Chapter 10—Monopoly and Competition (continued)

 Previous Section * Next Section
 Table of Contents

 

Chapter 10—Monopoly and Competition (continued)

D. The Instability of the Cartel

     Analysis demonstrates that a cartel is an inherently unstable form of operation. If the joint pooling of assets in a common cause proves in the long run to be profitable for each of the individual members of the cartel, then they will act formally to merge into one large firm. The cartel then disappears in the merger. On the other hand, if the joint action proves unprofitable for one or more members, the dissatisfied firm or firms will break away from the cartel, and, as we shall see, any such independent action almost always destroys the cartel. The cartel form, therefore, is bound to be highly evanescent and unstable.

     If joint action is the most efficient and profitable course for each member, a merger will soon take place. The very fact that each member firm retains its potential independence in the cartel means that a breakup could take place at any time. The cartel will have to assign production totals and quotas to each of the member firms. This is likely to lead first to a good deal of bicker­ing among the firms over the assignment of quotas, with each member attempting to gain a larger share of the assignment. Whatever basis quotas are assigned on will necessarily be arbi­trary and will always be subject to challenge by one or more members.[13] In a merger, or in the formation of one corporation, the stockholders, by majority vote, form a decision-making organ­ization. In the case of a cartel, however, disputes arise among independent owning entities.

     Particularly likely to be restive under the imposed joint action will be the more efficient producers, who will be eager to expand their business rather than be fettered by shackles and quotas to provide shelter for their less efficient competitors. Clearly, the more efficient firms will be the ones to break up the cartel. This will be increasingly true as time goes on and conditions change from the time the cartel was first formed. The quotas, the jealously made agreements that formerly seemed plausible to all, now be­come intolerable restrictions for the more efficient firms, and the cartel soon breaks up; for once one firm breaks away, expands output and cuts prices, the others must follow.

     If the cartel does not break up from within, it is even more likely to do so from without. To the extent that it has earned unusual monopoly profits, outside firms and outside producers will enter the same field of production. Outsiders, in short, rush in to take advantage of the higher profits. But once one strong competitor arises to challenge it, the cartel is doomed. For as the firms in the cartel are bound by production quotas, they must watch new competitors expand and take away sales from them at an accelerating rate. As a result, the cartel must break up under the pressure of the newcomers’ competition.[14]

E. Free Competition and Cartels

     There are other arguments that opponents of cartels use in decrying cartel action. One thesis asserts that there is something wicked about formerly competing firms now uniting, e.g., “re­stricting competition” or “restraining trade.” Such restriction is supposed to injure the consumers’ freedom of choice. As Hutt phrased it in his previously cited article: “Consumers are free . . . and consumers’ sovereignty is realizable, only to the extent to which the power of substitution exists.”

     But surely this is a complete misconception of the meaning of freedom. Crusoe and Friday bargaining on a desert island have very little range or power of choice; their power of substitution is limited. Yet if neither man interferes with the other’s person or property, each one is absolutely free. To argue otherwise is to adopt the fallacy of confusing freedom with abundance or range of choice. No individual producer is or can be responsible for other people’s power to substitute. No coffee grower or steel producer, whether acting singly or jointly, is responsible to any­one because he chose not to produce more. If Professor X or consumer Y believes that there are not enough coffee producers in existence or that they are not producing enough, these critics are free to enter the coffee or steel business as they see fit, thus increasing both the number of competitors and the quantity of the good produced.

     If consumer demand had really justified more competitors or more of the product or a greater variety of products, then en­trepreneurs would have seized the opportunity to profit by satis­fying this demand. The fact that this is not being done in any given case demonstrates that no such unsatisfied consumer de­mand exists. But if this is true, then it follows that no man-made actions can improve the satisfaction of consumer demand more than is being done on the unhampered market. The false confu­sion of freedom with abundance rests on a failure to distinguish between the conditions given by nature and man-made actions to transform nature. In a state of raw nature, there is no abundance; in fact, there are few, if any, goods at all. Crusoe is absolutely free, and yet on the point of starvation. Of course, it would be pleasanter for everyone if the nature-given conditions had been far more abundant, but these are vain fantasies. For vis-à-vis na­ture, this is the best of all possible worlds, because it is the only possible one. Man’s condition on earth is that he must work with the given natural conditions and improve them by human action. It is a reflection on nature, not on the free market, that everyone is “free to starve.”

     Economics demonstrates that individuals, entering into mutual relations in a free market in a free society—and only in such re­lations—can provide abundance for themselves and for the entire society. (“Free,” as always in this book, is used in the interper­sonal sense of being unmolested by other persons.) To employ freedom as itself equivalent to abundance obstructs understand­ing of these truths.

     The free market in the world of production may be termed “free competition” or “free entry,” meaning that in a free society anyone is free to compete and produce in any field he chooses. “Free competition” is the application of liberty to the sphere of production: the freedom to buy, sell, and transform one’s prop­erty without violent interference by an external power.

     We have seen above that in a regime of free competition con­sumers’ satisfaction will, at any time, tend to be at the maximum possible, given natural conditions. The best forecasters will tend to emerge as the dominant entrepreneurs, and if anyone sees an opportunity passed up, he is free to take advantage of his superior foresight. The regime that tends to maximize consumers’ satis­faction, therefore, is not “pure competition” or “perfect compe­tition” or “competition without cartel action,”[15]or anything other than one of simple economic liberty.

     Some critics charge that there is no “real” free entry or free competition in a free market. For how can anyone compete or enter a field when an enormous amount of money is needed to invest in efficient plants and firms? It is easy to “enter” the push­cart peddling “industry” because so little capital is required, but it is almost impossible to establish a new automobile firm, with its heavy requirements of capital.

     This argument is but another variant of the prevailing confu­sion between freedom and abundance. In this case, the abundance refers to the money capital which a man has been able to amass. Every man is perfectly free to become a baseball player; but this freedom does not imply that he will be as good a baseball player as the next man. A man’s range or power of action, dependent on his ability and the exchange-value of his property, is some­thing completely distinct from his freedom. As we have said, a free society will in the long run lead to general abundance and is the necessary condition for that abundance. But the two must be kept conceptually distinct, and not confused by phrases such as “real freedom” or “true freedom.” Therefore, the fact that everyone is free to enter an industry does not mean that every­one is able, either in terms of personal qualities or monetary capital, to do so. In industries requiring more capital, fewer peo­ple will be able to take advantage of their freedom to set up a new firm than in those requiring less capital, just as fewer la­borers will be able to take advantage of freedom of entry in a very highly skilled profession than in a menial position. There is no mystery about either situation.

     In fact, the disability is much more relevant in the case of la­bor than in the case of business competition. What are modern devices such as corporations but means of pooling capital by many people of greater and lesser wealth? The “difficulty” of investing in a new automobile firm should be considered, not in terms of the hundreds of millions of dollars required for total investment, but in terms of the 50 or so dollars required to purchase one share of stock. But while capital can be pooled, beginning with the smallest units, labor ability cannot be pooled.

     Sometimes the argument reaches absurd lengths. For example, it is often asserted that now, in this modern world, firms are so large that new people “cannot” compete or enter the industry because the capital cannot be raised. These critics do not seem to see that the aggregate capital and wealth of individuals have advanced along with the increase in wealth required to launch a new enterprise. In fact, these are two sides of the same coin. There is no reason to suppose that it was easier to raise the cap­ital to launch a new retail shop many centuries ago than it is to raise capital for the automobile firm today. If there is enough capital to finance the large firms currently existing, there is enough to finance one more; in fact, capital could be withdrawn from existing large firms and shifted to new ones if there is a need for them. Of course, if the new enterprise would be un­profitable and therefore unserviceable to consumers, it is easy to see why there is reluctance in the free market to embark on the venture.

     That there is inequality of ability or monetary income on the free market should surprise no one. As we have seen above, men are not “equal” in their tastes, interests, abilities, or locations. Resources are not distributed “equally” over the earth.[16] This in­equality or diversity in abilities and distribution of resources in­sures inequality of income on the free market. And, since a man’s monetary assets are derived from his and his ancestors’ abilities in serving consumers on the market, it is not surprising that there is inequality of monetary wealth as well.

     The term “free competition,” then, will prove misleading un­less it is interpreted to mean free action, i.e., freedom to com­pete or not to compete as the individual wills.

     It should be clear from the foregoing discussion that there is nothing particularly reprehensible or destructive of consumer freedom in the establishment of a “monopoly price” or in a cartel action. A cartel action, if it is a voluntary one, cannot injure freedom of competition and, if it proves profitable, benefits rather than injures the consumers. It is perfectly consonant with a free society, with individual self-sovereignty, and with the earning of money through serving consumers.

     As Benjamin R. Tucker brilliantly concluded in dealing with the problem of cartels and competition:

That the right to cooperate is as unquestionable as the right to compete; the right to compete involves the right to refrain from competition; cooperation is often a method of competition, and competition is always, in the larger view, a method of cooperation . . . each is a legitimate, orderly, non-invasive exercise of the individual will under the social law of equal liberty . . .

Viewed in the light of these irrefutable propositions, the trust, then, like every other industrial combination endeavoring to do collectively nothing but what each member of the combination might fully en­deavor to do individually, is, per se, an unimpeachable institution. To assail or control or deny this form of cooperation on the ground that it is itself a denial of competition is an absurdity. It is an ab­surdity, because it proves too much. The trust is a denial of com­petition in no other sense than that in which competition itself is a denial of competition. (Italics ours.) The trust denies competition only by producing and selling more cheaply than those outside of the trust can produce and sell; but in that sense every successful in­dividual competitor also denies competition. . . . The fact is that there is one denial of competition which is the right of all, and that there is another denial of competition which is the right of none. All of us, whether out of a trust or in it, have a right to deny competition by competing, but none of us, whether in a trust or out of it, have a right to deny competition by arbitrary decree, by interference with voluntary effort, by forcible suppression of in­itiative.[17]

     This is not to say, of course, that joint co-operation or com­bination is necessarily “better than” competition among firms. We simply conclude that the relative extent of areas within or between firms on the free market will be precisely that propor­tion most conducive to the well-being of consumers and producers alike. This is the same as our previous conclusion that the size of a firm will tend to be established at the level most serviceable to the consumers.[18]

F. The Problem of One Big Cartel

     The myth of the evil cartel has been greatly bolstered by the nightmare image of “one big cartel.” “This is all very well,” one may say, “but suppose that all the firms in the country amalgam­ated or cartelized into One Big Cartel. What of the horrors then?”

     The answer can be obtained by referring to chapter 9, pp. 612ff above, where we saw that the free market placed definite limits on the size of the firm, i.e., the limits of calculability on the mar­ket. In order to calculate the profits and losses of each branch, a firm must be able to refer its internal operations to external markets for each of the various factors and intermediate prod­ucts. When any of these external markets disappears, because all are absorbed within the province of a single firm, calculability disappears, and there is no way for the firm rationally to allocate factors to that specific area. The more these limits are encroached upon, the greater and greater will be the sphere of irrationality, and the more difficult it will be to avoid losses. One big cartel would not be able rationally to allocate producers’ goods at all and hence could not avoid severe losses. Consequently, it could never really be established, and, if tried, would quickly break asunder.

     In the production sphere, socialism is equivalent to One Big Cartel, compulsorily organized and controlled by the State.[19]Those who advocate socialist “central planning” as the more ef­ficient method of production for consumer wants must answer the question: If this central planning is really more efficient, why has it not been established by profit-seeking individuals on the free market? The fact that One Big Cartel has never been formed voluntarily and that it needs the coercive might of the State to be formed demonstrates that it could not possibly be the most efficient method of satisfying consumer desires.[20]

     Let us assume for a moment that One Big Cartel could be established on the free market and that the calculability prob­lem does not arise. What would the economic consequences be? Would the cartel be able to “exploit” anyone? In the first place, consumers could not be “exploited.” For consumers’ demand curves would still be elastic or inelastic, as the case may be. Since, as we shall see further below, consumers’ demand curves for a firm are always elastic above the free-market equilibrium price, it follows that the cartel will not be able to raise prices or earn more from consumers.

     What about the factors? Could not their owners be exploited by the cartel? In the first place, the universal cartel, to be effec­tive, would have to include owners of primary land; otherwise whatever gains they might have might be imputed to land. To put it in its strongest terms, then, could a universal cartel of all land and capital goods “exploit” laborers by systematically pay­ing the latter less than their discounted marginal value products? Could not the members of the cartel agree to pay a very low sum to these workers? If that happened, however, there would be created great opportunities for entrepreneurs either to spring up outside the cartel or to break away from the cartel and profit by hiring workers for a higher wage. This competition would have the double effect of (a) breaking up the universal cartel and (b) tending again to yield to the laborers their marginal product. As long as competition is free, unhampered by governmental restric­tions, no universal cartel could either exploit labor or remain universal for any length of time.[21]

3. The Illusion of Monopoly Price

     So far we have established that there is nothing “wrong” with a monopoly price, either when instituted by one firm or by a cartel; that, in fact, whatever price the free market (unhampered by violence or the threat of violence) establishes will be the “best” price. We have also shown the impossibility of separating “mo­nopolizing” from efficiency considerations in cartel actions or of separating technology from profitability in general; and we have seen the great instability of the cartel form.

     In this section we investigate a further problem: Granted that there is nothing “wrong” with monopoly prices, how tenable is the very concept of “monopoly price” on the free market? Can it be distinguished at all from “competitive price,” its supposed polar opposite? To answer this question, we must explore what the theory of monopoly price is all about.

A. Definitions of Monopoly

     Before investigating the theory of monopoly price, we must begin by defining monopoly. Despite the fact that monopoly prob­lems occupy an enormous quantity of economic writings, little or no clarity of definition exists.[22] There is, in fact, enormous vagueness and confusion on the subject. Very few economists have formulated a coherent, meaningful definition of monopoly.

     A common example of a confused definition is: “Monopoly exists when a firm has control over its price.” This definition is a mixture of confusion and absurdity. In the first place, on the free market there is no such thing as “control” over the price in an exchange; in any exchange the price of the sale is voluntarily agreed upon by both parties. No “control” is exercised by either party; the only control is each person’s control over his own ac­tions—stemming from his self-sovereignty—and consequently his control will be over his own decision to enter or not to enter into an exchange at any hypothetical price. There is no direct control over price because price is a mutual phenomenon. On the other hand, each person has absolute control over his own action and therefore over the price which he will attempt to charge for any particular good. Any man can set any price that he wants for any quantity of a good that he sells; the question is whether he can find any buyers at that price. Similarly, of course, any buyer can set any price at which he will purchase a certain good; the ques­tion is whether he can find a seller at that price. It is this process, indeed, of mutual bids and offers that yields the daily prices on the market.

     There is an all-too-common assumption, however, that if we compare, say, Henry Ford and a small wheat farmer, the two differ enormously in their respective powers of control. It is be­lieved that the wheat farmer finds his price “given” to him by the market, while Ford can “administer” or “set his own” price. The wheat farmer is allegedly subject to the impersonal forces of the market, and ultimately to the consumer, while Ford is, to a greater or lesser extent, the master of his own fate, if not indeed the ruler of the consumers. Further, it is believed that Ford’s “monopoly power” stems from his being “large” in relation to the automobile market, while the farmer is a “pure competitor” because he is “small” compared to the total supply of wheat. Usually, Ford is not considered an “absolute’‘ monopolist, but someone with a vague “degree of monopoly power.”

     In the first place, it is completely false to say that the farmer and Ford differ in their control over price. Both have exactly the same degree of control and of noncontrol: i.e., both have absolute control over the quantity they produce and the price which they attempt to get;[23] and absolute noncontrol over the price-and-­quantity transaction that finally takes place. The farmer is free to ask any price he wants, just as Ford is, and is free to look for a buyer at such a price. He is not in the least compelled to sell his produce to the organized “markets” if he can do better else­where. Every producer of every product is free, in a free-market society, to produce as much as he wants of whatever he possesses or can purchase and to try to sell it, at whatever price he can get, to anyone he can find.[24]Naturally, every seller, as we have repeatedly stated, will attempt to sell his produce for the highest possible price; similarly, every buyer will attempt to purchase goods at the lowest possible price. It is precisely the voluntary interaction of these buyers and sellers that establishes the entire supply and demand structure for consumers’ and producers’ goods. To accuse Ford or a waterworks or any other producer of “charg­ing whatever the traffic will bear” and to take this as a sign of monopoly is pure nonsense, for this is precisely the action of everyone in the economy: the small wheat farmer, the laborer, the landowner, etc. “Charging whatever the traffic will bear” is simply a rather emotive synonym for charging as high a price as can be freely obtained.

     Who officially “sets” the price in any exchange is a completely trivial and irrelevant technological question—a matter of institu­tional convenience rather than economic analysis. The fact that Macy’s posts its prices each day does not mean that Macy’s has some sort of mysterious “control” of its price over the con­sumer;[25] similarly, that large-scale industrial buyers of raw mate­rials often post their bid prices does not mean that they exercise some sort of extra control over the price obtained by the growers. Rather than acting as a means of control, in fact, posting simply furnishes needed information to all would-be buyers and/or sell­ers. The process of price determination through the interaction of value scales occurs in precisely the same way regardless of the concrete details and institutional conditions of market arrange­ments.[26]

     Each individual producer, then, is sovereign over his own ac­tions; he is free to buy, produce, and sell whatever he likes and to whoever will purchase. The farmer is not compelled to sell to any particular market or to any particular company, any more than Ford is compelled to sell to John Brown if he does not wish to do so (say, because he can get a higher price elsewhere). But, as we have seen, in so far as a producer wishes to maximize his monetary return, he does submit himself to the control of consumers, and he sets his output accordingly. This is true of the farmer, of Ford, or of anyone else in the entire economy—land­owner, laborer, service-producer, product-owner, etc. Ford, then, has no more “control” over the consumer than the farmer has.

     One common objection is that Ford is able to acquire “monop­oly power” or “monopolistic power” because his product has a recognized brand name or trade-mark, which the wheat farmer has not. This, however, is surely a case of putting the cart before the horse. The brand name and the wide knowledge of the brand come from consumers’ desire for the product attached to that particular brand and are therefore a result of consumer demand rather than a pre-existing means for some sort of “monopolistic power” over the consumers. In fact, farmer Hiram Jones is per­fectly free to stamp the brand name “Hiram Jones Wheat” on his product and attempt to sell it on the market. The fact that he has not done so signifies that it would not be a profitable step in the concrete market condition of his product. The chief point is that in some cases consumers and lower-order entrepreneurs consider each individual brand name as representing a unique product, while in other cases purchasers consider the output of one firm—one product-owner or set of product-owners operating jointly—as identical in use-value with products of other firms. Which situation will occur is entirely dependent on the buyers’ valuations in each concrete case.

     Later in this chapter we shall analyze in greater detail the tangled web of fallacies involved in the various theories of “mo­nopolistic competition”; at this point we are attempting to arrive at a definition of monopoly per se. To proceed: There are three possible coherent definitions of monopoly. One is derived from its linguistic roots: monos (only) and polein (to sell), i.e., the only seller of any given good (definition 1). This is certainly a legiti­mate definition, but it is an extraordinarily broad one. It means that, whenever there is any differentiation at all among individual products, the individual producer and seller is a “monopolist.” John Jones, lawyer, is a “monopolist” over the legal services of John Jones; Tom Williams, doctor, is a “monopolist” over his own unique medical services, etc. The owner of the Empire State Building is a “monopolist” over the rental services in his building. This definition, therefore, labels all consumer distinctions be­tween individual products as establishing “monopolies.”

     It must be remembered that only consumers can decide whether two commodities offered on the market are one good or two differ­ent goods. This issue cannot be settled by a physical inspection of the product. The elemental physical nature of the good may be only one of its properties; in most cases, a brand name, the “good will” of a particular company, or a more pleasant atmosphere in the store will differentiate the product from its rivals in the view of many of its customers. The products then become different goods for the consumers. No one can ever be certain in advance—least of all the economist—whether a commodity sold by A will be treated on the market as homogeneous with the same basic physi­cal good sold by B.[27][28]

     Hence, there is hardly any way that definition 1 of “monopoly” can be successfully used. For this definition depends on how we choose a “homogeneous good,” and this can never be decided by an economist. What constitutes a homogeneous commodity” (i.e., an industry)—neckties, bow ties, bow ties with polka dots, etc., or bow ties made by Jones? Only consumers will decide, and they, as different consumers, will be likely to decide differently in each concrete case. Use of definition 1, therefore, will probably reduce to the barren definition of monopoly as each man’s exclu­sive ownership of his own property—and this, absurdly, would make every single person a monopolist![29]

     Definition 1, then, is coherent, but highly inexpedient. Its use­fulness is very limited, and the term has acquired highly charged emotional connotations from past use of quite different defini­tions. For reasons detailed below, the term “monopoly” has sin­ister and evil connotations to most people. “Monopolist” is gen­erally a word of abuse; to apply the term “monopolist” to at least the vast majority of the population and perhaps to every man would have a confusing and even ludicrous effect.

     The second definition is related to the first, but differs very significantly. It, in fact, was the original definition of monopoly and the very definition responsible for its sinister connotations in the public mind. Let us turn to its classic expression by the great seventeenth-century jurist, Lord Coke:

A monopoly is an institution or allowance by the king, by his grant, commission, or otherwise . . . to any person or persons, bodies politic or corporate, for the sole buying, selling, making, working, or using of anything, whereby any person or persons, bodies politic or cor­porate, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade.[30]

In other words, by this definition, monopoly is a grant of special privilege by the State, reserving a certain area of production to one particular individual or group. Entry into the field is prohibited to others and this prohibition is enforced by the gen­darmes of the State.

     This definition of monopoly goes back to the common law and acquired great political importance in England during the six­teenth and seventeenth centuries, when an historic struggle took place between libertarians and the Crown over the issue of mo­nopoly as opposed to freedom of production and enterprise. Un­der this definition of the term, it is not surprising that “monop­oly” took on connotations of sinister interest and tyranny in the public mind. The enormous restrictions on production and trade, as well as the establishment by the State of a monopoly caste of favorites, were the objects of vehement attack for several cen­turies.[31]

     That this definition was formerly important in economic analy­sis is clear in the following quotation from one of the first Ameri­can economists, Francis Wayland:

A monopoly is an exclusive right granted to a man, or to a monopoly of men, to employ their labor or capital in some particular manner.[32]

     It is obvious that this type of monopoly can never arise on a free market, unhampered by State interference. In the free econ­omy, then, according to this definition, there can be no “monop­oly problem.”[33] Many writers have objected that brand names and trade-marks, generally considered as part of the free market, really constitute grants of special privilege by the State. No other firm can “compete” with Hershey chocolates by producing its own product and calling it Hershey chocolates.[34] Is this not a State-imposed restriction on freedom of entry? And how can there be “real” freedom of entry under such conditions?

     This argument, however, completely misconceives the nature of liberty and of property. Every individual in the free society has a right to ownership of his own self and to the exclusive use of his own property. Included in his property is his name, the linguistic label which is uniquely his and is identified with him. A name is an essential part of a man’s identity and therefore of his property. To say that he is a “monopolist” over his name is saying no more than that he is a “monopolist” over his own will or property, and such an extension of the word “monopolist” to every individual in the world would be an absurd usage of the term. The “governmental” function of defense of person and property, vital to the existence of a free society so long as any people are disposed to invade them, involves the defense of each person’s particular name or trade-mark against the fraud of for­gery or imposture. It means the outlawing of John Smith’s pre­tending to be Joseph Williams, a prominent lawyer, and selling his own legal advice after stating to clients that he is selling that of Williams. This fraud is not only implicit theft of the con­sumer, but it is also abusing the property right of Joseph Wil­liams to his unique name and individuality. And the use by some other chocolate firm of the Hershey label would be an equivalent perpetration of an invasive act of fraud and forgery.[35]

     Before adopting this definition of monopoly as the proper one, we must consider a final alternative: the defining of a monopolist as a person who has achieved a monopoly price (definition 3). This definition has never been explicitly set forth, but it has been implicit in the most worthwhile of the neoclassical writings on this subject. It has the merit of focusing attention on the im­portant economic question of monopoly price, its nature and consequences. In this connection, we shall now investigate the neoclassical theory of monopoly price and inquire whether it really has the substance it seems at first glance to possess.

B. The Neoclassical Theory of Monopoly Price[36]

     In previous sections we have refereed to a monopoly price as one established either by a monopolist or by a cartel of pro­ducers. At this point we must investigate the theory more closely. A succinct definition of monopoly price has been supplied by Mises:

If conditions are such that the monopolist can secure higher net proceeds by selling a smaller quantity of his product at a higher price than by selling a greater quantity of his supply at a lower price, there emerges a monopoly price higher than the potential market price would have been in the absence of monopoly.[37]

     The monopoly price doctrine may be summed up as follows: A certain quantity of a good, when produced and sold, yields a competitive price on the market. A monopolist or a cartel of firms can, if the demand curve is inelastic at the competitive-price point, restrict sales and raise the price, to arrive at the point of maximum returns. If, on the other hand, the demand curve as it presents itself to the monopolist or cartel is elastic at the competi­tive-price point, the monopolist will not restrict sales to attain a higher price. As a result, as Mises points out, there is no need to be concerned with the “monopolist” (in the sense of definition 1 above); whether or not he is the sole producer of a commodity is unimportant and irrelevant for catallactic problems. It becomes important only if the configuration of his demand curve enables him to restrict sales and achieve a higher income at a monopoly price.[38] If he learns about the inelastic demand curve after he has erroneously produced too great a stock, he must destroy or with­hold part of his stock; after that, he restricts production of the commodity to the most remunerative level.

     The monopoly price analysis is portrayed in the diagram in Figure 67. The basic assumption, usually only implicit, is that there is some identifiable stock, say 0A, and some identifiable market price, say, AC, which will result from competitive conditions. AB then represents the stock line under “competition.” Then, according to the theory, if the demand curve is elastic above this price, there will be no occasion to restrict sales and obtain a higher, or “monopoly,” price. Such a demand curve is DD. On the other hand, if the demand curve is inelastic above the com­petitive-price point, as in D'D', it will pay the monopolist to restrict sales to, say, 0A' (stock line represented by A'B') and achieve a monopoly price, A'M. This would yield the maximum monetary income for the monopolist.[39]

     The inelastic demand curve, giving rise to an opportunity to monopolize, may present itself either to a single monopolist of a given product or to “an industry as a whole” when organized into a cartel of the different producers. In the latter case, the de­mand curve, as it presents itself to each firm, is elastic. At the competitive price, if one firm raises its price, the customers preponderantly shift to purchasing from its competitors. On the other hand, if the firms are cartelized, in many cases the lesser range of substitution by consumers would render the demand curve, as presented to the cartel, inelastic. This condition serves as the impetus to the formation of the cartels studied above.

---

[13] As Professor Benham states:

Firms which have produced a relatively large share of output in the past will demand the same share in the future. Firms which are expanding—owing, for example, to an unusually efficient management—will demand a larger share than they obtained in the past. Firms with a greater “capacity” for producing, as measured by the size of their . . . plant will demand a correspondingly greater share. (Benham, Economics, p. 232)

On the difficulties faced by cartels, see also Bjarke Fog, “How Are Cartel Prices Determined?” Journal of Industrial Economics, November, 1956, pp. 16–23; Donald Dewey, Monopoly in Economics and Law (Chicago: Rand McNally, 1959), pp. 14–24; and Wieser, Social Economics, p. 225.

[14]For illustrations of this instability in the history of cartels, see Fairchild, Furniss, and Buck, Elementary Economics, II, 54–55; Charles Norman Fay, Too Much Government, Too Much Taxation (New York: Double­day, Page, 1923), p. 41, and Big Business and Government (New York: Doubleday, Page, 1912); A.D.H. Kaplan, Big Enterprise in a Competi­tive System (Washington, D.C.: Brookings Institute, 1954), pp. 11–12.

[15]These terms will be explained below.

[16]Clearly, the very term “equal” is unusable here. What does it mean to say that lawyer Jones’ ability is “equal” to teacher Smith’s?

[17]From his Address to the Civic Federation Conference on Trusts, held in Chicago, September 13–16, 1899, Chicago Conference on Trusts (Chi­cago, 1900), pp. 253–54, reprinted in Benjamin R. Tucker, Individual Liberty (New York: Vanguard Press, 1926), pp. 248–57. Said a lawyer at the conference:

The control of prices can be brought about per­manently only by such a superiority in the methods of manufacture as will successfully defy competition. Any price established by a com­bination which enables competitors to make a reasonable profit will soon encourage such competition as will reduce the price. (Azel F. Hatch, Chicago Conference, p. 70)

See also the excellent article by A. Leo Weil, ibid., pp. 77–96; and W.P. Potter, ibid., pp. 299–305: F.B. Thurber, ibid., pp. 124–36; Horatio W. Seymour, ibid., pp. 188–93; J. Sterling Morton, ibid., pp. 225–30.

[18]Does our discussion imply, as Dorfman has charged (J. Dorfman,  Economic Mind in American Civilization, III, 247), that “whatever is, is right”? We cannot enter into a dis­cussion of the relation of economics to ethics at this point, but we can state briefly that our answer, pertaining to the free market, is a qualified Yes. Specifically, our statement would be: Given the ends on the value scales of individuals, as revealed by their real actions, the maximum satisfaction of those ends for every person is achieved only on the free market. Whether individuals have the “proper” ends or not is another question entirely and cannot be decided by economics.

[19]If all the factors and resources are absolutely controlled by the State, it makes little difference if, legally, the State owns these resources. For ownership connotes control, and if the nominal owner is coercively de­prived of control, it is the controller who is the real owner of the resource.

[20]The only author, to our knowledge, that looks forward to One (volun­tary) Big Cartel as a potential ideal is Heath, Citadel, Market, and Altar, pp. 184–87.

[21]Cf. Mises, Human Action, p. 592.

[22] The same confusion exists in the laws concerning monopoly. Despite constitutional warnings against vagueness, the Sherman Anti-Trust Act outlaws “monopolizing” actions without once defining the concept. To this day there has been no clear legislative decision concerning what constitutes illegal monopolistic action.

[23]We are, of course, not considering here particular uncertainties of agriculture resulting from climate, etc.

[24]For further discussion, see Murray N. Rothbard, “The Bogey of Ad­ministered Prices,” The Freeman, September, 1959, pp. 39–41.

[25] On the contrary, the consumers control Macy’s to the extent that the store desires monetary income. Cf. John W. Scoville and Noel Sargent, eds., Fact and Fancy in the T.N.E.C. Monographs (New York: Na­tional Association of Manufacturers, 1942), p. 312.

[26]One reason often given for ascribing “control over price” to Ford and not the small wheat grower is that Ford is so large that his actions affect the market price of his product, while the farmer is so small that his actions do not affect the price. On this, see the critique below of “monopolistic competition” theories.

[27]Economists have often charged, for example, that consumers who will pay a higher price for the same good at a store with a more pleasant atmosphere are acting “irrationally.” Actually, they are by no means doing so, since consumers are buying not just a physical can of beans, but a can of beans sold in a certain store by certain clerks, and these factors may (or may not) make a difference to them. Businessmen are far less motivated by such “nonphysical” considerations (although good will affects their purchases too), not because they are “more rational” than consumers, but because they are not concerned, as consumers are, with their own value scales in deciding their purchases. As we have seen above, businessmen are generally motivated purely by the expected revenue that goods will bring on the market. For an excellent treat­ment of the definition of “homogeneous product,” see G. Warren Nut­ter, “The Plateau Demand Curve and Utility Theory,” Journal of Po­litical Economy, December, 1955, pp. 526–28. Also see Alex Hunter, “Product Differentiation and Welfare Economics,” Quarterly Journal of Economics, November, 1955, pp. 533–52.

[28]Professor Lawrence Abbott, in one of the outstanding theoretical works of recent years, demonstrates also that as civilization and the economy advance, products will become more and more differentiated and less and less homogeneous. For one thing, greater differentiation occurs at the consumer than at the producer level, and the expanding economy takes over an increasing proportion of goods once made by the con­sumer himself and therefore supplies more finished goods than raw materials to the consumer than formerly (bread rather than flour, sweaters rather than wool yarn, etc.). Thus, there is greater opportunity for differentiation.

        Furthermore, to the familiar charge that business advertising tends to create differentiation in the consumer’s mind that is not “really” there, Abbott replies incisively that the reverse is more likely to be true and that advancing civilization increases the consumer’s perception and discrimination of differences of which he was previously ignorant. Writes Abbott:

as man becomes more civilized, he develops greater powers of perception with regard to quality differences. Subjec­tive homogeneity may exist even when objective homogeneity does not, due to the inability or unwillingness of buyers to perceive differences between almost identical products and discriminate between them. . . . As a society matures and education improves, people learn to develop more acute powers of discrimination. Their wants become more de­tailed. They begin . . . to develop a preference, say, not simply for white wine, but for 1948 Chablis. . . . People generally tend to under­estimate the significance of apparently trivial differences in fields in which they are not expert. An unmusical person may be unwilling to concede that there is any difference in tone between a Steinway and a Chickering piano, being unable himself to detect it. A nongolfer is more likely than a habitual player to believe that all brands of golf balls are virtually alike. (Lawrence Abbott, Quality and Competition [New York: Columbia University Press, 1955], pp. 18–19, and chap. I)

Also see ibid., pp. 45–46 and Edward H. Chamberlin, “Product Hetero­geneity and Public Policy” in Towards a More General Theory of Value (New York: Oxford University Press, 1957), p. 96.

[29]Oddly, despite the reams of literature on monopolies, very few economists have bothered to define monopoly, and these problems have therefore been overlooked. Mrs. Robinson, in the beginning of her famous Economics of Imperfect Competition, saw the difficulty and then evaded the issue throughout the rest of the book. She concedes that under careful analysis either a monopoly would be defined as every producer’s control over his own product or monopoly could simply not exist on the free market at all. For competition exists among all prod­ucts for the consumer’s dollar, while very few articles are rigorously homogeneous. Mrs. Robinson then tries to evade the issue by falling back on “common sense” and defining monopoly as existing where there is a “marked gap” between the product and other substitutes the consumer may buy. But this will not do. Economics, in the first place, can establish no quantitative laws, so that there is nothing we can say about sizes of gaps. When does the gap become “marked”? Secondly, even if such “laws” were meaningful, there would be no way to measure the cross-elasticities of demands, the elasticity of substitution between the products, etc. These elasticities of substitution are changing all the time and could not be measured successfully even if they all remained constant, since supply conditions are always changing. No laboratory exists where all economic factors may be held fixed. After this point in her discussion, Mrs. Robinson practically forgets all about heterogeneity of product. Joan Robinson, Economics of Imperfect Competition (Lon­don: Macmillan & Co., 1933), pp. 4–6. Also cf. Hunter, “Product Differentiation and Welfare Economics,” pp. 547ff.

[30]Quoted in Richard T. Ely and others, Outlines of Economics (3rd ed.; New York: Macmillan & Co., 1917), pp. 190–91. Blackstone gave almost the same definition and called monopoly a “license or privilege allowed by the king.” Also see A. Leo Weil, Chicago Conference, p. 86.

[31]The onrush of monopoly grants by Queen Elizabeth I and Charles I provoked resistance from even the Crown’s subservient judges, and, in 1624, Parliament declared that “all monopolies are altogether contrary to the laws of this realm and are and shall be void.” This antimonopoly spirit was deeply ingrained in America, and the original Maryland con­stitution declared that monopolies were “odious” and “contrary to . . . principles of commerce.” Ely, Outlines of Economics, pp. 191–92. Also see Francis A. Walker, Political Economy (New York: Henry Holt & Co., 1911), pp. 483–84.

[32]Francis Wayland, The Elements of Political Economy (Boston: Gould & Lincoln, 1854), p. 116. Cf. this later definition by Arthur Latham Perry: “A monopoly, as the derivation of the word implies, is a restriction imposed by a government upon the sale of certain services.” Perry, Political Economy, p. 190. In recent years this definition has all but died out. A rare current example is: “Monopoly exists when government by its coercive power limits to a particular person or organization, or combination of them, the right to sell particular goods or services. . . . It is an infringement of the right to make a living.” Heath, Citadel, Market, and Altar, p. 237.

[33] As Weil stated: “Monopolies cannot be created by association or agreement. We now have no letters patent giving exclusive right. . . . It is therefore wholly unjustifiable to use the term monopoly as applied to the effects of industrial consolidation.” Weil, Chicago Conference, pp. 86f.

[34]For example, Edward H. Chamberlin, Theory of Monopolistic Competition (7th ed.; Cambridge: Harvard University Press, 1956), pp. 57ff., 270ff.

[35]It might be objected that these concepts are vague and give rise to prob­lems. Problems do arise, but they are not insuperable. Thus, if one man is named Joseph Williams, does this preclude anyone else from hav­ing the same name, and is any future Joseph Williams to be considered a criminal? The answer is clearly: No, so long as there is no attempt by one to impersonate the other. In short, it is not so much the name per se which an individual owns, but the name as an affiliate of his person.

[36]For clear expositions of the theory of monopoly price, see Mises, Socialism, pp. 385–92, and Human Action, pp. 278, 354–84; Menger, Principles of Economics, pp. 207–25; Fetter, Economic Principles, pp. 73–85, 381–85; Harry Gunnison Brown, “Competitive and Monopolistic Price-Making,” Quarterly Journal of Economics, XXII (1908), pp. 626–39; and Wieser, Social Economics, pp. 204, 211–12. In this particular case, “neoclassical” in­cludes “Austrian.“

[37]Mises, Human Action, p. 278.

[38]Thus:

The mere existence of monopoly does not mean anything. The publisher of a copyright book is a monopolist. But he may not be able to sell a single copy, no matter how low the price he asks. Not every price at which a monopolist sells a monopolized commodity is a monop­oly price. Monopoly prices are only prices at which it is more advantageous for the monopolist to restrict the total amount to be sold than to expand sales to the limit which a competitive market would allow. (Mises, Human Action, p. 356)

[39]Here we abstract from monetary expense or “money cost” considera­tions. When the producer is considering sale of already produced stock, such past monetary expenses are completely irrelevant. When he is con­sidering present and future production for future sale, present money­-cost considerations become important, and the producer strives for maximum net returns. At any rate, some A¢ point will be set, whatever the actual configuration of money costs, unless, indeed, average money costs are falling rapidly enough in this region to make the “competi­tive point” the most remunerative after all. It is curious that it is preci­sely the condition of falling average cost that has given the most worry to antimonopoly writers, who have been concerned that one given firm in any industry might grow to “monopoly” size because of this condition. And yet, if it is “monopoly price,” not monopoly, that is particularly important, such worry is clearly unfounded. On the gen­eral unimportance of cost considerations in monopoly theory, see Chamberlin, Theory of Monopolistic Competition, pp. 193–94.

Previous Section * Next Section
Table of Contents