WEBVTT NOTE 10.02. Cartels and Their Consequences 1 00:00:00.000 --> 00:00:05.000 2. CARTELS AND THEIR CONSEQUENCES 2 00:00:05.000 --> 00:00:09.000 a. CARTELS AND MONOPOLY PRICE 3 00:00:09.000 --> 00:00:19.000 But is not monopolizing action a restriction of production, and is not this restriction a demonstrably anti-social act? 4 00:00:19.000 --> 00:00:25.940 Let us first take what would seem to be the worst possible case of such action, the actual 5 00:00:25.940 --> 00:00:30.480 destruction of part of a product by a cartel. 6 00:00:30.480 --> 00:00:37.220 This is done to take advantage of an inelastic demand, and to raise the price to gain a greater 7 00:00:37.220 --> 00:00:40.220 monetary income for the whole group. 8 00:00:40.220 --> 00:00:46.020 We can visualize, for example, the case of a coffee cartel, burning great quantities 9 00:00:46.020 --> 00:00:47.820 of coffee. 10 00:00:47.820 --> 00:00:52.860 In the first place, such actions will surely occur very seldom. 11 00:00:52.860 --> 00:00:59.380 Actual destruction of its product is clearly a highly wasteful act, even for the cartel. 12 00:00:59.380 --> 00:01:04.700 It is obvious that the factors of production which the growers had expended in producing 13 00:01:04.700 --> 00:01:08.060 the coffee have been spent in vain. 14 00:01:08.060 --> 00:01:14.060 Clearly the production of the total quantity of coffee itself has proved to be an error, 15 00:01:14.060 --> 00:01:19.420 The burning of coffee is only the aftermath and reflection of the error. 16 00:01:19.420 --> 00:01:24.720 Yet because of the uncertainty of the future, errors are often made. 17 00:01:24.720 --> 00:01:31.260 Man could labor and invest for years in the production of a good, which, it may turn out, 18 00:01:31.260 --> 00:01:33.020 consumers hardly want at all. 19 00:01:33.020 --> 00:01:39.680 If, for example, consumers' tastes had changed so that coffee would not be demanded by anyone 20 00:01:39.680 --> 00:01:53.800 Error is certainly unfortunate, but it cannot be considered immoral or antisocial. 21 00:01:53.800 --> 00:01:57.000 Nobody aims deliberately at error. 22 00:01:57.000 --> 00:02:03.220 If coffee were a durable good, it is obvious that the cartel would not destroy it, but would 23 00:02:03.220 --> 00:02:09.660 would store it for gradual futures sale to consumers, thus earning income on the surplus 24 00:02:09.660 --> 00:02:10.880 coffee. 25 00:02:10.880 --> 00:02:16.820 In an evenly rotating economy where errors are barred by definition, there would be no 26 00:02:16.820 --> 00:02:24.380 destruction since optimum stocks for the attainment of money income would be produced in advance. 27 00:02:24.380 --> 00:02:27.620 Less coffee would be produced from the beginning. 28 00:02:27.620 --> 00:02:34.640 The waste lies in the excessive production of coffee at the expense of other goods that 29 00:02:34.640 --> 00:02:36.740 could have been produced. 30 00:02:36.740 --> 00:02:42.220 The waste does not lie in the actual burning of the coffee. 31 00:02:42.220 --> 00:02:47.260 After the production of coffee is lowered, the other factors which would have gone into 32 00:02:47.260 --> 00:02:50.520 coffee production will not be wasted. 33 00:02:50.520 --> 00:02:57.060 The other land, labor, etc. will go into other and more profitable uses. 34 00:02:57.060 --> 00:03:03.700 It is true that excess specific factors will remain idle, but this is always the fate of 35 00:03:03.700 --> 00:03:11.380 specific factors when the realities of consumer demand do not sustain their use in production. 36 00:03:11.380 --> 00:03:17.420 For example, if there is a sudden dwindling of consumer demand for a good so that it becomes 37 00:03:17.420 --> 00:03:24.580 unremunerative for labor to work with certain specialized machines, this idle capacity is 38 00:03:24.580 --> 00:03:29.580 is not a social waste, but is rather socially useful. 39 00:03:29.580 --> 00:03:33.620 It is proved an error to have produced the machines. 40 00:03:33.620 --> 00:03:39.500 And now that the machines are produced, working on them turns out to be less profitable than 41 00:03:39.500 --> 00:03:44.780 working with other lands and machines to produce some other result. 42 00:03:44.780 --> 00:03:51.780 Therefore, the economical step is to leave them idle, or perhaps to transform their material 43 00:03:51.780 --> 00:03:54.360 stuff into other uses. 44 00:03:54.360 --> 00:04:02.360 Of course, in an errorless economy, no excessive specific capital goods will be produced. 45 00:04:02.360 --> 00:04:08.880 Suppose for example that before the coffee cartel went into operation, X amount of labor 46 00:04:08.880 --> 00:04:17.000 and Y amount of land cooperated to produce 100 million pounds of coffee a year. 47 00:04:17.000 --> 00:04:23.460 The coffee cartel determined, however, that the most remunerative production was 60 million 48 00:04:53.460 --> 00:05:12.460 In fact, we may say it is more just, since the new allocation of factors will be more profitable, and hence, more value productive to consumers. 49 00:05:12.460 --> 00:05:19.460 In the value sense, then, overall production has now expanded, not contracted. 50 00:05:19.460 --> 00:05:40.460 It is clear we cannot say that production overall has been restricted, since output of goods other than coffee has increased, and the only comparison between the decline of one good and the increase in another must be made in these broad, valuational terms. 51 00:05:40.460 --> 00:05:47.420 Indeed, the shifting of factors to rubber and jungle guidance no more restricts coffee 52 00:05:47.420 --> 00:05:53.500 production than a previous shift of factors to coffee restricted the production of the 53 00:05:53.500 --> 00:05:55.500 former goods. 54 00:05:55.500 --> 00:06:01.700 The whole concept of restricting production, then, is a fallacy when applied to the free 55 00:06:01.700 --> 00:06:02.860 market. 56 00:06:02.860 --> 00:06:10.080 In the real world of scarce resources in relation to possible ends, all production involves 57 00:06:10.080 --> 00:06:23.400 In short, the production of any product is necessarily always restricted. 58 00:06:23.400 --> 00:06:30.360 Such restriction follows simply from the universal scarcity of factors and the diminishing marginal 59 00:06:30.360 --> 00:06:33.400 utility of any one product. 60 00:06:33.400 --> 00:06:37.960 But then it is absurd to speak of restriction at all. 61 00:06:37.960 --> 00:06:43.880 In the words of Professor Mises, that the production of a commodity P is not larger 62 00:06:43.880 --> 00:06:50.460 than it really is, is due to the fact that the complementary factors of production required 63 00:06:50.460 --> 00:06:55.600 for an expansion were employed for the production of other commodities. 64 00:06:55.600 --> 00:07:03.320 Neither did the producers of P intentionally restrict the production of P. Every entrepreneur's 65 00:07:03.320 --> 00:07:14.320 A man whose capital is limited. He employs it for those projects which he expects will, by filling the most urgent demand of the public, yield the highest profit. 66 00:07:14.320 --> 00:07:27.320 An entrepreneur at whose disposal are 100 units of capital employs, for instance, 50 units for the production of P and 50 units for the production of Q. 67 00:07:27.320 --> 00:07:38.320 If both lines are profitable, it is odd to blame him for not having employed more, for example, 75 units, for the production of P. 68 00:07:38.320 --> 00:07:46.320 He could increase the production of P only by curtailing correspondingly the production of Q. 69 00:07:46.320 --> 00:07:51.320 But with regard to Q, the same fault could be found by the grumblers. 70 00:07:51.320 --> 00:07:57.980 If one blames the entrepreneur for not having produced more P, one must blame him also for 71 00:07:57.980 --> 00:08:04.560 not having produced more Q. This means one blames the entrepreneur for the fact that 72 00:08:04.560 --> 00:08:12.740 there is a scarcity of the factors of production, and that the earth is not a land of cocaine. 73 00:08:12.740 --> 00:08:20.200 We cannot, then, say that the cartel has restricted production. After the final allocation has 74 00:08:20.200 --> 00:08:27.160 As eliminated the producer's error, the cartel's action will affect a maximization of producer's 75 00:08:27.160 --> 00:08:34.400 incomes in the service of the consumers, as do all other free market allocations. 76 00:08:34.400 --> 00:08:40.480 This is the result that people on the market tend to attain in consonance with their skill 77 00:08:40.480 --> 00:08:47.960 as forecasting entrepreneurs, and this is the only situation in which man as consumer 78 00:08:47.960 --> 00:08:51.760 harmonizes with man as producer. 79 00:08:51.760 --> 00:08:58.440 It follows from our analysis that the producer's original production of 100 million pounds 80 00:08:58.440 --> 00:09:03.400 was an unfortunate error, later corrected by them. 81 00:09:03.400 --> 00:09:09.120 Instead of being a vicious restriction of production to the detriment of the consumers, 82 00:09:09.120 --> 00:09:16.400 the cutback in coffee production was, on the contrary, a correction of the previous error. 83 00:09:16.400 --> 00:09:22.520 Since only the free market can allocate resources to serve the consumer, in accordance with 84 00:09:22.520 --> 00:09:29.560 monetary profitability, it follows that in the previous situation, too much coffee and 85 00:09:29.560 --> 00:09:35.260 too little rubber, jungle guide service, etc. were being produced. 86 00:09:35.260 --> 00:09:41.720 The cartel's action in reducing the production of coffee and causing an increase in the production 87 00:09:41.720 --> 00:09:48.560 Production of rubber, jungle guiding, etc. led to an increase in the power of the productive 88 00:09:48.560 --> 00:09:53.160 resources to satisfy consumer desires. 89 00:09:53.160 --> 00:09:59.580 If there are anti-cartellists who disagree with this verdict and believe that the previous 90 00:09:59.580 --> 00:10:05.400 structure of production served the consumers better, they are always at perfect liberty 91 00:10:05.400 --> 00:10:12.280 to Bid the Land, Labor and Capital Factors Away from the Jungle Guide Agencies and Rubber 92 00:10:12.280 --> 00:10:19.980 Producers and Themselves Embark on the Production of the Allegedly Deficient 40 Million Pounds 93 00:10:19.980 --> 00:10:21.520 of Coffee. 94 00:10:21.520 --> 00:10:27.860 Since they are not doing so, they are hardly in a position to attack the existing coffee 95 00:10:27.860 --> 00:10:30.820 producers for not doing so. 96 00:10:30.820 --> 00:10:36.780 As Mises succinctly stated, certainly those engaged in the production of steel are not 97 00:10:36.780 --> 00:10:43.680 responsible for the fact that other people did not likewise enter this field of production. 98 00:10:43.680 --> 00:10:48.860 If somebody is to blame for the fact that the number of people who joined the voluntary 99 00:10:48.860 --> 00:10:55.820 civil defense organization is not larger, then it is not those who have already joined, 100 00:10:55.820 --> 00:10:57.620 but those who have not. 101 00:10:57.620 --> 00:11:04.580 The position of the anti-cartellists implies that someone else is producing too much of 102 00:11:04.580 --> 00:11:12.660 some other product, yet they offer no standards except their own arbitrary decrees to determine 103 00:11:12.660 --> 00:11:16.280 which production is excessive. 104 00:11:16.280 --> 00:11:22.640 Criticism of steel owners for not producing enough steel, or of coffee growers for not 105 00:11:22.640 --> 00:11:30.360 not producing enough coffee also implies the existence of a caste system whereby a certain 106 00:11:30.360 --> 00:11:39.040 caste is permanently designated to produce steel, another caste to grow coffee, etc. 107 00:11:39.040 --> 00:11:46.360 Only in such a caste society would such criticism make sense, yet the free market is the reverse 108 00:11:46.360 --> 00:11:54.880 of the caste system. Indeed, choice between alternatives implies mobility between alternatives, 109 00:11:54.880 --> 00:12:02.920 and this mobility obviously holds for entrepreneurs or lenders with money to invest in production. 110 00:12:02.920 --> 00:12:10.280 Furthermore, as we have stated, an inelastic demand is purely the result of consumer's 111 00:12:10.280 --> 00:12:35.280 This would be impossible, if the growers knew that they would be confronted with the price of $40 million of coffee, and the price of $40 million of coffee would be double the price of one gold grain per pound to two gold grains per pound. 112 00:12:35.280 --> 00:12:45.280 This would be impossible if the growers knew that they would be confronted with an effective consumer boycott at the higher price. 113 00:12:45.280 --> 00:12:52.280 Further, consumers have another way, if they so desire, to prevent destruction of the good. 114 00:12:52.280 --> 00:13:03.280 Various consumers, acting either individually or jointly, could offer to purchase the existing coffee at higher than present prices. 115 00:13:03.280 --> 00:13:09.440 They could do this either because of their desire for coffee, or because of their philanthropic 116 00:13:09.440 --> 00:13:15.920 dismay at the destruction of a useful good, or from a combination of both motives. 117 00:13:15.920 --> 00:13:22.240 At any rate, if they did so, they would prevent the producer's cartel from decreasing the 118 00:13:22.240 --> 00:13:24.760 supply sold on the market. 119 00:13:24.760 --> 00:13:31.640 The boycott at a higher price and or increased offers at the lower price would change the 120 00:13:31.640 --> 00:13:38.120 to the demand, and render it elastic at the present stock level, thereby removing any 121 00:13:38.120 --> 00:13:43.160 incentive or need for the formation of a cartel. 122 00:13:43.160 --> 00:13:50.760 To regard a cartel as immoral or as hampering some sort of consumer's sovereignty is therefore 123 00:13:50.760 --> 00:13:52.940 completely unwarranted. 124 00:13:52.940 --> 00:13:59.960 And this is true even in the seemingly worst case of a cartel that we may assume is founded 125 00:13:59.960 --> 00:14:07.420 solely for restrictive purposes, and where, as a result of previous error and the perishability 126 00:14:07.420 --> 00:14:11.780 of product, actual destruction will occur. 127 00:14:11.780 --> 00:14:18.120 If consumers really wish to prevent this action, they need only change their demand schedules 128 00:14:18.120 --> 00:14:24.800 for the product, either by an actual change in their taste for coffee, or by a combination 129 00:14:24.800 --> 00:14:27.600 of boycott and philanthropy. 130 00:14:27.600 --> 00:14:33.440 The fact that such a development does not take place in any given circumstance signifies 131 00:14:33.440 --> 00:14:40.560 that the producers are still maximizing their monetary income in the service of the consumers, 132 00:14:40.560 --> 00:14:45.160 by a cartel action as well as by any other action. 133 00:14:45.160 --> 00:14:51.880 Some listeners might object that in offering higher demands for existing stock, the consumers 134 00:14:51.880 --> 00:14:58.360 would be bribing the producers, and that this constitutes an unwarranted extortion on the 135 00:14:58.360 --> 00:15:00.440 part of the producers. 136 00:15:00.440 --> 00:15:03.240 But this charge is untenable. 137 00:15:03.240 --> 00:15:08.040 Producers are guided by the goal of maximizing monetary income. 138 00:15:08.040 --> 00:15:13.840 They are not extorting, but simply producing where their gains are at a maximum, through 139 00:15:13.840 --> 00:15:19.880 exchanges concluded voluntarily by producers and consumers alike. 140 00:15:19.880 --> 00:15:26.480 This is no more nor less a case of extortion than when a laborer shifts from a lower-paying 141 00:15:26.480 --> 00:15:33.840 to a higher-paying job, or when an entrepreneur invests in what he thinks will be a more rather 142 00:15:33.840 --> 00:15:37.160 than a less profitable project. 143 00:15:37.160 --> 00:15:43.800 It must be recognized that once an error has been committed as it had been in the aforementioned 144 00:15:43.800 --> 00:15:59.800 In this situation, the rational course is not to bewail the past, nor to attempt to recover historical costs, but to make the best, ceteris paribus, the most money, of the present situation. 145 00:15:59.800 --> 00:16:08.800 We recognize this when previously produced machines or other capital goods face a loss of demand for their product. 146 00:16:08.800 --> 00:16:20.800 In the production process, as we have seen, labor energies work on natural and produced factors to arrive at the most urgently demanded consumers' goods. 147 00:16:20.800 --> 00:16:30.800 Since error is inevitable, this process is bound to lead to a considerable amount of idle capital goods at any given time. 148 00:16:30.800 --> 00:16:38.340 Similarly, much original land area will remain idle because existing labor has more profitable 149 00:16:38.340 --> 00:16:41.160 work to do on other lands. 150 00:16:41.160 --> 00:16:47.320 In short, the idle coffee is the result of an error in forecasting, and should be no 151 00:16:47.320 --> 00:16:55.000 more shocking or reprehensible than idle capacity in any other type of capital good. 152 00:16:55.000 --> 00:17:02.240 Our argument is just as applicable to a single firm producing a unique product with an inelastic 153 00:17:02.240 --> 00:17:06.120 demand as it is to a cartel of firms. 154 00:17:06.120 --> 00:17:13.000 A single firm with inelastic demand for its product could also destroy part of its stock 155 00:17:13.000 --> 00:17:16.160 after committing a forecasting error. 156 00:17:16.160 --> 00:17:22.960 Our critique of the anti-monopoly price and consumers' sovereignty doctrines applies 157 00:17:22.960 --> 00:17:29.960 A common argument holds that cartel action involves collusion, for one firm may achieve a monopoly price as a result of its natural abilities or consumer enthusiasm for its particular product, whereas a cartel of many firms allegedly involves collusion. 158 00:17:52.960 --> 00:17:55.680 Inclusion and Conspiracy. 159 00:17:55.680 --> 00:18:03.280 These expressions, however, are simply emotive terms designed to induce an unfavorable response. 160 00:18:03.280 --> 00:18:10.480 What is actually involved here is cooperation to increase the incomes of the producers. 161 00:18:10.480 --> 00:18:14.360 For what is the essence of a cartel action? 162 00:18:14.360 --> 00:18:19.520 Individual producers agree to pool their assets into a common lot. 163 00:18:19.520 --> 00:18:25.880 This single central organization to make the decisions on production and price policies 164 00:18:25.880 --> 00:18:32.080 for all the owners, and then to allocate the monetary gain among them. 165 00:18:32.080 --> 00:18:38.360 But is this process not the same as any sort of joint partnership, or the formation of 166 00:18:38.360 --> 00:18:40.480 a single corporation? 167 00:18:40.480 --> 00:18:45.200 What happens when a partnership or corporation is formed? 168 00:18:45.200 --> 00:18:51.360 Rules agree to pool their assets into a central management, this central direction to set 169 00:18:51.360 --> 00:18:57.200 the policies for the owners and to allocate the monetary gains among them. 170 00:18:57.200 --> 00:19:04.080 In both cases, the pooling, lines of authority and allocation of monetary gain take place 171 00:19:04.080 --> 00:19:09.360 according to rules agreed upon by all from the beginning. 172 00:19:09.360 --> 00:19:15.360 There is, therefore, no essential difference between a cartel and an ordinary corporation 173 00:19:15.360 --> 00:19:17.040 or partnership. 174 00:19:17.040 --> 00:19:24.060 It might be objected that the ordinary corporation or partnership covers only one firm, while 175 00:19:24.060 --> 00:19:32.160 the cartel includes an entire industry, that is, all firms producing a certain product, 176 00:19:32.160 --> 00:19:35.920 but such a distinction does not necessarily hold. 177 00:19:35.920 --> 00:19:41.880 Monopolist firms may refuse to enter a cartel, while, on the other hand, a single firm may 178 00:19:41.880 --> 00:19:48.880 well be a monopolist in the sale of its particular unique product, and therefore it may also 179 00:19:48.880 --> 00:19:52.800 encompass an entire industry. 180 00:19:52.800 --> 00:20:01.080 The correspondence between a cooperative partnership or corporation, not generally considered reprehensible, 181 00:20:01.080 --> 00:20:08.860 and a cartel, is further enhanced when we consider the case of a merger of various firms. 182 00:20:08.860 --> 00:20:16.100 Mergers have been denounced as monopolistic, but not nearly as vehemently as have cartels. 183 00:20:16.100 --> 00:20:22.340 Merging firms pool their capital assets, and the owners of the individual firms now become 184 00:20:22.340 --> 00:20:25.860 part owners of the single merged firm. 185 00:20:25.860 --> 00:20:32.020 They will agree on rules for the exchange ratios of the shares of the different companies. 186 00:20:32.020 --> 00:20:38.180 If the merging firms encompass the entire industry, then a merger is simply a permanent 187 00:20:38.180 --> 00:20:39.900 form of cartel. 188 00:20:39.900 --> 00:20:45.860 Yet clearly the only difference between a merger and the original forming of a single 189 00:20:45.860 --> 00:20:53.380 corporation is that the merger pools existing capital goods assets, while the original birth 190 00:20:53.380 --> 00:20:57.500 The birth of a corporation pools money assets. 191 00:20:57.500 --> 00:21:02.260 It is clear that economically there is little difference between the two. 192 00:21:02.260 --> 00:21:08.940 A merger is the action of individuals with a certain quantity of already produced capital 193 00:21:08.940 --> 00:21:16.020 goods, adjusting themselves to their present and expected future conditions by cooperative 194 00:21:16.020 --> 00:21:17.940 pooling of assets. 195 00:21:17.940 --> 00:21:24.940 The formation of a new company is an adjustment to expected future conditions before any specific 196 00:21:24.940 --> 00:21:31.380 investment has been made in capital goods by cooperative pooling of assets. 197 00:21:31.380 --> 00:21:38.880 The essential similarity lies in the voluntary pooling of assets in a more centralized organization 198 00:21:38.880 --> 00:21:43.260 for the purpose of increasing monetary income. 199 00:21:43.260 --> 00:21:51.060 The theorists who attack cartels and monopolies do not recognize the identity of the two actions. 200 00:21:51.060 --> 00:21:58.220 As a result, a merger is considered less reprehensible than a cartel, and a single corporation far 201 00:21:58.220 --> 00:22:00.660 less menacing than a merger. 202 00:22:00.660 --> 00:22:07.900 Yet an industry-wide merger is, in effect, a permanent cartel, a permanent combination 203 00:22:07.900 --> 00:22:09.400 and fusion. 204 00:22:09.400 --> 00:22:15.700 On the other hand, a cartel that maintains by voluntary agreement the separate identity 205 00:22:15.700 --> 00:22:23.640 of each firm is, by nature, a highly transitory and ephemeral arrangement, and, as we shall 206 00:22:23.640 --> 00:22:27.680 see, generally tends to break up on the market. 207 00:22:27.680 --> 00:22:34.800 In fact, in many cases, a cartel can be considered as simply a tentative step in the direction 208 00:22:34.800 --> 00:22:36.760 Correction of a Permanent Merger 209 00:22:36.760 --> 00:22:43.640 And a merger and the original formation of a corporation do not, as we have seen, essentially 210 00:22:43.640 --> 00:22:44.640 differ. 211 00:22:44.640 --> 00:22:51.960 The former is an adaptation of the size and number of firms in an industry to new conditions, 212 00:22:51.960 --> 00:22:56.460 or is the correction of a previous error in forecasting. 213 00:22:56.460 --> 00:23:04.700 The latter is a de novo attempt to adapt to present and future market conditions. 214 00:23:04.700 --> 00:23:10.560 C. Economics, Technology and the Size of the Firm. 215 00:23:10.560 --> 00:23:18.320 We do not know and economics cannot tell us the optimum size of a firm in any given industry. 216 00:23:18.320 --> 00:23:25.480 The optimum size depends on the concrete technological conditions of each situation as well as on 217 00:23:25.480 --> 00:23:32.200 the state of consumer demand in relation to the given supply of various factors in this 218 00:23:32.200 --> 00:23:34.600 and in other industries. 219 00:23:34.600 --> 00:23:41.900 All these complex questions enter into the decisions of producers and ultimately of consumers 220 00:23:41.900 --> 00:23:47.740 concerning how large the firms in various lines of production will be. 221 00:23:47.740 --> 00:23:54.500 In line with consumer demand and with opportunity costs for the various factors, factor owners 222 00:23:54.500 --> 00:24:01.100 and entrepreneurs will produce in those industries and firms in which they can maximize their 223 00:24:01.100 --> 00:24:07.100 and their monetary income or profit, other psychic factors being equal. 224 00:24:07.100 --> 00:24:17.100 Since forecasting is the function of entrepreneurs, successful entrepreneurs will minimize their errors and hence their losses as well. 225 00:24:17.100 --> 00:24:27.100 As a result, any existing situation on the free market will tend to be the most desirable for the satisfaction of consumers' demands, 226 00:24:27.100 --> 00:24:33.800 and Finance, including herein the non-monetary wishes of the producers. 227 00:24:33.800 --> 00:24:41.600 Neither economists nor engineers can decide the most efficient size of a firm in any situation. 228 00:24:41.600 --> 00:24:49.240 Only the entrepreneurs themselves can determine what size of firm will operate most efficiently, 229 00:24:49.240 --> 00:24:55.840 and it is presumptuous and unwarranted for economists or for any other outside observers 230 00:24:55.840 --> 00:25:02.140 to attempt to dictate otherwise. In this and other matters, the wishes and demands of the 231 00:25:02.140 --> 00:25:08.520 consumers are telegraphed through the price system, and the resulting drive for maximum 232 00:25:08.520 --> 00:25:16.640 monetary income and profits will always tend to bring about the optimum allocation and pricing. 233 00:25:16.640 --> 00:25:21.880 There is no need for the external advice of economists. 234 00:25:21.880 --> 00:25:29.200 It is clear that when several thousand individuals decide not to produce and own individual 235 00:25:29.200 --> 00:25:36.420 steel plants by themselves, but rather to pool their capital into an organized corporation 236 00:25:36.420 --> 00:25:44.280 which will purchase factors, invest and direct production and sell the product, later allocating 237 00:25:44.280 --> 00:25:51.520 the monetary gains among the owners, they are enormously increasing their efficiency. 238 00:25:51.520 --> 00:25:57.400 Compared to production in hundreds of tiny plants, the quantity of production per given 239 00:25:57.400 --> 00:26:00.480 factors will be greatly increased. 240 00:26:00.480 --> 00:26:06.500 The large firm will be able to purchase heavily capitalized machinery and to finance better 241 00:26:06.500 --> 00:26:10.360 organized marketing and distributing outlets. 242 00:26:10.360 --> 00:26:16.380 All this is quite clear when thousands of individuals pool their capital into the establishment 243 00:26:16.380 --> 00:26:24.000 of a Steel Firm, but why may it not be equally true when several small steel firms merge 244 00:26:24.000 --> 00:26:27.100 into one large company? 245 00:26:27.100 --> 00:26:33.660 It might be replied that in the latter merger, particularly in the case of a cartel, joint 246 00:26:33.660 --> 00:26:41.700 action is taken not to increase efficiency, but solely to increase income by restricting 247 00:26:41.700 --> 00:26:42.700 sales. 248 00:26:42.700 --> 00:26:49.580 There is no way that an outside observer can distinguish between a restrictive and an efficiency 249 00:26:49.580 --> 00:26:51.940 increasing operation. 250 00:26:51.940 --> 00:26:58.080 In the first place, we must not think of the plant or factory as being the only productive 251 00:26:58.080 --> 00:27:02.220 factors, the efficiency of which can increase. 252 00:27:02.220 --> 00:27:10.120 Marketing, advertising, etc. are also factors of production, for production is not simply 253 00:27:10.120 --> 00:27:16.920 the physical transformation of a product, but also consists in transporting it and placing 254 00:27:16.920 --> 00:27:19.440 it into the hands of users. 255 00:27:19.440 --> 00:27:25.760 The latter implies the expenses of informing the user about the existence and nature of 256 00:27:25.760 --> 00:27:30.080 the product, and of selling that product to him. 257 00:27:30.080 --> 00:27:36.520 Since a cartel always engages in joint marketing, who can deny that the cartel might render 258 00:27:36.520 --> 00:27:38.880 marketing more efficient? 259 00:27:38.880 --> 00:27:47.140 How therefore can this efficiency be separated from the restrictive aspect of the operation? 260 00:27:47.140 --> 00:27:53.880 Much error would have been avoided if economists had heeded the words of Arthur Latham Perry. 261 00:27:53.880 --> 00:28:00.320 Every man who puts forth an effort to satisfy the desire of another with the expectation 262 00:28:00.320 --> 00:28:22.320 The definition of a return is a producer. The Latin word, produceri, means to expose anything to sale. We must rid ourselves at the outset of the notion that it is only to be applied to forms of matter, that it means to transform something only. 263 00:28:22.320 --> 00:28:30.320 The fundamental meaning of the root word, both in Latin and in English, is effort with reference to a sale. 264 00:28:30.320 --> 00:28:34.320 A product is a service ready to be rendered. 265 00:28:34.320 --> 00:28:40.320 A producer is any person who gets something ready to sell and sells it. 266 00:28:40.320 --> 00:28:47.320 Furthermore, technological factors in production can never be considered in a vacuum. 267 00:28:47.320 --> 00:28:53.080 Technological knowledge tells us of a whole host of alternatives that are open to us, 268 00:28:53.080 --> 00:29:00.600 but the crucial questions in what to invest, how much, what production method to choose, 269 00:29:00.600 --> 00:29:07.160 can be answered only by economic, that is, by financial, considerations. 270 00:29:07.160 --> 00:29:14.200 They can be answered only on a market actuated by a drive for money incomes and profits. 271 00:29:14.200 --> 00:29:22.200 Thus, how is a producer to decide, in digging a subway tunnel, what material to use in its construction? 272 00:29:22.200 --> 00:29:30.200 From a purely technological point of view, solid platinum may be the best choice, the most durable, etc. 273 00:29:30.200 --> 00:29:33.200 Does this mean that he should choose platinum? 274 00:29:33.200 --> 00:29:39.200 He can make a choice among factors, methods, goods to produce, etc., 275 00:29:39.200 --> 00:29:46.760 etc., only by comparing the necessary monetary expenses, which are equal to the income the 276 00:29:46.760 --> 00:29:53.600 factors could earn elsewhere, with expected monetary income from the production. 277 00:29:53.600 --> 00:30:00.680 Only by maximizing monetary gain can factors be allocated in the service of consumers. 278 00:30:00.680 --> 00:30:06.600 Otherwise, and on purely technological grounds, there would be nothing to prevent the building 279 00:30:06.600 --> 00:30:27.600 The only reason this cannot be done under present conditions is the heavy money cost caused by the waste of drawing away factors and resources from uses far more urgently demanded by the consumers. 280 00:30:27.600 --> 00:30:45.600 But the fact of this urgent alternative demand, and thus the fact of the waste, can be discovered only through being recorded by a price system, actuated by a drive by producers for money incomes. 281 00:30:45.600 --> 00:30:55.600 Only empirical observation of the market reveals to us the full absurdity of such a transcontinental subway. 282 00:30:55.600 --> 00:31:05.360 Moreover, there are no physical units with which we can compare the different types of physical factors and physical products. 283 00:31:05.360 --> 00:31:12.760 Thus, suppose a producer attempts to determine the most efficient use of two hours of his labor. 284 00:31:12.760 --> 00:31:23.160 In a romantic moment, he tries to determine this efficiency by purely abstracting from sordid considerations of monetary gain. 285 00:31:23.160 --> 00:31:28.960 Assume that he is confronted with three technologically known alternatives. 286 00:31:28.960 --> 00:31:38.960 In alternative A, two hours of labor with five pounds of clay and one oven hour produces one pot. 287 00:31:38.960 --> 00:31:47.960 In alternative B, two hours of labor with one block of wood and one oven hour produces one pipe. 288 00:31:47.960 --> 00:31:58.800 In Alternative C, with two hours of labour and one block of wood and one oven hour, he is able to produce one model boat. 289 00:31:58.800 --> 00:32:10.400 Which of these alternatives, A, B or C, is the most efficient, the most technologically useful way of allocating his labour? 290 00:32:10.400 --> 00:32:16.600 It is clear that the idealistic, self-sacrificing producer has no way of knowing. 291 00:32:16.600 --> 00:32:24.360 He has no rational way of deciding whether or not to produce the pot, the pipe or the boat. 292 00:32:24.360 --> 00:32:31.080 Only the selfish money-seeking producer has a rational way of determining the allocation. 293 00:32:31.800 --> 00:32:40.040 In seeking maximum monetary gain, the producer compares the money costs, necessary expenses 294 00:32:40.040 --> 00:32:43.720 of the Various Factors with the Prices of the Products. 295 00:32:44.360 --> 00:32:53.080 Considering A and B, for example, if the purchase of the clay and oven hour would cost one gold ounce, 296 00:32:53.080 --> 00:32:59.320 and the pot could sell for two gold ounces, his labor would earn one gold ounce. 297 00:32:59.960 --> 00:33:06.280 On the other hand, if the wood and oven hour would cost one and a half gold ounces, 298 00:33:06.280 --> 00:33:12.940 and the pipe could sell for four gold ounces, he would earn two and a half ounces for his 299 00:33:12.940 --> 00:33:17.540 two hours of labor, and would choose to make this product. 300 00:33:17.540 --> 00:33:24.380 The prices of both the product and the factors are reflections of consumer demand, and of 301 00:33:24.380 --> 00:33:28.360 producers' attempts to earn money in its service. 302 00:33:28.360 --> 00:33:34.620 The only way the producer could determine which product to make is to compare expected 303 00:33:34.620 --> 00:33:36.740 monetary gains. 304 00:33:36.740 --> 00:33:42.100 If the boat would sell for five gold ounces, he would produce the boat rather than the 305 00:33:42.100 --> 00:33:49.380 pipe and thus satisfy a more urgent consumer demand as well as his own desire for monetary 306 00:33:49.380 --> 00:33:50.980 income. 307 00:33:50.980 --> 00:33:58.300 There can therefore be no separation of technological efficiency from financial considerations. 308 00:33:58.300 --> 00:34:04.100 The only way that we can determine whether one product is more demanded than another 309 00:34:04.100 --> 00:34:11.620 or one process more efficient than another is through concrete actions of the free market. 310 00:34:11.620 --> 00:34:17.100 We may think it is self-evident, for example, that the optimum efficient size of a steel 311 00:34:17.100 --> 00:34:24.700 plant is larger than that of a barbershop, but we know this not as economists from a priori 312 00:34:24.700 --> 00:34:32.280 or praxeological reasoning, but purely by empirical observation of the free market. 313 00:34:32.280 --> 00:34:39.520 There is no way that economists or any other outside observers can set the technological 314 00:34:39.520 --> 00:34:42.680 optimum for any plant or firm. 315 00:34:42.680 --> 00:34:46.680 This can be done only on the market itself. 316 00:34:46.680 --> 00:34:53.000 But if this is true in general, it is also true in the specific cases of mergers and 317 00:34:53.000 --> 00:34:54.320 cartels. 318 00:34:54.320 --> 00:35:01.280 The impossibility of isolating a technological element becomes even clearer when we remember 319 00:35:01.280 --> 00:35:07.600 Remember that the critical problem is not the size of the plant, but the size of the 320 00:35:07.600 --> 00:35:08.600 firm. 321 00:35:08.600 --> 00:35:11.600 The two are by no means synonymous. 322 00:35:11.600 --> 00:35:17.680 It is true that the firm will consider the optimum sized plant for whatever scale its 323 00:35:17.680 --> 00:35:25.040 operations will be on, and further that a larger sized plant will, Ceteris paribus, 324 00:35:25.040 --> 00:35:27.840 require a larger sized firm. 325 00:35:27.840 --> 00:35:32.360 But its range of decisions cover a much broader ground. 326 00:35:32.360 --> 00:35:37.760 How much to invest, what good or goods to produce, etc. 327 00:35:37.760 --> 00:35:44.720 A firm may encompass one or more plants or products, and always encompasses marketing 328 00:35:44.720 --> 00:35:51.700 facilities, financial organization, etc., which are overlooked when only the plant is 329 00:35:51.700 --> 00:35:53.360 held in view. 330 00:35:53.360 --> 00:36:20.360 R. H. Coase, in an illuminating article, The Nature of the Firm, has pointed out that the extent to which transactions take place within a firm, or between firms, is dependent on the balancing of the necessary costs of using the price mechanism as against the costs of organizing a structure of production within a firm. 331 00:36:20.360 --> 00:36:31.360 These considerations, incidentally, serve to refute the very popular distinction between production for use and production for profit. 332 00:36:31.360 --> 00:36:38.360 In the first place, all production is for use, otherwise it would not take place. 333 00:36:38.360 --> 00:36:46.360 In the market economy, this almost always means goods for the use of others, the consumers. 334 00:36:46.360 --> 00:36:52.760 Profit can be earned only through servicing consumers with produced goods. 335 00:36:52.760 --> 00:36:58.320 On the other hand, there can be no rational production above the most primitive level 336 00:36:58.320 --> 00:37:06.400 based on technological or utilitarian considerations abstracted from monetary gain. 337 00:37:06.400 --> 00:37:12.520 This spurious distinction was brought into wide currency by Thorstein Veblen and continued 338 00:37:12.520 --> 00:37:18.040 in the happily short-lived technocracy movement of the early 1930s. 339 00:37:18.040 --> 00:37:25.120 According to his biographer, this distinction was the keynote to all Veblen's writings. 340 00:37:25.120 --> 00:37:30.480 It is important to realize what we have not said in this section. 341 00:37:30.480 --> 00:37:37.080 We have not said that cartels will always be more efficient than individual firms, or 342 00:37:37.080 --> 00:37:42.080 that big firms will always be more efficient than small ones. 343 00:37:42.080 --> 00:37:48.600 Our conclusion is that economics can make few valid statements about the optimal size 344 00:37:48.600 --> 00:37:56.480 of a firm, except that the free market will come as close as possible to rendering maximum 345 00:37:56.480 --> 00:38:04.240 service to consumers, whether we are considering the size of a firm or any other aspect of 346 00:38:04.240 --> 00:38:05.240 production. 347 00:38:05.240 --> 00:38:11.760 All the concrete problems in production, the size of the firm, the size of the industry, 348 00:38:11.760 --> 00:38:23.080 The location, price, size and nature of the output, etc. are for entrepreneurs, not economists, to solve. 349 00:38:23.080 --> 00:38:28.680 We should not leave the problem of the size of the firm without considering a common worry 350 00:38:28.680 --> 00:38:30.840 of economic writers. 351 00:38:30.840 --> 00:38:36.720 What if the average cost of a firm continues to fall indefinitely? 352 00:38:36.720 --> 00:38:42.080 Should not the firm then grow so big as to constitute a monopoly? 353 00:38:42.080 --> 00:38:48.320 There is much lamentation that competition breaks down in such a situation. 354 00:38:48.320 --> 00:38:53.760 Much of the emphasis on this problem comes, however, from preoccupation with the case 355 00:38:53.760 --> 00:39:00.320 of pure competition, which, as we shall see, is an impossible figment. 356 00:39:00.320 --> 00:39:07.840 Secondly, it is obvious that no firm ever has been or can be infinitely large, so that 357 00:39:07.840 --> 00:39:16.640 limiting obstacles, rising or less rapidly falling costs, must enter somewhere, and relevantly, 358 00:39:16.640 --> 00:39:17.880 for every firm. 359 00:39:17.880 --> 00:39:25.080 Thirdly, if a firm, through greater efficiency, does obtain a monopoly in some sense in its 360 00:39:25.080 --> 00:39:31.960 Industry, it clearly does so, in the case we are considering falling average cost, by 361 00:39:31.960 --> 00:39:36.080 lowering prices and benefiting the consumers. 362 00:39:36.080 --> 00:39:43.440 And if, as all the theorists who attack monopoly agree, what is wrong with monopoly is precisely 363 00:39:43.440 --> 00:39:50.060 a restriction of production and a rise in price, there is obviously nothing wrong with 364 00:39:50.060 --> 00:39:56.060 with a monopoly achieved by pursuing the directly opposite path. 365 00:40:01.060 --> 00:40:08.060 Analysis demonstrates that a cartel is an inherently unstable form of operation. 366 00:40:08.060 --> 00:40:18.060 If the joint pooling of assets in a common cause proves in the long run to be profitable for each of the individual members of the cartel, 367 00:40:18.060 --> 00:40:20.060 The Theory of Money and Credit 368 00:40:48.060 --> 00:40:57.140 If joint action is the most efficient and profitable course for each member, a merger 369 00:40:57.140 --> 00:40:59.280 will soon take place. 370 00:40:59.280 --> 00:41:05.920 The very fact that each member firm retains its potential independence in the cartel means 371 00:41:05.920 --> 00:41:09.640 that a breakup could take place at any time. 372 00:41:09.640 --> 00:41:16.000 The cartel will have to assign production totals and quotas to each of the member firms. 373 00:41:16.000 --> 00:41:21.640 This is likely to lead first to a good deal of bickering among the firms over the assignment 374 00:41:21.640 --> 00:41:27.560 of quotas, with each member attempting to gain a larger share of the assignment. 375 00:41:27.560 --> 00:41:34.040 Whatever basis quotas are assigned on will necessarily be arbitrary and will always be 376 00:41:34.040 --> 00:41:37.920 subject to challenge by one or more members. 377 00:41:37.920 --> 00:41:43.960 As Professor Benham states, firms which have produced a relatively large share of output 378 00:41:43.960 --> 00:41:48.360 in the past will demand the same share in the future. 379 00:41:48.360 --> 00:41:54.220 Firms which are expanding, owing, for example, to an unusually efficient management, will 380 00:41:54.220 --> 00:41:58.380 demand a larger share than they obtained in the past. 381 00:41:58.380 --> 00:42:04.220 Firms with a greater capacity for producing, as measured by the size of their plant, will 382 00:42:04.220 --> 00:42:07.860 demand a correspondingly greater share. 383 00:42:07.860 --> 00:42:15.120 In a merger, or in the formation of one corporation, the stockholders, by majority vote, form a 384 00:42:15.120 --> 00:42:17.740 decision-making organization. 385 00:42:17.740 --> 00:42:25.780 In the case of a cartel, however, disputes arise among independent, owning entities. 386 00:42:25.780 --> 00:42:32.100 Particularly likely to be restive under the imposed joint action will be the more efficient 387 00:42:32.100 --> 00:42:38.260 Producers, who will be eager to expand their business rather than be fettered by shackles 388 00:42:38.260 --> 00:42:43.700 and quotas to provide shelter for their less efficient competitors. 389 00:42:43.700 --> 00:42:48.900 Clearly the more efficient firms will be the ones to break up the cartel. 390 00:42:48.900 --> 00:42:55.020 This will be increasingly true as time goes on and conditions change from the time the 391 00:42:55.020 --> 00:42:57.340 cartel was first formed. 392 00:42:57.340 --> 00:43:03.340 The quotas, the jealously made agreements that formerly seemed plausible to all, now 393 00:43:03.340 --> 00:43:09.940 become intolerable restrictions for the more efficient firms, and the cartel soon breaks 394 00:43:09.940 --> 00:43:18.880 up, for once one firm breaks away, expands output and cuts prices, the others must follow. 395 00:43:18.880 --> 00:43:25.680 If the cartel does not break up from within, it is even more likely to do so from without. 396 00:43:25.680 --> 00:43:32.800 To the extent that it has earned unusual monopoly profits, outside firms and outside producers 397 00:43:32.800 --> 00:43:35.560 will enter the same field of production. 398 00:43:35.560 --> 00:43:41.120 Outsiders, in short, rush in to take advantage of the higher profits. 399 00:43:41.120 --> 00:43:47.200 But once one strong competitor arises to challenge it, the cartel is doomed. 400 00:43:47.200 --> 00:43:53.740 For as the firms in the cartel are bound by production quotas, they must watch new competitors 401 00:43:53.740 --> 00:44:17.820 There are other arguments that opponents of cartels use in decrying cartel action. 402 00:44:17.820 --> 00:44:23.700 One thesis asserts that there is something wicked about formerly competing firms now 403 00:44:23.700 --> 00:44:31.020 Without uniting, for example, restricting competition or restraining trade, such restriction 404 00:44:31.020 --> 00:44:35.220 is supposed to injure the consumer's freedom of choice. 405 00:44:35.220 --> 00:44:41.620 As Hutt phrased it in his previously cited article, consumers are free and consumer's 406 00:44:41.620 --> 00:44:49.540 sovereignty is realizable only to the extent to which the power of substitution exists. 407 00:44:49.540 --> 00:44:54.500 But surely this is a complete misconception of the meaning of freedom. 408 00:44:54.500 --> 00:45:01.940 Crusoe and Friday bargaining on a desert island have very little range or power of choice. 409 00:45:01.940 --> 00:45:04.900 Their power of substitution is limited. 410 00:45:04.900 --> 00:45:12.300 Yet if neither man interferes with the other's person or property, each one is absolutely 411 00:45:12.300 --> 00:45:13.300 free. 412 00:45:13.300 --> 00:45:21.300 To argue otherwise is to adopt the fallacy of confusing freedom with abundance or range of choice. 413 00:45:21.300 --> 00:45:29.380 No individual producer is or can be responsible for other people's power to substitute. 414 00:45:29.380 --> 00:45:36.040 No coffee grower or steel producer, whether acting singly or jointly, is responsible to 415 00:45:36.040 --> 00:45:40.100 anyone because he chose not to produce more. 416 00:45:40.100 --> 00:45:46.980 If Professor X or Consumer Y believes that there are not enough coffee producers in existence 417 00:45:46.980 --> 00:45:52.620 or that they are not producing enough, these critics are free to enter the coffee or steel 418 00:45:52.620 --> 00:45:58.700 business as they see fit, thus increasing both the number of competitors and the quantity 419 00:45:58.700 --> 00:46:01.220 of the good produced. 420 00:46:01.220 --> 00:46:08.260 If consumer demand had really justified more competitors or more of the product or a greater 421 00:46:08.260 --> 00:46:38.260 The Theory of Money and Credit 422 00:46:38.260 --> 00:46:44.820 Market, the false confusion of freedom with abundance rests on a failure to distinguish 423 00:46:44.820 --> 00:46:52.780 between the conditions given by nature and man-made actions to transform nature. 424 00:46:52.780 --> 00:46:56.620 In a state of raw nature, there is no abundance. 425 00:46:56.620 --> 00:47:00.620 In fact, there are few, if any, goods at all. 426 00:47:00.620 --> 00:47:05.820 Crusoe is absolutely free, and yet on the point of starvation. 427 00:47:05.820 --> 00:47:11.180 Of course it would be pleasanter for everyone if the nature-given conditions had been far 428 00:47:11.180 --> 00:47:14.980 more abundant, but these are vain fantasies. 429 00:47:14.980 --> 00:47:22.540 For vis-à-vis nature, this is the best of all possible worlds, because it is the only 430 00:47:22.540 --> 00:47:24.380 possible one. 431 00:47:24.380 --> 00:47:30.140 Man's condition on earth is that he must work with the given natural conditions and 432 00:47:30.140 --> 00:47:32.780 improve them by human action. 433 00:47:32.780 --> 00:47:40.940 It is a reflection on nature, not on the free market, that everyone is free to starve. 434 00:47:40.940 --> 00:47:46.740 Economics demonstrates that individuals entering into mutual relations in a free market in 435 00:47:46.740 --> 00:47:54.300 a free society, and only in such relations, can provide abundance for themselves and for 436 00:47:54.300 --> 00:47:56.220 the entire society. 437 00:47:56.220 --> 00:48:04.720 Free, as always in this book, is used in the interpersonal sense of being unmolested by other persons. 438 00:48:04.720 --> 00:48:13.020 To employ freedom as itself equivalent to abundance obstructs understanding of these truths. 439 00:48:13.020 --> 00:48:20.220 The free market in the world of production may be termed free competition or free entry, 440 00:48:20.220 --> 00:48:28.620 Meaning that in a free society anyone is free to compete and produce in any field he chooses. 441 00:48:28.620 --> 00:48:34.980 Free competition is the application of liberty to the sphere of production, the freedom to 442 00:48:34.980 --> 00:48:43.700 buy, sell and transform one's property without violent interference by an external power. 443 00:48:43.700 --> 00:48:51.400 We have seen that in a regime of free competition, consumer satisfaction will, at any time, tend 444 00:48:51.400 --> 00:48:56.300 to be at the maximum possible given natural conditions. 445 00:48:56.300 --> 00:49:02.600 The best forecasters will tend to emerge as the dominant entrepreneurs, and if anyone 446 00:49:02.600 --> 00:49:09.260 sees an opportunity passed up, he is free to take advantage of his superior foresight. 447 00:49:09.260 --> 00:49:16.980 The regime that tends to maximize consumers' satisfaction, therefore, is not pure competition, 448 00:49:16.980 --> 00:49:25.020 or perfect competition, or competition without cartel action, or anything other than one 449 00:49:25.020 --> 00:49:28.680 of simple economic liberty. 450 00:49:28.680 --> 00:49:36.060 Some critics charge that there is no real free entry or free competition in a free market, 451 00:49:36.060 --> 00:49:41.940 Or how can anyone compete or enter a field when an enormous amount of money is needed 452 00:49:41.940 --> 00:49:45.500 to invest in efficient plants and firms? 453 00:49:45.500 --> 00:49:52.280 It is easy to enter the pushcart peddling industry because so little capital is required, 454 00:49:52.280 --> 00:49:58.140 but it is almost impossible to establish a new automobile firm with its heavy requirements 455 00:49:58.140 --> 00:50:00.220 of capital. 456 00:50:00.220 --> 00:50:06.700 This argument is but another variant of the prevailing confusion between freedom and abundance. 457 00:50:06.700 --> 00:50:13.200 In this case the abundance refers to the money capital which a man has been able to amass. 458 00:50:13.200 --> 00:50:19.200 Every man is perfectly free to become a baseball player, but this freedom does not imply that 459 00:50:19.200 --> 00:50:23.440 he will be as good a baseball player as the next man. 460 00:50:23.440 --> 00:50:30.680 A man's range or power of action dependent on his ability and the exchange value of his 461 00:50:30.680 --> 00:50:35.920 property is something completely distinct from his freedom. 462 00:50:35.920 --> 00:50:42.840 As we have said, a free society will in the long run lead to general abundance and is 463 00:50:42.840 --> 00:50:46.280 the necessary condition for that abundance. 464 00:50:46.280 --> 00:50:54.520 But the two must be kept conceptually distinct and not confused by phrases such as real freedom 465 00:50:54.520 --> 00:50:56.560 or true freedom. 466 00:50:56.560 --> 00:51:03.240 Therefore, the fact that everyone is free to enter an industry does not mean that everyone 467 00:51:03.240 --> 00:51:10.340 is able, either in terms of personal qualities or monetary capital, to do so. 468 00:51:10.340 --> 00:51:16.260 In industries requiring more capital, fewer people will be able to take advantage of the 469 00:51:16.260 --> 00:51:43.260 In fact, the disability is much more relevant in the case of labor than in the case of business competition. 470 00:51:43.260 --> 00:51:49.980 What are modern devices such as corporations, but means of pooling capital by many people 471 00:51:49.980 --> 00:51:52.720 of greater and lesser wealth? 472 00:51:52.720 --> 00:51:58.700 The difficulty of investing in a new automobile firm should be considered not in terms of 473 00:51:58.700 --> 00:52:04.760 the hundreds of millions of dollars required for total investment, but in terms of the 474 00:52:04.760 --> 00:52:10.080 fifty or so dollars required to purchase one share of stock. 475 00:52:10.080 --> 00:52:17.280 And while capital can be pooled, beginning with the smallest units, labor ability cannot 476 00:52:17.280 --> 00:52:19.080 be pooled. 477 00:52:19.080 --> 00:52:22.480 Sometimes the argument reaches absurd lengths. 478 00:52:22.480 --> 00:52:28.760 For example, it is often asserted that now, in this modern world, firms are so large that 479 00:52:28.760 --> 00:52:36.600 new people cannot compete or enter the industry because the capital cannot be raised. 480 00:52:36.600 --> 00:52:42.680 These critics do not seem to see that the aggregate capital and wealth of individuals 481 00:52:42.680 --> 00:52:49.800 have advanced along with the increase in wealth required to launch a new enterprise. 482 00:52:49.800 --> 00:52:53.700 In fact, these are two sides of the same coin. 483 00:52:53.700 --> 00:52:59.000 There is no reason to suppose that it was easier to raise the capital to launch a new 484 00:52:59.000 --> 00:53:06.520 retail shop many centuries ago than it is to raise capital for the automobile firm today. 485 00:53:06.520 --> 00:53:12.240 If there is enough capital to finance the large firms currently existing, there is enough 486 00:53:12.240 --> 00:53:14.160 to finance one more. 487 00:53:14.160 --> 00:53:21.360 In fact, capital could be withdrawn from existing large firms and shifted to new ones, if there 488 00:53:21.360 --> 00:53:23.040 is a need for them. 489 00:53:23.040 --> 00:53:28.800 Of course, if the new enterprise would be unprofitable and therefore unserviceable to 490 00:53:28.800 --> 00:53:34.640 consumers, it is easy to see why there is reluctance in the free market to embark on 491 00:53:34.640 --> 00:53:36.480 the venture. 492 00:53:36.480 --> 00:53:43.200 That there is inequality of ability or monetary income on the free market should surprise 493 00:53:43.200 --> 00:53:44.440 no one. 494 00:53:44.440 --> 00:53:51.720 As we have seen, men are not equal in their tastes, interests, abilities or locations. 495 00:53:51.720 --> 00:53:55.960 Resources are not distributed equally over the earth. 496 00:53:55.960 --> 00:54:00.080 Clearly, the very term equal is unusable here. 497 00:54:00.080 --> 00:54:06.800 What does it mean to say that Lawyer Jones' ability is equal to Teacher Smith's? 498 00:54:06.800 --> 00:54:14.720 This inequality or diversity in abilities and distribution of resources ensures inequality 499 00:54:14.720 --> 00:54:21.240 of income on the free market, and since a man's monetary assets are derived from his 500 00:54:21.240 --> 00:54:27.680 and his ancestors' abilities in serving consumers on the market, it is not surprising that there 501 00:54:27.680 --> 00:54:32.080 There is Inequality of Monetary Wealth as well. 502 00:54:32.080 --> 00:54:39.200 The term free competition, then, will prove misleading unless it is interpreted to mean 503 00:54:39.200 --> 00:54:47.920 free action, that is, freedom to compete or not to compete as the individual wills. 504 00:54:47.920 --> 00:54:53.760 It should be clear from the foregoing discussion that there is nothing particularly reprehensible 505 00:54:53.760 --> 00:55:00.100 Profitable or destructive of consumer freedom in the establishment of a monopoly price or 506 00:55:00.100 --> 00:55:02.240 in a cartel action. 507 00:55:02.240 --> 00:55:09.200 A cartel action, if it is a voluntary one, cannot injure freedom of competition and, 508 00:55:09.200 --> 00:55:14.280 if it proves profitable, benefits rather than injures the consumers. 509 00:55:14.280 --> 00:55:20.360 It is perfectly consonant with a free society, with individual self-sovereignty, and with 510 00:55:20.360 --> 00:55:24.460 with the earning of money through serving consumers. 511 00:55:24.460 --> 00:55:30.120 As Benjamin R. Tucker brilliantly concluded in dealing with the problem of cartels and 512 00:55:30.120 --> 00:55:37.040 competition, that the right to cooperate is as unquestionable as the right to compete. 513 00:55:37.040 --> 00:55:42.740 The right to compete involves the right to refrain from competition. 514 00:55:42.740 --> 00:55:48.820 Cooperation is often a method of competition, and competition is always in the larger view 515 00:55:48.820 --> 00:55:56.780 a method of cooperation, each is a legitimate, orderly, non-invasive exercise of the individual 516 00:55:56.780 --> 00:56:01.260 will under the social law of equal liberty. 517 00:56:01.260 --> 00:56:07.780 Viewed in the light of these irrefutable propositions, the trust, then, like every other industrial 518 00:56:07.780 --> 00:56:14.260 combination endeavouring to do collectively nothing but what each member of the combination 519 00:56:14.260 --> 00:56:21.540 might fully endeavor to do individually, is per se an unimpeachable institution. 520 00:56:21.540 --> 00:56:28.620 To assail or control or deny this form of cooperation on the ground that it is itself 521 00:56:28.620 --> 00:56:32.340 a denial of competition is an absurdity. 522 00:56:32.340 --> 00:56:36.140 It is an absurdity because it proves too much. 523 00:56:36.140 --> 00:56:43.100 The trust is a denial of competition in no other sense than that in which competition 524 00:56:43.100 --> 00:56:46.860 Competition itself is a denial of competition. 525 00:56:46.860 --> 00:56:54.380 The trust denies competition only by producing and selling more cheaply than those outside 526 00:56:54.380 --> 00:56:57.440 of the trust can produce and sell. 527 00:56:57.440 --> 00:57:04.620 But in that sense, every successful individual competitor also denies competition. 528 00:57:04.620 --> 00:57:11.220 The fact is that there is one denial of competition which is the right of all, and that there 529 00:57:11.220 --> 00:57:16.380 There is another denial of competition which is the right of none. 530 00:57:16.380 --> 00:57:23.780 All of us, whether out of a trust or in it, have a right to deny competition by competing, 531 00:57:23.780 --> 00:57:30.060 but none of us, whether in a trust or out of it, have a right to deny competition by 532 00:57:30.060 --> 00:57:39.280 arbitrary decree, by interference with voluntary effort, by forcible suppression of initiative. 533 00:57:39.280 --> 00:57:46.560 This is not to say, of course, that joint cooperation or combination is necessarily better than 534 00:57:46.560 --> 00:57:48.920 competition among firms. 535 00:57:48.920 --> 00:57:56.080 We simply conclude that the relative extent of areas within or between firms on the free 536 00:57:56.080 --> 00:58:03.920 market will be precisely that proportion most conducive to the well-being of consumers and 537 00:58:03.920 --> 00:58:05.820 producers alike. 538 00:58:05.820 --> 00:58:12.220 This is the same as our previous conclusion that the size of a firm will tend to be established 539 00:58:12.220 --> 00:58:16.420 at the level most serviceable to the consumers. 540 00:58:16.420 --> 00:58:21.140 Does our discussion imply that whatever is, is right? 541 00:58:21.140 --> 00:58:27.340 We cannot enter into a discussion of the relation of economics to ethics at this point, but 542 00:58:27.340 --> 00:58:34.460 we can state briefly that our answer, pertaining to the free market, is a qualified yes. 543 00:58:34.460 --> 00:58:41.380 Specifically our statement would be, given the ends on the value scales of individuals 544 00:58:41.380 --> 00:58:49.000 as revealed by their real actions, the maximum satisfaction of those ends for every person 545 00:58:49.000 --> 00:58:52.420 is achieved only on the free market. 546 00:58:52.420 --> 00:58:59.140 Whether individuals have the proper ends or not is another question entirely and cannot 547 00:58:59.140 --> 00:59:02.420 be decided by economics. 548 00:59:02.420 --> 00:59:10.320 F. The Problem of One Big Cartel The myth of the evil cartel has been greatly 549 00:59:10.320 --> 00:59:15.600 bolstered by the nightmare image of one big cartel. 550 00:59:15.600 --> 00:59:21.860 This is all very well, one may say, but suppose that all the firms in the country amalgamated 551 00:59:21.860 --> 00:59:25.940 or cartelized into one big cartel. 552 00:59:25.940 --> 00:59:28.120 What of the horrors then? 553 00:59:28.120 --> 00:59:34.020 The answer can be obtained by referring to Chapter 9, where we saw that the free market 554 00:59:34.020 --> 00:59:40.600 placed definite limits on the size of the firm, that is, the limits of calculability 555 00:59:40.600 --> 00:59:42.220 on the market. 556 00:59:42.220 --> 00:59:48.980 In order to calculate the profits and losses of each branch, a firm must be able to refer 557 00:59:48.980 --> 00:59:57.560 its internal operations to external markets for each of the various factors and intermediate 558 00:59:57.560 --> 01:00:06.560 When any of these external markets disappears, because all are absorbed within the province of a single firm, 559 01:00:06.560 --> 01:00:15.560 calculability disappears, and there is no way for the firm rationally to allocate factors to that specific area. 560 01:00:15.560 --> 01:00:22.560 The more these limits are encroached upon, the greater and greater will be the sphere of irrationality, 561 01:00:22.560 --> 01:00:26.560 and the more difficult it will be to avoid losses. 562 01:00:26.560 --> 01:00:36.960 One big cartel would not be able rationally to allocate producers' goods at all, and hence could not avoid severe losses. 563 01:00:36.960 --> 01:00:44.460 Consequently, it could never really be established, and, if tried, would quickly break asunder. 564 01:00:44.460 --> 01:00:54.260 In the production sphere, socialism is equivalent to one big cartel, compulsorily organized and controlled by the state. 565 01:00:54.260 --> 01:01:01.060 If all the factors and resources are absolutely controlled by the state, it makes little difference 566 01:01:01.060 --> 01:01:05.000 if legally the state owns these resources. 567 01:01:05.000 --> 01:01:12.840 For ownership connotes control, and if the nominal owner is coercively deprived of control, 568 01:01:12.840 --> 01:01:18.180 it is the controller who is the real owner of the resource. 569 01:01:18.180 --> 01:01:23.920 Those who advocate socialist central planning as the more efficient method of production 570 01:01:23.920 --> 01:01:31.760 for Consumer Wants, must answer the question, if this central planning is really more efficient, 571 01:01:31.760 --> 01:01:37.560 why has it not been established by profit-seeking individuals on the free market? 572 01:01:37.560 --> 01:01:44.020 The fact that one big cartel has never been formed voluntarily, and that it needs the 573 01:01:44.020 --> 01:01:50.000 coercive might of the state to be formed, demonstrates that it could not possibly be 574 01:01:50.000 --> 01:02:02.320 Let us assume for a moment that one big cartel could be established on the free market and 575 01:02:02.320 --> 01:02:05.860 that the calculability problem does not arise. 576 01:02:05.860 --> 01:02:09.020 What would the economic consequences be? 577 01:02:09.020 --> 01:02:12.600 Would the cartel be able to exploit anyone? 578 01:02:12.600 --> 01:02:18.720 In the first place, consumers could not be exploited, for consumers' demand would still 579 01:02:18.720 --> 01:02:26.300 will be elastic or inelastic, as the case may be, since, as we shall see further, consumers' 580 01:02:26.300 --> 01:02:32.880 demand for a firm is always elastic above the free market equilibrium price. 581 01:02:32.880 --> 01:02:40.260 It follows that the cartel will not be able to raise prices or earn more from consumers. 582 01:02:40.260 --> 01:02:41.960 What about the factors? 583 01:02:41.960 --> 01:02:46.120 Could not their owners be exploited by the cartel? 584 01:02:46.120 --> 01:02:51.960 In the first place, the universal cartel, to be effective, would have to include owners 585 01:02:51.960 --> 01:02:53.880 of primary land. 586 01:02:53.880 --> 01:02:59.040 Otherwise whatever gains they might have might be imputed to land. 587 01:02:59.040 --> 01:03:06.320 To put it in its strongest terms, then, could a universal cartel of all land and capital 588 01:03:06.320 --> 01:03:13.840 goods exploit laborers by systematically paying the latter less than their discounted marginal 589 01:03:13.840 --> 01:03:15.600 value products? 590 01:03:15.600 --> 01:03:21.300 Did not the members of the cartel agree to pay a very low sum to these workers? 591 01:03:21.300 --> 01:03:27.380 If that happened, however, there would be created great opportunities for entrepreneurs 592 01:03:27.380 --> 01:03:34.420 either to spring up outside the cartel, or to break away from the cartel and profit by 593 01:03:34.420 --> 01:03:37.780 hiring workers for a higher wage. 594 01:03:37.780 --> 01:03:44.620 This competition would have the double effect of a, breaking up the universal cartel, and 595 01:03:44.620 --> 01:03:50.480 and be tending again to yield to the laborers their marginal product. 596 01:03:50.480 --> 01:03:57.200 As long as competition is free, unhampered by governmental restrictions, no universal 597 01:03:57.200 --> 01:04:03.860 cartel could either exploit labor or remain universal for any length of time.