Monopolies and trusts

Front matter

THE CITIZEN'S LIBRARY

OF

ECONOMICS, POLITICS, AND SOCIOLOGY

Preface

It will be helpful to specialists in economics, and perhaps to others, to know that the present volume is a small part of a large work, The Distribution of Wealth, and to be told what position it occupies in the general plan so far as at present elaborated.

The Distribution of Wealth, then, is divided into five main divisions, which may be termed Books, as follows : Book I. The Fundamentals in the Existing Socio- Economic Order as Viewed from the Stand-point of Distribution ; Book II. The Separate Factors in Distribution ; Book III. Individual Fortunes ; Book IV. Actual and Contemplated Modifications of the Distribution of Wealth ; Book V. Social Progress and Wealth Distribution. Book I. consists of nine " Parts," as follows: Part I. Public and Private Property; Part II. Contract and its Conditions; Part III. Vested Interests; Part IV. Personal Conditions ; Part V. Custom ; Part VI. Competition; Part VII. Monopoly; Part VIII. Public Authority ; Part IX. Benevolence.

It will thus be seen that the discussion of Monopolies and Trusts is closely connected with other

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PREFACE

portions of an extensive treatise, and this fact must be borne in mind by those who would understand its scientific character. The History of the Theory of Monopoly, as well as the " Part " of Book I. dealing with " Competition" and those portions of Book II. dealing with "Differential Gains" and " Surplus Value," have an especially close connection with this volume. It is the purpose of many of the foot-notes to bring out the relations of various other portions of this large work to the treatment of " Monopolies and Trusts," and thus to explain what otherwise might be regarded as omissions. Undoubtedly this explanation suggests certain disadvantages in the publication of one small part of a large work, when all the parts are closely related, but it is the only practicable method for so extensive a treatise as the author's work, The Distribution of Wealth ; and it has its obvious advantages as well as its drawbacks.

It will be readily apparent to the reader that this volume has not been hastily gotten together to meet a popular demand for a work on Trusts. The author has been engaged on The Distribution of Wealth a considerable portion of his time for the past seven years, but he began to give special attention to the theory of monopoly twelve or thirteen years ago, and in 1888 he published his Problems of To-day, which is quite largely devoted to questions of monopoly. That work, while popular in its nature and purpose, contained suggestions of an original character which have been fruitful in the

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development of theory, and have also produced a large amount of discussion of a directly practical kind, as hundreds of letters written to the author from all parts of the United States testify. The author continued the scientific discussion of monopoly in his Introduction to Political Economy, published in 1889; in his Outlines of Economics, which appeared in 1893; and in his Socialism and Social Reform, which appeared one year later. He further developed his theory in articles written for the magazine Progress, the organ of the University Association of Chicago, during 1898 and 1899. The purpose of these observations, as well as of foot-notes giving references to earlier works, is to establish the author's just claims to priority for his original contributions to economic theory, so far as these relate to the subject of monopoly ; for he shares the conviction expressed by many, that the interests of science, as well as a proper self-regard, demand that investigators should mark off and claim what they believe to be their own, recognizing, of course, that ultimately it must rest with others to give the final verdict upon the justice of these claims. It is in this spirit, then, with a desire to claim his own, but with an equally sincere desire to attribute to fellow-economists what belongs to them — and no one can justly accuse him of shortcomings in this respect — that the author has made these remarks, and has in this volume referred to various earlier works.

While dates in this work show that parts of it go

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back to 1892, and while, as already stated, the theoretical development which it contains was begun by the author much earlier, illustrations have been added from an event so recent as the Trust Conference held in Chicago, September 13-16 of the current year ; and thus a connection is established with the present discussion of trusts.

Nothing could be further from the author's mind than to claim that this volume contains all the truth on the subjects which it discusses. He would like it rather to be regarded as an essay in the sense in which that word was used by early English writers. The development of industrial society has in the past brought many surprises, and doubtless the future will present quite as many and quite as startling ones. The author, then, simply ventures to hope that he has presented an original contribution to economic theory which will be further developed in the future by others and by himself. So far as the immediately practical side of this discussion is concerned, it is to be said that the aim has been to go below surface phenomena to underlying causes, and thus to indicate in a general way the lines of progress.

Richard T. Ely.

Madison, Wis., October, 1899.

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EDITOR'S PREFACE citizens' library of economics, politics, and

sociology

The present volume is the first in a Libraryhaving the above title. It is hoped eventually to cover the three fields of knowledge indicated by the title in such way that the various series included in the Library will afford such complete information concerning the theory and facts of these sciences that the volumes will have some of the advantages of an encyclopedic work combined with those of separate and distinct treatises. To aid in the accomplishment of this purpose, it is planned to issue from time to time an index volume or supplement, binding together a series on closely related subjects. This Library thus includes new and valuable features, for it will give to the public a set of works affording information on topics of

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importance to every citizen which must now be sought in a great multiplicity of sources, and often sought in vain.

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sions of opinion, and that publication in the Library does not necessarily mean an endorsement either by publishers or Editor of views found

in the several volumes.

The Editor.

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Contents

CHAP. PAGE

I. The Idea of Monopoly i

II. The Classification and Causes of Monopolies . 39

Chapter I The Idea Of Monopoly

The first step in the removal of the bewildering confusion of thought in the current discussion of monopolies and trusts is taken when monopoly is clearly and accurately defined. The term monopoly, with which we must begin any scientific treatment of our subject, stands in the popular mind not merely for many different ideas, but for a multiplicity of ideas, some of which are antagonistic to each other. Two centuries ago Locke expressed the opinion that disputations were traceable chiefly to failure on the part of disputants to connect with a common term the same idea, so that while they supposed they were talking about one and the same thing, they were really discussing different topics. He gives an instance of a learned debate to which he once listened concerning the question " whether any liquor passed through the filaments of the nerves," and says that after the debate had continued for some time, having " been used to suspect that the greatest part of disputes were more about the significance of words than a real difference in the conception of things," he requested that before they went any further in their arguments they should first define the word " liquor." That ended the debate, for they discovered on examining into the term that to each of them it was a sign of a different idea, that their discussion turned merely on the use of a word, whereas they were in agreement in ideas. Locke also expresses the view " that it is no shame to ask men the meaning of their words," as it is " no discredit not to know what precise idea any sound stands for in another man's mind without he declare it to me by some other way than barely using that sound."

While a precise definition of monopoly cannot be expected to produce harmony of views concerning monopolies and trusts, it paves the way for an intelligent discussion of the scientific and practical problems which they present, and for their settlement. It is also suggested that should no one take part in the discussion of these problems until he could explain to himself and others what he had in mind when he used the word monopoly, the volume of discussion would for some time to come be very sensibly diminished, while, on the other hand, the improved quality of utterances relating thereto might be a sufficient compensation for their diminished magnitude.

But it must be admitted that the confusion of thought on our subject extends beyond the general public, even to our experts in economics. By them, as by the general public, all sorts of things, differing in essential characteristics, have been frequently lumped together as monopolies. So long as this condition of things lasts, confusion of thought cannot fail to continue. The reasons for the confusion are obvious. The term monopoly, when so broadly used, embraces various classes of business, and the mind transfers peculiarities of one business to another business which lacks some of these peculiarities. When it comes to debates, the confusion is increased if the same word carries several ideas ; for not only does the mind of each debater pass from one business to another, but the minds of the two move unequally and irregularly as compared with each other, so that they are frequently talking about different things when they imagine that they are discussing one and the same thing ; and the prospect of a really enlightening debate, ending in agreement, is hopeless.

Manifestly, there are some large and vague notions to which the current discussion of monopoly may be traced. In a general way, it will doubtless be admitted by all "that there is a distinction between full and free competition and monopoly. An examination of popular speeches and articles on the one hand, and of economic literature on the other, makes it plain that monopoly differs in the mind of nearly if not quite every one from perfect competition. The difference may be slight or it may be great, but the difference is acknowledged. There is no other term to which, in general usage, monopoly is so antagonistic as it is to competition; and this fact must be our starting-point.

Without attempting at the present time to give a history of the theory of monopoly,* it is instructive to trace in a few typical writers the evolution of the idea of monopoly as something different from free and equal competition, and for present purposes we can do no better than to begin with William Nassau Senior, one of the ablest economists of the English classical school, and one who, unfortunately, has been unduly neglected. While Senior did not follow out and elaborate sufficiently his own thought, what he wrote was suggestive, and in the field of monopoly especially should have been more fruitful in the development of economic theory. But the considerable part of Senior's Political Economy which deals with monopoly, while new and valuable at the time, appears to have been that portion of his treatise which above all others has been neglected.

We go at once to the heart of the subject if we examine the following statement, quoted from Senior's Political Economy, in which we find a definition of monopoly and of monopolist : "Now it is clear that the production in which no appropriated

* This will be done elsewhere, in the work on The Distribution of Wealth, of which the present volume is only a small part.

natural agent has concurred is the only production which has been made under circumstances of perfectly equal competition. And how few are the commodities of which the production has in no stage been assisted by peculiar advantages of soil or situation, or by extraordinary talent of body or mind, or by processes generally unknown or protected by law from imitation ? Where the assistance of these agents, to which we have given the general name of natural agents, has been obtained, the result is more valuable than the result of equal labor and abstinence unassisted by similar aids. A commodity thus produced is called the subject of a monopoly ; and the person who has appropriated such a natural agent, a monopolist."*

According to Senior, monopoly, then, is anything which confers upon those who enjoy it a special and peculiar economic privilege, whatever this special and peculiar economic privilege may be. Monopoly means to Senior production under circumstances in which competition is not perfectly equal, but, on the contrary, under circumstances in which equal efforts, either subjective or objective, or both together, yield unequal returns to producers, f

* Senior's Political Economy, p. 103.

t The term effort, it will be observed, is used in a somewhat extended and technical sense. If two men of equal strength lift unequal weights, their efforts are subjectively unequal. If two men of unequal strength make equal physiological and psychical sacrifices, their efforts are objectively unequal. If two men have unequal capacity, the one hav-

Several causes of monopoly are mentioned, although they seem to be summed up in the term " appropriated natural agent." Mention is made of three causes — namely, peculiar advantages of soil or situation ; extraordinary talent of body or mind ; secret processes, or processes which the law protects from imitation.

It is clear, then, that to Senior monopoly is not something diametrically opposed to competition, but something which is different from perfectly equal competition. To Senior, monopoly means production so assisted by appropriated natural agents that it gives more valuable results than production not thus assisted. The idea is that which comes out so frequently in Senior — namely, the idea of surplus value. Production under perfectly equal competition is thought of as giving normal returns to labor and capital, and the superior returns of monopoly are, to Senior, surplus value. Rent is thus included under monopoly, as it is an extra return due to a superior situation of land, or to fertility beyond that of land which yields simply

ing talent, the other only normal faculties, equal subjective efforts would yield unequal returns. If two men of equal capacity cultivate ground of unequal fertility, equal objective efforts would produce unequal returns. If our two cultivators of the soil have unequal intellectual capacity and cultivate land of unequal fertility, the inequality in returns would be due both to subjective and objective causes. And in all these cases we would, according to Senior, have to do with monopoly.

normal returns to labor and capital ; that is, the land which it is only just worth while to cultivate. But Senior extends the term rent so as to make it cover generally what he regards as monopolistic gains. Whenever a differential advantage giving surplus value exists, we have, according to Senior, monopoly.

The idea of monopoly given by John Stuart Mill is very similar, but in the way in which he puts it he has been followed more generally than Senior. Mill defines and describes monopoly in these words: " A thing which is limited in quantity, even though its possessors do not act in concert, is still a monopolized article. But even when monopolized, a thing which is the gift of nature, and requires no labor or outlay as the condition of its existence, will, if there be competition among the holders of it, command a price only if it exists in less quantity than the demand. If the whole land of a country were required for cultivation, all of it might yield a rent. But in no country of any extent do the wants of the population require that all the land which is capable of cultivation should be cultivated. The food and other agricultural produce which the people need, and which they are willing and able to pay for at a price which remunerates the grower, may always be obtained without cultivating all the land ; sometimes without cultivating more than a small part of it; the lands most easily cultivated being preferred in a very early stage of society, the more fertile, or those in the more convenient situations, in a more advanced state. There is always, therefore, some land which cannot, in existing circumstances, pay any rent; and no land ever pays rent unless, in point of fertility or situation, it belongs to those superior kinds which exist in less quantity than the demand — which cannot be made to yield all the produce required for the community, unless on terms still less advantageous than the resort to less favored soils." *

Limitation, then, according to Mill, is the essence of monopoly ; w a thing which is limited in quantity, even though its possessors do not act in concert, is still a monopolized article"; and Mill speaks of " competition among the holders of it." He has just spoken about the owners of land " acting together as one man," as something conceivable, though it has never happened. According to Mill, monopoly evidently involves the idea of surplus value — something over and above returns to labor and capital ; yet there is, according to him, something distinct and separate in " acting together as one man." He speaks of a possible competition among the holders of a monopolized article, and so, according to Mill, we have the apparent anomaly of a competitive monopoly. But in the very place where he gives this definition he says that landowners do not act together as one man, inasmuch as if they did they would have in their hands a complete control over all the people of the community and

* Mill's Political Economy, book ii., chap, xvi., § 2.

over the entire wealth of society. " The exclusive possessor of the land of a country,'' Mill tells us, " could not well be other than the despot of it. The effect would be much the same if the land belonged to so few people that they could and did act together as one man, and fix the rent by agreement among themselves. This case, however, is nowhere known to exist."* So, according to Mill, there is something over and above mere monopoly and distinct from monopoly — that is, the " acting together as one man."

We next turn to Professor Henry Sidgwick, a writer deservedly distinguished, and frequently keen in analysis, who, however, in his treatment of monopoly, has not avoided considerable confusion of thought. Professor Sidgwick, in one place in his Principles of Political Economy, defines monopoly as "the control exercised by an individual seller or combination of sellers over a commodity that no one else can bring to market." \ Then he goes on to say, " Now we must use this term more widely," and he begins a process of expansion, taking in things which he sees are beyond his definition. He says : " In the first place, it is convenient to extend it to cases in which a person or union of persons — whom for brevity we will call the monopolist — cannot control more than a portion of the whole

* Mill, ibid.

t This is the definition which he gives in book ii., chap, ii., and repeats in chap. x.

supply of the commodity," because such partial control may result in raising prices over and above what they would be were there free competition.

Even where the monopolist has a complete control over the supply at any particular time, Professor Sidgwick says that we must distinguish between different degrees of completeness ; but this does not seem quite scientific. He says monopoly may be indestructible, either permanently, or for a determinate period. Thus the owner of a fine painting by one of the old masters, or the owner of land from which valuable mineral waters can be obtained, may be a monopolist.

In the second place, monopoly may be due to " prospective unprofitableness of the outlay of wealth or labor, or both, that would be required to provide the commodity from other sources," either by consumers or as ordinary business ventures.

Then, in the third place, he extends the concept to include buyers. He speaks of buyers' as well as sellers' monopolies, although there is no reason why he should not have included buyers in his definition. After all he does not introduce any essentially new ideas into his concept except to add partial monopolies and buyers' monopolies, and partial monopolies are included in the idea of monopoly.

If we turn to two younger writers who have given much attention to monopoly — namely, Professor Simon N. Patten and Mr. John A. Hobson — we find that they have so enlarged the idea of monopoly as to include under the head of monopoly all participation in a surplus gain in production or consumption over and above costs. According to Professor Patten, we have this surplus over and above costs in every part of the economic field. Wages participate in the surplus ; profits do likewise, and rent also. They all participate in the marginal surplus, and thus as a result we have a society composed of monopolists. Every one has a monopoly; and then we have to make a further distinction between competitive monopolies and exclusive monopolies ! This is brought out by Dr. Emory R. Johnson in his article on " The Relation of Taxation to Monopolies," in the Annals of the American Academy of Political and Social Science for March, 1894; for in this essay he presents the views shared by himself and Professor Patten.* Dr. Johnson gives this definition of monopoly: "By a monopoly is meant any productive agent possessing monopoly force. A monopoly force is that which gives to a productive agent the disposal of a definite portion of the surplus resulting from production." And as all agents of production, accord-

* Professor Patten's idea of monopoly pervades nearly, if not quite, all his economic writings. The following special references, however, may prove helpful to those who wish to examine further his concept of monopoly: "Cost and Utility," in the Annals of the American Academy for January, 1893, p. 35 ; his monographs, Dynamic Economics, pp. 63, 102, 107, 114; Stability of Prices, pp. 39-40, 57; Principles of Rational Taxation, pp. 7, 14.

ing to Professor Patten, do have the disposal of a definite portion of the surplus, we have the apparently curious anomaly of a monopoly force which includes the entire field of production. We could scarcely have a more violent departure from the ordinary usages of language ; and yet, in the distinction they make between competitive monopolies and non- competitive monopolies, they have good company in Mill, although he did not elaborate the idea as they have done.

Mr. Hobson has until recently had just as wide an idea of monopoly,* although he has considered the subject more objectively than Professor Patten. In every part of the industrial field, and in nearly every bargain that is made between men — and distribution is effected by bargaining — we find a surplus, and to that surplus, until recently, Mr. Hobson has given the name of monopoly gain. Now, however, he has yielded to the present writer's criticism, and to this gain which is found in the ordinary bargain he applies the term " forced gain"; and that is the term which will be found employed in his new book, The Economics of Distribution.*^ He has given up his former all-inclusive idea of monopoly.

* See, for example, Mr. Hobson's article, " The Law of the Three Rents," in the Quarterly Journal of Economics for April, 1891, pp. 267-8, and 273-4.

f The writer has had the privilege of reading the manuscript, and, on account of the importance which he attributes

We thus reach the termination of one line of evolution. We begin with the large and somewhat vague idea of any superiority over and above that enjoyed by those who simply have the opportunity to compete freely with anybody, this superiority yielding surplus value; and we end with the doctrine that all who participate in production enjoy a surplus over and above what are to them costs — that is, over and above the real pains and other sacrifices they undergo in production, and thus we have our entire industrial society composed of monopolists.

The conclusion suggests itself that a satisfactory discussion of monopoly must be based on a more restricted idea of monopoly. It is necessary to return to the more ordinary usage of language. What monopoly really signifies when we think of it as the opposite of competition, is unity in management of some kind of business * in some essential particular. It may be in production, it may be in sales, or it may be in purchases, or it may be in any two or all three of these particulars. It is the writer's belief that this is the only satisfactory use of the term monopoly, for it alone gives us a clear, scientific concept which is workable. We may, then, formulate this definition of monopoly :

to the work, feels himself justified in referring to it, though it will be several months before it appears.

* Business is used here in the widest sense, embracing not only material production, but services of every sort.

Monopoly means that substantial unity of action on the part of one or more persons engaged in some kind of business which gives exclusive control, more particularly, although not solely, with respect to price.

A few points in our definition require comment. Price is essential, and must be regarded as the fundamental test of monopoly, even if it is obvious that price-formation and price-control do not exhaust monopoly, since its import reaches beyond price. The other things than price-control which monopoly carries with it flow from such control and are not secure without it. A certain unity of action may be obtained without the establishment of monopoly, since it does not give rise to monopoly until the power to control price is secured. Again, it may seem needless to put in " on the part of one or more persons," because it would appear to be a matter of course, and yet it is required to complete our concept. We may have a monopoly of one person, and one person may act in such a manner as to receive the advantages of unified control — and if a person is mentally competent he will so act ; or we may have a monopoly controlled by a combination of persons.

The essence of monopoly, then, is substantial and controlling unity of action. It is not said that -unity of action need be absolute, but there must be substantial unity of action. Those in control of a monopolized business act as one man, as one person, and they gain the advantages, whatever they may be, great or small, of unified action. Professor

Sidgwick has spoken about the possibility of a monopoly which would not prevent price from falling below cost. That is quite possible and quite compatible with the definition given. The advantage of unified action may be that the loss is diminished. There would then be a negative advantage. Sometimes a monopoly will give perhaps simply normal returns ; sometimes there is loss, as in the case of an unprofitable copyrighted book ; sometimes it might happen that the monopoly price would be exactly the same as the competitive price ; sometimes it may go, and generally will go, above the competitive price,* although there might be other gains than that resulting from higher price. But whatever the gains resulting from unified action, they belong to monopoly. Monopoly signifies this unity of action, this unity of control in business. If eighty per cent, of a business gives substantial and controlling unity in the business — that is, if those who own eighty per cent, of the business are able to control it and make everything act in accordance with their policy, then we have monopoly.f