of the most successful of these enterprises would never suspect that their earnings were larger than those of competitive businesses. To show that they are so in fact requires a full knowledge of the operations of such corporations from the time they were first organized. In most cases such knowledge is confined to those most interested to keep it secret and in consequence it is rarely possible for an impartial investigator to determine what part of the earnings of a monopolistic enterprise represents a fair interest on the capital actually invested in it and what part monopoly profit. § 124. One consequence of the policy of concealing profits Funded is that the business community no longer regards nominal Incomes. capitalization as a fair criterion of capital value. It is so habituated to the practice of adjusting capitalization to earning power that it readily accepts the latter as the real test of what the capital ought to be. Thus a business which earns $80,000 a year over and above its expenses of operation, when the rate of interest on investments involving similar risks is 8 per cent, is taken to be worth $1,000,000, without much reference to the tangible capital invested in it. If the business is organized as a corporation with 10,000 shares of capital stock the shares will be quoted at $100. This procedure may be described as capitalizing income. Income which is thus capitalized is sometimes spoken of as funded income to distinguish is from simple interest on capital invested in competitive industries. The monopoly profits of monopolistic corporations are one, but by no means the only, type of funded income. Incomes. The practice of capitalizing income or of putting valuations Earned v. on monopolistic and other sources of income in proportion to Unearned the returns which they afford, gives rise to vested interests in the established order. "Innocent investors " buy shares of stock in monopolistic corporations, paying for them prices proportioned to the monopoly earnings that are being realized, and then claim the protection of the government against reformers who characterize monopoly profits as unearned and advocate their confiscation. The advantage of this kind of support to promoters of monopolistic undertakings is so obvious that they not infrequently, especially in connection with local monopolies, make special efforts to insure the wide dis tribution of the stock of their companies in the localities to be exploited. If persons of light and leading in such places can be persuaded to become stockholders the likelihood of government interference as profits grow is greatly lessened. In time innocent investors may come to control entirely corporations of this character through the silent withdrawal of the original promoters to other fields. Under such circumstances the claim that the monopoly profits are no more than a fair return on their bona fide investments may be advanced by the stockholders with much force. Most of the older natural monopolies in the United States have already reached this stage. Any proposal to curtail their monopoly earnings by fixing the prices they may ask for their services or by requiring from them extraordinary contributions to the support of the state is met by the objection that they pay no larger returns to those interested than competitive businesses, and should therefore be no more subject to government control or taxation than the latter. How serious an obstacle this argument opposes to efforts to secure for the general public a share of the benefits of monopoly is familiar to every one who follows current discussions of the monopoly problem. Monopolies § 125. There is a widespread impression in the United Not Always States that monopolies are always and unalterably opposed Disadvan tageous. to the public interest. This is based partly on experience of the bad phases of monopoly and partly on the teachings of jurists and economists. American courts uniformly declare monopoly, except that created by the government itself in the exercise of its constitutional powers, illegal. Economists are equally prone to characterize monopoly as abnormal and to extol an industrial system of free, all-sided competition as that best calculated to promote the general interest. There is, of course, good reason for this distrust of monopoly, but if the analysis we have given of the different kinds of monopolies and of the restraints under which they exercise their powers is accurate, it ought not to be extended to all without qualification. For some industries monopoly is not only as normal and inevitable as is competition for other industries, but it is the form of organization that best serves the public interest. Natural monopolies of organization, for example, are monopolies because as such they can produce more economically than could competing firms. For them the monopoly form of organization is the desirable form, which should be encouraged rather than discouraged by those who have the public interest at heart. Another misapprehension that is current is that monopoly always means large monopoly profits. That this is not the case is evident when it is remembered how many patented articles, in connection with which the government itself undertakes to protect the producer in his monopoly, are regularly produced at a loss. Many other conditions in addition to control over the supply of the good produced are necessary to make production profitable. When all the conditions are favorable, large monopoly profits, of course, may be and often are secured. But the power that consumers possess of substituting other goods for those monopolized and the danger that competition will be excited are ever present forces which confine monopoly profits in most businesses within narrow limits. Profits on Other Shares. § 126. In this treatise monopoly profits are discussed in- Influence of dependently of the other shares in distribution, not because Monopoly they are considered unusual, but because it is easier to trace their influence when they are studied in isolation. In actual industrial society competitive and monopolistic enterprises are carried on side by side and act and react upon one another. The influence of monopoly profits on the other shares in distribution should be briefly indicated before we turn to a discussion of the competitive shares of income-rent, wages and interest-treated in the following chapters. To secure monopoly profits monopolists must fix the prices of their goods above their expenses of production. In the example given in an earlier section the largest monopoly profit was secured when a price between nine and ten cents was fixed for the patented soap. The expenses of production for the 2,500,000 cakes that could be sold at ten cents averaged only five cents, so that the effect of the monopoly was to make the price nearly double what it would have been had competition had free play. To maintain the price at ten cents the monopolist must, of course, limit production to the 2,500,000 cakes which the public Practical in Later Chapters. will take at that figure. If competition forced him to lower the price to six cents he could produce and sell, according to the conditions of the illustration, 6,000,000 cakes. At the price corresponding exactly to the expenses of production, four and one-quarter cents, he could sell more than double this product. The effect of monopoly is, accordingly, to reduce the amount of the monopolized good that is produced and sold below what it would be under conditions of free, all-sided competition. Only through such reduction or curtailment of the supply can the coveted monopoly profit be secured. But reducing the output of the monopolized good involves the employment by the monopolistic enterprise of less land, labor and capital than would be needed in the same branch of production if competition had free play. The effect of monopoly is thus to increase the supplies of the factors of production which must find employment in competitive industries. What influence this mal-distribution of the factors of production is likely to have on the shares of income, rent, wages and interest, can only be explained after we have considered how these shares are determined. Such influence is of course supplementary to the tax on all consumers who buy monopolized products, resulting from the enhancement of their prices. The phases of the monopoly problem that have assumed greatest importance in the United States concern legal and natural monopolies, trusts and labor monopolies, and these are treated at some length in later chapters (XXIII., XXIV., XXV. and XXIX.). In them the reader will find many concrete details and illustrations which, out of consideration for space, have been omitted from the preceding sections. REFERENCES FOR COLLATERAL READING *Marshall, Principles of Economics, Book V., Chap. XIV.; *Ely, Monopolies and Trusts, Chaps. I.-IV.; Bullock, Introduction to the Study of Economics, Chap. XI.; Fetter, Principles of Economics, Chap. XXXIII.; *Taussig, Principles of Economics, Chap. XLV. CHAPTER XIV DISTRIBUTION: RENT Other § 127. In the preceding chapters the more or less irregular Contrast and uncertain shares in distribution have been discussed. Between Profits and Competitive profits rise and fall and for enterprisers as a whole, except in periods of industrial expansion, are as likely shares. to take the form of losses as of gains. Monopoly profits are more stable and in the aggregate constitute an important part of the community's income, but the conditions upon which monopoly depends are subject to change; the tastes of consumers may be modified or substitute articles may be put upon the market; new methods of production may be devised which deprive the monopoly of its advantage, or the strong arm of the law may be interposed to divert monopoly profit to the public either by the forcible lowering of prices or through taxation. In these and other ways monopoly profits may be reduced or entirely cut off before they have been enjoyed for any long term of years. In contrast with profits, the elements entering into the normal expenses of production -rent, wages and interest-are regular and persistent. Their payment is not due to the absence of competition, but is the direct consequence of the activity of competitive forces. The keener and more general competition is the more certain and definite these shares become. For this reason in explaining them it will be convenient to revert often to the relations that would prevail in an industrial society brought to the state of normal equilibrium. In such a society the relations which The German economist, von Thünen, advanced the theory that competitive profits must in the long run be on the positive side, because enterprisers take great risks, and must be compensated for so doing. This depends, obviously, upon whether taking risks in the industrial society under consideration is distasteful. In the United States there are so many people who really like to take risks that compensation for risk-taking is a small, if not a negligible, element in profits. |