On some level, almost everyone knows that monopolies are bad. They eliminate competition, which means that the person or group of people providing you a service can charge almost anything, and you have little choice but to buy it, even if the product is complete junk. What most people don't understand is what a monopoly actually is, and why you never see a good one. You'd think that if enough spaghetti was thrown at the wall, some would stick, right? As we'll see, the truth is counterintuitive.

What is a monopoly?

When you hear the word "monopoly," what do you think of? The Parker Brothers board game? The infamous "robber-barons" of old? Your local cable or wireless provider? Most people assume that a monopoly is one of the above, but in reality, the definition is this:

"the exclusive right or privilege granted to a person, company, etc, by the state to purchase, manufacture, use, or sell some commodity or to carry on trade in a specified country or area."

That's right. In order to have a true monopoly, you must have total and complete control of an industry, and represent 100% of the market. 99% doesn't cut it. As big as Microsoft or your local cable company is, they aren't truly "monopolies" by definition,. As long as someone can at least attempt to enter the market, there is no monopoly. The only way to have a monopoly is to enforce one through law. This, of course, requires force to be used to punish potential newcomers.

The one exception to this rule is the idea of a "natural monopoly," which is a situation in which there's only one provider of a good or service not because others are threatened if they try to compete, but because no one else wants to, or it isn't economically worth their while to try. Alcoa was a natural monopoly in some specific parts of the metals refining industry for a while, simply because they could do it so cheaply and so well that no one could do it better. They were later forced by law to allow other players due to a misapplication of anti-trust law.

Why don't monopolies work?

Monopolies don't work for several reasons, but most importantly, they can't know everything. This sounds obvious, but think about it. Organizations are simply groups of people who come together to make decisions and carry out actions. Think about your own life. Do you know everything about every aspect of your job? Of your family life? How much do know about the life of your next door neighbor, let alone some guy in Singapore? No one can know everything, but fortunately we don't have to, as long as there is competition and a price system.

Competition matters because it allows everyone to influence how resources are allocated. Without this, you get shortages of some products, and hugely wasteful overstocks of other products. No one decision maker knows everything about every product out there in the world, but he can make reasonable decisions as long as there's a system of trade that allows for prices to rise and fall based on consumer demand. Prices help people decide what their priorities are, and how much of something (if any) they want.

Take a simple pencil. Do you think you know where it came from, or how many resources went into making it? Spoiler alert: you don't. Think about it. The pencil is made of graphite, wood, paint, metal, and rubber, and we're not talking about all the other adhesives and dyes, etc. Let's keep it simple and just take the graphite. The graphite had to be put into the pencil by a machine, which was made by another machine, that was probably made of parts made by many other machines, and so on, almost to infinity. Then we have to go back and do the same thing for the wood, and then for the paint, and so on.

To really get it right, we'd have to go through that whole process for every single component of every single product every single time. And there are millions of them. And they're always changing. And even if we did all that, we still don't really know how much everyone else will care about our product in relation to other products, so we can't really know what to charge for it.

This is the issue command economies like the Soviet Union had, and certain industries in America today have. When there's no price system, or the price is fixed or substantially influenced behind the scenes by law, it's nearly impossible to figure out what to produce, let alone in what quantities. The only way to really do it, is to let producers and consumers base their decisions on how much they're willing to pay.

Sometimes self interest is a good thing.