It was not inevitable that it should always anticipate increases in the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the
field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel.
ALCOA is being condemned for being too successful, toe efficient, and too good a competitor. Whatever damage th< antitrust laws may have done to our economy, whatevei distortions of the structure of the nation's capital they ma] have created, these are less disastrous than the fact that the effective purpose, the hidden intent, and the actual practice of the antitrust laws in the United States have led to the condemnation of the productive and efficient members of ouj society because they are productive and efficient 5. COMMON FALLACIES ABOUT CAPITALISM BY NATHANIEL BRANDEN MONOPOLIES IN A SOCIETY OF LAISSEZ-FAIRE CAPITALISM, WHAT WOULD PREVENT THE FORMATION OF POWERFUL MONOPOLIES ABLE TO OWN CONTROL OVER THE ENTIRE ECONOMY? One of the worst fallacies in the field of economics— propagated by Karl Marx and accepted by almost everyone today, including many businessmen—is the notion that the development of monopolies is an inescapable and intrinsic result of the operation of a free, unregulated economy. In fact, the exact opposite is true. It is a free market that makes monopolies impossible. It is imperative that one be dear and specific in one's definition of "monopoly." When people speak, in an economic or political context, of the dangers and evils of monopoly, what they mean is a coercive monopoly—i.e., exclusive control of a given field of production which is closed to and exempt from competition, so that those controlling the field are able to set arbitrary production policies and charge arbitrary prices, independent of the market, immune from the law of supply and demand. Such a monopoly, it is important to note, entails more than the absence of competition; it entails the impossibility of competition. That is a coercive monopoly's characteristic attribute, which is essential to any condemnation of such a monopoly. In the entire history of capitalism, no one has been able to These articles appeared originally in the "Intellectual Ammunition Department" of The Objectivist Newsletter. They are brief answers to the economic questions most frequently asked by readers—questions that reflect the most widely spread misconceptions about capitalism. 72 establish a coercive monopoly by means of competition on a free market. There is only one way to forbid entry into a given field of production: by law. Every coercive monopoly that exists or has ever existed—in the United States, in Europe, or anywhere else in the world—was created and made possible only by an act of government: by special franchises, licenses, subsidies, by legislative actions which granted special privileges (not obtainable on a free market) to a man or a group of men, and forbade all others to enter that particular field. A coercive monopoly is not the result of laissez-faire; it can result only from the abrogation of laissez-faire and from the introduction of the opposite principle—the principle of statism. In this country, a utility company is a coercive monopoly: the government grants it a franchise for an exclusive territory, and no one else is allowed to engage in that service in that territory; a would-be competitor, attempting to sell electric power, would be stopped by law. A telephone company is a coercive monopoly. As recently as World War II, the government ordered the two then existing telegraph companies, Western Union and Postal Telegraph, to merge into one monopoly. In the comparatively free days of American capitalism, in the late-nineteenth-early-twentieth century, there were many attempts to "corner the market" on various commodities (such as cotton and wheat, to mention two famous examples)—then close the field to competition and gather huge profits by selling at exorbitant prices. All such attempts failed. The men who tried it were compelled to give up—or go bankrupt. They were defeated, not by legislative action, but by the action of the free market. The question is often asked: What if a large, rich company kept buying out its smaller competitors or kept forcing them out of business by means of undercutting prices and selling at a loss—would it not be able to gain control of a given field and then start charging high prices and be free to stagnate with no fear of competition? The answer is: No, it could not be done. If a company assumed heavy losses in order to drive out competitors, then began to charge high prices to regain what it had lost, this would serve as an incentive for new competitors to enter the field and take advantage of the high profitability, without any losses to recoup. The new competitors would force prices down to the market level. The large company would have to abandon its attempt to establish monopoly prices—or go bankrupt, fighting off the competitors that its own policies would attract. It is a matter of historical fact that no "price war" has ever succeeded in establishing a monopoly or in maintaining prices above the market level, outside the law of supply and demand. ("Price wars" have, however, acted as spurs to the economic efficiency of competing companies—and have thereby resulted in enormous benefits to the public, in terms of better products at lower prices.) In considering this issue, people frequently ignore the crucial role of the capital market in a free economy. As Alan Greenspan observes in his article "Antitrust"1: If entry into a given field of production is not impeded by government regulations, franchises, or subsidies, "the ultimate regulator of competition in a free economy is the capital market. So long as capital is free to flow, it will tend to seek those areas which offer the maximum rate of return." Investors are constantly seeking the most profitable uses of their capital. If, therefore, some field of production is seen to be highly profitable (particularly when the profitability is due to high prices rather than to low costs), businessmen and investors necessarily will be attracted to that field; and, as the supply of the product in question is increased relative to the demand for it, prices fall accordingly. "The capital market," writes Mr. Greenspan, "acts as a regulator of prices, not necessarily of profits. It leaves an individual producer free to earn as much as he can by lowering his costs and by increasing his efficiency relative to others. Thus it constitutes the mechanism that generates greater incentives to increased productivity and leads, as a consequence, to a rising standard of living." The free market does not permit inefficiency or stagnation— with economic impunity—in any field of production. Consider, for instance, a well-known incident in the history of the American automobile industry. There was a period when Henry Ford's Model-T held an enormous part of the automobile market. But when Ford's company attempted to stagnate and to resist stylistic changes—"You can have any color of the Model-T you want, so long as it's black"—General Motors, with its more attractively styled Chevrolet, cut into a major segment of Ford's market. And the Ford Company was compelled to change its policies in order to compete. One will find examples of this principle in the history of virtually every industry. Now if one considers the only kind of monopoly that can exist under capitalism, a now-coercive monopoly, one will see 1 See chapter 4. that its prices and production policies are not independent of the wider market in which it operates, but are fully bound by the law of supply and demand; that there is no particular reason for or value in retaining the designation of "monopoly" when one uses it in a non-coercive sense; and that there are no rational grounds on which to condemn such "monopolies." For instance, if a small town has only one drugstore, which is barely able to survive, the owner might be described as enjoying a "monopoly"—except that no one would think of using the term in this context. There is no economic need or market for a second drugstore, there is not enough trade to support it. But if that town grew, its one drugstore would have no way, no power, to prevent other drugstores from being opened. It is often thought that the field of mining is particularly vulnerable to the establishment of monopolies, since the materials extracted from the earth exist in limited quantity and since, it is believed, some firm might gain control of all the sources of some raw material. But observe that International Nickel of Canada produces more than two-thirds of the world's nickel—yet it does not charge monopoly prices. It prices its product as though it had a great many competitors —and the truth is that it does have a great many competitors. Nickel (in the form of alloy and stainless steels) is competing with aluminum and a variety of other materials. The seldom recognized principle involved in such cases is that no single product, commodity, or material is or can be indispensable to an economy regardless of price. A commodity can be only relatively preferable to other commodities. For example, when the price of bituminous coal rose (which was due to John L. Lewis' forcing an economically unjustified wage raise), this was instrumental in bringing about a large-scale conversion to the use of oil and gas in many industries. The free market is its own protector.