Ludwig von Mises Institute

PART III  THE ALLEGED INEVITABILITY OF SOCIALISM
SECTION II  The Concentration of Capital and the Formation of Monopolies as Preliminary Steps to Socialism

Chapter 26
Monopoly and Its Effects

No other part of economic theory has been so much misunderstood as the theory of monopoly. The mere mention of the word monopoly usually stirs up emotions which make clear judgment impossible and provokes, instead of economic arguments, the usual moral indignation evinced in etatistic and other anti-capitalist literature. Even in the United States the controversy raging over the trust problem has supplanted all impartial discussion of the problem of monopoly.

The widespread view that the monopolist can fix prices at will, that—in common phrase—he can dictate prices, is as erroneous as the conclusion, derived from this view, that he has in his hands the power to do whatever he likes. This could only be the case if the commodity monopolized were, by its very essence, completely outside the range of other goods. A man who could monopolize the atmosphere or drinking water could undoubtedly force all other human beings to obey him blindly. Such a monopoly would be unhampered by any competing economic agency. The monopolist would be able to dispose freely of the lives and property of his fellowmen. Such monopolies, however, do not come under our theory of monopoly. Water and air are free goods, and where they are not free—as in the case of water on a mountain top—one can evade the effect of monopoly by moving to a different place. Perhaps the nearest approach to such a monopoly was the power to administer grace to believers, exercised by the medieval Church. Excommunication and interdict were no less terrible than death from thirst or suffocation. In a socialist community the State as organized society would form such a monopoly. All economic goods would be united in its hands and it would therefore be in a position to force the citizen to fulfil its commands, would in fact confront the individual with a choice between obedience and starvation.

The only monopolies which concern us here are trade monopolies. They affect only economic goods which, however important and indispensable they may seem, do not of themselves exert any decisive power over human life. When a commodity of which a definite minimum is essential to everyone who wishes to go on living, falls under a monopoly, then indeed do all those consequences popularly assigned to monopolies inevitably follow. But we need not discuss this hypothesis. It is of no practical importance as it lies outside the range of economics, and therefore of price theory—except in the case of strikes in certain enterprises.[1] A distinction between goods which are essential to life and those which are not, is sometimes made when the effects of monopoly are being considered. But these supposedly indispensable commodities are, strictly speaking, not what they seem. As the whole argument is based on the strict concept of indispensability, we have first of all to consider whether we have to deal with indispensability in the exact and full meaning of the word. Actually we can dispense with the commodities in question, either by renouncing the services we obtain from them or by procuring those services from some alternative commodity. Bread is certainly an important commodity. Yet one can live without it, by living on potatoes, cakes made from maize, and so on. Coal, so important today that it might be called the bread of industry, is not, in the strict sense of the word, indispensable, for power and heat can be produced without coal too. And this is all that matters. The concept "monopoly" which alone concerns us here is that contained in the theory of price monopoly and is the only one which contributes materially to an understanding of economic conditions; it does not demand that a monopolized commodity shall be indispensable, unique, and without substitute. It assumes only the absence of perfect competition on the side of supply.[2]

Such loose concepts of monopoly are, moreover, not merely inappropriate; they are also theoretically misleading. They lead to the supposition that price phenomena can be explained without further investigation by demonstrating a monopolistic condition. Having once laid it down that the monopolist "dictates" prices, that his attempt to raise prices as high as possible could only be restrained by a "power" influencing the market from outside, such theorists proceed to render the concept of monopoly so elastic as to include all commodities not increasable or only increasable with increasing costs. As this already comprises most price phenomena, they are able to avoid the necessity of working out a theory of prices themselves. As a result many come to speak of the monopoly ownership of land and believe that they have solved the problem of rent by pointing out that this monopolistic relation exists. Others go further and seek to explain interest, profit, and even wages as monopoly prices and monopoly profits. Quite apart from other defects in these "explanations," their authors fail to perceive that, while alleging that a monopoly exists, they say nothing at all about the nature of price formation and that therefore the catchword monopoly is no substitute for a properly developed theory of prices.[3]

The laws determining monopoly prices are the same as those which determine other prices. The monopolist cannot ask any price he fancies. The price offers with which he enters the market influence the attitude of the buyers. Demand expands or contracts according to the price he demands, and he has to reckon with this like any other seller. The one and only peculiarity of monopoly is that, assuming a certain shape for the demand curve, the maximum net profit lies at a higher price than would have been the case in competition between sellers.[4] If we assume these conditions and if the monopolist cannot so discriminate as to exploit the purchasing power of each class of buyers, it pays him better to sell at the higher monopoly price than at the lower competitive price, even though sales are thereby diminished. Therefore, monopoly under such conditions has three results: the market price is higher, the profit is greater, both the quantity sold and the consumption are smaller than they would have been under free competition.

The last of these results must be examined more closely. If there is more of the monopolized commodity than can be placed at the monopoly price the monopolist must lock up or destroy so many surplus units that the remainder may attain the price needed. Thus the Dutch East India Company, which monopolized the European coffee market in the seventeenth century, destroyed some of its stocks. Other monopolists have done likewise: the Greek Government, for instance, destroyed currants in order to raise the price. Economically only one verdict on these proceedings is possible: they diminish the stock of wealth which serves to satisfy needs, they reduce welfare, they diminish riches. That goods which could have satisfied wants, and foodstuffs which could have stilled the hunger of the many, should be destroyed is a state of things which the outraged populace and the discerning economist unite, for once, in condemning.

Even in monopolistic undertakings, however, destruction of economic goods is rare. The far-sighted monopolist does not produce goods for the incinerator. If he wishes to place fewer goods on the market he takes steps to reduce his output. The problem of monopoly must be considered, not from the point of view of goods destroyed, but from that of production restricted.

2 The Economic Effects of Isolated Monopolies

Whether the monopolist can exploit his position at all depends on the shape of the demand curve of the monopolized commodity and on the costs of producing the marginal unit of the commodity at the existing scale of production. Only when the conditions are such that the sale of a smaller quantity at higher prices yields a greater net profit than the sale of a larger quantity at lower prices, is it possible to apply the specific principle of monopolistic policy.[5] But even then it is applied only if the monopolist fails to find a method of securing still higher profits. The monopolist serves his interests best if he can separate buyers into classes according to their purchasing power, for he can then exploit the purchasing power of each class separately and exact the highest prices from its members. Railways and other transport undertakings, which grade their tariffs according to what the traffic will bear are in this class. If, following the general method of monopolists, they treated all users of transport uniformly, those less able to pay would be excluded from transport and for those able to stand higher charges transport would be cheapened. The effect of this on the local distribution of industry is clear; amongst the factors determining the localization of individual industries the transport factor would make itself felt in a different way.

In examining the economic effect of monopoly, we must limit investigation to the type which restricts the production of its commodity. Now the result of this restriction is not that less is produced quantitatively. Capital and labour, set free by the restriction of production, must find employment in other production. For in the long run in the free economy there is neither unemployed capital nor unemployed labour. Thus against the smaller production of the monopolized goods one must set the increased production of other goods. But these, of course, are less important goods, which would not have been produced and consumed if the more pressing demands for a larger quantity of the monopolized commodity could have been satisfied. The difference between the value of these goods and the higher value of the quantity of the monopolized commodity not produced represents the loss of welfare which the monopoly has inflicted on the national economy. Here private profit and social productivity are at variance. A social society under such circumstances would act differently from a capitalist society.

It has sometimes been pointed out that although the monopoly can prove harmful to the consumer it might, on the other hand, be turned to his advantage. Monopoly could produce more cheaply because it eliminates all the expenses of competition and because, being adapted to large scale operations it enjoys all advantages of the division of labour. But this in no wise alters the fact that monopoly deflects production from more important products to less important ones. It may be as the defender of trusts is fond of repeating, that the monopolist, unable to increase his profit otherwise, endeavours to improve productive technique, but it is difficult to understand why the urge to this should be greater in him than in the competitive producer. Even if this be admitted, however, it does not alter what we have said about the social effects of monopoly.

3 The Limits of Monopoly Formation

The possibility of monopolizing the market varies radically with different goods. Even the producer who is protected from competition need not necessarily be in a position to sell at monopoly prices and obtain monopoly profits. If the quantity sold falls so steeply with the rise of prices that the extra sum obtained does not cover the deficiency in the number sold, then the monopolist is forced to content himself with the price which would have emerged under competitive selling. [6]

Apart from the enjoyment of artificial support—the grant of special legal privileges, for example—we shall find that a monopoly can, as a rule, maintain itself only by the exclusive power to dispose of certain natural factors of production. Similar power over reproducible means of production does not as a rule allow permanent monopolization. New enterprises may always spring up. As already pointed out, the progressive division of labour tends towards a condition in which, at the highest specialization of production, everyone will be the sole producer of one or several articles. But this would by no means necessarily involve a monopolized market for all these articles. The attempts of manufacturers to extract monopoly prices would, apart from other circumstances, be checked by the appearance of new competitors.

Experience of cartels and trusts during the last generation completely confirms this. All enduring monopolistic organizations are built up on the power of the monopoly to dispose of natural resources or of particular land sites. A man who tried to become a monopolist without the control of such resources—and without special legal aids such as tariffs, patents, etc.—had to resort to all sorts of tricks and artifices to secure even a temporary success. The complaints raised against cartels and trusts and investigated by the commissions of inquiry whose published records are so voluminous, deal almost exclusively with these tricks and practices, which aim at creating monopolies artificially where the conditions for them do not exist. Most cartels and trusts would never have been set up had not the governments created the necessary conditions by protectionist measures. Manufacturing and commercial monopolies owe their origin not to a tendency immanent in capitalist economy but to governmental interventionist policy directed against free trade and laisser-faire.

Without the special power to dispose of natural resources, or of advantageously situated land, monopolies could arise only where the capital required to erect a competing enterprise was not able to count on an adequate return. A railway company can achieve a monopoly where it would not pay to build a competing line, the traffic being too small for two lines to be profitable. The same may be true in other cases. But while this shows that a few monopolies of this kind are possible it does not reveal a general tendency to their formation.

The effect of such monopolies, e.g. the railway company or the electric power plant, is that the monopolist may be able, according to the circumstances of the case, to absorb a greater or smaller quantity of the ground rents of adjoining properties. The result of this may be a change in the distribution of income and property which is felt to be disagreeable—at least, by those directly affected.

4 The Significance of Monopoly in Primary Production

In an economy based on private ownership in the means of production, specific primary production is the only field liable to monopolization without special protection from the State. Monopolies in certain branches of primary production are possible. Mining, in the widest sense of the word, is their true domain. Where today we have monopolistic structures which do not spring from government intervention, they are—a part from such instances as the railway company and the power works—almost exclusively organizations built up on a power to dispose of certain kinds of natural resources. These natural resources must be such as are found in relatively few places, for this alone makes the monopoly possible. A world monopoly of potato farmers or milk producers is unthinkable.[7] Potatoes and milk, or at least substitutes for them, can be produced over the greater part of the earth's surface. World monopolies of oil, mercury, zinc, nickel, and other materials can occasionally be formed if the owners of the rare places where they exist can combine; examples of this are found in the history of recent years.

When such a monopoly is formed the higher monopoly price replaces the competitive price. The income of mine owners rises, production and consumption of their product fall. A quantity of capital and labour which would otherwise have been active in this branch of production is diverted to other fields. If we consider the effects of monopoly from the standpoint of the separate branches of world economy we see only the rise in the monopolists' income and the corresponding decline in the income of all other branches. Considered, however, from the standpoint of world economy and subspecie aeternitatis (from the point of view of eternity), monopolies would appear to economize consumption of irreplaceable natural resources. People come to deal more thriftily with these precious resources when as in mining, the monopoly price occasionally replaces the competitive price and they are driven to do less digging and more working up. Since in every mine in operation nature's irreplaceable gift to man is being used up, the less we touch this stock the better we provide for the supply of coming generations. We see now what it means when people detect in monopoly a conflict between social productivity and private profit. True, a socialist community would have no occasion to restrict production as Capitalism does under monopolies, but this would only mean that Socialism would deal less thriftily with irreplaceable natural treasures, that it would sacrifice the future to the present.

When we find that monopoly causes a conflict between profit and productivity which is not to be found anywhere else, we do not necessarily say that the effects of monopoly are pernicious. The naive assumption that the behavior of the socialist community—as typifying the idea of productivity—constitutes the Absolute Good is quite arbitrary. We have no standard on which to base a valid decision between what is good and what is evil in this context.

If, then, we consider the effects of monopoly without being biased by popular writers on cartels and trusts, we can discover nothing which could justify the assertion that growing monopolization makes the capitalist system intolerable. The monopolist's scope in a capitalist economy free from state interference is much smaller than this type of writer commonly assumes; and the consequences of monopoly must be judged by other standards than the mere catchwords Price Dictation and the Rule of the Trust Magnates.

[1]See p. 483.

[2]As there cannot be any question here of giving a theory of monopoly price, the monopoly of supply alone is examined.

[3]Ely, Monopolies and Trusts (New York, 1900), pp. 11 ff.; Vogelstein, "Die finanzielle Organisation der kapitalistischen Industrie und die Monopolbildungen" (op. cit., p. 231) too, and following him the German Socialization Commission (op. cit., pp. 31 ff.), start from a concept of monopoly which comes very close to the views criticized by Ely and generally abandoned by the price theory of modern science.

[4]Carl Menger, Grundsätze der Volkswirtschaftslehre (Vienna, 1871), p. 195; further Forchheimer, "Theoretisches zum unvollständigen Monopole" (Schmoller's Jahrbuch XXXII), pp. 3 ff.

[5]Compare on this important principle the large literature on the monopoly price. For example, Wieser, "Theorie der gesellschaftlichen Wirtschaft," in Grundriss für Sozialökonomik, Part I (Tübingen, 1914), p. 276.

[6]According to Wieser, ibid., this is "perhaps even the rule."

[7]It is different, perhaps, with agricultural productions which flourish only on relatively restricted soils; for example, coffee growing.