The unforgivable cost of state-protected monopolies

“A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly understocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate,” wrote Adam Smith in 1776.

On 31 January 1954, Edwin Howard Armstrong sat alone in his New York City apartment.  His wife, Marion, had left him and he felt that his suffering had become unendurable.  “I would give my life to turn back to the time when we were so happy and free,” he wrote. “May God help you and have mercy on my soul.”  With that, he dressed in his coat and hat, jumped out of the thirteenth floor window, and plunged to his death.

Nowadays, Armstrong is known as the man who invented commercial FM radio.  Between that invention and his death lies a tale of epic tragedy and outrageous brutality.

In November 1934, Armstrong introduced his FM system of broadcast, taking on the then ubiquitous AM system.  Anyone who insists on listening to AM knows that it is a noisy channel.  It is fine for voice, but listening to music is a challenge.  Armstrong’s system required less broadcast power than AM and, on hearing a jazz recording, one journalist remarked, “If the audience of fifty engineers had shut their eyes they would have believed the jazz band was in the same room. There were no extraneous sounds... [This is] one of the most important radio developments since the first earphone crystal sets were introduced.”

America’s monopoly broadcast company then was the Radio Corporation of America (RCA).  They at first ignored Armstrong, who had offered to sell them the technology, and then they started to actively work against him.

Working with the government-regulator, the Federal Communications Commission (FCC), RCA had the FM broadcast range pushed up from 42-50MHZ to 88-108MHZ requiring massive capital outlays to boost the power of broadcast signals.  This, for no other reason, is the range you’ll find all FM radio in today.

Then, once they had bankrupted Armstrong, RCA simply stole his patents to use in their new television broadcasts.  The courts protected RCA and awarded them a patent.  Armstrong fought as hard as he could but lost battle after battle.  It wouldn’t be until the 1960s – 30 years after FM’s invention – that Armstrong’s patents would be reinstated and FM would finally start to assert itself in the market.  Even so, it wasn’t until the 1980s that the majority of motor cars came equipped with FM receivers.

This is the unforgiveable cost of state-protected monopolies, of the abuse that comes with unaccountable and sweeping authority.

The cost is felt in innovation, investment, new job creation and in the general optimism required by innovators in order to work.  When governments pick winners they may help out their most important lobbyists, but they do a disservice to everyone else.