Monopolies, Free Market Capitalism, And Steel Tariffs

A Discussion With Dr. Nicholas J. Mauro, Professor, Dowling College and Nobel Laureate Economist Dr. Milton Friedman

 

On, May 30, 2002, following nearly three years of correspondence, Nobel Laureate, Dr. Milton Friedman, invited Dr. Nicholas J. Mauro, a Professor of Dowling College’s School of Business, to visit with him at his home in San Francisco.  Dr. Friedman is regarded as one of the top economics thinkers in the world today, and many consider him to be the number-one economist and the champion of free market capitalism.  Currently, Dr. Friedman is a resident fellow at the Hoover Institute in Palo Alto, California.  At this introductory meeting a foundation was provided that allowed both men the opportunity to discuss a variety of global economic issues.  For example, Dr. Friedman and Dr. Mauro spoke about such issues as systems thinking, statistical process control and quality as these related to competing globally.  Also discussed was the work of Dr. Walter Shewhart, considered to be the Father of Statistical Process Control, and Dr. W. Edwards Deming, an understudy, close friend and practitioner of Shewhart’s work.

Deming is the person given most credit for the Japanese industrial miracle and was a speaker at Dowling.

More recently, on November 11, 2003, Dr. Friedman invited Dr. Mauro to return to his home on the west coast for a second discussion on the above issues as these interacted with such issues as monetary behavior and theory, inflation, unemployment, local and global monopoly, and the steel industry along with a variety of other issues.  One may wish to note that in 1976, Dr. Friedman won a Nobel Prize for his research on Monetary Theory and this work is recognized globally as the scholarly work on this topic.

 

What follows are combined excerpts from both visits on the timely topic of monopolies in a globally competitive world as seen through the eyes of these two scholars.

 

 

Dr. Nicholas Mauro:  If I may, I would like to refresh both our memories.  In fact,

strangely enough one of the headlines in USA Today, yesterday (11/11/03), on its front page was “Steel Tariff Ruling Tests Bush.”

Dr. Milton Friedman:  Yes.

Nicholas Mauro:  It seems as if the steel issue is going to come to a head. 

And, of course, it has everything to do with free market capitalism and free trade.  The last thing I mentioned to you when last we spoke was what you thought of a “regional monopoly” which is what seems to be developing globally in the steel industry?

Milton Friedman:  Yes, I recall your concerns about this.

Nicholas Mauro:    I was wondering about your thoughts on a global/regional

monopoly?  What I have in mind is a people bonded together, nation-to-nation, by some cultural thread, and an unwritten agreement but from these very cultural similarities people then form or try to form a global monopoly – so to speak – in order to take control and retain control of an industry?  And in this instance governments might assist them to achieve their objective to seize an industry.  There doesn’t really have to be anything in writing…because they are bound together by culture -- they know each other’s behavior, also how they think and they just go about their plan to monopolize an industry?

MF:   Perhaps you can elaborate.

NM:    For example, I was thinking of the close bonding or cultural bonds that some Asian nations have with each other and how these nations seem to seize an industry, as a group, and then control that industry.  It is as if a global monopoly arises from such a relationship… kind of like a regional monopoly, and there seems to be a plan, unwritten as it may be.  It is not an accident or just something that randomly occurs, it is more.  Then after these nations seize control of an industry – there seems to be a move to drive all other global competitors (organizations) out of this business around the world?

 

MF:  I am certain you know that I am in favor of competition.  So any type

of  monopoly, I would not be in favor of…but I must admit I have not given this aspect any thought.  Further, I do not agree, for example, with protecting American steel because of their political influence.  In 1987/88 we were very critical of President Reagan for not dealing with Japan better.  Reagan placed import limits on Japanese cars to protect the American auto industry – we disagreed with what President Reagan did.

NM:   But what of a global/regional monopoly that might be formed to takeover an industry by a group of nations that then results in the same condition that would occur if a global or local monopoly was formed?

MF:   Yes, I am aware of what you are suggesting. Yes. 

NM:    Milton, if it is okay with you I would like very much to discuss this issue in the context of the Steel industry?

MF:   Yes, that is fine with me.

NM:    This is where I would like to begin because the issue raises questions about monopoly and monopolies in free markets.  And, I seem to have read somewhere that you may have altered or changed your position in regard to monopolies?

MF:  I have been re-thinking my position on monopoly in view of global monopolies and global competition.  Please continue.  I’d like to hear more about your point.

NM:  Okay.  Well, it seems as if there may be a few far eastern nations, in this case, (with one nation leading the way) that are moving toward monopolizing the steel industry and, price is the driver.

MF:  Shouldn’t people be able to buy products at the best possible price in the marketplace?  Isn’t that the substance of free trade?

NM:  You know Milton, I understand your point completely, but entering into this discussion is, of course …fair trade.  And that brings us to the “free trade” vs. “fair trade” debate that seems to be ongoing.  And…

MF:  Yes, now Nic, who is to say what is fair trade?  Isn’t that really through the eyes of who is looking at it in the eyes of the beholder?

NM:  Milton, I get your point, I really do and I understand it.  But, there are those who would argue that this is exactly what happened in the television industry or the photo industry, and the electronics industry and that some nations use monopoly to their advantage in this way.

MF:  What is your point?

NM:   Well, my point is that if their intentions are to secure an industry – by monopolizing that industry using monopolistic behavior, with no written agreements among themselves but rather simply because people think alike – then perhaps the US should not be so quick to break-up our most powerful companies – via the Anti-trust laws and the Justice Department and the Federal Trade Commission.  All of this seems to be unrealistic to me in a world of global competition, driven by price and quality…and I would really like to hear your position on these issues…

MF:  Okay, I understand.

NM:  Incidentally, excuse me Milton, but this pro-monopoly thing – by the way is

actually a strong argument put forward by Deming and Shewhart because of their history with AT&T…so they were very supportive of a monopolistic environment, and of course, this automatically leads us to Microsoft.

MF:   You know Nic, if we were to go back let’s say to 1800 or when this country began, this entire country was farming.  People, most people, were engaged in farming.  Now it is true it was a different time, but there is a point to be made here.  And, I think all the concern about losing an industry or industries must be looked at from the point of view that this is the way things happen.  The entire nation was

– let’s say 98% of it.  And then things started to change and we see today the percentage of farming and farmers, economically, is very small.  Now it is true…

NM:   Yes it is, by sector it is approximately 1.5 to 2% in the United States…

MF:  Yes, it is true that farming has gone to a very low level from a sector/industry point of view.  Today, farming is done everywhere in the world – even we, still do farming – but we do it much more efficiently.  But more importantly, it is not structured as it was in the 1700’s or 1800’s.  And, for those people who were farm people, they had to move off the farms into other industries.  This is true, and it is also true that it was not easy.  In fact, I am sure that it was a hardship, very hard.  Yet, the economy, the nation, and the people have survived and benefited from this transition.  Was it easy?  I think not, but it happened and it will continue to happen…

NM:   Yes, I agree…

MF:  Now let us get back to the instance at hand.  Our steel industry cannot compete in the global marketplace.  We are not really discussing why it cannot compete but we recognize it cannot compete.  There are other people, other countries, who are manufacturing steel better than we are, more efficiently than we are.  And, more importantly steel is being manufactured at a better price for those who use steel to make and build products.

NM:   But Milton…

MF:  Now, wait just a second.  Let’s go back. It seems to me that like the farming example, the steel industry is going to change and when it changes more of it will go overseas and it will be because other people produce steel more efficiently and at a better price.  So those people using steel will be able to use it at a better price and that seems to me what we have here.  People working in the steel industry will have to move into some other industries as this change takes place. 

We will no longer be the dominant producer of steel.  This is how I view the steel industry and the change it is undergoing.

NM:  Milton, I understand your position and from an economics’ point of view, I understand how the marketplace works.  However, it would appear that there is a plan underway; it may not be the usual plan as to how monopolies are formed.  This may be a plan, with the Japanese leading, to own the steel industry or as much of it as possible by certain countries…and it makes sense to do this.  Here there is no collusion, as we know it, what is done, is done because there are certain people who think and act alike.  So here we have a monopoly forming – before our very eyes – and yet, here in the United States we do everything we can to breakup monopolies.  To me, it makes no sense?

MF:  Yes, but look at the breakup of AT&T and what came of it.  All the other little and some larger communications companies…

NM:   Yes Milton I understand, but I am not certain I agree with that breakup.  But, look here, now we have Microsoft …a very powerful company, leading the industry and the United States Justice Department files an anti-trust suit against it and this suit opens the door to a flood of lawsuits, including global lawsuits.  To me, this doesn’t make sense in a globally competitive world.  None whatsoever

MF:  Well, I am not certain that I agree with the Microsoft issues?

NM:   Well, if Judge Pennyfield’s brief is accurate then they were clearly predators  and carnivorous in their actions against other companies in their industry.

MF:  What exactly do you mean by their behavior?  Pennyfield was the presiding judge?

NM:   Pennyfield was the original judge who presided over the case and he originally found them guilty.  He wrote a 40-plus page brief in which he used language that described Microsoft’s behavior as that of being unfair/monopolistic. 

It seems to me that if what was said in the brief is true then they very well may have behaved in an unfair manner.  The wording in the brief was very powerful…

MF:  But Nic look, the market we are looking at has lots of competitors and will continue to grow.  Who is to say that this market has been monopolized by Microsoft? 

NM:  The brief said that Microsoft deliberately tried to do harm to other companies in the marketplace.  I think I have an extra copy of the brief and will mail it to you.

MF:  Look Nic…let’s be realistic.  In regard to steel, the steel industry and steel imports.  If users of steel can purchase quality steel at a better price than can be produced in the United States, then it seems to me that they should have a right to this steel at that better price.  If, of course, you are a proponent of free trade and free markets.  Now, at some point the government will have to step in and do something.  No question…

NM:   You think so?

MF:  Yes absolutely.  Somewhere, it will be decided, at some point, … for national security reasons, national defense that we must continue to produce steel at home.  As we approach this point then the US government may be forced to subsidize steel.  There is no question about it.  But otherwise, I see the loss of the steel industry as a similar event, as the farming industry, as time passes.  The economy will adjust and the workers will adjust accordingly…and new industries will be formed.  It won’t be easy but this is what will happen.  

Closing note:  While Dr. Mauro and Dr. Friedman discussed several other issues, the above represents their discussion on the steel industry, monopolies and global monopolies as viewed through the eyes of these two colleagues.

All rights reserved April 2004