Monopolies are the reward for innovation (~COMPETITION can be bad for business, and monopolies drive progress)
I am going to disagree vehemently with the notion that monopolies drive progress.
Telkom spent a long time as a fixed-line telecommunications monopoly, and South Africa still has terrible fixed-line internet costs as a result.
Monopolies, as far as I can see, will almost always relax once their monopoly is secure and just keep doing things the same way all the time, holding onto their monopoly. (Sometimes they will even attempt to squash competitors before they grow large enough to threaten said monopoly). Companies in competition, on the other hand, will improve their offerings and/or lower their prices in order to attract more customers. Therefore—and this is borne out by the Telkom example—I conclude that monopolies lead to stagnation, while healthy competition is more likely to lead to progress.
You seem to interpret “progress” as “lower prices” :-)
While I think that Clarity is misunderstanding Peter Thiel (Thiel says that a potential monopoly is the carrot that drives a lot of innovation; Clarity wrongly interprets this as “monopolies drive progress”), the question of monopolies and progress is complicated. The two major examples that come to mind are Bell Labs (run by AT&T) and IBM (in the 1950s − 80s era).
The two major examples that come to mind are Bell Labs (run by AT&T) and IBM (in the 1950s − 80s era).
Assuming you are referring to IBM’s mainframe business, they did not really have a monopoly; they were just a dominant player. Competitors at that time included Amdahl, Burroughs, UNIVAC, NCR, Control Data, Honeywell, General Electric and RCA. Amdahl even offered products that were compatible with IBM’s mainframe offerings and could run software developed on/for IBM.
Given the context, I’m interpreting “monopoly” loosely and include being the dominant player in the definition.
Thiel talks about how you would want to parlay your technological (or first-mover) advantage into a monopoly and he clearly means companies like Microsoft or Google which are not legal monopolies like AT&T was.
While I think that Clarity is misunderstanding Peter Thiel (Thiel says that a potential monopoly is the carrot that drives a lot of innovation; Clarity wrongly interprets this as “monopolies drive progress”)
I read Thiel to be making the second argument as well, because monopolies have capacity to make the profits necessary for major R&D spending, as well as the capacity to benefit directly from major R&D spending. No individual commodity producer making zero economic profit has an incentive to invest in better methods of producing their commodity, as they correctly believe that the innovation will rapidly spread and benefit the consumers, rather than them.
The short way to visualize it is that the market for innovations has producer and consumer surplus, and only monopolists can capture both at once, which would suggest a monopolistic industry would spend more on innovation than a competitive industry. (This is true for some innovations and not others; monopolies should be expected to be better at developing basic science related to an industry, and competitions should be expected to be better at determining customer preferences.)
monopolies have capacity to make the profits necessary for major R&D spending, as well as the capacity to benefit directly from major R&D spending. No individual commodity producer making zero economic profit has an incentive to invest in better methods of producing their commodity, as they correctly believe that the innovation will rapidly spread and benefit the consumers, rather than them.
The short way to visualize it is that the market for innovations has producer and consumer surplus, and only monopolists can capture both at once, which would suggest a monopolistic industry would spend more on innovation than a competitive industry. (This is true for some innovations and not others; monopolies should be expected to be better at developing basic science related to an industry, and competitions should be expected to be better at determining customer preferences.)
Your explanation is compelling and unexpected. Can you reference a Wikipedia article (preferable) or another internet source so I can read more broadly on this thesis? The closest approximation I can find is theses on why patents and other forms of IP are awarded.
You seem to interpret “progress” as “lower prices” :-)
I see how it can look like that. But no, they are two related but seperate effects of a healthily competitive market.
...a potential monopoly is the carrot that drives a lot of innovation
That is a statement that I can agree with. (And I wouldn’t count a severely dominant player as a monopoly; a dominant player can drive a lot of progress as the smaller fish frantically try to find a way to one-up it and pull in customers)
You’re right, monopolies certainly don’t drive progress. But the possibility of a monopoly can.
Progress requires R&D, and R&D is expensive and unpredictable. No one would want to do the type of long-term research that invigorates the economy or even creates brand new industries if they won’t take in the lion’s share of the profits. So it would be a bad idea to implement a policy of breaking up any and all monopolies, despite the fact that it is better in the moment (similar to Newcomb’s problem). In fact, we actually institute monopolies using government power, via intellectual property.
I am going to disagree vehemently with the notion that monopolies drive progress.
Telkom spent a long time as a fixed-line telecommunications monopoly, and South Africa still has terrible fixed-line internet costs as a result.
Monopolies, as far as I can see, will almost always relax once their monopoly is secure and just keep doing things the same way all the time, holding onto their monopoly. (Sometimes they will even attempt to squash competitors before they grow large enough to threaten said monopoly). Companies in competition, on the other hand, will improve their offerings and/or lower their prices in order to attract more customers. Therefore—and this is borne out by the Telkom example—I conclude that monopolies lead to stagnation, while healthy competition is more likely to lead to progress.
You seem to interpret “progress” as “lower prices” :-)
While I think that Clarity is misunderstanding Peter Thiel (Thiel says that a potential monopoly is the carrot that drives a lot of innovation; Clarity wrongly interprets this as “monopolies drive progress”), the question of monopolies and progress is complicated. The two major examples that come to mind are Bell Labs (run by AT&T) and IBM (in the 1950s − 80s era).
Assuming you are referring to IBM’s mainframe business, they did not really have a monopoly; they were just a dominant player. Competitors at that time included Amdahl, Burroughs, UNIVAC, NCR, Control Data, Honeywell, General Electric and RCA. Amdahl even offered products that were compatible with IBM’s mainframe offerings and could run software developed on/for IBM.
Given the context, I’m interpreting “monopoly” loosely and include being the dominant player in the definition.
Thiel talks about how you would want to parlay your technological (or first-mover) advantage into a monopoly and he clearly means companies like Microsoft or Google which are not legal monopolies like AT&T was.
I read Thiel to be making the second argument as well, because monopolies have capacity to make the profits necessary for major R&D spending, as well as the capacity to benefit directly from major R&D spending. No individual commodity producer making zero economic profit has an incentive to invest in better methods of producing their commodity, as they correctly believe that the innovation will rapidly spread and benefit the consumers, rather than them.
The short way to visualize it is that the market for innovations has producer and consumer surplus, and only monopolists can capture both at once, which would suggest a monopolistic industry would spend more on innovation than a competitive industry. (This is true for some innovations and not others; monopolies should be expected to be better at developing basic science related to an industry, and competitions should be expected to be better at determining customer preferences.)
Your explanation is compelling and unexpected. Can you reference a Wikipedia article (preferable) or another internet source so I can read more broadly on this thesis? The closest approximation I can find is theses on why patents and other forms of IP are awarded.
Consider this article by Thiel.
I see how it can look like that. But no, they are two related but seperate effects of a healthily competitive market.
That is a statement that I can agree with. (And I wouldn’t count a severely dominant player as a monopoly; a dominant player can drive a lot of progress as the smaller fish frantically try to find a way to one-up it and pull in customers)
You’re right, monopolies certainly don’t drive progress. But the possibility of a monopoly can.
Progress requires R&D, and R&D is expensive and unpredictable. No one would want to do the type of long-term research that invigorates the economy or even creates brand new industries if they won’t take in the lion’s share of the profits. So it would be a bad idea to implement a policy of breaking up any and all monopolies, despite the fact that it is better in the moment (similar to Newcomb’s problem). In fact, we actually institute monopolies using government power, via intellectual property.
Agreed. The attempt to reach a monopoly is a great driver of progress; it’s only once a company reaches that state that it starts to hinder progress.