Modern Economic Problems Part 35

[Footnote 2: As in the list in sec. 8, below.]

[Footnote 3: See Vol. I, chs. 8 and 31.]

[Footnote 4: See Vol. I, ch. 8, on compet.i.tion and monopoly, and ch.

31, on monopoly prices and large production. An understanding of the definitions and of the general principles distinguishing compet.i.tion and monopoly is a necessary prerequisite to a profitable discussion of the practical problem of monopoly.]

[Footnote 5: See Vol. I, p. 267, on capital; pp. 388-393, on large production. See also references in preceding note on monopoly; and ch.

27, secs. 1 and 2, on corporate organization.]

[Footnote 6: See above, ch. 26, sec. 3; and ch. 25, secs. 6 and 7.]

[Footnote 7: Compiled from data given by "The Journal of Commerce and Commercial Bulletin," reprinted in "The Commercial Year Book," Vol. V, 1900, pp. 564-569.]

[Footnote 8: John Moody, "The Truth About the Trusts," 1904]

[Footnote 9: See Vol. I, pp. 388-393.]

[Footnote 10: See Vol. I, pp. 391-392.]

[Footnote 11: See Vol. I, p. 334, on the function of the promoter.]

[Footnote 12: See Vol. I, pp. 80-85, 382-387, 394-396.]

[Footnote 13: A summary of this evidence is given in the author's "Principles of Economics" (1904), pp. 327-330. A fuller outline of the results of the Commission's conclusions may be found in "The Trust Problem," by J.W. Jenks, who acted as expert in the investigation.]

CHAPTER 29

PUBLIC POLICY IN RESPECT TO MONOPOLY

-- 1. Moral judgments of compet.i.tion and monopoly. -- 2. Public character of private trade. -- 3. Evil economic effects of monopolistic price.

-- 4. Common law on restraint of trade. -- 5. Growing disapproval of combination. -- 6. Compet.i.tion sometimes favored regardless of results.

-- 7. Increasing regard for results of compet.i.tion. -- 8. Common law remedy for monopoly ineffective. -- 9. First federal legislation against monopoly. -- 10. Policy of the Sherman anti-trust law. -- 11. Policy of monopoly-accepted-and-regulated. -- 12. Field of its application. -- 13.

Industrial trusts,--a natural evolution? -- 14. Artificial versus natural growth. -- 15. Kinds of unfair practices. -- 16. Growing conception of fair compet.i.tion. -- 17. The trust issues in 1912. -- 18. Anti-trust legislation in 1914.

-- 1. #Moral judgments of compet.i.tion and monopoly.# What should be the att.i.tude of society toward monopoly? Is it good or bad as compared with compet.i.tion? Some very strong ethical judgments bearing on practical problems are found in the popular mind connected with the ideas of compet.i.tion and monopoly. Compet.i.tion usually is p.r.o.nounced bad when viewed from the standpoint of the compet.i.tors who are losing by it, and as good when viewed from the standpoint of the traders on the other side of the market who gain by that compet.i.tion. Compet.i.tion among buyers thus appears to sellers to be a good thing; that among sellers appears to themselves to be a bad thing (and _vice versa_).

Many persons are moved by sympathy to p.r.o.nounce compet.i.tion among low-paid and underfed workers to be bad, and each worker is convinced that it is so in his own trade. Yet nearly all men are of one mind that compet.i.tion is a good thing in most industries, those that are thought of as supplying "the general public." Monopoly is believed by the public to be wrong in such cases, and compet.i.tion to be the normal and right condition of trade. Yet there are some men interested in "large business" who look upon compet.i.tion as bad, and upon monopoly as having essentially the nature of friendly cooperation. The roots of these opinions, or prejudices, are easily discoverable in the theoretical study of the nature of monopoly.[1] Yet often different men or groups of men feel so strongly on this matter, viewing it from their own standpoints, that they are quite unable to understand how any one else can feel otherwise. There is thus a great deal of controversy to no purpose.

-- 2. #Public character of private trade.# Any such general judgment as that of the public, tho it may be mistaken in some details, is likely to be a resultant of broad experience. There is in compet.i.tive trade a public, a social character, which monopoly destroys. Even in a simple auction, when the bidding is really compet.i.tive, price depends far less on shrewd bargaining, on bluff, or on stubbornness, than is the case in isolated trade. Each bidder is compelled by self-interest to outbid his less eager compet.i.tors, and thus the limits within which the price must fall are narrowly fixed. The auction-sale is less a purely personal matter, takes on a more public aspect, has a more socialized character than isolated trade, depends more on forces outside the control of any one man, and results in a price fixed with greater definiteness. The price in a more developed market results from the play of impersonal forces, or at least from the play of personal forces which have come under the rules of the market.[2] This price men are ready to accept as fair. It has a democratic character, whereas the gains of monopoly price arouse resentment as being the work of personal, and felt to be despotic, power. Monopoly price is a bad price to the one who pays it, not only because it is a high price but because it bears the character of personal extortion.

The medieval notion of _justum pretium_, the just price, may have been often misapplied, and it was often criticized and ridiculed by economists in the period of idealized compet.i.tion (from Adam Smith to John Stuart Mill). But at the heart of the notion was the judgment that general uniform prices fixed in the open market are the proper norms for prices when one of the traders is caught at an exceptional disadvantage. The modern world has been compelled to reexamine the conception of the just price.

-- 3. #Evil economic effects of monopolistic price.# Theoretical a.n.a.lysis confirms this view. Any exercise of monopolistic power over price keeps some, the weaker bidders, from getting any of the desired goods, or limits them to their most urgently desired units. What may be called "the theoretically correct price"[3] with two-sided compet.i.tion is the one that permits the maximum number of trades with a margin of gain to each trader. In narrowing the possibility of subst.i.tution of goods by trade, the sum of values of goods for most men is diminished. All citizens thus that are the victims of an artificially created scarcity look upon monopoly as "bad," just as they do upon the evils of nature--drought, locusts, fires, and pestilence. A monopoly has an indirect and more distant effect upon the spirit of all those trading with it. If they are producers selling at prices depressed by monopoly, their money incomes are reduced; if they are consumers buying at monopoly prices, their real-incomes are reduced; in either case their psychic incomes, the motives of all industry, are diminished, and their industrial energies are relaxed.

-- 4. #Common law on restraint of trade.# The first recorded case in English law, wherein the courts sought to prevent the limiting of compet.i.tion by agreement, runs back to the year 1415, in the reign of Henry V. This was a very simple case of a contract in restraint of trade, whereby a dyer agreed not to practise his craft within the town for half a year. The court declared the contract illegal (and hence unenforceable in a court) and administered a severe reproof to the craftsman who made it. Thus was set forth the doctrine of the moral and legal obligation of each economic agent to compete fully, freely, and without restraint upon his action, even restraint imposed upon himself by a contract voluntarily entered into for his own advantage.

Not until the eighteenth century was this rigid doctrine somewhat relaxed so as to permit the sale of the "good will" of a business under limited conditions, and some "reasonable" contracts in restraint of trade. Later the emphasis was somewhat further shifted, by judicial interpretations, from the notion of free compet.i.tion to that of "fair"

compet.i.tion, so as to permit contracts involving moderate restraint of trade, if the essential element of compet.i.tion was retained. Thus it was said that a piano manufacturer might by contract grant an exclusive agency to a dealer in a certain territory, there being many other competing makes of pianos, and such a contract "does not operate to suppress compet.i.tion nor to regulate the production or sale of any commodity."[4] But with such moderate limitations the courts in cases under the common law have steadily disapproved contracts in restraint of trade that would appear to be to the disadvantage of third parties, whether producers or consumers.

-- 5. #Growing disapproval of combination.# The att.i.tude of the courts became in one respect stricter. Some earlier cases involved the doctrine that what is lawful for an individual to do alone is lawful if done in combination with others. Indeed, a comparatively recent case[5] declared regarding a group of dealers, agreeing not to deal with another, that "desire to free themselves from compet.i.tion was a sufficient excuse" for such action. But the general trend has been to the doctrine that a combination of men "has hurtful powers and influences not possessed by the individual." Hence threats of a.s.sociations of traders (retailers or wholesalers) not to deal with another if he continued to deal with some third party have been declared acts in restraint of trade.[6] Yet in the case cited the court seemed to have been more concerned with protecting "the individual against encroachment upon his rights by a greater power,"

"one of the most sacred duties of the courts," than with rights and interests of the general public, endangered by such restraint of trade.

-- 6. #Compet.i.tion sometimes favored regardless of results.# In another respect the courts have wavered in their att.i.tude toward compet.i.tion, the general doctrine being that compet.i.tion, particularly the cutting of prices, is absolutely justifiable, regardless of circ.u.mstances. In the leading English case[7] the facts were that the larger steamship companies sent to Hankow additional ships, now called, figuratively, "fighting ships," to "smash" freights in order to ruin tramp steamship owners and drive them out of the field. The court held that this const.i.tuted no legal wrong to the tramp steamship owners, and scouted the idea of the court's looking at the motives in price cutting, or taking into consideration in any way what the court called "some imaginary normal standard of freights and prices." And of this case the lawyer is forced to say: "Undoubtedly the excellent opinion just quoted represents the law everywhere," even tho there are other cases difficult to harmonize with it.[8]

To the economist, not bound in like manner by legal precedent, such a verdict was from the first impossible. The court appears to have considered that only the rights of the private litigants, the tramp steamship owners, were involved, not the rights and interests of the shipping public; it considered the immediate and not the ultimate effects of the "smashing" of rates; it allowed itself to be deceived by the appearance of acts that in outer form were compet.i.tion, but that had as their purpose the strengthening and maintenance of monopoly. These acts are forms of the "unfair" practices that will be mentioned later.[9]

-- 7. #Increasing regard for results of compet.i.tion.# Despite the binding precedents, the courts in some later decisions have refused to look upon compet.i.tion as good regardless of its motives and of its consequences. In a federal case[10] the judge, in a brief and acute dictum, recognized the evil of a rate war that would result from threats of definite cuts. They impair "the usefulness of the railroads themselves, and cause great public and private loss." The court's opinion was no doubt largely influenced by the fact that railroad rates were already subject to regulation: "Every precaution has been taken by state legislatures and by the congress to keep them just and reasonable,--just and reasonable for the public and for the carriers."

In a state case[11] the facts were that a man of wealth started a barber shop and employed a barber to injure the plaintiff and drive him out of business. The court recognized that while, as a general proposition, "compet.i.tion in trade and business is desirable," it may in certain cases result in "grievous and manifold wrongs to individuals"; and in this case the "malevolent" man of wealth was declared to be "guilty of a wanton wrong and an actionable tort."

The economists can but p.r.o.nounce this judgment admirable so far as it goes, but it is remarkably confined to a consideration of the private legal rights of the injured compet.i.tor, and gives hardly a hint of a higher criterion for judging compet.i.tive acts, that of the general welfare.

-- 8. #Common law remedy for monopoly ineffective.# The common law contained prohibitions enough, both broad and specific, against contracts and acts in restraint of trade. The common law contained likewise a closely related body of doctrine by which the railroads, as common carriers, ought to have given equitable and undiscriminating rates to all shippers. There was a strong body of influential opinion that long maintained that the case was sufficiently covered, that the only thing needed was to enforce the common law. Even now, after all that has elapsed, there are some in railroad and business circles who still appear to hold that opinion. But the evils of railroad discrimination and of other monopolistic practices continued, and for some cause the common law was not enforced, excepting occasionally, disconnectedly, and without important results.

Why? The answer may be ventured that in the common law the whole question of restraint of trade was treated primarily as one of private rights and only incidentally as one involving general public policy.

Cases came before the courts only on complaint of some individual that felt injured. Now the injury of higher prices due to contracts in restraint of trade is usually diffused among many customers, and the loss of any one is less than the expense of bringing suit.

Consequently, it rarely happened that cases were brought before the courts except by one of the two equally guilty parties to a contract in restraint of trade, when the other party had failed in some way to do his part. When such an illegal contract in restraint of trade was proved before a court by a defendant in a civil suit the contract was declared unenforceable, and the only penalty in practice was that the plaintiff could not collect his debt or secure performance from the defendant.[12] A very similar situation existed in the case of the individual's grievances against railroad charges and services.

-- 9. #Federal legislation against monopoly.# The pa.s.sage of the Interstate Commerce Act in 1887[13] prohibiting discrimination and railway pooling, and that of the Act of 1890 "to protect trade and commerce against unlawful restraints and monopolies," popularly known as the "Sherman Anti-trust Law," were part of one public movement to remedy monopoly. From one point of view it seems true, as has often been said, that in essence these statutes were simply enactments of long established principles of the common law. Section 1 of the Sherman law declared illegal "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations." Section 2 made it a misdemeanor "to monopolize, or attempt to monopolize."

But from another point of view, these new laws showed a marked change both in the conception of the interests involved and in the means of preventing the evils. The evil was at last conceived of as a general public evil; the laws are not merely to protect individuals,[14]

but "to regulate commerce," "to protect trade and commerce."

More important still, it was made the duty of public officers (district-attorneys of the United States) to inst.i.tute proceedings in equity "to prevent and restrain" violation of the Sherman Act, and a special Commission was inst.i.tuted to deal with railroad cases. It was this undertaking of the initiative by the government, the treatment of the problem as one of the general welfare, that marked a new epoch in this field. The methods and agencies provided might be at first inadequate and ineffective, but time and experience could remedy those defects.

-- 10. #Policy of the Sherman anti-trust law.# But in important respects opinion and policies were not yet clear and consistent. They wavered from one to another conception of the method for dealing with the problem. It was clear only that _laissez-faire_ had been laid aside. There are three other possible policies reflecting as many different conceptions of the problem of monopoly: (1) monopoly-prosecuted, (2) monopoly-accepted-and-regulated, (3) compet.i.tion-maintained-and-regulated. The policy of monopoly-prosecuted is merely negative. This is the policy of the Sherman law. It opposed no positive action to the making of monopolistic contracts and to the formation of combinations, but declared them to be illegal and provided for their prosecution and punishment after the mischief had been done. The great epoch of the formation of combinations[15] followed the enactment of this law.

True, lack of experience by the department of justice, and lack of vigorous effort to enforce the law, and the slow action of the courts were largely to blame for this result. The law has proved to be more effective to prevent new combinations since it has been successfully enforced in a few notable cases. But once large combinations have been formed and complex individual financial interests have become involved, the courts have proved to be incapable of undoing the deeds.

In practice the most sweeping remedy attempted under the law has been the dissolution of enormous combinations formed years after the law went into effect. This has been called the job of unscrambling the eggs. The most notable cases were those of the Standard Oil Company and of the Tobacco Company, decided in 1911, the results being absurdly futile.

-- 11. #Policy of monopoly-accepted-and-regulated.# A second policy may be called that of monopoly-accepted-and-regulated. This is represented by the Interstate Commerce Act (at first weakly, and more vigorously after its amendment), and by the great ma.s.s of state legislation putting the local and interurban public utilities under the control of regulative commissions. For some decades after these industries developed, the public faith was in compet.i.tion as the effective regulator. If monopolistic prices were too high, another company was chartered to build a parallel railroad or another horse-car line on the next street, or to lay down another set of gas pipes in the same block. Almost from the first some students of the subject saw the wastefulness and futility of this kind of compet.i.tion, and nearly a half century later the public reluctantly came to this view. Still, sad to relate, the same history had to be repeated in regard to the telegraph and telephone industry, and in some quarters the ultimate outcome is not yet recognized. The Interstate Commerce Act itself, with odd inconsistency, contains an anti-pooling provision (section 5) the purpose of which seems to have been to compel compet.i.tion as to rates which is now practically impossible under the other provisions of the law. The policy of "monopoly-accepted" was seen to involve as a necessary feature, public regulation of rates, to the point, if necessary, of absolutely fixing them. The principle has come to be accepted that wherever compet.i.tion ends there public regulation of prices and service begins. Monopolistic enterprises are _ipso facto_ quasi-public inst.i.tutions.

-- 12. #Field of its application#. This policy, gradually extending in practice, came to be applied to the cla.s.s of industries which, for lack of a better name, are called local utilities. The one characteristic that they all have in common is that the service, or product, which is sold requires for its delivery an expensive, permanent, physical plant, and some special use of public highways.

Thus gas pipes, water pipes, poles and wires for telegraph, telephones and electric light, street railways, regular steam railroads and some other minor industries all answer to this test.[16]

Beginning about the year 1900 one state after another enlarged the powers of its state railroad commission or created a new corporation commission to regulate these "local" or "public utilities."[17] They have accomplished much, but the development of this kind of regulation has not proceeded in many cases beyond the adjustment of relative rates and the abolition of discrimination among the different individuals and cla.s.ses of customers. Experience has shown the great difficulty of determining what is a fair absolute level of charges.

A new science of accounting has been developing to a.s.sist in the solution of a problem, the complexity of which transcends the agencies at hand to deal with it. With this policy applied to the local utility (and railroad) phase of monopoly, there remains still the problem of the industrial trusts in the manufacturing enterprises.

-- 13. #The industrial trust,--a natural evolution?# The policy that one is inclined to favor regarding industrial trusts depends very much on one's answer to the question: Are or are not industrial trusts natural growths? In this bare form the question is somewhat vague, but the thought of those who answer it in the affirmative is positive if not always entirely clear. They (at least the extreme representatives of this view) declare that trusts have been, are, and will continue to be, the results of a "natural evolution" of business conditions, as inevitable as the great changes in the physical world. If this is so man and society must recognize the facts, must waste no efforts vainly in fighting against fate, but should accept the trusts and realize their possibilities for good. And these are declared to be great, for it is a.s.sumed that without the trusts all of the economies of large production must be sacrificed. Irresistible economic forces, it is said, are creating larger and larger units of business; friendly cooperation and unified action must take the place of compet.i.tion in business.

The outcome must be monopoly in every important line of manufacturing industry and perhaps of commerce. In view of public opinion toward monopoly, its acceptance necessitates its regulation. This argument is supported by appeal to the experience in the field of railroads and other local utilities, where public opinion has, after long hesitation, recognized compet.i.tion to be impracticable and the acceptance of monopoly as inevitable. As extremes often meet, the view of the industrial trust as a natural evolution is most favored on the one hand by men of "big business," already interested financially in trusts, and on the other hand by the most radical communists (or socialists) whose ideal is the complete monopolization of industry under the government.

-- 14. #Artificial versus natural growth.# Opposed to this view is a deep and widespread popular opinion or prejudice, against the trust and in favor of compet.i.tion. General opinion in this case (as not always) finds much support in special economic studies of the methods by which the existing industrial trusts came into being. First the question properly is raised; just what is meant by "natural"? In a sense everything has been the natural outcome of evolution,--the steam engine, the submarine, the boycott, militarism. In an equally good, if not better sense, every mechanical invention and every method of industrial organization is artificial, has been the result of man's choice and effort. In any case men may choose as good or reject as unsuitable or bad, any particular mechanical device, and society may decide to adopt any particular policy toward a certain form of business organization and certain business practices (unless, indeed, our philosophy be that of automatism, crude determination or fatalism, regarding all human affairs).

Now when one examines the methods which the notable trusts actually did employ, and apparently had to employ, even when they were already powerful single enterprises, in order to destroy their compet.i.tors and to attain their monopolistic power, the word "natural" seems hardly to describe the process. The evidence is not a matter of hearsay but is embodied in a long line of judicial decisions, and in numerous special inquiries by governmental commissions and officials.[18]

-- 15. #Kinds of unfair practices#. This evidence is a startling array of "unfair practices" and "unfair" forms of compet.i.tion, which, however novel in appearance, are essentially of the kind that has been illegal under the common law for the past five hundred years. Many of these practices were baldly dishonest, many of them were contemptibly mean. The manifold varieties of unfair compet.i.tion may be roughly grouped under three headings according as they are connected with (1) Illegal favors received from public or quasi-public officials; (2) Discrimination against, or control of, customers; (3) Foul tactics against compet.i.tors.