Chapter 10—Monopoly and Competition (continued)
E. Some Problems in the Theory of the Illusion of Monopoly Price
(1) Location Monopoly
It might be objected that in the case of a location monopoly, a monopoly price can be distinguished from a competitive price on a free market. Let us consider the case of cement. There are cement consumers, say, who live in Rochester. A cement firm in Rochester could competitively charge a mill price of X gold grams per ton. The nearest competitor is stationed in Albany, and freight costs from Albany to Rochester are three gold grams per ton. The Rochester firm is then able to increase its price to obtain (X + 2) gold grams per ton from Rochester consumers. Does its locational advantage not confer upon it a monopoly, and is not this higher price a monopoly price?
First, as we have seen above, the good that we must consider is the good in the hands of the consumers. The Rochester firm is superior locationally for the Rochester market; the fact that the Albany firm cannot compete is not to be blamed on the Rochester firm. Location is also a factor of production. Furthermore, another firm could, if it wished, set itself up in Rochester to compete.
Let us, however, be generous to the location-monopoly theorists and grant that, in a sense (definition 1) this monopoly is enjoyed by all individual sellers of any good or service. This is due to the eternal law of human action, and indeed of all matter, that only one thing can be in one place at one time. The retail grocer on Fifth Street enjoys a monopoly of the sale of groceries for that street; the grocer on Fourth Street enjoys a monopoly of grocery service for his street, etc. In the case of stores which all cluster together in the same block, say radio stores, there are still a few feet of sidewalk over which each owner of a radio store exercises a location monopoly. Location is as specific to a firm or plant as ability is to a person.
Whether this element of location takes on any importance in the market depends on the configuration of consumer demand and on which policy is most profitable for each seller in the concrete case. In some cases a grocer, for example, can charge higher prices for his goods than another because of his monopoly of the block. In that case, his monopoly over the good “eggs available on Fifth Street” has taken on such a significance for the consumers in his block that he can charge them a higher price than the Fourth Street grocer and still retain their patronage. In other cases, he cannot do so because the bulk of his customers will desert him for the neighboring grocer if the latter’s prices are lower.
Now, a good is homogeneous if consumers evaluate its units in the same way. If that condition holds, its units will be sold for a uniform price on the market (or rapidly tend to be sold at a uniform price). If, now, various grocers must adhere to a uniform price, then there is no location monopoly.
But what of the case where the Fifth Street grocer can charge a higher price than his competitor? Do we not have here a clear case of an identifiable monopoly price? Can we not say that the Fifth Street grocer who can charge more than his competitor for the same goods has found that the demand curve for his products is inelastic for a certain range above the “competitive price,” the competitive price being taken as that equal to the price charged by his neighbor? Can we not say this even though we recognize that there is no “infringement on consumers’ sovereignty” in this action, since it is due to the specific tastes of his consuming customers? The answer is an emphatic No. The reason is that the economist can never equate a good with some physical substance. A good, we remember, is a quantity of a thing divisible into a supply of homogeneous units. And this homogeneity, we repeat, must be in the minds of the consuming public, not in its physical composition. If a malted milk consumed at a luncheonette is the same good in the minds of consumers as the malted at a fashionable restaurant, then the price of the malted will be the same in both places. On the other hand, we have seen that the consumer buys not only the physical good, but all attributes of a thing, including its name, the wrappings, and the atmosphere in which it is consumed. If most of the consumers differentiate sufficiently between food consumed in the restaurant and food consumed at the luncheonette, so that a higher price can be charged in one case than in the other, then the food is a different good in each case. A malted consumed in the restaurant becomes, for a significant body of consumers, a different good from a malted consumed at the luncheonette. The same situation obtains for brand names, even in those situations where a minority of the consumers do regard several brands as “actually” the same good. As long as the bulk of the consumers regard them as different goods, then they are different goods, and their prices will differ. Similarly, goods may differ physically, but as long as they are regarded by consumers as the same, they are the same good.
The same analysis applies to the case of location. Where the Fifth Street consumers regard groceries at Fifth Street as a significantly better good than groceries at Fourth Street, so that they are willing to pay more rather than walk the extra distance, then the two will become different goods. In the case of location, there will always be a tendency for the two to be different goods, but very often this will not be significant on the market. For a consumer may and almost always will prefer groceries available on this block to groceries available on the next block, but often this preference will not be enough to overcome any higher price for the former goods. If the bulk of the consumers shift to the latter good at a higher price, the two, on the market, will be the same good. And it is action on the market, real action, that we are interested in, not the nonsignificant pure valuations by themselves. In praxeology we are interested only in preferences that result in, and are therefore demonstrated by, real choices, not in the preferences themselves.
A good cannot be independently established as such apart from consumer preference on the market. Groceries on Fifth Street may be higher in price than groceries on Fourth Street to the Fifth Street consumers. If so, it will be because the former is a different good to the consumers. In the same way, Rochester cement may cost more than Albany cement in Albany to Rochester consumers, but the two are different goods by virtue of their difference in location. And there is no way of determining whether or not the price in Rochester or on Fifth Street is a “monopoly price” or a “competitive price” or of determining what the “competitive price” might be. It certainly could not be the price charged by the other firm elsewhere, since these prices are really for two different goods. There is no theoretical criterion by which we can distinguish simple locational income to sites from alleged “monopoly” income to sites.
There is another reason for abandoning any theory of locational monopoly price. If all sites are purely specific in locational value, there is no sense to the statement that they earn a “monopoly rent.” For monopoly price, according to the theory, can be established only by selling less of a good and thus commanding a higher price. But all locational properties of a site differ in quality because they differ in location, and therefore there can be no restriction of sales to part of a site. Either a site is in production, or it is idle. But the idle sites necessarily differ in location from the sites in use and are therefore idle because their value productivity is inferior. They are idle because they are submarginal, not because they are “monopolistically” withheld parts of a certain homogeneous supply.
The locational-monopoly-price theorist, then, is refuted whichever way he turns. If he takes a limited view of locational monopoly (in the sense of definition 1) and confines it to such examples as Rochester vs. Albany, he can never establish a criterion for monopoly price, for another firm can enter Rochester, either actually or potentially, to bid away any locational profit that the first firm may earn. His prices cannot be compared with those of his competitors, because they are selling different goods. If the theorist takes an extensive view of locational monopoly—which would take into consideration the fact that every location necessarily differs from every other—and compares locations a few feet apart, then there is no sense at all in talking of “monopoly price,” for (a) the price of a product at one location cannot be precisely compared with another, because they are different goods, and (b) each site is different in locational quality, and therefore no site can be conceptually split up into different homogeneous units—some to be sold and some to be withheld from the market. Each site is a unit in itself. But such a splitting is essential for the establishment of a monopoly-price theory.
A favorite target of the critics of “monopoly” is the so-called “natural monopoly” or “public utility,” where “competition is naturally not feasible.” A typically cited case is the water supply of a city. It is supposed to be technologically feasible for only one water company to exist for serving a city. No other firms are therefore able to compete, and special interference is alleged to be necessary to curb monopoly pricing by this utility.
In the first place, such a “limited-space monopoly” is just one case in which only one firm in a field is profitable. How many firms will be profitable in any line of production is an institutional question and depends on such concrete data as the degree of consumer demand, the type of product sold, the physical productivity of the processes, the supply and pricing of factors, the forecasting of entrepreneurs, etc. Spatial limitations may be unimportant; as in the case of the grocers, the spatial limits may allow only the narrowest of “monopolies”—the monopoly over the portion of sidewalk owned by the seller. On the other hand, conditions may be such that only one firm may be feasible in the industry. But we have seen that this is irrelevant; “monopoly” is a meaningless appellation, unless monopoly price is achieved, and, once again, there is no way of determining whether the price charged for the good is a “monopoly price” or not. And this applies to all circumstances, including a nation-wide telephone firm, a local water company, or an outstanding baseball player. All these persons or firms will be “monopolies” within their “industry.” And in all these cases, the dichotomy between “monopoly price” and “competitive price” is still an illusory one. Furthermore, there are no rational grounds by which we can preserve a separate sphere for “public utilities” and subject them to special harassment. A “public utility” industry does not differ conceptually from any other, and there is no nonarbitrary method by which we can designate certain industries to be “clothed in the public interest,” while others are not.
In no case, therefore, on the free market can a “monopoly price” be conceptually distinguished from a “competitive price.” All prices on the free market are competitive.
A. Restrictionist Pricing of Labor
It might be asserted that labor unions, in exacting higher wage rates on the free market, are achieving identifiable monopoly prices. For here two identifiable contrasting situations exist: (a) where individuals sell their labor themselves; and (b) where they are members of labor unions which bargain on their labor for them. Furthermore, it is clear that while cartels, to be successful, must be economically more efficient in serving the consumer, no such justification can be found for unions. Since it is always the individual laborer who works, and since efficiency in organization comes from management hired for the task, forming unions never improves the productivity of an individual’s work.
It is true that a union provides an identifiable situation. However, it is not true that a union wage rate could ever be called a monopoly price. For the characteristic of the monopolist is precisely that he monopolizes a factor or commodity. To obtain a monopoly price, he sells only part of his supply and withholds selling the other part, because selling a lower quantity raises the price on an inelastic demand curve. It is the unique characteristic of labor in a free society, however, that it cannot be monopolized. Each individual is a self-owner and cannot be owned by another individual or group. Therefore, in the labor field, no one man or group can own the total supply and withhold part of it from the market. Each man owns himself.
Let us call the total supply of a monopolist’s product P. When he withholds W units in order to obtain a monopoly for P – W, the increased revenue he obtains from P – W must more than compensate him for the loss of revenue he suffers from not selling W. A monopolist’s action is always limited by loss of revenue from the withheld supply. But in the case of labor unions, this limitation does not apply. Since each man owns himself, the “withheld” suppliers are different people from the ones getting the increased income. If a union, in one way or another, achieves a higher price than its members could command by individual sales, its action is not checked by the loss of revenue suffered by the “withheld” laborers. If a union achieves a higher wage, some laborers are earning a higher price, while others are excluded from the market and lose the revenue they would have obtained. Such a higher price (wage) is called a restrictionist price.
A restrictionist price, by any sensible criterion, is “worse” than a “monopoly price.” Since the restrictionist union does not have to worry about the laborers who are excluded and suffers no revenue loss from such exclusion, restrictionist action is not curbed by the elasticity of the demand curve for labor. For unions need only maximize the net income of the working members, or, indeed, of the union bureaucracy itself.
How may a union achieve a restrictionist price? Figure 69 will illustrate. The demand curve is the demand curve for a labor factor in an industry. DD is the demand curve for the labor in the industry; SS, the supply curve. Both curves relate the number of laborers on the horizontal axis and the wage rate on the vertical. At the market equilibrium, the supply of laborers offering their work in the industry will intersect the demand for the labor, at number of laborers 0A and wage rate AB. Now, suppose that a union enters this labor market, and the union decides that its members will insist on a higher wage than AB, say 0W. What unions do, in fact, is to insist upon a certain wage rate as a minimum below which they will not work in that industry.
The effect of the union decision is to shift the supply curve of labor available to the industry to a horizontal one at the wage rate WW', rising after it joins the SS curve at E. The minimum reserve price of labor for this industry has risen, and has risen for all laborers, so that there are no longer laborers with lower reserve prices who would be willing to work for less. With a supply curve changing to WE, the new equilibrium point will be C instead of B. The number of workers hired will be WC, and the wage rate 0W.
The union has thus achieved a restrictionist wage rate. It can be achieved regardless of the shape of the demand curve, granting only that it is falling. The demand curve falls because of the diminishing DMVP of a factor and the diminishing marginal utility of the product. But a sacrifice has been made—specifically, there are now fewer workers hired, by an amount CF. What happens to them? These discharged workers are the main losers in this procedure. Since the union represents the remaining workers, it does not have to concern itself, as the monopolist would, with the fate of these workers. At best, they must shift (being a nonspecific factor, they can do so) to some other—nonunionized—industry. The trouble is, however, that the workers are less suited to the new industry. Their having been in the now unionized industry implies that their DMVP in that industry was higher than in the industry to which they must shift; consequently, their wage rate is now lower. Moreover, their entry into the other industry depresses the wage rates of the workers already there.
Consequently, at best, a union can achieve a higher, restrictionist wage rate for its members only at the expense of lowering the wage rates of all other workers in the economy. Production efforts in the economy are also distorted. But, in addition, the wider the scope of union activity and restrictionism in the economy, the more difficult it will be for workers to shift their locations and occupations to find nonunionized havens in which to work. And more and more the tendency will be for the displaced workers to remain permanently or quasi-permanently unemployed, eager to work but unable to find nonrestricted opportunities for employment. The greater the scope of unionism, the more a permanent mass of unemployment will tend to develop.
Unions try as hard as they can to plug all the “loop-holes” of nonunionism, to close all the escape hatches where the dispossessed workmen can find jobs. This is termed “ending the unfair competition of nonunion, low-wage labor.” A universal union control and restrictionism would mean permanent mass unemployment, growing ever greater in proportion to the degree that the union exacted its restrictions.
It is a common myth that only the old-style “craft” unions, which deliberately restrict their occupational group to highly skilled trades with relatively few numbers, can restrict the supply of labor. They often maintain stringent standards of membership and numerous devices to cut down the supply of labor entering the trade. This direct restriction of supply doubtless makes it easier to obtain higher wage rates for the remaining workers. But it is highly misleading to believe that the newer-style “industrial” unions do not restrict supply. The fact that they welcome as many members in an industry as possible cloaks their restrictionist policy. The crucial point is that the unions insist on a minimum wage rate higher than what would be achieved for the given labor factor without the union. By doing so, as we saw in Figure 69, they necessarily cut the number of men whom the employer can hire. Ergo, the consequence of their policy is to restrict the supply of labor, while at the same time they can piously maintain that they are inclusive and democratic, in contrast to the snobbish “aristocrats” of craft unionism.
In fact, the consequences of industrial unionism are more devastating than those of craft unionism. For the craft unions, being small in scope, displace and lower the wages of only a few workers. The industrial unions, larger and more inclusive, depress wages and displace workers on a large scale and, what is even more important, can cause permanent mass unemployment.
There is another reason why an openly restrictionist union will cause less unemployment than a more liberal one. For the union which restricts its membership serves open warning on workers hoping to enter the industry that they are barred from joining the union. As a result, they will swiftly look elsewhere, where jobs can be found. Suppose the union is democratic, however, and open to all. Then, its activities can be described by the above figure; it has achieved a higher wage rate 0W for its working members. But such a wage rate, as can be seen on the SS curve, attracts more workers into the industry. In other words, while 0A workers were hired by the industry at the previous (nonunion) wage AB, now the union has won a wage 0W. At this wage, only WC workers can be employed in the industry. But this wage also attracts more workers than before, namely WE. As a result, instead of only CF workers becoming unemployed from the union’s restrictionist wage rate, more—CE—will be unemployed in the industry.
Thus, an open union does not have the one virtue of the closed union—rapid repulsion of the displaced workers from the unionized industry. Instead, it attracts even more workers into the industry, thus aggravating and swelling the amount of unemployment. With market signals distorted, it will take a much longer time for workers to realize that no jobs are available in the industry. The larger the scope of open unions in the economy, and the greater the differential between their restrictionist wage rates and the market wage rates, the more dangerous will the unemployment problem become.
The unemployment and the misemployment of labor, caused by restrictionist wage rates need not always be directly visible. Thus, an industry might be particularly profitable and prosperous, either as a result of a rise in consumer demand for the product or from a cost-lowering innovation in the productive process. In the absence of unions, the industry would expand and hire more workers in response to the new market conditions. But if a union imposes a restrictionist wage rate, it may not cause the unemployment of any current workers in the industry; it may, instead, simply prevent the industry from expanding in response to the requirements of consumer demand and the conditions of the market. Here, in short, the union destroys potential jobs in the making and imposes a misallocation of production by preventing expansion. It is true that, without the union, the industry will bid up wage rates in the process of expansion; but if unions impose a higher wage rate at the beginning, the expansion will not occur.
Some opponents of unionism go to the extreme of maintaining that unions can never be free-market phenomena and are always “monopolistic” or coercive institutions. Although this might be true in actual practice, it is not necessarily true. It is very possible that labor unions might arise on the free market and even gain restrictionist wage rates.
How can unions achieve restrictionist wage rates on the free market? The answer can be found by considering the displaced workers. The key problem is: Why do the workers let themselves be displaced by the union’s WW minimum? Since they were willing to work for less before, why do they now meekly agree to being fired and looking for a poorer-paying job? Why do some remain content to continue in a quasi-permanent pocket of unemployment in an industry, waiting to be hired at the excessively high rate? The only answer, in the absence of coercion, is that they have adopted on a commandingly high place on their value scales the goal of not undercutting union wage rates. Unions, naturally, are most anxious to persuade workers, both union and nonunion, as well as the general public, to believe strongly in the sinfulness of undercutting union wage rates. This is shown most clearly in those situations where union members refuse to continue working for a firm at a wage rate below a certain minimum (or on other terms of employment). This situation is known as a strike. The most curious thing about a strike is that the unions have been able to spread the belief throughout society that the striking members are still “really” working for the company even when they are deliberately and proudly refusing to do so. The natural answer of the employer, of course, is to turn somewhere else and to hire laborers who are willing to work on the terms offered. Yet unions have been remarkably successful in spreading the idea through society that anyone who accepts such an offer—the “strikebreaker”—is the lowest form of human life.
To the extent, then, that nonunion workers feel ashamed or guilty about “strike-breaking” or other forms of undercutting union-proclaimed wage scales, the displaced or unemployed workers agree to their own fate. These workers, in effect, are being displaced to poorer and less satisfying jobs voluntarily and remain unemployed for long stretches of time voluntarily. It is voluntary because that is the consequence of their voluntary acceptance of the mystique of “not crossing the picket line” or of not being a strikebreaker.
The economist qua economist can have no quarrel with a man who voluntarily comes to the conclusion that it is more important to preserve union solidarity than to have a good job. But there is one thing an economist can do: he can point out to the worker the consequences of his voluntary decision. There are undoubtedly countless numbers of workers who do not realize that their refusal to cross a picket line, their “sticking to the union,” may result in their losing their jobs and remaining unemployed. They do not realize this because to do so requires knowledge of a chain of praxeological reasoning (such as we have been following here). The consumer who purchases directly enjoyable services does not have to be enlightened by economists; he needs no lengthy chain of reasoning to know that his clothing or car or food is enjoyable or serviceable. He can see each perform its service before his eyes. Similarly, the capitalist-entrepreneur does not need the economist to tell him what acts will be profitable or unprofitable. He can see and test them by means of his profits or losses. But for a grasp of the consequences of acts of governmental intervention in the market or of union activity, knowledge of praxeology is requisite.
Economics cannot itself decide on ethical judgments. But in order for anyone to make ethical judgments rationally, he must know the consequences of his various alternative courses of action. In questions of government intervention or union action, economics supplies the knowledge of these consequences. Knowledge of economics is therefore necessary, though not sufficient, for making a rational ethical judgment in these fields. As for unions, the consequences of their activity, when discovered (e.g., displacement or unemployment for oneself or others), will be considered unfortunate by most people. Therefore, it is certain that when knowledge of these consequences becomes widespread, far fewer people will be “prounion” or hostile to “nonunion” competitors.
Such conclusions will be reinforced when people learn of another consequence of trade union activity: that a restrictionist wage raises costs of production for the firms in the industry. This means that the marginal firms in the industry—the ones whose entrepreneurs earn only a bare rent—will be driven out of business, for their costs have risen above their most profitable price on the market—the price that had already been attained. Their ejection from the market and the general rise of average costs in the industry signify a general fall in productivity and output, and hence a loss to the consumers. Displacement and unemployment, of course, also impair the general standard of living of the consumers.
Unions have had other important economic consequences. Unions are not producing organizations; they do not work for capitalists to improve production. Rather they attempt to persuade workers that they can better their lot at the expense of the employer. Consequently, they invariably attempt as much as possible to establish work rules that hinder management’s directives. These work rules amount to preventing management from arranging workers and equipment as it sees fit. In other words, instead of agreeing to submit to the work orders of management in exchange for his pay, the worker now sets up not only minimum wages, but also work rules without which he refuses to work. The effect of these rules is to lower the marginal productivity of all union workers. The lowering of marginal value-product schedules has a twofold result: (1) it itself establishes a restrictionist wage scale with its various consequences, for the marginal value product has fallen while the union insists that the wage rate remain the same; (2) consumers lose by a general lowering of productivity and living standards. Restrictive work rules therefore also lower output. All this is perfectly consistent with a society of individual sovereignty, however, provided always that no force is employed by the union.
To advocate coercive abolition of these work rules would imply literal enslavement of the workers to the dictates of catallactic consumers. But, once again, it is certain that knowledge of these various consequences of union activity would greatly weaken the voluntary adherence of many workers and others to the mystique of unionism.
Unions, therefore, are theoretically compatible with the existence of a purely free market. In actual fact, however, it is evident to any competent observer that unions acquire almost all their power through the wielding of force, specifically force against strikebreakers and against the property of employers. An implicit license to unions to commit violence against strikebreakers is practically universal. Police commonly either remain “neutral” when strikebreakers are molested or else blame the strikebreakers for “provoking” the attacks upon them. Certainly, few pretend that the institution of mass picketing by unions is simply a method of advertising the fact of a strike to anyone passing by. These matters, however, are empirical rather than theoretical questions. Theoretically, we may say that it is possible to have unions on a free market, although empirically we may question how great their scope would be.
Analytically, we can also say that when unions are permitted to resort to violence, the state or other enforcing agency has implicitly delegated this power to the unions. The unions, then, have become “private states.”
We have, in this section, investigated the consequences of unions’ achieving restrictionist prices. This is not to imply, however, that unions always achieve such prices in collective bargaining. Indeed, because unions do not own workers and therefore do not sell their labor, the collective bargaining of unions is an artificial replacement for the smooth workings of “individual bargaining” on the labor market. Whereas wage rates on the nonunion labor market will always tend toward equilibrium in a smooth and harmonious manner, its replacement by collective bargaining leaves the negotiators with little or no rudder, with little guidance on what the proper wage rates would be. Even with both sides trying to find the market rate, neither of the parties to the bargain could be sure that a given wage agreement is too high, too low, or approximately correct. Almost invariably, furthermore, the union is not trying to discover the market rate, but to impose various arbitrary “principles” of wage determination, such as “keeping up with the cost of living,” a “living wage,” the “going rate” for comparable labor in other firms or industries, an annual average “productivity” increase, “fair differentials,” etc.
A favorite reply of union advocates to the above analysis is this: “Oh, that is all very well, but you are overlooking the indeterminacy of wage rates. Wage rates are determined by marginal productivity in a zone rather than at a point; and within that zone unions have an opportunity to bargain collectively for increased wages without the admittedly unpleasant effects of unemployment or displacement of workers to poorer jobs.” It is curious that many writers move smoothly through rigorous price analysis until they come to wage rates, when suddenly they lay heavy stress on indeterminacy, the huge zones within which the price makes no difference, etc.
In the first place, the scope of indeterminacy is very small in the modern world. We have seen above that, in a two-person barter situation, there is likely to be a large zone of indeterminacy between the buyer’s maximum demand price and the seller’s minimum supply price for a quantity of a good. Within this zone, we can only leave the determination of the price to bargaining. However, it is precisely the characteristic of an advanced monetary economy that these zones are ever and ever narrowed and lose their importance. The zone is only between the “marginal pairs” of buyers and sellers, and this zone is constantly dwindling as the number of people and alternatives in the market increase. Growing civilization, therefore, is always narrowing the importance of indeterminacies.
Secondly, there is no reason whatever why a zone of indeterminacy should be more important for the labor market than for the market for the price of any other good.
Thirdly, suppose that there is a zone of indeterminacy for a labor market, and let us assume that no union is present. This means that there is a certain zone, the length of which can be said to equal a zone of the discounted marginal value product of the factor. This, parenthetically, is far less likely than the existence of a zone for a consumers’ good, since in the former case there is a specific amount, a DMVP, to be estimated. But the maximum of the supposed zone is the highest point at which the wage equals the DMVP. Now, competition among employers will tend to raise factor prices to precisely that height at which profits will be wiped out. In other words, wages will tend to be raised to the maximum of any zone of the DMVP.
Rather than wages being habitually at the bottom of a zone, presenting unions with a golden opportunity to raise wages to the top, the truth is quite the reverse. Assuming the highly unlikely case that any zone exists at all, wages will tend to be at the top, so that the only remaining indeterminacy is downward. Unions would have no room for increasing wages within that zone.
It is often alleged that the buyers of labor—the employers—have some sort of monopoly and earn a monopoly gain, and that therefore there is room for unions to raise wage rates without injuring other laborers. However, such a “monopsony” for the purchase of labor would have to encompass all the entrepreneurs in the society. If it did not, then labor, a nonspecific factor, could move into other firms and other industries. And we have seen that one big cartel cannot exist on the market. Therefore, a “monopsony’‘ cannot exist.
The “problem” of “oligopsony”—a “few” buyers of labor—is a pseudo problem. As long as there is no monopsony, competing employers will tend to drive up wage rates until they equal their DMVPs. The number of competitors is irrelevant; this depends on the concrete data of the market. Below, we shall see the fallacy of the idea of “monopolistic” or “imperfect” competition, of which this is an example. Briefly, the case of “oligopsony” rests on a distinction between the case of “pure” or “perfect”competition, in which there is an allegedly horizontal—infinitely elastic—supply curve of labor, and the supposedly less elastic supply curve of the “imperfect” oligopsony. Actually, since people do not move en masse and all at once, the supply curve is never infinitely elastic, and the distinction has no relevance. There is only free competition, and no other dichotomies, such as between pure competition and oligopsony, can be established. The shape of the supply curve, furthermore, makes no difference to the truth that labor or any other factor tends to get its DMVP on the market.
One common prounion argument is that unions benefit the economy through forcing higher wages on the employers. At these higher wages the workers will become more efficient, and their marginal productivity will rise as a result. If this were true, however, no unions would be needed. Employers, ever eager for greater profits, would see this and pay higher wages now to reap the benefits of the allegedly higher productivity in the future. As a matter of fact, employers often train workers, paying higher wages than their present marginal product justifies, in order to reap the benefits of their increased productivity in later years.
A more sophisticated variant of this thesis was advanced by Ricardo and has been revived by Hayek. This doctrine holds that union-induced higher wage rates encourage employers to substitute machinery for labor. This added machinery increases the capital per worker and raises the marginal productivity of labor, thereby paying for the higher wage rates. The fallacy here is that only increased saving can make more capital available. Capital investment is limited by saving. Union wage increases do not increase the total supply of capital available. Therefore, there can be no general rise in labor productivity. Instead, the potential supply of capital is shifted (not increased) from other industries to those industries with higher wage rates. And it is shifted to industries where it would have been less profitable under nonunion conditions. The fact that an induced higher wage rate shifts capital to the industry does not indicate economic progress, but rather an attempt, never fully successful, to offset an economic retrogression—a higher cost in the manufacture of the product. Hence, the shift is “uneconomic.”
A related thesis is that higher wage rates will spur employers to invent new technological methods to make labor more efficient. Here again, however, the supply of capital goods is limited by the savings available, and there is almost always a sheaf of technological opportunities awaiting more capital anyway. Furthermore, the spur of competition and the desire of the producer to keep and increase his custom is enough of an incentive to increase productivity in his firm, without the added burden of unionism.
A. Monopolistic Competitive Price
The theory of monopoly price has been generally superseded in the literature by the theories of “monopolistic” or “imperfect” competition. As against the older theory, the latter have the advantage of setting up identifiable criteria for their categories— such as a perfectly elastic demand curve for pure competition. Unfortunately, these criteria turn out to be completely fallacious.
Essentially, the chief characteristic of the imperfect-competition theories is that they uphold as their “ideal” the state of “pure competition” rather than “competition” or “free competition.” Pure competition is defined as that state in which the demand curve for each firm in the economy is perfectly elastic, i.e., the demand curve as presented to the firm is completely horizontal. In this supposedly pristine state of affairs, no one firm can, through its actions, possibly have any influence over the price of its product. Its price is then “set” for it by the market. Any amount it produces can and will be sold at this ruling price. In general, it is this state of affairs, or else this state without uncertainty (“perfect competition”), that has received most of the elaborate analysis in recent years. This is true both for those who believe that pure competition fairly well represents the real economy and for their opponents, who consider it only an ideal with which to contrast the actual “monopolistic” state of affairs. Both camps, however, join in upholding pure competition as the ideal system for the general welfare, in contrast to various vague “monopoloid” states that occur when there is departure from the purely competitive world.
The pure-competition theory, however, is an utterly fallacious one. It envisages an absurd state of affairs, never realizable in practice, and far from idyllic if it were. In the first place, there can be no such thing as a firm without influence on its price. The monopolistic-competition theorist contrasts this ideal firm with those firms that have some influence on the determination of price and are therefore in some degree “monopolistic.” Yet it is obvious that the demand curve to a firm cannot be perfectly elastic throughout. At some points, it must dip downward, since the increase in supply will tend to lower market price. As a matter of fact, it is clear from our construction of the demand curve that there can be no stretch of the demand curve, however small, that is horizontal, although there can be small vertical stretches. In aggregating the market demand curve, we saw that for each hypothetical price, the consumers will decide to purchase a certain amount. If the producers attempt to sell a larger amount, they will have to conclude their sale at a lower price in order to attract an increased demand. Even a very small increase in supply will lead to a perhaps very small lowering of price. The individual firm, no matter how small, always has a perceptible influence on the total supply. In an industry of small wheat farms (the implicit model for “pure competition”), each small farm contributes a part of the total supply, and there can be no total without a contribution from each farm. Therefore, each farm has a perceptible, even if very small, influence. No perfectly elastic demand curve can, then, be postulated even in such a case. The error in believing in “perfect elasticity” stems from the use of such mathematical concepts as “second order of smalls,” by which infinite negligibility of steps can be assumed. But economics analyzes real human action, and such real action must always be concerned with discrete, perceptible steps, and never with “infinitely small” steps.
Of course, the demand curve for each small wheat farm is likely to be very highly, almost perfectly, elastic. And yet the fact that it is not “perfect” destroys the entire concept of pure competition. For how does this situation differ from, say, the Hershey Chocolate Company if the demand curve for the latter firm is also elastic? Once it is conceded that all demand curves to firms must be falling, the monopolistic-competition theorist can make no further analytic distinctions.
We cannot compare or classify the curves on the basis of degrees of elasticity, since there is nothing in the Chamberlin-Robinson monopolistic-competition analysis, or in any part of praxeology for that matter, that permits us to do so, once the case of pure competition is rejected. For praxeology cannot establish quantitative laws, only qualitative ones. Indeed, the only recourse of monopolistic-competition theorists would be to fall back on the concepts of “inelastic” vs. “elastic” demand curves, and this would precisely plunge them right back into the old monopoly-price vs. competitive-price dichotomy. They would have to say, with the old monopoly-price theorists, that if the demand curve for the firm is more than unitarily elastic at the equilibrium point, the firm will remain at the “competitive” price; that if the curve is inelastic, it will rise to a monopoly-price position. But, as we have already seen in detail, the monopoly-competitive price dichotomy is untenable.
According to the monopolistic-competition theorists, the two influences sabotaging the possible existence of pure competition are “differentiation of product” and “oligopoly,” or fewness of firms, where one firm influences the actions of others. As to the former, the producers are accused of creating an artificial differentiation among products in the mind of the public, thus carving out for themselves a portion of monopoly. And Chamberlin originally attempted to distinguish “groups” of producers selling “slightly” differentiated products from old-fashioned “industries” of firms making identical products. Neither of these attempts has any validity. If a producer is making a product different from that of another producer, then he is a unique “industry”; there is no rational basis for any grouping of varied producers, particularly in aggregating their demand curves. Furthermore, the consuming public decides on the differentiation of products on its value scales. There is nothing “artificial” about the differentiation, and indeed this differentiation serves to cater more closely to the multifarious wants of the consumers. It is clear, of course, that Ford has a monopoly on the sale of Ford cars; but this is a full “monopoly” rather than a “monopolistic” tendency. Also, it is difficult to see what difference can come from the number of firms that are producing the same product, particularly once we discard the myth of pure competition and perfect elasticity. Much ado indeed has been made about strategies, “warfare,” etc., between oligopolists, but there is little point to such discussions. Either the firms are independent and therefore competing, or they are acting jointly and therefore cartelizing. There is no third alternative.
Once the perfect-elasticity myth has been discarded, it becomes clear that all the tedious discussion about the number and size of firms and groups and differentiation, etc., becomes irrelevant. It becomes relevant only for economic history, and not for economic analysis.
It might be objected that there is a substantial problem of oligopoly: that, under oligopoly, each firm has to take into account the reactions of competing firms, whereas under pure competition or differentiated products without oligopoly, each firm can operate in the blissful awareness that no competitor will take account of its actions or change its actions accordingly. Hiram Jones, the small wheat farmer, can set his production policy without wondering what Ezra Smith will do when he discovers what Jones’ policy is. Ford, on the other hand, must consider General Motors’ reactions, and vice versa. Many writers, in fact, have gone so far as to maintain that economics can simply not be applied to these “oligopoly” situations, that these are indeterminate situations where “anything may happen.” They define the buyers’ demand curve that presents itself to the firm as assuming no reaction by competing firms. Then, since “few firms” exist and each firm takes account of the reactions of others, they proceed to the conclusion that in the real world all is chaos, incomprehensible to economic analysis.
These alleged difficulties are nonexistent, however. There is no reason why the demand curve to a firm cannot include expected reactions by other firms. The demand curve to a firm is the set of a firm’s expectations, at any time, of how many units of its product consumers will buy at an alternative series of prices. What interests the producer is the hypothetical set of consumer demands at each price. He is not interested in what consumer demand will be in various sets of nonexistent situations. His expectations will be based on his judgment of what would actually happen should he charge various alternative prices. If his rivals will react in a certain way to his charging a higher or a lower price, then it is each firm’s business to forecast and take account of this reaction in so far as it will affect buyers’ demand for its particular product. There would be little sense in ignoring such reactions if they were relevant to the demand for its product or in including them if they were not. A firm’s estimated demand curve, therefore, already includes any expected reactions of rivals.
The relevant consideration is not the fewness of the firms or the state of hostility or friendship existing among firms. Those writers who discuss oligopoly in terms applicable to games of poker or to military warfare are entirely in error. The fundamental business of production is service to the consumers for monetary gain, and not some sort of “game” or “warfare” or any other sort of struggle between producers. In “oligopoly,” where several firms are producing an identical product, there cannot persist any situation in which one firm charges a higher price than another, since there is always a tendency toward the formation of a uniform price for each uniform product. Whenever firm A attempts to sell its product higher or lower than the previously ruling market price, it is attempting to “discover the market,” to find out what the equilibrium market price is, in accordance with the present state of consumer demand. If, at a certain price for the product, consumer demand is in excess of supply, the firms will tend to raise the price, and vice versa if the produced stock is not being sold. In this familiar pathway to equilibrium, all the stock that the firms wish to sell “clears the market” at the highest price that can be obtained. The jockeying and raising and lowering of prices that takes place in “oligopolistic” industries is not some mysterious form of warfare, but the visible process of attempting to find market equilibrium—that price at which the quantity supplied and the quantity demanded will be equal. The same process, indeed, takes place in any market, such as the “nonoligopolistic” wheat or strawberry markets. In the latter markets the process seems to the viewer more “impersonal,” because the actions of any one individual or firm are not as important or as strikingly visible as in the more “oligopolistic” industries. But the process is essentially the same, and we must not be led to think differently by such often inapt metaphors as the “automatic mechanisms of the market” or the “soulless, impersonal forces on the market.” All action on the market is necessarily personal; machines may move, but they do not purposefully act. And, in oligopoly situations, the rivalries, the feelings of one producer toward his competitors, may be historically dramatic, but they are unimportant for economic analysis.
To those who are still tempted to make the number of producers in any field the test of competitive merit, we might ask (setting aside the problem of proving homogeneity): How can the market create sufficient numbers? If Crusoe exchanges fish for Friday’s lumber on their desert island, are they both benefiting, or are they “bilateral monopolists” exploiting each other and charging each other monopoly prices? But if the State is not justified in marching in to arrest Crusoe and/or Friday, how can it be justified in coercing a market where there are obviously many more competitors?
Economic analysis, in conclusion, fails to establish any criterion for separating any elements of the free-market price for a product. Such questions as the number of firms in an industry, the sizes of the firms, the type of product each firm makes, the personalities or motives of the entrepreneurs, the location of plants, etc., are entirely determined by the concrete conditions and data of the particular case. Economic analysis can have nothing to say about them.
See the reference to Abbott, Quality and Competition, in note 28 above.
On “natural monopoly” doctrine as applied to the electrical industry, see Dean Russell, The TVA Idea (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1949), pp. 79–85. For an excellent discussion of the regulation of public utilities, see Dewing, Financial Policy of Corporations, I, 308–68.
 See Mises:
Prices are a market phenomenon. . . . They are the resultant of a certain constellation of market data, of actions and reactions of the members of a market society. It is vain to meditate what prices would have been if some of their determinants had been different. . . . It is no less vain to ponder on what prices ought to be. Everybody is pleased if the prices of things he wants to buy drop and the prices of the things he wants to sell rise. . . . Any price determined on a market is the necessary outgrowth of the interplay of the forces operating, that is, demand and supply. Whatever the market situation which generated this price may be, with regard to it the price is always adequate, genuine, and real. It cannot be higher if no bidder ready to offer a higher price turns up, and it cannot be lower if no seller ready to deliver at a lower price turns up. Only the appearance of such people ready to buy or sell can alter prices. Economics . . . does not develop formulas which would enable anybody to compute a “correct” price different from that established on the market by the interaction of buyers and sellers. . . . This refers also to monopoly prices. . . . No alleged “fact finding” and no armchair speculation can discover another price at which demand and supply would become equal. The failure of all experiments to find a satisfactory solution for the limited-space monopoly of public utilities clearly proves this truth. (Mises, Human Action, pp. 392–94; italics added)
The first to point out the error in the common talk of “monopoly wage rates” of unions was Professor Mises. See his brilliant discussion in Human Action, pp. 373–74. Also see P. Ford, The Economics of Collective Bargaining (Oxford: Basil Blackwell, 1958), pp. 35–40. Ford also refutes the thesis advanced by the recent “Chicago School” that unions perform a service as sellers of labor:
But a union does not itself produce or sell the commodity, labour, nor receive payment for it. . . . It could be more fitly described as . . . fixing the wages and other conditions on which its individual members are permitted to sell their services to the individual employers. (Ibid., p. 36)
A restrictionist, rather than a monopoly, price can be achieved because the number of laborers is so important in relation to the possible variation in hours of work by an individual laborer that the latter can be ignored here. If, however, the total labor supply is limited originally to a few people, then an imposed higher wage rate will cut down the number of hours purchased from the workers who remain working, perhaps so much as to render a restrictionist price unprofitable to them. In such a case it would be more appropriate to speak of a monopoly price.
Cf. Mises, Human Action, p. 764.
See Charles E. Lindblom, Unions and Capitalism (New Haven: Yale University Press, 1949), pp. 78ff., 92–97, 108, 121, 131–32, 150–52, 155. Also see Henry C. Simons, “Some Reflections on Syndicalism” in Economic Policy for a Free Society (Chicago: University of Chicago Press, 1948), pp. 131f., 139ff.; Martin Bronfenbrenner, “The Incidence of Collective Bargaining,” American Economic Review, Papers and Proceedings, May, 1954, pp. 301–02; Fritz Machlup, “Monopolistic Wage Determination as a Part of the General Problem of Monopoly” in Wage Determination and the Economics of Liberalism (Washington, D.C.: Chamber of Commerce of the United States, 1947), pp. 64–65.
See Murray N. Rothbard, “Mises’ Human Action: Comment,” American Economic Review, March, 1951, pp. 183–84.
The same is true, to an even greater extent, of measures of governmental intervention in the market. See chapter 12 below.
See James Birks, Trade Unionism in Relation to Wages (London, 1897), p. 30.
See James Birks, Trades’ Unionism: A Criticism and a Warning (London, 1894), p. 22.
We can deal here only with the directly catallactic consequences of labor unionism. Unionism also has other consequences which many might consider even more deplorable. Prominent is the fusing of the able and the incompetent into one group. Seniority rules, for example, are invariable favorites of unions. They set restrictively high wages for less able workers and also lower the productivity of all. But they also reduce the wages of the more able workers—those who must be chained to the stultifying march of seniority for their jobs and promotions. Seniority also decreases the mobility of workers and creates a kind of industrial serfdom by establishing vested rights in jobs according to the length of time the employees have worked. Cf. David McCord Wright, “Regulating Unions” in Bradley, Public Stake in Union Power, pp. 113–21.
Students of labor unions have almost universally ignored the systematic use of violence by unions. For a welcome exception, see Sylvester Petro, Power Unlimited (New York: Ronald Press, 1959). Also cf. F.A. Hayek, “Unions, Inflation, and Profits,” p. 47.
On the nature and consequences of these various criteria of wage determination, see Ford, Economics of Collective Bargaining, pp. 85–110.
See the excellent critique by Hutt, Theory of Collective Bargaining, passim.
On the Ricardo effect, see Mises, Human Action, pp. 767–70. Also see the detailed critique by Ford, Economics of Collective Bargaining, pp. 56–66, who also points to the union record of hindering mechanization by imposing restrictive work rules and by moving quickly to absorb any possible gain from the new equipment.
In particular, see Edward H. Chamberlin, Theory of Monopolistic Competition, and Mrs. Joan Robinson, Economics of Imperfect Competition. For a lucid discussion and comparison of the two works, see Robert Triffin, Monopolistic Competition and General Equilibrium Theory (Cambridge: Harvard University Press, 1940). The differences between the “monopolistic” and the “imperfect” formulations are not important here.
Recently, Professor Chamberlin has conceded this point and has, in a series of remarkable articles, astounded his followers by repudiating the concept of pure competition as a welfare ideal. Chamberlin now declares: “The welfare ideal itself . . . is correctly described as one of monopolistic competition. . . . [This] seems to follow very directly from the recognition that human beings are individual, diverse in their tastes and desires, and moreover, widely dispersed spatially.” Chamberlin, Towards a More General Theory of Value, pp. 93–94; also ibid., pp. 70–83; E.H. Chamberlin and J.M. Clark, “Discussion,” American Economic Review, Papers and Proceedings, May, 1950, pp. 102–04; Hunter, “Product Differentiation and Welfare Economics,” pp. 533–52; Hayek, “The Meaning of Competition” in Individualism and the Economic Order, p. 99; and Marshall I. Goldman, “Product Differentiation and Advertising: Some Lessons from Soviet Experience,” Journal of Political Economy, August, 1960, pp. 346–57. See also note 28 above.
This definition of the demand curve to the firm was Mrs. Robinson’s outstanding contribution, unfortunately repudiated by her recently. Triffin castigated Mrs. Robinson for evading the problem of “oligopolistic indeterminacy,” whereas actually she had neatly solved this pseudo problem. See Robinson, Economics of Imperfect Competition, p. 21. For other aspects of oligopoly, see Willard D. Arant, “Competition of the Few Among the Many,” Quarterly Journal of Economics, August, 1956, pp. 327–45.
For an acute criticism of monopolistic-competition theory, see L.M. Lachmann, “Some Notes on Economic Thought, 1933–53,” South African Journal of Economics, March, 1954, pp. 26ff., especially pp. 30–31. Lachmann points out that economists generally treat types of “perfect” or “monopolistic” competition as static market forms, whereas competition is actually a dynamic process.