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SECTION II  The Concentration of Capital and the Formation of Monopolies as Preliminary Steps to Socialism

Chapter 24
The Concentration of Enterprises

1 The Horizontal Concentration of Enterprises

The merger of several similar independent establishments into one enterprise may be called horizontal concentration of production. Here we follow broadly the usage of writers on cartels, though their definition is not in complete accord with ours. If the separate establishments do not remain completely independent, if, for example the management or some departments are amalgamated, there is concentration of establishments. A mere concentration of enterprises occurs only when the individual units remain independent in everything except the taking of decisive economic decisions. The typical example of this is a cartel or a syndicate. Everything stays as it was, but, according to whether it is a buying cartel or a selling cartel or both, decisions about purchases and sales are taken unitarily.

When it is not merely the preliminary step to an amalgamation of establishments, the purpose of these unions is monopolistic domination of the market. Horizontal concentration originates only in the efforts of separate entrepreneurs to derive those advantages enjoyed under certain circumstances by the monopolist.

2 The Vertical Concentration of Enterprises

Vertical concentration is the union into one unitary enterprise of independent enterprises, some of which use the products of the others. This terminology follows the usage of modern economic literature. Examples of vertical concentration are the union of weaving, spinning, bleaching and dyeing works; a printing works to which a paper factory and a newspaper enterprise are joined; the mixed works of the iron industry and of coal mining, etc.

Each productive unit is a vertical concentration of part processes and of apparatus. Unity of production is created by the fact that part of the means of production—certain machines, buildings, the direction of the works—is jointly held. Such joint holding is lacking in the vertical union of enterprises. Here the essence of the union lies in the will of the entrepreneur to make one enterprise serve another. The mere fact that one man owns two enterprises is not in itself sufficient if this will does not exist. Where a chocolate manufacturer owns also an iron works there is no vertical concentration. Vertical concentration is usually considered to aim at ensuring an outlet for the product or safeguarding the source of raw materials and half finished goods. This is what entrepreneurs reply when questioned as to the advantages of such combinations. Many economists accept it without question, for apparently they do not think it is their job to scrutinize what is said by "practical men"; and after accepting the statement as final they proceed to examine it from the ethical point of view. Still, even if they avoid thinking about it, closer research into facts should show them the truth. There is the fact that managers of plants attached to a vertical combination often have to make complaints. The manager of the paper-mill says: "I could get much better value for my paper if I did not have to supply it to 'our' printing works." The manager of the weaving-mill: "If I didn't have to get the yarn from 'our' spinning works I could get it cheaper." Such complaints are the order of the day, and it is not difficult to understand why they must accompany every vertical concentration.

If the amalgamated establishments were individually so efficient that they did not have to shun competition, vertical combination would serve no special purpose. A paper factory of the best type never needs to ensure its market. A printing works which is on a level with its competitors does not need to ensure its paper supply. The efficient enterprise sells where it gets the best prices, buys where it can do so most economically. Hence, it does not follow that two enterprises, working at different stages of the same branch of production and held by one owner, must necessarily unite in vertical combination. Only when one or other of them shows itself less able to sustain competition does the entrepreneur conceive the idea of supporting it by tying it to the strong one. He looks to the profits of the prosperous business for a fund to cover the deficits of the non-prosperous. Apart from tax remissions and other special advantages, such as those which the mixed works in the German iron industry were able to derive from cartel agreements, union achieves nothing but an apparent profit in one enterprise and an apparent loss in the other.

The number and importance of vertical concentrations is extraordinarily overestimated. In modern capitalist economic life on the contrary, new branches of enterprise are constantly forming and parts of those existing are constantly breaking away to become independent.

The progressive tendency to specialization in modern industry shows that development is moving away from vertical concentration, which, except where it is demanded by considerations of productive technique, is always art exceptional phenomenon, generally to be explained by regard for the legal and other political conditions of production. But even here the break-up of such unions and the re-establishment of individual enterprise is to be witnessed over and over again.

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