The Political Economy of Monopoly

THE POLITICAL ECONOMY OF MONOPOLY Business, Labor and Government Policies

THE POLITICAL ECONOMY OF

MONOPOLY Business, Labor and Government Policies

by FRITZ MACHLUP

Baltimore:

The

Johns

Hopkins

Press

Books by

FRITZ MACHLUP

Die Goldkernwiihrung (1925) Die neuen Wiihrungen in Europa (1927) Borserikredit, Industriekredit and Kapitalbildung (1931) Fuhrer durch die Krisenpolitik (1934) G.uide it travers les panacees econorniques (1938) The Stock Market, Credit and Capital Formation (1940) International Trade and the National Income Multiplier (1943) The Basing-Point System (1949) The Political Economy of Monopoly (1952) The Economics of Sellers' CompetUion (1952)

Copyright© 1952 by The Johns Hopkins Press, Baltimore, l\tId. 21218 Printed in the United States of America Library of Congress·Catalog Card Number 53-6338 Originally published, 1952 Second printing, 1955 Third printing, 1964 Fourth printing, 1967

Author's Preface a student in your first course on economics, I know Itough, that you are hard to please: you tend to find many books dull, or condescending. It has been my ambition to avoid all F YOU ARE

these unloved qualities and to write in a lucid style with a bit of a snap in it. I hope ,you will like what I have done. Some parts of this book, perhaps, are a little more "abstract" than you are used to. Certain sections in Chapters 9 and 10, on Labor Policies, and in Chapter 12, on Measuring the Degree of Monopoly, are perhaps more technical and "theoretical'> than you can stand. But try them anyway. If you area ngeneral reader" without any background in econOIYlics, you will find the· more "descriptive" parts-Chapters 4 to 8-on Business Policies and Government Policies the easiest. But even if the other chapters are harder, I hope you will find them readable and interesting enough to make your reading effort worth while. I can rely on you to know how to skip the more technical sections in Chapter 12 and elsewhere, even without specific advice from me. InCidentally, I should like to know how well or how little I have succeeded in making complicated things intelligible to the general reader. So, please, would you' mind writing me about it and telling me which parts in this book you have found clear and interesting, and which parts you have found dull or unintelligible? If you. are a student in ~ second or third course in economics, I hope the book will be rewarding to you in its entirety. Of course, your chief interest may not be in general economics but in a special field. If it is Labor Economics, I am afraid you will find my Chapters 9 and 10 rather different from the ideas put forth by most other books on the subject of trade-union wage policy; but I trust you will be tolerant of dissenting opinions. If your field is Government Control of Business, or Industrial Organization, you will surely need more illustrative case" material than is contained here, but the systematic treatment that I have tried to give here of the economic issues involved, may, if I have succeeded, cC

[v]

vi

AUTHOR'S PREFACE

afford you a better perspective and firmer understanding of the field as a whole and of the factual information gained from other sources. If you are studying the economics of competition and monopoly, this book may provide you with useful background knowledge; but it does not furnish enough of the necessary theoretical analysis. For this you will have to turn to a companion volume, published simultaneously by the Johns Hopkins Press under the title The Economics of Sellers' Competition: Model Analysis of Sellerl Conduct, where I present an exposition of the economic theory of competition that will, I hope, provide you with a solid foundation for analytical economic reasoning. If you are a trained and well-read economist, the present book may interest you mainly for what are, I believe, its somewhat original ways of dealing with issues with which you are familiar. To be sure, you will probably disagree with some of my views and I expect criticism from you, mostly of the really controversial issues of wage theory. If you are a teacher of economics, I hope you will find that this book is suitable for your students. I wish you would give it a try and let me know how it works. I expect brickbats on two scores. You may object to the number and length of footnotes; I felt it desirable that the discussion in the text be amplified in a way that permits the reader who does not care for more to skip it without loss of continuity. And you may object to some repetition; but the majority of readers do not finish the book in one sitting, and when reading a chapter, may well have forgotten what was said two or three chapters earlier. Moreover, some repetition is needed if the exposition is to make sense. For example, if business practices evolve in adaptation to changing government policies while government policies are again readjusted to changing business practices, one cannot reasonably avoid discussing each in connection with the otherand this implies repetition. A few sections of the present book have been published elsewhere. An earlier version of Chapters 1, 2, and 3 has been used in mimeographed form in courses in elementary economics at the. University of Buffalo. A portion of Chapter 3 is being published

AUTHOR'S PREFACE

vii

under the .title "Monopoly and the Problem of Economic Stability" as one of the papers presented at the conference on Monopoly and Competition and Their Regulation, held by the International Economic Association in Talloires, France, in September 1951. A section of Chapter 5 is being published under the title "Characteristics and Types of Price Discrimination" as one of the papers presented at the Conference on Business Concentration and Price Policy held by the Universities-National Bureau Committee for Economic Research in Princeton, N.J., in June 1952. A section of Chapter 6 was published as an article entitled ':':The American Antitrust Laws-Success or Failure?" in the Schweizerische Zeitschrift fur Volkswirtschaft und Statistik, Vol. 87 (1951), pp. 513520. Finally, an early version of substantial portions of Chapters 9 and 10 was published under the title ':':Monopolistic Wage Determination as a Part of the General Problem of Monopoly" in Wage Determination and the Economics of Liberalism, Economic Institute of the Chamber of Commerce of the United States (Washington: 1947), pp. 49-82. I probably should explain that the present book together with the companion volume on The Economics of Sellers' Competition take the place of what was previously announced as a forthcoming book ':'On the Economics of Competition and Monopoly." , I am indebted to numerous friends who have helped me in the preparation of this book. Listing only those who gave me generously of their time, I wish to thank John T. Dunlop, of Harvard University, who assisted me, back in 1939, in writing the first draft of an essay, portions of which are contained in this book; John D. Sumner, of the University of Buffalo, Roy W. Jastram, of the University of California, Emile B.enoit-Smullyan, then of the Department of Labor, and Edwin G. Nourse, then of the Brookings Institution in Washington, who gave me friendly criticism of those parts of the manuscript that I had written before 1942; Signlund Timberg, formerly of the Department of Justice, who made valuable comments on Chapter 6, on ':':Antitrust Laws"; and Edith Tilton Penrose, of the Johns Hopkins University, whose contribution to this book has been singularly extensive. She discussed with me nearly every problem of analysis and exposition, read and suggested improvements on almost every page, did most

viii

AUTHOR'S PREFACE

of the library research for Part III, on "Government Policies," and furnished a complete draft for Chapter 8. While the credit for many good features of this book should be hers, the responsibility for its shortcomings is of course entirely my own. I wish to record my gratitude to the Rockefeller Foundation for a grant permitting me to give a whole year-1942-43-tomy research on the problem of monopoly, although most of the studies of that year were on the patent system and the results of these studies will eventually go into a monograph on that subject. Financial aid received froln the Lessing Rosenthal Fund for ~conomic Research at the Johns Hopkins University is also gratefully acknowledged; it was used to defray editorial and clerical expenses connected with the preparation of the present book. Finally, I wish to thanl< Angela Lavarello, Secretary of the Department of Political Economy at the Johns Hopkins University, who cheerfully assumed the responSibilities connected with the task of getting the manuscript typed. FRITZ MACHLUP

Baltirnore, Maryland, July 1952

Table of Contents AUTHOR'S PREFACE

v

Chapter PART I-cONCEPTS, PROBL~MS, APPRAISALS

1. Fundamental Notions and Concepts 2. Monopoly: Meanings, Effects, Manifestations 3. Monopoly: Economic and Political Appraisals

3 24 46

PART II-BUSINESS POLICIES

4. Monopolistic Business Practices: Collusion, Merger, Exclusion 5. Monopolistic Business Practices : Price Leadership, Discrimination, Unfair Competition

81 127

PART III-GOVERNMENT POLICIES

6. Governmental Restr-aints on Monopoly: Antitrust Laws 181 7. Governmental Aids to Monopoly: Corporation Laws, Taxes, Tariffs, Patents 236 8. Governmental Aids to Monopoly: Licences, Regulation, Price Controls, Labor Law "287 PART IV-LABOR POLICIES

9. Monopolistic Labor Policies: Bargaining Power 10. Monopolistic Labor Policies: Wage Rates and Inrome

333 ~o

PART V-FACTS, THEORIES, MEASUREMENTS

11. Economic Fact and Theory 12. Measuring the Degree of Monopoly

439 469

529

INDEX

[ix ]

Analytical Table of Contents Chapter PART I-CONCEPTS, PROBLEMS, ApPRAISALS

1. Fundamental Notions and Concepts

3

Loose Charges and Vague Notions: The Sins of Monopoly and the Virtues of Competition· Vague Notions and Indiscernible Facts Competition, Pure and Perfect: Perfect Market· Pure Competition· Interview with a Pure Competitor· Non-Pure Competition . Pure Competition as an Ideal . Perfect Competition . The Function of Competitive Prices

2. Monopoly: Meanings, Effects, Manifestations

24

Monopolistic Restrictions of Operations and Entry: Restrictions of the Volume of Operations . Restrictions of Entry . Practices to Tighten Restrictions of Operations . The Economic Effects of Monopolistic Restrictions· Provisos and Reservations Monopoly in Business, Labor, and Agriculture: Monopolistic Business Policies· Various Meanings of Business Monopoly . Monopsony in Business· Mon0R-9listic Restrictions in Agriculture . Monopolistic Labor Policies

3. Monopoly: Economic and Political Appraisals I nevitability and Desirability of Monopoly: The Cost of Avoidance . Public versus Private Monopoly . Large-Scale Production . Variety of Product . Exploitation of Natural Resources· "Unstable" Industries· Monopolistic ShockAbsorbers and Stable Growth . ~1onopolistic Brakes and Technological Progress· Monopoly Policies versus Tax Policies

Debits and Credits of Monopolistic Restraints: False Issues and Real . Conflicting Objectives . A Balance Sheet Monopoly and Democracy: Monopoly and the Road to Serfdom . Democracy in a Planned Economy· Superstition or Prudence? [ xi]

46

xii

ANALYTICAL TABLE OF CONTENTS

Chapter PART II-BuSINESS POLICIES

4. Monopolistic Business Practices: Collusion, Merger, Exclusion

81

Meanings and Distinctions: Confusion Worse Confounded · Distinctions and "Reality" Cooperation, Collusion, Cartels: Gentlemen's· Agreement . Trade Associations, Cost Calculations and Statistics· Delivered-Price Formulas· Cartels with Enforcement Apparatus . The Contents of Cartel Arrangements . Profit Pools and Average Price Cartels . Centralized Selling Oppres~ion, Domination, Merger, Concentration: Manifold Interrelationships, Warfare and Cooperation· Oppressive Practices· Domination· The Merger Movement· Integration and Conglomeration· Concentration

Restrictions on ~ntry: Governmental Barriers . Threats of Ruinous Campaigns . Barred Access to Resources . Bigger Minimum Size

5. Monopolistic Business Practices: Price Leaqership, Discrimination, Unfair Competition Price Leadership: A Background of Merger, Domination, Coercion . Conformance without Pressure, Suasion or Collusion . Mutual Understanding between Leader and Followers·. Four Types of Price Leadership Price Discrimination: Definition . Monopoly Power as a Prerequisite . Classifications of Price Discrimination . Personal Discrimination· Group Discrimination· Consumer Location· Consumer Status· Product Use· Product Discrimination . Price Discrimination and the Public Interest A Digression on Price Uniformity: A Symptom of Collusion or of Competition? . Necessary Distinctions· Implications of Price Identity. and Uniformity

Unfair Competition: What is Unfair? . The Right to Compete· Economic Classification· Deception of the Consumer . Competition to Reduce Competition· No Harm to the Consumer

127

ANALYTICAL TABLE OF CONTENTS

xiii

Chapter PART III-GOVERNMENT POLICIES

6. Governmental Restraints on Monopoly: Antitrust

Laws

181

IntervenUons against Competition and against Monopoly: Interventions against Competition . Interventions against Monopoly A Chronology of Antimonopoly Policy: Ancient History . English History· American History

The Antitrust Laws of the United States: The Sherman Act . The Clayton Act· The Federal Trade Commision Act· The Robinson-Patman Act . The Celler Anti-Merger Act . Rules and Exceptions The Law of Collusion: Juridical Controversies· Unconditional Prohibitions· Certainties and Uncertainties· Observance, Enforcement, Penalties· Collusion through Restrictive Patent Licensing· Exemptions for Labor and Agriculture· Exemptions for Transportation, Banking, and Insurance . Exemptions for Exporters and Retail Distributors . "Emergenci' Exemptions The Law of Monopolization: Vexing Problems · An All Too Judicious Judiciary· An Injudicious Legislature· Frustration Continued· Frustration Ended? Antitrust Laws-Success or Failure?: Contradictory Appraisals . Stopping the Cartels-a Partial Success' Checking the Trusts-a Dismal Failure . Alternative and Complementary Antitrust Policies

7. Governmental Aids to Monopoly: Corporation Laws, Taxes, Tariffs, Patents Corporation Laws: The Privileges of the Body Corporate' Large-Scale Production versus Monopoly Control· Gratuitous Privileges and Lack of Limitations . Limiting the Privileges· Federal Incorporation

Tax Policies:. Non-Fiscal versus Fiscal Objectives . Corporation Income Taxes: Why and How? . The Actual Bias Against Small Business· Tax-Induced Sales of Small Business Fi~ms . The Potential Bias Against Big Business· Differential Taxes on Retained Earnings . Tax Policy and Antimonopoly Policy

236

xiv

ANALYTICAL TABLE OF CONTENTS

Chapter Trade Barriers: In1port Tariffs· Arguments for Tariff Protection . Pressure Group Politics· Tariffs, Competition, Cartelization' Import Quotas . Foreign Exchange Restrictions . Interstate Trade Barriers Patent Laws: JustiRcation of Patent Protection' Extension of the Patent Monopoly· Abolition or Prevention of Abuse?

8. Governmental Aids to Monopoly: Licences, Regulation, Price Controls, Labor Law

287

Licensing and HBoard Regulation": EconomiC' Freedom Gained and Lost Again' The Public Interest and the Private Interests· The Guild System Has Returned Public Utilities and Transportation: Protecting Competing Monopolies . Suppression of Competition in Transportation . Competition Prohibited Conservation of Natural Resources: Private and Social Costs . Organic Natural Resources . Oil Conservation or Restriction? . Coal Conservation-a Misnomer Price Controls: Minimum Prices and Price Supports' Output Control and Surplus Removal . Marketing Programs . International Price Programs· Subsidized Production for Destruction . Minimum-Price Controls . Prohibition of Sales Below Cost . Maximum-Price Legislation . Rent Control Labor Legislation: Legislature versus Judiciary. The Power to Organize' The Use of Organized Power· Pruning Back . The Public Interest

PART IV-LABOR POLICIES

9. Monopolistic Labor Policies: Bargaining Power Labor and Society: The Size of the Group Called "Labor" "Pro.:Labor" Sentiment· Approval of Labor Monopoly· Arguments for Strong Trade Unions· Two Points of Romantic Semantics Equalizing the Bargaining Power: The Meaning of Bargaining Power . "Labor-the Most Perishable Commodity" . Workers Must Eat-They Cannot Wait· No Visible Competition for Labor· Conspiracies among Employers . Immobility of Labor· Immobility and Isolated Markets·

333

ANALYTICAL TABLE OF CONTENTS

xv

Chapter Profits at the Expense of Wages . Immobility and General Unemployment· Immobility and Nonwage Competition. Corporations as Combinations of Capital· Redressing the Balance . Dealing with Isolated Labor Markets . Dealing with Employers' Collusion· Dealing with CoEmployer Differentiation"

10. Monopolistic Labor Policies: Wage Rates and Income

380

Correcting Defects of the Labor Market: Wage Differentials and Job Evaluation . Incorrect Adjustments to Changes Upward and Downward Spirals Raising the National Income: The Purchasing Power. Argument . Increasing the Propensity to Consume· Shocking the Employers into Increased Efficiency . Energizing the Workers into Increased Efficiency Redistributing the National Income: Gaining-at Whose Expense? . Real Wages and Labor's Relative Share . Wage Increases Paid Out of Profits? . Getting a "Cut" in Monopoly Profits· Squeezing all Profits in a Changing Economy . Raising Wages as Productivity Rises· The Unorganized Majority . There Will Always Be a Short Run The Wage Structure: Restricting the Supply· "No Help Wanted" · "Natural" and "Artificial" Wage Differentials· Wages in General Are Too Low Wages, Employment, Inflation: The Hidden Connection . Wage Policies of Trade Unions . ~~Full Employment Policy" . Political Freedom in Jeopardy· Restraint or Self-Restraint? . Governmental Regulation of Wage Rates . Reducing the Monopoly Power of Unions· The Problems of Poverty and Insecurity . The Wage Problem under Socialism

PART V-FACTS, THEORIES, MEASUREMENTS

11. Economic Fact and Theory Variations in

~lethod:

Conceptual Framework (Part I) .

Taxonomic Approach (Part II) . Historical Approach (Part III) . Theoretical Approach (Part IV)

Abstraction, Theory, and Fact: "It's a Fact" . "It's Just a Theory" . Facts or Implied Theories?

439

xvi

ANALYTICAL TABLE OF CONTENTS

Chapter

.

Explanation, Prediction, Evaluation: Prediction versus Explanation' Hypothetical Predictions· Evaluation' Implied Value Judgments· An Illustration . Conflicting Values Measurement: "Science is Measurement" . Some Implications of Measurement . Fictitious Accuracy

12. Measuring the Degree of Monopoly Purposes, Obstacles, Criteria: The Desirability of ~Ieasurement . Degree of Monopoly versus Monopoly Power· The Basic.Difficulties of Measurement· The Possible Criteria for Measurement Numbers and Concentration: The Number of Firms· The Concentration of Control . Definitions of Firm and Industry . The Size of the Market· Competition from Outside the Industry . The Index of Divergence The Rate of Profit: The Accounting Rate of Profit . An Adjusted Rate of Profit Price Inflexibility: The Rigidity of Administered Prices . Frequency and Amplitude of Changes . Comparing the Indexes · Margin Inflexibility The Gap Between Marginal Cost and Price: Inequality Between Marginal Cost' and Price· Objections and Limitations . Changes in the Degree of Monopoly Other Measurement Proposals: Gross Profit Margin and Aggregate Monopoly Income · Industry Control and the Slope Ratios of Demand Curves' Cross-Elasticities of Demand· Penetration and Insulation A Monopolist's Self-Analysis Conclusion

469

PART i-CONCEPTS, PROBLEMS, APPRAISALS

CHAPTER

1

Fundamental Notions and Concepts Loose Charges and Vague Notions: The Sins of Monopoly and the Virtues of Competition· Vague Notions and Indiscernible Facts Competition> Pure and Perfect: Perfect Market· Pure Competition· Interview with a Pure Competitor· Non-Pure Competition· Pure Competition as an Ideal· Perfect Competition· The Function of Competitive Prices

N POLITICAL

and popular discussions of economic problems the

«monopolistic practices" is often used to mean "evil pracItices,»termchiefly of "big business." At the same time many scholarly economists assert that monopolistic forms of competition are typical and nOlmal for all markets of industrial products. Are we then to conclude that all industrial policies are by definition "evil practices"? This is not a very felicitous background for an objective investigation of current economic problems. It would be helpful if politicians, lawyers, economists, and businessmen understood the language of one another better than they actually do. LOOSE CHARGES AND VAGUE NOTIONS

The Sins of Monopoly and the Virtues of Competition An impressive list of sins allegedly committed by "the monopo- . lies" is periodically resubmitted. The monopolies, according to the indictment, pick the pockets of the consumers by charging too high prices; cut the throats of small, independent businessmen by ruthless local price-cutting; exploit their workers and suppliers of raw material by iniquitous hiring and buying techniques; reduce the national product through uneconomic allocation and inefficient use of productive resources; jeopardize social stability through concen[3 ]

4

CONCEPTS, PROBLEMS, ApPRAISALS

tration of economic control; use all sorts of pressure to influence governmental policies in behalf of their own interests; prevent possible improvements of the standard of living by suppressing the adoption of superior production techniques; aggravate economic depres~ions by maintaining inflexible prices in the face of falling costs and falling demand; obstruct sustained recovery by choking revived demand through unwarranted price increases; create permanent unemployment by restricting production and resisting expansion; cause deflationary drains of purchasing power by accumulating idle cash surpluses; and threaten the existence of free enterprise and democratic government. The charges against "monopoly" are at the same time credits to "competition" inasmuch as the latter is supposed to prevent the evil consequences ascribed to the former. But more speCifically, competition is credited with securing lower prices for consumers, improvements in the qualities of the products, the introduction of new products and new services to the consumer, the use of the most efficient methods of production, and the best, allocation of the productive resources of the economy. Not everybody, however, has been using only dark colors for picturing the effects of monopoly and only bright colors for the effects of competition. There are many to whom the word competition suggests~instead of "order and efficiency"-disorder, anarchy, the "law of the jungle," ruthlessness, wastefulness, and hence a state of economic life that is socially undesirable. To them it appears preferable to restrict competition, and substitute for' it various schemes of "orderly marketing," "regulated competition" or "cooperation." But somehow the public appeal of the word competition is sufficiently favorable, and that of the word monopoly sufficiently unfavorable, to persuade the advocates of regulation or cooperation to retain the word competition in the descriptiqns or preambles of their schemes, and to insist that they do not propose to eliminate competition but mer'ely to limit it, to hold it to "healthy" degrees. There is also the idea that competition is helpful as long as it does not go too far; in other words, that we may have too much competition as well as too little, and that there exists somewhere a dose that is just right and beneficial for the economy. Since we have not

FUNDAMENTAL NOTIONS AND CONCEPTS

5

yet learned how to measure the amount or degree of competition, some have proposed that there are good and bad kinds of competition. Producers are inclined to dislike price competition, that is, attempts by individual sellers to secure more business by reducing their prices. Most consumers, however, find price competition among sellers more useful than any other kind, and many economists agree with them. If it is a seller's ambition to secure more business, he can do other things as well as, or instead of, reducing his prices. He may improve the quality of· his product; he may provide additional services to his customers; he may attract new customers or win loyalty of his old ones by advertising and other sorts of selling effort; he may deliver his products over great distances without collecting the full cost of transport; he may grant his customers more credit or for longer periods or on better terms; he may lie to his customers about some special qualities of his products; he may disparage the wares of his competitors; he may disturb the business of his competitors and thus divert their customers to himself; he may make it inconvenient for puyers to patronize his competitors; he may reduce the business of his competitors by obstructing their access to certain supplies or services. needed for their production; or he may through ruinous price wars force competitors out of business. If all these practices come under the heading of competition, it is certainly impossible to make generalizations about the benefits or evils of "competition." It would be necessary to distinguish socially harmful forms of competition from socially desirable ones. Some economists prefer to call the presumably harmful practices "monopolistic practices" and confine the word competition to those forms which they consider beneficial to society. To fit the definitions to one's prejudices is analytically of no use. It is possible, though, to adopt such. a narrow definition of competition that it covers only some idealized situation~-which are regarded as socially desirable-and to call all deviations from this construction «monopolistic." This is permissible, but then it is necessary to provide distinctions on the basis of which the various kinds of deviations from the :> of the government are not normally called by that name because habitually one thinks more of "private:>:> monopolists. The early English popular movements against monopoly were against privileges granted to private firms, not against stateoperated monopolies. The American political antimonopoly campaigns were against "the trusts:>:> and "big business.':> Governmental prosecution of monopoly was against private restraints of trade. To be sure, the governmental measures designed to raise agricultural prices above competitive levels and to restrict supplies of agricultural products below competitive levels were often criticized and opposed; but the difference in the political situation, more impressive than the similarity of the economic nature of the policies, apparently has prevented critics from using the term "monopolistiC" to characterize the agricultural programs of the government. Economic analysis, however, and economic welfare evaluation may conveniently deal with these programs in terms of monopoly restrictions and monopoly prices, regardless of what terminology is employed. Not all agricultural monopoly is confined to government programs. Other forms of organization can be used for the execution of monopolistic policies concerning non-staple produce. For example, in dairy farming and fruit growing the formation of strong cooperatives has been a successful instrument of monopolistic

MONOPOLY: MEANINGS, EFFECTS, MANIFESTATIONS

43

policy, although even here direct intervention by the government was often required for the enforcement of the ;;,agreements:>:> against producers who would not agree. Aided by the coercive power of the state, collusive monopoly has achieved an "enviable record of success:>:> in several fields of agricultural production-enviable from the point of view of some industrial producers whose attempts at cooperation with their competitors have been only moderately successful and frequently short-lived. There will not be much discussion of agricultural monopoly in this book. Chapter 8, on ;;'Governmental Aids to Monopoly,':> contains a sketchy account of some farm programs in the United States. Beyond that, the word "agriculture:>:> will not often occur in, the discussions of monopolistic practices or of monopoly power. But failure to mention the word agriculture does not imply inapplicability or irrelevance of the analysis to agriculture. The firm and the seller whose conduct is analysed may be a farmer just as well as an industrialist or merchant. An industrial producer as a member of a "selling carter' or "syndicate" and an agricultural producer as a member of a marketing cooperative may behave very similarly in several respects and the same analytical model may apply to both. And that the analysis of the small, undifferentiated seller of homogeneous products may fit the agricultural producer of staple products better than most industrial producers has already been said. Thus, as far as the competitive or monopolistic conduct of the individual farmer is concerned-rather than the execution of monopolistic farm policies of the government-much of the ';;theory of the firm" may be found to relate to agriculture no less than to other forms of business. As far as the general monopoly problem and its significance in the economy is concerned, many of the general observations of these chapters are as pertinent to agricultural restrictions as to any others. Monopolistic Labor Policies

To what extent will the applicability of DlOSt general observations about the effects of monopoly extend to labor and monopolistic labor policies? And to what extent will the analysis of sellers'

44

CONCEPTS, PROBLEMS, ApPRAISALS

conduct fit the case of the sale of labor effort? Our answer to the first question is: "to a very great extent," but: "hardly at all," to the second. Neither an individual worker selling his labor to. an employer nor a labor union bargaining about the price at which labor may be bought by an employer, can be usefully regarded as a firm selling its products or services. The analysis of the conduct of a business firm as a seller of its output has little to offer for the explanation of the conduct of a worker or a labor union. There may be some similarity between the considerations of a syndicate or the council of a cartel and the executives.of a labor union, the former pondering what prices, the latter what wage rates, their members should obtain. But how far this similarity goes and to what extent the same model can be helpful in the analysis of both cartel price and union wage determination are open questions. It is not suggested here that the model analysis of sellers' conduct is applicable to the problem of wage determination. It is suggested, however, that the effects of union wage determination can ·and should be analysed in terms of monopoly prices and monopolistic restrictions. Wage rate making through collective bargaining by large national unions can hardly ~esult in a competitive wage structure, nor is it intended to do so. The substitution of collective bargaining for the individual bargain has the very purpose of eliminating wage-depressing competition among job seekers, and to the extent that this purpose is attained the resulting wage determination must be regarded as monopolistic. Wage rates thus set above the competitive level restrict the volume of employment in the firms or industries concerned. And since the presence of a large supply of unemployed eligible candidates for the same jobs may make it difficult to obtain and maintain these monopolistic wage rates, policies of restricting entry into the union, into the occupation, or into the region may be pursued as valuable or necessary supports for the wage policies. These restrictions of entry are, of course, no more and no less monopolistic than- the various barriers to the entry of new enterprise in industry. Both are designed to protect the earnings of the insiders against newcomers' competition. Some sensitive advocates of strong labor unionism have ob-

MONOPOLY: MEANINGS, EFFECTS, MANIFESTATIONS

45

jected to the phrase "labor monopoly" and consider it to be a slur on the objectives of the labor movement. There are historical reasons for this disinclination to treat combinations of workers in the same language as combinations of businessmen. For there was a time when workers were prohibited from forming combinations while.business combinations went unchallenged. Some employers' coalitions had the explicit purpose of keeping wage rates downthey were, technically speaking, collusive monopsonies. Even after the legal bans against labor coalitions were lifted, it took them considerable time to attain substantial "bargaining power," that is, monopoly power. With understandable sympathy for the underdog, the lawmakers in the United States then completed the swing of the pendulum and wrote explicit exemptions for labor into the antimonopoly laws. With this history behind the development of labor organizations one may understand the protestations of their advocates that "there is no such thing as a labor monopoly." It is peculiar that one should have to quarrel about the "justi~ fication" for using the term "monopoly" in connection with labor organization when the purpose is neither legal nor political but entirely analytical. It is reminiscent of the fight of the trade associations against the use of the word monopoly applied to their activities in connection with the pricing techniques of their members. From the legal point of view their protestations were understandable. Analytically they were specious and irrelevant. Trade unions and trade associations, to the extent that they are concerned with wages and prices and with collective or cooperative methods of determining them or influencing their determination, unquestionably invite the use of the sallie models or tools of analysis, at least with respect to the effects of their activities on relative prices and the allocation of productive resources.

CHAPTER

:3

Monopoly: Economic and Political Appraisals Inevitability and Desirability of Monopoly: The Cost of Avoidance· Public versus Private Monopoly· Large-Scale Production· Variety of Product· Exploitation of Natural Resources . CCUnstable" Industries· Monopolistic Shock-Absorbers and Stable Growth· Monopolistic Brakes and Technological Progress· Monopoly Policies versus Tax Policies Debits and Credits of Monopolistic Restraints: False Issues and Real· Conflicting Objectives' A Balance Sheet Monopoly and Democracy: Monopoly and the Road to Serfdom· Democracy in a Planned Economy . Superstition or Prudence?

those who think that monopoly has one thing in common with the weather: you may complain but you cannot do anything about it. A few do not even complain about monopoly, but find many good things to say about it. On the other side are those who are in a constant state of agitation about the evils of monopoly and call for a mobilization of all political forces against it. In the middle are the judicious ones, together with the meek, the placid, and the indolent. But monopoly is not an indivisible whole. It is a variety of ingredients, separable and inseparable, in the "ragout" of the national economy, some of which can be fished out to great advantage while others cannot. The real issue is not about (Cmonopoly as a whole," but about bigger or smaller individual lumps of mOJ?opoly, and the question of whether they can and should be gotten rid of.

T

HERE ARE

INEVITABILITY AND DESIRABILITY OF MONOPOLY

For each separate lump of monopoly the question of its avoidability and desirability should be asked separately. There are ba[46 ]

MONOPOLY: ECONOMIC AND POLITICAL ApPRAISALS

47

sically four different answers: any particular element of monopoly may be (a) unavoidable and desirable; (b) avoidable but desirable; (c) undesirable but unavoidable; (d) undesirable and avoidable. If there were agreement about which of the answers was correct in a particular instance, there could be no doubt that we should do nothing to combat monopoly in each of the first three cases. And in the fourth, before "doing something" one would have to ask two further questions~ "just how undesirable?" and "avoidable at what cost?" The Cost of Avoidance

Only seldom is it possible to answer the question whether some particular lump of monopoly is "unavoidable" with an unqualified yes. It can nearly always be turned into a question of the cost of avoidance. For example, if monopoly in telephone service is definitely inherent in the technology of the thing, one might still eliminate this monopoly by doing without telephone service at all. Most people will undoubtedly agree that this would be too high a cost to pay for the removal of this particular lump of monopoly. The meaning of avoiding monopoly power, of course, need not imply a choice between all or none but rather between more monopoly or less. It is, for example, technologically possible to have several competing companies furnish telephone service in one city. The cost of the service under this set-up would probably be higher and the convenience to the public would be considerably reduced. Depending on whether "inevitability" is. to mean that monopoly power cannot be eliminated (except by eliminating the entire production of the good or service) or that it cannot be reduced, we should find the answers (a) or (b) appropriate in this instance. With respect to the quality of the service, the telephone is an obvious example of a field in which monopoly is desirable. In other instances the cost of reducing monopoly power and the relative desirability of monopoly seem to merge into one question. Take the case of streetcar systems in large cities. We have known cities with competing tramway companies, serving parallel streets and operating four tracks in wider streets. The disadvantage of having more streets cut up by car-tracks, the advantage of more

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people being closer to a car line, the disadvantage of no transfer between competing lines, the advantage of quality competition (if .it exists), all these considerations are so mixed up with the comparative cost of the service that it is hard to consider them separately. (Incidentally, it should be said that the existenc~ of "duopoly" rather than monopoly in the narrow sense of the word rarely involves.a reduction in the "degree of monopoly" and any closer approximation to the state of "pure competition." On the other hand, even a streetcar "monopoly" may have to comp~te with several other means of transportation, such as elevated and underground railways, bus lines and taxi cab companies~) The consensus seems to be in favor of monopoly in the streetcar service of a city, although the considenlti'ons behind this view need not support monopoly in bus service. The relative inevitability of monopoly in, the provision of a community with water, gas, and electricity is well recognized. It lies in the technology of distributing these utilities to the consumer: the mains, pipes and cable lines could not economically be duplicated and certainly not multiplied. These are "natural" monopolies. The cost of reducing-to say nothing about avoiding -monopoly in these fields would be so enormous that one is entitled to say that monopoly here is practically inevitable. Public versus Private Monopoly

\Vhere monopoly is inevitable or, more correctly, where its avoidance is too costly, the question of public versus private monopoly arises. In favor of public, :and against private, 'monopoly the following arguments have been advanced: 1. If someone has to have power, it is less intolerable if vested in the state rather than in private persons. 2. The state may be assumed to be more responsible in the exercise of monopoly power than. private persons. 3. The state is executor of the public will and guardian of the public interest, whereas private persons look out for their own interests; hence, consumers and workers will fare better under public than under private monopolies. 4. It may be desirable to have the products of certain monopo-

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lies furnished at prices below average cost; for example, where enterprises must operate under decreasing marginal cost-which may happen precisely where monopoly cannot reasonably be avoided-marginal cost pricing would· imply selling below cost; public ownership of the monopolies, with the state covering the deficits out of general funds, is preferable to any system of government subsidies for private monopolies. The case against public and for private monopoly has been argued as folJows: 1. The managements of private monopolies, since they are always suspected of operating against the public interest, will be more carefully watched; the managements of public monopolies, supposed to have the public interest at heart, are not prima facie suspect, and therefore will be less suspiciously watched. 2. Private managements are afraid of the government and are more careful to avoid cause for discontent than public managements who regard themselves as part of the government. S. Private monopolies can attract more competent men for their management than can public monopolies, where "politics" is apt to dominate the selection of personnel. 4. Private monopolies must protect their liquidity more carefully than public monopolies, which may fall back on "general funds"; hence, costs and efficiency are likely to be watched more closely under private management. 5. Public monopolies are more exposed to pressures of organized interest groups, such as trade unions or special consumer groups. 6. If there is dissatisfaction with the conduct of private monopolies, the people' have an appeal to the government, which may start to "discipline" the monopolies; if the people are dissatisfied with the government operation of monopolies they cannot carry their appeal to anybody but the government itself. 7. If as a result of changes connected with the growth of the economy-especially with technological progress-a more competitive organization of the industry should become practical, there is some chance that competition, direct or through newly developed substitutes, will eventually emerge and end the rule of private monopolies; but if monopolies are public, entry of newcomers

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will probably be outlawed and competition by new substitutes prevented. Many more arguments exist on each side; only the more respectable ones were here enumerated. We should note that the nationalization of inevitably monopolistic industries is not always a socialist demand, but is sometimes proposed by antisocialist advocates of a free-enterprise economy.! On the other hand, some of the arguments against public monopolies are sometimes given strong support by socialist writers who favor nationalization but recognize, and wish to guard against, the dangers incident to public operation of nationalized industries. 2 1 Henry C. Simons, A Positive Program for Laissez-Faire: Some Proposals for a Liberal Economic Policy (Chicago: University of Chicago Press, 1934). Reprinted in Henry C. Simons, Economic Policy for a Free Society (Chicago: University of Chicago Press, 1948). Simons states that "the case for a liberalconservative policy nlust stand or fall on the . . . abolition of private monopoly. . . . It implies that every industry should be either effectively competitive or socialized and that government should plan definitely on socialization . . . of every industry where competitive conditions cannot be preserved" (pp. 57-58). . 2 W. Arthur Lewis, "Recent British Experience of Nationalization as an Alternative to Monopoly Contro~." Paper presented to the Round Table on Monopoly and Competition and Their Regulation, International Economic Association (Talloires, September 6, 1951). The following quotations from this objective account may serve as illustrations for some of the arguments listed in the text. "The appointing of public directors to manage an undertaking is not sufficient public control." "Parliament is handicapped in controlling corporations by its lack of time. . . . Neither have Members of Parliament the competence to supervise these great industries. . . . Parliament is further handicapped . . . by paucity of information . . . for example, less information is now published about the railways than was available before they were nationalized." "Except in the case of transport, the British government has resisted proposals that public corporations should be treated in the same way [as private monopolies], with the result that the consumer is formally less well protected vis-a-vis public corporations than he was vis-a-vis private firms operating public utilities." "The [public] corporation's Board, though publicly appointed, has many loyalties in addition to its loyalty to the public. It has also a loyalty to itself, and to its own staff, which may well conflict with the interest of the consumer." ccpublic corporations have not found it easy to dismiss redundant workers, or even to close down inefficient units or to expand more efficient units in some other place (e.g., railways, mines). It may well tum out that public corporations are less able to promote this kind of efficiency than are private corporations, in the British atmosphere of tenderness towards established sources of income."

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Large-Scale Production There may be industrial products of which the entire demand can be met by the output of a single establishment. Where the ca-

pacity of the productive establishment of "optimum size" is very large in relation to the total demand for the product, competition cannot exist or cannot endure. The fact that the technological developments of the last century have resulted in conspicu