<h2>CHAPTER 35</h2>
<h3>EFFECT OF TRUSTS ON PRICES</h3>
<h4>§ I. HOW TRUSTS MIGHT AFFECT PRICES</h4>
<div class="sidenote">Economics of the trust problem</div>
<p>1. <i>The economist's task, strictly confined, is to explain the relation
of trusts to prices, not to solve the problem of their political
control.</i> The question of trusts is such a large one that its discussion
here must be confined to those aspects having close relation to the
central subject of economic study,—the laws of value. These laws were
by the older economists thought to be true only within the limits of
free competition. Seeing that in various ways this freedom is interfered
with not only by caste, custom, organized labor, but by patents,
political privileges, and the power of large aggregations of capital (in
short by all things that check the flow of ability and of agents from
one industry to another), the question occurs: Are the abstract laws of
rents, profits, and wages of any significance or of any help in
discussing the great practical questions of to-day? Are not prices
determined by the personal whim of industrial despots who can bid
defiance to the laws of price? The control of trusts by legislative
action is largely a political problem, but it must be guided by a
correct economic analysis. Proposed legislative measures often assume or
imply that in no way, directly or indirectly, is competition found in
the problem. It should be the aim of economic study to make clear the
true bearing and force of monopoly power in practical problems of value.</p>
<div class="sidenote">Limited power of trusts</div>
<div class="sidenote">Monopoly and supply</div>
<p>2. <i>The fundamental principles of market value cannot be<span class="pagenum"><SPAN name="Page_324" id="Page_324">[Pg 324]</SPAN></span> changed by a
trust; a selling monopoly can affect price only as it affects supply or
demand.</i> The strongest "trust" yet seen has not been omnipotent. Many
careless expressions on the subject are heard even from ordinarily
careful writers and speakers: "The trust can fix its own prices," "has
unlimited control," "can determine what it will pay and for what it will
sell." This implies that trusts are benevolent, seeing that the prices
they charge are usually not far in excess of competitive prices in the
past. Such a view overlooks the forces that limit the price a monopoly
can charge. The law according to which the value of products on the
market is determined, is as valid where there is a trust as anywhere
else. The marginal utility of goods to the consumer determines the price
of any given supply. If the supply remains the same, no trust can make
the price go higher. What it gets in exchange are the services or the
wealth of the rest of the public. At what rate can it exchange its
products for the products of others (including other trusts)? The
monopoly usually directs its efforts to affecting the supply, leaving
the price to adjust itself. (This is the case of the selling monopoly;
the statement must be adjusted where it is a buying monopoly.) It can
affect the supply either by lessening its own output or by intimidating
and forcing out its competitors. It is true that this logical order is
not always the order of events. The trust does not first limit the
supply, and then wait for prices to adjust themselves; it first raises
its prices, but unless it is prepared to limit the supply in accordance
with the new resulting conditions of demand, such action would be vain.
The control of the sources of supply is the logical explanation of the
higher price, even though the limitation of supply is effected later by
successive acts found necessary to maintain the higher price.</p>
<p>Monopoly price is therefore a rational thing, not a mystery entirely out
of harmony with the simple law of value laid down for consumption goods.
The trust works as the magician<span class="pagenum"><SPAN name="Page_325" id="Page_325">[Pg 325]</SPAN></span> does, not as was thought of old, in
defiance of natural laws, but in harmony with them and by their aid. The
view the public took of the trusts was at first medieval. That should
not be the view to-day.</p>
<div class="sidenote">Monopolistic gains from successful combination</div>
<p>3. <i>The economies of large production after a successful combination may
be divided in varying proportions among monopolists, workmen, and
consumers.</i> If the great economies of large production are effected by a
new combination which makes no attempt to fix a higher price and limit
production, where will the fruits of these economies go? They will go
first to the owners of the trust, because, unless inspired by motives of
philanthropy, they have no need to lower prices. Though they are in
possession of special facilities, they will try to secure as high a
price as before. A wider margin permits greater profits on each unit
without limiting the output or the sales. They may retain this so long
as they do not yield to the temptation to increase the output in
proportion to their new facilities.</p>
<div class="sidenote">Gains to workmen</div>
<p>These economies, may, however, at times inure to the benefit of the
workmen in higher wages if they succeed by any means whatever in
squeezing the employers at this time of exceptional gains. The
suggestion has even come from employers that in order to allay labor
troubles there should be a union of capital and labor to squeeze the
consumer, by doing away with all competition in fixing prices. This
proposition to divide the plunder of monopoly has been viewed
approvingly by some leaders of organized labor, but it does not look
especially alluring to the general public, to which is assigned the
humble part of paying the bill.</p>
<div class="sidenote">Gains to consumers</div>
<p>Part of the advantages will go to the consumer whenever there is a
motive on the part of the large establishment to increase supply in
order to get a larger profit or to forestall new competition. As the
improvements become matters of public knowledge, most of the new
economic methods can and will be adopted by new enterprisers, and other
large aggregations of capital will be induced to come in to reap<span class="pagenum"><SPAN name="Page_326" id="Page_326">[Pg 326]</SPAN></span> the
benefits. The effect, of course, is an increase in supply and a lowering
of prices. The fiat of the trust to prices to remain fixed while supply
increases is as vain as a mortal's commands to the waves to be still.
The undesigned result of the economies of large production, therefore,
where control is not great, is to lower the prices and to diffuse the
benefits among the public.</p>
<div class="sidenote">Social burden of monopoly profits</div>
<p>4. <i>If the trust succeeds in raising its prices it gains at the expense
of the community.</i> If a producer has some monopoly power, recognizes and
uses it, his gain does not correspond with an increase in production. It
is taken from those who buy these products, it is deducted from the
psychic incomes of other members of society. This raising of prices
actually reduces technical production, for the output is limited in
order to secure the higher price. The probably less urgent wants of the
receivers of monopoly incomes are gratified in place of the probably
more urgent wants of the average purchaser. The result is a decreased
social income, with an increase of the inequality of distribution. There
is an analogy here with the effects of trade-unions. If the trade-union
succeeds in forcing prices higher than the competitive prices, it gains
at the expense of the other portion of the community. But while its
gains appear to be more largely at the expense of the richer elements of
society, the gains of the trust are more likely at the expense of the
poorer elements. If the success of organized labor means to some extent
a leveling up of income, the success of the trust means a still further
inequality. Hence a difference in public sympathy in the two cases.</p>
<div class="sidenote">The praise and blame for trust prices</div>
<p>5. <i>The responsibility for either the rise or the decline of trust
prices cannot always be determined.</i> Prices are changing constantly
under competitive conditions. In this active, moving world, changes of
demand, the exhaustion of sources of supply, new processes, expiration
of patents, opening up of new lines of transportation, affect prices in
a multitude of ways entirely independent of organization.
Trust-controlled<span class="pagenum"><SPAN name="Page_327" id="Page_327">[Pg 327]</SPAN></span> industries are open to all these influences. Economic
forces cannot be isolated as can elements in a chemical laboratory, and,
therefore, trusts claim the credit for all the reductions of price that
have occurred. By such a calculation the trusts usually make a showing
of progress, as, until 1896, for twenty years the tendency of prices in
most lines was downward. Always getting the highest price they can under
the market conditions, they yet pose as benefactors. They would claim
that the economies possible only under trust organization cause even a
monopoly price to be less than a competitive price would be. Critics of
the trusts, on the other hand, charge them with causing all the increase
that occurs, and with checking the decline in prices. The critics
compare the percentages of decline in price during the decades before
and after the combination was formed, and as it is impossible for a
geometric rate of decrease in price, as a result of improvements, to be
long maintained, this showing is very unfavorable to the trusts. A
method has been found, however, of testing, in the case of a few leading
industries, the effects they have had on the price of their portion of
the productive process.</p>
<h4>§ II. HOW TRUSTS HAVE AFFECTED PRICES</h4>
<div class="sidenote">Trusts raise prices</div>
<div class="sidenote">The oil trust</div>
<p>1. <i>Examination of the course of prices in the case of some notable
trusts shows that, wherever effective, they raise prices above the
competitive rate possible to smaller production.</i> The most instructive
study in the subject is that undertaken by J. W. Jenks a number of years
ago, and later developed by him when working with the Industrial
Commission from 1898 to 1900. Its results are embodied in a series of
charts. It appears that the price of refined petroleum, in 1871, was
twenty-five and seven tenths cents per gallon; in 1880, eight and six
tenths cents; in 1887, seven and eight tenths cents; in 1900, seven and
eight tenths cents. A writer in the "North American Review" claims that
this<span class="pagenum"><SPAN name="Page_328" id="Page_328">[Pg 328]</SPAN></span> decline was due to the economies accomplished by the Standard Oil
Trust. It will be noticed, however, that prices fell most rapidly (from
twenty-five and seven tenths cents to eight and six tenths cents)
between 1871 to 1880, a period of intense competition, when the industry
was new, and when the independent companies, fighting for their
existence, introduced many improvements and began the construction of
the pipe-lines that were later secured by the Standard Oil Co. Despite
this rapid decline, the smaller companies still could have maintained a
profitable business had it not been for the ruinous discrimination of
the railroads against them. Because of this, the Standard Oil Co., in
1880, obtained almost complete control. The price twenty years later
than that date was less than a cent cheaper. In the meantime the price
for a time continued to fall. Competition was never quite stilled. The
small competitor, wherever he saw a chance, has nibbled off a bit of the
tempting profits. The rise from 1898 to 1900 was in accord with that
occurring in other lines. A much lower cost of production is now
possible to the great monopoly with its larger sales and more economical
methods. The by-products, unknown at the beginning of the period, now
yield large sums, yet the price remains much the same as a quarter of a
century ago. The trust has succeeded in retaining a large part of the
increasing margin of price over cost.</p>
<div class="sidenote">The sugar trust</div>
<p>The influence of the sugar trust may be studied by what is known as the
method of differentials. The differential in sugar is the difference
between the cost of the raw sugar and the refined granulated sugar. Raw
sugar is the main material and the principal fluctuating item of cost
beyond the control of the trust. Changes in the differential reflect the
changes in profits except as modified by a cheapening of the process.
The period from 1880 to 1887 was one of great competition. In 1880, the
differential was one and ninety-two hundredths cents on each pound of
refined sugar, but it fell steadily till, in 1887, it had reached
sixty-four hundredths<span class="pagenum"><SPAN name="Page_329" id="Page_329">[Pg 329]</SPAN></span> cents. In the fall of that year the trust was
formed; and the next year the differential had risen to one and
twenty-five hundredths cents, in 1889 to one and thirty-two hundredths
cents. Tempted by the enormous profits, the rival refineries of Claus
Spreckel were started, and with competition the differential fell, in
1890, to seventy hundredths cents. The rival factories were then bought
up and under the new combination the differential went sailing up to one
and three hundredths in 1892, and to one and fifteen hundredths in 1893.
Rival factories again arose and competition grew stronger, reducing the
differential to ninety-four hundredths in 1894. It was in that year that
the firm of Arbuckle Brothers and Claus Doscher each opened a great
refinery, and in the next year the differential fell to fifty hundredths
cents. In 1900, some agreement, the terms of which were unknown to the
public, was entered into by the rivals and the differential had risen,
in March, 1901, to ninety-five hundredths cents. In every case the
differential fell when competition was effective and went up when
monopoly power was regained.</p>
<div class="sidenote">The nail trust</div>
<p>The differential of steel-wire nails is the difference between the cost
of the steel billets and the price of the wire. Between 1890 and 1895
there was a steady decline in the differential. In 1895 was formed the
nail pool, an agreement to share the profits, a form of combination. A
rapid advance took place, both in the price and in the differential. In
the fall of 1896 the pool was broken and then occurred a fall in prices
and in the differential during 1896-97. In January, 1899, the nail trust
was formed, controlling sixty-five to ninety-five per cent. of the
output of wire nails, and a rapid advance occurred in the price and also
in the differential.</p>
<div class="sidenote">The tin-plate trust</div>
<p>The tin-plate industry practically had its origin in the United States,
in 1892, under the McKinley tariff. As competition increased, prices and
the differential fluctuated and declined. At the end of 1898 the
tin-plate company was<span class="pagenum"><SPAN name="Page_330" id="Page_330">[Pg 330]</SPAN></span> formed and prices at once started upward with a
rapid increase in the differential. Cause may, in a measure, be mistaken
here for effect. In these cases the part of the rise in price due to the
rise of materials is not brought about by the trust. The differential
represents its part of the productive process and its source of profits.
The power to make the differential high is due in part to the general
conditions of business in the last three years considered. The profits
of all industries in those years increased. While prices may have risen
partly because the trust was formed, it may have been possible to form
the trust because prices were rising. The general conclusion is that
trust prices are always raised when, and to the extent that, control is
secured. They are lowered below normal prices when competition becomes
troublesome. Fluctuation of prices probably has been more rapid and more
spasmodic under trusts than it has been under ordinary competitive
conditions.</p>
<div class="sidenote">Effective trusts injure various producers</div>
<p>2. <i>A large degree of monopoly control may lower the incomes of
producers of materials, the value of competitive plants, and prices in
special local markets.</i> A strong selling monopoly tends to become also a
buying monopoly. A great industry using great quantities of materials
may either own the sources or purchase from small producers. The steel
trust owns mines, and ships and railroads to bring the ore to the
furnaces; but the tobacco trust buys from the farmers. If the packing,
refining, and marketing of a product is monopolized, the sellers of the
raw or partly finished product are subject to one-sided competition. The
small producers of tobacco, of crude oil, and of anthracite coal claim
that the effect of the trusts is to give them lower prices for their
products. Some have been severely punished by the monopolies for
refusing to take the first offer made. Monopoly is thus likewise able to
purchase competing plants at ridiculously small sums, by first making
them valueless through fierce price-cutting, or by threats of it. "Rich"
is often a relative term, and it is said that many a small millionaire<span class="pagenum"><SPAN name="Page_331" id="Page_331">[Pg 331]</SPAN></span>
producer has anxiously waited to see whether the great trust would next
turn its attention to him.</p>
<div class="sidenote">The persistence of competition reducing prices</div>
<p>3. <i>Competition of less capable producers works in most cases to prevent
the great or continued rise of trust prices.</i> Early trusts overestimated
their power. The persistence of competition in industries where the
trusts have had great advantages in position and resources has been
astonishing. The wall-paper trust, though for many years it kept prices
above competitive rates, was repeatedly undermined by competition. The
whisky trust, while it frequently raised prices, was as often forced by
the growth of small distilleries to lower them below competitive rates.
Competition in the oil industry has persisted under the greatest
difficulties. The smaller companies have hauled the product by wagon
when the trust was moving it by pipe-lines. The continuance of high
prices by a trust depends on a high degree of control of supply. A
recognition of the limits of their power has led trusts in some cases to
a policy of moderate prices, affording a good profit, but not
encouraging competition.</p>
<div class="sidenote">Supply as the condition of low prices</div>
<p>The limits of the power of the trust to control prices are strikingly
shown by the fact that it cannot even insure low prices if the market
conditions do not justify them. The steel trust, in 1902-3, declared
that it would not advance the price of steel rails above twenty-eight
dollars, and this was hailed as a beneficent effect of trust control,
which, by equalizing production, could prevent excessive fluctuations of
price. But the trust's declaration was a bit of inexpensive humor on the
part of the managers; the trust had nothing to sell at the price quoted,
as its entire product had been sold out months in advance. While,
therefore, the trust continued calmly to quote steel rails at
twenty-eight dollars, competition raised the market price to
thirty-three dollars a ton; twenty-eight dollars or more was paid for
second-hand rails, and a proportionate price for other iron products.
Such exceptional conditions, raising prices to abnormal levels, are<span class="pagenum"><SPAN name="Page_332" id="Page_332">[Pg 332]</SPAN></span>
followed by a decline disastrous not only to the small producer, but to
the trusts as well.</p>
<div class="sidenote">Modes of controlling trusts</div>
<p>4. <i>The control of the trusts must be sought in the direction of
maintaining potential competition through fair and free conditions of
industry.</i> Many of the remedies suggested are reactionary and would give
up the benefits of large production. Measures must be sought in harmony
with the economic principles of price. Since many of the trusts have
grown wealthy by special shipping privileges from the great quasi-public
corporations, the railroads, and by special favors from public or
corporation officers, who have been false to their duties, the solution
must be a political and moral one; it must be sought in the development
of honest citizenship and of a more efficient social regulation of
quasi-public industries. The conditions of competition may be made
fairer by requiring publicity of accounts, and by making it impossible
for great corporations to strangle their local competitors by special
and temporary prices. The state here has the same duty to perform that
it has to protect the weak man from personal violence at the hands of
the strong. This will not prevent competition, but it will determine the
ways in which the rivalries of men can be manifested. Any measures for
controlling the great combinations must start from a right understanding
of the law of value, neither underestimating nor overestimating their
economic power. Public sentiment toward the trust question has changed
somewhat in recent years, because the nature of trusts and the extent of
their power are better understood. There is now less fear of them, and
more confidence that they can be tamed and made to serve the welfare of
society.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_333" id="Page_333">[Pg 333]</SPAN></span></p>
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