THE SOURCES OF MONOPOLY
There are three major sources of monopoly: "technical" considerations, direct and indirect governmental assistance, and private collusion.
1. Technical Considerations As pointed out in chapter ii, monopoly arises to some extent because technical considerations make it more efficient or economical to have a single enterprise rather than many. The most obvious example Is a telephone system, water system, and the like in an individual community. There is unfortunately no good solution for technical monopoly. There is only a choice among three evils: private unregulated monopoly, private monopoly regulated by the state, and government operation.
It seems impossible to state as a general proposition that one of these evils is uniformly preferable to another. As stated in chapter ii, the great disadvantage of either governmental regulation or governmental operation of monopoly is that it is exceedingly difficult to reverse. In consequence, I am inclined to urge that the least of the evils is private unregulated monopoly wherever this is tolerable. Dynamic changes are highly likely to undermine it and there is at least some chance that these will be allowed to have their effect. And even in the short run, there is generally a wider range of substitutes than there seems to be at first blush, so private enterprises are fairly narrowly limited in the extent to which it is profitable to keep prices above cost. Moreover, as we have seen, the regulatory agencies often tend themselves to fall under the control of the producers and so prices may not be any lower with regulation than without regulation.
Fortunately, the areas in which technical considerations make monopoly a likely or a probable outcome are fairly limited. They would offer no serious threat to the preservation of a free economy if it were not for the tendency of regulation, introduced on this ground, to spread to situations in which it is not so justified.
2. Direct and Indirect Government Assistance Probably the most important source of monopoly power has been government assistance, direct and indirect. Numerous examples of reasonably direct government assistance have been cited above. The indirect assistance to monopoly consists of measures taken for other purposes which have as a largely unintended effect the imposition of limitations on potential competitors of existing firms. Perhaps the three clearest examples are tariffs, tax legislation, and law enforcement and legislation with respect to labor disputes.
Tariffs have of course been imposed largely to "protect" domestic industries, which means to impose handicaps on potential competitors. They always interfere with the freedom of individuals to engage in voluntary exchange. After all, the liberal takes the individual, not the nation or citizen of a particular nation, as his unit. Hence he regards it just as much a violation of freedom if citizens of the United States and Switzerland are prevented from consummating an exchange that would be mutually advantageous as if two citizens of the United States are prevented from doing so. Tariffs need not produce monopoly. If the market for the protected industry is sufficiently large and technical conditions permit many firms, there can be effective competition domestically in the protected industry, as in the United States in textiles. Clearly, however, tariffs do foster monopoly. It is far easier for a few firms than for many to collude to fix prices, and it is generally easier for enterprises in the same country to collude than for enterprises in different countries. Britain was protected by free trade from widespread monopoly during the nineteenth and early twentieth centuries, despite the relatively small size of her domestic market and the large scale of many firms. Monopoly has become a much more serious problem in Britain since free trade was abandoned, first after World War I and then more extensively in the early 1930's.
The effects of tax legislation have been even more indirect yet not less important. A major element has been the linkage of the corporate and individual income tax combined with the special treatment of capital gains under the individual income tax. Let us suppose a corporation earns an income of $1 million over and above corporate taxes. If it pays the whole million dollars to its stockholders as dividends, they must include it as part of their taxable income. Suppose they would, on the average, have to pay 50 per cent of this additional income as income tax. They would then have available only $500,000 to spend on consumption or to save and invest. If instead the corporation pays no cash dividends to its stockholders, it has the whole million dollars to invest internally. Such reinvestment will tend to raise the capital value of its stock. Stockholders who would have saved the funds if distributed can simply hold the stock and postpone all taxes until they sell the stock. They, as well as others who sell at an earlier date to realize income for consumption, will pay tax at capital gains rates, which are lower than rates on regular income.
This tax structure encourages retention of corporate earnings. Even if the return that can be earned internally is appreciably less than the return that the stockholder himself could earn by investing the funds externally, it may pay to invest internally because of the tax saving. This leads to a waste of capital, to its use for less productive rather than more productive purposes. It has been a major reason for the post-World-War-II tendency toward horizontal diversification as firms have sought outlets for their earnings. It is also a great source of strength for established corporations relative to new enterprises. The established corporations can be less productive than new enterprises, yet their stockholders have an incentive to invest in them rather than to have the income paid out so that they can invest it in new enterprises through the capital market.
A major source of labor monopoly has been government assistance. Licensure provisions, building codes, and the like, discussed above have been one source. Legislation granting special immunities to labor unions, such as exemption from the antitrust laws, restrictions on union responsibility, the right to appear before special tribunals, and so on, are a second source. Perhaps of equal or greater importance than either is a general climate of opinion and law enforcement applying different standards to actions taken in the course of a labor dispute than to the same actions under other circumstances. If men turn cars over, or destroy property, out of sheer wickedness or in the course of exacting private vengeance, not a hand will be lifted to protect them from the legal consequences. If they commit the same acts in the course of labor dispute, they may well get off scot free. Union actions involving actual or potential physical violence or coercion could hardly take place if it were not for the unspoken acquiescence of the authorities.
3. Private Collusion The final source of monopoly is private collusion. As Adam Smith says, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."3 Such collusion or private cartel arrangements "are therefore constantly arising. However, they are generally unstable and of brief duration unless they can call government to their assistance. The establishment of the cartel, by raising prices, makes it more profitable for outsiders to enter the industry. Moreover, since the higher price can be established only by the participants' restricting their output below the level that they would like to produce at the fixed price, there is an incentive for each one separately to undercut the price in order to expand output. Each one, of course, hopes that the others will abide by the agreement. It takes only one or at most a few "chiselers" -- who are indeed public benefactors -- to break the cartel. In the absence of government assistance in enforcing the cartel, they are almost sure to succeed fairly promptly.
The major role of our antitrust laws has been to inhibit such private collusion. Their main contribution in this respect has been less through actual prosecutions than by their indirect effects. They have ruled out the obvious collusive devices -- such as the public get-together for this specific purpose -- and have therefore made collusion more expensive. More important, they have reaffirmed common law doctrine that combinations in restraint of trade are unenforceable in the courts. In various European countries, the courts will enforce an agreement entered into by a group of enterprises to sell only through a joint selling agency, committing the enterprises to pay specified penalties if they violate the agreement. In the United States, such an agreement would not be enforceable in the courts. This difference is one of the major reasons why cartels have been more stable and widespread in European countries than in the United States.
APPROPRIATE GOVERNMENT POLICY
The first and most urgent necessity in the area of government policy is the elimination of those measures which directly support monopoly, whether enterprise monopoly or labor monopoly, and an even-handed enforcement of the laws on enterprises and labor unions alike. Both should be subjected to the antitrust laws; both should be treated alike with respect to laws about the destruction of property and about interference with private activities.
Beyond this, the most important and effective step toward the reduction of monopoly power would be an extensive reform of the tax laws. The corporate tax should be abolished. Whether this is done or not, corporations should be required to attribute to individual stockholders earnings which are not paid out as dividends. That is, when the corporation sends out a dividend check, it should also send a statement saying, "In addition to this dividend of -------- cents per share, your corporation also earned -------- cents per share which was reinvested." The individual stockholder should then be required to report the attributed but undistributed earnings on his tax return as well as the dividend. Corporations would still be free to plough back as much as they wish, but they would have no incentive to do so except the proper incentive that they could earn more internally than the stockholder could earn externally. Few measures would do more to invigorate capital markets, to stimulate enterprise, and to promote effective competition.
Of course, so long as die individual income tax is as highly graduated as it is now, there is strong pressure to find devices to evade its impact. In this way as well as directly, the highly graduated income tax constitutes a serious impediment to the efficient use of our resources. The appropriate solution is the drastic scaling down of the higher rates, combined with an elimination of the avoidance devices that have been incorporated in the law.
