Further Essays in Economics
Leon Maclaren

V

MONOPOLIES

A MAN enjoys monopoly powers when by reason of some privilege he is able to exclude other men from any trade or any market. It is not necessary for him to be able to exclude all others entirely; sufficient that he can exclude some. Naturally, the value to him of his monopoly powers will vary with their extent.

The privileges which enable some to prevent others from entering particular trades or markets are few but effective.

First in importance is the control of land. There is no surer way of excluding others from a particular trade or a particular locality than by acquiring the land suitable for that trade in that locality, not in order to use it, but in order to prevent its use for particular purposes.

To begin with a small instance; it has been a common practice amongst persons developing building estates to enter into agreements with each of their trading tenants by which they undertake not to permit any other person on the estate to carry on the trade in which the tenant is engaged. This is a valuable privilege on a large estate, because it naturally inflates the rent obtained by the tenant with the result that he is willing to pay a larger sum to the estate owner as his landlord for the protected tenancy. From the standpoint of the residents on the estate, such an arrangement is usually both burdensome and expensive: and it illustrates very clearly how monopoly works. A rent inflated at the general expense, with a corresponding increase in the landlord's claim.

On a larger scale, the entrepreneurs may take it upon themselves to secure monopoly powers in particular localities. Thus in a great town, the sites most suitable for popular restaurants will be the corner sites at the junction of main thoroughfares, especially where many routes converge. A restaurateur may therefore find property dealing a valuable sideline to his business. By acquiring substantial interests in these valuable sites, he may let them to tenants to cover his outlay but provide in all the leases that the sites shall not be used for the popular restaurant trade. The more sites he obtains the closer he comes to being the only restaurateur able to carry on business in these favourable situations. The general public, whose limited lunch hour and limited means conjoin to prevent their searching out the independent restaurants, find themselves herded into the places provided by these chain purveyors of mass-produced food until ingrained habit teaches them to like it. Equally the streams of strangers who would be lost in the by-ways, intensify the press of crowds at these favoured sites. In the course of time, one chain amalgamates with another and monopoly emerges in its full strength. The rents produced on these sites rise rapidly, and the entrepreneur, who has not taken steps to liquidate or postpone the landlord's claim, will find when his leases fall in that his landlord is fully aware of the value of his privileged position. In the same way cinema and theatre chains may be extended until they become masters of the whole industry. In every such case it will be found that the property dealing subsidiaries are rich and powerful.

No field is so sure in this kind of operation as that of the basic industries; those engaged in extracting raw materials from the soil. Gain control of the soil from which the raw materials are drawn, exclude others, and all will pay tribute. People may take sandwiches to the office, they may break the habit of the weekly visit to the cinema, but they will not go without coal, iron, aluminium, tin, lead, oil, bricks, cement, fats or chemicals in one form or another. With control of production at this point, the starting point of all industry, the entrepreneur can extend his activities into every field of production which uses his raw material. Beginning with control of the production and marketing of fats for soap and margarine, he may end with chains of grocery stores, fishmongers' shops, and sausage and ice cream businesses. These sprawling combines, cumbersome and inefficient, are built up and maintained at great cost. Such are the rents which their privileged position brings them, however, that despite all the costs, despite all the cumbersome waste inseparable from their unwieldy size, they are very profitable.

Next in importance after the control of land, are privileges bestowed by law. By means of import restrictions varying in rigour from taxes on imported goods to absolute prohibitions of imports, those who control the protected market are insulated from foreign competition. Still more efficient however, is the legal limitation of production itself. It is amazing to reflect that governments have worked in concert over the whole world to restrict production by such instruments as the international tin, sugar and rubber agreements, by which all governments having jurisdiction over producing territories for the particular commodity agreed, either to fix a quota of production for each territory, or to regulate the sales of the commodity; and the various parliaments and other legislative bodies passed the necessary laws. National laws to restrict production are many and varied. Between 1935, and 1940 the British government restricted the production in England of potatoes, bacon and meat by orders made under the Agricultural Marketing Acts.

An important and rather different legal power is that conferred by the Patents Acts. The intention of this legislation is to secure to inventors the reward for their endeavour and achievement. This is sought to be secured by the registration of inventions, and by giving the owner of a registered patent a complete monopoly on the manufacture, use and sale of the patented device. If the owner agrees, however, anyone may use the registered patent provided he pays a royalty to the owner - a system which is normally used by universities and similar institutions. Now it is evident that a monopoly in an invention may give an owner, who is engaged in a trade, a powerful lead over his competitors. It is not surprising therefore, to find that large trading undertakings devote much money, time and energy to acquiring patents, both by buying up inventions and by employing research scientists and patenting the results of their researches. They do not necessarily put the invention to any use.

From the social standpoint the greatest benefit which the inventor can confer flows from the general use of his invention, not from the restriction of that use. It is injurious that some traders should gain great advantage and others suffer severe handicaps as a result of the inventor's work. At the same time it is important to protect the inventor so far as the law can protect him from going unpaid for the work he does. If registration were limited to the method by which an invention is made available for the use of anyone without restriction upon payment of a proper royalty to the inventor, both problems would be solved. Firstly, the inventor's reward would be as safe as it is now. Moreover, it would be directly related to the use made of the invention and not to the monopoly power which the patent conferred. What is more, no trader would gain a monopoly power from this registration. Incidentally, the practice of making some minor improvement in a new invention and registering the improvement in order to defeat the original patent would become pointless and a waste of time, money and energy.

Another important privilege is the ownership of public utilities such as ports, railways, water, gas and electricity supplies and the like. From their very nature, these services must become monopolies. It is not practical to have competing services for gas, water, electricity or railways. These public services inevitably fall into geographical areas within which only one service can operate economically. Every port has its own hinterland and its own particular qualities making it suitable for particular purposes.

These public services are different in their nature from ordinary industrial enterprises. Once they have been fully extended and established, they are not subject to the spur of competition as is the case in other industries, and consequently are not obliged to keep pace with other undertakings controlled by skilful men. On the other hand the public whom they serve take an interest in them quite beyond that which they are able to take in other industries. The condition of the gas, water, electricity or transport services is a constant topic of conversation and of public debate. The daily use of these services and the daily dependence on them of all the members of the public who live in the area where they operate makes this quite natural. They are, therefore, peculiarly suited to public control. In places where any of these services have been administered by the local elected authority their efficiency is the kind of issue which will swing local elections, since the position and prestige of the councillors largely depends upon it. By contrast, the directors of the privately-owned public utility undertakings are all but free from responsibility. Provided they pay a dividend to their shareholders, which in their monopoly position is not usually difficult, they are beyond criticism. In such cases, the efficiency of the unit depends entirely on the drive and skill of the particular management and there is no external pressure to keep the timid or indolent or inefficient managements up to any general level or standard.

Indeed, it is almost self-evident that public services should be publicly controlled where from the nature of the service it becomes a monopoly. The method of control, however, is of major importance. Those charged with the management of the service should be directly responsible to the people who use it for the simple reason that the state of the electricity supply, say, in Stockton-on-Tees, might decide the fate of the town councillors, but it certainly would not swing a general election, where issues of much wider and graver import hang in the balance. To put these public services under a central authority, whether or not it is responsible to a Minister of the Crown, protects them from the criticisms of the users of the service just as efficiently as the shareholders protect the board of directors in a private concern. Indeed, the necessity under which the directors work at least to show a profit on the undertaking is removed from these public boards, and they become subject to a most undesirable political pressure not to prejudice the party in power by expecting too much from the numerous employees. It is to be preferred, therefore, that the organisation of public services should be based on the smallest convenient area and that this area should be controlled by the elected authority. The co-ordination of these services could then be operated by regional or central committees, as might be convenient, representing the elected authorities and responsible to the regional or central authority. By this means the pyramid would stand on its base instead of being precariously balanced on its apex. More important, the units being relatively small there would be a direct personal contact between the management and those working in the unit, a relationship which could do much to dispel the kind of friction which grows from working to rules laid down by a remote authority for people of whom it has no direct knowledge and whose work and conditions of work must vary greatly in accordance with the nature and the people of the area which they serve.

It should of course be the duty of all these authorities to serve all people wishing to use their services and to do so without any discrimination between them. Every individual should have a right to enforce this duty by process in the ordinary courts in the land.

It is not only the fact that these services inevitably become monopolies that makes them significant. For example, people who own and operate railways or ports, if allowed to pick and choose whom they will serve and on what terms, are in a position very quickly to capture the trade of the area which depends on their services. It has been the practice in Great Britain to restrict the powers of these undertakings and to oblige them to give equal service to all upon fixed scales of charges. This, however, has not been the case everywhere, particularly in colonial territories, where the control of such services has been used to gain control of the trade of the territory. Again, the trade of any locality can be very adversely affected if the public services are inefficient or expensive. It is just as though those working in the area were subjected to a discriminatory tax upon their produce. For all these reasons it is desirable that public services which become monopolies should be controlled by the elected authorities for the areas in which they operate.

Another device by which monopolies are extended is the use of agreements in restraint of trade. The old common law of England sternly declared all such agreements to be illegal, as they were conceived to be a breach of the duty not to interfere with a person's right to earn his living in his own way. In a previous essay it was observed how, where all land is enclosed, and wages are reduced to a minimum and the control of industry falls into the hands of promoters and money-lenders, the operation of economic law causes trade wars which in times of slump become a desperate struggle for existence. These undoubted facts have forced themselves upon the notice of judges, who have accommodated the principles of law to the facts of the cases before them. The rule against restraints on trade has therefore been modified by the introduction of an exception which has all but destroyed the rule. Men are now permitted to make agreements enforceable by the courts provided that the restraints they put upon the action of others are reasonable and are intended to protect the interests of the restrainer rather than to do injury to the other party. Now the boundaries between defence and aggression cannot be drawn, and what is reasonable is a matter of opinion. So difficult does the problem become that in two famous cases the Court of Appeal and the Court of Criminal Appeal took opposite views. A trade association sought in the civil courts to recover a penalty under the association's rules from a trader who had sold goods below the fixed price. The civil Court of Appeal gave the association judgment for the penalty. The Court of Criminal Appeal, however, convicted the secretary of the association of demanding money with menaces. The conflict was ultimately settled by the House of Lords in favour of the contract constituted by the rules of the association and against the view of the criminal court. These two cases illustrate what happens when economic forces drive men to abandon what are plainly sound principles of human conduct.

Agreements in restraint of trade have gone to great lengths and have been used to extend the power of already established monopolies. Traders have been persuaded both by economic circumstances and by the intervention of governments in trade, to form themselves into trade associations. These associations, not infrequently backed by suppliers who hold a monopoly of some essential raw material of the trade, have laid down rules fixing prices and restricting the entrance of new-comers into the trade. These rules have been supported by powerful sanctions. A favourite device is to black-list a defaulter and to recover a penalty from him, and for the defaulter to be put beyond bounds to any member of the association and his supplies or some of them cut off. Not infrequently such rules provide for arbitration in the case of dispute. Under cover of the Arbitration Acts arbitrators have in virtue of such rules exercised a private jurisdiction with power to punish defaulters and even put them out of business.

Throughout the centuries merchants have always established their private courts administering rules peculiar to the trade concerned and have by this means facilitated their trade and done much to preserve law and order in mercantile relationships. From time to time these private jurisdictions have been extended beyond their useful sphere to become public abuses and the time is certainly ripe for an enquiry into these jurisdictions and for amendment of the laws under which they operate.

It is, however, of little use to put these matters in good shape if economic forces are putting human relationships in bad shape. Before these mighty influences human legislation is of little avail. Plainly the fundamental conditions which are within human control must be modified so that these same powerful forces may shape human affairs in the desired way instead of perverting them.

Contracts in restraint of trade are greatly facilitated by the concentration of wealth in the hands of a few. As has been seen, those who subscribe the funds with which sites are acquired and equipment obtained for the labourers in the larger undertakings stand in relation to the undertaking as a money-lender does to a debtor. Their knowledge of and interest in the undertaking is generally limited to this relationship. It is necessary, therefore, for them to appoint directors to manage the concern. Not unnaturally, they judge the merit of directors by the dividends they declare. In these circumstances some men will gain a reputation for the management of industry in the service of the money-lender and will be invited to serve on the boards of many companies. An agreement between these companies soon becomes a Pooh-Bah operation, where Mr. Brown of Eccentric Enterprises Limited writes to himself as Director of Eccentric Appliances Limited proposing a cartel arrangement which, after due consideration and carefully weighing the merits of it, he agrees to accept.

Again, those who have acquired a monopoly in any commodity can in time force a restrictive association on those who trade in that commodity and can cut off supplies from those who do not abide by the rules.

Moreover, national monopolies are easily extended by agreement into international cartels which control production of the monopolised commodities throughout the world and determine the supply to particular markets. Nothing short of dissolving the national monopolies would break up these cartels. It would, however, be sufficient to dissolve one because the one nation whose supplies went on the world market at keen competitive prices would shake the whole expensive and extravagant arrangement to its foundations.

These, then, are the powers by which monopoly is sustained: control of natural resources so as to exclude others; the force of law; control of public services; the concentration of wealth in the hands of a few; and agreements in restraint of trade.

To remove these powers will be to dissolve monopoly. If land were free and any man who so wished could easily acquire a piece for himself, and if every land-holder were under a duty to keep his land in good condition, not to use it in a way which would disturb his neighbour's use of his land, and further to yield to the community the rental value of his land; and if with the public revenue drawn from this source taxation were removed from production and the processes of production; then two things at least would follow. Firstly, it would be impractical for a man to hold more land than he could profitably use and the power to exclude men from natural resources would be destroyed. Secondly, wealth would be redistributed so that wages would rise to what a man could earn on the best free land open to use as his own master: and those engaged in every undertaking would provide the funds necessary to equip their own labour. It would be rare indeed for anyone to have recourse to a money-lender for this purpose and the control of the undertaking would be in the hands of the fully qualified men engaged in them. The result of this would be that the concentration of wealth which smoothes the way towards monopoly would be dispersed and there would be in every industry so many undertakings that it would be hopeless without the aid of law to enforce agreements in restraint of trade. With the fundamental pattern of society in this shape it will be easy to remove the other supports of monopoly. The laws sustaining them could be repealed; public services which by their nature are monopolies, could be put under public control and the direction of them given to the elected representatives of the people living in the locality where they operated ; and finally, the old rule against agreements in restraint of trade could be restored to its ancient vigour.

Thus robbed of the privileges by which monopolists exercise their powers, they could no longer exclude new entrants into their trade. The keen breath of competition would rapidly reduce them to undertakings of a kind and size similar to those which would come into being.

It remains to observe what advantage monopoly confers and its effect upon other undertakings. It is evident that those who build and sustain monopolies do not stint time, trouble or expense in the process. This must be because the advantages which they gain far outweigh the debit side of the operation. By robbing their customers of an alternative market they are enabled to fix the price of their products at such level as seems best to them. Needless to say, this level is considerably higher than would have been obtained in a free market. Were it otherwise, there would be no point in the heavy expenses involved in building up and supporting monopoly. Now this increased reward which comes to the monopolist does not go in wages. It is kept by the tenant in occupation of the land; it is rent. The extent of this inflation of rent on land suitable for use in a monopolised trade is illustrated whenever a piece of good land is discovered outside the monopolist's control: for example, when oil is discovered in a man's land he becomes very rich over-night.

This inflated rent, however, comes to the tenants of the affected land in virtue of the toll they are able to levy on other people in increased prices. These are drawn in the first instance sometimes from wages - as when the labourer's wife purchases monopolised articles while doing her shopping and sometimes from rent when the tenant in occupation of land buys the monopolised commodities and materials for his industry. As however, wages are at present determined by the least a man is willing to accept, other things being equal, anything which tends to inflate the cost of living inflates his minimum demand and to this extent reduces rent. In these ways the inflated rent on the monopolist's land is achieved by the reduction of rent on other land.

Now the effect of this reduction of rent on poorer sites is to jeopardise the tenant's chances of paying his landlord, the money-lender and the tax gatherer. Plainly if his rent is reduced to less than the secondary claims upon it, he will be forced out of business. In this way, monopoly breeds monopoly, forcing out of production men and land which otherwise would be fully engaged. In short, the charges levied by monopolists upon their fellow human beings operate in just the same way as taxation when it is levelled on production and on incomes.

To the extent that this monopoly charge reduces production and the chances of employment it has two serious results. First, it further restricts the opportunity of enterprising men to set up on their own account by limiting the area of land upon which they can successfully work. Secondly, by reducing the opportunities of employment it increases the struggle for work and reduces wages.

This is the vicious circle which can only be cut by removing the privileges which set it in motion. No laws prohibiting monopoly, no compulsory decentralisation nor similar device can check its growth. These formulas will only drive it underground. With monopolies as with other social problems, it is useless to play with effects. Nothing but the alteration of the fundamental human relationships from which the whole train of relationships proceeds can change the process which has been under examination.

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