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(2) Monopoly Profit versus Monopoly Gain to a Factor
Many monopoly-price theorists have declared that establishment of the monopoly price means that the monopolist is able to attain permanent “monopoly profits.” This is then contrasted with “competitive” profits and losses, which, as we have seen, disappear in the evenly rotating economy. Under “competition,” if one firm is seen to be making great profits in a particular productive process, other firms rush in to take advantage of the anticipated opportunities, and the profits disappear. But in the case of the monopolist, it is asserted, his unique position allows him to keep making these profits permanently.42
To use such terminology is to misconceive the nature of “profit” and “loss.” Profits and losses are purely the results of entrepreneurial activity, and that activity is the consequence of the uncertainty of the future. Entrepreneurship is the action on the market that takes advantage of estimated discrepancies between selling prices and buying prices of factors. The better forecasters make profits, and the incorrect ones suffer losses. In the evenly rotating economy, where everyone has settled down to an unchanging round of activity, there can be no profit or loss because there is no uncertainty on the market. The same is true for the monopolist. In the evenly rotating economy, he obtains his “specific monopoly gain,” not as an entrepreneur, but as the owner of the product which he sells. His monopoly gain is an added income to his monopolized product; whether for an individual or for a cartel, it is this product which earns more income through restriction of its supply.
The question arises: Why cannot other entrepreneurs seize the gainful opportunity and enter into the production of this good, thereby tending to eliminate the opportunity? In the case of the cartel, this is precisely the tendency that will always prevail and lead to the breakup of a monopoly-price position. Even if new firms entering the industry are “bought off” by being offered quotal positions in the old cartel, and both the new and the old firms have been able to agree on allocations of production and income, such actions will not suffice to preserve the cartel. For new firms will be tempted to acquire a share in the monopoly gains, and ever more will be created until the entire cartel operation is rendered unprofitable, there being too many firms to share the benefits. In such situations, the pressure will become greater and greater for the more efficient firms to cut loose from the cartel and to refuse further to provide a comfortable shelter for the host of inefficient firms.
In the case of a single monopolist, either his brand name and unique goodwill with the consumers prevents others from taking away his monopoly gains, or else he is a recipient of special monopoly privilege from the government, in which case other producers are prevented by force from producing the same good.
Our analysis of monopoly gain must be pursued further. We have said that the gain is derived from income from the sale of a certain product. But this product must be produced by factors, and we have seen that the return to any product is resolved into returns to the factors which produce it. Such “imputation,” in the market, must also take place for monopoly gains. Let us say, for example, that the Staunton Washing Machine Company has been able to achieve a monopoly price for its product. It is clear that the monopoly gain cannot be attributed to the machines, the plant, etc., which produce the washers. If the Staunton Company bought these machines from other producers, then any monopoly gains would, in the long run, as the machines were replaced, accrue to the producers of the machines. In the evenly rotating economy, where entrepreneurial profits and losses disappear, and the price of a product equals the sum of the prices of its factors, all the monopoly gain would accrue to a factor and not a product. Furthermore, no income, except time income, could accrue to the owner of a capital good, because every capital good must, in turn, be produced by higher-order factors. Ultimately, all capital goods are resolvable into labor, land, and time factors. But if the Staunton Washing Machine Company cannot itself achieve a monopoly gain from a monopoly price, then obviously it does not benefit by restricting production in order to obtain this gain. Therefore, just as no income in the evenly rotating economy can accrue specifically to owners of capital goods, neither can specific monopoly gains.
The monopoly gains must, then, be imputed to either labor or land factors. In the case of a brand name, for example, a certain kind of labor factor is being monopolized. A name, as we have seen, is a unique identifying label for a person (or a group of persons acting co-operatively), and is therefore an attribute of the person and his energy. Considered generally, labor is the term designating the productive efforts of personal energy, whatever its concrete content. A brand name, therefore, is an attribute of a labor factor, specifically the owner or owners of the firm. Or, considered catallactically, the brand name represents the decision-making rent accruing to the owner and his name. If a monopoly price is achieved by the baseball prowess of Mickey Mantle, this is a specific monopoly gain attributable to a labor factor. In both of these cases, then, the monopoly price stems, not simply from the unique possession of the final product, but, more basically, from the unique possession of one of the factors necessary to the final product.
A monopoly gain might also be imputable to ownership of a unique natural resource or “land” factor. Thus, a monopoly price for diamonds may be attributable to a monopoly of diamond mines, from which diamonds must be ultimately produced.
Under the analysis of monopoly price, then, there cannot be, in the evenly rotating system, any such thing as “monopoly profits”; there are only specific monopoly income gains to owners of labor or land factors. No monopoly gain can accrue to an owner of a capital good. If a monopoly price has been imposed because of a grant of monopoly privilege by the State, then obviously the monopoly gain is attributable to this special privilege.43
- 42. We are not discussing here the generally conceded point that monopoly profits are capitalized in capital gains to the shares of the firm's stock.
- 43. To attain a monopoly price, the factor-owner must meet two conditions: (a) He must be a monopolist (in the sense of definition 1) over the factor; if he were not, the monopoly gain could be bid away by competitors entering the field; and (b) the demand curve for the factor must be inelastic above the competitive-price point.