The Principles of Economics Part 30

These figures would indicate that the industrial trusts more than doubled within four years, most of the growth being within three years.

The same authority, in a more comprehensive list, cla.s.sifies in six groups all so-called "trusts" of the United States, at the date of January 1, 1904, as follows (the figures just given above are the totals of the first three groups):

No. of Plants Acquired or Total Groups Number Controlled Nominal Capital

1. Greater industrial trusts 7 1528 $2,660,000,000

2. Lesser industrial trusts 298 3426 4,055,000,000

3. Other industrial trusts in process of reorganization or readjustment 13 334 528,000,000

4. Franchise trusts 111 1336 3,735,000,000

5. Great steam railroad groups 6 790 9,017,000,000

6. Allied independent railroad groups 10 250 380,000,000 --- ---- --------------- Total, 445 8664 $20,000,000,000

-- II. ADVANTAGES OF LARGE PRODUCTION

[Sidenote: Economical use of machinery in large production]

1. _A great technical advantage of large production is the better and fuller use of machinery._ A large factory with a large output can keep a special machine adjusted for each pattern and process, whereas in a small factory much time and energy are wasted in adjusting one machine for various processes. The machinery in a large factory is thus more fully utilized. Compare the machinery used in a large ax-factory with that used in twenty-five small ax-factories having the same total output: the one hundred and fifty workmen in twenty-five small factories would use twenty-five shears, one hundred trip-hammers, fifty grindstone-pits, fifty polishing-frames, a total of two hundred and twenty-five machines; the same one hundred and fifty men in one large factory would require three shears, a saving of twenty-two; twenty trip-hammers, a saving of eighty; thirty-seven grindstone-pits, a saving of thirteen; thirty polishing-frames, a saving of twenty; a total of ninety machines, a saving of one hundred and thirty-five machines. The difference in cost due to machinery is not so great as these figures indicate, as the unused machines last longer; but in the small factory there is more depreciation from rust and decay, and a larger proportionate investment of capital for which interest must be earned.

The average amount of stock and materials required in a large factory is not so great in proportion to the output.

[Sidenote: Economy in labor power]

2. _In a large factory the division of labor may be more complete and effective._ The technical economies of the division of labor can be realized in large measure only when a number of men work together.

Partly because of the advantages in the use of machinery, but partly from other causes, labor in a large group is proportionately more effective than in a small group, especially in producing form-value. In making plows, nine men working separately will average sixty-six plows each per year, while one hundred and eighty men working together will average one hundred and ten each per year, the output per man being increased sixty-six and two thirds per cent. In a rifle-factory with a daily output of fifty, eight men are needed for the same product that can be supplied by three men in a factory with an output of one thousand daily.

[Sidenote: Miscellaneous economies]

3. _In the larger industry the costs of management, supervision, and marketing are relatively less._ Division of labor decreases the difficulty of supervision in larger factories, where the processes are divided, systematized, and made a matter of routine. The necessary inspection of the results is more rapid and easy. The advertising of certain kinds of goods involves a large and inevitable outlay, which is relatively less for a larger business, as the greater the output the smaller the burden on each unit of the product. Combination effects a great saving in the number of commercial travelers, a result partly due to the decrease in compet.i.tion, but partly also to better organization.

Each of twenty different factories must send its drummers into every part of the country to seek business. In combination they can divide the territory, visit every merchant and get larger orders at smaller cost.

Supplies can be purchased more cheaply in large amounts, and shipments in car-load and train-load lots make possible special (sometimes illegal) concessions from railroads and from carriers on waterways.

[Sidenote: Limits to the growth of a single factory]

4. _There are some disadvantages in a large industry which put a limit to the growth of a single local establishment._ There is practically a limit to the advantages of size in a factory. When each man is working on the smallest possible subdivision of the product, doubling the number of employees will not increase his skill. When the finest machinery can be kept constantly in use, economy in its use has reached the maximum.

As large factories tend to create cities around them, land rises in value and higher wages must be paid the workmen. Small factories are constantly seeking out lower rents, taxes, wages, salaries, cheaper local sources of materials, cheap though limited sources of power, and thus they compete successfully in many markets. The point is reached in the growth of establishments where oversight cannot be as perfect and complete; the eye of the master cannot be over all. The market that can be reached by one factory is limited by distance, as the cost of transportation finally offsets all the other advantages of large industry.

[Sidenote: Do not necessarily limit consolidation]

It is evident that most of these reasons apply to a single local factory with far greater force than to a federation of locally scattered plants.

It was once believed that the growing disadvantages of large industry would set an early limit to consolidation. While there is a truth in this thought not to be overlooked, the effects must now be recognized to be more distant than was supposed. The limits to the advantages of combination have been removed by the application of the federative plan which makes possible under one management the maximum of advantages with the minimum of the disadvantages in large industry. That was the discovery of the early promoters of the trust movement.

-- III. CAUSES OF INDUSTRIAL COMBINATIONS

[Sidenote: Trusts in the legal and the popular sense]

1. _Trusts are large combinations of capital with some degree of monopoly power._ The original, legal meaning of the term trust does not include the idea of monopoly. The old legal idea of a trust is the confidence imposed in a trustee. The method that was adopted by the early combinations was the trust method, that is, they made use of this legal device: the stock of the separate companies was put into the hands of a board of trustees to whom was thus given the right to control. As it has been found possible to accomplish the same end without the use of this legal method, the popular meaning of the word trust, as applied to a monopoly, no longer agrees with the legal meaning. The word trust is popularly used of any large industry, though usually there is connected with it the idea of some evil power to raise prices to the consumers. A large number of the corporations called trusts have, however, little monopoly power, and some have none at all. They are simply large establishments.

[Sidenote: Economies of combination]

2. _A strong reason for combination of competing plants is found in the legitimate economies of large production._ The economies that are possible within a single factory may be still greater in a number of combined or federated industries. The cost of management, amount of stock carried, advertising, cost of selling the product, may all be smaller per unit of product. A large aggregation can control credit better and escape loss from bad debts. By regulating and equalizing the output in the different localities, it can run more nearly full time.

Being acquainted with the entire situation, it can reduce the friction.

A strong combination has advantages in shipment. It can have a clearing-house for orders and ship from the nearest source of supply.

The least efficient factories can be first closed when demand falls off.

Factories can be specialized to produce that for which each is best fitted. The magnitude of the industry and its presence in different localities strengthens its influence with the railroads. Its political as well as its economic power is increased.

[Sidenote: Integration of industry]

A recent phase of corporate growth is the "integration of industry,"

that is, the grouping under one control of a whole series of industries.

One company may carry the iron ore through all the processes from the mine to the finished product. A railroad line across the continent owns its own steamers for shipping goods to Asia or Europe. Large wholesale houses own or control the output of entire factories. The possibilities in this direction have only begun to be realized.

[Sidenote: Combination prevents compet.i.tion]

3. _The men uniting to form a trust always declare that its formation is the necessary result of excessive compet.i.tion._ The statement is often true in the sense that a hard fight and lower prices have preceded the formation of the trust. But as this excessive compet.i.tion usually is for the very purpose of forcing the combination, this explanation is a begging of the question. It is fallacious also in that it ignores the marginal principle in the problem of profits. Profits are never h.o.m.ogeneous from factory to factory, and to those that are on the margin compet.i.tion may appear excessive. It is generally the largest and strongest factories, in the more favored situations, that, in order to get rid of troublesome compet.i.tors, force the smaller, weaker, industries to come into the trust. When, therefore, it is said that compet.i.tion is destructive, it may be a partial truth, but more likely it is a pleasantry reflecting the happy humor of the prosperous promoters of the combination.

[Sidenote: Financial gains of combination]

4. _Another strong motive for the combination is the profit to promoters and organizers._ There are indirect as well as direct gains to the managers of a large business. There is the gain from the production and sale of goods to consumers, and there is the gain from the financial management, from the rise and fall in the value of stock. The promoters of a combination often expect to make from sales to the investing public far more than from sales to the consumer of the product. A season of prosperity and confidence, when trusts and their enormous profits are constantly discussed, has an effect on the public mind like that of the discovery of a new El Dorado, a California, or a Klondike. Then is the time for the wily promoter to offer shares without limit to investors.

These considerations show that the trust is not simple in its cause, nor in its nature. In a sense the most artificial of industrial arrangements, in another sense it is a natural evolution of industry.

More and more it is being recognized that though it has in it something of evil, it has as well something of good, and certainly much of the inevitable.

CHAPTER 35

EFFECT OF TRUSTS ON PRICES

-- I. HOW TRUSTS MIGHT AFFECT PRICES

[Sidenote: Economics of the trust problem]

1. _The economist's task, strictly confined, is to explain the relation of trusts to prices, not to solve the problem of their political control._ The question of trusts is such a large one that its discussion here must be confined to those aspects having close relation to the central subject of economic study,--the laws of value. These laws were by the older economists thought to be true only within the limits of free compet.i.tion. Seeing that in various ways this freedom is interfered with not only by caste, custom, organized labor, but by patents, political privileges, and the power of large aggregations of capital (in short by all things that check the flow of ability and of agents from one industry to another), the question occurs: Are the abstract laws of rents, profits, and wages of any significance or of any help in discussing the great practical questions of to-day? Are not prices determined by the personal whim of industrial despots who can bid defiance to the laws of price? The control of trusts by legislative action is largely a political problem, but it must be guided by a correct economic a.n.a.lysis. Proposed legislative measures often a.s.sume or imply that in no way, directly or indirectly, is compet.i.tion found in the problem. It should be the aim of economic study to make clear the true bearing and force of monopoly power in practical problems of value.

[Sidenote: Limited power of trusts]

[Sidenote: Monopoly and supply]

2. _The fundamental principles of market value cannot be changed by a trust; a selling monopoly can affect price only as it affects supply or demand._ The strongest "trust" yet seen has not been omnipotent. Many careless expressions on the subject are heard even from ordinarily careful writers and speakers: "The trust can fix its own prices," "has unlimited control," "can determine what it will pay and for what it will sell." This implies that trusts are benevolent, seeing that the prices they charge are usually not far in excess of compet.i.tive prices in the past. Such a view overlooks the forces that limit the price a monopoly can charge. The law according to which the value of products on the market is determined, is as valid where there is a trust as anywhere else. The marginal utility of goods to the consumer determines the price of any given supply. If the supply remains the same, no trust can make the price go higher. What it gets in exchange are the services or the wealth of the rest of the public. At what rate can it exchange its products for the products of others (including other trusts)? The monopoly usually directs its efforts to affecting the supply, leaving the price to adjust itself. (This is the case of the selling monopoly; the statement must be adjusted where it is a buying monopoly.) It can affect the supply either by lessening its own output or by intimidating and forcing out its compet.i.tors. It is true that this logical order is not always the order of events. The trust does not first limit the supply, and then wait for prices to adjust themselves; it first raises its prices, but unless it is prepared to limit the supply in accordance with the new resulting conditions of demand, such action would be vain.

The control of the sources of supply is the logical explanation of the higher price, even though the limitation of supply is effected later by successive acts found necessary to maintain the higher price.

Monopoly price is therefore a rational thing, not a mystery entirely out of harmony with the simple law of value laid down for consumption goods.