Why does one of the world's most successful entrepreneurs believe monopolies are the key to human progress?

PayPal and Palantir co-founder, early investor in companies such as Facebook, SpaceX and LinkedIn and outspoken libertarian Peter Thiel has a new book out full of insights on business -- and applicable to life and society as a whole -- that he has accumulated from his time as an entrepreneur and venture capitalist.

One of the particularly counterintuitive arguments in his fascinating new, "Zero to One: Notes on Startups, or How to Build the Future," is that monopolies are good for both monopolists and consumers alike.

Peter Thiel delivers a speech at SXSW in 2013, titled "You Are Not a Lottery Ticket." (Image Source: YouTube screengrab)

Contrary to the popular notion that a monopoly hurts society by killing competition and "gouging" consumers, Thiel argues that in a free economy, monopolies are actually essential to human advancement, with "the history of progress...a history of better monopoly businesses replacing incumbents."

Defining a monopoly as a company "so good at what it does that no other firm can offer a close substitute," excluding "illegal bullies or government favorites," Thiel writes:

A monopoly like Google...Since it doesn't have to worry about competing with anyone...has wider latitude to care about its workers, its products, and its impact on the wider world...Monopolists can afford to think about things other than making money; non-monopolists can't. In perfect competition a business is so focused on today's margins that it can't possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.

Stated differently, Thiel believes that by dominating a market, a company can afford to focus less on quarterly targets and more on ambitious long-term (and thus riskier) plans, whose benefits will take longer to accrue but may ultimately prove far more revolutionary. This incidentally, echoes the insights of Austrian economists, who speak to the strength of businesses and economies as a whole comprised of individuals with longer "time preferences," not to mention the primacy of entrepreneurs to economic growth.

Thiel continues:

[instory-book ISBN="9780804139298"]

In a static world, a monopolist is just a rent collector. If you corner the market for something, you can jack up the price; others will have no choice but to buy from you. Think of the famous board game: deeds are shuffled around from player to player, but the board never changes. There's no way to win by inventing a better kind of real estate development.

...But the world we live in is dynamic: it's possible to invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren't just good for the rest of society; they're powerful engines for making it better.

Speaking to the benefits of patents:

Even the government knows this [the benefits of monopolies]: that's why one of its departments works hard to create monopolies (by granting patents to new inventions) even though another part hunts them down (by prosecuting antitrust cases). It's possible to question whether anyone should really be awarded a legally enforceable monopoly simply for having been the first to think of something like a mobile software design. But it's clear that something like Apple's monopoly profits from designing, producing, and marketing the iPhone were the reward for creating greater abundance, not artificial scarcity: customers were happy to finally have the choice of paying high prices to get a smartphone that just works.

Moreover, Thiel asserts that monopolies not only create abundance, but innovation:

[sharequote align="center"]"[T]he history of progress is a history of better monopoly businesses replacing incumbents"[/sharequote]

The dynamism of new monopolies itself explains why old monopolies don't strangle innovation. With Apple's iOS at the forefront, the rise of mobile computing has dramatically reduced Microsoft's decades-long operating system dominance. Before that, IBM's hardware monopoly of the '60s and '7y0s was overtaken by Microsoft's software monopoly. AT&T had a monopoly on telephone service for most of the 20th century, but now anyone can get a cheap cell phone plan from any number of providers. If the tendency of monopoly businesses were to hold back progress, they would be dangerous and we'd be right to oppose them. But the history of progress is a history of better monopoly businesses replacing incumbents.

Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and to finance the ambitious research projects that firms locked in competition can't dream of.

Thiel concludes, echoing the sentiments of George Gilder in his groundbreaking "Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing our World":

...it's worth recalling that the long-run equilibrium predicted by 19th-century physics [and applied by economists] was a state in which all energy is evenly distributed and everything comes to rest--also known as the heat death of the universe. Whatever your views on thermo-dynamics, it's a powerful metaphor: in business, equilibrium means stasis, and stasis means death. If your industry is in a competitive equilibrium, the death of your business wouldn't matter to the world; some other undifferentiated competitor will always be ready to take your place.

Perfect equilibrium may describe the void that is most of the universe. It may even characterize many businesses. But every new creation takes place far from equilibrium. In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.

Tolstoy opens Anna Karenina by observing: "All happy families are alike; each unhappy family is unhappy in its own way." Business is the opposite. All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.

 

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