80 Can Capitalism Survive? ee he suppreson of hew methods of prod use them) and so ons envisaged, equi conditions of perfect competition, now not only becomes possible but itself does not ‘between producing for private enterprise is correctly described as tolls and ransoms? CHAPTER Vit THE PROGESS OF CREATIVE DESTRUCTION we theories of monopolistic and oligopolistic competition and ir popular variants may in two ways be made to serve the view that capitalist reality is unfavorable to maximum performance in production. One may hold chat it always has been so and that along output has been expanding in spite of the secular sabotage perpetrated by the managing bourgeoisie. Advocates of this proposi- tion would have to produce evidence to the effect that the observed rate of increase can be accounted for by a sequence of favorable cir- cumstances unconnected with the mechanism of private enterprise and strong enough to overcome the latter's resistance. This is precisely the question which we shall discuss in Chapter IX. However, those who espouse this variant at least avoid the trouble about historical fact that the advocates of the alternative proposition have to face. This avers that ca reality once tended to favor maximum pro- ductive performance, or at all events productive performance so con- siderable as to constitute a major element in any serious appraisal of the system: but that the later spread of monopolist structures, killing mn, has by now reversed that tendency. is involves the creation of an entirely imaginary golden age ‘of perfect connpetition that at some time somehow metamorphosed age, whereas it is quite clear that perfect ¢ been more of a reality than it is at present. Secondly, it is necessary to point out that the rate of increase in ouiput did not decrease from the ni lence of the largestsize concerns, at leas would have to be dated; that there is nothing in the behavior of the suggest a “break in trend”; and, most He \dern workman's budget and from pri terms of money but money prices divided by each year’s hourly wage rates—we cannot f wo be advance which, considering the spec seems to have been greater and not wishful thinking and more to the observation of facts, doubts would _ &Be Can Capitalism Survive? ‘The Process of Creative Destruction 83 immediately arise as to th have led us to expect a very as we go into deta progress was most conspicuot not those firms that work under ns of comparatively free com: petition but precisely to the doors of the large concerns—which, as ‘case of agricultural machinery, also account for much of the progress in the comy sector—and a shocking su: upon us that ss may have had more to do wi that standard of ‘The conclusions in fact almost comp! ‘end of the preceding chapter are ly false. Yet they follow from observa theorems that are almost completely! true, Both e popular rs have once more ran away happened to grasp. These ‘Their formal proj ns about capit from such fragmentary analyses. If we it only by accident. That has been done. And the lucky int to grasp is chat in dealing in evolutionary process. It may seem strange that anyone can fail to see so obvious ago emphasized by Karl Ma yields the bulk of al fuet about capitalism. It is n and what every ca on yur problem a process whose every element takes ing its true features and wl performance oft judge its performance ove unfolds through decades or centuries. A's and not only nevei tionary char that economic ntage may yet in m that does so at no given point of justrial change, but they are not its prime movers. failure to do so may be a condition for the level or speed of long-run Nor is this evolutionary character due to a quast-aucoma performance. or to the vagaries of monetary systems of Second, since we are dealing w what happens in any pai inconclus ue signif beyond that. Every piece of business strategy acquire lar co give due nce only against the background of that process and ‘of satie theory, 2 Thove row are separated fs busines cree.Can Capitalism Survive? The Process of Creative Destruction 8 ation created by it. Tt must be seen in its role in the 0 much more important that perennial gale of creative destruction; it cannot be understood irre becomes a mi er of comparative ordinary sense fanetions more ~ oF Jess promptly; ver tht in the long rom expands output and i tis hardly now have in countermoves and restrictions of 0 precisely that hyp. there were no past or wve understood what there is to tputs of the existing firms but at their foundations and their very juch more effective than the “This i alo shown by 2 theorem we frequently meet wi th forcing a door, and theorem that perfornsance ral86 Can Capitalism Survives Now a theoretical construction which neglects of the case neglects all that is most typically capi if correct im logic as well as in fa like Hamlet Danish prince. CHAPTER VISE iy manage within his inescapabh ms, ‘methods of competitors who can afford ta sell att sever adapt him oes thee MONOPOLISTIC PRACTICES ‘nar has been said so far is really sufficient to enable the reader ro deal with the large majority of the practical cases he is likely to meet and to realize the inadequacy of most of those criticisms of the profit economy which, directly or indirectly, rely on the absence of ion. Since, however, the bearing of our argument oF sms may not be obvious at a glance, it will be to elaborate a little in order to make a few points more explicit. 1, We have just seen that, both as a fact and as a threat, the impact of new things—new technologies for instance—on the existing strue- yngrun scope and im- put, at consery- ture of an industry considerably reduces the portance of practices that aim, through restricting ing established positions and at maximizing the profi them. We must now recognize the further fact that restr of this kind, i the perennial would not hi ther than an increase in profits of buyers except the case of balanced advan prove to be the easiest and most effective way of collecting the means by which to finance additional investment.' But in the process of creative destruc- tion, restrictive practices may do much to steady the viate temporary dificulcies. which always turns up in times of depression and, as everyone knows, hhas become very popular with governments and their economic ad. visers—witness the NRA, While it has been so much misused and Theorists are apt to look upor ‘of gross error, and to prove88. Can Capi same advisers who are responsi much more general rationale. Practically any investment ent entrepreneurial action, cet get that is not only indistinct but moving—and mov- a that, Hence it Deoomes necesary to resort to such vents or temporary secrecy of processes or, ont contracts secured fn advance. Bat these ro: ‘most economists accept as normal elements of 1? are only special cases of a larger class com: ‘condemn although they ising many others 6 not der funda at the same end will seem to productive of excess profits. if secured, eff excess capa long-period contracts cannot be wve to be devised in order to tie prospective customers to the investing firm. : In analyzing such business strategy ex visu of a given point of the investigating economist or g predatory and re of paradox in this than there is in saying that motorcars are travel- {ng faster than they otherwige would Becouse they are provided with brakes. in particular, policy that aims at preserving "Some economists, howev Monopolistic Practices 89 2, This stands out most clearly in the case of those sectors of the economy which at any time happen to ss and methods on the ies or processes (such as the aluminum industry) or else reor- rt or the whole of an industry (such as, for instance, the 1rd Oil Company). fe weapo! the rarest of cases fail to improve ity, both through the new method quantity or at no time used. umstanced as to require, Purposes of attack and defense, also pieces of armor other than price and quality of their product which, moreover, must be strategically ipulated all chat at an of time they seem to be Keeping prices high. iate- ‘outset that competition requirements or lack of expe- that means are available to discourage or checkmate it so ie and space for further developments, Even the con- ial control over competing concerns in otherwise unas- the securing of advantages that run counter to the : d rebates—move, as far as long-r 0 a different i or removing obstacles that the institution of che path of progress, In_a socialist society be no less necessary. They would have secured by order of the centr ‘cases be impossible if (oa severe eetert paribus ps about equivalentstrategy just manages it is $0 Successful as to profits far above what is necessary in order to induce the correspo: investment, These cases then provide the at lure capi to untried ‘ails. Their presence explains in part how it is possible for so large a section of the capitalist world to work for n the midst of 1 ies just about half of the business 5 were run at a loss, at zero profits, been foreseen, would have been inade- the effort and expenditure involve snds beyond the cases ction in which many would be able to live on vigorously and useful of such general crises or depressiox the rapid change of data that disorganizes an industry for the time being a losses and to create avoidable unemployment ere is cer- ily no point in urying to conserve obsolescent industries indefi- trying to avoid their coming down ich may become a center to orderly retreat. Correspondingly ‘case of industries that have sown their wild oats but ing and not losing ground, such a thing as orderly int~in fact of much of our genersl mobile and struggle three concerns emergod that By now acco for over So per cent of total sales. They are under competitive presure in spite of the advantages of an ‘Thi has now gone on for upwards done of theoretically perfect competi Monopolistic Practices of creative destruct habit of relegating to be is another side to industri theorists are contemplating. as well as those which merely co ion may be eff . As far as they are, they may in the end produ steadier but also greater expansion of total output than co secured by an entirely uncontrolled onward rush that cann to be studded with catastrophes. Nor can it be argued that these catastrophes occur in any case, We know what has happened in cach historical case, We have a very imperfect idea of what might have happened, considering the tremendous pace of the process, if such pegs had been entirely absent, Even 2s now extended however, our argument does not cover all if strategy, many of which no doubt is effect on the lon ly attributed to ‘our argument does cover, stances and of the way regulates itself in each, ‘pervading degree to which industry is certainly as conceivable system might sabotage all progress as is thar it might realize, with smaller social and that perfect compe ipposed to rea ment does not amount to a case ag that there is no general case for indis prosecution of everything that quai mal as distinguished from vindictive regulation by public au- be an extremely delicate problem which not every government agency, particularly when in full cry against big business, can be trusted to solve.* But our argument, framed to refute a preva: now be offered to the public, or higher wages and more oF ‘employment to the workmen. ‘The rayon industry had why our argue ion, It does show lacus ‘may politely term ‘economie royalist” their competence, suchas crowd upon us particilary whea we tee the legal mind at work, are much more dificult for them'to stand.92 Can Capitalism Survive? Monopol Practices 93 as a matter of business pol difficult to change, say rice In order (0 appraise the » another outlook on facts terptet them. For our purpose 7 themselves have the floor. 3. Next, a few words on the subject of Rij receiving so much attention of lace. It rea of the problem we have been fter laborious neg fact on the long-run d I necessary to realize that this wi ‘omenon, There are no major instances of long , Whichever manufacturing industry or group of manufactured es of any importance we choose to investigate over a period of Prices which has been but a particular aspect the extent to which prices are 1 material and the method of meas rence a doubtful matter. But whatever J in that prices are not nearly are many reasons why what in effect is a change in price ical picture; in other words, why there shoul account by ap- ity of products. aims at—all, in any ‘oid seasonal, random and cyclical in response to the more inges in the conditions that underlie those fluctua changes take time in declaring ly by discrete steps—keeping durable contours have emerged into strategy aims at moving along a step and yet not approximate trends. And that is what genuine and bility in the ntary price rigidity in most cases amounts to. In fact, most econo- sense, There are mists do admit this, at least by implication. For though some of their is the sole motive for brin i arguments about rigidity would hold ue only if the phenomenon ngrun one—for instance most of the arguments averring yy Keeps the fruits of technological progress from practice they measure and discuss primarily cyclical nd especially the fact that many prices do not, oF do not ns and depressions. The real question Jeft at the previous quotation—again a price reduction that does not show. Moreover, the great majority of new consumers’ goods—par- ticularly all the gadgets of modern life—are at first introduced in an experimental and unsatisfactory form in which they could never con~ quer their potential markets. Improvement in the quality of products is hence a pra universal feature of the development of f vidual concerns and of industries. Whether or not this improvement involves additional costs, a constant price per unit of an improving commodity should not be called rigid without further investigation. OF course, plenty of cases of genuine price rigidity remain—of tons of the current doctrine of rigCan Capitalism Survive? rigidity? may affect gets but either keeps total expenditure in the economy may be reduced thereby. If happens, other industries or firms may get 2 cum ‘may so influence say last longer than the ten years and There neous ones of erage about i ments doin important caer occ periods o sbout that length. ‘The full extent of the spectacular changer reveal Fecelf ony in periods muck longer than this, To\do ‘motorcar prices one must survey a prices up may be the the neces of deanna peas, bth ot whieh spiral” than fsa possible reduction total expendiuure, See the comments on the second argument air range. People thelr fume ae not Hiei to bay reduced by 25 per cer and if the red ich adopt that by avoiding chaos weir part—it may make f out of what otherwise might be centers of devastation, As we have seen id if depression were al In other words, depression further unstabilize the system, instead of it mo doubt would under the conditions envisaged by to a large extent recognized in those ly concerned, for instance in those cases he admits rea may be no more than regulated adaptation, Perhaps the reader feels some surprise ine of which so much has been made h some people, standing defect engine and—almost—the fundamental fact explanation of depressions. But there is not Individuais and groups snaich at any! covery lending support to the p96 Can Capitalism Survive? doctrine of price rigidity, with a modicum of truth to its cred! not the worst case of this kind by a long way. 4, Another doctrine has crystallized into a slogan, ¥i era of big business the maintenance of | becomes the chief to put a stop to all costreducing im- t order becomes provement. progress Progress entails, as we the strata with which structure and ty to av say, they can and So far as at conserving ca} same thing as conserving profits. Modern theor: the concept Present Net V: the concept of Prof order to conserve sn a management, Knows that department every member depends on his suecess in dl improvement This practice does not obviously suggest aversion to technologic progtess. Nor can we in reply be referred to the cases in which patents acquired by business concerns have not been used promptly or not ‘been used at all, For there may be perfectly good reasons for th for example, the patented proc turn out to be no good Jeast not to be in shape to wan i Monopolistic Practices 97 and from their istorted picture.19 ‘@ question of theor that private and socialist managements wi ch however is not so. Private management, if actuated by the profit interest ag the values of any given building or machine st mana that private man- to do is to maximize the present net value of total equal to the discounted value of expected net returns, Iways adopt a new method of Id a larger stream of future outlay, both in use. The ther or not paralleled by a bonded debt that has to be amortized, does not enter at all to the extent derlying the id jon un- of past investment would cor s following from the profit motive th the rules set for the behavior of the ‘manager. capi {echnological progress would pr the presence of & lag of ordinarily moderate length in the introduction of new methods,98 Can Capitalism Survive? Monopolistic Practices At is however not true that private firms owning equipment the vvalue of which is endangered by a new method which they also co trol—if they do not control it, there is no problem and no will adopt the new m than prime unit cost hhas been completely before the new wher ously set ‘value as of asure a given pattern of expected to ret independently of the m tion for some length of time. A new type but a link in a chain of cir services ‘et against compe- che position of a single can in general be conquered—and retained for decades—only the condition that he does not behav. will be touched upon prese this talk about monopoly? TI interest for the student of the psychology of course, the concept of monopoly is other. Peopl ly connected with other ® even be said however that we have not already me year. itled this chapter as I facts and. pr it common parlance associates monopoly or monopol So far I have as much as poss ‘Tee coca there is the term itself. Monopolist means Single 2 There ave of course many other elements. The reader will pleate understand ‘chat in dealing with a few quetiont of principles i is impossible to do foll jus- it beckme increasingly dear ti Uce to any of the topics touched upon. produced or substitnted for100 Can Capitalism Survive? on. But this is not all. Economists, government agents, journalists and politicians in this country obviously love the word because it has come to be a term of opprobrium which is sure to rouse the public's hostility against any interest so labeled. In the Anglo-American world monopoly hhas been cursed and associated with functionless exploitation ever since, in che sixteenth and seventeenth cen administrative practice to create monopoly posi bers which, on the one hand, answered fairly wel pattern of monopolist behavior and, on the other hand, f the wave of indignation that impressed even the great Nothing is so retentive as a nation’s memory. Our time offers other and more important instances of a nation’s reaction to what happened centuries ago. That practice made the Englishspeaking public so monopoly-conscious that it acquired a habit of attributing to that sinister. power practically everytl the typical liberal bourgeois in particular, monopoly became the f of almost all abuses—in fact, it became his pet bogey. Adam Sm thinking primarily of monopolies of the Tudor and Stuart frowned on them in awful digni conservatives occasionally knew how to borrow from the arsenal of the demagogue—in his famous epilogue to his last period of office that gave so much offense to ‘2 monopoly of, bread or wheat, though English grain production was of course per- fectly competitive in spi ry monop- oly is being made practically synonymous with any large-scale business. (®) The excepting a un, Tongan fon the lists. Monopolistic Practices 101 ever there are superior methods avai either are not avai of competitors of advantages whi because monopoly pric monopoly ou be at efficiency reach of the type of firm compatible with the comp hypothesis. ‘There cannot be any reasonable appar point of the monopolist’s opti cost price in the above sei or more than ced a¢ wan the enaguer ‘of sponsors of such com Aluminum Company of America ie not a mono as defined above, 7 cher reasons becuu r ose from 30 metric tons to In 1gog. aArgement from costs and proCan Capitalism Survive? ic Practices 103 mn is practiced and excess capacity is in evidence all along. OF the methods of production, organization and improved by or in conne ‘© the monopolist schema, as in it affords against temporary dis market and the space it secures for longrange ever the argument merges into the analysis sul 6. Glancing back we realize touched upon in facts and arguments is chapter tend to dim the halo that once sur- petition as much as they suggest a more favor mative. 1 will now briefly restate our argument be built upon lustry, a monopoly position ny itself, even within its chosen precincts of a sta- growing economy, has since the time of Marshall -n discovering an increas i fed belie in its virtuss cher, ed between Ricardo and Mer. England and Frances Ter propositions that a. perfectly economical of resources and. Rloeste to be good profits wou! the field—that it can move at pleasure on income—propositions very relevat uestion of the behavior stretch of the demand curve, at least until the metal label smashes’ » “cof output—cannot now be held with the old. confidence #2 that demand curve to pieces. Much more serious is the breach made by more recent work in the New methods of yn OF new commodities, especially the field of dynamic theory (Frisch, Tinbergen, Roos, Hicks and others). , do not per se \onopoly, even if used or produced is of sequences in time. In explaining single firm. The product of the new method has to compete with the why a certain economic quantity, for instance a price, is what we find products of the old ones and the new commodity has to be intro- it to be at a given moment, it takes ideration not only the uced, ic, its demand schedule has to be built up, As a rule neither State of other coonomic quantities at the same moment, as static theory patents nor monopol i does, but also their state at preceding points of time, and the expec in cases of spectacular tations about their future values, Now the first thing we discover in working out the propositions that thus relate quantities belong different points of time is the fact that, once equi has been destroyed by some disturbance, the process of establishing a new one is or may be an element of genuine is not so sure and prompt and economical as the old theory of perfect those entrepreneurial profits which are the ‘competition made it out 0 be; and the possibility that the very struggle demand schedule for patent has expired. offered by capitalist society to the successful innovator. But the quan- for adjustment might lead such a system farther away from instend its volatile nature and its function of nearer to a new equilibrium. This will happen in most cases unless the disturbance is small. In many cases, lagged adjustment is secured by patent sulficient to produce this result I can do here is to illustrate by the oldest, simplest and m familiar exampie. Suppose that demand and intended supply are in the opportunity Dreakdowns. This Is, in fa the pr factor of modern 3 Fee however supra, § 1.Can Capitalism Survive? market for wheat, but chat farmers intended to supply. and the farmers thereupor it would pay them to quantity of wheat price were the equi ‘ions of the theory of nism passes out through the ivory gate, But from our standpoint we m 'g0 furcher than th is about perfect competition. llustrate the point once more. al allocation of resources and hence for ws and if nothing happened except wvings combine in order to set Monopolistic Practices 105 ible to enter it at introduction of new methods of produc- hardly conceivable with perfect—and from the start. And this me progress is incompatible : is and always has been temporarily ing new is being introduced—automatically ised for the purpose—even in otherwise perfectly ly prompt—compe! of what we call econo prices stands all rigl that ‘pe of resistance to adapt ion excludes. And for the ions which have been treated by nal theory, itis again quite que that such resistance spells loss id reduced output, But we have seen that in the spurts and vicissi. tudes of the process of creative destruction the opposite may be true: id instantaneous flexibility may even produce functionless This of course can 1ows that there are az tempts at adaptation that intensify disequilibrium, Again, under its own assum ial theory is correct in in each individual case to equilibrium amount of means of production, entrepre- ability included, both indicate themselves Joss and that business strategy that aims at keeping thet alive is inimical \f total output. Perfect competition would inate such surplus profits and leave no the process of capitalist evolution funetions—I do not want to repeat any longer be unconditionally credited ly ive model, so far as the secular ‘output is concerned, it can indeed be shown that, under the same assumptions which amount to excluding the most characteristic features of capi talist realit ive economy is comparatively free i lar from those kinds of waste which we srpart. But this does not tell us looks under the conditions set by the anything about how process of creative destruct On the one hand, 1at without reference to those condi- cyclical peaks of de- a regime of perfect competition be much reduced. But when all ine facts of the case are taken into consideration,106 Can Capi it is no longer correct to say that perfect competition that score. For though a cor prices would, in fact, use ginal costs covered by the ruling have the quantity and qu: created and was abl “strategical and does not in a reason for periority for a soci " should not fication be listed as ism Survive? CHAPTER Ix CLOSED SEASON 1e preceding analysis has observational and interpre- jons like ours the room for mn can be narrowed but not reduced to zero. For solution of our fi Jeads to the door jt arise at all. as I have put Economics is only tative science which implies that in qut difference of opi the same reason ‘The first problem it (p. 72), the st tures of a ‘mod unfettered. capi My affirm: answer to this qu analysis that ran on at whicl ‘monopol ess. can agri the Eng- le industry are costing consumers much more and are affect- otal output much more injuriously than they would if cont of them, by a dozen good brains. ly everyone concedes to the theoretical construction, realit —or because it always hment or unit of control inseparable from the economic ced from sabotaging by the forces inherent hhave got to accept is that it has £ that progress an iz» the observed develop. that there was a rather striking t arrangement was favorable to pro- why we cannot stop at our contusion another problem, ight still be possible to account for the observed per engh the Jongrun expansion of y exceptional circumstances which would have asserted | oe themselves in any institutional pattern. The only way to deal with this resp -ompetition is not only impos- in any P: ly way bbut inferior, and has no title to being set up as a model of is possibility is to examine the economic and political history of to base the theory of government the period in question and to discuss such exceptional circumstances | as we may be able to find. We tack the problem by considering those candidates for the role of exceptional circumstances not inherent in the business processes of capitalism which have been put up by economists or historians. There are five of them. ‘The first is government action which, though I quite agree with 107 prin che respective ind socialist economy rather than on those of the competitive moi