Authors:
Historic Era: Era 7: The Emergence of Modern America (1890-1930)
Historic Theme:
Subject:
July/August 1994 | Volume 45, Issue 4
Authors:
Historic Era: Era 7: The Emergence of Modern America (1890-1930)
Historic Theme:
Subject:
July/August 1994 | Volume 45, Issue 4
Economists from Adam Smith on have written about the evils and dislocations that monopolies bring to an economy. What has been much less written about over the years, however, are the evils of monopsony.
In the interest of saving wear and tear on 300,000 dictionaries, let me hasten to offer a definition. A monopoly is any entity that effectively controls the supply of a commodity. A monopsony, on the other hand, controls the total demand for a commodity.
Obviously, monopsonies are much rarer than monopolies. The only one I ever enjoyed happened years ago when I was traveling in Greece. A photographer, quite unasked, snapped pictures of the members of a tour I was on, and the next morning, he went from table to table in the hotel dining room, offering eight-by-ten glossies at outrageous prices and doing a brisk business.
When he came to me, however, I told him I’d give him one-tenth his asking price for the photos he had taken of me. He indignantly refused, so I suggested he call up the newspapers and see what they would pay for pictures of an utterly unfamous college student walking around Delphi with a guidebook in his hand. He took the money I offered him and said something in Greek that would probably lose nothing in translation. The same to you, buddy, and welcome to the world of market forces.
But monopsonies can have large-scale, pernicious effects for much the same reasons as monopolies: they prevent the determination of real prices while their possessors invariably come to abuse their power. And like most monopolies nowadays, monopsonies tend strongly to be government ones—state textbook boards are one example—and the greatest of them are military in nature.
After all, how many customers are there for, say, nuclear-missile submarines? Mercifully, perhaps, there is only one, and Electric Boat sells to the Navy or it doesn’t sell at all.
These military monopsonies are nothing new. A hundred years ago, when battleships, not nuclear submarines, were the measure of naval power, the government had a 30-year dispute with the country’s steelmakers over armor plate. It’s an instructive tale.
The battle between the Monitor and the Merrimack in 1862 had spelled the doom of wooden navies. By the 1880s, the monitor form had evolved into the battleship, armed with the biggest guns afloat and protected by belts of armor plate. The U.S. Navy, however, had quickly shriveled to insignificance after the Civil War and bought what little armor plate it required from abroad. Then the Arthur administration decided to expand the Navy and wanted domestic sources to assure supply in case of war.
The steel manufacturers were not interested in building highly specialized plants that could make only armor. Why should they have been? Demand was subject to the vagaries of politics, the Navy would be virtually the only customer, and the technology was very difficult to