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10. Monopoly and Competition > 2. Cartels and Their Consequences

A. Cartels and "Monopoly Price"

But is not monopolizing action a restriction of production, and is not this restriction a demonstrably antisocial act? Let us first take what would seem to be the worst possible case of such action: the actual destruction of part of a product by a cartel. This is done to take advantage of an inelastic demand curve and to raise the price to gain a greater monetary income for the whole group. We can visualize, for example, the case of a coffee cartel burning great quantities of coffee.

In the first place, such actions will surely occur very seldom. Actual destruction of its product is clearly a highly wasteful act, even for the cartel; it is obvious that the factors of production which the growers had expended in producing the coffee have been spent in vain. Clearly, the production of the total quantity of coffee itself has proved to be an error, and the burning of coffee is only the aftermath and reflection of the error. Yet, because of the uncertainty of the future, errors are often made. Man could labor and invest for years in the production of a good which, it may turn out, consumers hardly want at all. If, for example, consumers’ tastes had changed so that coffee would not be demanded by anyone, regardless of price, it would again have to be destroyed, with or without a cartel.

Error is certainly unfortunate, but it cannot be considered immoral or antisocial; nobody aims deliberately at error.5 If coffee were a durable good, it is obvious that the cartel would not destroy it, but would store it for gradual future sale to consumers, thus earning income on the “surplus” coffee. In an evenly rotating economy, where errors are barred by definition, there would be no destruction, since optimum stocks for the attainment of money income would be produced in advance. Less coffee would be produced from the beginning. The waste lies in the excessive production of coffee at the expense of other goods that could have been produced. The waste does not lie in the actual burning of the coffee. After the production of coffee is lowered, the other factors which would have gone into coffee production will not be wasted; the other land, labor, etc., will go into other and more profitable uses. It is true that excess specific factors will remain idle; but this is always the fate of specific factors when the realities of consumer demand do not sustain their use in production. For example, if there is a sudden dwindling of consumer demand for a good, so that it becomes unremunerative for labor to work with certain specialized machines, this “idle capacity” is not a social waste, but is rather socially useful. It is proved an error to have produced the machines; and now that the machines are produced, working on them turns out to be less profitable than working with other lands and machines to produce some other result. Therefore, the economical step is to leave them idle or perhaps to transform their material stuff into other uses. Of course, in an errorless economy, no excessive specific capital goods will be produced.

Suppose, for example, that before the coffee cartel went into operation, X amount of labor and Y amount of land co-operated to produce 100 million pounds of coffee a year. The coffee cartel determined, however, that the most remunerative production was 60 million pounds and therefore reduced annual output to this level. It would have been absurd, of course, to continue wasteful production of 100 million pounds and then to burn 40 millions. But what of the now surplus labor and land? These shift to the production, say, of 10 million pounds of rubber, 50,000 hours of service as jungle guides, etc. Who is to say that the second structure of production, the second allocation of factors, is less “just” than the first? In fact, we may say it is more just, since the new allocation of factors will be more profitable, and hence more value-productive, to consumers. In the value sense, then, overall production has now expanded, not contracted. It is clear we cannot say that production, overall, has been restricted, since output of goods other than coffee has increased, and the only comparison between the decline of one good and the increase in another must be made in these broad valuational terms. Indeed, the shifting of factors to rubber and jungle guidance no more restricts coffee production than a previous shift of factors to coffee restricted the production of the former goods.

The whole concept of “restricting production,” then, is a fallacy when applied to the free market. In the real world of scarce resources in relation to possible ends, all production involves choice and the allocation of factors to serve the most highly valued ends. In short, the production of any product is necessarily always “restricted.” Such “restriction” follows simply from the universal scarcity of factors and the diminishing marginal utility of any one product. But then it is absurd to speak of “restriction” at all.6

We cannot, then, say that the cartel has “restricted production.” After the final allocation has eliminated the producer's error, the cartel's action will effect a maximization of producers’ incomes in the service of the consumers, as do all other free-market allocations. This is the result that people on the market tend to attain, in consonance with their skill as forecasting entrepreneurs, and this is the only situation in which man as consumer harmonizes with man as producer.

It follows from our analysis that the producers’ original production of 100 million pounds was an unfortunate error, later corrected by them. Instead of being a vicious restriction of production to the detriment of the consumers, the cutback in coffee production was, on the contrary, a correction of the previous error. Since only the free market can allocate resources to serve the consumer, in accordance with monetary profitability, it follows that in the previous situation, “too much” coffee and “too little” rubber, jungle guide service, etc., were being produced. The cartel's action, in reducing the production of coffee and causing an increase in the production of rubber, jungle guiding, etc., led to an increase in the power of the productive resources to satisfy consumer desires.

If there are anticartelists who disagree with this verdict and believe that the previous structure of production served the consumers better, they are always at perfect liberty to bid the land, labor, and capital factors away from the jungle-guide agencies and rubber producers, and themselves embark on the production of the allegedly “deficient” 40 million pounds of coffee. Since they are not doing so, they are hardly in a position to attack the existing coffee producers for not doing so. As Mises succinctly stated:

Certainly those engaged in the production of steel are not responsible for the fact that other people did not likewise enter this field of production. ... If somebody is to blame for the fact that the number of people who joined the voluntary civil defense organization is not larger, then it is not those who have already joined but those who have not.7

The position of the anticartelists implies that someone else is producing too much of some other product; yet they offer no standards except their own arbitrary decrees to determine which production is excessive.

Criticism of steel owners for not producing “enough” steel or of coffee growers for not producing “enough” coffee also implies the existence of a caste system, whereby a certain caste is permanently designated to produce steel, another caste to grow coffee, etc. Only in such a caste society would such criticism make sense. Yet the free market is the reverse of the caste system; indeed, choice between alternatives implies mobility between alternatives, and this mobility obviously holds for entrepreneurs or lenders with money to invest in production.

Furthermore, as we have stated above, an inelastic demand curve is purely the result of consumers’ choice. Thus, suppose that 100 million pounds of coffee have been produced and lie in stock, and a group of growers jointly decide that a burning of 40 million pounds of coffee will, say, double the price from one gold grain per pound to two gold grains per pound, thus giving them a higher total income acting jointly. This would be impossible if the growers knew that they would be confronted with an effective consumer boycott at the higher price. Further, consumers have another way, if they so desire, to prevent destruction of the good. Various consumers, acting either individually or jointly, could offer to purchase the existing coffee at higher than present prices. They could do this either because of their desire for coffee or because of their philanthropic dismay at the destruction of a useful good, or from a combination of both motives. At any rate, if they did so, they would prevent the producers’ cartel from decreasing the supply sold on the market. The boycott at a higher price and/or increased offers at the lower price would change the demand curve and render it elastic at the present stock level, thereby removing any incentive or need for the formation of a cartel.

To regard a cartel as immoral or as hampering some sort of consumers’ sovereignty is therefore completely unwarranted. And this is true even in the seemingly “worst” case of a cartel that we may assume is founded solely for “restrictive” purposes, and where, as a result of previous error and the perishability of product, actual destruction will occur. If consumers really wish to prevent this action, they need only change their demand schedules for the product, either by an actual change in their taste for coffee or by a combination of boycott and philanthropy. The fact that such a development does not take place in any given circumstance signifies that the producers are still maximizing their monetary income in the service of the consumers—by a cartel action, as well as by any other action. Some readers might object that, in offering higher demands for existing stock, the consumers would be bribing the producers, and that this constitutes an unwarranted extortion on the part of the producers. But this charge is untenable. Producers are guided by the goal of maximizing monetary income; they are not extorting, but simply producing where their gains are at a maximum, through exchanges concluded voluntarily by producers and consumers alike. This is no more nor less a case of “extortion” than when a laborer shifts from a lower-paying to a higher-paying job or when an entrepreneur invests in what he thinks will be a more rather than a less profitable project.

It must be recognized that once an error has been committed, as it had been in the aforementioned situation, the rational course is not to bewail the past, nor to attempt to “recover” historical costs, but to make the best (ceteris paribus, the most money) of the present situation. We recognize this when previously produced machines or other capital goods face a loss of demand for their product. In the production process, as we have seen, labor energies work on natural and produced factors to arrive at the most urgently demanded consumers’ goods. Since error is inevitable, this process is bound to lead to a considerable amount of “idle” capital goods at any given time. Similarly, much original land area will remain idle because existing labor has more profitable work to do on other lands. In short, the “idle” coffee is the result of an error in forecasting and should be no more shocking or reprehensible than “idle capacity” in any other type of capital good.

Our argument is just as applicable to a single firm producing a unique product with an inelastic demand as it is to a cartel of firms. A single firm, with inelastic demand for its product, could also destroy part of its stock after committing a forecasting error. Our critique of the “anti-monopoly-price” and consumers’-sovereignty doctrines applies equally well to such a case.

  • 5. See chapter 8, p. 516 above.
  • 6. In the words of Professor Mises:
    That the production of a commodity p is not larger than it really is, is due to the fact that the complementary factors of production required for an expansion were employed for the production of other commodities. ... Neither did the producers of p intentionally restrict the production of p. Every entrepreneur's capital is limited; he employs it for those projects which, he expects, will, by filling the most urgent demand of the public, yield the highest profit.  An entrepreneur at whose disposal are 100 units of capital employs, for instance, 50 units for the production of p and 50 units for the production of q. If both lines are profitable, it is odd to blame him for not having employed more, e.g., 75 units, for the production of p. He could increase the production of p only by curtailing correspondingly the production of q. But with regard to q the same fault could be found by the grumblers. If one blames the entrepreneur for not having produced more p, one must blame him also for not having produced more q. This means: one blames the entrepreneur for the fact that there is a scarcity of the factors of production and that the earth is not a land of Cockaigne. (Mises, Planning for Freedom, pp. 115–16)
  • 7. Ibid., p. 115.