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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\u2019t dream of.<\/p>\n\n\n\n
So why are economists obsessed with competition as an ideal state? It\u2019s a relic of history. Economists copied their mathematics from the work of 19th-century physicists: they see individuals and businesses as interchangeable atoms, not as unique creators. Their theories describe an equilibrium state of perfect competition because that\u2019s what\u2019s easy to model, not because it represents the best of business. But it\u2019s worth recalling that the long-run equilibrium predicted by 19th-century physics was a state in which all energy is evenly distributed and everything comes to rest\u2014also known as the heat death of the universe. Whatever your views on thermodynamics, it\u2019s 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 won\u2019t matter to the world; some other undifferentiated competitor will always be ready to take your place.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
Tolstoy opens Anna Karenina by observing: \u201cAll happy families are alike; each unhappy family is unhappy in its own way.\u201d 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.<\/p>\n\n\n\n