Open advantages

A monopoly means a company is effectively lying flat

Economists don't like monopolies and they tend to be prejudiced in favor of openness.

About monopolies, there's a standard theory and then there's a new theory. The standard theory is a monopolist sets prices and low output, and that helps the owners of the monopoly. The people who own a monopoly get more profits, but that hurts other parties and people. It harms potential competing entrepreneurs. It harms consumers. Too little is produced in a monopolized industry, too much in other industries. There's a misallocation of resources across industries. That's the standard theory.

Economists have tried to estimate the cost of monopoly. There's a famous study by US economist Arnold C. Harberger. He didn't like monopolies, but he was surprised at what he found. He said there were costs, but they weren't a big percentage of GDP. And for a number of years, Harberger's numbers and similar ones convinced a lot of economists and policymakers that you really didn't have to worry about a monopoly.

But there's some new work that says you really should worry about a monopoly. And more recent evidence is built on the famous economist John R. Hicks's insight that the benefits of monopoly make for a quiet life, meaning that monopolists become less efficient and lazy. So this is all about the inefficient allocation of resources within companies.

James Schmiz, a senior research economist at the Federal Reserve Bank of Minneapolis, has done very detailed studies of real resource allocations, that is the efficiency and cost effectiveness of resource allocations within companies, in particular in the cement, iron, ores and sugar industries. For a long time these industries were protected with trade barriers that protected US monopolies. There were tariffs or transportation costs. And then what happened is those barriers dropped. Most of the unnatural barriers dropped. So competition came in and threatened the monopolies. The consequences were that there are big increases in efficiency. These were much bigger than Harberger would have predicted. And the standard theory on monopoly leaves this out. So monopoly protection leads to this insight that monopolists actually don't minimize costs. They behave worse than the standard theory predicts. So it promotes rent seeking and increases dead weight losses. Schmitz has put numbers and lots of details on these ideas, and his very interesting scholarly work can be repeated in other contexts.

The spirit and the substance of Schmitz's findings align really well with themes that I see running through the World Openness Report. And there's a convincing case in both instances of the benefits of openness.

I personally have benefited from importing from other countries, exporting ideas and other things to me as a citizen of my country. And right now I benefit immensely from open-source software, which I'm a small participant in it. People create software that is available worldwide and it's freely shared by generous people who want to push it forward. They have pushed out the frontiers of digital technology using the opportunities made possible by openness.

The author is the director of NYU and Peking University HSBC Business School and a 2011 Nobel laureate in Economics. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

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