Thirty years ago a young assistant professor of law named Richard Posner asked the provocative question, Does the existence of natural monopoly provide adequate justification for government regulation? His even more provocative answer was no. The evils of natural monopoly are exaggerated, the effectiveness of regulation in controlling them is highly questionable, and regulation costs a great deal.
The Cato Institute has reprinted his path-breaking essay from the Stanford Law Review in a 30th anniversary edition, Natural Monopoly and Its Regulation, with a new preface by the author. Posner, who is now chief judge of the U.S. Court of Appeals for the Seventh Circuit, has written extensively on the economics of criminal law, labor law, and intellectual property.
Posner has this to say about what he wrote three decades ago: "What struck me most forcibly in rereading it while composing this foreword to the republished article is how tame it now seems." At the time he composed the essay, Posner recounts, the focus of the literature on regulation of monopolies "was on ways of improving the operation of the regulatory process to make it a more effective constraint on monopoly pricing, predatory pricing, and other supposed dangers of unregulated monopoly."
Deregulation wasn't a common term then, and it certainly wasn't on the policy agenda. Posner explains that "at that time the emphasis on reforming rather than abolishing regulation reflected the fact that most economists and lawyers had considerable faith in government—and considerable distrust of free markets." A variety of factors has encouraged that attitude to change. "What mainly happened is that regulation broke down; its breakdown was a microcosm of that of the Soviet Union's command-and-control economy. A combination of inflation in the 1970s and accelerating technological change favorable to competition brought about a situation in which regulation no longer satisfied the needs of key interest groups, whether of regulated firms or of customers."
The result, Posner says, is that "natural monopolies have crumbled; even the local natural monopolies, which are based on the inefficiency of duplicating a local grid of wires or pipes, may soon go the way of the former natural monopoly of long-distance telephone service."
Although Posner doesn't comment directly on the Department of Justice's case against Microsoft, he does say that "the resources and energies of government should be directed to problems we know are substantial, that we think are traceable to government action, and that cannot be left to the private sector to work out. There are plenty of those problems and it is doubtful that natural monopoly is among them."
This article originally appeared in the July/August 1999 edition of Cato Policy Report.