Now if a company were able to gain and hold a non-coercive monopoly, if it were able to win all the customers in a given field, not by special government-granted privileges, but by sheer productive efficiency—by its ability to keep its costs low and/or to offer a better product than any competitor could—there would be no grounds on which to condemn such a monopoly. On the contrary, the company that achieved it would deserve the highest praise and esteem.
No one can morally claim the right to compete in a given field if he cannot match the productive efficiency of those with whom he hopes to compete. There is no reason why
people should buy inferior products at higher prices in order to maintain less efficient companies in business. Under capitalism, any man or company that can surpass competitors is free to do so. It is in this manner that the free market rewards ability and works for the benefit of everyone— except those who seek the undeserved.
A bromide commonly cited in this connection by capitalism’s opponents is the story of the old corner grocer who is driven out of business by the big chain store. What is the clear implication of their protest? It is that the people who live in the neighborhood of the old grocer have to continue buying from him, even though a chain store could give them better service at lower prices and thereby let them save money. Thus both the owners of the chain store and the people in the neighborhood are to be penalized—in order to protect the stagnation of the old grocer. By what right? If that grocer is unable to compete with the chain store, then, properly, he has no choice but to move elsewhere or go into another line of business or seek employment from the chain store. Capitalism, by its nature, entails a constant process of motion, of growth, of progress; no one has a vested right to a position if others can do better than he can.
When people denounce the free market as “cruel,” the fact they are decrying is that the market is ruled by a single moral principle: justice. And that is the root of their hatred for capitalism.
There is only one kind of monopoly that men may rightfully condemn—the only kind for which the designation of “monopoly” is economically significant: a coercive monopoly. (Observe that in the /ion-coercive meaning of the term, every man may be described as a “monopolist”—since he is the exclusive owner of his effort and product. But this is not regarded as evil—except by socialists.)
In the issue of monopolies, as in so many other issues, capitalism is commonly blamed for the evils perpetrated by its destroyers: it is not free trade on a free market that creates coercive monopolies, but government legislation, government action, government controls. If men are concerned about the evils of monopolies, let them identify the actual villain in the picture and the actual cause of the evils: government intervention into the economy. Let them recognize that there is only one way to destroy monopolies: by the separation of State and Economics—that is, by instituting the
principle that the government may not abridge the freedom of production and trade.
(JUNE 1962.)
DEPRESSIONS
ARE PERIODIC DEPRESSIONS INEVITABLE IN A SYSTEM OF LAISSEZ-FAIRE CAPITALISM?
It is characteristic of the enemies of capitalism that they denounce it for evils which are, in fact, the result not of capitalism but of statism: evils which result from and are made possible only by government intervention in the economy.
I have discussed a flagrant example of this policy: the charge that capitalism leads to the establishment of coercive monopolies. The most notorious instance of this policy is the claim that capitalism, by its nature, inevitably leads to periodic depressions.
Statists repeatedly assert that depressions (the phenomenon of the so-called business cycle, of “boom and bust”) are inherent in laissez-faire, and that the great crash of 1929 was the final proof of the failure of an unregulated, free-market economy. What is the truth of the matter?
A depression is a large-scale decline in production and trade; it is characterized by a sharp drop in productive output, in investment, in employment, and in the value of capital assets (plants, machinery, etc.). Normal business fluctuations, or a temporary decline in the rate of industrial expansion, do not constitute a depression. A depression is a nation-wide contraction of business activity—and a general decline in the value of capital assets—of major proportions.
There is nothing in the nature of a free-market economy to cause such an event. The popular explanations of depression as caused by “over-production,” “under-consumption,” monopolies, labor-saving devices, maldistribution, excessive accumulations of wealth, etc., have been exploded as fallacies many times.8 Readjustments of economic activity, shifts of capital and
‘See, in this connection, Carl Snyder, Capitalism the Creator, New York: The Macmillan Company, 1940.
labor from one industry to another, due to changing conditions, occur constantly under capitalism. This is entailed in the process of motion, growth, and progress that characterizes capitalism. But there always exists the possibility of profitable endeavor in one field or another, there is always the need and demand for goods, and all that can change is the kind of goods it becomes most profitable to produce.
In any one industry, it is possible for supply to exceed demand, in the context of all the other existing demands. In such a case, there is a drop in prices, in profitableness, in investment, and in employment in that particular industry; capital and labor tend to flow elsewhere, seeking more rewarding uses. Such an industry undergoes a period of stagnation, as a result of unjustified, that is, uneconomic, unprofitable, unproductive investment.
In a free economy that functions on a gold standard, such unproductive investment is severely limited; unjustified speculation does not rise, unchecked, until it engulfs an entire nation. In a free economy, the supply of money and credit needed to finance business ventures is determined by objective economic factors. It is the banking system that acts as the guardian of economic stability. The principles governing money supply operate to forbid large-scale unjustified investment.
Most businesses finance their undertakings, at least in part, by means of bank loans. Banks function as an investment clearing house, investing the savings of their customers in those enterprises which promise to be most successful. Banks do not have unlimited funds to loan; they are limited in the credit they can extend by the amount of their gold reserves. In order to remain successful, to make profits and thus attract the savings of investors, banks must make their loans judiciously: they must seek out those ventures which they judge to be most sound and potentially profitable.
If, in a period of increasing speculation, banks are confronted with an inordinate number of requests for loans, then, in response to the shrinking availability of money, they (a) raise their interest rates, and (b) scrutinize more severely the ventures for which loans are requested, setting more exacting standards of what constitutes a justifiable investment. As a consequence, funds are more difficult to obtain, and there is a temporary curtailment and contraction of business investment. Businessmen are often unable to borrow the funds they desire and have to reduce plans for expansion. The purchase of common stocks, which reflects the investors’ estimates of the future earnings of companies, is similarly
curtailed; overvalued stocks fall in price. Businesses engaged in uneconomic ventures, now unable to obtain additional credit, are obliged to close their doors; a further waste of productive factors is stopped and economic errors are liquidated.
At worst, the economy may experience a mild recession, i.e., a slight general decline in investment and production. In an unregulated economy, readjustments occur quite swiftly, and then production and investment begin to rise again. The temporary recession is not harmful but beneficial; it represents an economic system in the process of correcting its errors, of curtailing disease and returning to health.
The impact of such a recession may be significantly felt in a few industries, but it does not wreck an entire economy. A nation-wide depression, such as occurred in the United States in the thirties, would not have been possible in a fully free society. It was made possible only by government intervention in the economy—more specifically, by government manipulation of the money supply.
The government’s policy consisted, in essence, of anesthetizing the regulators, inherent in a free banking system, that prevent runaway speculation and consequent economic collapse.
All government intervention in the economy is based on the belief that economic laws need not operate, that principles of cause and effect can be suspended, that everything in existence is “flexible” and “malleable,” except a bureaucrat’s whim, which is omnipotent; reality, logic, and economics must not be allowed to get in the way.
This was the implicit premise that led to the establishment, in 1913, of the Federal Reserve System—an institution with control (through complex and often indirect means) over the individual banks throughout the country. The Federal Reserve undertook to free individual banks from the “limitations” imposed on them by the amount of their own individual reserves, to free them from the laws of the market—and to arrogate to government officials the right to decide how much credit they wished to make available at what times.