Freeman

ARTICLE

Is Economic Freedom Possible?

APRIL 01, 1963 by BENJAMIN A. ROGGE

Dr. Rogge is Dean of Wabash College, Craw­fordsville, Indiana.

This article is recorded in the "Seminar Library" series of LP records available from the Foundation for Economic Education, In, ington-on-Hudson, New York. $3.50. Write for complete list.

The real debate on domestic policy in the United States at mid-century concerns the proper role of government—and those who wish for less government in economic affairs are obviously los­ing. The judges, in this case the voters of the United States, have been giving verdict after verdict to those who argue for more gov­ernment intervention.

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 United States has done far more to pro­mote monopoly than to promote and permit competition.

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.

Cartels in America

The history of cartels in Amer­ica is a history of brief initial suc­cesses followed by increased cheating on the agreement, then serious internal conflict, and even­tual breakdown and dissolution of the cartel. This was the history of cartels long before the govern­ment made such agreements ille­gal per se, when the only restrain­ing influence was the time-honored common law practice of court re­fusal to enforce cartel contracts. I could provide one case history after another to support my thesis. At the same time, I know of no cartel agreement in the his­tory of this country that has been both effective and long-lived ex­cept those that have had the ex­plicit support of government.

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 Wash­ington.

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.

HAROLD FLEMING

ASSOCIATED ISSUE

April 1963

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