December 03 2011| Filed Under Business, Economics
Monopoly, or the exclusive control of a commodity, market or means of
production, is an integral part of history. In a monopoly, all the power is
concentrated in the hands of a select few. Monopolies, in many cases, have been
vital to getting large jobs done. Unfortunately, they also have been known for
abusing the same power that makes them so effective. In this article, we'll
take a walk through history to uncover the roots of this single-minded vision.
(For more on this topic, see Antitrust Defined.)
TUTORIAL: Economics Basics
When All Business was Small Business
Through most of human history, the formation of business monopolies, or even
powerful monarchies, was precluded by the limitations of transportation and
communication. Anyone can claim to rule a kingdom, but it comes to naught if
you can't order your subjects around or send your soldiers to discipline them.
In this same way, businesses were limited in most cases to the village or even
the neighborhood in which they were physically located. Shipping by horse, boat
or on foot were possible, but this added costs that made the shipped goods more
expensive than locally produced products.
In this sense, many of these small businesses enjoyed monopolies within their
own towns, but the extent to which they could fix prices was restricted by the
fact that the goods could be bought from the next town over if prices went too
high. Also, these small businesses were mostly family or guild operations that
put the emphasis on quality rather than quantity, so there was no pressure to
mass-produce and expand the market to other towns. The tools for mass
production didn't become available until the industrial revolution, when
cottage businesses were all but erased by factories and sweatshops. (For more
insight, read An Exploration Of The Development Of The Market and Financial
Capitalism Opens Doors To Personal Fortune.)
Roma
The reign of the Roman Empire introduced the world to the best and worst of
concentrated power. In the time of Tiberius, the second Roman emperor and the
man who set the tone for debauchery that his successors, Caligula and later
Nero, took even further, monopolies (or monopolium) were given to senators and
nobles by the empire. These included shipping, salt and marble mining, grain
crops, public construction and many other aspects of Roman industry. The
senators that granted monopolies were responsible for reporting revenues and
assuring a steady supply, but were not very involved in the business except to
skim profits. In many cases, the labor and the management were supplied through
slavery, with the highly educated slaves doing most of the administration.
These slave-supported monopolies helped Rome expand its infrastructure at an
amazing speed. (To learn more about revenues, see Can Earnings Guidance
Accurately Predict The Future?)
Toward the end of the Roman Empire, the increased infrastructure was all put at
the disposal of a succession of unstable and corrupt emperors who used their
excellent roads to drain conquered foes through taxation until they rebelled.
The monopolies also caused problems as they granted too much power to citizens
who used the proceeds to bribe their way up the ladder.
Monopoly and Monarchy
The first modern monopolies were created by the various monarchies in Europe.
Charters written by feudal lords granting land holdings and the accompanying
revenues to loyal subjects during the Middle Ages became the titles and deeds
that landed nobles displayed to cement their status by right of lineage. In the
late 1500s, however, royal charters extended into private business. A number of
monarchs granted royal charters that gave exclusive shipping rights to private
firms. The majority of these firms had someone on the board with ties to
nobility or some other connections with the crown, but the investors and
venture capitalists that actually funded the firms were largely from the
newly-rich merchant classes (bankers, moneylenders, ship owners, guild masters,
etc.). (To learn more, see How Venture Capitalists Make Investment Choices.)
Britannia
Royal charters allowed the Dutch East India Company to corner the spice market
as well as later allowing the British East India Company to do the same in
addition to giving them considerable power over shipping and trade regulations.
The monopolies created by charters were, with the exception of the British East
India Company, very fragile. When royal charters expired, competing companies
quickly undercut the established company. These price wars often cut too deep
for all involved, depressing the whole industry until venture capitalists put
up money to get fresh companies into the decimated market. (For related
reading, see The Birth Of Stock Exchanges.)
Government and Business
The British East India Company was an exception because it was associated with
the ascendant British government and acted like a nation, having an army unto
itself. When China tried to stop Britain's illegal importation of opium into
the country, the army of the British East India Company beat the country into
submission, thus keeping the opium channels open and securing more free trading
ports. Even when the charter expired, the ultra-wealthy company bought up
controlling interests in any company that sought capital to compete with it.
The company and the British government grew almost indistinguishable from one
another as many of its investors were also the business and political pillars
of Britain. But the company, like the Roman Empire, suffered from its own
success. Despite years of huge revenue, it was teetering on the edge of
bankruptcy when its shoddy administration of countries under its imperial rule
caused famines and labor shortages that the company lacked capital to cover.
The corruption within the company led it to try and make up the difference by
tightening its monopoly on Indian tea and driving the prices up. This
contributed to the Boston Tea Party and added to the fervor that lead to the
American Revolution. (To learn more see, What is the history behind today's
bankruptcy laws?)
Death of a Double Centenarian
The British government then formalized its relationship with the British East
India Company by taking it over in a series of acts and regulations. The
government took over the administration of the company's colonies, but modeled
its civil service in much the same way and, in many cases, with the very same
people. The main difference was that the colonies were now part of the United
Kingdom and their revenues flowed into government coffers instead of to the
company's. The company maintained some of its privileges by managing the tea
trade for a few more decades, but it became a toothless lion lounging at the
heels of the British parliament, which began stripping the company of all its
charters, licenses and privileges from 1833 to 1873. In 1874, the British East
India Company finally dissolved.
Conclusion: Sunset of the British Sun
Much of the economic prosperity enjoyed by England from the 1600s to the early
1900s was due to the one-way trading systems that the British East India
Company imposed on colonies. The goods from the American colonies, for example,
were in raw forms that were processed in English factories and sold back at a
premium. It is hard to say the monopoly created the British Empire, but it
certainly sustained it. And, although it was claimed that the sun never set on
the British Empire, it did. The colonies proved to be the clouds that covered
the British sun as they - long sufferers underneath imperialistic monopolies -
emerged to create monopolies of a scale that appalled even the British.
by Andrew Beattie
Andrew Beattie has spent most of his career writing, editing and managing Web
content in all its many forms. He is especially interested in the future of
search and the application of analytics to the business world. In addition to
being a long-time contributor to Investopedia.com, Andrew has been working on
ForexDictionary.com.