The Theory of Idle Resources

APPENDIX TO CHAPTER X

IN THIS DISCUSSION, we have used the term “monopolist” to cover controllers of natural monopolies as well as controllers of collusive monopolies. A monopoly is “natural” when it does not depend upon any amalgamation of interests through the purchase of competing resources or any other form of contractual or tacit collusion. In practice, the natural monopolist is one who owns some unique source of supply, or enjoys what the present writer has called “the advantage of site and size” (i.e., “geographical advantage” or “scale of production advantage”). Now, every entrepreneur confronted with a downward sloping long-run demand schedule is a monopolist unless his autonomy is limited in some other way. And one method of attempting to limit such autonomy in the case of natural monopoly, is public utility control. The object of public utility control is presumably to restrict entrepreneurial powers in such a way as to convert a monopolistic situation into a competitive one. We use the term “competitive” because the attempt is clearly to enable the disposal of the resources at the entrepreneurs command, not according to private interest, but in accordance with the interests of society; and the free movement and utilization of resources, regardless of private interests which are thereby injured, is what orthodox economists have in fact meant by competition. That was, by implication, the traditional meaning of the term until recent abstract expositions started applying adjectives like “monopolistic,” “imperfect” or “impure” to “competition.” Distinctive names may be more appropriately applied to the institutions within which the essentially homogeneous force of competition tends to bring about an equilibrium. One does not talk about “buoyant,” “imperfect” or “impure” gravity because there are balloons and aeroplanes.

The natural monopolist is in a position to benefit by allowing scarce resources or scarce available services to be wasted; and he is in a position also to exclude resources from coming in to cooperate in the field under his control. That is, he can limit investment to his own advantage. But he is in that position because of existing institutions. Hence Mr. Kaldor’s suggestion1 that the notion of “institutional” monopolies should be confined to those based on “restriction of entry,” and that natural monopolies (arising from economies of scale) should cease to be termed “monopolies” seems to be based upon misconceptions. Natural monopolies equally exist because institutions permit them. And they restrict “freedom of entry” in exactly the same way that collusive monopolies do. This is most clear in respect of the amount of cooperant resources which they allow in. Their demand for such resources is limited by the identical principles which limit collusive monopolists’ demand for cooperant resources. But even when they waste part of the supply of “costless” but scarce homogeneous products (e.g., a mineral water spring, part of whose output is allowed to run to waste), they do so by “restricting entry” in the sense that they deny access to the supply. And when natural monopolists “withhold capacity,” they do so for the same reasons as collusive monopolists, and with the same effects.

We have thought it necessary to make this point because there seems to be a rather vague tendency in some academic quarters to suggest that, because natural monopoly exists, and because to some extent almost all productive activities enjoy some uniqueness, attempts to create competitive institutions must be visionary. Such a view implies that withheld capacity is inevitable when it depends upon natural monopoly. We do not accept that view, although we cannot here discuss the institutions necessary to limit the autonomy of natural monopolies, just as we have not here been concerned with the actual means of dissolving collusive monopolies. But we admit that the problem of public utility control has so far received even less satisfactory discussion than the problem of antitrust policy in respect of amalgamations and associations. And it may well be that control of the former constitutes a much more practically difficult problem than control of the latter. Nevertheless, the framers of social policy who are concerned with the idleness of resources and its connected problems need not be unduly perturbed by such difficulties. For apart from the large public utilities (which are in any case usually protected also by collusive agreements or legal enactment), natural monopoly can be observed in practice to be of relatively small importance in comparison with collusive monopoly.

In the absence of collusive monopoly (in conspicuous or unrecognized form) there can be little withholding of capacity.2 It is true that each individual in the labor market may, in addition to purchasing leisure, endeavor to maximize his earnings by holding back his services. But only in the case of rare skills, such as those of virtuoso musical performers, can any importance be attached to this possibility.

________________

3  N. Kaldor, “Professor Chamberlin on Monopolistic and Imperfect Competition, “Quarterly Journal of Economics 3 (May, 1938 ): 523‒29.

4  The reader must be reminded that the withholding of stocks has nothing to do with the withholding of capacity. Stocks of commodities are only withheld in our sense when their liquidation is proceeding at a rate slower than that required by the social interest (that is, under the consumers’ sovereignty criterion, consumers’ interest). See chap. III, para. 13.

• 1 Ibid., p. 106.
• 2 Ibid., pp. 61–62.
• 3If we really want to alleviate unemployment and poverty, Hutt continues, we must do something about this crony capitalism, with its privileged government-business and government-labor partnership monopolies, and it’s supporting out-of-control government and fiscal monetary policies. All such monopoly systems create “contrived scarcity,” “enforced waste,” and other completely irrational outcomes. Unemployment and poverty are simply “indications of its presence,” of the “triumph [of] ... private interest ... over social interest.”
• 4Hutt also correctly predicted that this problem would get worse before it got better. In an especially acute passage, he explained why the medical system would increasingly be drawn into the monopolistic crony capitalist framework.