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

E. Free Competition and Cartels

There are other arguments that opponents of cartels use in decrying cartel action. One thesis asserts that there is something wicked about formerly competing firms now uniting, e.g., “restricting competition” or “restraining trade.” Such restriction is supposed to injure the consumers’ freedom of choice. As Hutt phrased it in his previously cited article: “Consumers are free ... and consumers’ sovereignty is realizable, only to the extent to which the power of substitution exists.”

But surely this is a complete misconception of the meaning of freedom. Crusoe and Friday bargaining on a desert island have very little range or power of choice; their power of substitution is limited. Yet if neither man interferes with the other's person or property, each one is absolutely free. To argue otherwise is to adopt the fallacy of confusing freedom with abundance or range of choice. No individual producer is or can be responsible for other people's power to substitute. No coffee grower or steel producer, whether acting singly or jointly, is responsible to anyone because he chose not to produce more. If Professor X or consumer Y believes that there are not enough coffee producers in existence or that they are not producing enough, these critics are free to enter the coffee or steel business as they see fit, thus increasing both the number of competitors and the quantity of the good produced.

If consumer demand had really justified more competitors or more of the product or a greater variety of products, then entrepreneurs would have seized the opportunity to profit by satisfying this demand. The fact that this is not being done in any given case demonstrates that no such unsatisfied consumer demand exists. But if this is true, then it follows that no man-made actions can improve the satisfaction of consumer demand more than is being done on the unhampered market. The false confusion of freedom with abundance rests on a failure to distinguish between the conditions given by nature and man-made actions to transform nature. In a state of raw nature, there is no abundance; in fact, there are few, if any, goods at all. Crusoe is absolutely free, and yet on the point of starvation. Of course, it would be pleas-anter for everyone if the nature-given conditions had been far more abundant, but these are vain fantasies. For vis-à-vis nature, this is the best of all possible worlds, because it is the only possible one. Man's condition on earth is that he must work with the given natural conditions and improve them by human action. It is a reflection on nature, not on the free market, that everyone is “free to starve.”

Economics demonstrates that individuals, entering into mutual relations in a free market in a free society—and only in such relations—can provide abundance for themselves and for the entire society. (“Free,” as always in this book, is used in the interpersonal sense of being unmolested by other persons.) To employ freedom as itself equivalent to abundance obstructs understanding of these truths.

The free market in the world of production may be termed “free competition” or “free entry,” meaning that in a free society anyone is free to compete and produce in any field he chooses. “Free competition” is the application of liberty to the sphere of production: the freedom to buy, sell, and transform one's property without violent interference by an external power.

We have seen above that in a regime of free competition consumers’ satisfaction will, at any time, tend to be at the maximum possible, given natural conditions. The best forecasters will tend to emerge as the dominant entrepreneurs, and if anyone sees an opportunity passed up, he is free to take advantage of his superior foresight. The regime that tends to maximize consumers’ satisfaction, therefore, is not “pure competition” or “perfect competition” or “competition without cartel action,”15 or anything other than one of simple economic liberty.

Some critics charge that there is no “real” free entry or free competition in a free market. For how can anyone compete or enter a field when an enormous amount of money is needed to invest in efficient plants and firms? It is easy to “enter” the pushcart peddling “industry” because so little capital is required, but it is almost impossible to establish a new automobile firm, with its heavy requirements of capital.

This argument is but another variant of the prevailing confusion between freedom and abundance. In this case, the abundance refers to the money capital which a man has been able to amass. Every man is perfectly free to become a baseball player; but this freedom does not imply that he will be as good a baseball player as the next man. A man's range or power of action, dependent on his ability and the exchange-value of his property, is something completely distinct from his freedom. As we have said, a free society will in the long run lead to general abundance and is the necessary condition for that abundance. But the two must be kept conceptually distinct, and not confused by phrases such as “real freedom” or “true freedom.” Therefore, the fact that everyone is free to enter an industry does not mean that everyone is able, either in terms of personal qualities or monetary capital, to do so. In industries requiring more capital, fewer people will be able to take advantage of their freedom to set up a new firm than in those requiring less capital, just as fewer laborers will be able to take advantage of freedom of entry in a very highly skilled profession than in a menial position. There is no mystery about either situation.

In fact, the disability is much more relevant in the case of labor than in the case of business competition. What are modern devices such as corporations but means of pooling capital by many people of greater and lesser wealth? The “difficulty” of investing in a new automobile firm should be considered, not in terms of the hundreds of millions of dollars required for total investment, but in terms of the 50 or so dollars required to purchase one share of stock. But while capital can be pooled, beginning with the smallest units, labor ability cannot be pooled.

Sometimes the argument reaches absurd lengths. For example, it is often asserted that now, in this modern world, firms are so large that new people “cannot” compete or enter the industry because the capital cannot be raised. These critics do not seem to see that the aggregate capital and wealth of individuals have advanced along with the increase in wealth required to launch a new enterprise. In fact, these are two sides of the same coin. There is no reason to suppose that it was easier to raise the capital to launch a new retail shop many centuries ago than it is to raise capital for the automobile firm today. If there is enough capital to finance the large firms currently existing, there is enough to finance one more; in fact, capital could be withdrawn from existing large firms and shifted to new ones if there is a need for them. Of course, if the new enterprise would be unprofitable and therefore unserviceable to consumers, it is easy to see why there is reluctance in the free market to embark on the venture.

That there is inequality of ability or monetary income on the free market should surprise no one. As we have seen above, men are not “equal” in their tastes, interests, abilities, or locations. Resources are not distributed “equally” over the earth.16 This inequality or diversity in abilities and distribution of resources insures inequality of income on the free market. And, since a man's monetary assets are derived from his and his ancestors’ abilities in serving consumers on the market, it is not surprising that there is inequality of monetary wealth as well.

The term “free competition,” then, will prove misleading unless it is interpreted to mean free action, i.e., freedom to compete or not to compete as the individual wills.

It should be clear from the foregoing discussion that there is nothing particularly reprehensible or destructive of consumer freedom in the establishment of a “monopoly price” or in a cartel action. A cartel action, if it is a voluntary one, cannot injure freedom of competition and, if it proves profitable, benefits rather than injures the consumers. It is perfectly consonant with a free society, with individual self-sovereignty, and with the earning of money through serving consumers.

As Benjamin R. Tucker brilliantly concluded in dealing with the problem of cartels and competition:

That the right to cooperate is as unquestionable as the right to compete; the right to compete involves the right to refrain from competition; cooperation is often a method of competition, and competition is always, in the larger view, a method of cooperation ... each is a legitimate, orderly, non-invasive exercise of the individual will under the social law of equal liberty ...

Viewed in the light of these irrefutable propositions, the trust, then, like every other industrial combination endeavoring to do collectively nothing but what each member of the combination might fully endeavor to do individually, is, per se, an unimpeachable institution. To assail or control or deny this form of cooperation on the ground that it is itself a denial of competition is an absurdity. It is an absurdity, because it proves too much. The trust is a denial of competition in no other sense than that in which competition itself is a denial of competition. (Italics ours.) The trust denies competition only by producing and selling more cheaply than those outside of the trust can produce and sell; but in that sense every successful individual competitor also denies competition. ... The fact is that there is one denial of competition which is the right of all, and that there is another denial of competition which is the right of none. All of us, whether out of a trust or in it, have a right to deny competition by competing, but none of us, whether in a trust or out of it, have a right to deny competition by arbitrary decree, by interference with voluntary effort, by forcible suppression of initiative.17

This is not to say, of course, that joint co-operation or combination is necessarily “better than” competition among firms. We simply conclude that the relative extent of areas within or between firms on the free market will be precisely that proportion most conducive to the well-being of consumers and producers alike. This is the same as our previous conclusion that the size of a firm will tend to be established at the level most serviceable to the consumers.18

  • 15. These terms will be explained below.
  • 16. Clearly, the very term “equal” is unusable here. What does it mean to say that lawyer Jones’ ability is “equal” to teacher Smith's?
  • 17. From his Address to the Civic Federation Conference on Trusts, held in Chicago, September 13–16, 1899, Chicago Conference on Trusts (Chicago, 1900), pp. 253–54, reprinted in Benjamin R. Tucker, Individual Liberty (New York: Vanguard Press, 1926), pp. 248–57. Said a lawyer at the conference:
    The control of prices can be brought about permanently only by such a superiority in the methods of manufacture as will successfully defy competition. Any price established by a combination which enables competitors to make a reasonable profit will soon encourage such competition as will reduce the price. (Azel F. Hatch, Chicago Conference, p. 70) See also the excellent article by A. Leo Weil, ibid., pp. 77–96; and W.P. Potter, ibid., pp. 299–305: F.B. Thurber, ibid., pp. 124–36; Horatio W. Seymour, ibid., pp. 188–93; J. Sterling Morton, ibid., pp. 225–30.
  • 18. Does our discussion imply, as Dorfman has charged (J. Dorfman, Economic Mind in American Civilization, III, 247), that “whatever is, is right”? We cannot enter into a discussion of the relation of economics to ethics at this point, but we can state briefly that our answer, pertaining to the free market, is a qualified Yes. Specifically, our statement would be: Given the ends on the value scales of individuals, as revealed by their real actions, the maximum satisfaction of those ends for every person is achieved only on the free market. Whether individuals have the “proper” ends or not is another question entirely and cannot be decided by economics.