“Can Capitalism Survive?” Ch. 4 – Monopolistic Tendencies by Joseph Schumpeter (1942)

Spilling the beans…“Can Capitalism Survive?” Ch. 4 – Monopolistic Tendencies by Joseph Schumpeter (1942)

  • Let’s be more specific about what’s been said:
  • 1 – New technology is a threat to industries who try to conserve positions through restriction of output
    • Creative destruction disrupts the slow, balanced or even stationary state of growth
    • Production expansion only happens to the benefit of profit & at the buyers’ expense
    • In Creative Destruction, the restriction process may allow for the alleviation of temporary difficulties
      • Government policies often misused & hurt the economy
    • Investment requires safeguarding (insuring or hedging)
      • Long-term investment with rapidly changing conditions is like shooting at an unpredictably moving target
      • Patents & secret processes, long-term contracts help but are only special cases of a larger area of condemned practices by economists
      • War risk is insurable but ultimately price strategy doesn’t work if there’s no capital or customers to sell to – & causes restriction
      • If a patent can’t be secured, the investment might not be made in the first place
      • If long-term contracts can’t be entered into, other ways will have to be used to attract customers
      • These price strategies will seem predatory & restriction of output will seem less than optimal
      • These aren’t restrictive but protective practices
  • 2 – we see this largely in innovative sectors of the economy
    • Watch the behavior in new firms & industries with new commodities or processes or reorganized industries
    • They tend to be aggressive & competitive. Intrusion rarely fails to lead to total quantitative or qualitative output growth or both for defensive & offensive, & price & quality strategically manipulated
    • Large scale production wouldn’t even occur if barriers to entry were prohibitive through large capital requirements or lack of experience
      • Conquest of financial control over competitors may secure advantages that may not be in the public’s best interest
      • Railroad rebates & removal of private property obstacles to commercial progress
      • Socialists advocate for this through a central authority
    • Enterprise wouldn’t happen if a decent chance of success weren’t on the table – exploited by price, quantity, quality manipulation provide loads of short-term profits
      • Strategies can be so successful & beyond necessary investment – they lure capital into untried areas that ultimately amount to nothing
    • Old firms compete in the same space
      • Creative destruction kills off old firms unable to weather the innovative storm
      • Rapid change & no data available causes chaos in industries leading to losses & unemployment
      • No point to conserve obsolete firms & industries but to avoid crashes, which can mitigate economic depression
    • In middle-aged industries, there’s an orderly advance
      • This fact is often ignored
    • Creative destruction is often relegated to a “consequence of the business cycle” but there’s another side to industrial self-organization of theorists
      • “Restraints of Trade” – cartels or just tacit understandings about price competition may actually be remedies for depression under special circumstances
      • When they are, they steady output from a mad rush forward that would end in a catastrophe in a hypothetical circumstance
    • Argument doesn’t cover all cases of restrictive/regulating strategy many of which have harmful effects on long-term development of output
      • Net effects vary depending on special cases
    • Cartel systems very well could sabotage all progress it’d make with smaller social & private costs that perfect competition would make
      • This is why we can’t rule out government intervention but shouldn’t do indiscriminate trust-busting or go after any minor case of restraint of trade
  • 3 – Rigid prices – defined as if less sensitive to changes in conditions of supply & demand than if perfect competition prevailed
    • Depends on material & method selected but it’s probably not as rigid as it appears to be
    • Change in price may not show in statistical picture – spurious rigidity
      • New commodities break down pre-existing structure & satisfy a given want a lower price/unit of service & not one price needs to change
      • Flexibility may be accompanied by rigidity in a formal sense
      • Price reduction may be sole motive to bring out a new brand while the old is at the previous quotation
      • New gadgets are at first experimental & unsatisfactory & unable to conquer markets, improvement in qualitative of products moves marked
      • Improvement of quality doesn’t show up in rigidity
    • Rigid is still in prices in markets kept constant as a matter of business policy or difficult to change with price set by cartel or contract
      • To see the long-term effect, realize rigidity is the result of short-term phenomena
        • No long-term rigidity due to technological progress, almost always falling due to technology unless monetary events/policy or wage rates change prices
    • The business strategy aims to avoid seasonal, random & cyclical fluctuations in price & only to move with fundamental changes in market conditions
      • These changes take time to be apparent – discrete steps & account for what voluntary price rigidity is
    • Question: How does short-term price rigidity affect the long-term
      • Only important issue is that prices that stay up in a recession or depression influence the business situation in those phases of the cycle
        • This is worse than with perfect inflexibility all around because destruction wrought each time affects output & subsequent recoveries, permanently decreasing total output below in the absence of the rigidities
    • Arguments for:
      • A – an industry refusing to lower prices in a recession goes on selling the same quantity as if it had reduced them
        • Buyers are out of pocket by industry profits due to rigidity
        • total expenditure in an economy may well be reduced as a result
        • Industries may suffer & if they restrict, it might accumulate depressive effects
          • The rigidity may influence quantity & distribution of national income to decrease balances or increase idle balances [savings]
      • B – dislocating effects price rigidity may exert if it leas to an additional restriction of output
        • important conductor of effects is increase in unemployment is the indictment against rigidity motivated by low sensitivities of demand to short-run price changes
          • Car purchases in a depression won’t be affect by 25% reductions, especially if purchase is postponable, leads to drop in quantity
        • Argument is inconclusive in light of Creative Destruction
          • At more flexible prices, greater quantity could be sold & it doesn’t follow that output of commodities in question or total output & employment would be greater
          • Refusal to lower price strengthens industrial position adopting that policy by increasing revenue to avoid market chaos – to fortified the market not expose it to weakness
            • Total output & employment may be higher with restrictions if trying to avoid total industry collapse, destabilizing the economy
          • Rigidity is to many the outstanding defect of capitalist regime & the fundamental factor of depressions
            • Slightly true but definitely exaggerated
  • 4 – Idea that maintaining the value of existing investment is a primary goal of the entrepreneur & can slow down cost-reducing improvement, & the capitalist is the one slowing down progress
    • Progress, via creative destruction, requires capital value destruction so that a new commodity or production method competes
    • In perfect competition, old investments must be adapted or abandoned
    • In non-perfect competition, firms can fight an attack on capital structure &  try to avoid losses – fighting progress itself
    • Conserving capital values is the same as conserving profits
      • A technological device (e.g. patent) may mean scrapping some or all of a firm’s equipment
      • The firm may choose not to use the patent & opt for the status quo
      • R&D departments exist only to improve technology but it’s possible patents aren’t commercially viable
    • Private & socialist management will introduce improvements if total cost per unit of product expected is lower than the one in use
      • If unfulfilled, private management will not introduce it but a socialist one might without regard to capital values. Maybe not…
      • Private profit motive may be to conserve to squeak out value from a machine more than a socialist would because debt will have to be amortized – not the concern of a socialist
      • All has to be calculated using discounts & opportunity costs
    • Not true – private management will switch if new average variable costs are greater old average variable cost, only if old investment is paid for (accounting amortization schedule)
      • Socialist management won’t always work to cost averages or social advantages
    • Another element is the ex ante conservation of capital in expectation of further improvement
      • Often a firm doesn’t face the question of adopting a new method or not – they can expect the situation to remain for some time
      • Improvements themselves will also become obsolete
      • Will stifle improvement until it’s clear that old methods & capital are no longer  viable &/or new methods & capital aren’t going to be obsolete soon
  • 5 – Comments on use of the terms “Monopoly” & “Monopolistic”
    • A – Monopolist – single seller
      • Technically can be true if not exactly like what other sellers sell, differentiation changes the market
      • Definition – single sellers who aren’t open to the intrusion of would-be producers of same commodity or actual ones of a similar commodity
      • Face a demand schedule severely independently of own action or others’ reactions to their actions
      • Pure long-run monopolies are rare & tolerable ones are rarer than cases of perfect competition
      • Power to exploit demand at pleasure can barely persist long-term to affect analysis of total output unless helped by a public authority
      • Modern businesses aren’t even so protected by import duties or prohibitions
        • Railroads & electric power had to create demand in order to be in a place to try to defend positions from competition
        • Outside of public utilities, positions can be conquered only if the firm doesn’t behave like a monopolist
      • We talk about monopolies because they’re talked about loosely & the term is used as an epithet in hostility to the accused.
        • We may malign firms with terms but monopolies have only existed long-term because governments have created them on one hand but on the other hand, raised a stink about them
        • Peel used the term demagoguery even when the market was competition is spite of protection
          • Monopoly is now synonymous with large-scale business
    • B – Theory teaches us that monopoly prices are even higher & output is lower than those of competition
      • True if method & organization are the same
        • But monopolists don’t have the same methods & organizations as smaller competitors & what’s available to them
      • Advantages come from methods & organization not from levels of competition – defeats the original argument
        • Monopoly prices aren’t necessarily high or outputs lower than competitive price & out, because of lack of competitive but embedded productive & organizational efficiency
        • Inevitable when large-scale production through move size plays a role production, arising from creative destruction & functioning in a necessary way to get to that point
        • They create what they exploit & conclusion about long-run continuation doesn’t work because of that face
      • Even if motivation for monopoly price & output were the only reason for their behavior, pressure of improved methods or some large factor pushing the monopolist output toward competitive prices & output is a competitive mechanism even if restriction or excess capacity is evident
      • If methods of production, organization, etc. aren’t improved – usually by a cartel
      • Also the idea monopolies stop innovation doesn’t hold because it’s actually caused by something else (mentioned later)
    • C – Genuine monopolies are rare
      • They may be temporarily monopolies but once competitors realize that fact, they choose to enter
        • New production methods or new commodities don’t create monopolies
          • New production methods still have to compete & new commodities still have to be introduced & demand for them has to be built
          • Even those with patents or monopolistic practices have to do that
            • Perhaps in special circumstances with a permanent demand schedule established before patent has expired
        • May be a true element of monopoly gain offered to the innovator but its volatility & its function are hard to predict
          • Usually only provides a temporary benefity
  • 6 – As time & analysis go on, perfect competition & free trade aren’t the seamless miracles they appear to be. There’s just not the same confidence in these ideas as was before
    • Mostly because of advancements in dynamic theory that analyzes sequences in time
      • i.e. why prices occur at certain times & what predicts them in the future. Static theory doesn’t address this
        • Once equilibrium is upset, establishing a new one isn’t so sure once perfect competition isn’t guaranteed according to theory because of lagging adjustment
      • E.g. Demand & intended Supply are in equilibrium for wheat but bad weather reduces intended supply
        • If price rises accordingly & farmers produce quantity to result in the new price as it were an equilibrium – a slump will occur the next year
        • Then if farmers restrict output accordingly, next year’s price will be even higher but will induce higher production the next year due to profit motive
        • A natural blip in a perfectly competitive market will be corrected by incentives to make more money & output expansion will result
        • However, imperfections in perfect competition are apparent but the mechanisms tend to compensate for them
    • Let’s imagine how creative destruction works in perfect competition
      • Perfect competition implies free entry into all industries for optimal allocation of resources & maximum output
      • If industries with perfect competition conditions existed with established & invariant methods, entry of labor & entrepreneurs & financing would cause loss to the industries
      • But free entry into a new industry actually would be impossible
      • Perfect competition is temporarily suspended with introduction of new methods, technology, etc. because all aren’t using the new methods & perfect competitions don’t hold
    • With a traditional system with rigid prices
      • Rigidity is a resistance to adaptation that perfect & prompt competition excludes
      • Resistance would mean loss & reduced output
      • Creative destruction has showed to have the opposite effect where perfect competition actually causes functionless catastrophes
      • General dynamic theory shows there are attempts adaptation that intensify disequilibrium
      • Traditional theory says holding profits about what’s necessary at the individual case for a market equilibrium to occur will result in a new social loss
      • Perfect competition stops this from happening by eliminating surplus profits & eliminates the strategy
      • But Capitalism requires those profits for the market & economy’s evolution
    • Perfect competition markets are fairly free from waste but that doesn’t say much about creative destruction
      • It’s difficult to say when wastes stops being waste when it is the impetus to excess capacity of building ahead of demand
      • Capacity in perfect competition implies producing at Marginal Cost = Price & building beyond that point provides a short-run loss
      • However, “strategically”, doesn’t necessarily mean or not mean that perfect competition isn’t working or a monopoly is taking shape or a Socialist system is superior compared to a Capitalist system
      • In Capitalist evolution, perfect competition actually displays waste in the form of opportunities based on not expanding technology & efficiency purely because it is risky & in the short term will lead to loss of profits
    • To argue perfect competition is impossible under modern conditions or that it’s always impossible it’s a large scale control establishment & a necessary evil for economic progress protected from competition due to its productive capacities
      • Not only is perfect competition impossible but it is inferior
      • Seen as a model for efficiency
        • Pushes for regulation because of that notion but unable to provide any progress

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