The Free Market and the "Tyranny of Wealth"
DECEMBER 01, 1976 by DAVID OSTERFELD
Mr. Osterfeld is an Instructor in Political Science at the University of Cincinnati.
Libertarians believe that the substitution of a completely laissez faire economic system for the political system of government intervention would largely eliminate the problem of power in society. While government claims a monopoly on the use of force in society, the market is nothing more than the nexus of exchanges. Since no exchange can occur unless all parties can mutually agree to the conditions, voluntarism is the requisite of an exchange economy, the market, therefore, is characterized by the absence of power relationships.
The credibility of libertarianism, however, has been consistently damaged by its alleged naivete regarding the problem of monopolies. The absence of a governmentally imposed antitrust policy, runs the popular argument, would permit either voluntary cartelization or "cut throat" competition which, in turn, would result in the emergence of a few giant corporations able to use their monopolistic positions to tyrannize over society.
The libertarian response to this critical question is that, provided they are voluntary, mergers, price-fixing agreements, cartelizations, and the like, do not harm the consumer. On the contrary, like all voluntary actions on the market, they help to find the most value-productive point for the allocation of resources, so, they are positively beneficial from the point of view of maximizing the satisfaction of all members of society. Assume, for example, that firms A, B and C find that by merging they can increase their profits by restricting production. The "restriction" of production means, of course, that some of the factors of production will now become idle. But so long as there is price flexibility, as there will always be on the free market, resources cannot long remain idle; and their employment in other areas will expand production in those areas. But if this is so then production has not, in fact, been restricted at all.
What has occurred was a shifting of factors from one area to another. But the merger would take place only if the merger participants believed that it would increase their profits. Since the market correlates profits and consumer satisfaction, the merger will—provided the expectations of the merger participants are correct—actually increase consumer satisfaction. That is, while physical output will have remained about the same, the value of that output, from the standpoint of the consumers, has been augmented.
It is further argued that the larger the firm in relation to the size of its market, the more limited it is in its ability to calculate and therefore the more susceptible it is to losses that would preclude further expansion. Since a monopoly or cartel eliminates the market in the area of its operations, it has no economic signals to guide it in allocating its resources or making investment decisions. Since this means that the decisions of the monopoly would be economically arbitrary, and therefore inefficient, it would suffer severe losses. There is, in other words, no economic difference between a monopoly and a socialist economy and both would collapse for the same reason: the absence of economic calculation.
Consequently, the libertarian believes that the size of the firm is limited by the limits of calculability and denies that the market confers any power on any firm, regardless of size, to exploit the consumer or victimize society. The popular fear of the "tyranny of wealth" under the free market is therefore seen as an illusion.¹
Monopolies and the Progressive Period
The period between the Civil War and World War I was a period of massive business consolidation and is commonly cited as proof that the unregulated market results in powerful monopolies and concentrations of great wealth. This view has, perhaps, received its most uncompromising statement in the writings of Fritz Redlich, who contends that in the late 1860′s, while "the belief in laissez-faire was declining in Europe … the American businessmen became adherents to that creed without any reservations whatsoever" Business has a "distinctly negative attitude toward government" and the latter half of the nineteenth century was a period of unrestrained laissez faire. In the resulting brutal competitive struggles only the fittest survived, and by the 1880′s the economy was dominated by a "generation of Robber Barons" with monopolistic control over nearly all markets.
According to Redlich, "The check which competition had exerted before, disappeared . . . while government as a regulator, had not entered the scene as yet." Consequently, the "Robber Barons," "lacking a sense of social and national responsibility," were able to set high prices for their merchandise and low wages for their employees. "Only in reaction to the increasing power of business leaders, underprivileged strata in America, such as were farmers at the time and labor, forced first the states and later the national government to assume protective functions." The result was the emergence of such regulations of business as the Interstate Commerce Commission, the Sherman Antitrust Act, and the Food and Drug Administration, among a host of others.²
This interpretation has been called into serious question by recent historical investigations. Interestingly enough, the primary figure in this reinterpretation has been the prominent New Left historian, Gabriel Kolko. Far from laissez faire, contends Kolko, the inter-war period was characterized by massive government intervention and regulation of the economy.
Kolko points out that the prevailing belief that American industry was monopolized and centralized to the extent that it was able to free itself from the dictates of the market was an "illusion." The reverse was true. As the economy expanded in the post-Civil War period, businessmen found themselves unable to control their own markets. Competition, far from dying out, was increasing. This view is supported by the following empirical evidence supplied primarily by Kolko:
· 1. Steel. Between 1901 and 1911 prices charged by U.S. Steel fell by an average of 11 per cent. Yet, its percentage of the nation’s steel production declined precipitously from 61.6 per cent in 1901 to 39.9 per cent by 1920. Even at the height of U.S. Steel’s "market domination" its competitors flourished. By 1911 there were over 80 firms in direct competition with U.S. Steel and producing over 60 per cent of all iron and steel products sold in the United States.³
· 2. Oil. Between 1880 and 1895 Standard Oil did maintain a high (85%) share of the market. But it could do this only because it reduced prices from 9.12 cents per gallon of refined oil in 1880 to 5.91 cents by 1897. Despite this, Standard’s competitors increased from 37 independent refineries in the United States in 1899 to 147 by 1911, and Standard’s share of the market declined noticeably during this period. This was prior to the Supreme Court decision on May 15, 1911 ordering the dissolution of the "monopoly."4
· 3. Agricultural Implements. Between 1903 and 1911 International Harvester’s share of the binder market declined from 96 per cent to 87 per cent; its share of the mower market declined from 91 per cent to 75 per cent; its share of the harvester market from 85 per cent in 1902 to 80 per cent in 1911 and 64 per cent in 1918. While the number of manufacturers of agricultural implements declined slightly over this period, there were still 640 in the United States in 1909. Moreover, this decline was reversed in 1915 when the auto manufacturers began diversifying into tractors.5
· 4. Communications. A.T. & T. had a complete monopoly between its foundation in 1877 and 1894. This, however, was based on its control of crucial patents, which lapsed in 1894. By 1895 there were 27 companies in competition with A.T. & T.; by 1902 this number had risen to 9,100 and by 1907 to 22,000. A.T. & ‘Fs control of the market declined to 50 per cent by 1907 (3.1 million telephones controlled by A.T. & T., 3.0 million controlled by the independents). The effect was to force A.T. & Us subsidiaries, such as Bell, to lower their rates. In 1895 Bell received $88 of revenue perstation. By 1914 it had fallen to $41.6
· 5. Copper. Monopolistic control was never in question in the copper industry. The combined production of the nation’s four largest producers of copper declined from 76 per cent of the market in 1890 to 39 per cent in 1920.7
· 6. Meat Packing. The three largest meat packers’ share of the market declined from a combined total of 35 per cent in 1905 to only 22 per cent by 1909, while the number of competitors rose from 1,080 in 1899 to 1,641 in 1909.8
· 7. Automobile. The absence of monopolistic control in the automobile industry is indicated by the turnover of companies in the top ten. Between 1903 and 1924 there were 180 companies in the business of making and selling automobiles. Of the ten leading producers in 1903, only one was still in the top ten by 1924.9
Clearly, monopolistic control was not present during this period and competition was actually increasing, not declining. But competition was the last thing that owners of these giant corporations desired. Since their firms were already dominant in their respective industries, competition could only hurt them. Hence, they desired to "rationalize" the economy, i.e., to preserve the status quo and therefore their own socio-economic positions. To insulate themselves from their competition, price-fixing agreements and divisions of the markets were negotiated, but quickly broke down in every case. "Voluntary agreements among corporations in the ,form of pools and agreements of every kind usually failed," says Kolko. "Consolidations and mergers were the next logical step, and also failed."¹º
The extent of the failure of the merger movement is vividly demonstrated in the study by the former Harvard economist A.S. Dewing. Dewing studied 35 industrial consolidations which were chosen at random from those mergers taking place no later than 1903 and in existence for ten years. Dewing arrived at two significant conclusions. First, the average aggregate earnings of the separate competing firms in the ten years prior to merger were a fifth greater than the average earnings of the consolidated firms in the ten years following the merger. Second, in only four of the 35 cases did the earnings during the first year after consolidation equal or exceed the expected returns of the promoters. And yet, as Dewing notes, "The earnings of the first year after consolidation were greater—by a little less than a tenth (7%) —than the earnings of the tenth year."¹¹
As the attempts at voluntary control of competition failed disastrously, "it became apparent to many important businessmen," says Kolko, "that only the national government could rationalize the economy." Thus, he continues, "crucial big business support could be found for every major federal regulatory movement…. Progressivism was not the triumph of small business over the trusts … but the victory of big businesses in achieving the rationalization of the economy that only the federal government could provide."¹² The following are some of the areas receiving big business support:
1. Interstate Commerce Act. Prior to the inception of the Interstate Commerce Commission the railroads had attempted to maintain high rate levels by means of price-fixing agreements. These were constantly being undercut, however, and resulted in price wars between railroads. Consequently, in the 17 years prior to the ICC, railroad rates declined from an average of $19 per 1,000 ton-miles to $8.50. The main impact of the ICC was to eliminate undercutting by establishing minimum rates and compelling compliance. Price competition was eliminated. Due largely to deflationary conditions during the 1890′s rates continued to decline slightly (from $8.50 per ton-mile to $7.80). The decline was effectively slowed, however, by the existence of the ICC, and after that period rates began a sharp increase. Thus Kolko comments that "the railroads were the leading advocates of increased government regulation after 1887."¹³
· 2. The Department of Commerce Act. Numerous businesses and financial organizations, including the House of Morgan, had long been pushing for the establishment of a Department of Commerce which would establish comprehensive federal legislation which not only would take precedence over the varied and often contradictory state legislation but could also be used to control competition. Thus, "Agitation for a Department of Commerce had been carried on by business organizations throughout the 1890′s."14
· 3. The Meat Inspection Act of 1906. The European export market was vital to the major American meat packers. In the 1880′s European nations began to ban American meat imports allegedly for health reasons, which was no doubt at least partially true; but the influence of the European meat packers who were losing business to American importers also played a part. "And since the six largest packers slaughtered and sold less than 50 per cent of the cattle, and could not regulate the health conditions of the industry, government inspection was their only means of breaking down European barriers to the growth of American exports."
The major packers also felt that strict regulation would serve to "bring the small packers under control." Thus, "it was the large meat packers who were at the forefront of the reform movement."15
· 4. The Pure Food and Drug Act of 1906. Many of the larger food companies felt that their interests were being damaged by unscrupulous competitors selling cheap products and that federal regulation of food not only would end such practices but could be used to discriminate against their competitors as well. Thus, business support for federal regulation of food began as early as the 1880′s, and received the endorsement of the National Association of Manufacturers, the Creamery Butter Makers’ Association, the Retail Grocers’ Association, and the American Baking Powder Association, to name just a few. "The food reform movement was essentially supported by the food industry itself…."16
· 5. The Federal Reserve Act of 191 3. "The bankers were the only significant group concerned with banking reform after 1897, and their problems and needs were the primary cause and motive behind the Act. For the Federal Reserve Act was the result of a movement led by bankers seeking rationalization, and hoping to offset the decentralization of banking toward small banks and state banks. The expansion and domination of banking by big city bankers was possible only with the aid of the federal government, and although the Act solved many of the problems of the small bankers, it held out the promise of reversing those larger tendencies within the banking system running against the big bankers." The final version of the bill, it should be noted, bore a clear resemblance to the earlier Aldrich Bill which had been drafted by such big city bankers as Paul Warburg.17
6. The Federal Trade Commission Act of 1914. This act was supported by every major business group in the nation with the exception of NAM, which remained neutral. Business felt that a Federal Trade Commission could do the same thing for general business as the Federal Reserve did for the big bankers and the ICC did for the transportation industry, i.e., stabilize business by eliminating or reducing competition. The FTC was invested with the power to outlaw "unfair methods of competition," but it was left up to the Board to determine what such practices were. This meant that the Board could, and was, used against small businesses that might be tempted to cut prices. In an interesting speech, Edward Hurley, who assumed the head of the FTC in 1916, remarked that "In my position on the Federal Trade Commission I am there as a businessman … and I think that the businessmen of the country will bear me out when I say that I try to work wholly in the interest of business."18
In short, the corporate elite found themselves unable to control their markets in the expanding economy of the inter-war years. Since such efforts as voluntary price-fixing and consolidations failed to insulate them from the rigors of the market, their only recourse lay in the imposition of compulsory regulation through the aegis of the government.
The Kolko thesis is significant for, as a member of the New Left, Kolko certainly cannot be accused of being an apologist for the free market. Yet, his analysis persuasively indicates that the Progressive period, which is so often cited as "proof" that the unregulated market would result in a "tyranny of wealth," demonstrates just the opposite. Far from the market leading to monopolies, the Kolko analysis clearly demonstrates that it was precisely the market that effectively and continuously thwarted the monopolistic schemes of the corporate elite. It was in response to the failure of their attempts at voluntary control of the market that the corporate elite turned to the state for the control of competition through compulsory regulation.
Thus, the Progressive period was certainly characterized by monopolistic control of many markets, but it is of crucial importance to realize that the source of these monopolies lay not in the market but in the government restrictions on the market. As Kolko pungently remarks elsewhere, "political power in our society after the Civil War responded to power and influence in the hands of businessmen, who have often had more leverage over political … than over business affairs—and they were quick to use it to solve business problems."19
This, of course, is precisely in conformity with the libertarian theory of monopoly. The specter of the market leading to the "tyranny of wealth" is clearly an illusion. The only effective antimonopoly policy lay not in government controls but in the unregulated market.
¹ On the libertarian theory of monopoly see, in particular, Murray Rothbard, Man, Economy and State (Los Angeles: Nash, ¹970); Murray Rothbard, Power and Market (Menlo Park, Ca.: Institute For Humane Studies, ¹970); and D.T. Armentano, The Myths of Antitrust (New Rochelle: Arlington House, ¹97²).
² Fritz Redlich, "The Robber Barons: Creative or Destructive?’ The Robber Barons, Saints or Sinners?, ed. Thomas Brewer (New York: Holt, Rinehart and Winston, ¹970), pp. 88-¹º0.
Also see Richard Hofstadter, Social Darwinism in American Thought (New York: Beacon Press, ¹944); Richard Hofstadter, The Age of Reform and Harvey Buncke, A Primer on American Economic History (New York: Random House, ¹969), pp. ¹¹7-¹8. This view is advanced in most history and political science texts. See, for example, William Ebenstein, et al., American Democracy in World Perspective (New York: Harper and Row, ¹97³), pp. ³88-89; James Burns and Jack Pelatson, Government by the People (Englewood Cliffs: Prentice-Hall, ¹966), pp. 6²0-²²; and John Garraty, The American Nation (New York: Harper and Row, ¹966), pp. 58-59 and 648.
³ Gabriel Kolko, The Triumph of Conservatism (Chicago: Quadrangle Books, ¹967), p. ³7. Also see Armentano, pp. ¹º²-05.
4 Ibid., pp. 40-4¹; and Armentano, pp. 77-79.
5 Kolko, pp. 46-47.
6 Ibid., pp. 47-49.
7 Ibid., pp. 50-5¹.
8 Ibid., pp. 5²-5³.
9 Ibid., p. 4³.
¹º Ibid., p. 56. For a detailed analysis of why these failed see Armentano, Chapter 7, "Price Fixing in Theory and Practice," pp. ¹³²-6³.
¹¹ A.S. Dewing, "A Statistical Test of the Success of Consolidations?’ Quarterly Journal of Economics (¹9²¹), pp. 84-¹º¹.
¹² Kolko, pp. ²8³-84.
¹³ p. 59. Much of this information is also drawn from Yale Brozen, "Is Government the Source of Monopoly?," The Intercollegiate Review (Winter, ¹968-69), pp. 7¹-7².
¹4 Kolko, p. 69.
¹5 Ibid., pp. 98-¹º8.
¹6 Ibid., pp. ¹08-¹¹0.
¹7 Ibid., pp. ¹94-95 and ²4³.
¹8 Ibid., pp. ²67-75.
¹9 Gabriel Kolko, "Power and Capitalism in ²0th Century America?’ Liberation (December, ¹970), pp. ²¹-²6.