The Principles of Economics, with Applications to Practical Problems

by Frank A. Fetter

EFFECT OF TRUSTS ON PRICES

§ I. HOW TRUSTS MIGHT AFFECT PRICES

Economics of the trust problem

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

Limited power of trusts

Monopoly and supply

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

Monopoly price is therefore a rational thing, not a mystery entirely out of harmony with the simple law of value laid down for consumption goods. The trust works as the magician does, not as was thought of old, in defiance of natural laws, but in harmony with them and by their aid. The view the public took of the trusts was at first medieval. That should not be the view to-day.

Monopolistic gains from successful combination

3. The economies of large production after a successful combination may be divided in varying proportions among monopolists, workmen, and consumers. If the great economies of large production are effected by a new combination which makes no attempt to fix a higher price and limit production, where will the fruits of these economies go? They will go first to the owners of the trust, because, unless inspired by motives of philanthropy, they have no need to lower prices. Though they are in possession of special facilities, they will try to secure as high a price as before. A wider margin permits greater profits on each unit without limiting the output or the sales. They may retain this so long as they do not yield to the temptation to increase the output in proportion to their new facilities.

Gains to workmen

These economies, may, however, at times inure to the benefit of the workmen in higher wages if they succeed by any means whatever in squeezing the employers at this time of exceptional gains. The suggestion has even come from employers that in order to allay labor troubles there should be a union of capital and labor to squeeze the consumer, by doing away with all competition in fixing prices. This proposition to divide the plunder of monopoly has been viewed approvingly by some leaders of organized labor, but it does not look especially alluring to the general public, to which is assigned the humble part of paying the bill.

Gains to consumers

Part of the advantages will go to the consumer whenever there is a motive on the part of the large establishment to increase supply in order to get a larger profit or to forestall new competition. As the improvements become matters of public knowledge, most of the new economic methods can and will be adopted by new enterprisers, and other large aggregations of capital will be induced to come in to reap the benefits. The effect, of course, is an increase in supply and a lowering of prices. The fiat of the trust to prices to remain fixed while supply increases is as vain as a mortal's commands to the waves to be still. The undesigned result of the economies of large production, therefore, where control is not great, is to lower the prices and to diffuse the benefits among the public.

Social burden of monopoly profits

4. If the trust succeeds in raising its prices it gains at the expense of the community. If a producer has some monopoly power, recognizes and uses it, his gain does not correspond with an increase in production. It is taken from those who buy these products, it is deducted from the psychic incomes of other members of society. This raising of prices actually reduces technical production, for the output is limited in order to secure the higher price. The probably less urgent wants of the receivers of monopoly incomes are gratified in place of the probably more urgent wants of the average purchaser. The result is a decreased social income, with an increase of the inequality of distribution. There is an analogy here with the effects of trade-unions. If the trade-union succeeds in forcing prices higher than the competitive prices, it gains at the expense of the other portion of the community. But while its gains appear to be more largely at the expense of the richer elements of society, the gains of the trust are more likely at the expense of the poorer elements. If the success of organized labor means to some extent a leveling up of income, the success of the trust means a still further inequality. Hence a difference in public sympathy in the two cases.

The praise and blame for trust prices

5. The responsibility for either the rise or the decline of trust prices cannot always be determined. Prices are changing constantly under competitive conditions. In this active, moving world, changes of demand, the exhaustion of sources of supply, new processes, expiration of patents, opening up of new lines of transportation, affect prices in a multitude of ways entirely independent of organization. Trust-controlled industries are open to all these influences. Economic forces cannot be isolated as can elements in a chemical laboratory, and, therefore, trusts claim the credit for all the reductions of price that have occurred. By such a calculation the trusts usually make a showing of progress, as, until 1896, for twenty years the tendency of prices in most lines was downward. Always getting the highest price they can under the market conditions, they yet pose as benefactors. They would claim that the economies possible only under trust organization cause even a monopoly price to be less than a competitive price would be. Critics of the trusts, on the other hand, charge them with causing all the increase that occurs, and with checking the decline in prices. The critics compare the percentages of decline in price during the decades before and after the combination was formed, and as it is impossible for a geometric rate of decrease in price, as a result of improvements, to be long maintained, this showing is very unfavorable to the trusts. A method has been found, however, of testing, in the case of a few leading industries, the effects they have had on the price of their portion of the productive process.

§ II. HOW TRUSTS HAVE AFFECTED PRICES

Trusts raise prices

The oil trust

1. Examination of the course of prices in the case of some notable trusts shows that, wherever effective, they raise prices above the competitive rate possible to smaller production. The most instructive study in the subject is that undertaken by J. W. Jenks a number of years ago, and later developed by him when working with the Industrial Commission from 1898 to 1900. Its results are embodied in a series of charts. It appears that the price of refined petroleum, in 1871, was twenty-five and seven tenths cents per gallon; in 1880, eight and six tenths cents; in 1887, seven and eight tenths cents; in 1900, seven and eight tenths cents. A writer in the "North American Review" claims that this decline was due to the economies accomplished by the Standard Oil Trust. It will be noticed, however, that prices fell most rapidly (from twenty-five and seven tenths cents to eight and six tenths cents) between 1871 to 1880, a period of intense competition, when the industry was new, and when the independent companies, fighting for their existence, introduced many improvements and began the construction of the pipe-lines that were later secured by the Standard Oil Co. Despite this rapid decline, the smaller companies still could have maintained a profitable business had it not been for the ruinous discrimination of the railroads against them. Because of this, the Standard Oil Co., in 1880, obtained almost complete control. The price twenty years later than that date was less than a cent cheaper. In the meantime the price for a time continued to fall. Competition was never quite stilled. The small competitor, wherever he saw a chance, has nibbled off a bit of the tempting profits. The rise from 1898 to 1900 was in accord with that occurring in other lines. A much lower cost of production is now possible to the great monopoly with its larger sales and more economical methods. The by-products, unknown at the beginning of the period, now yield large sums, yet the price remains much the same as a quarter of a century ago. The trust has succeeded in retaining a large part of the increasing margin of price over cost.

The sugar trust

The influence of the sugar trust may be studied by what is known as the method of differentials. The differential in sugar is the difference between the cost of the raw sugar and the refined granulated sugar. Raw sugar is the main material and the principal fluctuating item of cost beyond the control of the trust. Changes in the differential reflect the changes in profits except as modified by a cheapening of the process. The period from 1880 to 1887 was one of great competition. In 1880, the differential was one and ninety-two hundredths cents on each pound of refined sugar, but it fell steadily till, in 1887, it had reached sixty-four hundredths cents. In the fall of that year the trust was formed; and the next year the differential had risen to one and twenty-five hundredths cents, in 1889 to one and thirty-two hundredths cents. Tempted by the enormous profits, the rival refineries of Claus Spreckel were started, and with competition the differential fell, in 1890, to seventy hundredths cents. The rival factories were then bought up and under the new combination the differential went sailing up to one and three hundredths in 1892, and to one and fifteen hundredths in 1893. Rival factories again arose and competition grew stronger, reducing the differential to ninety-four hundredths in 1894. It was in that year that the firm of Arbuckle Brothers and Claus Doscher each opened a great refinery, and in the next year the differential fell to fifty hundredths cents. In 1900, some agreement, the terms of which were unknown to the public, was entered into by the rivals and the differential had risen, in March, 1901, to ninety-five hundredths cents. In every case the differential fell when competition was effective and went up when monopoly power was regained.

The nail trust

The differential of steel-wire nails is the difference between the cost of the steel billets and the price of the wire. Between 1890 and 1895 there was a steady decline in the differential. In 1895 was formed the nail pool, an agreement to share the profits, a form of combination. A rapid advance took place, both in the price and in the differential. In the fall of 1896 the pool was broken and then occurred a fall in prices and in the differential during 1896-97. In January, 1899, the nail trust was formed, controlling sixty-five to ninety-five per cent. of the output of wire nails, and a rapid advance occurred in the price and also in the differential.

The tin-plate trust

The tin-plate industry practically had its origin in the United States, in 1892, under the McKinley tariff. As competition increased, prices and the differential fluctuated and declined. At the end of 1898 the tin-plate company was formed and prices at once started upward with a rapid increase in the differential. Cause may, in a measure, be mistaken here for effect. In these cases the part of the rise in price due to the rise of materials is not brought about by the trust. The differential represents its part of the productive process and its source of profits. The power to make the differential high is due in part to the general conditions of business in the last three years considered. The profits of all industries in those years increased. While prices may have risen partly because the trust was formed, it may have been possible to form the trust because prices were rising. The general conclusion is that trust prices are always raised when, and to the extent that, control is secured. They are lowered below normal prices when competition becomes troublesome. Fluctuation of prices probably has been more rapid and more spasmodic under trusts than it has been under ordinary competitive conditions.

Effective trusts injure various producers

2. A large degree of monopoly control may lower the incomes of producers of materials, the value of competitive plants, and prices in special local markets. A strong selling monopoly tends to become also a buying monopoly. A great industry using great quantities of materials may either own the sources or purchase from small producers. The steel trust owns mines, and ships and railroads to bring the ore to the furnaces; but the tobacco trust buys from the farmers. If the packing, refining, and marketing of a product is monopolized, the sellers of the raw or partly finished product are subject to one-sided competition. The small producers of tobacco, of crude oil, and of anthracite coal claim that the effect of the trusts is to give them lower prices for their products. Some have been severely punished by the monopolies for refusing to take the first offer made. Monopoly is thus likewise able to purchase competing plants at ridiculously small sums, by first making them valueless through fierce price-cutting, or by threats of it. "Rich" is often a relative term, and it is said that many a small millionaire producer has anxiously waited to see whether the great trust would next turn its attention to him.

The persistence of competition reducing prices

3. Competition of less capable producers works in most cases to prevent the great or continued rise of trust prices. Early trusts overestimated their power. The persistence of competition in industries where the trusts have had great advantages in position and resources has been astonishing. The wall-paper trust, though for many years it kept prices above competitive rates, was repeatedly undermined by competition. The whisky trust, while it frequently raised prices, was as often forced by the growth of small distilleries to lower them below competitive rates. Competition in the oil industry has persisted under the greatest difficulties. The smaller companies have hauled the product by wagon when the trust was moving it by pipe-lines. The continuance of high prices by a trust depends on a high degree of control of supply. A recognition of the limits of their power has led trusts in some cases to a policy of moderate prices, affording a good profit, but not encouraging competition.

Supply as the condition of low prices

The limits of the power of the trust to control prices are strikingly shown by the fact that it cannot even insure low prices if the market conditions do not justify them. The steel trust, in 1902-3, declared that it would not advance the price of steel rails above twenty-eight dollars, and this was hailed as a beneficent effect of trust control, which, by equalizing production, could prevent excessive fluctuations of price. But the trust's declaration was a bit of inexpensive humor on the part of the managers; the trust had nothing to sell at the price quoted, as its entire product had been sold out months in advance. While, therefore, the trust continued calmly to quote steel rails at twenty-eight dollars, competition raised the market price to thirty-three dollars a ton; twenty-eight dollars or more was paid for second-hand rails, and a proportionate price for other iron products. Such exceptional conditions, raising prices to abnormal levels, are followed by a decline disastrous not only to the small producer, but to the trusts as well.

Modes of controlling trusts

4. The control of the trusts must be sought in the direction of maintaining potential competition through fair and free conditions of industry. Many of the remedies suggested are reactionary and would give up the benefits of large production. Measures must be sought in harmony with the economic principles of price. Since many of the trusts have grown wealthy by special shipping privileges from the great quasi-public corporations, the railroads, and by special favors from public or corporation officers, who have been false to their duties, the solution must be a political and moral one; it must be sought in the development of honest citizenship and of a more efficient social regulation of quasi-public industries. The conditions of competition may be made fairer by requiring publicity of accounts, and by making it impossible for great corporations to strangle their local competitors by special and temporary prices. The state here has the same duty to perform that it has to protect the weak man from personal violence at the hands of the strong. This will not prevent competition, but it will determine the ways in which the rivalries of men can be manifested. Any measures for controlling the great combinations must start from a right understanding of the law of value, neither underestimating nor overestimating their economic power. Public sentiment toward the trust question has changed somewhat in recent years, because the nature of trusts and the extent of their power are better understood. There is now less fear of them, and more confidence that they can be tamed and made to serve the welfare of society.

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