Brittany Hunter: Technology Is Not Pro-Monopoly

In the fourth chapter of Hayek’s The Road to Serfdom, he specifically addresses the issue of monopolies. Specifically, the myth “that technological changes have made competition impossible in a constantly increasing number of fields and that the only choice left to us is between control of production by private monopolies and direction by the government.”

Hayek explains how this fear that technology necessarily leads to monopolies played out in his own day. As labor saving machines were becoming the norm when it came to mass production, many smaller companies believed that technological innovation made them economically vulnerable. Technology created economies of scale, which favored big companies over small.

This belief that big companies always have the technological upper hand is simply untrue.

However, as Hayek pointed out, these fears neglect a host of circumstances regarding the very nature of monopolies altogether.  

Monopolies by Design

This belief that big companies always have the technological upper hand is simply untrue. As Hayek notes, even economies of scale reach an upper limit.  To be sure, large companies outcompeting the small do not inherently create monopolies. Instead, it is the policy crafted by the state that encourages the elevation of one company over another, as Hayek points out:

The conclusions that the advantage of large-scale production must lead inevitably to the abolition of competition cannot be accepted. It should be noted, moreover, that monopoly is frequently the product of factors other than lower costs….It is attained through collusive agreement and promoted by public policy.

Luckily for Hayek, time has proven his sentiment correct, as we are currently seeing today with the ridesharing economy and traditional taxicabs.

Before the advent of the sharing economy, taxis enjoyed a near 80-year monopoly over the industry without having to deal with substantial competition. But this monopoly was not by coincidence, it was by design.

Medallion laws, as they have come to be known restrict entry into the traditional “cab” sector. Before a vehicle can be legally used as a taxicab service, it must seek the state’s permission and obtain a medallion.

In most major cities around the country these laws exist primarily to restrict the number of cabs on the road and thus, control the competition. But what is more interesting about these medallion laws is who its biggest champions have always been: cab companies themselves.

By barring entry into this field, “taxi kings” have avoided any organic incentive to innovate because the need itself has been squashed by government policy. The state, with the help of cab company lobbyists, has crafted these policies so as to avoid any unwanted competition. If someone has a newer and better way to run the industry, they will have a hard time getting these ideas off the ground without paying sometimes as much as one million dollars just for one medallion.

By barring entry into this field, “taxi kings” have avoided any organic incentive to innovate.

However, this all changed when Uber came around.  

Technology Levels the Playing Field

Taxi kings were seen to have the advantage over the cab market largely because they already owned fleets of cabs. These cabs were also already issued medallions by the state. While these factors would at least seemingly deter any new competitors from attempting to join the market, because it gave one industry a financial leg up over another, no one fathomed the rise of ridesharing.

Now, instead of access to technological progress causing large companies to squash their smaller competitors as was feared in Hayek’s day, technology and economies of scale are now actually working in the favor of upstarts.

Uber and Lyft, for example, have completely abolished the need for overhead costs when it comes to maintaining fleets of taxis. This is simply because the companies themselves do not own any physical cars. And since they do not actually own the cars, they have made the argument that the medallion laws do not apply to their model.

Last year, for example, a law was passed in Massachusetts that forced a tariff on the ridesharing industry.

Since the sharing economy is based on individuals using property they already own in order to make a living, it negates any need for Uber or Lyft to make a costly investment towards owning a fleet of vehicles or permits in the form of medallions. Allowing them to compete with big cab companies who may have had the upper hand in an outdated market.

This has helped these smaller upstarts break into the market and break up the established taxi cartel. But this doesn’t mean their success has not been met with obstacles from the cab companies.

Technological advances, and especially smartphone technology, have completely restructured the way consumers even think about hailing a cab. Gone are the days when the only alternative to owning a car was standing on busy streets and hoping a cabby will notice you.

Without any real competition, there were no substantial reasons for the cab companies to alter their existing models. But once Uber, Lyft, and other ridesharing companies began rising in popularity, the cab companies got mad and demanded that the government take action. “We can’t compete with this new technology-reliant model,” some claimed, “This is unfair to our business.”

But just as in Hayek’s day, those who complained about technology putting their companies at an unfair disadvantage only offered solutions that involved government intervention.

Last year, for example, a law was passed in Massachusetts that forced a tariff on the ridesharing industry. The purpose of this tax was to hold the ridesharing industry “accountable” for the cab industry’s inability to innovate and compete with their market competitors. In this case, it was the refusal to incorporate technological advances into their service models.

So instead of competing fairly, the cab companies got away with instituting a tax on their competitors that directly went towards funding the cab company’s apathetic quest to adopt new technology.

This is the reverse from Hayek’s day in that it is now lumbering incumbents scared of the technology savvy little guy instead of the reverse. But, in both cases, the fear-mongering capitalizes on the fear of technology. Both also reiterated the belief that the state should insert itself in the market to make competition more “just.”

And as Hayek has pointed out in every chapter of his book so far, state planning, whether in the form of new taxes or regulatory medallion laws, always serves to inhibit true competition. This is as true now as it was in the mid-1940s.

Brittany Hunter

Brittany Hunter

Brittany Hunter is an associate editor at FEE. Brittany studied political science at Utah Valley University with a minor in Constitutional studies.

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10 Responses to Brittany Hunter: Technology Is Not Pro-Monopoly

  1. DM OF WA

    Her case study concentrates on the emerging competition in the taxi industry triggered by technological innovation by Uber. However it overlooks the fact that Uber is attempting to become a monopoly itself! Uber’s apparent success in some markets is due to its willingness to resort to an array of practices which are unethical and even illegal.

    Consider Google. This company has built an effective monopoly in online search solely by virtue of its patents. Giant technological companies like Google, Apple, Facebook Samsung and others are in a constant state of legal warfare using patents to prevent competition from emerging.

    The fact is that technology is neither pro-monopoly nor anti-monopoly.

  2. The term “natural monopolies” mistakenly refers to industries, when in reality they only apply to technologies, such as landline telephony, broadcast television and radio-based taxis. Change the technology, and the associated infrastructure becomes redundant, and therefore also the economies of scale that go with it.

    Disruptive technologies disrupt not only incumbent technologies, but also their economies of scale. All of this is organic and natural.

    However, as we’ve seen many times before, were now seeing it with such formerly technological upstarts as Google transforming from disruptor to defender, which they do by engaging and influencing governments, ultimately to artificially raise barriers to potential competition to do nothing more than protect their gains.

    And governments invariably enable them because politicians are politicians because they value power, influence, control and fame, and as such will always seek powerful friends.

    I personally consider myself libertarian rather than conservative despite the latter’s wisdom, because liberty, when allowed to thrive, naturally imparts the greatest total benefits through what are in the broad sense positive externalities. This is the very essence of Adam Smith’s work, which construed benefits beyond those in free contract, however only absent external coercion, which in the political-economic sense is more commonly associated with cronyism.

    Companies grow on purpose to gain economies of scale, which are proven in a multitude of technologies, however they are highly vulnerable to disruptive technologies. Such technologies render economies of scale moot, which in reality forms another motivation for cronyism and to raise artificial barriers. Artificial barriers require artificial all laws to stop them, and yet the very people who can make those laws have a conflict of interests, having benefits in aligning with incumbents rather than competitors. And thats what constitutions are for.

  3. Nerblnob

    Well said, Beer Whisperer.

    Uber has done deals in a number of European cities that effectively put them on the inside of the tent with the taxicos. This is mainly because of local government attempts to ban or frustrate them, in order to protect lucrative taxi-licensing deals.

    The “safety” excuse is just a joke, as anyone who’s had the chance to compare traditional taxicos with Ride-share apps knows. But safety is still considered an invincible stick to beat businesses with.

    Few noticed that London’s TfL refused a licence to a small startup, Taxify, at the same time as they refused to renew Uber’s. Established or heavily-backed competitors such as Via and Lyft have also been frozen out by TfL.

    The gatekeepers protecting the monopoly rather than the public, despite their claims.

    Few people are even asking why ride-share appcos even need a licence from TfL.

  4. duncanm

    Monopolies and large players are typically slow to adapt and inflexible – though they may have a long reign, their death is often swift when a new technology comes along.

    Today its Google – yesterday it was US cable and telco’s. Kodak and the digital revolution (despite the fact they invented the technology), etc.

  5. DM of WA

    I have no love of the taxi industry in general (though I do respect anyone who passes the Knowledge and and earns a licence from London Taxi and Private Hire).

    It amuses me to see the brave, vocal libertarians who constantly cheer the ongoing degradation and ultimate destruction of the little guys who drive cabs and deliver pizzas but somehow seem to entirely lack a similar level of zeal for taking down the really big monopolies/cartels: medicine, law, finance, real estate, higher education, and so on.

  6. duncanm

    It amuses me to see the brave, vocal libertarians who constantly cheer the ongoing degradation and ultimate destruction of the little guys who drive cabs

    the little guys who drive cabs rarely own the plates these days, AFAIK… and if they’re smart, they’ll just slide on over to uber anyway.

  7. Art Vandelay

    It amuses me to see the brave, vocal libertarians who constantly cheer the ongoing degradation and ultimate destruction of the little guys who drive cabs

    What about the 40,000 little guys who drove for Uber in London until a corrupt government put them out of business with the stoke of a pen?

  8. Nerblnob

    Today its Google – yesterday it was US cable and telco’s. Kodak and the digital revolution (despite the fact they invented the technology), etc.

    Nokia. Blackberry.

    DM of WA:
    The Knowledge is irrelevant in the age of SatNav – which also works sahf of d’ rivva at night.

    The “little guys” and gals could suddenly afford to get round London safely at night with Uber. What about them?

    Taking down the big monopolies isn’t in itself a smart goal. Better deal for the paying public is a worthier goal.

  9. What’s the difference between crony capitalists and crony socialists?

    Nothing that really matters, that’s what.

    And as for monopolies, they are characterised by undersupplying as it achieves the same profit for less effort. Thus, competition should always be enabled and encouraged.

  10. Chris

    DM, good points but right now its the ‘little guys’ suffering. They had the opportunity to get into Uber, bought a car and now can’t make a living because Uber is cutting their share, and unlimited entry in cities with many people losing salaried jobs has an inevitable outcome. Of course a $60K Prius is not all lost when you quit… it is better than a $60K Prius and $250K for taxi plates.

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