Plausible Capitalism

4. Let us take the second stride.

The Marshall-Wicksell analysis of course did not overlook the many cases that fail to conform to that model. Nor, for that matter, had the classics overlooked them. They recognized cases of “monopoly,” and Adam Smith himself carefully noticed the prevalence of devices to restrict competition 6 and all the differences in flexibility of prices resulting therefrom. But they looked upon those cases as exceptions and, moreover, as exceptions that could and would be done away with in time. Something of that sort is true also of Marshall. Although he developed the Cournot theory of monopoly 7 and although he anticipated later analysis by calling attention to the fact that most firms have special markets of their own in which they set prices instead of merely accepting them, 8 he as well as Wicksell framed his general conclusions on the pattern of perfect competition so as to suggest, much as the classics did, that perfect competition was the rule. Neither Marshall and Wicksell nor the classics saw that perfect competition is the exception and that even if it were the rule there would be much less reason for congratulation than one might think.

If we look more closely at the conditions—not all of them explicitly stated or even clearly seen by Marshall and Wicksell—that must be fulfilled in order to produce perfect competition, we realize immediately that outside of agricultural mass production there cannot be many instances of it. A farmer supplies his cotton or wheat in fact under those conditions: from his standpoint the ruling prices of cotton or wheat are data, though very variable ones, and not being able to influence them by his individual action he simply adapts his output; since all farmers do the same, prices and quantities will in the end be adjusted as the theory of perfect competition requires. But this is not so even with many agricultural products—with ducks, sausages, vegetables and many dairy products for instance. And as regards practically all the finished products and services of industry and trade, it is clear that every grocer, every filling station, every manufacturer of gloves or shaving cream or handsaws has a small and precarious market of his own which he tries—must try—to build up and to keep by price strategy, quality strategy—“product differentiation”— and advertising. Thus we get a completely different pattern which there seems to be no reason to expect to yield the results of perfect competition and which fits much better into the monopolistic schema. In these cases we speak of Monopolistic Competition. Their theory has been one of the major contributions to postwar economics. 9

There remains a wide field of substantially homogeneous products— mainly industrial raw materials and semi-finished products such as steel ingots, cement, cotton gray goods and the like—in which the conditions for the emergence of monopolistic competition do not seem to prevail. This is so. But in general, similar results follow for that field inasmuch as the greater part of it is covered by largest-scale firms which, either individually or in concert, are able to manipulate prices even without differentiating products—the case of Oligopoly. Again the monopoly schema, suitably adapted, seems to fit this type of behavior much better than does the schema of perfect competition.

As soon as the prevalence of monopolistic competition or of oligopoly or of combinations of the two is recognized, many of the propositions which the Marshall-Wicksell generation of economists used to teach with the utmost confidence become either inapplicable or much more difficult to prove. This holds true, in the first place, of the propositions turning on the fundamental concept of equilibrium, i.e., a determinate state of the economic organism, toward which any given state of it is always gravitating and which displays certain simple properties. In the general case of oligopoly there is in fact no determinate equilibrium at all and the possibility presents itself that there may be an endless sequence of moves and countermoves, an

indefinite state of warfare between firms. It is true that there are many special cases in which a state of equilibrium theoretically exists. In the second place, even in these cases not only is it much harder to attain than the equilibrium in perfect competition, and still harder to preserve, but the “beneficial” competition of the classic type seems likely to be replaced by “predatory” or “cutthroat” competition or simply by struggles for control in the financial sphere. These things are so many sources of social waste, and there are many others such as the costs of advertising campaigns, the suppression of new methods of production (buying up of patents in order not to use them) and so on. And most important of all: under the conditions envisaged, equilibrium, even if eventually attained by an extremely costly method, no longer guarantees either full employment or maximum output in the sense of the theory of perfect competition. It may exist without full employment; it is bound to exist, so it seems, at a level of output below that maximum mark, because profit-conserving strategy, impossible in conditions of perfect competition, now not only becomes possible but imposes itself. Well, does not this bear out what the man in the street (unless a businessman himself) always thought on the subject of private business? Has not modern analysis completely refuted the classical doctrine and justified the popular view? Is it not quite true after all, that there is little parallelism between producing for profit and producing for the consumer and that private enterprise is little more than a device to curtail production in order to extort profits which then are correctly described as tolls and ransoms?