Daniel Brockman: The Eric Tetralogy: 1: Rents and Monops

A subsaga of FTC the Fairy Tale of Capitalism

FTC provides a way to explain our circumstance.

Eric of Pomerania 1381-1459 (Public Domain)

Long before the Old Ones, the sorcerer of strategy selected her great-nephew Eric of Pomerania to be King of Denmark, Norway and Sweden. His future held trials and adventures and triumphs, wars, the Monop shifting the benefits of trade to enhance the Firehose Up, the eventual grandeur of his kingdom, the woman he would marry, the woman he would love, his flight from the throne, and piracy. In his Wikipedia portrait, he looks as though his lunch distressed his belly, and he was known for his troublesome temper. But he could be more handsome and charming than any Hollywood hero. Pope Pius II wrote “all women were drawn to him.”

What is the Firehose Up? What is a Monop? I’m glad you asked. Let’s start with what a Monop is, how it works, and where Monop Rents come from.

A Monop is a Monopoly or a Monopsony or a person who benefits from them. A marketplace having a single seller Monopoly has no competition among sellers. A Monopsony has no competition among buyers.

King Eric established a long lasting Monop, so we know Monops existed. But the Tales of the Old Ones give little attention to Monops. In their minds, monops didn’t exist, except possibly as transient or trivial phenomena of no importance. There were many competing buyers and sellers who quickly undercut any advantage gained from a strong market presence. Monops couldn’t endure.

In a trade, each of two parties gives up something they want less in exchange for something they want more. When a grocer gives up a tomato in exchange for money, the counterparty gives up money in exchange for a tomato. The buyer wants the tomato more than the money which he can’t eat, while the grocer prefers money because she has more tomatoes than she can eat, and she has many uses for money. Each party gets a benefit from the trade, the difference between the thing wanted more and the thing wanted less, a kind of profit for each party.

The manager of the only factory in a small town is the single buyer in a Monopsony. She gives up money in exchange for a Worker’s Labor. Generally, considering trades of all kinds, nothing distinguishes the buyer from the seller, except that the seller receives money. Monopoly and Monopsony have the same essential character.

The Monop controls something scarce. The Monop can give up the scarce item in exchange. No one else can. Since the counterparty can’t get the item from anyone else, the Monop dictates the price. A Monop grocer can price the tomatoes so high that most customers choose cheap beans instead. A Monop employer can pay the employees just enough to meet immediate necessities if they get second jobs somewhere. In practice, some traders dominate their markets, participating in 60% or 80% of the transactions, with nearly the same influence they would have with 100% dominance. They have much of the same market character as Monops, and we call them Monops, too.

Monops figure but tangentially in the Old Ones’ Tales, specifically in Ricardo’s parables of Rent. Here’s how it goes in FTC.

The farmer’s role is that of Ricardo’s Capitalist who brings investment, her own or that of her investors, and the Capitalist’s return is the profit. The farmer-Capitalist may hire Workers or perform some of the Labor role herself. For an insignificant ceremonial permit fee to the landlord, a shilling or so in Ricardo’s time, the landlord can claim the land as property, and with the fee receipt the farmer can claim permission to use the land.

Good land becomes scarce when demand for product rises, and the best land can’t produce enough. Then farmers cultivate the second-best land. The second-best land produces less crop than the best land. Now competing landlords of the best land can collect Rent, in addition to the ceremonial fee, from competing farmers, but the second-best land gets zero Rent, just the ceremonial fee. (The farmer and landlord don’t know the future market price nor the quantity of harvest, so they agree to Rent as a fraction of crop at the time the plow hits the dirt.)

If the competing landlords ask too much Rent, then the competing farmer tenant moves cultivation from the best land to second-best land. If the profit from the second-best land equals the profit from the best land, then there’s no difference to the farmer between cultivating the best land and the second-best land. The landlord can collect Rent until the farmer comes to the point of no difference, but not more.

That is, the competing farmer will trade some portion of the crop as Rent to the landlord, until the Rent reduces the farmer’s profit from farming a unit of the best land almost to the level of the profit of farming a unit of the second-best land. In this case, the scarcity of the best land (and property rights) gives one party the ability to transfer some benefits of the trade to herself from the counterparty. The ability to shift the benefits of the trade is the key character of Rent.

The marketplace demand for product creates Rent. If demand for product grows to exceed the capacities of the best land and the second-best land, then the competing farmers will cultivate the third-best land. Only then can competing landlords demand Rent on the second-best land based on the market value of product from the third-best land. Landlords do nothing to produce Rent other than collect the ceremonial fee that maintains their property rights to the Land.

Ricardo’s parable of Rent ends here with competing landlords and farmers and no Monops. We elaborate on implications of Monops without the wisdom of the Old Ones.

The competing landlord can’t get more Rent than the neighboring landlord for land of the same quality, for the competing farmer chooses the landlord with the lesser Rent. But a farmer with a Monop landlord has no choice. No competition from other landlords constrains the Monop landlord. The Monop can enlarge her benefit from the trade by shifting to herself some of the farmer’s benefit from the trade.

Despite paying high Rent to the Monop landlord, the farmer must maintain her level of profit, her benefit from the trade, to continue in business, lest her investors take their Capital to other ventures. The farmer may try raising the price she asks for product in the marketplace. If buyers of product will pay sufficiently more, the farmer restores her profit by getting some of the benefit of trade from the buyers of product. The benefit of the marketplace trade shifts via the trades to the Monop landlord who collects the shifted benefit as Rent. And if the buyers of product won’t pay the higher price, then the Monop landlord can’t get more Rent, because the farmer can’t pay. Characteristic of Monop Rents, the maximum price the Monop can ask exceeds the maximum under competition. Another definition, succinct though pivoting on “dominance”, is Paul Krugman’s “monopoly rents: profits that don’t represent returns on investment, but instead reflect the value of market dominance.”

Workers taught their children that competing buyers and sellers bring happiness for everyone.

King Eric collected Monop Rents. Eric, with his shore batteries and ships, controlled passage of merchant vessels through the Oresund and the Denmark Straits. Eric increased the benefit of the trade to himself by reducing the benefit of the trade to the masters of the vessels. The next episode of FTC will be an author's note, after which we’ll follow with the story of the Tea Party and more about King Eric. Oh yes, and the Firehose Up.

I'm most grateful to my friends who gave me the benefits of their comments on prepublication drafts, their corrections, their advice and their encouragements.

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Images for the Eric Tetralogy

W.D. Cooper, “Boston Tea Party”, published in “The History of North America” ( 1789, E. Newbury, London https://en.wikipedia.org/wiki/Tea_Act#/media/File:Boston_Tea_Party-Cooper.jpg, Public Domain in USA, copyright may apply in Switzerland, Mexico, Germany, Mainland China and Canada)

Nathaniel Currier, “The Destruction of Tea at Boston Harbor” (1846, Public Domain, https://commons.wikimedia.org/wiki/File:Boston_Tea_Party_Currier_colored.jpg)

“Elizabeth I of England” (circa 1590, National Maritime Museum, Greenwich, England, Creative Commons Non-Commercial Share with Attribution, http://collections.rmg.co.uk/collections/objects/14154.html)

“Eric VII of Denmark” (a.k.a. Eric of Pomerania, Southerly Clubs of Stockholm Sweden, Public Domain https://en.wikipedia.org/wiki/Eric_of_Pomerania#/media/File:Eric_VII_the_Pomeranian_of_Denmark_(photo_2010)_crop.jpg)

William Downman, “Flag of the British East India Company” from “Notebook” (1685, Public Domain, https://commons.wikimedia.org/w/index.php?curid=4118976)

Hans Peter Hansen, "Coronation of Eric of Pomerania" (1884, Wikimedia, Public Domain, https://commons.wikimedia.org/wiki/File%3AErik_af_Pommern.jpg)

Nicholas Hilliard, “Portrat eines Junglings unter Rosen, Robert Devereux 2nd Earl of Essex” (circa 1588, Collection of the Victoria and Albert Museum, Public Domain, Wikimedia, https://commons.wikimedia.org/wiki/File:Nicholas_Hilliard_013.jpg)

J. P. Morgan portrait, (Wikipedia, Public Domain, https://en.wikipedia.org/wiki/J._P._Morgan)

Oresund Map (Karte des Öresund / Quelle: Meyers Konversationslexikon von 1888, Band 10, Seite 61, Public Domain, https://commons.wikimedia.org/wiki/File:Karte_der_Umgebung_von_Kopenhagen.jpg)

“Theodore Newton Vail” (circa 1918, Library of Congress, Wikipedia, Public Domain, https://commons.wikimedia.org/wiki/File:Theodore_Newton_Vail_circa_1918_cropped.png)

Sources for the Eric Tetralogy

AT&T