The Evolution of Modern Capitalism: A Study of Machine Production

by J. A. Hobson

§ 2. To the class Economies in Competitive Power belong those advantages which a large business enjoys in competing with smaller businesses, which enable it either to take trade away from the latter, or to obtain a higher rate of profits without in any way increasing the net productiveness of the community. This includes—

(1) A large portion of the economy in advertising, travelling, local agents, and the superiority of display and touting which a large business is able to afford. In most cases by far the greater part of this publicity and self-recommendation is no economy from the standpoint of the trade or the community, but simply represents a gain to one firm compensated by a loss to others. In not a few cases the "trade" may be advantaged to the damage of other trades or of the consumer, as when a class of useless or deleterious drugs is forced into consumption by persistent methods of self-appraisal which deceive the public.

(2) The power of a large business to secure and maintain the sole use of some patent or trade secret in machinery or method of manufacture which would otherwise have gone to another firm, or would have become public property in the trade, represents no public economy, and sometimes a public loss. Where such improvement is due solely to the skill and enterprise of a business man, and would not have passed into use unless the sole right were secured to his business, this economy belongs to the productive class.

(3) The superior ability of a large business to depress wages by the possession of a total or partial monopoly of local employment, the corresponding power to obtain raw material at low prices, or to extort higher prices from consumers than would obtain under the pressure of free competition, represent individual business economies which may enable a large business to obtain higher profits.

§ 3. Now all these forces operative in trades which are said to be subject to the law of increasing returns tend to increase the size and to diminish the number of businesses competing within a given area. In some industries the expanding size of the market or area of competition keeps pace with this movement, so that the total number of the larger competitors within the market may be as great as before. But in most of the markets the growing scale of the business is attended by an absolute diminution in the number of effective competitors, or at any rate by an increase which is very much smaller than the increase in the amount of trade that is done.

So long as we have merely the substitution of a smaller number of large competing businesses for a larger number of small ones, no radical change is effected in the nature of industry. So long as every purchaser is able to buy from two or more equally developed and effectively competing firms he can make them bid against one another until he obtains the full advantage of the economies of large-scale production which are common to them. So long as there remains effective competition, all the productive economies pass into the hands of the consumer in reduction of price. Nay, more than this, a competing firm cannot keep to itself the advantages of a private individual economy if its competitor has another private economy of equal importance. If A and B are two closely competing firms, A owning a special machine capable of earning for him 2 per cent. above the normal trade profit, and B owning a similar advantage by possession of "cheaper labour," these private economies will be cancelled by competition, and pass into the pocket of the consuming public.

There is every reason to believe that with a diminution in the number of competitors and an increase of their size, competition grows keener and keener. Under old business conditions custom held considerable sway; the personal element played a larger part alike in determining quality of goods and good faith; purchasers did not so closely compare prices; they were not guided exclusively by figures, they did not systematically beat down prices, nor did they devote so large a proportion of their time, thought, and money to devices for taking away one another's customers.[124] From the new business this personal element and these customary scruples have almost entirely vanished, and as the net advantages of large-scale production grow, more and more attention is devoted to the direct work of competition. Hence we find that it is precisely in those trades which are most highly organised, provided with the most advanced machinery, and composed of the largest units of capital, that the fiercest and most unscrupulous competition has shown itself. The precise part which machinery, with its incalculable tendency to over-production, has played in this competition remains for later consideration. Here it is enough to place in evidence the acknowledged fact that the growing scale of the business has intensified and not diminished competition. In the great machine industries trade fluctuations are most severely felt; the smaller businesses are unable to stand before the tide of depression and collapse, or are driven in self-defence to coalesce. The borrowing of capital, the formation of joint-stock enterprise and every form of co-operation in capital has proceeded most rapidly in the textile, metal, transport, shipping, and machine-making industries, and in those minor manufactures, such as brewing and chemicals, which require large quantities of expensive plant. This joining together of small capitals to make a single large capital, this swallowing up of small by large businesses, means nothing else than the endeavour to escape the risks and dangers attending small-scale production in the tide of modern industrial changes. But since all are moving in the same direction, no one gains upon the other. Certain common economies are shared by the monster competitors, but more and more energy must be given to the work of competition, and the productive economies are partly squandered in the friction of fierce competition, and partly pass over to the body of consumers in lowered prices. Thus the endeavour to secure safety and high profits by the economies of large-scale production is rendered futile by the growing severity of the competitive process. Each big firm finds itself competent to undertake more business than it already possesses, and underbids its neighbour until the cutting of prices has sunk the weaker and driven profits to a bare subsistence point for the stronger competitors.

So long as the increased size of business brings with it a net economic advantage, the competition of ever larger competitors, whose total power of production is far ahead of sales at remunerative prices, and who are therefore constrained to devote an increased proportion of energy to taking one another's trade, must intensify this cut-throat warfare. The diminishing number of competitors in a market does not ease matters in the least, for the intensity of the strife reaches its maximum when two competing businesses are fighting a life or death struggle. As the effective competitors grow fewer, not only is the proportion of attention each devotes to the other more continuous and more highly concentrated, but the results of success are more intrinsically valuable, for the reward of victory over the last competitor is the attainment of monopoly.

§ 4. To keen-eyed business men engaged in the thick of large-scale competition it becomes increasingly clear that good profits can only be obtained in one of two ways. A successful firm must either be in possession of some trade secret, patent, special market, or such other private economy as places it in a position of monopoly in certain places or in certain lines of goods, or else it must make some arrangement with competing firms whereby they shall consent to abate the intensity or limit the scope of their competition. It will commonly be found that both these conditions are present where a modern firm of manufacturers or merchants succeeds in maintaining during a long period of time a prosperous or paying business. The firm, though in close competition over part of the field of industry, will have a speciality of a certain class of wares, at any rate in certain markets, and it will be fortified by a more or less firmly fixed rate of prices extending over the whole class of commodities. Both of these forces signify a restriction upon competition.

To the older economists, who regarded free competition as the only safe guarantee of industrial security and progress, it appeared natural that capitalists continually engaged in the maximum competition would yet secure a living rate of profit, for if this were not the case, they ingenuously urged, capital would cease to remain in such a trade. With the fallacy involved in this theory we shall deal in a later chapter. It is sufficient here to observe that where keen competition is operative in modern machine industries the average rate of profits obtained for capital is generally below that which would suffice to induce new capital invested with full knowledge to come into the trade.