The Evolution of Modern Capitalism: A Study of Machine Production

by J. A. Hobson

§ 3. Power over Employees of a Trust.

§ 4. Power over Consumers.

§ 5. Determinants of a Monopoly Price.

§ 6. The Possibility of low Monopoly Prices.

§ 7. Considerations of Elasticity of Demand limiting Prices.

§ 8. Final Summary of Monopoly Prices.

§ 1. It remains to investigate the actual economic power which a "monopoly" possesses over the several departments of an industrial society. Although the "trust" may be taken as the representative form of monopoly of capital, the economic powers it possesses are common in different degrees to all the other weaker or more temporary forms of combination, and to the private business which, by the possession of some patent, trade secret, or other economic advantage, is in control of a market. These powers of monopoly may be placed under four heads in relation to the classes upon whose interests they operate—(a) business firms engaged in an earlier or later process of production; (b) actual and potential competitors or business rivals; (c) employees of the Trust or other monopoly; (d) the consuming public.

(a) The power possessed by a monopoly placed in the transport stage, or in one of the manufacturing or merchant stages, to "squeeze" the earlier or less organised producers, has been illustrated by the treatment of farmers by the railways and by the Elevator Companies and the Slaughtering Companies of the United States. The Standard Oil Trust, as we saw, preferred, until quite recently, to leave the oil lands and the machinery for extracting crude oil in the hands of unattached individuals or companies, trusting to their position as the largest purchasers of crude oil to enable them to dictate prices. The fall in the price paid by the company for crude oil from 9.19 cents in 1870 to 2.30 in 1881, when the Trust was formed, and the maintenance of an almost uniform lower level from 1881 to 1890, testifies to the closeness of the grip in which the company held the oil producers; for although improvements in the machinery for sinking wells and for extracting oil took place during the period, these economies in production do not at all suffice to explain the fall. Indeed, the method of the company's transactions with the oil producers, as described by their own solicitor in his defence of the Trust, is convincing testimony of their control of the situation:—"When the producer of oil puts down a well, he notifies the pipe line company (a branch of the Trust), and immediately a pipe line is laid to connect with his well. The oil is taken from the tank at the well, whenever requested, into the large storage tanks of the company, and is held for the owner as long as he desires it. A certificate is given for it, which can be turned into cash at any time; and when sold it is delivered to the purchaser at any station on the delivery lines."[138] In similar fashion the Sugar Trust, before the competition of the Spreckles refineries arose, controlled the market for raw sugar. Nor was this power exercised alone over the producers of raw sugar. It extended to dictating the price at which the wholesale grocers who took from them the refined sugar should sell to their customers.[139] This power of a monopoly is not merely extended to the control of prices in the earlier and later processes of production and distribution of the commodity. One of the most potent forms it assumes in manufactures where machinery is much used is a control over the patentees and even the manufacturers of machinery. Where a strong Trust exists, the patentee of a new invention can only sell to the Trust and at the Trust's price. Charges are even made against the Standard Oil Trust and other powerful monopolies to the effect that they are in the habit of appropriating any new invention, whether patented or not, without paying for it, trusting to their influence to avoid the legal consequences of such conduct. There is indeed strong reason to believe that the irresponsible position in which some of these corporations are placed induces them to an unscrupulous use of their great wealth for such purposes.

§ 2. (b) Since the prime object of a Trust is to effect sales at profitable prices, and prices are directly determined by the quantitative relation between supply and demand, it is clearly advantageous for a Trust to obtain as full a power in the regulation of the quantity of supply as is possible. In order to effect this object the Trust will pursue a double policy. It will buy up such rival businesses as it deems can be worked advantageously for the purposes of the Trust. The price at which it will compel the owners of such businesses to sell will have no precise relation to the value of the business, but will depend upon the amount of trouble which such a business can cause by refusing to come into the Trust. If the outstanding firm is in a strong position the Trust can only compel it to sell, by a prolonged process of cutting prices, which involves considerable loss. For such a business a high price will be paid. By this means a strongly-established Trust or Syndicate will bring under its control the whole of the larger and better-equipped businesses which would otherwise by their competition weaken the Trust's control of the market. A smaller business, or an important rival who persistently stands out of the Trust, is assailed by the various weapons in the hands of the Trust, and is crushed by the brute force of its stronger rival. The most common method of crushing a smaller business is by driving down prices below the margin of profit, and by the use of the superior staying power which belongs to a larger capital starving out a competitor. This mode of exterminating warfare is used not merely against actually existing rivals, as where a railway company is known to bring down rates for traffic below cost price in order to take the traffic of a rival line, but is equally effective against the potential competition of outside capital. After two or three attempts to compete with Jay Gould's telegraph line from New York to Philadelphia had been frustrated by a lowering of rates to a merely nominal price, the notoriety of this terrible weapon sufficed to check further attempts at competition. In this way each strongly-formed Trust is able to fence off securely a certain field of investment, thus narrowing the scope of use for any outside capital. This employment of brute force is sometimes spoken of as "unfair" competition, and treated as something distinct from ordinary trade competition. But the difference drawn is a purely fallacious one. In thus breaking down a competitor the Trust simply makes use of those economies which we have found to attach to large-scale businesses as compared with small. Its action, however oppressive it may seem from the point of view of a weaker rival, is merely an application of those same forces which are always operating in the evolution of modern capital. In a competitive industrial society there is nothing to distinguish this conduct of a Trust in the use of its size and staying power from the conduct of any ordinary manufacturer or shopkeeper who tries to do a bigger and more paying business than his rivals. Each uses to the full, and without scruple, all the economic advantages of size, skill in production, knowledge of markets, attractive price-lists, and methods of advertisement which he possesses. It is quite true that so long as there is competition among a number of fairly equal businesses the consuming public may gain to some extent by this competition, whereas the normal result of the successful establishment of a Trust is simply to enable its owners to take higher profits by raising prices to the consumer. But this does not constitute a difference in the mode of competition, so that in this case it deserves to be called "fair," in the other "unfair."

It is even doubtful whether such bargains as that above described between the Standard Oil Company and the Railways, whereby a discriminative rate was maintained in favour of the Company, is "unfair," though it was underhand and illegal. In the ordinary sense of the term it was a "free" contract between the Railways and the Oil Company, and in spite of its discriminative character might have been publicly maintained had the law not interfered on a technical point. The same is even true of the flagrant act of discrimination described by Mr. Baker:—"A combination among manufacturers of railway car-springs, which wished to ruin an independent competitor, not only agreed with the American Steel Association that the independent company should be charged $10 per ton more for steel than the members of the combine, but raised a fund to be used as follows: when the independent company made a bid on a contract for springs, one of the members of the Trust was authorised to under-bid at a price which would incur a loss, which was to be paid out of the fund. In this way the competing company was to be driven out of business."[140] These cases differ only in their complexity from the simpler modes of underselling a business rival. Mean, underhand, and perhaps illegal many of these tactics are, but after all they differ rather in degree than in kind from the tactics commonly practised by most businesses engaged in close commercial warfare. If they are "unfair," it is only in the sense that all coercion of the weak by the strong is "unfair," a verdict which doubtless condemns from any moral standpoint the whole of trade competition, so far as it is not confined to competing excellence of production.