The Principles of Economics Part 28

[Sidenote: Its limited success]

2. _Practically the plan has been made to work in a comparatively few simple industries._ The most notable examples of successful cooperation in America have been the cooper-shops in Minneapolis. There were a simple problem of costs, few and uniform materials, patterns, and qualities of product, few machines and much hand-labor, simple well-known processes, a sure local market. Mr. Lloyd, in a recent book, describes many successful societies in England, but they are all of a simple sort of industry, as agriculture and dairy-farming. Within the whole field of industry, this method of organization makes little if any progress. Most experiments have failed and the successful ones often become ordinary stock companies with the most able men in control.

Therefore, whether losing or making money, they nearly all cease to exist as cooperative enterprises. This result has disappointed the prophecies of many wise men of seventy-five years ago. In the time of John Stuart Mill, great expectations were entertained of the future of productive cooperation, which was thought to be a solution of the whole social problem.

[Sidenote: Its main difficulty]

3. _The main difficulty in productive cooperation is to secure managing ability of a high order._ There is no touchstone for business talent, no way of selecting it with any certainty in advance of trial. This selection is made hard in cooperative shops by the jealousies and rivalries, and by the politics among the workmen. A man thus selected by his fellows finds it almost impossible to enforce discipline. In cooperation there is occasionally developed good business ability that might have remained dormant under the wage system; some workmen showing unusual capacity cease to be handicraftsmen. But the unwillingness on the part of the workers to pay high salaries results in the loss of able managers. Having demonstrated their ability, the leaders go to competing industries where their function is not in such bad repute, and where higher salaries can be earned; or they go into business independently, being able easily to get control of the necessary capital.

[Sidenote: Cooperators under-value the enterpriser's function]

4. _Most cooperative schemes have suffered from a lack of good theory, an inability of the workers to see the importance of the enterpriser's service._ Most men make a very imperfect a.n.a.lysis of the productive process. They see that a large part of the product does not go to the workmen; they see the gross amount going to the enterpriser, and they ignore the fact that this contains the cost of materials, interest on capital, and incidental expenses. They ignore further that the enterpriser's function is a productive and essential one. The theory of exploitation, or robbery, as explaining the employer's profits, is very commonly held in a more or less vague way by workmen. With a body of intelligent and thoroughly honest workmen, keenly alive to the truth, the dangers, and the risks of the enterprise, cooperation would be possible in many industries where now it is not. The producers'

cooperative schemes usually stumble into an unsuspected pitfall. When a heedless and over-confident army ventures into an enemy's country without a knowledge of its geography, without a map, and without leaders that have been tested on the field of battle, the result can easily be foreseen.

-- III. CONSUMERS' COoPERATION

[Sidenote: Nature and kinds of consumers' cooperation]

1. _Consumers' cooperation is the union of a number of buyers to save for themselves the profits of the merchants or agents._ There are many cla.s.ses of consumers' cooperation, but the chief ones are: (1) to sell goods (retail stores); (2) to provide insurance (cooperative insurance companies); (3) to provide credit or capital (cooperative banks). These are also productive enterprises, for the merchant's work adds value to the goods, the insurance company and its agent do a real service, the profits of the small bank are, ordinarily, earned fairly under existing conditions. The terms producers' and consumers' cooperation merely set in contrast the part of the productive process that is undertaken.

Producers' cooperation is concerned with the earlier steps, usually stopping when the product is disposed of to wholesale or retail merchants. Consumers' cooperation (often called distributive cooperation) is concerned with the later steps, the placing of a consumption good (rarely also productive agents) into the hands of the final user. It imparts the same value to goods that the retail merchant does. The one thing this cla.s.s of cooperators is sure of when they begin is a number of consumers to make use of the service or products they purpose to supply; hence the name.

[Sidenote: Costliness of compet.i.tive mercantile business]

2. _The waste of compet.i.tive mercantile business is the source from which it is expected that the savings of the cooperative enterprise will come._ It is a great expense to the retail dealer to secure a body of customers. Rent of store-room, clerk hire, interest on invested capital are fixed charges, which can be met only on condition of a regular and frequent turnover of the stock. To attract customers the dealer must have a well-located store, must advertise, keep open long hours, and pay idle clerks. Frequently he must give credit, raising the price enough to cover the expense of bookkeeping, collection, bad accounts, and loss of interest. The public's likings, whims, lack of judgment, and lack of business a.n.a.lysis make these charges necessary. There are many communities where it would be impossible to carry on a cash business even at considerably lower prices. Customers are exacting and require the costly delivery of small packages; two horses and a driver must travel two miles to deliver a spool of thread or a half-dozen oranges.

Frequent changes of fashion and the shifting of customers from one store to another keep the merchant always insecure in his trade. A number of buyers mutually agreeing to pay cash, to buy at certain times, to place all their orders with one store, to go to a cheaper location, down an alley or into a bas.e.m.e.nt, can save much of this cost on one condition: that the management approaches in its efficiency that of ordinary compet.i.tive business. In spite of all these advantages, if there is inefficient management the final cost will be no less than that of ordinary business.

[Sidenote: The more successful cooperative stores]

3. _Despite the possibilities of saving, most cooperative stores fail through a lack of good management._ Note first the greater successes.

Since 1842, from which time it dates, the cooperative-store movement has progressed steadily in England, where the scores of retail societies are federated and own large wholesale stores. The long experience has developed good methods and a conservatism almost inconceivable to an American mind. They are practically great stock companies in which one can buy a share at a small cost and become a purchaser at usual prices, receiving a dividend later according to the amount of his purchases.

Cooperative stores in American universities are generally successful, apparently because they don't cooperate. Some get into politics and go the way of the wicked. The survivors gravitate into the hands of a committee of the faculty, which tries to employ an efficient manager, and administers the business as a public trust without private profit.

The wastefulness of multiplying orders for text-books to be used by a cla.s.s whose number is definitely known in advance, and the comparatively uniform character of the supplies, make economy peculiarly easy in this case. A large part of the services of the cooperative store, however, are indirect; it reduces and regulates the charges in the stores near by.

[Sidenote: The failures and their causes]

Nearly all the Granger stores, started thirty years ago in great numbers, and most of the cooperative stores among American workmen, have failed. The failure is easily explained by the ignorance of danger, by lack of harmony, by credit sales, and by inefficient management. The wastes of compet.i.tive business are partly a tax imposed upon men (taken collectively) by their lack of business method; the community is not intelligent enough, honest enough, or self-sacrificing enough to do business in the most economical way. Partly they are the price paid for variety and change, and for the cherished American right "to kick"--something difficult for the members of a cooperative store to do without hurting themselves.

[Sidenote: Profit-sharing and cooperation in relation to the enterpriser]

[Sidenote: Continued need of the enterpriser]

4. _The experience with these plans verifies the a.n.a.lysis of the enterpriser's function: pure profits are the earnings of a productive service._ Comparing these three plans, they are seen to be alike in seeking to make workers share some of the profits, to change the destination to which profits would go. The first would create profits by the effort of the workers, and give them a part of the saving. The second would have collective workers perform the enterpriser's work in the factory and get his reward. The third would have collective buyers do the work of the merchant and save his profits and other costs. The last is the easiest to do. Profit-sharing is next in difficulty, and producers' cooperation is the hardest of all to put into practice. In some cases, under some conditions, the enterpriser's services may be more economically performed than at present, for the waste is great. But taking men as they are and things as they are, in most places the enterpriser's service is necessary and must be paid for. His contribution to the success of the industry depends on his nature and ability, and it can be distinguished theoretically and practically from the contribution made by the workmen. Nothing but changes in human nature, in education, and in morality can diminish the necessity for his service.

CHAPTER 33

MONOPOLY PROFITS

-- I. NATURE OF MONOPOLY

[Sidenote: Difficulty of fixing the meaning of monopoly]

1. _The term monopoly is used loosely and in many senses._ In popular discussion monopoly means almost any wealthy corporation or the power the corporation possesses, a power which is usually thought of as oppressive. Even economists have held the vaguest ideas regarding monopoly. The recent rise of trusts and monopolies has given a large new body of facts bearing upon the subject, but all the resulting discussion by the public and by economists has not brought agreement upon a definition entirely satisfactory. When usage has not settled upon any one meaning, the selection of a definition is in a measure arbitrary, though it may be guided by logic and considerations of expediency. Let us state the various meanings and indicate the one adopted in this discussion.

[Sidenote: Monopoly is not merely scarcity]

2. _Monopoly should not be used as synonymous with scarcity._ Scarcity is the essential condition of all value. The simplest things--bricks, sand, the commonest unskilled labor--would have no value were there not a degree of scarcity relative to the wants that may be gratified.

"Monopoly," whatever else it means, always conveys the idea of some exceptional kind of scarcity, scarcity due in part to some source or cause not ordinarily present. It is a bad practice in definition to apply two words to one idea, leaving the other idea unnamed, as is done when monopoly is made synonymous with scarcity. Both words are needed.

Such a usage unfortunately is common in economic literature. Many economic writers, for example, have called landownership monopoly, saying that land being the work of nature cannot be increased by men, and therefore must always be scarce. Even if it were true that in the economic sense land could be produced by man, there still would be confusion here between a general cla.s.s of goods and a special thing. The fact that a particular field cannot be duplicated does not make a monopoly of land as a whole, any more than the existence of desert land in Arizona makes land valueless or a free good. Nor is a land-owner a monopolist any more than is the owner of a valuable machine. The owner of forty acres of land worth four hundred dollars, or the owner of a village lot worth a hundred dollars, can hardly be called a monopolist.

It leads to absurdity to use the word monopoly with reference to landownership indiscriminately. Neither mere scarcity nor the limitation of natural stores should be called monopoly when ownership is scattered and combination between owners does not exist.

[Sidenote: Monopoly is not merely superior economic power]

3. _The ability of superior material agents and of skilled workers to secure higher returns than do poor ones does not const.i.tute monopoly._ The free compet.i.tion a.s.sumed in abstract discussions of value, does not mean equal capacity or efficiency, but the legal freedom and personal willingness to move a productive agent into the highest industrial place it is capable of holding. The rocky field does not compete with the fertile one in the sense that it can yield the same uses. The field fit only for potatoes does not compete with those rare and favored localities that can raise the best wines. The gardener earning two dollars a day does not compete with the skilled physician with an income of twenty thousand dollars a year, for he has not the economic capacity to do so; but he is _free_ to compete (as is the owner of the rocky field) unless law, caste, cla.s.s legislation, social prejudice, or some other objective factor forbids. Anything, however, that prevents the labor or capital of buyers or sellers from application for which they are fitted, defeats free compet.i.tion. To use the term monopoly of any and every limitation of economic ability is to extend it to every case of value. To use it of the high wages of skilled workmen, where no union to suppress compet.i.tion exists among them, is to make it a colorless synonym of scarcity. It should be confined to a narrower and more exclusive use. Some special kinds of limitation should be connected with the idea of monopoly.

[Sidenote: Monopoly consists in unified control]

4. _The limitation connected with monopoly is not that of economic capacity but that of ownership and control._ The derivation of the word from the Greek points to the general thought: _monos_, alone, _poleo_, to sell, a single seller, the sole source of supply in a given market.

The term was first used in England of special grants or patents of monopoly from the crown to make or deal in specified articles, such as soap, candles, etc. The political power of the state created and defended the monopoly. This policy is pursued in a limited degree to-day for the encouragement of invention, in the granting of patents and copyrights. In the current definition, "The exclusive right, power, or privilege of dealing in some article or trading in some market," the term "dealing in" is well chosen, for it is broad enough to cover cases of buying as well as selling, and includes power derived from political as well as from other sources. But the term "exclusive" is too absolute, allows of no gradations, and makes the definition applicable only in the rarest cases.

[Sidenote: Definition of monopoly]

[Sidenote: Monopoly limits supply]

5. _Monopoly is such a degree of control over the supply of goods in a given market that a net gain will result to the seller if a portion is withheld._ Every producer has control over some agents and some portion of the supply of products; but ordinarily the portion controlled by any one is so small that withholding it entirely from sale would not cause the market price to rise in any appreciable degree. The producer in such a case regulates his action as if the market price were fixed beyond his control, and he uses his productive agents fully up to the point where costs equal price on the marginal unit of product. A skilled worker getting five dollars a day loses that sum every day he is idle. A landowner whose land can command a compet.i.tive rent of ten dollars an acre must take that sum or less, or nothing; he cannot get more. How can a net gain ever result from a smaller sale? As a reduction of supply results in a higher price, it is possible, as is seen in the paradox of value, for a situation to arise in the case of some goods, where a smaller number of units yield a larger sum in the market than a larger number of units. But the seller's interest lies not in the increase of total sales, but in that of net gains. Net gains, being the product of the number of units sold multiplied by the gain on each unit, increase at a much faster rate than do total sales. The existence of monopoly power in any degree depends therefore on several factors: the effect of contraction of supply in raising prices, the effect on costs, the number of units remaining in the ownership of the one contracting supply, and the possibility of preventing others from increasing supply later to profit by the higher prices.

-- II. KINDS OF MONOPOLY

[Sidenote: The sources of monopoly power]

[Sidenote: Political monopoly]

1. _Monopoly gets its power from political, economic, and commercial sources._ A political monopoly derives its power of control from a special grant from the government, forbidding others to engage in that business. The typical political monopoly is that conferred by a crown patent bestowing the exclusive right to carry on a certain business. A second kind is that conferred by a patent for invention, or the copyright on books, the object of which is to stimulate invention, research, and writing by giving the full control and protection of the government to the inventor and writer or their a.s.signees. In this case the privilege is socially earned by the monopolist; it is not gotten for nothing. Moreover, the patent is limited in time, expires and becomes a social possession. A third kind is a government monopoly for purposes of revenue. In France, the government controls the tobacco trade, and the high price charged for tobacco makes the monopoly yield a large income. A fourth kind are public franchises for public service, as street-railways, lights, gas, waterworks, etc. These are granted to private capitalists to induce them to invest capital in something which has public utility.

[Sidenote: Economic monopoly]

Economic monopoly arises when the ownership of scarce natural agents, as mines, land, water-power, comes under the control of one man or one group of men who agree on a price. Economic monopoly is a result of private property that is undesigned by the government or by society. It is exceptional, considering the whole range of private property, but it is important. The oil-wells embracing the main sources of the world's supply have come under one control. One corporation may control so many of the richest iron-mines of the country as to be able to fix a price different from that which would result under compet.i.tion. Coal-mines, especially those of some peculiar and limited kind, such as anthracite, appear to become easily an object of monopolization. Economic monopoly merges into political monopolies, such as patents and franchises.

Private property is a political inst.i.tution designed to further social welfare, and only rarely is any particular property a monopoly. Private control of great natural resources doubtless would have been prohibited had it been foreseen.

[Sidenote: Commercial monopoly]

Commercial monopoly, variously called contractual, organized, or capitalistic monopoly, arises where men unite their wealth to control a market, to overpower or intimidate opposition, and to keep out or limit compet.i.tion by the mere magnitude of their wealth. These various kinds so merge into each other that they cannot always be distinguished in practice. A patent may help a capitalistic monopoly in getting control of a market; great wealth may enable a company to get control of rare natural resources.

[Sidenote: Special cla.s.ses of monopoly]