1 J.L. & Econ. 105 (1958)
Competition and Democracy

handle is hein.journals/jlecono1 and id is 107 raw text is: COMPETITION AND DEMOCRACY*
Columbia University
ECONOMISTS have often argued that if an industry acts as a monopolist it
would be desirable government policy either to break up the monopoly or, if
this is undesirable because of increasing returns, to regulate and perhaps even
nationalize it.1 This proposition, although extremely well known and often
accepted as obvious, turns out upon close examination to be far from obvious,
and to involve several assumptions of doubtful validity. The argument sup-
porting this proposition goes something as follows: Monopolies cause a mal-
distribution of resources, since the price charged by a monopolist exceeds
marginal costs and an optimal distribution requires price equal to marginal
cost. An optimal allocation would occur if the industry were made competitive,
since price equals marginal costs in competitive industries. If the industry
were a natural monopoly, price could be made equal to marginal cost either
indirectly by government regulation or directly by government administration.
Therefore, the recommendation is an anti-trust law to prevent or break up
contrived monopolies and government regulation or government administra-
tion of natural monopolies.
The non-sequitor in this argument is the sentence beginning with there-
fore; the recommendation of government intervention does not follow from
the demonstration that government intervention could improve matters. Dem-
onstrating that a set of government decisions would improve matters is not the
same as demonstrating that actual government decisions would do so. This
kind of inference is logically equivalent to identifying the actual workings of
the market sector with its ideal workings.
In Section I a theory of the workings of a political democracy under ideal
conditions is developed. It is shown that an ideal democracy is very similar
* A draft of this paper was written in the summer of 1952, but pressure of other work
prevented me from revising it for publication until the summer of 1957. In the interval, an
article using a similar approach was published by Anthony Downs, An Economic Theory
of Political Action in a Democracy, 67 J. Pol. Econ. 135 (1957) ; however, our work does
not overlap too much, since Downs emphasizes somewhat different aspects of the political
structure than I do here.
'Henry Simons vigorously argued that all natural monopolies (i.e., monopolies caused
by increasing returns) should be nationalized by the state; see his A Positive Program for
Laissez-faire, reprinted in Economic Policy for a Free Society (1948).

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