The problem of monopoly; a study of a grave danger and of the natural mode of averting it

Front matter

Cornell University Library HD2795.C53

The problem of monopoly; a study of a gra

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Preface

This little work gives permanent form to a course of lectures recently delivered in Cooper Union, New York. They were given in an off-hand way and stenographically reported; and they are now published with a minimum of revision. The considerate reader will, as I hope, take the book for what it is, in view of the manner of its preparation and its general purpose. That purpose is merely to apply to important problems economic principles which have recently become known.

The industrial system which developed under a regime of freedom and competition has become perverted by the presence of monopoly; and the thing to be accomplished is not to revolutionize the system by the method of state socialism, nor yet to cause it to reverse its natural development by resolving the great corporations which now dominate it into their constituent elements, as crude anti-trust legislation would try to do, but rather to retain the corporations for their efficiency while taking from them their power of oppression. Nature has shown us how to accomplish this, by revealing forces which now partly accomplish it, though without some action by the state they do their work imperfectly. We have to clear away

Vi PREFACE

the obstacles that interfere with these natural forces. The policy is not destructive but preservative, since it demands that we do not kill the industrial monsters which threaten and injure us, but tame them and convert them into useful servants.

It is monopolies in general, and not merely the so-called trusts, that we have to deal with, and it is a condition of freedom which we have to restore. On the descriptive side the book is too brief to add much to common knowledge ; but on the basis of accepted facts it may possibly make more apparent the true way out of our difficulties. The route is a clearly defined one, though following it in the face of obstacles will require very strenuous effort.

JOHN BATES CLARK.

Columbia University, New York.

Contents

PAOE

CHAPTER I The Growth of Corporations 3 CHAPTER n The Sources of the Corporations' Power for Evil. ... 25

CHAPTER m Great Corporations and the Law 39

CHAPTER IV Organized Labor and Monopoly 60

CHAPTER V Agriculture and Monopolies 86

CHAPTER VI Governmental Monopolies 108

COLUMBIA UNIVERSITY LECTURES

DELIVERED

IN THE COOPER UNION

19 4

CHAPTER I

I know of no more startling and disquieting tendency of recent times than the growth of those great corporations which have gathered to themselves, each in its own field, nearly all the business that is there transacted. They look like all-consuming monopolies and we regarded them at first with an alarm which has partly subsided as we have gotten more and more used to them. That alarm, however, was not ill grounded. The size and power of the new corporations was enough to excite it. If the dinosaurs which, geologists say, once wandered to and fro upon this earth, terrifying and devouring as they went, were to reappear in bodily presence, they would affect our nerves about as the corporations would have done if we had not gotten used to them gradually. The modern monster looks as all-devouring as the ancient one and one of the questions which we have now to ask ourselves is whether they really are as predatory as they look. Do they devour everything within their reach ? We have observed that they do a great deal of devouring, and yet we have seen that some living things which might have fallen a prey to them survive. A competitor here and there holds his place. It is much as though a comparatively insignificant animal, wandering about in one of those early forests in easy sight and reach of one of the dinosaurs went undevoured and unattacked— possibly by reason of his insignificance. The monster may have looked at him out of the corner of an eye and left him undisturbed. Far otherwise would it have been, however, if the great animal had considered his feeding ground invaded and the abundance of his food supply reduced. Then there would have been a snap of the hungry jaws and it would have been all over with the smaller animal.

Now something of this sort happens whenever one of the monster corporations finds a smaller one in the way. The great corporations know how to dispose of a smaller rival, though they do not always use this knowledge. There are conditions in which it is not wise to use it ; but in a great many instances they do so. Can they, then, exterminate weak competitors and become monopolies, able to tax the people at will? Certainly monopoly is an evil thing, and I shall encounter little opposition in making that statement. No one of us is fond of the vender of necessary goods who says to us: "Aha! I have the whole supply of these goods. You must come to me for them and I will charge you what I will." We get less and less fond of this when we pay bills for more and more articles manufactured by monopolies and sold to us for more than we formerly paid for them.

THE GEOWTH OF COEPORATIONS 6

Possibly we may also have felt the effects of the new system in a forcing down of out wages ; for neither prices nor wages can possibly be normal under the general regime of monopoly. There was a time when the prices of goods were near to their natural standards as these were fixed by the cost of making them. Where there are many competitors making something— shoes, cotton goods, woolen cloth, steel or what not— they compete with each other vigorously for business, and if the price of anything is high— if it yields much more than is necessary to pay the wages of all the labor and the interest on all the capital that are employed in making it — there is a chance for somebody to make a profit by going into that business. Then it is that everyone who has a small mill wants to make it larger, and people who are in other lines of business want to go into this line where a good profit is realized. It thus comes about that the prospect of a special gain draws additional labor and capital to the point where profit is realized, more and more goods are made and, in the end, they have to be sold at natural prices. If there is a "boom" in cotton goods, more and more of them are put upon the market, lower and lower go the prices and all special profit vanishes. The goods are still sold for about enough to pay the wages of all the laborers, the salaries of all the managers, the insurance against all risks, and the interest on all the capital at the ordinary rate; but that does not leave a net surplus that will attract any more capital. This was our old philosophy of prices, and it was a very good one under the old conditions. In a way it is good in principle still ; but not all prices now hold at that rate at which nobody makes any net profit out of them. Do you think that when you pay the bill for some article manufactured by a trust you do not put into somebody's pocket more than the wages of labor and the interest on capital have taken out of it ?

The trusts are fond of advancing prices. They have to do it by reducing the output of their goods. If they did not reduce the product they could not advance the prices. There is an old proverb about leading a horse to water but not being able to make him drink ; you might coffer any amount of goods to the public at a high price, but you cannot compel the public to buy them. If, however, you cut down sufficiently the amount that you have to offer, the public will buy the goods at the higher prices ; and so it comes about that the trusts diminish the output of the goods, holding it down to an abnormally small amount, in order that the prices may be held at an abnormally high figure.

Then there is a problem concerning the wages of labor. We had once an exceedingly simple philosophy of wages, which taught us quite correctly where competition may help the laborer. Where many manufacturers are seeking labor as well as many laborers seeking employment, there is a play of forces which gives to a man approxi-

THE GEOWTH OF CORPORATIONS 7

mately what he is worth to an employer— that is, what his presence adds to the output of a mill. Can that be altogether true under a regime of monopoly? If the manufacturer puts up the price to a certain level so that a workman really creates more in his mill than men create elsewhere, does he pay extra wages ? He pays the marketj rate, and that is less than the men are worth to him.i Possibly, if circumstances make him liberal, he may seeurel the favor of his employees by giving them wages corresponding, in a measure, with the special and extra value which they have in his mill. It is probably true in the history of a considerable number of trusts that they have paid their workmen just a shade more than such workmen could elsewhere get. The trusts get a rather high price from the public and share gains, in some degree, with their men. Paying one class of laborers a little more | in the way of wages than others can get is, indeed, a good thing' for the particular workmen who happen to be in a position which enables them to get such a favor. A corporation may adopt this liberal policy of its own volition or may be compelled to do it by a strong trade union. But how about laborers altogether outside of the domain of the trusts? Can they get higher wages than formerly prevailed ? On the contrary, they get lower real wages measured in food, clothing, furniture, house room, etc. They have to buy these things with money and the prices of them have risen. Moreover, it is probable that the wages of most labor, even measured in money, are made smaller by the influence of monopoly. Unless a man is on the inside of the favored circle he has to thank monopoly for some reduction of his real income.

Very great will be the transformations that will come if ever these monster-like corporations shall have full possession of the field of industry. As yet they are very far from this goal ; nevertheless, they have enough of the field to throw society into an unnatural state. Even political life is disturbed, and neither elections nor law making can go on in a "natural way in the presence of great monopolies. We cannot now go far into the domain of polities. We shall have enough to do if we try only to make a cursory study of the economic action of great corporations. But there is as little doubt as there is about anything in human affairs that their presence in politics is very baneful. This is "a government of the people, for the people and by the people, " is it not ? Do not we elect our own officers at our pleasure 1 We cast our votes and, for the most part, our votes are counted. The percentage of those that are not counted is small, and if voting were really ruling, this would still be the type of government which Abraham Lincoln believed he had seen forever established, a genuine people's state. But I notice that when I am invited to vote I have not a very large selection of candidates to choose from. Somebody else does the nominating, and if he makes me choose between two of

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his OTTO men, how much does the voting amount to? There is something which we call a machine which puts candidates in nomination, and without assuming to know very much about the workings of these machines, or to talk about them in this discussion, we may admit that their workings are not altogether uninfluenced by the power of consolidated wealth. Corporations have something to say as to what the political machines shall do ; if it should ever come to this, that corporations should control the political machines, that the machines should control the nominations, and that the people should only be invited to ratify these nominations, how much would be left of democracy? In particular where should we look for a power able to regulate the corporations ? Not to mention the federal government, we should only have to let the state legislatures become the property of the trusts in order to cause every effort to control the trusts to present the appearance of a vicious circle. To curb the power of corporations we should apply to legislatures selected by party machines owned by corporations. Thank fortune, there are powers still left in the state which massed capital does not own.

For the preservation of much that is dear to us we must control the government sufSciently to make it control the corporations, and some day we shall manage to do it. Some day we shall find out what needs to be done, act on the knowledge and compel our legislators to make laws — not to smash the corporations as some legislatures have tried to do— but to control them. We shall get the full benefit of their magnificent strength and make them do good and not evil. Infinitely harder is it to control them than to smash them, and the task that is set for us is that of letting them live and work without sacrificing to them our economic and political freedom.

It is well to notice the chief cause of the growth of these great powers. In 1776, a date which curiously enough appears to coincide with the beginning of the independence of the United States, Adam Smith, the most discerning of the economists, came to the conclusion that corporations never could play a very important part in this world. He said they were not so efficient as private employers and called attention to the fact that the corporation has to be managed by a hired officer, that the stockholders cannot oversee their business and that hired managers never care for it as well as owners would do. The most painstaking manager of a business is the man who owns the whole of it himself. A great deal would slip through the fingers of the salaried superintendent which a private owner would hold. While, therefore, Adam Smith thought that there would be a few large enterprises which would require more capital than any private owner could furnish, and that these would call a few corporations into being, he concluded that there never could be very many of them. The field as a whole would,

THE GEOWTH OF C0EP0EATI0N8 H

he thought, continue to be occupied by individual producers, who would own their own shops and control everything by close personal supervision.

It has not worked in that way. Something like seventy-five years after Adam Smith stated his conclusions another great economist, Mr. John Stuart Mill, discussed the prospects of the corporation. He concluded that Adam Smith had underestimated the efSciency of corporations. In the interval between the time of Smith and that of Mill, railroads had come into being and had attained a considerable growth, and Mr. Mill concluded that individuals would never build many railroads, though he thought they would still build and run the factories and the shops. Aside from railroads and steampship lines and a few other departments of business, which would gravitate into the hands of corporations, the majority of business would still be transacted by individual owners and by partners. Mill's expectation is far from having been realized. The problem now is not whether the corporation can survive in competition with individuals, but whether in many lines of business, anything can survive except the corporation. A great consolidated company has the individual producer pretty much at its mercy.

The hundred years following Adam Smith's time would j be characterized by most people as an age of incomparable | progress due to the introduction of machinery. At the beginning of that century most articles were made byi

12 THE PROBLEM OP MONOPOLY

hand. The little grist mill and the saw mill were to be found, and falling water turned millstones and drove saws in a primitive way. There were pumps for mines and a very few other applications of power calling for rude and simple machinery. At the end of that hundred years, in 1876, how much of the field was left for old-fashioned hand processes ? Some things are still done by hand ; but into the making of almost everything there enters some machine work, and in the case of most things it preponderates. Hand workers, so-called, put together things that are prepared by the machine. What we call building consists of hand labor to a large extent ; but the final conistruction is merely assembling materials that are made ihere and yon in mills. Once all the building was done on the spot by hand labor, and though some raw materials 'were partly fashioned by machinery this was carried little farther than to the sawing of lumber. There is, however, a much greater proportion of hand labor in building than there is in manufacturing. Almost everything that is sent by the freight trains over the country and in ships over the world is the product of machine labor, and hand labor does little toward making it and less toward carrying it.

Now this transformation which took place between 1776 and 1876 occasioned a much greater amount of disturbance and a more thorough reconstruction of society than can ever again be occasioned by such a cause. We shall still continue to invent and apply machines, and we shall still cause the more efficient appliance to take the place of the less efficient ; but any change as radical as the J putting of a machine into the place formerly occupied by a great body of hand laborers we shall seldom again be able to make. There are countries which still have that change before them. That is true of much of Asia, and when we send American products there we start a movement which will end in the making of such products in Asia by American processes. Mere trade, traffic in goods, is only the beginning of the transformation that is coming. The Chinese empire will go through the transforming process through which our country has already gone. China now does nearly everything by hand; but after a time— long or short, as the case may be— it will learn to make use of machinery ; and then as we study the Asiatic problem, we shall see something that we scarcely dream of now, a vast increase of manufacturing in the densely populated lands of the East. They will supply their own markets with such products and may even, in time, send them into ours. The general transition from hand labor to machine labor has, in our own country, taken place once for all. We already have machinery employed on such a vast scale j that the most we can hope for in the future is the improv-i ing of machinery and the extending of its field a little herefi and a little there. It is the making of comparativelyl minor changes instead of sweeping and revolutionary!

ones. The introduction of great numbers of labor-saving devices was the disturbing fact of the first century of our republic. It threw men out of their accustomed employments. Mills were set up which made, even with the rude machinery of those early days, far more articles than hand labor could make, and the artisans' field of employment was abridged. In due time George Stephenson made his locomotive and Eobert Fulton built his steamboat, the Clermont, which went puffing up the Hudson at no rapid rate, but at a rate which in the end transformed a world. Locomotives and steamers have caused the earth to shrink to small dimensions, and have made it possible to go around it for a small outlay and to send goods around at less cost than was once involved in sending them from one English county to another. The reduction of freight charges on railroads and steamship lines has made habitable the great areas of the North American continent, and has opened new and rich fields of employment for those who were displaced by machinery. As Hargreaves, Arkwright and Crompton, by their textile machinery, displaced the hand spinners and weavers, Stephenson, by his locomotives, made accessible homes for them in the Mississippi valley ; and at the end of a hundred years there was not, in the enlarged area, a greater percentage of idle labor than there was in the small area at the beginning. Nevertheless there was an enormous displacement and I relocation of labor during the process. It meant a vast

THE GEOWTH OF COEPOEATIONS I5

ultimate gain secured at the cost of immediate hardship./ Exactly that type of hardship is not before us. Such a wholesale disturbance will, in all probability, never again] take place.

It remains to be seen what further effects machinery can produce. The machine— and particularly the locomotive—has been what we may call a great promoter ; it has been a great consolidater of business establishments and has caused large shops to be so economical as to drive out a multitude of small ones. Even if manufacturing were still done by hand the big shops would be economical, but they would not drive out the small ones. In flour-making cities such as Minneapolis great quantities of barrels are made. The staves may be made elsewhere by machinery, but putting them together is one of the surviving hand processes. In this branch of industry there is not the great and decisive advantage on the side of the big shop. Coopers can still work in little shops standing under the shadow of big ones. If the whole process of making barrels shall come to be done by machinery the big shop will have this field to itself to the same extent that it has others. Where any product is made by machines and sent into a general market, size gives an enormous competing advantage. The flour that fills the barrels cannot be made in small mills; and flouring is not the industry in which mere size of plant gives the greatest advantage. The large mill can usually sell its product more cheaply than

.16 THE PBOBLEH OF MONOPOLY

the small one can make it. The cost of oversight is far smaller per unit of product, for a man can oversee a large mill about as well as he can a small one ; and, moreover, he can use cheap labor and dear labor in such ways as to get the most from them. A small mill has to have allround men whom it can shift from one employment to another; but the great shop has men who are highly specialized and do not have to be shifted. It employs women, and to some extent, boys; and it effects economies which are decisive in the competition with small mills. Little chance for survival has, as a rule, the small establishment, except in the sheltered corners of the field where it can cater to local demands and take orders directly from consumers. If you are making only one article of a kind, it is cheaper to make it in a small shop and perhaps even by hand. There will always be places where the small shop can survive ; but the big shop will have the general field and that by reason of its power to make and sell things cheaply.

Now it is not comfortable for the owner of the small shop to be driven out of business by the big ones ; but it is good for the public to have that shop survive which will sell the goods at the lowest rate. In the long run even the man who has lost his position as an independent producer very often is able to get something to do which is better for him than what he had before. If he is lucky enough to become a manager of a successful mill it is better than to struggle along as proprietor of an unprofitable one. He has really been promoted in the industrial scale, and while I am not claiming that the man altogether enjoys the process and welcomes extermination as an independent producer, I am claiming that the general results of the survival of the big shop— if that has come about by the honest process of offering goods cheaply— are good for the public, and are often not bad for the man immediately affected. Unhappily the big shop does not rely on such fair competition.

Unhappily it has other ways of exterminating the small shop ; such, for instance, as getting special rates for freight on the railroads which the small shop cannot get. The big shop has nearly always been able to get an advantage over the small one in the matter of freight charges and that single advantage is sometimes large enough to decide the whole matter in favor of the big shop.

Now some people have drawn a comparison between America and foreign countries — for instance, Germany— in the matter of trusts and have told us that trusts are as numerous in Germany as they are in America and that no one there finds any fault with them. There is, however, one enormous difference between the position of a German trust and that of an American one, in that the German Kartel cannot get any special favors from roads, while American trusts can do this. In addition to the advantage which the big company has by its mere size, it has

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a further advantage— an altogether illegitimate one — in the reduced rates of freight which it is able to command. An alliance between the railroads and a great producing company is certain to be fatal to any effective rivalry on the part of a small one. After one hundred years of growth of big shops by a perfectly natural process, we have come upon a period of consolidation and growth by an abnormal process ; and it is this that troubles us.

The consolidation of competing shops comes about when the small ones have been exterminated except in out of the way corners of the field, and when the surviving large ones compete with each other so fiercely that no one of them can make much. At such a time competition works to depress prices even more than it did under earlier conditions. When the struggle is between fifty great shops, all of one kind and all very efficiently managed and equipped with the latest machinery, there is even less chance for making profits than there was when there were a thousand little shops running each in its own local field. It is a struggle for custom in one general market that creates a fierce cutting of prices. In early days a shop in one corner of the country was not felt as a dangerous competitor in another corner of the country ; but now with the Output of all the shops so great, it is possible for any one of them to seek markets all over the country, if not all over the world ; and in many an industry we have a product large enough to justify the owners in sending canvassing agents hither and yon over vast areas. The territories of the different companies overlap each other and they have had to resort to every sort of device, not merely to open up new territory, but to get away territory from each other.

Advertising has played a large part in this work, and the traveling men have been the most costly part of the advertising. There was a time when in certain kinds of wholesale business it was sufficient for a "drummer" to j visit the customer once in three or four months. Any order that a customer had to give between the visits could be sent perfectly well by mail, and seeing the customer three or four times a year sufficed to retain his trade. But the eager determination of different producers to get I away each other's customers caused some of them to send the traveling men more frequently, and so it came about that they had to visit every customer about once in two months. Still the process went on as they struggled to, get away each other's territory, and at present in many lines of business, a concern cannot count on holding iti trade unless its traveling men see the customers every twi weeks, while weekly and semi-weekly visits are not un-l known. This terribly wasteful process is accompanied by eager bids in the way of discounts to customers, till such competition cuts profits down to little or nothing, As the competitors become fewer the opportunity for uniting them in a great consolidation becomes better.

There is a tenfold desire to stop this cut-throat competition and it is ten times as easy as it would once have been to do it. The last quarter of the nineteenth century has been the beginning of an age of consolidation ; but it is a type of consolidation unlike that which went before it. It does not come about by straightforward and honest competition, but comes rather by the extinction of competition—by the uniting of competitors not only in order to save costs, but also to keep up prices and make larger profits. A newspaper founded to record the progress of machinery, called itself The Age of Steel: and this was a fitting designation of the century from 1776 to 1876. If the trusts of to-day dealt fairly with their competitors and had no advantage over them except that which comes from better machinery and greater economy, the phrase would describe the time we live in. If the trust's advantages come from evading laws and securing illegitimate favors we shall be tempted to use the descriptive phrase giving to the last word a different spelling. It is a time of vast opportunity for men whose aim is to prey on the public. Is "honesty the best policy?" In the long run, Yes, provided that the people take wise measures to make it so; but in a time of imperfect law and of very lax enforcement of law unscrupulousness has been a lucrative policy. The public feels the effects of this and working people who do not happen to share any of the monopolistic gains feel them. Political life feels the blight of it and there has taken place in society a moral transformation which puts men on a lower plane of character at the verj* time when there have come into use wealth-creating devices that ought to lift us morally and intellectually to a higher plane.