Thus far in our study, we have assumed that we knew what competition
was. Now, however, as we are to study it scientifically, we are in need
of an exact definition, that we may know just what the term includes.
Prof. Sturtevant, in his "Economics," says: "_Competition is that law of
human nature by which every man who makes an exchange will seek to
obtain as much as he can of the wealth of another for a given amount of
his own wealth._" Simmer this down to its essence, and we have simply:
_Competition is selfishness._ To the other evident faults of the
definition we need not allude. It is a much more satisfactory definition
which Webster's Dictionary gives us, for it includes the idea that
competition necessitates two or more parties to exercise it:
"_Competition is the act of seeking the same object that another is
seeking._" But this is too broad a definition for our purpose. It takes
in competitions for fame, social standing, etc., with which we have
nothing to do.
Failing to find a satisfactory definition, let us make one, as follows:
_Competition is that force of rivalry between buyers or between sellers
which tends to make the former give a greater price for the commodity
they wish to secure, and tends to make the latter offer better
commodities for a less price._
That competition _is_ a force, even in the popular estimation, is
evidenced by such common expressions as "the pressure of competition,"
"a strong competition," and indeed, "the force of competition." But
these very expressions show us as well, what we have already found to be
true in the preceding chapters, that it is not a constant force but a
variable one. What, then, are the laws of its variation?
Let us see what we can learn by a study of three typical examples of the
force of competition. Let us take first the business of growing corn.
There are perhaps three million farmers in the United States engaged in
producing corn, and each one of these competes with all the others. Is
this doubted? We have defined competition as a rivalry that tends to
make the sellers offer better goods for a less price. Now at first sight
it may seem that there is no rivalry at all. Neighboring farmers work
together in all harmony; and no man thinks that because his neighbors
have raised a large crop of corn, he is in any way injured. And yet this
_tendency_ to give better goods and lower prices exists and is plainly
felt. Suppose a new and superior variety of corn were introduced, which
buyers preferred. Some farmers would at once begin to raise it, so that
they might be more sure of a market and perhaps of a better price, and
other farmers would be obliged to follow suit to meet the competition.
Again, consider that the supply and demand adjust themselves to each
other through competition. For suppose, at the ruling price, the demand
to be less than the supply; then to increase the demand, the price must
fall; and the cause of the fall in price is simply that the farmers
compete with each other for the market, and lower their prices in order
to secure a sale for their crops. Note, however, that the rivalry in
this case never becomes a personal one. Each farmer recognizes that an
increased supply lessens the price for his goods; but his neighbor's
extra acreage is such a drop in the bucket, that he never thinks of it
as being really a rival of his own crop.
Take as a second example, the wholesale paper trade. Here are perhaps
three hundred men, each knowing personally many of his competitors and
probably hating some of them cordially. Each striving to secure for
himself all the trade possible, and to gain, if he can, his rivals'
customers. He sends out his salesmen with instructions to, "Sell goods!
For the best prices you can get, but sell them, anyhow." These
"drummers" are sharp, active business men, they might well be employed
in directing some productive process; but they go out and spend their
time in inducing customers by all the means in their power to buy their
goods. They spend money in various "treats" to secure the
good-fellowship of the man with whom it is desired to trade, and use his
time as well as their own. Another item of expense is for advertising
and for keeping the firm name prominently before the purchasing public.
All these things cost money, as any wholesale merchant engaged in a
business where there is sharp competition can testify. It may be thought
that a firm which would have the courage to do away with all these
expenses and give the money thus saved to their patrons in reduced
prices and better goods, would be able to keep its trade and even gain
over its competitors. But it is hardly so; most men are more likely to
be wheedled into taking slightly inferior goods at a slightly greater
price.
Another matter to be considered in this connection is the variation in
price. In the case of the producers of corn, we saw that prices were
practically uniform at any given place, being fixed by the ratio of
supply and demand in the chief markets of the world. But in making sales
of paper, the sharp, close-dealing buyer is generally able to secure a
better price than a buyer not posted in regard to the condition of the
paper trade.
As competition becomes more intense, its burdens become more heavy to
carry. Perhaps two of the largest houses in the trade, who are able to
force prices lowest, come to a sort of tacit understanding that their
salesmen "will respect each others rights a little and not force prices
down beyond all reason." It is plain that _here_ the foundation is laid
for the establishment of a monopoly. Yet the agreement certainly seems
to be nothing more than these two firms have a right to make. Its result
is seen, however, in a slight increase in the price their customers have
to pay. Soon the tacit agreement becomes a formal one. Then other firms
are taken in. The first seed has borne fruit. The combination grows
larger and stronger. The number of producing units is growing less.
Finally it includes practically all the paper manufacturers in the
country. Whoever wants paper must buy of the combination, there is no
other source of supply. Competition is dead.
If the combination is strong enough and is managed well enough, it may
be permanent; and prices of paper will be regulated by other laws than
the law of competition. But suppose that the number of paper makers is
so great and that they are so widely scattered that the combination
proves difficult to maintain; local jealousies creep in, and charges are
made of partiality on the part of the managers. The combination finally
breaks up. Can we expect a perfect return to the old system of free
competition? When men have once reaped the enormous returns that are
yielded by the control of a monopoly, the ordinary profits of business
seem tame and dull. There will surely be attempts to form the monopoly
anew on a stronger and more permanent basis; and even if these attempts
do succeed in producing only short-lived monopolies, the effect will be
to keep the whole trade and all dependent upon it in a state of disquiet
and uncertainty. Prices will swing up and down very suddenly between
wide limits; and it is everywhere recognized that _stability in price_
is a most important element in inducing general prosperity. A perusal of
the trade journals for the years 1887 and 1888 will convince one of the
truth that when a combination is once formed, its members are loth to
try competition again. A considerable number of combinations which were
formed in 1887 were soon broken up, often from the strength of old feuds
and jealousies. But in almost every case they have been formed anew on a
stronger basis after a short experience of competition.
This matter of the variation in price is a very important one, and it
has an important influence in checking business prosperity. Men are far
less apt to engage in an enterprise, if they cannot calculate closely on
prices and profits. But the main point, after all, is the waste which is
due to competition. It is for the interest of the public at large that
the papermakers should devote all the energies which they give to their
business to making the best quality of each grade of paper with the
least possible waste of labor and material.
Take for a third example two railway lines doing business between the
same points. We have fully pointed out the practical working of this
sort of competition in the chapter devoted to railways. It is plain that
the general effect is a fluctuation of rates between wide limits, an
enormous waste of capital and labor, and ultimately, the permanent death
of competition by the consolidation of the two lines.
In comparing now the above three cases, the most noticeable difference
in the conditions is in the _number of competing units_. There were in
the first example three million competitors; in the second, three
hundred; and in the last, but two.
The first difference in the competition which existed is in intensity.
In the case of the producers of corn, competition was so mild that its
very existence was doubted. In the case of the papermakers it was vastly
more intense, so that it caused those engaged in it to take steps to
restrict and finally abolish it. In the case of the railroads it was
still more intense, so that it was not able to survive any length of
time, but had to suffer either a temporary or permanent death very soon.
Let us state, therefore, as the first law of competition, this: _In any
given industry the intensity of competition tends to vary inversely as
the number of competing units._
We also saw that among the producers of corn there was virtually no
waste of energy from competition. Among the paper makers there was a
large waste. And in the case of the railroads, the whole capital
invested in the rival railroad, as well as the expense of operating it,
was probably a total waste. Let us state, then, for a second law of
competition: _In any given industry the waste due to competition tends
to vary directly as the intensity._ As an additional example to prove
the truth of these laws, take the competition which exists between
buyers. In the case of ordinary retail trade the number of buyers is
very great, and the competition between them is so moderate that we
hardly remember that it exists. It is difficult to see how there could
be any waste from this competition among buyers, at least of any amount.
Expressed in the language of the laws we have found: The number of
competing units is so great that competition is neither intense nor
wasteful.
From these two laws and a study of the examples we have given, it is
easy to deduce a third. We have seen that when competition became very
wasteful, monopoly arose; indeed, we have noted the working of this law
all through our investigation. The principal cause assigned for the
formation of the linseed-oil trust was the waste which intense
competition had caused. The third law is, then: _In any given industry
the tendency toward the death of competition (monopoly) varies directly
with the waste due to competition._
We might now combine these three laws to deduce the fourth law, which
is: _In any given industry the tendency toward the death of competition
(monopoly) varies inversely with the number of competing units._ But
this law is also proved independently. Look back over all the monopolies
we have studied, and it will be seen that one of the most important
conditions of their success was the small number of competitors. Fifty
men could be brought together and organized, and made to bury their
feuds and rivalries, when with a thousand the combination would have
been impossible. We have seen, in the case of the farmers, how their
great number alone has prevented them from forming combinations to
restrict the competition among themselves.
It should be said that these laws, like all other laws of economics,
are not to be taken in a narrow mathematical sense. We cannot study
causes and effects dependent on the caprice of men's desires and wills
with the minute exactness with which we solve numerical problems. Taken
in the broad sense, however, the study we have made in the preceding
chapters is sufficient proof of their truth.
The common expressions of trade afford still further evidence. We often
hear the expression: "A healthy competition." But the very existence of
the phrase implies that there may be an unhealthy competition, and if
so, what is it? Is it not that competition whose intensity is so great
that it causes a large waste of capital and labor in work other than
production; whose intensity is so great that, like an animal or a
machine working under too great a load, it labors intermittently,--now
acting with great intensity and forcing prices far below their normal
plane, now pausing in a reaction, when a temporary combination is
formed, and allowing prices to spring back as far above the point
indicated by the relation of supply and demand; and finally reaching the
natural end for unhealthiness--death. In fact, a recent economic writer
declares that especially intense competition should be called war, as,
indeed, it frequently is called, rather than competition.
Looking about us for other causes of variation in the intensity of
competition we discover a fifth law: _The intensity of competition tends
to vary directly in proportion to the amount of capital required for the
operation of each competing unit, especially when the interest on the
capital invested forms a large proportion of the cost of production._
Take, for example, the case of a railway line. All the capital invested
in it is wasted unless the road is in operation. Hence it will be
better to operate the road, so long as receipts are any thing more than
the expense of operation, than to abandon it. An enterprise in which no
capital is invested will cease operations when receipts do not exceed
its expenditure and there is no prospect of betterment. But in the total
expense of operating a railroad, a large item is the interest on the
capital invested, which is as truly a part of the total cost of carrying
the traffic as is the daily labor expended in keeping the road in good
repair. (In railway bookkeeping only an arbitrary line can ever be drawn
between capital account and operating expenses.) Now, in order to pay
operating expenses and fixed charges, railways must secure traffic. We
suppose that they are doing this by competition, and that they have not
yet combined to form a monopoly. Let us suppose that this competition
cuts down receipts to a point where they are just sufficient to pay the
whole cost of carriage. In an enterprise in which no capital was
invested some of the competitors would be sure to fall out when profits
disappeared; but here there is no such chance of relief; and though the
competition keeps on until the receipts are only enough to pay the
operating expenses, still the road is not abandoned because then the
capital invested, in it would be a complete loss. Changes in productive
processes often lessen the demand for a line of goods; but the owners of
the capital invested in factories and machines for making these goods
may often cause them to be continued in operation at a loss rather than
lose all that they have invested, and because they hope for better days
and a renewal of the demand.
For the sixth law of competition we have: _In any given industry the
tendency toward the death of competition (monopoly) varies directly
with the amount of capital required for each competing unit._ This law
is proven in part by the preceding laws; for when a large capital is
required for each competing unit, the number of competitors will be
small and the tendency toward monopoly will be strong; but it may also
be proven independently. Business men, before they form a combination,
are certain to ask whether new competitors are likely to enter the field
against the combination. Now, as we have seen in very many cases in the
preceding chapters, when there is a great amount of capital required,
new competitors will be very unlikely to enter the field. If there is
but little capital required, they will be very apt to do so, being
tempted by the prospect of large profits at the monopoly's prices. But
they know that the combination will concentrate its strength to fight
them in every way; and if they must invest a great deal of money in
buildings, plant, etc., to start operations, they will be apt to think
twice before they take the field against the combination.
The seventh law of competition is: _In any given industry in which
natural agents are necessary, the tendency toward the inequality of
competition (monopoly) tends to vary directly with the scarcity of
available like natural agents._
The influence of limited natural agents in promoting the growth of
monopolies is a matter of the greatest importance. That the law is true,
is evident upon slight investigation. For if some especial gift of
Nature is a necessity to any industry, and those who are engaged in that
industry can secure all the available gifts of Nature of that sort,
there is no opportunity for new competitors to enter the field.
It is to be noted that in this seventh law we have used in apposition
with the term monopoly, the term "inequality of competition" instead of
"death of competition," as in the preceding laws. We are now in need of
a definition of the term monopoly. Webster defines it as "the sole
control over the sale of any line of goods"; Prof. Newcomb says "a
monopoly is the ownership or command by one or a limited number of
persons of some requisite of production which is not solely a product of
human labor"; Sturtevant says "a monopoly is such a control of the
supply of any desirable object as will enable the holder to determine
its price without appeal to competition." To the first definition we
object that it is both narrow and indefinite. The second seems to omit
such important classes of monopolies as the combinations to limit
competition; and Sturtevant's definition is unscientific in this: Hardly
any monopoly exists whose holders can without limit determine the price
of its product. If the price continues to rise, competition in some form
will appear. Take, for example, the business of transporting goods from
New York to San Francisco; if all the railway lines combine to form a
monopoly, the competition of ocean steamers via Panama would eventually
stop the rise in rates, if no other outside competition stopped it
before. The owners of a rich mine have a real monopoly, though they
cannot raise the price above a certain point without being undersold by
the owners of poorer mines or those more remote from market.
Consideration of these facts lead us to construct the following
definition: _A monopoly in any industry consists in the control of some
advantage over existing or possible competitors by which greater profits
can be secured than these competitors can make._ For the law of
monopolies we have: _The degree of a monopoly depends upon the amount of
advantage which is held over existing or possible competitors._ When the
advantage of the monopoly is so great that no other competitor will try
to do business in competition with it, we may rightly say that
competition is dead. The great share of the monopolies which are based
on this seventh law of competition, those due to the control of natural
agents, only restrict competition by the attainment of an advantage over
their competitors, and do not destroy it.
The principal natural agents which are necessary to production, and
whose supply may be so limited to cause an appreciable monopoly, are:
(1) Land for agricultural purposes; (2) land for purposes of manufacture
or commerce; (3) transportation routes, such as mountain passes, room
for railway tracks in a city street, or for gas-and water-pipes beneath
its surface; (4) natural deposits of minerals and metals; (5) sources of
water supply or water power. (The latter is unimportant now compared
with a score of years ago, because of the lessened cost of its
competitor, steam.)
Let us be especially careful not to confound this seventh law of
competition with a certain doctrine which is now receiving more and more
credence, which is, in brief, that the private ownership of the gifts of
Nature used in production should be abolished. The grounds in opposition
to this doctrine we will discuss in a later chapter. The law we have
stated says nothing of the right or wrong of the private ownership of
the gifts of Nature. What it does say is, that when any of these are
limited in amount, those who control them are given an advantage over
other would-be competitors, which constitutes a monopoly.
In considering the natural agents enumerated above, we can easily see
the truth of the law. Agricultural lands, the most important of natural
agents, are in this country so abundant that their rental is entirely
fixed by competition. In England, where they are so much more limited in
area, rent is fixed by custom. As regards land for purposes of
manufacture or commerce, we have already pointed out the cases in which
monopolies are prominent, as also for transportation routes. As regards
mineral wealth, deposits of iron are so numerous and widespread that no
monopoly has ever yet succeeded in controlling competition in the
manufacture of pig-iron to any great extent. But the rarer metals, like
copper, tin, nickel, and others, are largely controlled by monopolies.
Now, while this seventh law says nothing as to the right or wrong, the
expediency or inexpediency of the private ownership of natural wealth,
it does follow from it that this private ownership generally constitutes
a monopoly, as we have defined it. For of no class of natural agents is
it true that their richness and availability are absolutely equal. Those
competitors who have the richest and best natural resources to work with
have an advantage over their competitors which is essentially a
monopoly. Thus the owners of fertile lands near a large city have an
advantage over the owners of less fertile lands far removed from
markets, which is of a monopolistic nature. If any one doubts this, let
him say how this case is logically different from that of the ownership
of a mine of native copper so near to New York City that the cost of
laying it down in the market there will be half what it is from any
existing mine; or, for a second case, take the New York Central railway,
which has the control of such a valuable pathway between the Mississippi
Valley and the Atlantic seaboard that it has an advantage over all
competitors in the business of transportation between those points.
We have now to turn our attention to other variations in competition
besides the variation in intensity. We need to distinguish the different
species of competition. That competition which is in daily operation in
most branches of industry we may call _actual_ competition. That
competition which would spring up in any industry in case an increase in
profits called it out, we may call _potential_ competition. The third
class is instanced in the letting to the highest bidder a franchise for
city water or gas-works, or street-car lines. Here competition acts at a
single time to fix the price for perhaps twenty years. We may call this,
for want of a better name, _franchise_ competition. It possesses the
evident advantage that it avoids both the waste of competition and the
fluctuation of prices. It has the disadvantage that, unless the owners
of the franchise are held strictly to their contract, quality is apt to
be sacrificed; also that if the purchase is for a term of years,
cheapening in processes may result in undue profits to the franchise
holders. The discussion of this matter, however, does not properly
belong to this chapter.
Arranging in their logical order the laws of competition which we have
found, we have the following diagram:
In any given industry the tendency toward monopoly increases:
(1.) As the waste due to competition increases.
The waste of competition increases in proportion to its intensity.
(1.) The intensity of competition increases as the number of
competing units decreases.
(2.) The intensity of competition increases with the amount of
capital required for each competing unit.
(2.) As the number of competing units decreases.
(3.) As the amount of capital required for each competing unit
increases.
(4.) As the number of available natural agents decreases.
The preceding diagram sets plainly before us the three great salient
causes from which have grown the long list of monopolies under which our
civilization labors. First, the supply of natural agents of which new
competitors in any industry may avail themselves has been largely
exhausted, or has been gathered up by existing monopolies to render
their position more secure; the world has not the natural resources to
develop that she had a century ago. Second, the concentration of all the
productive industries, except agriculture, into great establishments,
while it has enormously lessened the cost of production, has so reduced
the number of competing units that a monopoly is the inevitable final
result. Last, the enormous capital required for the establishment and
maintenance of new competing units tends to fortify the monopoly in its
position and render the escape of the public from its grasp practically
impossible. These terse statements contain exactly the kernel of potent
truth for which we are seeking; MONOPOLIES OF EVERY SORT ARE AN
INEVITABLE RESULT FROM CERTAIN CONDITIONS OF MODERN CIVILIZATION.
The vital importance of this truth cannot be over-estimated. For so long
as we refuse to recognize it, so long as we attempt to stop the present
evils of monopoly by trying to add a feeble _one_ to the number of
competing units, or by trying to legislate against special monopolies,
we are only building a temporary dam to shut out a flood which can only
be controlled at the fountain head.
The facts of history testify to the truth of this law. Monopolies were
never so abundant as to-day, never so powerful, never so threatening;
and with unimportant exceptions they have all sprung up with our modern
industrial development. The last fifteen years have seen a greater
industrial advancement than did the thirty preceding, but they have also
witnessed a more than proportionate growth of monopolies. How worse than
foolish, then, is the short-sightedness that ascribes monopolies to the
personal wickedness of the men who form them. It is as foolish to decry
the wickedness of trust makers as it is to curse the schemes of labor
monopolists. Each is working unconsciously in obedience to a natural
law; and the only reason that almost every man is not engaged in forming
or maintaining a similar monopoly is that he is not placed in similar
circumstances. Away, then, with the pessimism which declares that the
prevalence of monopolies evidences the decay of the nobler aspirations
of humanity. The monopolies of to-day are a natural outgrowth of the
laws of modern competition, and they are as actually a result of the
application of steam, electricity, and machinery to the service of man,
as are our factories and railways. Great evils though they may have
become, there is naught of evil omen in them to make us fear for the
ultimate welfare of our liberties.
To the practical mind, however, the question at once occurs, what light
have we gained toward the proper method of counteracting this evil? Can
it be true that the conditions of modern civilization necessitates our
subjection to monopolies, and that all our vaunted progress in the arts
of peace only brings us nearer to an inevitable and deplorable end, in
which a few holders of the strongest monopolies shall ride rough shod
over the industrial liberties of the vast mass of humanity? Were this
true, perhaps we had better take a step backward; relinquish the factory
for the workshop, the railway for the stage-coach. "Better it is to be
of an humble spirit with the lowly, than to divide spoil with the
proud." But the law we have found commits us to no such fate. We
cannot, indeed, abolish the causes of monopolies. We cannot create new
gifts of Nature, and it would be nonsense to attempt to bring about an
increase in the number of competing units and a decrease in the
capitalization of each by exchanging our factories and works of to-day
for the workshops of our grandfathers. But while monopolies are
inevitable, our _subjection_ to them is not inevitable; and when the
public once comes to fully understand that _the remedy for the evils of
monopoly is not abolition, but control_, we shall have taken a great
step toward the settlement of our existing social evils. To discuss the
details of the remedy, so far as it can be done in a volume of this
sort, belongs properly to a later chapter. Before undertaking it,
however, it seems well to devote some further attention to the evils
which the attempt to abolish monopolies and adhere to the ideal system
of universal competition has brought upon us, and to make, also, some
further study of the general evils due to monopoly.