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CHAPTER III

DIFFICULTIES OF REGULATING COMBINATIONS

In the preceding lectures we have undertaken to show that it is necessary either to prohibit and destroy the trusts and pools or to regulate their prices and profits. Merely to prohibit unfair competitive methods and to deprive combinations of special privileges would not, in all probability, remove their power to extort monopoly prices. We further sought to show that it is possible to prevent the formation of combinations having effective monopoly power, and possible also in large measure to break up such combinations as already exist. The American people, therefore, are in a position to choose between the policy of regulating permitted trusts and pools, and the policy of prohibiting and destroying them. In making this choice they must first consider what would be the difficulties and what the probable results of a policy of regulation. They must then consider whether the advantages of combinations from the standpoint of efficiency and economy are great enough to justify permitting them to exist despite the difficulties of regulating them.

Few of those who have advocated the policy of permitting combinations to exist subject to regulation by the government seem to have given much thought to the magnitude of such a task, its difficulties, or its ultimate outcome. They have had in mind the comparatively few closely knit trusts of the present time, or possibly only a part of those trusts. They have had

in mind particularly the so-called "good" trusts with their alleged superior efficiency and their more or less reasonable policy toward the public.

In the first place, it would be difficult to limit the number of trusts under such a policy. It is, of course, conceivable that the government should undertake to suppress combinations in general, while permitting a few particular trusts to exist. A limited number of trusts might be tolerated, not because of the good motives or exceptional ability of their managers, but because of special economic characteristics of the industries concerned which tended to make combination particularly economical or to make the maintenance of competition peculiarly difficult. Such a plan would not necessarily lead to unreasonable discrimination between individuals and classes, tho to determine what were the extraordinary conditions justifying the existence of a trust would be extremely hard. If, however, the people once concede the right of a monopolistic combination to exist, independently of extraordinary conditions, a sense of justice should apparently compel them to permit combinations ad libitum. sauce for the goose is sauce for the gander. Under no theory of justice could all the trusts heretofore organized be permitted to continue without granting permission to organize trusts in every other field. Moreover, if the government permitted trusts freely to organize, it would have to permit pools also, at least until it was demonstrated that the trusts had material economies and other advantages and that the pools had no such advantages.

What is

In the second place, it would seem that if combinations having power to restrain trade are to be permitted

at all, they must be permitted to become as comprehensive as they desire. Why should a combination not be allowed to take over 100 per cent of the business in its field quite as readily as 90 or 80 or 70 per cent ? Very few persons desire to prohibit combinations which control only a small proportion of a given industry and which possess no possible monopoly power; but if we permit that limit to be overstepped at all, there is no limit.

One can only speculate how numerous and how comprehensive the trusts and pools would become if the policy were adopted of permitting them freely but subjecting them to regulation. Presumably the disinclination to submit themselves to government regulation would prevent business men from forming combinations as universally as they would if combinations were permitted without regulation. It is quite possible that the field of combination would become immensely great. In all probability it would become far greater than at present. Beyond question, moreover, every combination, unless prevented by the government, would take in just as large a proportion of the trade as could be persuaded to enter it. In many cases this would mean the entire trade.

If combinations were freely permitted and no limit placed upon their magnitude, neither actual nor potential competition would be an adequate check upon prices and charges for service. This was, I think, sufficiently demonstrated in the first lecture. Government regulation would unquestionably be necessary.

Some have suggested that regulation would be comparatively simple. Good trusts would be left alone and only bad trusts interfered with, and the fear of

government intervention would make most of the trusts good. The government, some seem to think, could let the trust go its own way until it was proved to have become extortionate or to have used unfair competitive methods, and could then step in and punish its officers, or suspend its right to do business for a season, or even dissolve it altogether. Such a course is fundamentally inconsistent with the principle of permitting combinations at all. How is the trust manager to know in advance what prices or what practices will be adjudged so unreasonable as to call for criminal prosecution? What advantage would there be in breaking up a trust the first time it went too far, if another trust could be formed in its place the next day? It would be intolerable to the users of the products or the services of a trust to stop its business, even temporarily, as a punishment for unreasonable prices or unfair methods of competition.

A good trust may become
Shall it be a lawful or-

a bad trust overnight. ganization today and an outlawed wreck tomorrow? (Regulation of combinations implies continuity of the combinations.

Even if the government adopted the policy of punishing trust managers or breaking up combinations, as a penalty for extortionate prices and unfair practices, it would require almost as thoro and continuous investigation and quite as difficult judgment on the part of the government to determine when to inflict such penalties as to determine the proper prices and practices for the future. It would be most unjust to take drastic action against a trust or its managers without possession of most detailed knowledge of all the conditions.

In its very essence, however, regulation implies, not

punishment of past action, but prescription of future action. This means simply that the government, if it undertakes to regulate the trusts and combinations, will ultimately have to fix their prices or limit their profits, or both. After all, the one thing in which the general public is interested is the reasonableness of prices and charges. The prevention of combinations in restraint of trade and of unfair competitive methods are not ends in themselves. There is no way to insure reasonable prices under monopoly except to restrict them, to fix them outright, or to limit the profits in such a way as to remove the incentive to unreasonable prices.

It

If the government enters upon the policy of fixing prices and profits strictly, ought it not to go a step further and guarantee to the combinations a permanent monopoly, protecting them against competition? has lo been urged by the owners of railroads and other public service industries that justice to investors demands protection against competition as a concomitant of regulation of rates and charges. The public has been gradually coming to accept this view. a series of years the investor in trust securities has had his profits held down to a low percentage by government regulation, it is hardly fair for the government to permit those profits to be still further lowered, perhaps wholly destroyed, by the advent of a competitor.

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Whatever might be the outcome of government regulation in this respect, there can be no doubt of the immense difficulty of just and efficient regulation of the prices or the profits of industrial combinations. As already shown, the field to be covered by regulation would probably be exceedingly wide and diverse. The

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