Ultimate Goal of Businessmen is Monopoly

[ReasonAlone]

I have been reading recently in The Age of the Moguls by Stewart H. Holbrook. I would recommend this book to anyone, although it is a fair guess to say that many of you are familiar with the book and its author. If not, check it out.

Anyway, a motif in the book seems to be that many of the moguls in the 19th century were concerned primarily with monopolization. From Vanderbilt to Rockefeller, all aimed at creating a monopoly or their particular product/service, and some of them supposedly succeeded.

So, here's the case:

The goal of businessmen is to expand their business and to increase efficiency as much as possible. The end result of perfection in business must then be a monopoly. If I am wrong here, please enlighten me. But, assuming that what I said is true, I will proceed. Ayn Rand has said that in a rational society, a monopoly would be impossible. Wouldn't there then be a lot of unhappy and unsatisfied businessmen? Thanks.

[DavidOdden]

The goal of businessmen is to expand their business and to increase efficiency as much as possible. The end result of perfection in business must then be a monopoly. If I am wrong here, please enlighten me.

Consider yourself enlightened. Why do you even think that a monopoly is the result expanding business as much as possible and increasing efficiency as much as possible?

[Jake_Ellison]

The goal of businessmen is to expand their business and to increase efficiency as much as possible.

Actually, I'll cut this off one sentence shorter than David. The goal of businessmen is to maximize their profits.

[Pokarrin]

A rational businessman understands that the presence of other businesses in his area, even those that compete directly with his, increase the total amount of wealth in that area, which can only be good for business. In the event that the businessman finds a lower relative demand for his particular product because of increased supply, he will know that he must either improve his product, lower its cost, or make something else. In any of those cases, if he does it right, his business has improved, and he will continue to make money. If he instead seeks to use government intervention to legislate his competitors out of business, he will have placed control of his means of production in the fickle hands of that government, and cannot succeed long-term. The only other way for him to gain a monopoly would be for him to make a product so good and so cheaply that no one is able to compete, and he must then be constantly on his guard against a new competitor coming along with a more efficient process or a better product, which will inevitably happen in a free market.

Gaining that monopoly, then, does not materially change the requirements of running a successful business, so there's no particular reason for a businessman to seek one for its own sake. A monopoly might be the result of running a business extaordinarily well, but under no circumstances should it be the goal of a business. That's not to say there aren't or haven't been businessmen who seek to gain a monopoly, but those who do are attempting to put effect before cause.

[wilicyote]

If a businessman succeeded in achieving a monopoly in his field without the aid of government favors or interferance, this monopoly would only last so long as his product was the best value to the consumer. If this is the case, more power to him; everyone gains, no one looses. But the reality is that some ingeinous little creator would always be out there trying to invent a better or cheaper way of doing it. His monopoly would always be under attack, not by government but by other businessmen. We, the consumers, have the great fortune of benefiting from this dynamic. Lucky us, huh?

[Tordmor]

The end result of perfection in business must then be a monopoly.

First there is no such thing as a monopoly because any business not only competes on its market but also with substitute products. The example our marketing professor told us is that of Porsche. Porsche is a manufacturer of luxury cars. It has no direct competitors because no other car manufacturer competes for the same customers. If anyone wants a Porsche he doesn't think about buying a Mercedes instead. That's simply two different wants. However Porsche has a strong competition with Yacht manufacturers because people do think about buying either a Porsche or a Yacht. So unless you have a completely state run market there is always the option of adressing a want in an entirely different way.

Second, no business can have a monopoly on a large section of a market. E.g. Coca Cola could never sustain a monopoly on beverages as a whole because there are just too many variations to produce everything within one organization. So businesses concentrate on smaller segments of the market. The goal of a business therfore is a monopoly on a tiny, well defined segment of the market and that allows for a multitude of businesses in "neighboring" market segments. E.g. you can't have a monopoly on beverages but you could try for a monopoly on non-alcoholic beverages served in small to medium sized cinemas. Then I could specialize on huge cinema complexes or on alcoholic beverages or on theaters instead of cinemas or any other such thing. Or I could try to take away from you the small cinemas by specializing on small quantities or a better distribution channel.

[wilicyote]

Well, that is not exactly true. Monopolies are rare, but do exist. I had one. I sold a unique martial arts product that I produced myself. I was the only one in the entire world who did so for several years. At a couple of points along the way others tried to enter the market but died because they could not compete on price (I used child labor ). It was in every way a monopoly. Alas, to remain a monopoly I cut my margin so thin that I was not able to endure the present economic crash -- so now that monopoly is gone.

Edited March 2, 2009 by wilicyote

[John McVey]

Actually, I'll cut this off one sentence shorter than David. The goal of businessmen is to maximize their profits.

As a technical note, businessmen seek to maximise equityholder's wealth, not profits. It's a subtle distinction, but an important one. Profits each year are just one of the chief ways of maximising wealth, but shareholders can revolt if they think that long-term wealth (ie stock price) is being endangered by activity that raises short-term profits but endangers profits in the future.

To be even more precise, the goal of businessmen is to pursue owners' goals, whatever they may be. It so happens that the owners' goal in almost all cases is maximisation of the equity's value, but it isn't the exclusive goal (the owners may expect the business to stay in a certain range of industries, for example) and nor need it always be present. One common example of the latter is where skilled tradesmen who are friends with each other or part of a family organise a closely-held corporation whose primary goal is to provide jobs in that industry to the friends/family members. The business itself is expected to just get by through break-even or slightly better.

JJM

Edited March 2, 2009 by John McVey

[knast]

When Rand says that a monopoly is impossible under capitalism, she's refering to government sponsored/enforced monopolies, not monopolies created by the free market.

The goal of a _rational_ businessman is to produce as much as possible, to make as much money as possible, by making as good products as possible, as efficiently as possible. Not to dominate others. Not to become "number one" or a monopoly.

If they become "number one" or a monopoly _as a result of their productive ability_, then that's obviously a good thing for him (and incidentally everybody else who deals with him). And his success would, all other things equal, make him happy.

But it's _not_ the rational businessman's main concern - and his happiness does not depend on it. The rational businessman is not concerned with _destroying_ other businesses. He's mainly concerned with _expanding and improving his own business_, i.e., with _creation and innovation_ because of the pure joy that brings him. If other businesses can't compete with him, as a result, then so be it. But it's _not_ his main concern.

The rational businessman has essentially the same approach to these things as the arch-individualist Howard Roark in Ayn Rand's novel The Fountainhead. The rational businessman is, in other words, _not_ a Gail Wynand. If you are not familiar with Howard Roark, Gail Wynand or Miss Rand's novel The Fountainhead, then I strongly suggest that you read it. You will not regret it!

Besides there is _no_ reason to assume that the happiness of a businessman - or any man for that matter - rests only on being a monopolist or even number one. And you do not need to read The Fountainhead to figure that out. Just look around you. Most businessmen are, after all, not "number one" or even "number two" in their industry. Yet they seem perfectly capable of leading happy lives. Likewise, some businessmen are "number one", and some of them are miserable.

Hope my answer were of some value to you.

[Jake_Ellison]

As a technical note, businessmen seek to maximise equityholder's wealth, not profits. It's a subtle distinction, but an important one. Profits each year are just one of the chief ways of maximising wealth, but shareholders can revolt if they think that long-term wealth (ie stock price) is being endangered by activity that raises short-term profits but endangers profits in the future.

I don't know if there is a distinction. I guess it could depend on your definition of profits, but you said it yourself: the only reason to give up any short term profits is to increase future ones. I didn't say maximize profits this year, but maximize profits in general.

I'd say any (relevant) growth in an equity holder's wealth is the result of the ability (perceived or actual, now or in the future) to make a profit, no? In other words, the worth of the company is directly proportional to its potential profits. (and inversely proportional with the number of years separating us from those potential profits, but that's just a nuance)

Where else would that growth in the stock price come from? If, for instance, a company like GM is deemed to have no ability to make a profit (ever in the future-like they most likely would be if the government stayed away), their stock would drop close to zero (only the people who go on holiday to Vegas to get rich would purchase their stock), no matter how much they expand and research.

One common example of the latter is where skilled tradesmen who are friends with each other or part of a family organise a closely-held corporation whose primary goal is to provide jobs in that industry to the friends/family members. The business itself is expected to just get by through break-even or slightly better.

Sure. But if they were to sell that business, would they get more than one dollar for it, at best? (if the business is making no money, nor is expected to make any in the future)

Such a business would have zero value, unless there are hidden profits which the owners agreed to call salaries and give them to these overpayed relatives, as charity. (they set the charity act up this way for tax reasons, hopefully, and not as a form of evading reality) Of course, for those hidden profits to exist, the real employees of the company would have to vastly outnumber the (dare I say mooching) relatives.

Or the people behind the business could be employees themselves, and choosing to collect their profits in the form of salaries rather than account for them as profit. (I'm sure there are countries in which that actually is a good idea-even a good way to commit fraud legally or at least concealed enough for officials to be able to turn a blind eye-, though I don't think the US is one of them)

In a LFC economy, almost any such set-up would be a waste of resources.

Edited March 2, 2009 by Jake_Ellison

[FrolicsomeQuipster]

Ayn Rand has said that in a rational society, a monopoly would be impossible. Wouldn't there then be a lot of unhappy and unsatisfied businessmen? Thanks.

*Processing*

Ayn Rand has said that in a rational society, a government enforced monopoly would be impossible. Wouldn't there then be a lot of unhappy and unsatisfied fascists? Thanks.

Why yes there would be a quite a few annoyed fascists, but that's just an added bonus.

Edited March 2, 2009 by FrolicsomeQuipster

[Steve D'Ippolito]

I've seen a number of companies obsess over "increasing market share" and become upset at the thought of getting a smaller fraction of a bigger market--even if the absolute size of the piece is larger. (This was the sort of thinking that nearly sunk Apple originally.)

[ReasonAlone]

Thanks for the replies.

[shadesofgrey]

I have been reading recently in The Age of the Moguls by Stewart H. Holbrook. I would recommend this book to anyone, although it is a fair guess to say that many of you are familiar with the book and its author. If not, check it out.

Anyway, a motif in the book seems to be that many of the moguls in the 19th century were concerned primarily with monopolization. From Vanderbilt to Rockefeller, all aimed at creating a monopoly or their particular product/service, and some of them supposedly succeeded.

So, here's the case:

The goal of businessmen is to expand their business and to increase efficiency as much as possible. The end result of perfection in business must then be a monopoly. If I am wrong here, please enlighten me. But, assuming that what I said is true, I will proceed. Ayn Rand has said that in a rational society, a monopoly would be impossible. Wouldn't there then be a lot of unhappy and unsatisfied businessmen? Thanks.

From an objectivist point of view, how could you justify a monopoly morally? Excluding the other businesspeople for the moment, a monopoly ends up hurting the customer more than anyone else because the rules of supply and demand no longer apply. The monopoly can charge whatever it wants for its product and people will have to buy it (provided the product is something "essential" like electricity or phone service - think AT&T pre-1984). I can't think of anything offhand in the objectivist corpus that would permit personal financial gain at the expense of others.

[SD26]

From an objectivist point of view, how could you justify a monopoly morally? Excluding the other businesspeople for the moment, a monopoly ends up hurting the customer more than anyone else because the rules of supply and demand no longer apply. The monopoly can charge whatever it wants for its product and people will have to buy it (provided the product is something "essential" like electricity or phone service - think AT&T pre-1984). I can't think of anything offhand in the objectivist corpus that would permit personal financial gain at the expense of others.

Government leveraged Bell's monopoly.

And the alternative was cheaper: mail. It lacked speed, obviously.

[shadesofgrey]

Government leveraged Bell's monopoly.

And the alternative was cheaper: mail. It lacked speed, obviously.

But that same government divested the company. That doesn't address the moral question though.

[SD26]

But that same government divested the company. That doesn't address the moral question though.

Well, when competition was allowed, what happened? What do we have now?

[shadesofgrey]

Well, when competition was allowed, what happened? What do we have now?

I'm not sure what you mean. Back then after divestiture we had 7 different companies, now there's many more competing with each other. They all have government oversight in the form of the FCC to prevent another monopoly from developing. Unfortunately it's far from impartial, susceptible to politics, legal wrangling, and most of all, power. However, the argument can be made that at least some consumers benefit from the current setup whereas none benefitted before.

[SD26]

I'm not sure what you mean. Back then after divestiture we had 7 different companies, now there's many more competing with each other. They all have government oversight in the form of the FCC to prevent another monopoly from developing. Unfortunately it's far from impartial, susceptible to politics, legal wrangling, and most of all, power. However, the argument can be made that at least some consumers benefit from the current setup whereas none benefitted before.

Broken, then competition. Prices went way down and more companies got involved. Cell phones, email, VOIP.

Could all of that happened sooner without government developing the monopoly? Yes.

[shadesofgrey]

Broken, then competition. Prices went way down and more companies got involved. Cell phones, email, VOIP.

Could all of that happened sooner without government developing the monopoly? Yes.

It sounds like we're on the same side on this one. What's your take on the moral issue of a monopoly?

[softwareNerd]

From an objectivist point of view, how could you justify a monopoly morally?

There are two concepts of monopoly, and they're very different.

One concept is "a business which is the sole seller" in some "market". This concept can be broadened to "oligopolies" where there are a few sellers, and people sometimes say that such businesses have "monopoly power". This concept looks at numbers alone, and does not consider the legal questions of whether one can set up a competing business. So, if we have a tiny village with one tiny restaurant, one might call it a monopoly, using this concept.

A second concept of monopoly is where the situation is sustained by some legal force. For instance, the British East India Company, or a NYC taxi-cab.

Objectivism holds that the second (call it "legally enforced monopoly" if you like) is not legitimate. On the other hand, the person who runs a tiny restaurant in a tiny village could be perfectly moral, even if nobody sees any point in competing with him.

[shadesofgrey]

There are two concepts of monopoly, and they're very different.

One concept is "a business which is the sole seller" in some "market". This concept can be broadened to "oligopolies" where there are a few sellers, and people sometimes say that such businesses have "monopoly power". This concept looks at numbers alone, and does not consider the legal questions of whether one can set up a competing business. So, if we have a tiny village with one tiny restaurant, one might call it a monopoly, using this concept.

A second concept of monopoly is where the situation is sustained by some legal force. For instance, the British East India Company, or a NYC taxi-cab.

Objectivism holds that the second (call it "legally enforced monopoly" if you like) is not legitimate. On the other hand, the person who runs a tiny restaurant in a tiny village could be perfectly moral, even if nobody sees any point in competing with him.

I agree with that. But what if it were a monopoly sustained by economics, not law? I refer again back to pre-divestiture AT&T. There was literally no one else offering phone service because no one COULD....and this wasn't in a tiny town, it involved the entire country. How would objectivism view that?

[softwareNerd]

I agree with that. But what if it were a monopoly sustained by economics, not law? I refer again back to pre-divestiture AT&T. There was literally no one else offering phone service because no one COULD....and this wasn't in a tiny town, it involved the entire country. How would objectivism view that?

I'm not familiar enough with the facts surrounding AT&T. I don't know what types of deals they had signed with various city governments and the like, regarding stringing lines and so on.

Your more general question is about "a monopoly sustained by economics". Well, what does that mean? It means that the facts of reality are such that nobody thinks it is worth their while to compete against the company. There are very rare cases where this happens, and they are always sustained by the long-term efficiency of the single company. If AT&T could wire up the country, then others could. When the internet was booming, companies like "Level-3" laid miles and miles of new cable. When cable TV came out, miles of "last mile" cables were laid to homes. So, the notion that "no one COULD" compete is a little fuzzy.

Often, newcomers compete in creative ways. For instance, they may choose one little context in which the product or service is being used, and they focus on that (think Ryan Air or SouthWest airlines). They force the main player to cannibalize other ares, to compete in this small area. Wal*Mart came up this way as well, but it now sustains its position by being extremely efficient.

One argument often used to justify the lack of competition is that a competitor would have to deploy large amounts of capital. However, history shows that a good business plan can draw forth capital for the most ambitious of ventures. Further, there are often many existing companies that are just as big in other industries, and who are willing to diversify if the numbers are right.

[SD26]

It sounds like we're on the same side on this one. What's your take on the moral issue of a monopoly?

If someone makes stuff that good, either buy it while you can or make something better. If there's a moral issue, it's the immoral control of freedom of choices.

[shadesofgrey]

I'm not familiar enough with the facts surrounding AT&T. I don't know what types of deals they had signed with various city governments and the like, regarding stringing lines and so on.

Your more general question is about "a monopoly sustained by economics". Well, what does that mean? It means that the facts of reality are such that nobody thinks it is worth their while to compete against the company. There are very rare cases where this happens, and they are always sustained by the long-term efficiency of the single company. If AT&T could wire up the country, then others could. When the internet was booming, companies like "Level-3" laid miles and miles of new cable. When cable TV came out, miles of "last mile" cables were laid to homes. So, the notion that "no one COULD" compete is a little fuzzy.

Often, newcomers compete in creative ways. For instance, they may choose one little context in which the product or service is being used, and they focus on that (think Ryan Air or SouthWest airlines). They force the main player to cannibalize other ares, to compete in this small area. Wal*Mart came up this way as well, but it now sustains its position by being extremely efficient.

One argument often used to justify the lack of competition is that a competitor would have to deploy large amounts of capital. However, history shows that a good business plan can draw forth capital for the most ambitious of ventures. Further, there are often many existing companies that are just as big in other industries, and who are willing to diversify if the numbers are right.

Don't get me wrong, I'm all for competition. I see Monopolies as a bad thing because they harm the consumer, not because they prevent other businesses from flourishing. I use the AT&T example because it was the biggest monopoly in American history and a good amount of the anti-trust law we have today stems from that situation. I also use it because it provided what was considered an essential service. You can always say that telephones are not necessary for human existence, but I think we all know that modern-day society would break down pretty damn quickly if we suddenly had no way to communicate over phone lines.

You're right, it IS rare when nobody thinks it's worth their while to compete against a company, but this was one of those times. AT&T owned every phone line ever constructed, had every land easement along those lines (and all the associated switching stations, access roads, etc), every right of way through private property (because it was considered an essential service), basically free reign. The situation was unique because the company developed at what was really towards the beginning of the Industrial Revolution, so technological innovation and industry were concentrated in a few pockets, rather than all over the country like they are today. We have the capacity to make life-changing technologies in our garages with the proper equipment, but in 1877 that was far from the case. So trust me when I say that another company couldn't provide phone service. On top of that, AT&T's monopoly was government sanctioned for 50-some years, so the option to compete was extinct for all practical purposes. If it was possible, I would think someone would have done it. At least for a little while.

So yes, it's an isolated example unlikely to be repeated any time soon, but my question was a theoretical one, just for the sake of argument. In any case, however you view a monopoly, if it's a monopoly that provides an "essential" service that people within reason have no choice but to buy, what would be the objectivist interpretation of that?