[A Theory of Socialism and Capitalism (1989; 2007)]
The previous chapters have demonstrated that neither an economic nor a moral case for socialism can be made. Socialism is economically and morally inferior to capitalism. The last chapter examined why socialism is nonetheless a viable social system, and analyzed the socio-psychological characteristics of the state — the institution embodying socialism. Its existence, stability, and growth rest on aggression and on public support of this aggression which the state manages to effect.
This it does, for one thing, through a policy of popular discrimination — a policy, that is, of bribing some people into tolerating and supporting the continual exploitation of others by granting them favors — and secondly, through a policy of popular participation in the making of policy, i.e., by corrupting the public and persuading it to play the game of aggression by giving prospective power wielders the consoling opportunity to enact their particular exploitative schemes at one of the subsequent policy changes.
We shall now return to economics, and analyze the workings of a capitalist system of production — a market economy — as the alternative to socialism, thereby constructively bringing my argument against socialism full circle. While the final chapter will be devoted to the question of how capitalism solves the problem of the production of so-called “public goods,” this chapter will explain what might be termed the normal functioning of capitalist production and contrast it with the normal working of a system of state or social production. We will then turn to what is generally believed to be a special problem allegedly showing a peculiar economic deficiency in a pure capitalist production system: the so-called problem of monopolistic production.
Ignoring for the moment the special problems of monopolistic and public-goods production, we will demonstrate why capitalism is economically superior as compared to its alternative for three structural reasons. First, only capitalism can rationally, i.e., in terms of consumer evaluations, allocate means of production; second, only capitalism can ensure that, with the quality of the people and the allocation of resources being given, the quality of the output produced reaches its optimal level as judged again in terms of consumer evaluations; and third, assuming a given allocation of production factors and quality of output, and judged again in terms of consumer evaluations, only a market system can guarantee that the value of production factors is efficiently conserved over time.1
As long as it produces for a market, i.e., for exchange with other people or businesses, and subject as it is to the rule of nonaggression against the property of natural owners, every ordinary business will use its resources for the production of such goods and such amounts of these goods which, in anticipation, promise a return from sales that surpasses as far as possible the costs which are involved in using these resources. If this were not so, a business would use its resources for the production of different amounts of such goods or of different goods altogether. And every such business has to decide repeatedly whether a given allocation or use of its means of production should be upheld and reproduced, or if, due to a change in demand or the anticipation of such a change, a reallocation to different uses is in order.
The question of whether or not resources have been used in the most value-productive (the most profitable) way, or if a given reallocation was the most economic one, can, of course, only be decided in a more or less distant future under any conceivable economic or social system, because invariably time is needed to produce a product and bring it onto the market. However, and this is decisive, for every business there is an objective criterion for deciding the extent to which its previous allocational decisions were right or wrong. Bookkeeping informs us — and in principle anyone who wanted to do so could check and verify this information — whether or not and to what extent a given allocation of factors of production was economically rational, not only for the business in total but for each of its subunits, insofar as market prices exist for the production factors used in it.
Since the profit-loss criterion is an ex post criterion, and must necessarily be so under any production system because of the time factor involved in production, it cannot be of any help when deciding on future ex ante allocations. Nevertheless, from the consumers’ point of view it is possible to conceive of the process of resource allocation and reallocation as rational, because every allocational decision is constantly tested against the profit-loss criterion. Every business that fails to meet this criterion is in the short or long run doomed to shrink in size or be driven out of the market entirely, and only those enterprises that successfully manage to meet the profit-loss criterion can stay in operation or possibly grow and prosper.
To be sure, then, the institutionalization of this criterion does not insure (and no other criterion ever could) that all individual business decisions will always turn out to be rational in terms of consumer evaluations. However, by eliminating bad forecasters and strengthening the position of consistently successful ones, it does insure that the structural changes of the whole production system which take place overtime can be described as constant movements toward a more rational use of resources and as a never-ending process of directing and redirecting factors of production out of less value-productive lines of production into lines which are valued more highly by the consumer.2
The situation is entirely different and arbitrariness from the point of view of the consumer (for whom, it should be recalled, production is undertaken) replaces rationality as soon as the state enters the picture. Because it is different from ordinary businesses in that it is allowed to acquire income by noncontractual means, the state is not forced to avoid losses if it wants to stay in business as are all other producers. Rather, since it is allowed to impose taxes and/or regulations on people, the state is in a position to determine unilaterally whether or not, to what extent, and for what length of time to subsidize its own productive operations. It can also unilaterally choose which prospective competitor is allowed to compete with the state or possibly outcompete it.
Essentially this means that the state becomes independent of cost-profit considerations. But if it is no longer forced to test continually any of its various uses of resources against this criterion, i.e., if it no longer need successfully adjust its resource allocations to the changes in demand of consumers in order to survive as a producer, then the sequence of allocational decisions as a whole must be regarded as an arbitrary, irrational process of decision making. A mechanism of selection forcing those allocational “mutations” which consistently ignore or exhibit a maladjustment to consumer demand out of operation simply no longer exists.3 To say that the process of resource allocation becomes arbitrary in the absence of the effective functioning of the profit-loss criterion does not mean that the decisions which somehow have to be made are not subject to any kind of constraint and hence are pure whim. They are not, and any such decision faces certain constraints imposed on the decision maker.
If, for instance, the allocation of production factors is decided democratically, then it evidently must appeal to the majority. But if a decision is constrained in this way or if it is made autocratically, respecting the state of public opinion as seen by the autocrat, then it is still arbitrary from the point of view of voluntarily buying or not-buying consumers.4 Hence, the allocation of resources, whatever it is and however it changes over time, embodies a wasteful use of scarce means. Freed from the necessity of making profits in order to survive as a consumer-serving institution, the state necessarily substitutes allocational chaos for rationality. M. Rothbard nicely summarizes the problem as follows:
How can it (i.e. the government, the state) know whether to build road A or road B, whether to invest in a road or in a school — in fact, how much to spend for all its activities? There is no rational way that it can allocate funds or even decide how much to have. When there is a shortage of teachers or schoolrooms or police or streets, the government and its supporters have only one answer: more money. Why is this answer never offered on the free market? The reason is that money must be withdrawn from some other uses in consumption or investment … and this withdrawal must be justified. This justification is provided by the test of profit and loss: the indication that the most urgent wants of the consumers are being satisfied. If an enterprise or product is earning high profits for its owners and these profits are expected to continue, more money will be forthcoming; if not, and losses are being incurred, money will flow out of the industry. The profit-and-loss-test serves as the critical guide for directing the flow of productive services. No such guide exists for the government, which has no rational way to decide how much money to spend, either in total, or in each specific line. The more money it spends, the more service it can supply — but where to stop?5
Besides the misallocation of factors of production that results from the decision to grant the state the special right to appropriate revenue in a noncontractual way, state production implies a reduction in the quality of the output of whatever it decides to produce. Again, an ordinary profit-oriented business can only maintain a given size or possibly grow if it can sell its products at a price and in such quantity that allow it to recover at least the costs involved in production and is hopefully higher. Since the demand for the goods or services produced depends either on their relative quality or on their price — this being one of many criteria of quality — as perceived by potential buyers, the producers must constantly be concerned about “perceived product quality” or “cheapness of product.” A firm is dependent exclusively on voluntary consumer purchases for its continued existence, so there is no arbitrarily defined standard of quality for a capitalist enterprise (including so-called scientific or technological standards of quality) set by an alleged expert or committee of experts. For it there is only the quality as perceived and judged by the consumers.
Once again, this criterion does not guarantee that there are no low-quality or overpriced products or services offered on the market because production takes time and the sales test comes only after the products have appeared on the market. And this would have to be so under any system of goods production. Nonetheless, the fact that every capitalist enterprise must undergo this sales test and pass it to avoid being eliminated from the market guarantees a sovereign position to the consumers and their evaluations. Only if product quality is constantly improved and adjusted to consumer tastes can a business stay in operation and prosper.
The story is quite different as soon as the production of goods is undertaken by the state. Once future revenue becomes independent of cost-covering sales — as is typically the case when the state produces a good — there is no longer a reason for such a producer to be concerned about product quality in the same way that a sales-dependent institution would have to be. If the producer’s future income can be secured, regardless of whether according to consumer evaluations the products or services produced are worth their money, why undertake special efforts to improve anything?
More precisely, even if one assumes that the employees of the state as a productive enterprise with the right to impose taxes and to regulate unilaterally the competitiveness of its potential rivals are, on the average, just as much interested or uninterested in work as those working in a profit-dependent enterprise,6 and if one further assumes that both groups of employees and workers are on the average equally interested or uninterested in an increase or decrease in their income, then the quality of products, measured in terms of consumer demand and revealed in actual purchases, must be lower in a state enterprise than in private business, because the income of the state employees would be far less dependent on product quality. Accordingly, they would tend to devote relatively less effort to producing quality products and more of their time and effort would go into doing what they, but not necessarily the consumer, happen to like.7
Only if the people working for the state were superhumans or angels, while everyone else was simply an ordinary, inferior human being, could the result be any different. Yet the same result, i.e., the inferiority of product quality of any state-produced goods, would again ensue if the human race in the aggregate would somehow improve: if they were working in a state enterprise even angels would produce a lower-quality output than their angel colleagues in private business, if work implied even the slightest disutility for them.
Finally, in addition to the facts that only a market system can ensure a rational allocation of scarce resources, and that only capitalist enterprises can guarantee an output of products that can be said to be of optimal quality, there is a third structural reason for the economic superiority, indeed unsurpassability, of a capitalist system of production. Only through the operation of market forces is it possible to utilize resources efficiently over time in any given allocation, i.e., to avoid overutilization as well as underutilization. This problem has already been addressed with reference to Russian style socialism in chapter 3.
What are the institutional constraints on an ordinary profit-oriented enterprise in its decisions about the degree of exploitation or conservation of its resources in the particular line of production in which they happen to be used? Evidently, the owner of such an enterprise would own the production factors or resources as well as the products produced with them. Thus, his income (used here in a wide sense of the term) consists of two parts: the income that is received from the sales of the products produced after various operating costs have been subtracted; and the value that is embodied in the factors of production which could be translated into current income should the owner decide to sell them.
Institutionalizing a capitalist system — a social order based on private property — thus implies establishing an incentive structure under which people would try to maximize their income in both of these dimensions. What exactly does this mean?8 Every act of production evidently affects both mentioned income dimensions. On one hand, production is undertaken to reach an income return from sales. On the other hand, as long as the factors of production are exhaustible, i.e., as long as they are scarce and not free goods, every production act implies a deterioration of the value of the production factors. Assuming that private ownership exists, this produces a situation in which every business constantly tries not to let the marginal costs of production (i.e., the drop in value of the resources that results from their usage) to become greater than the marginal revenue product, and where with the help of bookkeeping an instrument for checking the success or failure of these attempts exists.
If a producer were not to succeed in this task and the drop in the value of capital were higher than the increase in the income returns from sales, the owner’s total income (in the wider sense of the term) would be reduced. Thus, private ownership is an institutional device for safeguarding an existing stock of capital from being overexploited or if it is, for punishing an owner for letting this happen through losses in income. This helps make it possible for values produced to be higher than values destroyed during production. In particular, private ownership is an institution in which an incentive is established to efficiently adjust the degree of conserving or consuming a given stock of capital in a particular line of production to anticipated price changes.
If, for instance, the future price of oil were expected to rise above its current level, then the value of the capital bound up in oil production would immediately rise as would the marginal cost involved in producing the marginal product. Hence, the enterprise would immediately be impelled to reduce production and increase conservation accordingly, because the marginal revenue product on the present market was still at the unchanged lower level. On the other hand, if in the future oil prices were expected to fall below their present level, this would result in an immediate drop in the respective capital values and in marginal costs, and hence the enterprise would immediately begin to utilize its capital stock more intensively since prices on the present market would still be relatively higher. And to be sure, both of these reactions are exactly what is desirable from the point of view of the consumers.
If the way in which a capitalist production system works is compared with the situation that becomes institutionalized whenever the state takes care of the means of production, striking differences emerge. This is true especially when the state is a modern parliamentary democracy. In this case, the managers of an enterprise may have the right to receive the returns from sales (after subtracting operation costs), but, and this is decisive, they do not have the right to appropriate privately the receipts from a possible sale of the production factors.
Under this constellation, the incentive to use a given stock of capital economically over time is drastically reduced. Why? Because if one has the right to privately appropriate the income return from product sales but does not have the right to appropriate the gains or losses in capital value that result from a given degree of usage of this capital, then there is an incentive structure institutionalized not of maximizing total income — i.e., total social wealth in terms of consumer evaluations — but rather of maximizing income returns from sales at the expense of losses in capital value.
Why, for instance, should a government official reduce the degree of exploitation of a given stock of capital and resort to a policy of conservation when prices for the goods produced are expected to rise in the future? Evidently, the advantage of such a conservationist policy (the higher capital value resulting from it) could not be reaped privately. On the other hand, by resorting to such a policy one’s income returns from sales would be reduced, whereas they would not be reduced if one forgot about conserving.
In short, to conserve would mean to have none of the advantages and all of the disadvantages. Hence, if the state managers are not superhumans but ordinary people concerned with their own advantages, one must conclude that it is an absolutely necessary consequence of any state production that a given stock of capital will be overutilized and the living standards of consumers impaired in comparison to the situation under capitalism.
Now it is fairly certain that someone will argue that while one would not doubt what has been stated so far, things would in fact be different and the deficiency of a pure market system would come to light as soon as one paid attention to the special case of monopolistic production. And by necessity, monopolistic production would have to arise under capitalism, at least in the long run. Not only Marxist critics but orthodox economic theorists as well make much of this alleged counterargument.9 In answer to this challenge four points will be made in turn.
First, available historical evidence shows that contrary to these critics’ thesis, there is no tendency toward increased monopoly under an unhampered market system. In addition, there are theoretical reasons that would lead one to doubt that such a tendency could ever prevail on a free market. Third, even if such a process of increasing monopolization should come to bear, for whatever reason, it would be harmless from the point of view of consumers provided that free entry into the market were indeed ensured. And fourth, the concept of monopoly prices as distinguished from and contrasted to competitive prices is illusory in a capitalist economy.
Regarding historical evidence, if the thesis of the critics of capitalism were true, then one would have to expect a more pronounced tendency toward monopolization under relatively freer, unhampered, unregulated laissez-faire capitalism than under a relatively more heavily regulated system of “welfare” or “social” capitalism. However, history provides evidence of precisely the opposite result. There is general agreement regarding the assessment of the historical period from 1867 to World War I as being a relatively more capitalist period in history of the United States, and of the subsequent period being one of comparatively more and increasing business regulations and welfare legislation.
However, if one looks into the matter one finds that there was not only less development toward monopolization and concentration of business taking place in the first period than in the second but also that during the first period a constant trend towards more severe competition with continually falling prices for almost all goods could be observed.10 And this tendency was only brought to a halt and reversed when in the course of time the market system became more and more obstructed and destroyed by state intervention. Increasing monopolization only set in when leading businessmen became more successful at persuading the government to interfere with this fierce system of competition and pass regulatory legislation, imposing a system of “orderly” competition to protect existing large firms from the so-called cutthroat competition continually springing up around them.11 G. Kolko, a left-winger and thus certainly a trustworthy witness, at least for the critics from the Left, sums up his research into this question as follows:
There was during this [first] period a dominant trend toward growing competition. Competition was unacceptable to many key business and financial leaders, and the merger movement was to a large extent a reflection of voluntary, unsuccessful business effects to bring irresistible trends under control … As new competitors sprang up, and as economic power was diffused throughout an expanding nation, it became apparent to many important businessmen that only the national government could [control and stabilize] the economy.… Ironically, contrary to the consensus of historians, it was not the existence of monopoly which caused the government to intervene in the economy, but the lack of it.12
In addition, these findings, which stand in clear contradiction to much of the common wisdom on the matter, are backed by theoretical considerations.13 Monopolization means that some specific factor of production is withdrawn from the market sphere. There is no trading of the factor, but there is only the owner of this factor engaging in restraint of trade. Now if this is so, then no market price exists for this monopolized production factor. But if there is no market price for it, then the owner of the factor can also no longer assess the monetary costs involved in withholding it from the market and in using it as he happens to use it. In other words, he can no longer calculate his profits and make sure, even if only ex post facto, that he is indeed earning the highest possible profits from his investments.
Thus, provided that the entrepreneur is really interested in making the highest possible profit (something, to be sure, which is always assumed by his critics), he would have to offer the monopolized production factors on the market continually to be sure that he was indeed using them in the most profitable way and that there was no other more lucrative way to use them, so as to make it more profitable for him to sell the factor than keep it. Hence, it seems, one would reach the paradoxical result that in order to maximize his profits, the monopolist must have a permanent interest in discontinuing his position as the owner of a production factor withheld from the market and, instead, desire its inclusion in the market sphere.
Furthermore, with every additional act of monopolization the problem for the owner of monopolized production factors — i.e., that because of the impossibility of economic calculation, he can no longer make sure that those factors are indeed used in the most profitable way — becomes ever more acute. This is so, in particular, because realistically one must assume that the monopolist is not only not omniscient but that his knowledge regarding future competing goods and services by the consumers in future markets becomes more and more limited as the process of monopolization advances. As production factors are withdrawn from the market, and as the circle of consumers served by the goods produced with these factors widens, it will be less likely that the monopolist, unable to make use of economic calculation, can remain in command of all the relevant information needed to detect the most profitable uses for his production factors.
Instead, it becomes more likely in the course of such a process of monopolization, that other people or groups of people, given their desire to make profits by engaging in production, will perceive more lucrative ways of employing the monopolized factors.14 Not necessarily because they are better entrepreneurs, but simply because they <>occupy different positions in space and time and thus become increasingly aware of entrepreneurial opportunities which become more and more difficult and costly for the monopolist to detect with every new step toward monopolization. Hence, the likelihood that the monopolist will be persuaded to sell his monopolized factors to other producers — nota bene: for the purpose of thereby increasing his profits — increases with every additional step toward monopolization.15
Now, let us assume that what historical evidence as well as theory proves to be unlikely happens anyway, for whatever reason. And let us assume straightaway the most extreme case conceivable: there is only one single business, one supermonopolist so to speak, that provides all the goods and services available on the market, and that is the sole employer of everyone. What does this state of affairs imply regarding consumer satisfaction, provided, of course, as assumed, that the supermonopolist has acquired his position and upholds it without the use of aggression? For one thing, it evidently means that no one has any valid claims against the owner of this firm; his enterprise is indeed fully and legitimately his own. And for another thing it means that there is no infringement on anyone’s right to boycott any possible exchange. No one is forced to work for the monopolist or buy anything from him, and everyone can do with his earnings from labor services whatever he wants. He can consume or save them, use them for productive or nonproductive purposes, or associate with others and combine their funds for any sort of joint venture.
But if this were so, then the existence of a monopoly would only allow one to say this: the monopolist clearly could not see any chance of improving his income by selling all or part of his means of production, otherwise he would do so. And no one else could see any chance of improving his income by bidding away factors from the monopolist or by becoming a capitalist producer himself through original saving, through transforming existing nonproductively used private wealth into productive capital, or through combining funds with others, otherwise it would be done.
But then, if no one saw any chance of improving his income without resorting to aggression, it would evidently be absurd to see anything wrong with such a supermonopoly. Should it indeed ever come into existence within the framework of a market economy, it would only prove that this self-same supermonopolist was indeed providing consumers with the most urgently wanted goods and services in the most efficient way.
Yet the question of monopoly prices remains.16 Doesn’t a monopoly price imply a suboptimal supply of goods to consumers, and isn’t there then an important exception from the generally superior economic working of capitalism to be found here? In a way this question has already been answered by the above explanation that even a supermonopolist establishing itself in the market cannot be considered harmful for consumers. But in any case, the theory that monopoly prices are (allegedly) categorically different from competitive prices has been presented in different, technical language and hence deserves special treatment. The result of this analysis, which is hardly surprising now, only reinforces what has already been discovered: monopoly does not constitute a special problem forcing anyone to make qualifying amendments to the general rule of a market economy being necessarily more efficient than any socialist or statist system. What is the definition of “monopoly price” and, in contrast to it, of “competitive price” according to economic orthodoxy (which in the matter under investigation includes the so-called Austrian school of economics as represented by L. v. Mises)? The following definition is typical:
Monopoly is a prerequisite for the emergence of monopoly prices, but it is not the only prerequisite. There is a further condition required, namely a certain shape of the demand curve. The mere existence of monopoly does not mean anything in this regard. The publisher of a copyrighted book is a monopolist. But he may not be able to sell a single copy, no matter how low the price he asks. Not every price at which a monopolist sells a monopolized commodity is a monopoly price. Monopoly prices are only prices at which it is more advantageous for the monopolist to restrict the total amount to be sold than to expand its sales to the limit which a competitive market would allow.17
However plausible this distinction might seem, it will be argued that neither the producer himself nor any neutral outside observer could ever decide if the prices actually obtained on the market were monopoly or competitive prices, based on the criterion “restricted versus unrestricted supply’ as offered in the above definition. In order to understand this, suppose a monopolist producer in the sense of “a sole producer of a given good” exists. The question of whether or not a given good is different from or homogeneous to other goods produced by other firms is not one that can be decided based on a comparative analysis of such goods in physical or chemical terms ex ante, but will always have to be decided ex post facto, on future markets, by the different or equal treatment and evaluations that these goods receive from the buying public. Thus every producer, no matter what his product is, can be considered a potential monopolist in this sense of the term, at the point of decision making.
What, then, is the decision with which he and every producer is faced? He must decide how much of the good in question to produce in order to maximize his monetary income (with other, nonmonetary income considerations assumed to be given). To be able to do this he must decide how the demand curve for the product concerned will be shaped when the products reach the market, and he must take into consideration the various production costs of producing various amounts of the good to be produced. This done, he will establish the amount to be produced at that point where returns from sales, i.e., the amount of goods sold times price, minus production costs involved in producing that amount, will reach a maximum. Let us assume this happens and the monopolist also happens to be correct in his evaluation of the future demand curve in that the price he seeks for his products indeed clears the market.
Now the question is, is this market price a monopoly or a competitive price? As M. Rothbard realized in his pathbreaking but much-neglected analysis of the monopoly problem, there is no way of knowing. Was the amount of the good produced “restricted” in order to take advantage of inelastic demand and was a monopoly price thus reaped, or was the price reached a competitive one established in order to sell an amount of goods that was expanded “to the limit that a competitive market would allow”? There is no way to decide the matter.18 Clearly, every producer will always try to set the quantity produced at a level above which demand would become elastic and would hence yield lower total returns to him because of reduced prices paid. He thus engages in restrictive practices.
At the same time, based on his estimate of the shape of future demand curves, every producer will always try to expand his production of any good up to the point at which the marginal cost of production (that is, the opportunity cost of not producing a unit of an alternative good with the help of scarce production factors now bound up in the process of producing another unit of x) equals the price per unit of x that one expects to be able to charge at the respective level of supply. Both restriction and expansion are part of profit maximizing and market-price formation, and neither of these two aspects can be separated from the other to make a valid distinction between monopolistic and competitive action.
Now, suppose that at the next point of decision making the monopolist decides to reduce the output of the good produced from a previously higher to a new lower level, and assume that he indeed succeeds in securing higher total returns now than at the earlier point in time. Wouldn’t this be a clear instance of a monopoly price? Again, the answer must be no. And this time the reason would be the indistinguishability of this reallocational “restriction” from a “normal” reallocation that takes account of changes in demand. Every event that can be interpreted in one way can also be interpreted in the other, and no means for deciding the matter exist, for once again both are essentially two aspects of one and the same thing: of action, of choosing.
The same result, i.e., a restriction in supply coupled not only with higher prices but with prices high enough to increase total revenue from sales, would be brought about if the monopolist who, for example, produces a unique kind of apples faces an increase in the demand for his apples (an upward shift in the demand curve) and simultaneously an even higher increase in demand (an even more drastic upward shift of the demand curve) for oranges. In this situation he would reap greater returns from a reduced output of apples, too, because the previous market price for his apples would have become a subcompetitive price in the meantime. And if he indeed wanted to maximize his profits, instead of simply expanding apple production according to the increased demand, he now would have to use some of the factors previously used for the production of apples for the production of oranges, because in the meantime changes in the system of relative prices would have occurred.
However, what if the monopolist who restricts apple production does not engage in producing oranges with the now available factors, but instead does nothing with them? Again, all that this would indicate is that besides the increase in demand for apples, in the meantime an even greater increase in the demand for yet another good — leisure (more precisely, the demand for leisure by the monopolist who is also a consumer)-had taken place. The explanation for the restricted apple supply is thus found in the relative price changes of leisure (instead of oranges) as compared with other goods.
Neither from the perspective of the monopolist himself nor from that of any outside observer could restrictive action then be distinguished conceptually from normal reallocations which simply follow anticipated changes in demand. Whenever the monopolist engages in restrictive activities which are followed by higher prices, by definition he must use the released factors for another more highly valued purpose, thereby indicating that he adjusts to changes in relative demand. As M. Rothbard sums up,
We cannot use “restriction of production” as the test of monopoly vs. competitive price. A movement from a sub-competitive to a competitive price also involves a restriction of production of this good, coupled, of course, with an expansion of production in other lines by the released factors. There is no way whatever to distinguish such a restriction and corollary expansion from the alleged “monopoly price” situation. If the restriction is accompanied by increased leisure for the owner of the labor factor rather than increased production of some other good on the market, it is still the expansion of the yield of a consumer good — leisure. There is still no way of determining whether the “restriction” resulted in a “monopoly” or a “competitive” price or to what extent the motive of increased leisure was involved. To define a monopoly price as a price attained by selling a smaller quantity of a product at a higher price is therefore meaningless, since the same definition applies to the “competitive” price as compared with a subcompetitive price.19
The analysis of the monopoly question, then, provides no reason whatsoever to modify the description given above of the way a pure market economy normally works and its superiority over any sort of socialist or statist system of production. Not only is a process of monopolization highly unlikely to occur, empirically as well as theoretically, but even if it did, from the point of view of the consumers it would be harmless. Within the framework of a market system a restrictive monopolistic price could not be distinguished from a normal price hike stemming from higher demand and changes in relative prices. And as every restrictive action is simultaneously expansionary, to say that the curtailment of production in one production line coupled with an increase in total revenue implies a misallocation of production factors and an exploitation of consumers is simply nonsense. The misunderstanding involved in such reasoning has been accurately revealed in the following passage from one of L. v. Mises’s later works in which he implicitly refutes his own above-cited orthodox position regarding the monopoly-price problem. He states,
An entrepreneur at whose disposal are 100 units of capital employs, for instance, 50 units for the production of p and 50 units for the production of q. If both lines are profitable, it is odd to blame him for not having employed more, e.g., 75 units, for the production of p. He could increase the production of p only by curtailing correspondingly the production of q. But with regard to q the same fault could be found with the grumblers. If one blames the entrepreneur for not having produced more p, one must blame him also for not having produced more q. This means: one blames the entrepreneur for the fact that there is scarcity of factors of production and that the earth is not a land of Cockaigne.20
The monopoly problem as a special problem of markets requiring state action to be resolved does not exist.21 In fact, only when the state enters the scene does a real, nonillusory problem of monopoly and monopoly prices emerge. The state is the only enterprise whose prices and business practices can be conceptually distinguished from all other prices and practices, and whose prices and practices can be called ‘too high’ or ‘exploitative’ in a completely objective, nonarbitrary way. These are prices and practices which consumers are not voluntarily willing to pay and accept, but which instead are forced upon them through threats of violence. And only for so privileged an institution as the state is it also normal to expect and to find a permanent process of increasing monopolization and concentration.
As compared to all other enterprises, which are subject to the control of voluntarily buying or not-buying consumers, the enterprise “state” is an organization that can tax people and need not wait until they accept the tax, and can impose regulations on the use people make of their property without gaining their consent for doing so. This evidently gives the state, as compared to all other institutions, a tremendous advantage in the competition for scarce resources. If one only assumes that the representatives of the state are as equally driven by the profit motive as anyone else, it follows from this privileged position that the organization “state” must have a relatively more pronounced tendency toward growth than any other organization. And indeed, while there was no evidence for the thesis that a market system would bring about a tendency toward monopolistic growth, the thesis that a statist system would do so is amply supported by historical experience.
This article is excerpted from A Theory of Socialism and Capitalism, chapter 9, “Capitalist Production and the Problem of Monopoly” (1989; 2007).
- 1Cf. on this also Chapter 3 above and Chapter 10 below.
- 2On the function of profit and loss cf. L. v. Mises, Human Action, Chicago, 1966, Chapter 15; and “Profit and Loss,” in: the same, Planning for Freedom, South Holland, 1974; M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, Chapter 8.
- 3On the economics of government cf., esp. M. N. Rothbard, Power and Market, Kansas City, 1977, Chapter 5.
- 4Regarding democratically controlled allocations, various deficiencies have become quite evident. For instance J. Buchanan and R. Wagner write (The Consequences of Mr. Keynes, London, 1978, p. 19), “Market competition is continuous; at each purchase, a buyer is able to select among competing sellers. Political competition is intermittent; a decision is binding generally for a fixed number of years. Market competition allows several competitors to survive simultaneously…. Political competition leads to an all-or-nothing outcome…. in market competition the buyer can be reasonably certain as to just what it is that he will receive from his purchase. In political competition, the buyer is in effect purchasing the services of an agent, whom he cannot bind…. Moreover, because a politician needs to secure the cooperation of a majority of politicians, the meaning of a vote for a politician is less clear than that of a ‘vote’ for a private firm.” (Cf. on this also J. Buchanan, “Individual Choice in Voting and the Market,” in: the same, Fiscal Theory and Political Economy, Chapel Hill, 1962; for a more general treatment of the problem J. Buchanan and G. Tullock, The Calculus of Consent, Ann Arbor, 1962.) What has commonly been overlooked, though — especially by those who try to make a virtue of the fact that a democracy gives equal voting power to everyone, whereas consumer sovereignty allows for unequal “votes” — is the most important deficiency of all: that under a system of consumer sovereignty people might cast unequal votes but, in any case, they exercise control exclusively over things which they acquired through original appropriation or contract and hence are forced to act morally. Under a democracy of production everyone is assumed to have something to say regarding things one did not so acquire, and hence one is permanently invited thereby not only to create legal instability with all its negative effects on the process of capital formation, but, moreover, to act immorally. Cf. on this also L. v. Mises, Socialism, Indianapolis, 1981, Chapter 31; also cf. Chapter 8 above.
- 5On the economics of government cf., esp. M. N. Rothbard, Power and Market, Kansas City, 1977, Chapter 5.
- 6This is a very generous assumption, to be sure, as it is fairly certain that the so-called public sector of production attracts a different type of person from the very outset and boasts an unusually high number of inefficient, lazy, and incompetent people.
- 7Cf. L. v. Mises, Bureaucracy, New Haven, 1944; Rothbard, Power and Market, Kansas City, 1977, pp. 172ff; and For A New Liberty New York, 1978, Chapter 10; also M. and R. Friedman, iThe Tyranny of the Status Quoc, New York, 1984, pp. 35-51.
- 8On the following cf. L. v. Mises, Human Action, Chicago, 1966, Chapter 23.6; M.N. Rothbard, Man Economy and State, Los Angeles, 1970, Chapter 7, esp. 7.4-6;
- 9On this and the following cf. L. v. Mises, Socialism, Indianapolis, 1981, part 3.2.
- 10Thus states J. W. McGuire, Business and Society, New York, 1963, pp. 38-39: “From 1865 to 1897, declining prices year after year made it difficult for businessmen to plan for the future. In many areas new railroad links had resulted in a nationalization of the market east of the Mississippi, and even small concerns in small towns were forced to compete with other, often larger firms located at a distance. At the same time there were remarkable advances in technology and productivity. In short it was a wonderful era for the consumer and a frightful age for the producers especially as competition became more and more severe.”
- 11Cf. on this G. Kolko, The Triumph of Conservatism, Chicago, 1967; and Railroads and Regulation, Princeton, 1965; J. Weinstein, The Corporate Ideal in the Liberal State, Boston, 1968; M. N. Rothbard and R. Radosh (eds.), A New History of Leviathan, New York, 1972.
- 12G. Kolko, The Triumph of Conservatism, Chicago, 1967, pp.4-5; cf. also the investigations of M. Olson, The Logic of Collective Action, Cambridge, 1965, to the effect that mass organizations (in particular labor unions), too, are not market phenomena but owe their existence to legislative action.
- 13On the following cf. L. v. Mises, Socialism, Indianapolis, 1981, part 3.2; and Human Action, Chicago, 1966, Chapters 25-26; M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, pp.544ff; pp.585ff; and “Ludwig von Mises and Economic Calculation under Socialism,” in: L. Moss (ed.), The Economics of Ludwig von Mises, Kansas City, 1976, pp. 75-76.
- 14Cf. F. A. Hayek, Individualism and Economic Order, Chicago, 1948, esp. Chapter 9; I. Kirzner, Competition and Entrepreneurship, Chicago, 1973.
- 15Regarding large-scale ownership, in particular of land, Mises observes that it is normally only brought about and upheld by nonmarket forces: by coercive violence and a state-enforced legal system outlawing or hampering the selling of land. “Nowhere and at no time has the large scale ownership of land come into being through the working of economic forces in the market. Founded by violence, it has been upheld by violence and that alone. As soon as the latifundia are drawn into the sphere of market transactions they begin to crumble, until at last they disappear completely…. That in a market economy it is difficult even now to uphold the latifundia, is shown by the endeavors to create legislation institutions like the ‘Fideikommiss’ and related legal institutions such as the English ‘entail’…. Never was the ownership of the means of production more closely concentrated than at the time of Pliny, when half the province of Africa was owned by six people, or in the day of the Merovingian, when the church possessed the greater part of all French soil. And in no part of the world is there less large-scale land ownership than in capitalist North America,” Socialism, Indianapolis, 1981, pp.325–326.
- 16Cf. on the following in M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, Chapter 10, esp. pp.586ff; also W. Block, “Austrian Monopoly Theory. A Critique,” in: Journal of Libertarian Studies, 1977.
- 17L.v. Mises, <em>Human Action</em>, Chicago, 1966, p.359; cf. also any current textbook, such as P. Samuelson, <em>Economics</em>, New York, 1976, p.500.
- 18Cf. M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, Chapter 10, esp. pp.604-614.
- 19M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, p.607.
- 20L.v. Mises, “Profit and Loss,” in: Planning for Freedom, South Holland, 1974, p.116.
- 21In fact, historically, governmental anti-trust policy has almost exclusively been a practice of providing less successful competitors with the legal tools needed to hamper the operation of their more successful rivals. For an impressive assembly of case studies to this effect cf. D. Armentano, Antitrust and Monopoly, New York, 1982; also Y. Brozen, Is Government the Source of Monopoly? And Other Essays, San Francisco, 1980.
