Is Economic Freedom Possible?
APRIL 01, 1963 by BENJAMIN A. ROGGE
Dr. Rogge is Dean of Wabash College, Crawfordsville,
This article is recorded in the "Seminar Library" series of LP records available from the Foundation for Economic Education, In, ington-on-Hudson,
The real debate on domestic policy in the
Those of us who are losing the debate often ascribe our losses to the work of men in academic life and elsewhere who are preaching socialism and trying to subvert the traditional American system of free enterprise. This easy and tempting explanation implies that our un-American opponents should be silent, and thus permit true American principles to prevail.
This explanation is both untrue and dangerous. It is dangerous because it could lead us to impose restraints on freedom of speech and of press that would indeed be un-American. It is dangerous because it leads us to relax our efforts to prepare and present our own case as powerfully and persuasively as possible. It is untrue because not one in five hundred of those who favor more government intervention is a committed socialist or even basically opposed to free private enterprise. On the contrary, most of them are committed to the free market arrangement and believe that their proposals are designed to strengthen rather than to weaken it. Specifically, they argue that the market arrangement can survive only if certain of its weaknesses and failures are offset by appropriate government action.
For example, it is alleged that the free market economy tends to be unstable, alternating between boom and bust, and that this instability will destroy the economy unless corrected by appropriate government action. Though this is a serious charge, I believe both the analysis and the call for government action are mistaken.
What I prefer to discuss here is an equally serious charge made against the free market by its friends.
Their charge is that economic freedom, though desirable, is not strictly possible—that in an unhampered market the individual would not be truly free but would be imposed upon by monopolies of various kinds and degrees. This charge appears in the preamble to one piece of interventionist legislation after another. Thus, the worker is said to need special protection because of the monopoly power of the employer. The farmer must be protected against monopolies on both sides of his market. Certain kinds of business firms must be protected against certain other kinds. Certain price decisions must be influenced by government because of the monopoly power of the firms involved. And on and on it goes. Clearly, if private monopoly is indeed this ubiquitous, a presumption is established in favor of a substantial role for government.
In my opinion, however, and this is to be the central thesis of my argument, the unhampered market tends to be a competitive market. In fact, strong action by government is all that can prevent its being a competitive market.
Phrased another way, my thesis is that positions of monopoly power tend to be short-lived and relatively ineffective, except as they receive the positive assistance and protection of government. Or phrased still another way, government in the
Good for Others, Not for Me!
In developing the argument, I admit that there are certain very human attitudes which tend to work against competition. Although each of us may approve of competition as a general principle, we are less than anxious to face competition in our own personal activities. Competition is good in principle, we say, but not in our particular industry or occupation, or not when it comes from overseas, or not when it comes from people improperly trained in this occupation.
A natural outcome of this attitude is the attempt to reduce competition by cooperative action among would-be competitors. This tendency was clearly recognized by Adam Smith, the father of free market economics. In The Wealth of Nations published in 1776, he wrote as follows: "People of the same trade rarely meet together even for merriment and diversion except that it end in some contrivance to raise prices."
A second reason for questioning the possibility of a truly free economy is the influence of advancing technology on the size of the firm. The continuing technological revolution has produced a situation in one industry after another where, to be efficient, a firm must represent a large accumulation of capital, translated into buildings, machinery, and distribution organizations of great size and complexity. This growth in the size of the efficient firm is another challenge to the maintenance of the competitive economy.
A third reason often advanced for skepticism about competition is the difficulty of keeping oneself informed on the alternatives facing him in the multiple markets in which he operates, and the associated difficulty of retaining the mobility to shift his course of action in response to changes in those market alternatives.
A Temptation To Connive
The modern economic world is indeed a complex and confusing world, and these charges deserve serious attention. Let us take the charge that collusion rather than competition tends to be the distinguishing characteristic of the unregulated market economy. It is true that men are always tempted to practice collusion. However, it is equally true that the same forces which lead to the formation of cartel agreements tend to destroy those agreements.
The principal force involved here is simply the desire to make money. For example, suppose that a number of farmers agree to hold livestock off the market in a local area. The effect of this, of course, is to cause livestock prices to rise in that area. But with each increase in price, the individual farmer is under greater temptation to break the rules of the cartel and sell his hogs or beef cattle. At the same time, each increase in price attracts more livestock to that local market from farms outside the agreement area. The members of the cartel must then battle both their own members and outsiders to maintain the effectiveness of their operation.
In the same way, if a number of business firms agree to divide the total market into exclusive territories, the resulting price increase tempts each firm to try to increase its sales so as to increase its profits. However, each firm’s own territory provides only limited opportunities for increased sales, and the temptation is enormous to expand sales by poaching on the neighboring, forbidden markets.
The history of cartels in
The farm program in this country in the last 35 years has been nothing more nor less than a government sponsored and operated cartel arrangement among otherwise competing producers. Then on farm citizens have had to pay both the higher food and fiber prices and the cost of operating the cartel producing those higher prices.
In the same way, the trade union, a cartel arrangement among otherwise competing sellers of the services of labor, has been given the explicit support of government. In addition, trade unions have been permitted methods of enforcing their cartel rules that have made a mockery of the legal prohibition against assault.
In the same way, certain business and professional groups have been given legal protection in their cartel arrangements through licensing and franchise protection and through so-called fair trade laws.
Justice Encouraged To Peek
The seriousness of these actions by government lies not only in the economic consequences but also in the violation of an important cornerstone of the free society—equality before the law. The union member, the farmer, and certain businessmen have been encouraged and assisted in doing precisely that for which other businessmen are sent to jail. The blindfolded goddess of justice has been encouraged to peek, and she now says with the jurists of the ancient regime, "First, tell me who you are, and then I will tell you what your rights are."
To summarize the point: although there is a natural tendency toward collusion among those who otherwise would be competing, there is an equally natural and ultimately stronger tendency for such collusive agreements to break down. The greatest contribution the government can make in this regard is to stop assisting and encouraging cartel groups.
Adam Smith followed the words I quoted above on "people of the same trade," and so forth, by saying, "There is no law that would be consistent with either liberty or justice that could prevent such meetings, but surely the government should do nothing to encourage such meetings, or to make such meetings necessary."
We have in the traditions of our common law refusal to enforce cartel agreements all that is really needed to prevent such agreements from destroying the basic competitiveness of the American economy.
Growth in Size of Firm
I turn now to the second argument: the threat to competition that is said to be posed by the growth in the size of the firm. Here again, there is no disputing the fact that advancing technology has led to larger and larger firmsin many industries. However, in some industries advancing technology has made it possible for small, even household units to compete successfully with the giant firms. The development of efficient and relatively inexpensive tools, for example, has made it possible for many a husband to run a basement factory for producing furniture, at least for use in his own home.
But rather than rest the case on this possibility, I would further point out that the growth in the size of the firm often has been matched, or more than matched, by the growth in the size of the market. It is the size of the firm relative to the market that is important, and not the absolute size of the firm. Advancing technology also has been at work in transportation and communication, and this has had the effect of widening all markets.
For example, as a result of the automobile, no giant supermarket today has as much control over its market as did one small store in the small Midwestern town where I was raised. The United States Steel Corporation has less control of its market than did many a small backyard iron foundry in the last century. Transportation costs shielded the backyard operation from competition located no more than a few miles away. U. S. Steel, on the other hand, faces competition from firms in every steel producing country in the world.
In the same way, the worker living in a small town with only one major employer usually has the real alternative today of driving no more than 25 miles to dozens of other employment opportunities. Thus, in many cases, improved transport and communication facilities have widened markets more rapidly than firms have grown in size, and competition has increased rather than diminished.
A second way in which markets have been widened by advancing technology is through the development of substitute products and materials. Thus, the major steel companies, in almost every use for steel, face tremendous competition from substitute materials—aluminum, wood, concrete, plastics—even glass. In fact, it is quite unrealistic to speak of this arrangement as the steel industry. There really exists an entire complex of firms and industries, and no one firm—no one industry even—approaches monopoly power when so used. The typical textbook, man on-the-street way of defining industry—and hence, of evaluating monopoly power—is both unrealistic and dangerous. It leads to a gross exaggeration of the marketpower actually possessed by the firms involved.
But again, let us not rest the case on these possibilities of widening markets. In spite of these powerful influences, there still can exist situations in which a given firm, or small group of firms, dominate a given market—no matter how wide that market has become. Do these not constitute hard core cases of monopoly, calling for government action to break them up or offset their consequences by creating counter monopolies of labor or agriculture or other business firms? My answer is no!
Success Through Service
To begin with, it is extremely unlikely that a firm can acquire market power except by laudable efficiency in serving the wishes of consumers. Is this firm to be rewarded for its efficiency by government antitrust action? And, if so, what of the consumer and the service he has been receiving?
Furthermore, if this firm uses its market power to raise prices above the competitive level, other firms will be tempted to enter the industry. These other firms can include large, diversified companies with adequate capital to invade any market. In this country in recent years we have seen many cases of large firms in a given industry suddenly finding themselves facing the competition of other large firms, already established in other fields, but coming into this market to reap the rewards of diversification and higher profit margins. The result is that even the powerful firm in a dominant position in its own market must behave as if it faced immediate important competition, because a failure to do so would soon attract that competition.
Beyond this, the very process of technological progress which may have created this dominant firm tends, over time, to weaken its position. Other firms with newer, better ideas will come into the field, and the original firm will find its share of the market shrinking. Thus, in spite of the fact that the Supreme Court decided long ago against breaking up the United States Steel Company, that company’s percentage share of steel sold by American producers has declined steadily from over 75 per cent to around 35 per cent.
It is the little foxes, indeed, who nibble away at the market, who improvise and experiment, whose administrative simplicity permits daring moves, who reduce the stature of the giant to one quite consistent with almost any meaningful definition of competition. This process of short-run market power being replaced by someone else’s short-run reign, in turn supplanted by a third, and so on, was eloquently described by the late great Austrian and Harvard University economist, Joseph Schumpeter. He argued, not only that the dominance attained through technological advance is short-lived, but also that it is this possibility of at least short-run market power and security that induces firms to undertake the technological explorations which are revolutionizing the modern world.
In summary, then, although the process is not perfect nor instantaneous, there are powerful forces always at work in the modern world to create a dynamic and effective competitive process, protecting each element in the economy from each other.
"Individuals in Modern Economy Lack Knowledge and Mobility"
Turn now to the third charge, to the claim that individuals in the modern complex economy do not possess the necessary knowledge and mobility to force competitive practices on those with whom they deal.
I would first say that the modern economy, with its advanced techniques of communication and transportation, provides the individual with more information and better and cheaper means of transport than ever before in the history of the world. But beyond that, it is not necessary that all individuals in a given market be completely informed and completely mobile for adequate competitive pressures to exist.
For example, I know almost nothing about the workings of a television set. What protects me then, when I buy a television set or have one repaired? It is the fact that there are a substantial number of men who do have the required technical knowledge. The television dealer who expects to prosper and survive must meet the demands of all with whom he deals, or quickly lose out to other more reputable and reliable dealers. On the other hand, in certain areas I am the better informed buyer, and in these areas I protect the less well-informed.
In the same way, I have a personal commitment to the college where I work and the community where I live which seriously reduces my mobility. Here, I am protected in part by the good will of those who employ me, but I am protected as well by the fact that the college must offer a general program of working conditions and salaries that will retain the uncommitted and that will attract the appropriate staff replacements and additions.
Not All Must Move at Once
This same process works to effect the many adjustments that must continually be made in a dynamic economy. Usually, in a dying industry or area, not all workers must leave at once. The process customarily takes years. The adjustments are made by the sizable mobile element in every work force, thus protecting the less mobile from loss of employment or exploitation. The adjustment process can be left to each individual and does not require that everyone have complete knowledge and complete mobility.
Another variant of this argument is the charge that the consumer is deliberately misled and confused by advertising, and hence falls easy prey to noncompetitive sellers. I have heard this argument presented by many people from all income levels and all walks of life. But I have yet to find one of them who would admit that he himself was the helpless victim of Madison Avenue. It is always "they"—a vague and never identified "they" who are thus bamboozled. The fact is that advertising itself is competitive, an expression of the basic competitiveness of the American economy, a process through which all of us receive the necessary information for the making of decisions.
In summarizing my answers to the charges that have been made against the possibility of a truly competitive free market, let me repeat, I do not insist that the processes at work produce instant pure competition, in every market in the country, at every moment of time. I say only that the forces are sufficiently strong, and work in good enough time, to give us a workably competitive economy, an economy that does not need government action to offset the noncompetitive elements.
More Harm than Good
When I have admitted that the system is not perfect, does this not leave a case at least for government antitrust legislation to handle the imperfections that remain? In theory, a case might be made for this; but in practice, I see no evidence that antitrust legislation and action ever can be devised to correct the few imperfections without the greater possibility of destroying dynamic competitive firms.
How is one to distinguish between the firm that has acquired temporary market power through greater efficiency and the one that has acquired power without being efficient? To break up the firm that is efficient is to work against true competition rather than to promote it. Nor can we seek to maintain competition by maintaining competitors. This has been a common thrust of our antitrust action. Yet, in fact, it thwarts competition rather than promotes it. Under true competition, the resources come under the control of those firms which have proved themselves the most efficient in serving the interests of consumers. The weeding-out process is severe and effective. To stop that process, to try to maintain a given number of competitors, is to promote inefficiency, not competition.
Another direction taken by our antitrust laws has been that of prohibiting unfair competition. Unfair competition has been defined as selling below cost in order to drive out rivals and thus gain a dominant position in the market. In practice, though, it is virtually impossible to distinguish between low prices that are a natural part of competitive maneuvering and those that are designed to establish market dominance. In practice, then, this legislation has done much more to reduce the competitiveness of the economy than to enhance it. In addition, it has contributed to a general climate for business decision-making characterized by uncertainty and confusion. Thus, one major electrical manufacturing firm recently was under indictment for charging prices that were thought to be too high and at the same time for charging prices that were thought to be too low.
Antitrust legislation generally has been subjected to such varied interpretations that the most experienced legal staff in the country cannot, with any certainty, advise a company on what practices will be illegal under the legislation. Surely, this reflects the basic philosophical and practical weakness of the antitrust approach itself.
In conclusion, then, I would offer as the only meaningful definition of monopoly the following one used by Adam Smith: "Monopoly is a government grant of exclusive trading privileges." If this definition be accepted, it follows that what the government must do, and all that it must do, to promote competition is to stop fostering and protecting monopoly, whether it be in business, or in the professions, or in agriculture, or in labor. In the words of the great Belgian historian, Henri Pirenne, in his study of the emergence of competitive capitalism from the blight of the government-protected guild economy: "Capitalism is not in itself opposed to the tendencies of human nature, but its restriction is. Economic liberty is spontaneous."
Ideas on Liberty
Ten Thousand Commandments
The breakup of the leading integrated companies and the divorce, divestiture, or dissolution of the biggest producers and distributors, whether integrated or not, is a luxury the country cannot afford. Its "great concentrations of economic power" in American industry are more essential to the nation’s defense than its great concentrations of administrative power in
The new interpretations of the antitrust laws endanger the political structure of the country. They disintegrate the law, making it a respecter of persons, which tends to be no law at all. They upset the balance of power between Congress and the courts by judicial legislation, which is a usurpation of Congress’ role. Whatever "power" they take away from business organizations will not revert to the people but is automatically being appropriated by government agencies.