2. CARTELS AND THEIR CONSEQUENCES
a. CARTELS AND MONOPOLY PRICE
But is not monopolizing action a restriction of production, and is not this restriction a demonstrably anti-social act?
Let us first take what would seem to be the worst possible case of such action, the actual
destruction of part of a product by a cartel.
This is done to take advantage of an inelastic demand, and to raise the price to gain a greater
monetary income for the whole group.
We can visualize, for example, the case of a coffee cartel, burning great quantities
of coffee.
In the first place, such actions will surely occur very seldom.
Actual destruction of its product is clearly a highly wasteful act, even for the cartel.
It is obvious that the factors of production which the growers had expended in producing
the coffee have been spent in vain.
Clearly the production of the total quantity of coffee itself has proved to be an error,
The burning of coffee is only the aftermath and reflection of the error.
Yet because of the uncertainty of the future, errors are often made.
Man could labor and invest for years in the production of a good, which, it may turn out,
consumers hardly want at all.
If, for example, consumers' tastes had changed so that coffee would not be demanded by anyone
Error is certainly unfortunate, but it cannot be considered immoral or antisocial.
Nobody aims deliberately at error.
If coffee were a durable good, it is obvious that the cartel would not destroy it, but would
would store it for gradual futures sale to consumers, thus earning income on the surplus
coffee.
In an evenly rotating economy where errors are barred by definition, there would be no
destruction since optimum stocks for the attainment of money income would be produced in advance.
Less coffee would be produced from the beginning.
The waste lies in the excessive production of coffee at the expense of other goods that
could have been produced.
The waste does not lie in the actual burning of the coffee.
After the production of coffee is lowered, the other factors which would have gone into
coffee production will not be wasted.
The other land, labor, etc. will go into other and more profitable uses.
It is true that excess specific factors will remain idle, but this is always the fate of
specific factors when the realities of consumer demand do not sustain their use in production.
For example, if there is a sudden dwindling of consumer demand for a good so that it becomes
unremunerative for labor to work with certain specialized machines, this idle capacity is
is not a social waste, but is rather socially useful.
It is proved an error to have produced the machines.
And now that the machines are produced, working on them turns out to be less profitable than
working with other lands and machines to produce some other result.
Therefore, the economical step is to leave them idle, or perhaps to transform their material
stuff into other uses.
Of course, in an errorless economy, no excessive specific capital goods will be produced.
Suppose for example that before the coffee cartel went into operation, X amount of labor
and Y amount of land cooperated to produce 100 million pounds of coffee a year.
The coffee cartel determined, however, that the most remunerative production was 60 million
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.
In the value sense, then, overall production has now expanded, not contracted.
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.
Indeed, the shifting of factors to rubber and jungle guidance no more restricts coffee
production than a previous shift of factors to coffee restricted the production of the
former goods.
The whole concept of restricting production, then, is a fallacy when applied to the free
market.
In the real world of scarce resources in relation to possible ends, all production involves
In short, the production of any product is necessarily always restricted.
Such restriction follows simply from the universal scarcity of factors and the diminishing marginal
utility of any one product.
But then it is absurd to speak of restriction at all.
In the words of Professor Mises, that the production of a commodity P is not larger
than it really is, is due to the fact that the complementary factors of production required
for an expansion were employed for the production of other commodities.
Neither did the producers of P intentionally restrict the production of P. Every entrepreneur's
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.
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.
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.
He could increase the production of P only by curtailing correspondingly the production of Q.
But with regard to Q, the same fault could be found by the grumblers.
If one blames the entrepreneur for not having produced more P, one must blame him also for
not having produced more Q. This means one blames the entrepreneur for the fact that
there is a scarcity of the factors of production, and that the earth is not a land of cocaine.
We cannot, then, say that the cartel has restricted production. After the final allocation has
As eliminated the producer's error, the cartel's action will affect a maximization of producer's
incomes in the service of the consumers, as do all other free market allocations.
This is the result that people on the market tend to attain in consonance with their skill
as forecasting entrepreneurs, and this is the only situation in which man as consumer
harmonizes with man as producer.
It follows from our analysis that the producer's original production of 100 million pounds
was an unfortunate error, later corrected by them.
Instead of being a vicious restriction of production to the detriment of the consumers,
the cutback in coffee production was, on the contrary, a correction of the previous error.
Since only the free market can allocate resources to serve the consumer, in accordance with
monetary profitability, it follows that in the previous situation, too much coffee and
too little rubber, jungle guide service, etc. were being produced.
The cartel's action in reducing the production of coffee and causing an increase in the production
Production of rubber, jungle guiding, etc. led to an increase in the power of the productive
resources to satisfy consumer desires.
If there are anti-cartellists who disagree with this verdict and believe that the previous
structure of production served the consumers better, they are always at perfect liberty
to Bid the Land, Labor and Capital Factors Away from the Jungle Guide Agencies and Rubber
Producers and Themselves Embark on the Production of the Allegedly Deficient 40 Million Pounds
of Coffee.
Since they are not doing so, they are hardly in a position to attack the existing coffee
producers for not doing so.
As Mises succinctly stated, certainly those engaged in the production of steel are not
responsible for the fact that other people did not likewise enter this field of production.
If somebody is to blame for the fact that the number of people who joined the voluntary
civil defense organization is not larger, then it is not those who have already joined,
but those who have not.
The position of the anti-cartellists implies that someone else is producing too much of
some other product, yet they offer no standards except their own arbitrary decrees to determine
which production is excessive.
Criticism of steel owners for not producing enough steel, or of coffee growers for not
not producing enough coffee also implies the existence of a caste system whereby a certain
caste is permanently designated to produce steel, another caste to grow coffee, etc.
Only in such a caste society would such criticism make sense, yet the free market is the reverse
of the caste system. Indeed, choice between alternatives implies mobility between alternatives,
and this mobility obviously holds for entrepreneurs or lenders with money to invest in production.
Furthermore, as we have stated, an inelastic demand is purely the result of consumer's
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.
This would be impossible if the growers knew that they would be confronted with an effective consumer boycott at the higher price.
Further, consumers have another way, if they so desire, to prevent destruction of the good.
Various consumers, acting either individually or jointly, could offer to purchase the existing coffee at higher than present prices.
They could do this either because of their desire for coffee, or because of their philanthropic
dismay at the destruction of a useful good, or from a combination of both motives.
At any rate, if they did so, they would prevent the producer's cartel from decreasing the
supply sold on the market.
The boycott at a higher price and or increased offers at the lower price would change the
to the demand, and render it elastic at the present stock level, thereby removing any
incentive or need for the formation of a cartel.
To regard a cartel as immoral or as hampering some sort of consumer's sovereignty is therefore
completely unwarranted.
And this is true even in the seemingly worst case of a cartel that we may assume is founded
solely for restrictive purposes, and where, as a result of previous error and the perishability
of product, actual destruction will occur.
If consumers really wish to prevent this action, they need only change their demand schedules
for the product, either by an actual change in their taste for coffee, or by a combination
of boycott and philanthropy.
The fact that such a development does not take place in any given circumstance signifies
that the producers are still maximizing their monetary income in the service of the consumers,
by a cartel action as well as by any other action.
Some listeners might object that in offering higher demands for existing stock, the consumers
would be bribing the producers, and that this constitutes an unwarranted extortion on the
part of the producers.
But this charge is untenable.
Producers are guided by the goal of maximizing monetary income.
They are not extorting, but simply producing where their gains are at a maximum, through
exchanges concluded voluntarily by producers and consumers alike.
This is no more nor less a case of extortion than when a laborer shifts from a lower-paying
to a higher-paying job, or when an entrepreneur invests in what he thinks will be a more rather
than a less profitable project.
It must be recognized that once an error has been committed as it had been in the aforementioned
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.
We recognize this when previously produced machines or other capital goods face a loss of demand for their product.
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.
Since error is inevitable, this process is bound to lead to a considerable amount of idle capital goods at any given time.
Similarly, much original land area will remain idle because existing labor has more profitable
work to do on other lands.
In short, the idle coffee is the result of an error in forecasting, and should be no
more shocking or reprehensible than idle capacity in any other type of capital good.
Our argument is just as applicable to a single firm producing a unique product with an inelastic
demand as it is to a cartel of firms.
A single firm with inelastic demand for its product could also destroy part of its stock
after committing a forecasting error.
Our critique of the anti-monopoly price and consumers' sovereignty doctrines applies
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.
Inclusion and Conspiracy.
These expressions, however, are simply emotive terms designed to induce an unfavorable response.
What is actually involved here is cooperation to increase the incomes of the producers.
For what is the essence of a cartel action?
Individual producers agree to pool their assets into a common lot.
This single central organization to make the decisions on production and price policies
for all the owners, and then to allocate the monetary gain among them.
But is this process not the same as any sort of joint partnership, or the formation of
a single corporation?
What happens when a partnership or corporation is formed?
Rules agree to pool their assets into a central management, this central direction to set
the policies for the owners and to allocate the monetary gains among them.
In both cases, the pooling, lines of authority and allocation of monetary gain take place
according to rules agreed upon by all from the beginning.
There is, therefore, no essential difference between a cartel and an ordinary corporation
or partnership.
It might be objected that the ordinary corporation or partnership covers only one firm, while
the cartel includes an entire industry, that is, all firms producing a certain product,
but such a distinction does not necessarily hold.
Monopolist firms may refuse to enter a cartel, while, on the other hand, a single firm may
well be a monopolist in the sale of its particular unique product, and therefore it may also
encompass an entire industry.
The correspondence between a cooperative partnership or corporation, not generally considered reprehensible,
and a cartel, is further enhanced when we consider the case of a merger of various firms.
Mergers have been denounced as monopolistic, but not nearly as vehemently as have cartels.
Merging firms pool their capital assets, and the owners of the individual firms now become
part owners of the single merged firm.
They will agree on rules for the exchange ratios of the shares of the different companies.
If the merging firms encompass the entire industry, then a merger is simply a permanent
form of cartel.
Yet clearly the only difference between a merger and the original forming of a single
corporation is that the merger pools existing capital goods assets, while the original birth
The birth of a corporation pools money assets.
It is clear that economically there is little difference between the two.
A merger is the action of individuals with a certain quantity of already produced capital
goods, adjusting themselves to their present and expected future conditions by cooperative
pooling of assets.
The formation of a new company is an adjustment to expected future conditions before any specific
investment has been made in capital goods by cooperative pooling of assets.
The essential similarity lies in the voluntary pooling of assets in a more centralized organization
for the purpose of increasing monetary income.
The theorists who attack cartels and monopolies do not recognize the identity of the two actions.
As a result, a merger is considered less reprehensible than a cartel, and a single corporation far
less menacing than a merger.
Yet an industry-wide merger is, in effect, a permanent cartel, a permanent combination
and fusion.
On the other hand, a cartel that maintains by voluntary agreement the separate identity
of each firm is, by nature, a highly transitory and ephemeral arrangement, and, as we shall
see, generally tends to break up on the market.
In fact, in many cases, a cartel can be considered as simply a tentative step in the direction
Correction of a Permanent Merger
And a merger and the original formation of a corporation do not, as we have seen, essentially
differ.
The former is an adaptation of the size and number of firms in an industry to new conditions,
or is the correction of a previous error in forecasting.
The latter is a de novo attempt to adapt to present and future market conditions.
C. Economics, Technology and the Size of the Firm.
We do not know and economics cannot tell us the optimum size of a firm in any given industry.
The optimum size depends on the concrete technological conditions of each situation as well as on
the state of consumer demand in relation to the given supply of various factors in this
and in other industries.
All these complex questions enter into the decisions of producers and ultimately of consumers
concerning how large the firms in various lines of production will be.
In line with consumer demand and with opportunity costs for the various factors, factor owners
and entrepreneurs will produce in those industries and firms in which they can maximize their
and their monetary income or profit, other psychic factors being equal.
Since forecasting is the function of entrepreneurs, successful entrepreneurs will minimize their errors and hence their losses as well.
As a result, any existing situation on the free market will tend to be the most desirable for the satisfaction of consumers' demands,
and Finance, including herein the non-monetary wishes of the producers.
Neither economists nor engineers can decide the most efficient size of a firm in any situation.
Only the entrepreneurs themselves can determine what size of firm will operate most efficiently,
and it is presumptuous and unwarranted for economists or for any other outside observers
to attempt to dictate otherwise. In this and other matters, the wishes and demands of the
consumers are telegraphed through the price system, and the resulting drive for maximum
monetary income and profits will always tend to bring about the optimum allocation and pricing.
There is no need for the external advice of economists.
It is clear that when several thousand individuals decide not to produce and own individual
steel plants by themselves, but rather to pool their capital into an organized corporation
which will purchase factors, invest and direct production and sell the product, later allocating
the monetary gains among the owners, they are enormously increasing their efficiency.
Compared to production in hundreds of tiny plants, the quantity of production per given
factors will be greatly increased.
The large firm will be able to purchase heavily capitalized machinery and to finance better
organized marketing and distributing outlets.
All this is quite clear when thousands of individuals pool their capital into the establishment
of a Steel Firm, but why may it not be equally true when several small steel firms merge
into one large company?
It might be replied that in the latter merger, particularly in the case of a cartel, joint
action is taken not to increase efficiency, but solely to increase income by restricting
sales.
There is no way that an outside observer can distinguish between a restrictive and an efficiency
increasing operation.
In the first place, we must not think of the plant or factory as being the only productive
factors, the efficiency of which can increase.
Marketing, advertising, etc. are also factors of production, for production is not simply
the physical transformation of a product, but also consists in transporting it and placing
it into the hands of users.
The latter implies the expenses of informing the user about the existence and nature of
the product, and of selling that product to him.
Since a cartel always engages in joint marketing, who can deny that the cartel might render
marketing more efficient?
How therefore can this efficiency be separated from the restrictive aspect of the operation?
Much error would have been avoided if economists had heeded the words of Arthur Latham Perry.
Every man who puts forth an effort to satisfy the desire of another with the expectation
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.
The fundamental meaning of the root word, both in Latin and in English, is effort with reference to a sale.
A product is a service ready to be rendered.
A producer is any person who gets something ready to sell and sells it.
Furthermore, technological factors in production can never be considered in a vacuum.
Technological knowledge tells us of a whole host of alternatives that are open to us,
but the crucial questions in what to invest, how much, what production method to choose,
can be answered only by economic, that is, by financial, considerations.
They can be answered only on a market actuated by a drive for money incomes and profits.
Thus, how is a producer to decide, in digging a subway tunnel, what material to use in its construction?
From a purely technological point of view, solid platinum may be the best choice, the most durable, etc.
Does this mean that he should choose platinum?
He can make a choice among factors, methods, goods to produce, etc.,
etc., only by comparing the necessary monetary expenses, which are equal to the income the
factors could earn elsewhere, with expected monetary income from the production.
Only by maximizing monetary gain can factors be allocated in the service of consumers.
Otherwise, and on purely technological grounds, there would be nothing to prevent the building
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.
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.
Only empirical observation of the market reveals to us the full absurdity of such a transcontinental subway.
Moreover, there are no physical units with which we can compare the different types of physical factors and physical products.
Thus, suppose a producer attempts to determine the most efficient use of two hours of his labor.
In a romantic moment, he tries to determine this efficiency by purely abstracting from sordid considerations of monetary gain.
Assume that he is confronted with three technologically known alternatives.
In alternative A, two hours of labor with five pounds of clay and one oven hour produces one pot.
In alternative B, two hours of labor with one block of wood and one oven hour produces one pipe.
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.
Which of these alternatives, A, B or C, is the most efficient, the most technologically useful way of allocating his labour?
It is clear that the idealistic, self-sacrificing producer has no way of knowing.
He has no rational way of deciding whether or not to produce the pot, the pipe or the boat.
Only the selfish money-seeking producer has a rational way of determining the allocation.
In seeking maximum monetary gain, the producer compares the money costs, necessary expenses
of the Various Factors with the Prices of the Products.
Considering A and B, for example, if the purchase of the clay and oven hour would cost one gold ounce,
and the pot could sell for two gold ounces, his labor would earn one gold ounce.
On the other hand, if the wood and oven hour would cost one and a half gold ounces,
and the pipe could sell for four gold ounces, he would earn two and a half ounces for his
two hours of labor, and would choose to make this product.
The prices of both the product and the factors are reflections of consumer demand, and of
producers' attempts to earn money in its service.
The only way the producer could determine which product to make is to compare expected
monetary gains.
If the boat would sell for five gold ounces, he would produce the boat rather than the
pipe and thus satisfy a more urgent consumer demand as well as his own desire for monetary
income.
There can therefore be no separation of technological efficiency from financial considerations.
The only way that we can determine whether one product is more demanded than another
or one process more efficient than another is through concrete actions of the free market.
We may think it is self-evident, for example, that the optimum efficient size of a steel
plant is larger than that of a barbershop, but we know this not as economists from a priori
or praxeological reasoning, but purely by empirical observation of the free market.
There is no way that economists or any other outside observers can set the technological
optimum for any plant or firm.
This can be done only on the market itself.
But if this is true in general, it is also true in the specific cases of mergers and
cartels.
The impossibility of isolating a technological element becomes even clearer when we remember
Remember that the critical problem is not the size of the plant, but the size of the
firm.
The two are by no means synonymous.
It is true that the firm will consider the optimum sized plant for whatever scale its
operations will be on, and further that a larger sized plant will, Ceteris paribus,
require a larger sized firm.
But its range of decisions cover a much broader ground.
How much to invest, what good or goods to produce, etc.
A firm may encompass one or more plants or products, and always encompasses marketing
facilities, financial organization, etc., which are overlooked when only the plant is
held in view.
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.
These considerations, incidentally, serve to refute the very popular distinction between production for use and production for profit.
In the first place, all production is for use, otherwise it would not take place.
In the market economy, this almost always means goods for the use of others, the consumers.
Profit can be earned only through servicing consumers with produced goods.
On the other hand, there can be no rational production above the most primitive level
based on technological or utilitarian considerations abstracted from monetary gain.
This spurious distinction was brought into wide currency by Thorstein Veblen and continued
in the happily short-lived technocracy movement of the early 1930s.
According to his biographer, this distinction was the keynote to all Veblen's writings.
It is important to realize what we have not said in this section.
We have not said that cartels will always be more efficient than individual firms, or
that big firms will always be more efficient than small ones.
Our conclusion is that economics can make few valid statements about the optimal size
of a firm, except that the free market will come as close as possible to rendering maximum
service to consumers, whether we are considering the size of a firm or any other aspect of
production.
All the concrete problems in production, the size of the firm, the size of the industry,
The location, price, size and nature of the output, etc. are for entrepreneurs, not economists, to solve.
We should not leave the problem of the size of the firm without considering a common worry
of economic writers.
What if the average cost of a firm continues to fall indefinitely?
Should not the firm then grow so big as to constitute a monopoly?
There is much lamentation that competition breaks down in such a situation.
Much of the emphasis on this problem comes, however, from preoccupation with the case
of pure competition, which, as we shall see, is an impossible figment.
Secondly, it is obvious that no firm ever has been or can be infinitely large, so that
limiting obstacles, rising or less rapidly falling costs, must enter somewhere, and relevantly,
for every firm.
Thirdly, if a firm, through greater efficiency, does obtain a monopoly in some sense in its
Industry, it clearly does so, in the case we are considering falling average cost, by
lowering prices and benefiting the consumers.
And if, as all the theorists who attack monopoly agree, what is wrong with monopoly is precisely
a restriction of production and a rise in price, there is obviously nothing wrong with
with a monopoly achieved by pursuing the directly opposite path.
Analysis demonstrates that a cartel is an inherently unstable form of operation.
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,
The Theory of Money and Credit
If joint action is the most efficient and profitable course for each member, a merger
will soon take place.
The very fact that each member firm retains its potential independence in the cartel means
that a breakup could take place at any time.
The cartel will have to assign production totals and quotas to each of the member firms.
This is likely to lead first to a good deal of bickering among the firms over the assignment
of quotas, with each member attempting to gain a larger share of the assignment.
Whatever basis quotas are assigned on will necessarily be arbitrary and will always be
subject to challenge by one or more members.
As Professor Benham states, firms which have produced a relatively large share of output
in the past will demand the same share in the future.
Firms which are expanding, owing, for example, to an unusually efficient management, will
demand a larger share than they obtained in the past.
Firms with a greater capacity for producing, as measured by the size of their plant, will
demand a correspondingly greater share.
In a merger, or in the formation of one corporation, the stockholders, by majority vote, form a
decision-making organization.
In the case of a cartel, however, disputes arise among independent, owning entities.
Particularly likely to be restive under the imposed joint action will be the more efficient
Producers, who will be eager to expand their business rather than be fettered by shackles
and quotas to provide shelter for their less efficient competitors.
Clearly the more efficient firms will be the ones to break up the cartel.
This will be increasingly true as time goes on and conditions change from the time the
cartel was first formed.
The quotas, the jealously made agreements that formerly seemed plausible to all, now
become intolerable restrictions for the more efficient firms, and the cartel soon breaks
up, for once one firm breaks away, expands output and cuts prices, the others must follow.
If the cartel does not break up from within, it is even more likely to do so from without.
To the extent that it has earned unusual monopoly profits, outside firms and outside producers
will enter the same field of production.
Outsiders, in short, rush in to take advantage of the higher profits.
But once one strong competitor arises to challenge it, the cartel is doomed.
For as the firms in the cartel are bound by production quotas, they must watch new competitors
There are other arguments that opponents of cartels use in decrying cartel action.
One thesis asserts that there is something wicked about formerly competing firms now
Without uniting, for example, restricting competition or restraining trade, such restriction
is supposed to injure the consumer's freedom of choice.
As Hutt phrased it in his previously cited article, consumers are free and consumer's
sovereignty is realizable only to the extent to which the power of substitution exists.
But surely this is a complete misconception of the meaning of freedom.
Crusoe and Friday bargaining on a desert island have very little range or power of choice.
Their power of substitution is limited.
Yet if neither man interferes with the other's person or property, each one is absolutely
free.
To argue otherwise is to adopt the fallacy of confusing freedom with abundance or range of choice.
No individual producer is or can be responsible for other people's power to substitute.
No coffee grower or steel producer, whether acting singly or jointly, is responsible to
anyone because he chose not to produce more.
If Professor X or Consumer Y believes that there are not enough coffee producers in existence
or that they are not producing enough, these critics are free to enter the coffee or steel
business as they see fit, thus increasing both the number of competitors and the quantity
of the good produced.
If consumer demand had really justified more competitors or more of the product or a greater
The Theory of Money and Credit
Market, the false confusion of freedom with abundance rests on a failure to distinguish
between the conditions given by nature and man-made actions to transform nature.
In a state of raw nature, there is no abundance.
In fact, there are few, if any, goods at all.
Crusoe is absolutely free, and yet on the point of starvation.
Of course it would be pleasanter for everyone if the nature-given conditions had been far
more abundant, but these are vain fantasies.
For vis-à-vis nature, this is the best of all possible worlds, because it is the only
possible one.
Man's condition on earth is that he must work with the given natural conditions and
improve them by human action.
It is a reflection on nature, not on the free market, that everyone is free to starve.
Economics demonstrates that individuals entering into mutual relations in a free market in
a free society, and only in such relations, can provide abundance for themselves and for
the entire society.
Free, as always in this book, is used in the interpersonal sense of being unmolested by other persons.
To employ freedom as itself equivalent to abundance obstructs understanding of these truths.
The free market in the world of production may be termed free competition or free entry,
Meaning that in a free society anyone is free to compete and produce in any field he chooses.
Free competition is the application of liberty to the sphere of production, the freedom to
buy, sell and transform one's property without violent interference by an external power.
We have seen that in a regime of free competition, consumer satisfaction will, at any time, tend
to be at the maximum possible given natural conditions.
The best forecasters will tend to emerge as the dominant entrepreneurs, and if anyone
sees an opportunity passed up, he is free to take advantage of his superior foresight.
The regime that tends to maximize consumers' satisfaction, therefore, is not pure competition,
or perfect competition, or competition without cartel action, or anything other than one
of simple economic liberty.
Some critics charge that there is no real free entry or free competition in a free market,
Or how can anyone compete or enter a field when an enormous amount of money is needed
to invest in efficient plants and firms?
It is easy to enter the pushcart peddling industry because so little capital is required,
but it is almost impossible to establish a new automobile firm with its heavy requirements
of capital.
This argument is but another variant of the prevailing confusion between freedom and abundance.
In this case the abundance refers to the money capital which a man has been able to amass.
Every man is perfectly free to become a baseball player, but this freedom does not imply that
he will be as good a baseball player as the next man.
A man's range or power of action dependent on his ability and the exchange value of his
property is something completely distinct from his freedom.
As we have said, a free society will in the long run lead to general abundance and is
the necessary condition for that abundance.
But the two must be kept conceptually distinct and not confused by phrases such as real freedom
or true freedom.
Therefore, the fact that everyone is free to enter an industry does not mean that everyone
is able, either in terms of personal qualities or monetary capital, to do so.
In industries requiring more capital, fewer people will be able to take advantage of the
In fact, the disability is much more relevant in the case of labor than in the case of business competition.
What are modern devices such as corporations, but means of pooling capital by many people
of greater and lesser wealth?
The difficulty of investing in a new automobile firm should be considered not in terms of
the hundreds of millions of dollars required for total investment, but in terms of the
fifty or so dollars required to purchase one share of stock.
And while capital can be pooled, beginning with the smallest units, labor ability cannot
be pooled.
Sometimes the argument reaches absurd lengths.
For example, it is often asserted that now, in this modern world, firms are so large that
new people cannot compete or enter the industry because the capital cannot be raised.
These critics do not seem to see that the aggregate capital and wealth of individuals
have advanced along with the increase in wealth required to launch a new enterprise.
In fact, these are two sides of the same coin.
There is no reason to suppose that it was easier to raise the capital to launch a new
retail shop many centuries ago than it is to raise capital for the automobile firm today.
If there is enough capital to finance the large firms currently existing, there is enough
to finance one more.
In fact, capital could be withdrawn from existing large firms and shifted to new ones, if there
is a need for them.
Of course, if the new enterprise would be unprofitable and therefore unserviceable to
consumers, it is easy to see why there is reluctance in the free market to embark on
the venture.
That there is inequality of ability or monetary income on the free market should surprise
no one.
As we have seen, men are not equal in their tastes, interests, abilities or locations.
Resources are not distributed equally over the earth.
Clearly, the very term equal is unusable here.
What does it mean to say that Lawyer Jones' ability is equal to Teacher Smith's?
This inequality or diversity in abilities and distribution of resources ensures inequality
of income on the free market, and since a man's monetary assets are derived from his
and his ancestors' abilities in serving consumers on the market, it is not surprising that there
There is Inequality of Monetary Wealth as well.
The term free competition, then, will prove misleading unless it is interpreted to mean
free action, that is, freedom to compete or not to compete as the individual wills.
It should be clear from the foregoing discussion that there is nothing particularly reprehensible
Profitable or destructive of consumer freedom in the establishment of a monopoly price or
in a cartel action.
A cartel action, if it is a voluntary one, cannot injure freedom of competition and,
if it proves profitable, benefits rather than injures the consumers.
It is perfectly consonant with a free society, with individual self-sovereignty, and with
with the earning of money through serving consumers.
As Benjamin R. Tucker brilliantly concluded in dealing with the problem of cartels and
competition, that the right to cooperate is as unquestionable as the right to compete.
The right to compete involves the right to refrain from competition.
Cooperation is often a method of competition, and competition is always in the larger view
a method of cooperation, each is a legitimate, orderly, non-invasive exercise of the individual
will under the social law of equal liberty.
Viewed in the light of these irrefutable propositions, the trust, then, like every other industrial
combination endeavouring to do collectively nothing but what each member of the combination
might fully endeavor to do individually, is per se an unimpeachable institution.
To assail or control or deny this form of cooperation on the ground that it is itself
a denial of competition is an absurdity.
It is an absurdity because it proves too much.
The trust is a denial of competition in no other sense than that in which competition
Competition itself is a denial of competition.
The trust denies competition only by producing and selling more cheaply than those outside
of the trust can produce and sell.
But in that sense, every successful individual competitor also denies competition.
The fact is that there is one denial of competition which is the right of all, and that there
There is another denial of competition which is the right of none.
All of us, whether out of a trust or in it, have a right to deny competition by competing,
but none of us, whether in a trust or out of it, have a right to deny competition by
arbitrary decree, by interference with voluntary effort, by forcible suppression of initiative.
This is not to say, of course, that joint cooperation or combination is necessarily better than
competition among firms.
We simply conclude that the relative extent of areas within or between firms on the free
market will be precisely that proportion most conducive to the well-being of consumers and
producers alike.
This is the same as our previous conclusion that the size of a firm will tend to be established
at the level most serviceable to the consumers.
Does our discussion imply that whatever is, is right?
We cannot enter into a discussion of the relation of economics to ethics at this point, but
we can state briefly that our answer, pertaining to the free market, is a qualified yes.
Specifically our statement would be, given the ends on the value scales of individuals
as revealed by their real actions, the maximum satisfaction of those ends for every person
is achieved only on the free market.
Whether individuals have the proper ends or not is another question entirely and cannot
be decided by economics.
F. The Problem of One Big Cartel The myth of the evil cartel has been greatly
bolstered by the nightmare image of one big cartel.
This is all very well, one may say, but suppose that all the firms in the country amalgamated
or cartelized into one big cartel.
What of the horrors then?
The answer can be obtained by referring to Chapter 9, where we saw that the free market
placed definite limits on the size of the firm, that is, the limits of calculability
on the market.
In order to calculate the profits and losses of each branch, a firm must be able to refer
its internal operations to external markets for each of the various factors and intermediate
When any of these external markets disappears, because all are absorbed within the province of a single firm,
calculability disappears, and there is no way for the firm rationally to allocate factors to that specific area.
The more these limits are encroached upon, the greater and greater will be the sphere of irrationality,
and the more difficult it will be to avoid losses.
One big cartel would not be able rationally to allocate producers' goods at all, and hence could not avoid severe losses.
Consequently, it could never really be established, and, if tried, would quickly break asunder.
In the production sphere, socialism is equivalent to one big cartel, compulsorily organized and controlled by the state.
If all the factors and resources are absolutely controlled by the state, it makes little difference
if legally the state owns these resources.
For ownership connotes control, and if the nominal owner is coercively deprived of control,
it is the controller who is the real owner of the resource.
Those who advocate socialist central planning as the more efficient method of production
for Consumer Wants, must answer the question, if this central planning is really more efficient,
why has it not been established by profit-seeking individuals on the free market?
The fact that one big cartel has never been formed voluntarily, and that it needs the
coercive might of the state to be formed, demonstrates that it could not possibly be
Let us assume for a moment that one big cartel could be established on the free market and
that the calculability problem does not arise.
What would the economic consequences be?
Would the cartel be able to exploit anyone?
In the first place, consumers could not be exploited, for consumers' demand would still
will be elastic or inelastic, as the case may be, since, as we shall see further, consumers'
demand for a firm is always elastic above the free market equilibrium price.
It follows that the cartel will not be able to raise prices or earn more from consumers.
What about the factors?
Could not their owners be exploited by the cartel?
In the first place, the universal cartel, to be effective, would have to include owners
of primary land.
Otherwise whatever gains they might have might be imputed to land.
To put it in its strongest terms, then, could a universal cartel of all land and capital
goods exploit laborers by systematically paying the latter less than their discounted marginal
value products?
Did not the members of the cartel agree to pay a very low sum to these workers?
If that happened, however, there would be created great opportunities for entrepreneurs
either to spring up outside the cartel, or to break away from the cartel and profit by
hiring workers for a higher wage.
This competition would have the double effect of a, breaking up the universal cartel, and
and be tending again to yield to the laborers their marginal product.
As long as competition is free, unhampered by governmental restrictions, no universal
cartel could either exploit labor or remain universal for any length of time.