The Principles of Economics Part 29

2. _Monopolies may, for special purposes, be cla.s.sified also as selling and buying, producing and trading, lasting and temporary, general and local._ The terms selling and buying monopoly explain themselves, though the latter conflicts with the etymology. Under conditions of barter the selling and the buying monopoly would be the same thing in two aspects.

A selling monopoly is by far the more common, but a buying monopoly may be connected with it. A large oil-refining corporation that sells most of the product may by various methods succeed in driving out the compet.i.tors who would buy the crude oil. It thus becomes practically the only outlet for the oil product, and the owners of the land thus must share their ownership with the buying monopoly by accepting, within certain limits, the price it fixes. The Hudson Bay Company, dealing in furs, had practically this sort of power in North America. Many instances can be found, yet, relatively to the selling monopolies, those of the buying kind are rare. A producing monopoly is one controlling the manufacture or the source of supply of an article; a trading monopoly is one controlling the avenues of commerce between the source and the consumers. Monopolies are lasting or temporary, according to the duration of control. By far the larger number are of the temporary sort, because high prices strongly stimulate efforts to develop other sources of supply. Yet the average profits of a monopoly may be large throughout a succession of periods of high and low prices. Monopolies are general or local, according to the extent of territory where their power is felt. At its maximum where transportation and other costs most effectually shut out compet.i.tion, monopoly power shades off to zero on the border-line of compet.i.tive territory.

[Sidenote: Relativity of monopoly]

[Sidenote: The test of monopoly]

3. _Degrees of power to affect price result from varying extent of control; monopoly is a relative term._ The term monopoly by its derivation has reference to a single seller; but there are other thoughts in the concept. Monopoly has reference also to the amount of the supply controlled. The frequent use of the adjectives partial, limited, and virtual are implied but usually superfluous recognitions of the relative character of monopoly. Ownership of a particular knife, pencil, book, makes one the unique seller of it, but confers no monopoly power, as the power of subst.i.tution is practically absolute; the welfare of no one depends in any appreciable measure on that particular pencil.

Ownership of an important fraction of an entire species of goods gives more power to affect value. One owning a large part of the desirable building sites or houses in town may gain by occasionally letting one stand vacant in order to drive better bargains with tenants. A trade-union may control most of the labor-supply of one kind in a town.

But the test of monopoly is that a gain results from a higher price and fewer sales. It begins at the point where there is a motive to limit the supply in accordance with the paradox of value. The control of an entire species of goods gives price-fixing power, limited only by subst.i.tution of goods. Even though one person controlled all the coal and wood in any market, their prices still would be limited. If there were but one possible source of meat-supply, most people could live without meat. The monopoly of great species of goods can thus be seen gradually to merge from one grade into another. It is a matter of quality as well as quant.i.ty. There is more or less of it in the different industries, and, as noted in the preceding paragraph, it varies over time and territory.

-- III. THE FIXING OF A MONOPOLY PRICE

[Sidenote: Forces governing compet.i.tive prices]

1. _A compet.i.tive producer gets the highest price that will permit him to dispose of his product._ The enterpriser seeks to get the highest price for his product that the market will afford. His ability to continue making a profit at a lower price does not induce him to reduce the price unless the reduction is to his interest. The ordinary competing manufacturer is limited in his price by two things: first, his customers may cease to buy such articles entirely and may subst.i.tute other goods if the price is too high; secondly, they may buy of other sellers. Between his wish to keep the price up, and the customer's wish to buy as cheaply as he can, the price is fixed at a point where there is no inducement for others to come in and reduce his sales, or for him to seek a better market. There may be under these conditions a potential but very limited monopoly power. The sole druggist in a small town might occasionally get extortionate prices from particular customers in times of dire need, but he would thus drive away much of his custom, and would tempt a fairer and less grasping compet.i.tor to come in. Thus, when men and capital are free to come and go, there results an average or normal return for ability and agents of a certain grade. Prices come to equilibrium where each is selling his total product.

[Sidenote: Monopoly's greater control of price]

2. _Where a monopoly exists to a greater or less degree, there is less reason to fear loss of custom to compet.i.tors._ The degree of control determines the fear of compet.i.tors. If the control is slight, a very small rise of price will bring in compet.i.tors. The monopoly profits in this case either must be very small or they will be very brief. Those outside, controlling a large supply, will be tempted by large profits to market it at once and to increase it as fast as possible. Even where a large part of the supply is under one control, the fear of subst.i.tution puts a limit on the price demanded. If the control were extended to all wealth, the monopolist would be the absolute despot of the lives of his fellows. But as things are, the monopolist aims, just as the compet.i.tor does, to get the price that gives the maximum gain. The monopolist, however, is in a more or less favored position, as he can raise his price considerably before losing the most of his customers. Much depends on whether the costs increase or decrease as output grows. Where a large increase in output greatly decreases the cost, lower price may leave a larger margin between the cost and the selling price. A general monopoly price is therefore not an unlimited price. It is higher than the compet.i.tive price if the same cost of production is maintained. It may conceivably be lower than the former compet.i.tive price if the economies of combination greatly reduce the cost and justify a large increase of the output.

[Sidenote: Discriminating monopoly rates]

3. _A monopoly often seeks to avoid a general market price, and it adjusts its charge in each small market separately._ This is a most important aspect of the monopoly problem and a most important modification of the principle just stated. A market price is the expression of the least urgent demand that aids in carrying off a given supply. It is a maxim that there can be but one price at a time in a given market. The baker ordinarily sells the loaf at the same price to every one buying a given quant.i.ty. If he had a monopoly of the bread-supply, however, he might deal with each customer separately, ascertain, by personal inquiry into the lives of the citizens and by the aid of a force of detectives, just how much each could or would pay rather than do without bread. The policy of varying prices is thus followed by monopolies, though usually in a less inquisitorial way, to enable them to get the highest possible returns. Under the name of "charging what the traffic will bear," it is practiced by the railroads as local and personal discrimination. The endurance of some communities and of some individuals being greater than that of others, the burden is adjusted to the back, being made not as light but as heavy as each can be forced to bear.

[Sidenote: Low rates to destroy compet.i.tors]

Large monopolies dealing in commodities use an adaptation of this method to kill off small compet.i.tors who, within a certain district, sell at less than the monopoly price. Prices are suddenly reduced in that community below cost until, the small compet.i.tor being ruined, the monopoly rate is reestablished perhaps higher than before. Fear of suffering a like fate prevents others from attempting compet.i.tion even when prices offer a great attraction and give a high monopoly profit.

[Sidenote: The source of monopolistic profits]

The profits of monopoly can be explained by the ordinary laws of value, yet evidently they form a peculiar economic and social problem. They appear to be due not to the services of the enterpriser in increasing production, but to his success in limiting it. There is, therefore, an antisocial element in them not found in the profits of ordinary industry. This deserves further and closer study.

CHAPTER 34

GROWTH OF TRUSTS AND COMBINATIONS IN THE UNITED STATES

-- I. GROWTH OF LARGE INDUSTRY IN THE UNITED STATES

[Sidenote: Distinction between large capital]

[Sidenote: Large production]

[Sidenote: And monopoly]

1. _In the discussion of the so-called trust problem three things must be distinguished: large individual capital, large production, and monopoly power._ Capital, in the sense of valuable agents, is found in the smallest as well as the largest industry, and every owner, from the small shop-keeper to the wealthiest bondholder, is a capitalist. In popular discussion, however, the word frequently implies great wealth in a single hand, though this wealth may be invested in a large number of small industries. Large production is the concentration of capital into large units of industry. The capital may be the same as before, the ownership may or may not be widely diffused, but the control and management are unified. Large factories may or may not have monopoly power; as factories grow in size, compet.i.tion among them often becomes more, not less, complete and severe. On the contrary, monopoly, as before defined, may exist where the industry is small, as the waterworks in a small town, or a small factory for making patented articles. In periods of depression a business with a capital of ten thousand dollars may go on and prosper, while one with millions may be forced into bankruptcy. These three ideas--great individual wealth, large industry, and monopoly power--are often hopelessly confused in the discussion of present-day questions.

[Sidenote: Stages of tools and household industries]

[Sidenote: Of simple machines]

[Sidenote: And of large industry]

2. _Three industrial stages may be broadly distinguished: that of tools, that of machines and small factories, and that of large production._ Men are p.r.o.ne to forget that all the world is not doing just as they are.

Over two thirds of the people on the globe are still in the first industrial stage. One billion people use only tools, and have no better source and means of power than domestic animals. This is true in the most of Asia and Africa, in the greater part of South America, and in many portions of North America. About two hundred million people live in the stage of simple machines and small factories. These are found in eastern and southern Europe, small portions of South America, some parts even of the United States. In this stage there is not enough manufacturing power in the community to supply much more than its own needs. About two hundred million people in the United States and western Europe have reached the third and highest industrial plane, where the highest mechanical devices are employed and industry becomes highly specialized. These differences are broadly stated; there are contrasts within every nation. Three hundred miles from here, in the Alleghanies, people still can be found spinning and weaving and wearing homespun as in colonial days. In a trip of twenty miles in Tyrol or Switzerland one can observe every one of these industrial stages. The most striking development, if not the typical form, in America to-day is large or concentrated industry.

[Sidenote: Household industry in America]

[Sidenote: Recent changes in number of factories]

3. _In the last half century the unit of organization in leading industries has tended to grow larger._ Seventy-five years ago a tool-using household industry, on farms and in homes where the greater part of the things used were produced in the family, was still the typical organization in the United States. The early factories growing out of the household industry were small. A family specialized in producing cloth and exchanged with its neighbors; so with shoes, candles, soap, canned goods, cured meats, etc. Since that time two counter forces have been at work to affect the ratio of manufacturing establishments to population. The number of establishments has been increased by specialization of farming which has called for many industries to produce the things once made on farms, and by increasing wealth and invention, which has made possible many small industries supplying things before almost unknown. The number of establishments has been diminished as the staple products that can be transported have come to be made in larger factories. The resultant of these movements during the thirty years ending in 1900 is somewhat surprising: the ratio of factories (with an output worth five hundred dollars) to population has somewhat increased. In 1870 there were two hundred and fifty-two thousand establishments; in 1890, three hundred and fifty-five thousand, and in 1900, five hundred and twelve thousand, a ratio to population of one to one hundred and sixty-two, one hundred and seventy-seven, and one hundred and forty-four respectively. The last date was one of great industrial prosperity, and doubtless many ephemeral enterprises had been called into existence, thus giving a somewhat abnormal result. Moreover, there has been a large increase in the number of things made in factories which were formerly made in the homes, and which then did not appear at all in the census of manufactures.

[Sidenote: Large production in some industries]

In cotton-weaving, however, the unit of industry is growing, factories in 1870 numbering nine hundred and fifty-six; in 1890, nine hundred and five; in 1900, one thousand and fifty-five, the later increase being due to the fact that many new factories in the South have been started in the last decade. The population meantime doubled. This movement has been going on for seventy years, there being about the same number of mills in 1900 as in 1830, though population had multiplied six-fold. Iron- and steel-mills numbered one thousand three hundred in 1880, one thousand in 1890, and nine hundred and sixty-five in 1900. In industries having local markets and sources of supply for materials, the change has been less rapid. There were twenty-four thousand grist-mills in 1880, eighteen thousand in 1890, and twenty-five thousand in 1900, a change of ratio from two thousand one hundred to three thousand population per grist-mill. There were twenty-six thousand sawmills in 1880, twenty-two thousand in 1890, and thirty-three thousand in 1900, a change from about one thousand nine hundred and twenty to two thousand two hundred and seventy persons per sawmill.

But while the number of establishments in these staple industries was decreasing, the number of employees per establishment in most cases was increasing. The average in all industries, in 1870, was eight; in 1890, twelve; in 1900, ten and four tenths. In cotton-mills, in 1870, the average was one hundred and eighty-four; in 1890, two hundred and forty-four; in 1900, two hundred and eighty-seven. The grist-mills, in 1880, had two and four tenths persons per establishment; in 1890, three and four tenths. The sawmills, in 1880, averaged six employees each; in 1890, fourteen; iron- and steel-mills in 1880, one hundred and twenty-one each; in 1890, one hundred and ninety-six.

[Sidenote: Growing concentration of capital into large industries]

4. _The amount of capital per establishment is tending to increase in the leading lines of industry._ The amount of capital is not so easy to determine as the number of employees, and it is recognized that the census figures on this subject are only approximately correct. We are told that in cotton-mills, in 1830, the average capital invested was fifty thousand dollars; in 1890, nearly four hundred thousand dollars; in 1900, four hundred and forty thousand dollars. It is easy to observe the large increase in investment of capital in flouring-mills since the new processes came into use. The average capital of all industries does not grow as in the staple ones, for many smaller industries have come into existence. In 1880, the average capital was eleven thousand dollars; in 1900, it was eighteen thousand dollars.

[Sidenote: Recent formation of combinations]

The years between 1890 and 1900 saw the rapid formation of trusts and combinations, and of larger industries. Consolidation took place on a great scale in railroads and in manufactures. Much of this has been of such a kind that it does not appear at all in the figures showing the number of establishments and of employees. Many discrepancies appear in the data regarding this movement given by different authorities, as there is no generally accepted rule by which to determine the selection of the companies to be included in the lists, and as the conditions are changing from day to day. A competent financial authority[1] gives the following figures regarding the "industrial" trusts (manufacturing and commercial) and gas trusts, organized in the United States between 1860 and 1899, not including combinations in such businesses as banking, shipping, railroad transportation, etc. The figures refer to the reorganization and consolidation of industries into larger units, some of which have much and others little or no monopoly power.

Decade Number Organized Total Nominal Capital 1860-69 2 $13,000,000 1870-79 4 135,000,000 1880-89 18 288,000,000 1890-99 157 3,150,000,000 --------------- --- ------------- Total, 40 years 181 $3,586,000,000

The number organized and the capital represented by this movement in the last of these decades are eight times as great as in the thirty years preceding. In the last ten years can be traced the influence of general industrial conditions.

Year Number Organized Total Nominal Capital 1890 6 $82,000,000 1891 13 168,000,000 1892 13 140,000,000 1893 5 226,000,000 1894 2 35,000,000 1895 7 104,000,000 1896 3 40,000,000 1897 6 93,000,000 1898 22 574,000,000 1899 80 1,688,000,000 --------------- --- ------------- Total, 10 years 157 $3,150,000,000

[Footnote 1: Compiled from data given by "The Journal of Commerce and Commercial Bulletin," reprinted in "The Commercial Year Book," Vol. V, 1900, pp. 564-569.]

The first three years enjoyed great prosperity and the number of combinations were six, thirteen, thirteen. In 1893, the number was less, but the total nominal capital (preferred and common stocks and bonds) was still the greatest it had ever been in any year. Then came the period of depression, 1894-97, when both the numbers and the capital were comparatively small. Then followed the period of the greatest formation of trust companies the world has ever seen, which extended from 1898 to 1901, and ended in 1902.

[Sidenote: Trust statistics for 1904]

In a list recently revised by another authority[2] it appears that the data for all "industrial trusts" (nearly, but not quite, comparable with the foregoing figures), are in round numbers as follows:

Number of Plants Acquired Total Date Number or Controlled Nominal Capital Jan. 1, 1904 318 5288 $7,246,000,000

[Footnote 2: John Moody, "The Truth About the Trusts," 1904.]