CHAPTER V THE DOCTRINE OF FREE COMPETITION AFTER the seventeenth century prolonged competitive struggles between numerous manufacturers arose wherever legal monopolies had been abolished, and were regarded as a natural consequence of freedom of trade.1 On such competition the English Parliament, which in its admiration for Colbert on the one hand opposed all industrial monopolies, and on the other tried to aid industrial progress by bounties, prohibitions of imports, export duties, etc., or by the artificial stimulus of consumption, counted. The same protective measures which had enriched particular individuals or companies under Elizabeth and the early Stuarts were now under the magic influence of competition to benefit whole branches of industry, and, inasmuch as they favoured numerous mutually competing manufacturers, even consumers also. Accordingly the inevitability of competition was always the argument with which the fears of the consumer were soothed whenever, in consequence of the high protection given to an infant industry,2 he thought himself delivered over to the arbitrary dictation of a few monopolist manufacturers. 1Cf. von Justi, 'Abhandlung von den Manufakturen,' Copenhagen 1767, pp. 149, 150. * For an instance see A Brief Essay on the Copper and Brass Manufacture of England,' London 1712, p. 20. The author defends high duties thus: 'Whoever lives a few years will probably see many more undertakers of these works, who, by striving to undermine one another, will always keep prices low.' G Vor M 98 SMITH AND MALTHUS ON COMPETITION These views, generally accepted in England after the end of the seventeenth century, prevailed also among the founders of classical political economy at the end of the eighteenth and the beginning of the nineteenth centuries. Very similar terms to those which we have already found in Adam Smith were used later by Malthus: "If a machine was invented in a particular country by the aid of which one man can do the work of ten the possessors of it will of course at first make very unusual profits; but, as soon as the invention is generally known, so much capital will be brought into this new and profitable employment as to make its products greatly exceed both the foreign and domestic demand at the old prices. These prices, therefore, will continue to fall till the stock and labour employed in this direction cease to yield unusual profits."' Except for legal restrictions on competition by gild regulations and for certain special peculiarities in particular occupations, Adam Smith knew of no circumstances which could prevent the tendency of manufacturers' profits to equalise. Starting from the proposition that industrial production could be increased at will at the same cost, he concluded that when for any reason the profits of a particular industry rose above the normal level in a country, an immediate increase in undertakings would take place. From this it necessarily followed that agreements between manufacturers to keep up profits must in the end prove ineffective, and that the interest of each manufacturer was best served by free competition. If, on the other hand, profits were reduced to beneath the normal level, Adam Smith assumed that the weaker were crushed out, either losing their capital or investing it elsewhere; so that here again the interest of the stronger was in the competitive struggle.2 1T. R. Malthus, 'Essay on the Principle of Population,' 5th ed. London 1817, vol. ii. p. 404. 2 Compare chap. ix. of vol. i. and vol. ii. p. 50. In coal mining also Adam Smith holds that the closing of pits worked at a high price was a necessary consequence of the competitive struggle, vol. i. p. 279. VIEWS OF BUCHANAN 2 3 99 It is to be noticed that Adam Smith only identifies the interest of the individual manufacturer with competition where he assumes elasticity of production. Where a restriction of already existing undertakings seems probable, he fully recognises the possibility and the appropriateness of a coalition. As he explains in his lectures: "When a number of butchers have the sole privilege of selling meat, they may agree to make the price what they please." 1 In another place he says that "The trades which employ but a small number of hands run most easily into such combinations. Half a dozen wool-combers, perhaps, are necessary to keep a thousand spinners and weavers at work. By combining not to take apprentices, they can not only engross the employment, but... raisethe price of their labour much above what is due to the nature of the work." Another time he contrasts two competing traders with twenty traders, and says: "In the latter case competition would be the greater, and the likelihood of their combining to rise the price the less." It would therefore be wrong to assume that Adam Smith identified competition with the interest of the individual unconditionally. Where he had in mind a limited number of sellers the substitution of combination for competition seemed to him both possible and also in the interests of the traders. His later editor, D. Buchanan, vigorously attacked this opinion, seeing in all such remarks of Smith's a desertion of his own doctrine of enlightened selfishness and failing to notice that to make use of coalition instead of competition in Smith's hypothetical case was simply the result of the desire for the greatest possible profit which animated the trader. Against Smith's wise reservation in the case of competition among few traders, Buchanan argued that competition was the strongest of all motives animating traders, and would therefore even in such cases be the only consideration in their minds. 'Hirst, Monopolies, Trusts and Cartels,' p. 21. He 100 VIEWS OF M'CULLOCH disputes Smith's example of the wool-combers thus: 1 "Dr. Smith is not aware that if the principle of combination be once admitted it may be turned against the most valuable of his doctrines. But a combination of rival traders is a phenomenon which, until human nature is changed, will never be exhibited." In other places 2 Buchanan, again in polemic against Adam Smith, formulates more closely the peculiar and invincible desire of "human nature" for competition: "No body of traders ever can frame an effectual combination against the public; as all such engagements are broken by the partial interest of the individual concerned. No trader will keep up his prices for the profit of others; he will always sell when it suits his own convenience, and upon this principle accordingly is founded all this rivalship of trade." Even where official interference makes the original rise of competition difficult or impossible, as among gilds, Buchanan will not hear of the possibility of the private combination of such privileged workers. "The same principle of selfishness which prompts them to form the league, prompts them also to break it. Rival traders have no confidence in each other; not two of them will ever act in concert.' M'Culloch was of quite the same opinion. While he, in support of Adam Smith, deduces the impossibility of increasing prices from the law that profits tend to equalise, he is, on the other hand, convinced that the principle of competition must prove effective even where the number of sellers is limited and no fresh competitors are added. For as soon as a number of traders in combination raise the price above "what is due to the nature of their work," it would be "in the interest of a large body of the combiners to secede from the combination and throw their goods on the market." 5 J. R. M'Culloch, 'Principles of Political Economy,' Edinburgh 1825, P. 246. * M‘Culloch, 'An Essay on the Rate of Wages,' Edinburgh 1826, p. 190. |