II.

Historical Background

Economic monopolies have existed throughout much of human history. In ancient and medieval times dire scarcity of resources was common and affected the lives of most human beings. When resources are extremely scarce, little room exists for a multiplicity of producers for many products and services. Chinese emperors from the Han dynasty onwards used official monopolies to create key industries. The medieval guilds, for example, were associations of merchants or artisans that controlled output, set terms for entering a trade, and regulated prices and wages.

As nation-states began to emerge in the late Renaissance era, monopoly proved to be a useful device for sovereigns, ever strapped for the cash necessary to sustain their armies, courts, and extravagant lifestyles. Monopoly rights were awarded to court favourites for manufacture and trade in basic essentials such as salt and tobacco. In all such charters, the sovereign received an ample share of the profits. Most major European nations also granted monopoly powers to private trading companies, such as the East India Companies, to stimulate exploration and the discovery of new lands. The awarding of monopoly power by the sovereign to private companies and court favourites, however, led to many abuses. In England, Parliament finally passed a Statute of Monopolies (1624) that sharply curtailed the monarch's right to create private monopolies in domestic trade. This act did not apply to the monopoly powers granted to companies formed for exploration and colonization.

Two developments, both English in origin, brought about a reversal of these conditions, leading to a competitive-based economic order in the early 19th century. First was the emergence through English common law of a hostile attitude towards private combinations that were in restraint of trade. Under the common law, private agreements of a monopolistic nature that restrained free trade were not enforceable. This common-law hostility towards monopoly was important in Great Britain and America. The second development was the expansion of production that followed the Industrial Revolution, combined with the ideas of the Scottish philosopher and economist Adam Smith on private property, markets, and the free play of competition, which became the dominant influences shaping economic life in the first half of the 19th century. This period most resembled Smith's textbook “model” of a competitive economic order—one in which business firms in nearly all industries were many in number and small in size.

In the late 19th century the tendencies inherent in a free market economy order brought about new changes. In Great Britain, the United States, and other industrial nations, giant business firms began to emerge and dominate the economy. In part, this stemmed from the empire-building tactics of the “captains of industry”, such as the American entrepreneur John D. Rockefeller, who drove most competitors from the field. It also came about because of technological advances that enabled a handful of large firms to satisfy the demand in many markets. The result was not complete monopoly but, rather, an economic order known as oligopoly, in which production is dominated by a few firms.

In more recent years, most governments have sought, through competition laws, to prevent the outright emergence of private monopolies in major industries by using law, the courts, and regulators to impose competitive conditions on firms in these industries. If competitive conditions are not possible—in the case of natural monopolies—governments have either nationalized the industry, or regulated its profits so as to protect consumers.