Chapter 10—Monopoly and Competition
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10
MONOPOLY
AND COMPETITION
1. The Concept of
Consumers’ Sovereignty
A. Consumers’ Sovereignty versus
Individual Sovereignty
We have seen that in the free market economy people
will tend to produce those goods most demanded by the consumers.
Some
economists have termed this system “consumers’
sovereignty.” Yet there is no compulsion about this. The
choice is purely an independent one by the producer; his dependence on
the consumer is purely voluntary, the result of his own choice for the
“maximization” of utility, and it is a choice that
he is free to revoke at any time. We have stressed many times that the
pursuit of monetary return (the consequence of consumer demand) is
engaged in by each individual only to the extent that other
things are equal. These other things are the individual
producer’s psychic valuations, and they may counteract
monetary influences. An example is a laborer or other factor-owner
engaged in a certain line of work at less monetary return than
elsewhere. He does this because of his enjoyment of the particular line
of work and product and/or his distaste for other alternatives. Rather
than “consumers’ sovereignty,” it would
be more accurate to state that in the free market there is sovereignty
of the individual: the individual is sovereign over his own
person and actions and over his own property.
This may
be termed individual self-sovereignty. To earn a
monetary return, the individual producer must satisfy demand, but the
extent to which he obeys this expected monetary return, and the
extent to which he pursues other, nonmonetary factors, is
entirely a matter of his own free choice.
The term
“consumers’ sovereignty” is a typical
example of the abuse, in economics, of a term
(“sovereignty”) appropriate only to the political
realm and is thus an illustration of the dangers of the application of
metaphors taken from other disciplines.
“Sovereignty” is the quality of ultimate
political power; it is the power resting on the use of violence. In a
purely free society, each individual is sovereign over his own
person and property, and it is therefore this self-sovereignty which
obtains on the free market. No one is
“sovereign” over anyone else’s actions or
exchanges. Since the consumers do not have the power to coerce
producers into various occupations and work, the former are not
“sovereign” over the latter.
B. Professor Hutt and Consumers’
Sovereignty
The
metaphorical shibboleth of “consumers’
sovereignty” has misled even the best economists. Many
writers have used it as an ideal with which to contrast the allegedly
imperfect free- market system. An example is Professor W.H.
Hutt of the University of Cape Town, who has made the most
careful defense of the concept of consumers’ sovereignty.
Since he
is the originator of this concept and his use of the term is widespread
in the literature, his article is worth particular attention.
It will be used as the basis for a critique of the concept of
consumers’ sovereignty and its implications for the problems
of competition and monopoly.
In the
first part of his article, Hutt defends his concept of
consumers’ sovereignty against the criticism that he
has neglected the desires of producers. He does
this by asserting that if a producer desires a means
as an end in itself, then he is
“consuming.” In this formal
sense, as we have seen, consumers’ sovereignty, by
definition, always obtains. Formally, there is nothing wrong with such
a definition, for we have stressed throughout this book that an
individual evaluates ends (consumption) on his value scale and that his
valuation of means (for production) is dependent upon the former. In
this sense, then, consumption always rules production.
But this
formal sense is not very useful for analyzing the situation on
the market. And it is precisely the latter sense
that Hutt and others employ. Thus, suppose producer A withholds his
labor or land or capital service from the market. For whatever
reason, he is exercising his sovereignty over his person and property.
On the other hand, if he supplies them to the market, he is, to the
extent that he aims at monetary return, submitting himself to the
demands of the consumers. In the aforementioned general sense,
“consumption” rules in any case. But the critical
question is: which “consumer”?
The market consumer of exchangeable goods who buys these goods
with money, or the market producer of exchangeable goods who
sells these goods for money? To answer this question, it is necessary
to distinguish between the “producer of exchangeable
goods” and the “consumer of exchangeable
goods,” since the market, by definition, can deal only in
such goods. In short, we can designate people as
“producers” and as “consumers,”
even though every man must act as a consumer, and every man must also
act, in another context, as a producer (or as the receiver of
a gift from a producer).
Making
this distinction, we find that, contrary to Hutt, each individual has self-sovereignty
over his person and property on the free market. The producer, and the
producer alone, decides whether or not he will keep his property
(including his own person) idle or sell it on the market for
money, the results of his production then going to the consumers in
exchange for their money. This decision—concerning how much
to allocate to the market and how much to withhold—is the
decision of the individual producer and of him alone.
Hutt
implicitly recognizes this, however, since he soon shifts his argument
and begins inconsistently to hold up “consumers’
sovereignty” as an ethical ideal against which the
activities of the free market are to be judged.
Consumers’ sovereignty becomes almost an Absolute Good, and
any action by producers to thwart this ideal is considered as little
less than moral treason. Wavering between consumers’
sovereignty as a necessary fact and the
contradictory concept of consumers’ sovereignty as an ideal
that can be violated, Hutt attempts to establish various criteria to
determine when this sovereignty is being
violated. For example, he asserts that when a producer withholds his
person or property out of a desire to use it for enjoyment as
a consumers’ good, then this is a legitimate act,
in keeping with rule by the consumer. On the other hand, when the
producer acts to withhold his property in order to attain more
monetary income than otherwise (presumably, although Hutt does not
state this, by taking advantage of an inelastic demand curve
for his product), then he is engaging in a vicious infringement on the
consumers’ will. He may do so by acting to restrict
production of his own personal product, or, if he makes the same
product as other producers, by acting in concert with them to restrict
production in order to raise the price. This is the doctrine of
monopoly price, and it is this monopoly price that is allegedly the
instrument by which producers pervert their rightful function.
Hutt
recognizes the enormous difficulty of distinguishing among the
producer’s motives in any concrete case. The individual who
withholds his own labor may be doing so in order to obtain
leisure; and even the owner of land or capital may be
withholding it in order to derive, say, an aesthetic enjoyment from the
contemplation of his unused property. Suppose, indeed, that
there is a mixture of motives in both cases. Hutt
is definitely inclined to solve these difficulties by not
giving the producer the benefit of the doubt, particularly in the case
of property.
But the
difficulty is far greater than Hutt imagines. Every individual
producer is always engaged in an attempt to maximize his
“psychic income,” to arrive at the highest place on
his value scale. To do so, he balances on this scale monetary income
and various nonmonetary factors, in accordance with his particular
valuations. Let us take the producer first as a seller of
labor. In judging how much of his labor to sell and at what
price, the producer will take into consideration the monetary
income to be gained, the psychic return from the type of work and the
“working conditions,” and the leisure
forgone, balancing them in accordance with the operation of
his various marginal utilities. Certainly, if he can earn a
higher income by working less, he will do so, since he also gains
leisure thereby. And the question arises: Why is this immoral?
Moreover,
(1) it is impossible, not simply impracticable, to
separate the leisure from monetary considerations here, since
both elements are involved, and only the person himself will know the
intricate balancing of his own valuations. (2) More important,
this act does not contravene the truth that the
producer can earn money only by serving the consumers. Why has he been
able to extract a “monopoly price” through
restricting his production? Only because the demand for his
services (either directly by consumers or indirectly from them
through lower-order producers) is inelastic, so
that a decreased production of the good and a higher price will lead to
increased expenditure on his product and therefore increased
income for him. Yet this inelastic demand schedule is purely the result
of the voluntary demands of the consumers. If the
consumers were really angry at this “monopolistic
action,” they could easily make their demand curves elastic
by boycotting the producer and/or by increasing
their demands at the “competitive”
production level. The fact that they do not do so signifies their
satisfaction with the existing state of affairs and demonstrates that
they, as well as the producer, benefit from the resulting voluntary
exchanges.
What about
the producer in his capacity as a seller of property—the main
target of the “anti-monopoly-price” school? The
principle, first of all, is virtually the same. Individual producers
may restrict the production and sale of their land or capital goods,
either individually or in concert (by means of a
“cartel”) in order to increase their
expected monetary incomes from the sale. Once again, there is nothing
distinctively immoral about such action. The producers, other things
being equal, are attempting to maximize the monetary income from their
factors of production. This is no more immoral than any other
attempt to maximize monetary income. Furthermore, they can do
so only by serving the consumers, since,
once again, the sale is voluntary on the part of both producers and
consumers. Again, such a “monopoly price,” to be
established either by one individual or by individuals
co-operating together in a cartel, is possible only if the
demand curve (directly or indirectly of the consumers) is inelastic,
and this inelasticity is the resultant of the purely
voluntary choices of consumers in their maximization of satisfaction.
For this “inelasticity” is simply a label
for a situation in which consumers spend more money on a good at a
higher than at a lower price. If the consumers were really opposed to
the cartel action, and if the resulting exchanges really hurt them,
they would boycott the “monopolistic” firm or
firms, they would lower their purchasing so that the demand
curve became elastic, and the firm would be forced
to increase its production and reduce its price again. If the
“monopolistic price” action had been taken by a
cartel of firms, and the cartel had no other advantages for
rendering production more efficient, it would then have to
disband, because of the now demonstrated elasticity of the
demand schedule.
But, it
may be asked, is it not true that the consumers would prefer
a lower price and that therefore achievement of a
“monopoly price” constitutes a
“frustration of consumers’
sovereignty”? The answer is: Of course, consumers
would prefer lower prices; they always would. In fact, the lower the
price, the more they would like it. Does this mean that the ideal price
is zero, or close to zero, for all goods, because this would represent
the greatest degree of producers’ sacrifice to
consumers’ wishes?
In their
role as consumers, men would always like lower prices for their
purchases; in their capacity as producers, men always like higher
prices for their wares. If Nature had originally provided a
material Utopia, then all exchangeable goods would be free for the
taking, and there would be no need for any labor to earn a money
return. This Utopia would also be “preferred,” but
it too is a purely imaginary condition. Man must necessarily work
within a given real environment of inherited land
and durable capital.
In this
world, there are two, and only two, ways to settle what the prices of
goods will be. One is the way of the free market, where prices are set
voluntarily by each of the participating individuals. In this
situation, exchanges are made on terms benefiting all the
exchangers. The other way is by violent intervention in the
market, the way of hegemony as against contract. Such hegemonic
establishment of prices means the outlawing of free exchanges and the
institution of exploitation of man by man—for exploitation
occurs whenever a coerced exchange is made. If the free-market
route—the route of mutual benefit—is adopted, then
there can be no other criterion of justice than the
free-market price, and this includes alleged
“competitive” and
“monopoly” prices, as well as the actions
of cartels. In the free market, consumers and producers adjust their
actions in voluntary cooperation.
In the
case of barter, this conclusion is evident; the various
producer-consumers either determine their mutual exchange rates
voluntarily in the free market, or else the ratios are set by
violence. There seems to be no reason why it should be more or
less “moral,” on any grounds, for the horse-price
of fish to be higher or lower than it is on the free market, or, in
other words, why the fish-price of horses should be lower or higher.
Yet it is no more evident why any money price should be lower or higher
than it is on the market.
2.
Cartels and Their Consequences
A. Cartels and “Monopoly Price”
But is not
monopolizing action a restriction of production, and is not this
restriction a demonstrably antisocial act? Let us first take what would
seem to be the worst possible case of such action: the actual
destruction of part of a product by a cartel. This is done to take
advantage of an inelastic demand curve and to raise the price to gain a
greater monetary income for the whole group. We can visualize, for
example, the case of a coffee cartel burning great quantities of coffee.
In the
first place, such actions will surely occur very seldom. Actual
destruction of its product is clearly a highly wasteful act, even for
the cartel; it is obvious that the factors of production which the
growers had expended in producing the coffee have been spent in vain.
Clearly, the production of the total quantity of coffee itself has
proved to be an error, and the burning of coffee is only the aftermath
and reflection of the error. Yet, because of the uncertainty
of the future, errors are often made. Man could labor and invest for
years in the production of a good which, it may turn out, consumers
hardly want at all. If, for example, consumers’
tastes had changed so that coffee would not be demanded by anyone,
regardless of price, it would again have to be destroyed, with or
without a cartel.
Error is
certainly unfortunate, but it cannot be considered immoral or
antisocial; nobody aims deliberately at error.
If coffee
were a durable good, it is obvious that the cartel would not
destroy it, but would store it for gradual future sale to
consumers, thus earning income on the “surplus”
coffee. In an evenly rotating economy, where errors are barred
by definition, there would be no destruction, since optimum stocks for
the attainment of money income would be produced in advance. Less
coffee would be produced from the beginning. The waste
lies in the excessive production of coffee at the expense of
other goods that could have been produced. The waste does not
lie in the actual burning of the coffee. After the production
of coffee is lowered, the other factors which would have gone into
coffee production will not be wasted; the other land, labor, etc., will
go into other and more profitable uses. It is true that excess specific
factors will remain idle; but this is always the fate of specific
factors when the realities of consumer demand do not sustain
their use in production. For example, if there is a sudden
dwindling of consumer demand for a good, so that it becomes
unremunerative for labor to work with certain specialized machines,
this “idle capacity” is not a
social waste, but is rather socially useful. It is proved an error to
have produced the machines; and now that the machines are
produced, working on them turns out to be less profitable than working
with other lands and machines to produce some other result. Therefore,
the economical step is to leave them idle or perhaps to transform their
material stuff into other uses. Of course, in an errorless economy, no
excessive specific capital goods will be produced.
Suppose,
for example, that before the coffee cartel went into operation, X
amount of labor and Y amount of land co-operated to
produce 100 million pounds of coffee a year. The coffee cartel
determined, however, that the most remunerative production was 60
million pounds and therefore reduced annual output to this level. It
would have been absurd, of course, to continue wasteful production of
100 million pounds and then to burn 40 millions. But what of the now
surplus labor and land? These shift to the production, say, of 10
million pounds of rubber, 50,000 hours of service as jungle guides,
etc. Who is to say that the second structure of production, the second
allocation of factors, is less “just” than the
first? In fact, we may say it is more just, since
the new allocation of factors will be more profitable, and hence more value-productive,
to consumers. In the value sense, then, overall production has now expanded,
not contracted. It is clear we cannot say that production, overall, has
been restricted, since output of goods other than
coffee has increased, and the only comparison between the decline of
one good and the increase in another must be made in these broad
valuational terms. Indeed, the shifting of factors to rubber
and jungle guidance no more restricts coffee
production than a previous shift of factors to coffee restricted
the production of the former goods.
The whole
concept of “restricting production,” then, is a
fallacy when applied to the free market. In the real world of
scarce resources in relation to possible ends, all
production involves choice and the allocation of factors to serve the
most highly valued ends. In short, the production of any
product is necessarily always
“restricted.” Such
“restriction” follows simply from the universal
scarcity of factors and the diminishing marginal utility of any one
product. But then it is absurd to speak of
“restriction” at all.
We cannot,
then, say that the cartel has “restricted
production.” After the final allocation has
eliminated the producer’s error, the
cartel’s action will effect a maximization of
producers’ incomes in the service of the consumers, as do all
other free-market allocations. This is the result that people on the
market tend to attain, in consonance with their skill as forecasting
entrepreneurs, and this is the only situation in which man as
consumer harmonizes with man as producer.
It follows
from our analysis that the producers’ original
production of 100 million pounds was an unfortunate error,
later corrected by them. Instead of being a vicious restriction of
production to the detriment of the consumers, the cutback in
coffee production was, on the contrary, a correction of the previous
error. Since only the free market can allocate resources to
serve the consumer, in accordance with monetary profitability, it
follows that in the previous situation, “too much”
coffee and “too little” rubber, jungle guide
service, etc., were being produced. The cartel’s
action, in reducing the production of coffee and causing an increase in
the production of rubber, jungle guiding, etc., led to an increase
in the power of the productive resources to satisfy consumer
desires.
If there
are anticartelists who disagree with this verdict and believe that the previous
structure of production served the consumers better, they are
always at perfect liberty to bid the land, labor, and capital factors
away from the jungle-guide agencies and rubber producers, and
themselves embark on the production of the allegedly
“deficient” 40 million pounds of coffee. Since they
are not doing so, they are hardly in a position to attack the existing
coffee producers for not doing so. As Mises succinctly stated:
Certainly those engaged in the production of steel
are not responsible for the fact that other people did not
likewise enter this field of production. . . . If somebody is to blame
for the fact that the number of people who joined the voluntary civil
defense organization is not larger, then it is not those who have
already joined but those who have not.
The position of the anticartelists implies that
someone else is producing too much of some other
product; yet they offer no standards except their own arbitrary decrees
to determine which production is excessive.
Criticism
of steel owners for not producing “enough” steel or
of coffee growers for not producing “enough” coffee
also implies the existence of a caste system, whereby a certain caste
is permanently designated to produce steel, another caste to
grow coffee, etc. Only in such a caste society would such
criticism make sense. Yet the free market is the reverse of the caste
system; indeed, choice between alternatives implies mobility
between alternatives, and this mobility obviously holds for
entrepreneurs or lenders with money to invest in production.
Furthermore, as we have stated above, an inelastic demand curve is
purely the result of consumers’ choice. Thus, suppose that
100 million pounds of coffee have been produced and lie in stock, and a
group of growers jointly decide that a burning of 40 million pounds of
coffee will, say, double the price from one gold grain per pound to two
gold grains per pound, thus giving them a higher total income acting
jointly. This would be impossible if the growers knew that
they would be confronted with an effective consumer boycott at the
higher price. Further, consumers have another way, if
they so desire, to prevent destruction of the good. Various
consumers, acting either individually or jointly, could offer to
purchase the existing coffee at higher than present prices.
They could do this either because of their desire for coffee or because
of their philanthropic dismay at the destruction of a useful
good, or from a combination of both motives. At any rate, if they did
so, they would prevent the producers’ cartel from decreasing
the supply sold on the market. The boycott at a higher price and/or
increased offers at the lower price would change the demand curve and
render it elastic at the present stock level, thereby removing any
incentive or need for the formation of a cartel.
To regard
a cartel as immoral or as hampering some sort of consumers’
sovereignty is therefore completely unwarranted. And this is true even
in the seemingly “worst” case of a cartel that we
may assume is founded solely for
“restrictive” purposes, and where, as a result of
previous error and the perishability of product, actual
destruction will occur. If consumers really wish to prevent this
action, they need only change their demand schedules for the product,
either by an actual change in their taste for coffee or by a
combination of boycott and philanthropy. The fact that such a
development does not take place in any given circumstance signifies
that the producers are still maximizing their monetary income
in the service of the consumers—by a cartel action, as well
as by any other action. Some readers might object that, in offering
higher demands for existing stock, the consumers would be bribing the
producers, and that this constitutes an unwarranted extortion
on the part of the producers. But this charge is untenable. Producers
are guided by the goal of maximizing monetary income; they are not
extorting, but simply producing where their gains are at a maximum,
through exchanges concluded voluntarily by producers and
consumers alike. This is no more nor less a case of
“extortion” than when a laborer shifts from a
lower-paying to a higher-paying job or when an entrepreneur
invests in what he thinks will be a more rather than a less profitable
project.
It must be
recognized that once an error has been committed, as it had been in the
aforementioned situation, the rational course is not to bewail the
past, nor to attempt to “recover” historical costs,
but to make the best (ceteris paribus, the most
money) of the present situation. We recognize this when previously
produced machines or other capital goods face a loss of demand
for their product. In the production process, as we have seen, labor
energies work on natural and produced factors to arrive at the most
urgently demanded consumers’ goods. Since error is
inevitable, this process is bound to lead to a considerable
amount of “idle” capital goods at any given time.
Similarly, much original land area will remain idle because existing
labor has more profitable work to do on other lands. In short,
the “idle” coffee is the result of an error in
forecasting and should be no more shocking or reprehensible than
“idle capacity” in any other type of capital good.
Our
argument is just as applicable to a single firm producing a unique
product with an inelastic demand as it is to a cartel of firms. A
single firm, with inelastic demand for its product, could also destroy
part of its stock after committing a forecasting error. Our critique of
the “anti-monopoly-price” and
consumers’-sovereignty doctrines applies equally
well to such a case.
B. Cartels, Mergers, and Corporations
A common
argument holds that cartel action involves collusion.
For one firm may achieve a “monopoly price” as a
result of its natural abilities or consumer enthusiasm for its
particular product, whereas a cartel of many firms allegedly involves
“collusion” and
“conspiracy.” These expressions, however, are
simply emotive terms designed to induce an unfavorable response. What
is actually involved here is co-operation to
increase the incomes of the producers. For what is the essence of a
cartel action? Individual producers agree to pool their assets
into a common lot, this single central organization to make the
decisions on production and price policies for all the owners
and then to allocate the monetary gain among them. But is
this process not the same as any sort of joint partnership or the
formation of a single corporation? What happens when
a partnership or corporation is formed? Individuals agree to pool their
assets into a central management, this central direction to set the
policies for the owners and to allocate the monetary gains among them.
In both cases, the pooling, lines of authority, and allocation
of monetary gain take place according to rules agreed upon by all from
the beginning. There is therefore no essential difference
between a cartel and an ordinary corporation or partnership.
It might be objected that the ordinary corporation or partnership
covers only one firm, while the cartel includes an
entire “industry” (i.e., all firms producing a
certain product). But such a distinction does not necessarily hold.
Various firms may refuse to enter a cartel, while, on the other hand, a
single firm may well be a “monopolist” in the sale
of its particular unique product, and therefore it may also
encompass an entire “industry.”
The
correspondence between a co-operative partnership or
corporation—not generally considered
reprehensible—and a cartel is further enhanced when we
consider the case of a merger of various firms.
Mergers have been denounced as “monopolistic,” but
not nearly as vehemently as have cartels. Merging firms pool their
capital assets, and the owners of the individual firms now become part
owners of the single merged firm. They will agree on rules for the
exchange ratios of the shares of the different companies. If the
merging firms encompass the entire industry, then a merger is simply a
permanent form of cartel. Yet clearly the only difference between a
merger and the original forming of a single corporation
is that the merger pools existing capital goods assets, while
the original birth of a corporation pools money
assets. It is clear that, economically, there is little difference
between the two. A merger is the action of individuals with a
certain quantity of already produced capital goods, adjusting
themselves to their present and expected future conditions by
cooperative pooling of assets. The formation of a new company is an
adjustment to expected future conditions (before any specific
investment has been made in capital goods) by cooperative pooling of
assets. The essential similarity lies in the voluntary pooling of
assets in a more centralized organization for the purpose of increasing
monetary income.
The
theorists who attack cartels and monopolies do not recognize
the identity of the two actions. As a result, a merger is
considered less reprehensible than a cartel, and a single
corporation far less menacing than a merger. Yet an industry-wide
merger is, in effect, a permanent cartel, a permanent combination and
fusion. On the other hand, a cartel that maintains by
voluntary agreement the separate identity of each firm is by nature a
highly transitory and ephemeral arrangement and, as we shall see below,
generally tends to break up on the market. In fact, in many cases, a
cartel can be considered as simply a tentative step in the
direction of permanent merger. And a merger and the original
formation of a corporation do not, as we have seen,
essentially differ. The former is an adaptation of the size and number
of firms in an industry to new conditions or is the correction of a
previous error in forecasting. The latter is a de novo
attempt to adapt to present and future market conditions.
C. Economics, Technology, and the Size of the Firm
We do not
know, and economics cannot tell us, the optimum size of a firm in any
given industry. The optimum size depends on the concrete technological
conditions of each situation, as well as on the state of consumer
demand in relation to the given supply of various factors in this and
in other industries. All these complex questions enter into the
decisions of producers, and ultimately of consumers, concerning how
large the firms in various lines of production will be. In line with
consumer demand and with opportunity costs for the various
factors, factor-owners and entrepreneurs will produce in those
industries and firms in which they can maximize their monetary income
or profit (other psychic factors being equal). Since forecasting is the
function of entrepreneurs, successful entrepreneurs will
minimize their errors and hence their losses as well. As a result, any
existing situation on the free market will tend to be the most
desirable for the satisfaction of consumers’ demands
(including herein the nonmonetary wishes of the producers).
Neither
economists nor engineers can decide the most efficient size of a firm
in any situation. Only the entrepreneurs themselves can determine what
size of firm will operate most efficiently, and it is presumptuous and
unwarranted for economists or for any other outside observers to
attempt to dictate otherwise. In this and other matters, the wishes and
demands of the consumers are “telegraphed” through
the price system, and the resulting drive for maximum monetary income
and profits will always tend to bring about the optimum allocation and
pricing. There is no need for the external advice of economists.
It is
clear that when several thousand individuals decide not
to produce and own individual steel plants by themselves, but rather to
pool their capital into an organized corporation—which will
purchase factors, invest and direct production, and sell the product,
later allocating the monetary gains among the owners—they are
enormously increasing their efficiency. Compared to production
in hundreds of tiny plants, the quantity of production per given
factors will be greatly increased. The large firm will be able to
purchase heavily capitalized machinery and to finance better organized
marketing and distributing outlets. All this is quite clear when
thousands of individuals pool their capital into the establishment of a
steel firm. But why may it not be equally true when several
small steel firms merge into one large company?
It might
be replied that in the latter merger, particularly in the case of a
cartel, joint action is taken, not to increase efficiency, but solely
to increase income by restricting sales. Yet there is no way that an
outside observer can distinguish between a
“restrictive” and an efficiency-increasing
operation. In the first place, we must not think of the plant or
factory as being the only productive factors the efficiency of
which can increase. Marketing, advertising, etc., are also factors
of production; for “production” is not
simply the physical transformation of a product, but also
consists in transporting it and placing it into the hands of
users. The latter implies the expenses of informing the user about the
existence and nature of the product and of selling that
product to him. Since a cartel always engages in joint marketing, who
can deny that the cartel might render marketing more efficient? How,
therefore, can this efficiency be separated from the
“restrictive” aspect of the operation?
Furthermore,
technological factors in production can never be considered in a
vacuum. Technological knowledge tells us of a whole host of
alternatives that are open to us. But the crucial
questions—in what to invest? how much? what production method
to choose?—can be answered only by economic, i.e., by financial
considerations. They can be answered only on a market actuated by a
drive for money incomes and profits. Thus, how is a producer
to decide, in digging a subway tunnel, what material to use in its
construction? From a purely technological point of view, solid platinum
may be the best choice, the most durable, etc. Does this mean that he
should choose platinum? He can make a choice among factors, methods,
goods to produce, etc., only by comparing the necessary monetary
expenses (which are equal to the income the factors could earn
elsewhere) with expected monetary income from the production.
Only by maximizing monetary gain can factors be allocated in the
service of consumers; otherwise, and on purely technological
grounds, there would be nothing to prevent the building of
platinum-lined subway tunnels the breadth of the continent. The only
reason this cannot be done under present conditions is the heavy money
“cost” caused by the waste of drawing away factors
and resources from uses far more urgently demanded by the consumers.
But the fact of this urgent alternative demand—and thus the
fact of the waste—can be discovered only through
being recorded by a price system actuated by a drive by producers for
money incomes. Only empirical observation of the market
reveals to us the full absurdity of such a transcontinental subway.
Moreover,
there are no physical units with which we can compare the
different types of physical factors and physical products. Thus,
suppose a producer attempts to determine the most efficient use of two
hours of his labor. In a romantic moment, he tries to determine this
efficiency by purely abstracting from “sordid”
considerations of monetary gain. Assume that he is confronted with
three technologically known alternatives. These are tabulated
as follows:
Which of these alternatives, A, B,
or C, is the most efficient, the most
technologically “useful,” way of allocating his
labor? It is clear that the “idealistic,”
self-sacrificing producer has no way of knowing! He has no rational way
of deciding whether or not to produce the pot, the pipe, or the boat.
Only the “selfish” money-seeking producer has a
rational way of determining the allocation. In seeking maximum monetary
gain, the producer compares the money costs (necessary expenses) of the
various factors with the prices of the products. Considering A
and B, for example, if the purchase of the clay and
oven-hour would cost one gold ounce, and the pot could sell for two
gold ounces, his labor would earn one gold ounce. On the other hand, if
the wood and oven-hour would cost one and a half gold ounces, and the
pipe could sell for four gold ounces, he would earn two and a half
ounces for his two hours of labor and would choose to make this
product. The prices of both the product and the factors are reflections
of consumer demand and of producers’ attempts to
earn money in its service. The only way the producer could determine
which product to make is to compare expected monetary gains. If the
boat would sell for five gold ounces, he would produce the boat rather
than the pipe, and thus satisfy a more urgent consumer demand, as well
as his own desire for monetary income.
There can
therefore be no separation of technological efficiency from financial
considerations. The only way that we can determine whether one product
is more demanded than another, or one process more efficient than
another, is through concrete actions of the free market. We may think
it self-evident, for example, that the optimum efficient size of a
steel plant is larger than that of a barber shop. But we know this not
as economists from a priori or praxeological reasoning, but purely by
empirical observation of the free market. There is no way that
economists or any other outside observers can set the technological
optimum for any plant or firm. This can be done only on the market
itself. But if this is true in general, it is also true in the specific
cases of mergers and cartels. The impossibility of isolating a
technological element becomes even clearer when we remember that the
critical problem is not the size of the plant,
but the size of the firm. The two are by no means
synonymous. It is true that the firm will consider the optimum-sized
plant for whatever scale its operations will be on, and, further, that
a larger-sized plant will, ceteris paribus, require
a larger-sized firm. But its range of decisions cover a much broader
ground: how much to invest, what good or goods to produce, etc. A firm
may encompass one or more plants or products and always
encompasses marketing facilities, financial organization,
etc., which are overlooked when only the plant is held in view.
These
considerations, incidentally, serve to refute the very popular
distinction between “production for use” and
“production for profit.” In the first
place, all production is for use;
otherwise it would not take place. In the market economy, this
almost always means goods for the use of others—the
consumers. Profit can be earned only through servicing consumers with
produced goods. On the other hand, there can be no rational production,
above the most primitive level, based on technological or
utilitarian considerations abstracted from monetary gain.
It is
important to realize what we have not said in this
section. We have not said that cartels will always be more efficient
than individual firms or that “big” firms will
always be more efficient than small ones. Our conclusion is that
economics can make few valid statements about the optimal size of a
firm except that the free market will come as close
as possible to rendering maximum service to consumers, whether we are
considering the size of a firm or any other aspect of production. All
the concrete problems in production—the size of the firm, the
size of the industry, the location, price, size and nature of the
output, etc.—are for entrepreneurs, not economists, to solve.
We should
not leave the problem of the size of the firm without
considering a common worry of economic writers: What if the average
cost curve of a firm continues to fall indefinitely? Would not the firm
then grow so big as to constitute a
“monopoly”? There is much lamentation that
competition “breaks down” in such a situation. Much
of the emphasis on this problem comes, however, from preoccupation with
the case of “pure competition,” which, as we shall
see below, is an impossible figment. Secondly, it is obvious that no
firm ever has been or can be infinitely large, so that limiting
obstacles—rising or less rapidly falling costs—must
enter somewhere, and relevantly, for every firm.
Thirdly,
if a firm, through greater efficiency, does obtain a
“monopoly” in some sense in its industry, it
clearly does so, in the case we are considering (falling average cost),
by lowering prices and benefiting the consumers. And if (as all the
theorists who attack “monopoly” agree)
what is wrong with “monopoly” is precisely a restriction
of production and a rise in price, there is
obviously nothing wrong with a “monopoly” achieved
by pursuing the directly opposite path.
This applies not
only to specific types of goods, but also to the allocation
between present and future goods, in accordance with the time
preferences of the consumers.
Of course, we may
formally salvage the concept of “consumers’
sovereignty” by asserting that all these psychic
elements and evaluations constitute
“consumption” and that the concept therefore still
has validity. However, it would seem to be more appropriate in the catallactic
context of the market (which is the area here under
discussion) to reserve “consumption” to mean the
enjoyment of exchangeable goods.
Naturally, in the final sense, everyone is an ultimate
consumer—both of exchangeable and of nonexchangeable
goods. However, the market deals only in exchangeable goods (by
definition), and when we separate the consumer and the producer in
terms of the market, we distinguish the demanding, as compared to the
supplying, of exchangeable goods. It is more appropriate, then, not to
consider a nonexchangeable good as an object of consumption in this
particular context. This is important in order to discuss the
contention that individual producers are somehow subject to the
sovereign rule of other individuals—the
“consumers.”
W.H. Hutt,
“The Concept of Consumers’ Sovereignty,” Economic
Journal, March, 1940, pp. 66–77. Hutt originated
the term in an article in 1934. For an interesting use of a similar
concept, cf. Charles Coquelin, “Political Economy”
in Lalor’s Cyclopedia,
III, 222–23.
To be consistent,
currently fashionable theory would have to accuse Crusoe and Friday of
being vicious “bilateral monopolists,” busily
charging each other “monopoly prices” and therefore
ripe for State intervention!
See chapter 8, p.
516 above.
In the
words of Professor Mises:
That the production of a commodity p
is not larger than it really is, is due to the fact that the
complementary factors of production required for an expansion
were employed for the production of other commodities. . . . Neither
did the producers of p intentionally restrict the
production of p. Every
entrepreneur’s capital is limited; he employs it for
those projects which, he expects, will, by filling the most
urgent demand of the public, yield the highest profit.
An entrepreneur at whose disposal are 100 units of
capital employs, for instance, 50 units for the production of p
and 50 units for the production of q. If both lines
are profitable, it is odd to blame him for not having employed more,
e.g., 75 units, for the production of p. He could
increase the production of p only by curtailing
correspondingly the production of q. But
with regard to q the same fault could be found by
the grumblers. If one blames the entrepreneur for not having produced
more p, one must blame him also for not having
produced more q. This means: one blames the
entrepreneur for the fact that there is a scarcity of the factors of
production and that the earth is not a land of Cockaigne. (Mises, Planning
for Freedom, pp. 115–16)
Ibid.,
p. 115.
Much error would
have been avoided if economists had heeded the words of Arthur Latham
Perry:
Every man who puts forth an effort to satisfy the
desire of another, with the expectation of a return, is . . . a
Producer. The Latin word producere means to
expose anything to sale. . . . We must rid ourselves at the
outset of the notion . . . that it is only to be applied to forms of matter,
that it means . . . to transform something
only. . . . The fundamental meaning of the root-word, both in Latin and
in English, is effort with reference to a sale. A
product is a service ready to be rendered. A producer is any person who
gets something ready to sell and sells it. (Perry, Political
Economy, pp. 165–66)
R.H. Coase, in an
illuminating article, has pointed out that the extent to which
transactions take place within a firm or between
firms is dependent on the balancing of the necessary costs of
using the price mechanism as against the costs of organizing a
structure of production within a firm. Coase, “The Nature of
the Firm.”
This spurious
distinction was brought into wide currency by Thorstein Veblen and
continued in the happily short-lived “technocracy”
movement of the early 1930’s. According to his
biographer, this distinction was the keynote of all Veblen’s
writings. Cf. Joseph Dorfman, The Economic Mind in American
Civilization (New York: Viking Press, 1949), III, 438ff.
On the
“orthodox” neglect of cost limitations, see
Robbins, “Remarks upon Certain Aspects of the Theory of
Costs.”
Cf. Mises, Human
Action, p. 367.
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