April Freeman Banner 2014

ARTICLE

Monopoly And Competition

NOVEMBER 01, 1955 by BRADFORD SMITH

Mr. Smith is Economist for the United States Steel Corporation.

Free competition is as much threatened by coercive attempts to perfect it as by direct abuse of monopoly powers

According to the writers of economic textbooks, competition is not just competition; there is “perfect competition,” “imperfect competition,” “non-price competition,” “unfair competition,” “potential competition,” “workable competition,” “monopolistic competition,” and a host of other kinds.

To the degree that I understand these terms, the distinctions between the various kinds of competition are primarily based upon the number and relative size of the producers or buyers in a market for a given product. The range is from so-called “perfect competition” where there are a great many producers, no one of which is significantly large, to “monopoly” where there is only one producer. In theory—and I think in theory only—there is also a paralleling consequence to prices. Thus, under so-called “perfect competition” producers can theoretically get very little for what they produce, while under “monopoly” the producer can theoretically charge whatever people are willing to pay rather than do without the product.

And finally, there is often some sort of social judgment that is implied. The implied judgment is that “perfect competition” is a good thing—an objective generally to be sought or achieved by law, while anything less than so-called “perfect competition” is something short of perfection with monopoly at the tail end of the procession being regarded as something very bad that ought to be abolished and forbidden.

That such a social judgment is achieved is, I suppose, quite natural. There is an insidious semantic inducement to do so in the very terminology itself. Thus these economists have set up for theoretical analysis a hypothetical condition which, in the real world, seldom, if ever, exists at any time or place. They have given this condition a name, to wit: “perfect competition.” Perfect competition assumes producers so numerous and small that the disappearance of any one of them would be unnoticed. It also assumes complete information and mobility of resources—that is, entry into or withdrawal from production being relatively costless.

Any scholar at any time has a perfect right to establish a hypothesis, give names to concepts, define his terms, make and state assumptions, abide by them, and reason from them. These are, indeed, the methods of scientific analysis. In this case, however, the choice of the name, “perfect competition,” was, I think, a little unfortunate. It is popularly interpreted to mean the “best kind of competition.” The technician using this terminology is also able to point to any industry in America and say that competition in that industry is “imperfect” or “oligopolistic.” To make it “perfect,” all large units of production must be forcefully broken up into little bits. From there on out, discussion is more likely to become demagogic than discerning.

This gets things turned upside down because the fact is that so-called “perfect competition” is not the best kind of competition for America. As a matter of fact, it is probably the very worst kind, from the point of view of getting the maximum production and distribution of the good things of life. I believe this to be true: If the economist’s ideal “perfect competition” were ever legislatively imposed and enforced in this country, prices would not be lower but very much higher; and productivity would decline so far and so fast that millions of us would literally die of starvation and destitution.

One does not have to go any further than his own home and back yard to prove this. Thus in the little economic world of the home, mother has a monopoly of preparing the meals, while father has a monopoly on mowing the lawn. Now suppose “perfect competition” were imposed and they were forced to compete with each other. Well, I can testify that father’s time spent in the kitchen would be largely wasted, and mother’s time behind the lawnmower might be a shade less effective than father’s. Net result: The family’s living scale would go down.

In the community at large, under an enforced “perfect competition,” the only way that the more efficient producers could possibly be kept from getting a bigger share of the market would be to forbid them to do so under threat of fine, imprisonment, or punitive taxation. Thus the inefficient would be sheltered; costs and prices would be kept up; the benefits of the division of labor would be denied; there would be greatly diminished incentive to invest in the great factories and large-scale output which have made America’s abundant production possible. In short, the America we know would disappear should we seek to impose upon ourselves that which is technically named “perfect competition.”

Actually, monopoly—as contrasted to “perfect competition” is the mechanism through which the world progresses to new and better products and services. Forbid monopoly and on that day progress stops. This follows from the commonplace observation that there always has to be a first producer—a monopolist—of anything new. He who produces and markets something new is not taking anything away from anybody. He is offering them something in addition. There is no way that he can possibly injure them through the price he puts on his product. The buyer carries his own remedy in refusal to buy if he deems the price too high.

I would not have you understand from these observations that all types of monopolies are necessarily good things. Far from it! But I would have you understand that a numerical investigation that yields the conclusion that there is only one or a few producers of a given item is not a sufficient reason for condemning that situation as undesirable in the public interest.

Here are illustrations of two types of monopoly—one bad and one good: Every young lady is acquainted with a number of young men. Quite frequently, two or more of these young men are seeking to monopolize her time and affection. There are, broadly speaking, two ways in which one of these young men can achieve the monopoly to which he aspires. The first way is to buy a gun and shoot his rivals. The other way is to outperform his rivals. Monopoly achieved by forcefully preventing others from producing is against both good morals and economic welfare. Monopoly achieved by doing a better job at better prices than others can do is a service to the community, not a sin against it.

I must confess that I find the “number system” approach to the story of monopoly and competition both fruitless and frustrating for my purposes. Counting the number of noses, and their relative size, in a given market tells me nothing about what is good or bad for our beloved country. It does not tell me what number and size of noses in given markets would most promote the production and distribution of wanted goods and services. It does not help me in advising my own company with respect to expansion or retrenchment policy. And so I am regretfully compelled to put the number system analysis of competition aside as interesting, but not helpful. I must seek elsewhere for understanding and enlightenment about competition.

I have already stated that any student had a right to establish concepts, to label and define them. So, here is my definition of my ideal which is free competition: It is the absence of fraud, theft, coercion, and intimidation from any source in the dealings of people with each other. Let me repeat that definition because it is the key thought to my theme. Free competition is the absence of fraud, theft, coercion, and intimidation from any source in the dealings of people with each other. You will note that the definition is in the negative; it is concerned with what is to be eliminated from transactions rather than what is to be injected into them. It can be stated, although I think it is not so illuminating, in the positive like this: Free competition means that whatever non-harmful things are to be produced, by whom, where, when, in what amount, and at what price or wage is left strictly to the voluntary decisions of the people concerned.

I think that the maintenance of free competition, as I have defined it, is very important, and that its increasing impairment can spell the doom of the American republic as we know it. Free competition is important, first, because it guarantees the maximum possible production of the most wanted goods. It yields the maximum satisfaction of human wants from the human and natural resources available, thus guaranteeing the maximum achievable economic progress. Second, free competition is our only instrument for continuously dispensing economic justice. Finally, and most important, free competition is the foundation stone of individual liberty. Free competition and individual liberty are, indeed, virtually one and the same thing. They have the same definition. Abolish free competition and individual liberty will perish from this earth.

Here follow my explanations of why I believe these things to be true, along with a few comments on the avenues by which free competition is being impaired. But to do so I have to go back to some key words in that definition—namely, fraud, theft, coercion, and intimidation.

Few people believe in fraud or theft as a means of personal dealing with each other. But when dealing through government, these same things under different names seem obscure to most people. It is the more dangerous for that very reason. Let me give you an example: The private counterfeiter is universally condemned, and for good reasons; he is engaged in both fraud and theft. Now suppose the government does the same thing—prints a lot of paper money and distributes it to people who are thereby entitled to get something for nothing. The process dilutes the currency, diminishes its buying power, and thereby robs all other holders of money of part of that which they have justly earned. It also unbalances the flow of money and goods to markets, thus creating a temporary and synthetic demand that brings about economic maladjustment. It is inflation. It is amazing to me that some people advocate the monetary equivalent of such official fraud and theft as a cure for economic troubles. It is not a cure; it is a cause of such trouble: That is the unvarying verdict of history.

I come now to the words “coercion” and “intimidation.” Intimidation is the threat of coercion, so that leaves coercion. Coercion is an ugly thing. But we must seek to understand it and its administration because it is the central theme of political organization. For example, should we as a people decide we wanted that thing called “perfect competition,” it could only be brought about by coercion. Also, the principal distinction between the economic organization of Russia and of this country is that production and prices in Russia are dictated under the whip of the policeman, whereas in this country they are only partially so dictated.

The essence of coercion can be discerned if you consider the possible ways by which you can force or compel anyone to do anything—whether it is the baby in your own family or your neighbor across the street. I do not mean the mechanisms of persuading, or hiring, or bribing, or bargaining with a person—I mean forcing or coercing him to do or not to do something against his will. Think as you will, I believe you will find that the ways of compelling people to do things come down to a very few basic things. They are the actual or threatened infliction of physical pain or confinement and the taking of one’s property without his consent. Thus, is there any way you can force your neighbor to do anything if he knows that you cannot injure him in his person, good name, or property in any way? I think not. The power to coerce is the armed power to confine or injure people even unto death, and to deprive them of their possessions without their consent. Government always and everywhere has a legal monopoly of the power to coerce. It has a police force—equipped with clubs, guns, and jails—which supervises the behavior of a disarmed populace. Government alone can legally imprison, torture, execute, or impose fines upon people. The individual who is governed cannot legally do any of these things except as the government delegates part of its power. Thus the parent cannot even give his own child a well-merited spanking—that is, inflict pain—except as the government permits him to do so in a limited way. If he spanks his child too hard, he will land in jail. So much for the nature of coercion and the government’s monopoly of it.

Now that we understand this, it follows that we will have free competition when and only when the government exercises its power to coerce exclusively for the purpose of canceling out the exercise of fraud, theft, coercion, and intimidation in the dealings of people with each other. Put another way, the government will, on the one hand, prohibit and punish people for resorting to fraud, theft, coercion, and intimidation in their dealings with each other; and, on the other hand, it will itself refrain from dictating under threat of fine, imprisonment, or punitive taxation what people will produce and the prices and wages they will pay to each other. In this way, and in this way alone, can free competition be established and maintained. This is also the only way under the sun that individual freedom can be established and maintained. For as long as people can coerce each other, either directly or indirectly through their government, then they are not a free people. Free competition can be practiced only by a free people.

As previously stated, free competition results in the maximum possible satisfaction of human wants from the labor and resources available. To illustrate this, let’s start with one individual wanting one thing. Let’s suppose that you want a drink of water. Well, neither I nor anybody else can tell just how much you want that drink of water. We do not know whether you want it badly enough to justify the effort of walking into another room to get it. But we do have a certain way of making sure that you get the maximum net satisfaction out of the situation. We simply say to you: No one is going to force you to go get a drink, and no one is going to prevent you from getting the drink. So you balance your innate desire for the drink against your innate disinclination to exert yourself to get it and thereby do the thing which yields to you the highest net satisfaction in terms of your own wants and capacities. If anyone forces you to a different decision, your net satisfaction will be diminished.

Now take the example of several persons in an informal social gathering, all wanting drinks of water and also wanting the phonograph supplied with a constant change of records. Well, some might want records more than drinks and vice versa. And some might be more disinclined to be record-changers than drink-getters and vice versa. Again, no one knows how to measure the intensity of either the wants or the disinclinations. But we do know how to make sure that, whatever they are, they can be balanced against each other to yield the maximum human satisfaction for the efforts involved. The way to do it is to prescribe that no one is going to force anyone to do or not to do anything. Then some will become drink-getters for the group and others will become record-changers. Everyone gets both the drinks and the music wanted, but each one undertakes that job to which he is least disinclined. Please note that by this voluntary division of labor and subsequent exchange of products, the net human satisfaction of everyone is increased in terms of each one’s innate wants and capacities. Each one gets both the music and drinks he wants but gets them by a process that is more satisfactory to him than if he performed both services for himself. If record-changers demand too many drinks in exchange for their records, then some will change over from being drink-getters to record-changers, and the record-changing price will drop relative to drinks. But if coercion is kept out of the picture, the exchange rate—the price—balances at the point yielding the most human satisfaction in terms of the labor involved.

So much for free competition as the guarantee of maximum human satisfaction from the available resources. I have also stated that free competition is the guardian of economic justice. This touches on the whole complicated problem of what is a fair price or fair wage. But I think that problem can be greatly illuminated and vastly simplified if approached from the point of view of free competition as I have defined it. That approach results in a simple and, I think, uncontestable proposition. It is that the fair price to a seller of a product or of his services is the highest price that anyone in all this land will voluntarily pay in view of what others are asking for the same product or service. Similarly the fair price to a buyer of a product is the lowest price at which anyone in all the land will voluntarily sell the product in view of what other buyers are voluntarily willing to pay.

You as a seller always want a high price for what you sell. But you—the very same you—always want a low price for what you buy. The only way that we can be sure that you get the highest possible price when you sell is to make sure that no one who might want to buy your product is coercively prevented from so doing. The only way that we can be sure that you pay the lowest possible price when you are a buyer is that no one who might want to sell you the product is coercively prevented from so doing. But that is free competition as I have defined it. So much, then, about free competition as the guardian of economic justice.

I said that free competition also guarantees the maximum achievable economic progress. This is true because free competition is the only mechanism ever discovered by man which gives the maximum possible incentive and opportunity to each man living under it without undermining a similar incentive and opportunity for all other men. This is how it works out: Free competition says to each and every person that he is entitled to that which he produces, either to consume himself, to save, or to dispose of in voluntary exchange for the fruits of other’s efforts. Equally it says that you are not entitled to take away from others, without their consent, what they have produced. Thus to each producer is held out a reward which is exactly equivalent to the full and fair value of what he produces. Similarly to each person, there is applied the spur of his own necessity R because he is denied any right to take away from others that which they have produced. Now let us suppose for a moment that we suspend free competition and dictate that from the more productive shall coercively (how else?) be taken part of what they produce for the benefit of the less productive. See what that does to the incentives: If the output of the more productive is taken from them, their incentive to be more productive is automatically diminished. If the less productive get something for nothing, they also have less reason to exert themselves as much as they can. Everybody’s incentive is thus undermined; progress decreases.

As for the maintenance of maximum opportunity for everyone, it would seem clear that under free competition anyone can undertake any occupation he desires, since those already engaged in it are denied any means of preventing him from so doing. This means maximum mobility between occupations. With maximum possible incentives, maximum possible opportunity, and maximum mobility, we can logically expect that under free competition more people will find their way to doing that which they can do most efficiently and most pleasurably than will happen under any other system. The almost miraculous rise in American production and living standards that has taken place during the life of the republic is imposing and impressive evidence of this truth.

Well, that is enough about free competition and why it is important—very important in my opinion. Now we come to the impairment of competition. I guess we might just as well face up to the fact that free competition has been gravely impaired. Since I have defined competition as the absence of fraud, theft, coercion, and intimidation, the only impairment of competition that is possible is through the introduction of fraud, theft, coercion, or intimidation.

There is only one kind of impairment of competition that ever receives much publicity or public attention as such—and it is probably the least important of the several impairments of competition. I refer to the case where a few producers of a similar item agree with each other that they will not sell to each other’s customers or that they will refuse to make sales to anyone at less than an agreed upon price. Such agreements—the mutually coercive restriction of each other’s production—used to be enforceable through the courts. That is where the element of compulsion came in. But they were outlawed under the Sherman Anti-Trust Act. Nevertheless, it is often believed by some that such unlawful agreements today will be secretly made and voluntarily fulfilled because of supposed mutual benefit. In such instances the federal government brings a so-called antitrust suit.

I will offer you my own industry as an illustration. Many years ago, the United States Steel Corporation produced about two-thirds of the steel made in this country. A suit under the antitrust acts was brought against it. Many people know of this. As a result, the so-called “Steel Trust” used to be used in textbooks as a favorite example of monopoly. Possibly it is still so used—I have not looked it up. What people do not know, or fail to remember, or seldom mention, is that the case against the Corporation was carried up to the Supreme Court which Court declared it innocent some thirty years ago. They also do not seem to realize that over the years the situation in the steel industry has greatly changed. Whereas U. S. Steel used to produce twice as much steel as its competitors, its competitors, nowadays, produce twice as much steel as U. S. Steel.

Nearly all the recent scholarly analyses of so-called concentration of economic power in corporations indicate that such concentration as exists is diminishing rather than increasing. I do not suppose that anyone would contend that as much as two or three per cent of the nation’s business is significantly suffering from impairment of competition through concentration. What I am concerned about is the unpublicized impairments of free competition that affect nearly all of the people and all of the business they do.

First, I will refer to the use of taxation to impair free competition. You will recall that if you forcefully take away from the more productive the fruits of their greater productivity to give to the less productive, you have thereby diminished the incentive of everybody. Nevertheless, in The Communist Manifesto, Karl Marx advised, even demanded, that communists everywhere try to bring about steep progressive income taxes and confiscatory inheritance taxes.

In this matter of taxation, we in this country have now done exactly what Karl Marx demanded. We are taxing the more productive up to 90 per cent of their incomes. At the other end of the income line, we have a permanent roll of unemployed people. On the topside, more and more capable people are saying: “Why should I work so hard when the government takes most of it?” On the bottom side, we have more and more people saying: “Why should I work at all when I can get along all right on what the government will give me?” I know of no more serious and hidden impairment of free competition than this. Steep progressive taxation is the best way to murder progress.

Another fearful impairment of free competition is the resort to printing press money—or its monetary equivalent. I have previously mentioned it as fraud and theft, officially conducted, which is enough to classify it as an impairment of free competition. The more customary way of studying it is as the source of inflationary boom and subsequent bust. That we have been suffering badly from inflation in recent years is common knowledge.

Boom and bust wrench the economy. During boom, manpower and resources are mis-invested to supply the demand that the inflow of new money or credit seems to represent. When the inflow stops, such resources are proved to have been wasted. It is like a girl investing in a dress for a party she expects to attend only to discover, too late, that the party is called off. During the reactionary depression following boom, manpower and resources are wasted in idleness. Currency debauchery ranks with steep progressive taxation as a hidden and evil means of destroying the benefits of free competition. The communists have long recommended them as among the very best ways to bring about the downfall of our form of civilization.

Finally, I will call your attention to several situations in which coercion is a principal factor in the determination of prices or wages and hence in the impairment of free competition. The first one has to do with the price of farm products. Suppose a policeman called at your home and compelled you to go to the market and buy some potatoes and butter, which he then compelled you to turn over to a man that he required you to hire to destroy the potatoes and butter. If you then wanted to buy some more potatoes and butter to eat, you could, of course, do so, but at a higher price because you have already bought and destroyed part of the supply. This may sound a bit grim and it is obviously the story of wasted productive effort, coercively enforced; yet, I submit, that if I had said “tax collector” instead of “policeman,” it is an exact statement of what we have—by force of government—been doing in recent years.

The farm product situation illustrates the economic wastage in overproduction that occurs when we, through our government, coercively dictate prices that are higher than would be established in the absence of such coercion. There is similar wastage when prices are dictated at levels which are lower than would be established in the absence of such coercion. Such prices say to the buyer that no matter how much greater his need or want for the product may be, he is nevertheless forbidden to bid the product away from other buyers of lesser need. That the product will go to the places where it will do the most good cannot, therefore, be insured; total satisfaction is thus diminished rather than maximized.

Worse than that, such dictated sub-competitive prices say to the producer and to would-be producers: “There is to be little or no profit in bringing about increased production.” This tends to depress the production of what is wanted.

My last illustration of the impairment of free competition is to be found in the great labor monopolies that have been created and nurtured by legislation. Under the labor laws, the government, in effect, appoints for the employees of each company an “exclusive bargaining agent.” In practice, the same “exclusive bargaining agent” is appointed for most or all of the employees in an industry. The law further states, under threat of fine or imprisonment, that no employer can pay to any covered employee either more or less than the “exclusive bargaining agent” says and agrees to. It does not make any difference whether the particular employee is or is not a member of the union. The individual employee has no right to decide for himself on his wages and working conditions. The right is taken away from him and vested in the “exclusive bargaining agent.”

If employers do not wish to pay as high an amount as the agent demands, then the law permits the exclusive bargaining agent to call an industry-wide strike, enforce it with picket lines, close down the industry—regardless of civil and defense needs—and make everybody suffer until the agent is satisfied. The picket line is supposed to be peaceful. It is peaceful only so long as no workers—preferring to work rather than to strike—seek to cross it. In practice, it can and has become violent the instant they seek to do so—a violence that in the past not infrequently has resulted in killing people. It is like a high voltage electric transmission line. It is very peaceful if you stay away from it; but if you touch it, you may be killed.

This is monopoly established and maintained by combined government and private coercion and intimidation. Its exact equivalent, just one stage further along the production line, would be the legislative creation of nation-wide exclusive selling agents for the products of each industry, with all people legally prohibited on pain of fine and imprisonment from buying the products from anybody at prices differing from those set by such exclusive selling agents. Indeed, a coercive monopoly of the labor that goes into a product and a coercive monopoly of the product itself are in an economic sense very much the same thing, because about 85 per cent of the over-all nontax cost of industrial products is the cost of the labor that goes into them.

One of these forms of coercively enforced monopoly we now have in our land on a scale never before realized. Either form of such monopoly could serve equally well as an energizer of political demand for more inflation with all its evils, because the terrible power to exact ever higher prices as a payment for surcease from deliberately inflicted suffering and deprivation is always bound to be abused. To exact ever higher wages and wage-covering prices is to invite an ever-continued manufacture of new money to contain them, lest increasing segments of the economy price themselves, and their politically entrenched friends, out of existence. This compounds the impairment of free competition and results in the ominous game of leapfrog up the ladder of inflation.

This brings us to the end of our brief exploratory journey into the realm of economic competition. In the course of that journey, I have attempted to show you another tool of analysis that you may use, if you wish, in your investigation of competition. The approach which I have suggested will furnish you no criteria of what is the most desirable number and size of producers or buyers in the market for a given product or service. But the approach does seek to suggest that the maximum human welfare and progress can be insured if we search penetratingly for and eliminate fraud, theft, coercion, and intimidation in the dealings of people with each other.

I have emphasized that we must not overlook the contamination of competition by means of the coercion that we may practice upon each other via our government—the monopoly of legal coercion. I have done so because it is quite human and natural to suppose that if government does something, that thing is thereby rendered proper even sacrosanct—in a democratic sense. But I remind you that in our land, our government belongs to us. In that sense, it is an extension of ourselves. And if it is wrong for us individually to fine or imprison or intimidate the other fellow to keep him from producing the same thing we want to produce or to force him to sell or buy something at a price he would not voluntarily approve—then doing the same thing through our government does not make it right. In both instances, it violates the Ten Commandments and the Golden Rule.


The same liberal construction which is required for the protection of life and liberty, in all particulars in which life and liberty are of any value, should be applied to the protection of private property. If the legislature of a State, under pretense of providing for the public good, or for any other reason, can determine, against the consent of the owner, the uses to which private property shall be devoted, or the prices which the owner shall receive for its uses, it can deprive him of the property as completely as by a special act for its confiscation or destruction. If, for instance, the owner is prohibited from using his building for the purposes for which it was designed, it is of little consequence that he is permitted to retain the title and possession . . .

 

Justice Stephen J. Field’s dissenting opinion
In Munn vs. Illinois, 94 U. S., 115, (1877)

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