Monopolized Requisites of Production
( Originally Published Early 1900's )
IN the preceding chapter we were mainly concerned with the mutual relations of price and demand. The next subject in logical order is the effect of a change in the demand for a commodity, or its price, upon the supply. From the popular point of view, which was to a certain extent the view of the earlier economists, the law is very simple. When the price of a commodity rises, more people will engage in its production, until by their mutual competition the price is brought to the lowest paying point. If skill is required in the work, then the producer of that skill must be paid for the labor which he spent in acquiring it. If the compensation is more than sufficient to pay for the labor, it will stimulate men to acquire the skill. Thus the gains of a physician form the compensation not only for his current work, but for the time and money which he spent in learning his profession. It is thus conceived that the price of a commodity can be ultimately expressed in terms of human labor, provided we include not only the labor spent directly in production, but in collecting all the requisites of production, whether capital, skill, or knowledge.
There was one obvious exception to this. The production of breadstuffs and other means of subsistence required land, and it was clear that the price of land did not admit of being measured by human labor, since it was not the product of labor. Thus rent became an important factor in the price. Rent was defined by Adam Smith as the income received by the owner for the original indestructible powers of the soil.
It was next seen that production could not be increased indefinitely by the mere increase of human labor, but that in many cases every additional unit of quantity produced required more labor than the preceding unit. For example, suppose that from a given farm 1000 bushels of wheat can be produced at a certain cost in labor, fertilizers, management, etc. It is possible that by doubling the cost, that is, the labor and material devoted to the farm, 2000 bushels could be raised. If with every addition of this amount of labor 1000 additional bushels of wheat could be raised from the farm, it is evident that there would be no limitation upon the amount. But, as a matter of fact we know very well that this is not the case, and that after a certain point every additional bushel will cost more and more labor, and that practically no. amount of additional expense will increase the product beyond a certain maximum.
We must now recognize the fact that at the present time all the requisites of production are not equally at the command of every one, but that in a great number of cases their possession is limited to such an extent that no sufficient approximation to the truth can be gained by assuming that production can be measured in labor alone. We need a word to express the possession of requisites for production which are not at the command of. men in general, and the word which best expresses this is monopoly. The use of this word is indeed subject to the great objection that it is used in ordinary language as a term of reproach. Were this idea necessarily associated with it, economists should find another. But it should be a part of the training of the scientific student to eliminate all ideas of praise and blame from the terms which he uses, and to re-member that science deals only with things and facts as they are. Hence when we use the word " monopoly " we attach no reproach to the idea conveyed, but simply use the word to designate a certain state of things.
How the Monopoly Element comes into the Question. Suppose a great increase in the demand for a commodity C. We may suppose, to fix the ideas, that while a year or two ago -a quantity of C represented by 1000 units could be sold annually at a price of $1 per unit, the same amount can now be sold at $3 per unit, or that 3000 can be sold at $1 per unit. It is then clear that the result must lie somewhere between two extremes.
The first extreme case is that in which all the elements necessary for the production of C are at the command of everybody, or at least of as many people as are necessary to supply the increased demand of 3000 units. The result of this will be that a slight increase in the price of C will stimulate those already engaged in producing it to enlarge their facilities, and will draw other people into the work. This increase of production will continue until the amount produced is trebled. As production has kept pace with demand, the selling price will be the same as before, or at least not materially higher.
But suppose, as the other extreme case, that some element necessary to the production of C cannot be commanded by the world at large. Perhaps there is a man X who alone possesses the knowledge and skill to make C at a less cost than $3 per unit, or who has a patent on something which is a necessary component of. C, or there is a company Y which owns a mine out of which the raw material for making C can alone be got. It is then clear that there will not necessarily be any increase of production, but that, instead of 3000 units of C being sold at $1 per unit, there may be only 1000 as before, with the selling price raised from $1 to $3 in consequence of the increase of demand.
The word which expresses this exclusive command by X or Y may now be defined as follows :
A monopoly is the ownership or command, by one or a limited number of persons, of some requisite of production which is not solely a product of human labor.
A little consideration will make known to us three classes of monopolies.
Firstly, the exclusive command of every man over the faculties with which the Creator has endowed him constitutes a monopoly. If a man is born with an unusual share of administrative or business ability which enables him to organize and direct the productive labor of thousands of other men in the most effective and economical way ; if he is born with any special talent, or with unusual skill in any branch of production, then he has the monopoly of a valuable requisite of production which his fellow-men cannot take from him. This monopoly is not only a rightful one, but the principle on which it rests is at the basis of all our ideas of human rights.
The second great class of monopolies consists in the private ownership of natural requisites of production. As already shown, the laws of all civilized nations recognize, establish, and protect this ownership. Such natural requisites are land, and the coal, iron, and other minerals which are beneath it. Although the value of land depends largely on human labor, yet the land itself, the acres on the surface of the earth, are entirely the gift of nature. The iron, copper, silver, tin, and other ores beneath the surface of the earth are also entirely the gift of nature. Although labor is required to give them value, yet every one is not at liberty to apply this labor; the right to do this being absolutely confined to the owners. The question of the rightfulness and expediency of this class of monopolies may be regarded in some of its points as. an open one, but its discussion does not belong to the purely scientific treatment of the subject.
The third class of monopolies consists of those which. are granted by governments, such as the exclusive right to build a railway or dig a canal over particular regions, to make a patented article, or to publish a copyrighted book. Patents and copyrights are in a certain degree a mere extension of the first class of monopolies, since their object is to guarantee to inventors and authors the benefit of any superior skill with which nature may have endowed them.
It may seem that patents and copyrights do not strictly come within our definitions of monopolies, since what is monopolized cannot be called a requisite of production limited in supply. It is perfectly true that they are not material requisites of production. But we have shown that knowledge, which is immaterial, is a very important requisite, and what is granted to the patentee or author is the benefit of a certain knowledge which he has himself acquired. The man who can write a very interesting and popular novel has been endowed by nature with a peculiar skill which he can use to increase the pleasure of his fellow-men. It is perfectly right that he should gain whatever compensation he can by the use of this special skill. But when he writes his story everybody can copy it and spread it, unless forbidden to do so. Thus in order to secure the author's right to the product of his skill and labor it is necessary that government shall prohibit the multiplication by printing of copyright stories, except with the author's consent. In form the monopoly is that of printing certain combinations of words in a book, and we may consider the monopoly to consist in the exclusive right to use these printed words. From this point of view the object in which the wealth inheres would not be the work of nature. But the author's faculties are originally the work of nature, and it is this which we should regard as really protected by the copyright laws. These same remarks apply to patented machines with so few modifications that the reader can make them for himself.
Limitations 'upon the Definition of the Word Monopoly. The essential feature of the monopoly element in production, which gives it its economic importance, consists in this, that the possessors of monopolies may have to a greater or less extent an advantage over their less favored fellows in the price which they can command for the use of the special agencies monopolized. This advantage must be not merely a temporary one, but such as to entirely prevent competition on equal terms between the less and the more favored classes in the use of the monopolized agency. In order that the definition may include nothing but what is essential to this advantage, certain limitations have to be placed upon it.
First Limitation. A monopoly is of no value or account unless the number of persons who possess it is so small copared with the quantity of the monopolized article which the public demand that these persons can command a higher price for the article than if there were no monopoly. For example, in the widest sense, we may say that John Smith has the complete and exclusive monopoly of his own hands. But if his hands are no better than those of other people, this monopoly gives him no advantage over them, because they can do what-ever he can. Again, the shoemaker has the monopoly of his own skill; and it may be that not one man out of fifty in the community has the natural aptitude which would enable him to become a good shoemaker. But if this fraction of the population has the aptitude, and can make all the shoes the community demands, the monopoly is of no value. We must there-fore distinguish between effective monopolies, which give their possessors an advantage in production, and ineffective monopolies, which give no such advantage, either because there is not. sufficient demand for the monopolized requisite, or because too many people share the monopoly. Hereafter whenever we use the word monopoly we shall be understood to mean an effective monopoly.
Second Limitation. It must be understood that the application of the word monopoly is limited to such requisites of production as are not the sole products of the labor of the person owning them. Now, a number of elements enter into every production. When, therefore, we inquire how far a requisite of production is monopolized, we must analyze it into its original elements until we find where the natural agency comes in. For example, the skill of the shoemaker may be entirely a product of time and labor spent in acquiring it. But in order to effectively expend that time and labor he must have possessed in the beginning the industry and perseverance to enable him to learn his trade. This industry and perseverance may be in part acquired qualities, and therefore not monopolies; but in so far as the man did not acquire them they are monopolies. In order to acquire them he must have had some good qualities born in him, and his parents must have taken some pains in promoting these qualities. Now, since the man did not make himself nor guide his parents in his early education, it is to these native and early acquired habits that we are to look for the monopolized elements in his nature.
So also with regard to any finished product. We cannot generally say of the product as a whole that it is or is not monopolized. What we must do is to trace its production back to its beginning, and see what monopolized elements in the shape of patent-rights, land, ores, or other natural products were necessary elements in its existence.
Third Limitation. Monopolies are not in general absolute, but the advantages which they give vary, in degree. As a general rule a monopolized requisite is not one which the owners of the monopoly alone can supply on any terms what-ever, but it is one which they can supply with less labor to themselves than other people can. To return to our former example : even if one or a few men, owing to their superior skill, should monopolize all the shoemaking of a community, it may nevertheless be the case that other people could, on a pinch, make shoes. Again, the ownership of land is very valuable near a city, and continually diminishes as we go away from population. If the owners near the city charge too high for their products, people can fall back on the more distant land. Some deposits of iron ore may be so rich in metal and so near the surface that iron can be made from them at six dollars per ton ; from other deposits it might cost twelve dollars a ton, and from yet others twenty, fifty, or a hundred. The values of these monopolies therefore differ in degree, and no one of them be-comes effective until it will pay to utilize the ore.
Since, in these cases, a monopoly only means facilities superior to those enjoyed by other men, there is implied in it a term of comparison comprising men in general. Then when we say that this man X possesses talents, skill, or a natural agent superior to those enjoyed by men in general, the question may arise what we are to understand by this last term. There are so many gradations among men that we can set up no exact standard as that of men in general. The question cannot be answered in a way which shall be mathematically exact. We can only say that the proper term of comparison is the class of men having the same general talents, education, possessions, or powers of production in the community at large. Since this implies a series of gradually increasing monopolies, we may call them relative or graduated monopolies.
An absolute monopoly will then mean one possessed only by one or a limited number of persons.
Temporary Monopolies. If an individual or a company has a great capital invested in a manufacturing establishment, although there may be no actual monopoly, yet for the time being the situation will be the same in its relation to varying demand as if the skill and capital invested in the establishment were monopolized. An increasing demand, especially if it is believed to be temporary, cannot be at once met by other men founding similar factories, because this requires time, while the product is wanted now. But if demand falls off, the establishment cannot advantageously devote its capital and its organization to any other industry than that in which it is engaged. Cotton-making machinery can make nothing but cotton, and the operatives of the factory are not readily available for other employments. The result is that the owners of the factory may be obliged to go for a considerable period without gaining either profits on their investments or compensations for their peculiar skill.
In this connection we must always remember that the economic effect of a monopoly does not arise merely from its preventing competition on equal terms, but that it also implies that the owner of the monopolized product cannot change his occupation without a relative disadvantage. For example, a lawyer who has rare natural gifts for his profession cannot advantageously change that profession merely because he finds the demand for his services falling off. The chances are that in any other profession he can do no better than the common run of mankind.
Thus the conclusion that the supply of a monopolized element cannot be readily increased to meet an increasing demand implies that it cannot readily be diminished to meet a diminishing demand. This is as true of a temporary monopoly as of any other one.
Recapitulation. The preceding definitions may be summed up as follows :
I. When one or a limited number of persons command the supply of any natural requisite of production their power is called a monopoly.
II. Monopolies inhere, not in manufactured products, but in the original elements or requisites which are necessary to the existence of the product.
III. A monopoly is ineffective if the number of holders is so great and the demand for the requisite so small that the holders can command no higher price for the requisite monopolized than will pay them for the labor and capital which they expend in supplying it. It is effective when the demand becomes so great or the supply so small that the monopolized requisite commands a higher price than this.
IV. A monopoly is complete or absolute if no others than one or a limited number of possessors can supply the requisite. It is relative or graduated when it comprises only superior facilities for supplying the requisite, so that the latter can be obtained from an unlimited number of sources by increasing the labor and capital devoted to obtaining it.
V. A temporary monopoly may inhere in a manufactured product through a sudden increase of demand, or through all the manufacturers combining to limit production and keep up price.
Effect of Monopolies upon the Relation between Price and Supply. We have seen that when the demand for a commodity increases in such wise that more of it is wanted and, in consequence, people are willing to give a higher price for it, one of two things will occur. Its producers must either make a greater quantity of the commodity in order to supply the increased demand, or they can and will charge a higher price without increasing the quantity. Thus the supply and demand can be equalized in either of two ways by a proper adjustment of the price. Both adjustments will commonly come into play; that is, a larger quantity will be produced, but not a quantity so much larger that it will all be demanded at the old price. The production will be increased and the price raised at the same time.
Let us return to the illustration of § 22. We there supposed that 1000 units of a product C were sold annually, in a certain condition of demand at the price of $1 per unit. When the -demand is increased threefold the extreme results would be :
1000 units produced as before, but sold at $3 per unit.
3000 units produced and sold at the old price of $1.
If, as a result of the increased demand, 3000 units were produced, corresponding to the increase, it would show that there was no effective monopoly. If only 1000 units were produced, it would show that the monopoly was absolute. The average result might be that 2000 units would be produced, and would be sold at perhaps $1.50 per unit, or at least at some price exceeding $1.
The state of equilibrium is reached when the price is so adjusted that the quantity produced and brought to market is all that can be sold at that price, and all that the producers are willing to make at that price.
The important distinguishing effect of a monopoly is that it prevents the supply of the commodity in which it inheres from varying in response to variations in the demand. The question what kind of monopolies enter into a manufactured product, and to what extent they enter, can be best answered by investigating the effect of an increased demand for that product.
If the conditions of production are such that any increase of demand will be met by a corresponding increase of production without raising the price, then there is no monopoly. If, owing to the necessity of requiring skill or capital, a considerable period, say a year or more, is required to increase the production, then there may be a temporary monopoly. If, however, the price comes down to its former limit when a reasonable time has been given for increasing production, the monopoly is only temporary. If it will never come down, then the monopoly is permanent and real.
If the same party or parties must supply the market, no matter how much the demand may be increased, the monopoly is absolute. If the increased demand and higher prices result in a limited competition, the monopoly is relative.
Moreover, in every case, to find in what particular requisite the monopoly inheres, we must seek out those requisites the supply of which cannot be indefinitely increased without increasing the cost. These will be the monopolized requisites.