In highly organised trades, where the natural effects of free competition have been fully manifested, we find that the hope of a profitable business is entirely based upon the possibility that a trade agreement will so mitigate competition as to allow a rate of selling prices to obtain which remains considerably higher than that which free competition would allow.
As the field of competition is narrowed to a comparatively few large competitors, there arises a double inducement to suspend or mitigate hostilities; as the competition is fiercer more is gained by a truce; as the number of combatants is smaller, a truce can be more easily formed and maintained. In most machine-using countries each branch of a staple industry endeavours to protect itself from free competition by a combination of masters to fix a scale of prices. This is the normal condition of trade in England to-day. These combinations to fix and maintain prices are not equally successful in all trades, but they are always operative to a more or less extent in modifying or retarding the effects of competition. Where trade unions of operatives are strong, well-informed, and resolute, or where outsiders have large facilities for investing capital and dividing the trade, the endeavours to maintain prices and to secure a higher than the competitive rate of profits are unsuccessful. The joint operation of both these conditions in the cotton-spinning trade explains why the Lancashire spinners have been unable to check the effects of cut-throat competition. But throughout all branches of textile, metal, pottery, engineering, and machine-making trades strong and persistent endeavours are made by co-operative action of capitalists to limit competition by fixing a scale of prices which should not be underbid.
Where competing railways fix a tariff of rates for carriage, or competing manufacturers fix a scale of prices for their goods, their object is to secure to themselves in higher profits a portion or the whole of the productive and competitive economies attending large-scale production, instead of allowing them by unrestricted competition to pass into the hands of their customers. Suppose that a number of steel rail manufacturers freely competing would drive down the selling price to £1 a ton, but that by a trade agreement they maintain £1 10s. as the minimum price, 10s. per ton represents the economies of production which they divert from their customers into their own possession by a limitation of the competition. Part of the 10s. may represent the actual saving of the labour which would have been spent in competition as prices fell from £1 10s. to £1. Part may represent a taking in higher profits of some of the economies of new machinery or improved methods of production common to the competing firms, and which would inevitably have led to a fall of price if the competitive process had been allowed free play.
The prices thus fixed are monopoly prices—that is to say, they are determined by the action of a number of competing capitals which at a certain point agree to suspend their conflict and act as a single capital; when the bidding is above a certain figure they are many, when it is below that figure they are one. The condition in such a trade is one of limited monopoly. The prices fixed by such trade agreements will generally be different from those of a single firm with the absolute monopoly of a market, whose prices are arranged to yield the maximum net profit on the capital engaged. For since the economies of competition and some of the economies of production would be far greater for a single producing firm with a monopoly, the schedule of supply prices measuring the expenses of producing the different quantities of goods will be different, and this difference will be reflected in a different scale of non-competitive market prices from that which would issue from a trade agreement. Moreover, a loose voluntary compact between trade rivals yields a monopoly of a far feebler order than does the unity of a single capital. If a scale of prices were fixed which would yield a considerably higher profit than the market rate, the temptation to secure a larger share of trade by secret underbidding through commissions, drawbacks, or otherwise, or even by an open cutting of rates, is very powerful. Moreover, the ability of a number of firms with conflicting interests to secure this monopoly by quick and vigorous repression of the attempts of outside capital to come in either for the purpose of sharing the higher profits, or of being bought out, is far less than in the case of a single monopolist firm. So the scale of prices fixed by a number of competing firms will generally be nearer to the competition prices than would be the case with the prices of a single monopolist.
§ 5. The recognition of the advantages of limiting competition by price tariffs, and the experience of the difficulty of maintaining such tariffs, lead competing businesses to take further steps in the curtailment of competition. Where a powerful trade opinion can be focussed on an offender against the scale, where he can be boycotted or otherwise subjected to punishment, and where outsiders can be prevented from intruding into the trade, a common scale of profitable prices can often be maintained with the verbal or even the tacit consent of those concerned. This is the case in many manufactures where the fixed and well-known character of the goods makes a close price-list possible. Retail dealers in local markets are often able to keep a close adherence to a rigid scale by the pure force of esprit de corps. The price of bread, meat, milk, coals, and other articles sold locally by well-known measures, is seldom, if ever, regulated by free competition among the vendors. In articles where more depends upon the individual quality of wares, and where a rigid tariff is less easily fixed and less easily maintained, as in the case of vegetables, fruit, fish, and groceries, trade agreements are less easy to maintain. Still more difficult is it to maintain a tariff for articles of dress or adornment of the person or the house, and in other articles where the consumer is less confined to a narrow local market.
The general experience of manufacturing and mercantile businesses, where each firm is closely confronted by other firms of similar capacity and equipment at every point in the market, indicates an increasing difficulty in maintaining prices at a profitable level. Everywhere complaints are heard of a reckless use of the productive power of machinery, of over-stocked markets, of a cutting of prices in order to get business, and of a growing inability to make a living rate of profit.
§ 6. The endeavour of a number of individual businesses in a trade to fix and maintain a certain profitable scale of prices is constantly frustrated. The introduction of new machinery enabling certain firms to make a profit at prices below the tariff induces them to utilise their full productivity, cut prices, and still sell at a profitable price; others involved in the meshes of speculative production are compelled to cut prices and effect sales even at a loss; the difficulty of finding safe investments drives new capital into the hands of company-promoters, who fling it with criminal negligence into this or that branch of production, underbidding the tariff to win a footing in the market. All these forces render loose agreements to limit competition more and more inadequate to secure their purpose. Frequent experience of the impotence of these partial forms of co-operation drives trade competitors to seek ever closer forms of combination. An issue of this necessity is the Syndicate and the Trust. By raising the co-operative action so as to cover the whole, and by thus reducing the competition to zero, it is hoped that a union may be formed strong enough to maintain monopoly prices. Thus the Trust is seen as the logical culmination of the operation of economic forces which have been continually engaged in diminishing the number of effective competitors, while increasing their size and the proportion of their energy devoted to the competition.
At each stage in the process the smaller competitors are eliminated, and the larger driven to increase their size so that the whole may be illustrated by a pyramid, the base or first stage of which consists of a larger number of small units, and each higher stage of a smaller number of larger units, with a Trust or Monopoly Syndicate for its apex.
§ 7. The motive which induces a number of businesses hitherto separate, or associated merely for certain specific actions, such as the fixing of prices or wages, to amalgamate so that they form a single capital on which a single rate of interest is paid, is a double-edged one. There is, on the one hand, the desire to protect themselves against excessive competition and cutting of rates, and on the other hand a desire to secure the advantages which arise from monopoly. The way in which Syndicates and Trusts are regarded depends very much from which of these two aspects they are regarded. Those who consider these business "combines" as arbitrary and high-handed interferences with freedom of commerce, undertaken in order to place in the hands of a few persons a power to rob and oppress the consuming public by legalised extortion, regard the motive of combination to be monopoly. On the other hand, the combining firms represent themselves as the victims of circumstances, bound in self-protection to combine. Our analysis of the operations of commercial competition enables us to see that these two forces are not really separate, but are only two ways of looking at the same action. Every avoidance of so-called "excessive" competition is ipso facto an establishment of a monopoly. The tariff of prices established a weak and partial monopoly. The "combine," whether it takes the name of "ring," "syndicate," or "trust," succeeds, in so far as it establishes a stronger and more absolute monopoly.
In their economic aspect these terms are somewhat vague, the vagueness arising in some degree from the changing and secret shapes these combinations often find it convenient to adopt in order to preserve the appearance of competition, or to avoid public obloquy or legal interference. "Combine" is probably the generic term which covers all these operations. A syndicate of capitalists are said to form a "combine" with the view of controlling prices so as to pay a profitable interest. If they apply their capital not to the acquisition of the plant and machinery of manufacture with the view of regulating production, but directly and mainly to the planning of some speculative stroke or series of strokes in the produce market, obtaining temporary control of sufficient goods of a particular kind to enable them to manipulate prices, they are said to form a "corner" or "ring." Such forms of combined action are generally of short duration. Technically they consist in an artificial diversion[125] of a particular class of goods from the ordinary channel of a number of competing owners into a single ownership, so that they may be held and placed upon the supply market at such times and in such ways as to enable the owner to obtain a famine price. The following description of a wheat "corner" will serve to exemplify this method of "combine":—