions, such as Tyrol or Saxony, in some instances expanding these to near domination of entire industries, as by the Fugger in copper or the Höchstetter in mercury. Nearly all corporations sought monopoly rights for themselves. In most cases, these were thought to guarantee the shared interests of all, producers and consumers alike.

EARLY MODERN OPPOSITION

Attitudes began to change as early as the fifteenth century. More accurately, attitudes began to be recorded, published, and preserved more consistently at this time. Merchant companies came under suspicion of manipulating prices through monopoly. The 1425–1429 guild rising in the south German city of Constance demanded the dissolution of commercial firms, and the Reformatio Sigismundi (1438–1439) reflected this sentiment. (The Reformatio Sigismundi, a document attributed to the Emperor Sigismund [ruled 1433–1437], set forth a program of social and ecclesiastical reform within the Holy Roman Empire. Though not accepted in its day, many of its ideas resonated in the Protestant Reformation a century later.) Complaints multiplied against "monopolists," who hoarded commodities to keep prices artificially high. By the sixteenth century, "monopoly" had become a clarion call of opposition not only to monopolies in the strict sense, but also to cartels, syndicates, hoarders, and usurers who did not deserve it, however questionable their dealings.

Matters came to a head in the Holy Roman Empire, where large mercantile companies, such as the Fugger, Rehlinger, and Höchstetter, engaged in interest-bearing credit and investment transactions as well as price-manipulating monopolies and cartels to increase their profits. Such activities inspired opposition from many strata of society, not only artisans and peasants but also merchants and princes, all of whom saw their expenses rise and incomes fall within the environment of the "price revolution" of the sixteenth century. They found a compelling spokesman in Martin Luther (1483–1546), who viewed such commercial enterprises with a "peasant's mistrust." He wrote and preached repeatedly against interest and usury. His 1524 pamphlet "Von Kaufshandlung und Wucher" lumped monopoly among these other abuses according to the rationale that any price beyond a just price constituted usury—a violation of divine law.

By this time the issue had already engaged the attention of the imperial government for more than a decade. At the urging of estates in the territories of the Hanseatic League and Franconia, centers of opposition to monopolistic practices, the Imperial Diet of 1512 first considered limiting the activities of the great mercantile houses. In 1523, the Reichsfiskal, an institution of the imperial government charged with overseeing taxation and expenditures, lodged a formal complaint against the monopolistic practices of six Augsburg firms, the Fugger above all others. Only the refusal of Emperor Charles V (ruled 1519–1558) to support the measure—prompted by the personal influence of his banker, Jacob Fugger himself—prevented the measure from becoming law. Yet the antimonopoly forces were not ready to admit defeat. The Reichsfiskal renewed its complaint and brought the matter before the Imperial Diet of Augsburg in 1530. Its members moved to form a commission, which prepared a report for the "common good" on the monopolistic abuses of these great companies. It referred specifically to their trade in Oriental spices and metal ores, their use of interest-bearing instruments and transactions, and their manipulation of prices through speculation and hoarding. These techniques allowed the monopolists to alter market conditions in such a way as to unjustly inflate their profits from these enterprises, thus driving their more modest competitors out of business and the "common man" into the streets. The report also proposed that monopolistic practices be forbidden by law, that commercial firms be limited in size, that imported goods be subjected to price controls, that imperial subjects be forbidden to engage in overseas enterprise, and that foreign merchants in the empire be similarly regulated.

In the midst of such dangerous opposition, mercantile interests found a spokesman in Conrad Peutinger (1465–1547), merchant son, universitytrained jurist, Augsburg councillor, and renowned humanist. In a 1530 legal opinion, he defended monopoly as essential to the economic well-being of the nation. Through their entrepreneurship and audacity the accused monopolists drew international trade to the empire and, he argued, created profit and advantage for princes and plebeians alike. Their firms traded in large volumes of goods, thus lowering prices. Their capacity to concentrate capital enabled them to undertake ventures that were too costly or risky for smaller competitors. He argued that risk and profit should be linked. Indeed, the pursuit of individual advantage in economic life was not opposed to the common good, rather contributed directly to it and, as such, was both economically and morally justified. Peutinger became one of the first advocates of a truly modern economic ethos. Whether his arguments had any immediate bearing cannot be determined. Emperor Charles V saw fit to let the matter die an administrative death.

UBIQUITOUS MONOPOLIES

The resort to monopolies—as well as opposition to them—continued in the Holy Roman Empire and elsewhere. Inspired by mercantilist thought, which emphasized protectionist legislation to shield domestic industries from competition, German princes granted production monopolies as a privilege to German manufacturers. Indeed, the catalogue of princely prerogatives, referred to collectively as Regalien, included the granting of monopoly rights. Although denied to the Holy Roman emperor by the Treaty of Westphalia (1648), these prerogatives came into increasingly frequent use among territorial princes who were anxious to expand their power and increase their revenue. Nor were the Germans alone. State-sponsored monopolies were a common economic contrivance in Bourbon France and Tudor-Stuart England. Everywhere, trading monopolies played an essential role in commercial and colonial development. They involved the creation of charter trading companies to which the crown gave monopoly rights. The Company of Merchant Adventurers, the Levant Company, and the East India Company used political influence to exclude foreign competitors and limit export quotas in order to maintain market share and stabilize profits. Members paid a fee to trade under the aegis of company direction, a fact that led to bitter resentment among those excluded. An attack on trading companies was launched in Parliament in 1604, but their monopolies were not relaxed until late in the 1600s, when regulation of monopolies was no longer viewed as essential to commercial security. Monopolies were not limited to commerce. The reign of Elizabeth (ruled 1558–1603) witnessed the expansion of the patent system as a spur to English manufacturing, whereby patents were granted the sole right to produce a given product by a given process, in effect monopoly control of a certain manufacturing process. Reliance on monopolies did not yield to faith in competition until physiocratic thinking made its influence generally felt in the course of the eighteenth century.

The early modern economy relied to a surprising extent on monopoly and monopolistic practices. Their effects were not uniformly deleterious. Yet the period initiated a passionate debate about commercial activities and a turn toward freer competition that continues to this day.

See also Capitalism ; Fugger Family ; Luther, Martin ; Smith, Adam ; Trading Companies .

BIBLIOGRAPHY

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Thomas Max Safley