Concentration of Resources in Capitalism
Monday, May 17, 2010
A common argument against Capitalism is that industry and wealthy individuals will inevitably concentrate. This was a primary argument of the inevitability of Socialism in the writings of Marx and Engels. In Chapters 22 through 26 of Ludwig von Mises' [Socialism](http://files.libertyfund.org/files/1060/Mises_0069_EBk_v5.pdf), written in 1922, as part of the broader Part III on "The Alleged Inevitability of Socialism," Mises argues that these theories-- the inevitable concentration of establishments, enterprises, and fortunes-- are expounded originally by Marx in Das Kapital, and Engels, later reinterpreted by Kautsky, and unsurprisingly Mises disagrees with them in these three component parts of concentration of establishments, enterprises and fortunes (this part of the book follows Part II which is what the book is most well known for in describing "the economic calculation problem" -- Mises is credited for being the first to describe why, in theory, purer forms of Socialism such as Bolshevist Russia would ultimately collapse economically).
A potential summary of the quotes:
- Concentration of establishments: This is a feature of the division of labour; however, the size of the unit of production is scoped by the Laws of Diminishing Returns and the Optimal Combination of the Factors of Production (this unit of production being not gauged, and impossible to do so, in historical economic statistics). Therefore, the the number and type of dissimilar productive establishments will tend to increase.
- The Vertical Concentration of Enterprises: Serves no special (and in fact, often superfluous) purpose other than to prop up a weaker enterprise with that of a stronger. However, the modern tendency toward specialization shows that there is a natural move away from vertical concentration.
- The Concentration of Fortunes:
- Disproven by the number of enterprises that have come up (joint stock company, societas unius acti, etc.) versus the equal decline of individual wealthy merchants. The most large scale concentration of fortune occurs under political or militaristic rule.
- Mercantile wealth is rarely sustained but through the purchase of land, or through the smart reinvestment of capital. In the rare instances of land wealth, those families fall out of being merchants.
- Fortunes cannot grow without someone increasing them. Acquired capital cannot produce consumption goods without trade, maintenance, and/or reinvestment. Even in the case of investment, this is purely speculative and can involve complete loss. The more rapid the change in economic conditions, the shorter time in which ever riskier speculation must bear fruit.
* The Theory of Increasing Poverty: Even Marxists concede that Capitalism has shown to be, comparatively, the system that produces the highest overall increase in the standard of living. The more capitalistic, the more the increase. The fact that Capitalism is not Utopia, nor does it give an equal increase in wealth to all members, is a secondary issue to its overall effect to raise the standard of life. Capitalism uniquely maximizes general envy. * Monopoly (or the Horizontal Concentration of Enterprises): In most cases caused by government, but can occur in specific primary production fields (oil, mining, railroads, electric companies, etc.). However, even if competition is not supported by potential profitability in those fields, or geographic monopoly occurs, these cases are limited and can actually have a beneficial effect of being thrifty with limited resources (e.g. oil), which would not occur in a present-oriented Socialism. Secondly, if the monopolist charges more than a free competition price, (s)he necessarily will limit production (instead of destruction of resources), and although profit will increase, demand will decrease, and excess labour and capital will go into other fields (e.g. alternative energies).
In essence, the opposite of the concentration of resources occurs in capitalism.
The Concentration of Establishments:
- The concentration of establishments comes automatically with the division of labour.
- The more the work is split up, the more must similar processes be concentrated.
- Census of the concentration of productive units does not take into account the units (or components) of production.
- The higher productivity of the division of labour results, above all, from the specialization of processes which it makes possible.
- The size of the productive unit is determined by the complementary quality of the factors of production.
- Economic development drives industry to ever greater division of labour, involving at once an increase in the size and a limiting of the scope of the unit of production.
- The actual size of the unit is the result of the interaction of these two forces.
- The Law of the Optimal Combination of the factors of production indicates the most profitable size of the establishment.
- Net profit is greater according to the degree to which it size permits all factors of production to be employed without residue.
- It was a mistake to think that enlargement of the industrial establishment must always lead to an economy of costs, a mistake of which Marx and his school have been guilty.
- It is merely certain peculiarities of the conditions of agricultural production which cause us to regard the Law of Diminishing Returns as primarily affecting land.
- In short, one can see nowhere in primary production any tendency to concentrate productive units. This is equally true of transport.
- The economic superiority of the larger productive unit exists only in so far as the Law of the Optimal Combination of Factors of Production demands it and that consequently no advantage is to be gained by enlarging the establishment beyond the point where the instruments are most efficiently utilized.
- A Law of the Concentration of Establishments operates therefore only in so far as the division of labour leads to progressive division of production into new branches. This concentration is really nothing more than the reverse side of the division of labour. As a result of the division of labour numerous dissimilar establishments, within which uniformity is the rule, replace numerous similar establishments within which various different processes of production are carried out. It causes the number of similar plants to decrease, whilst the circle of persons, for whose needs they work directly or indirectly, grows. If the production of raw materials was not geographically fixed, a circumstance which acts counter to the process initiated by the division of labour, one single plant would exist for every branch of production.
The Vertical Concentration of Enterprises (union of independent enterprise, some of which use the products of the others)
- If the amalgamated establishments were individually so efficient that they did not have to shun competition, vertical combination would server no special purpose.
- It does not follow that two enterprises, working at different stages of the same branch of production and held by one owner, must necessarily unite in vertical combination. Only when one or other of them shows itself less able to sustain competition does the entrepreneur conceive the idea of supporting it by tying it to the strong one.
- Apart from tax remissions and other special advantages, such as those which the mixed works in the German iron industry were able to derive from cartel agreements, union achieves nothing but an apparent profit in one enterprise and an apparent loss in the other.
- The number and importance of vertical concentrations is extraordinarily overestimated.
- The progressive tendency to specialization in modern industry shows that development is moving away from vertical concentration, which, except where it is demanded by considerations of productive technique, is always an exceptional phenomenon, generally to be explained by regard for the legal and other political conditions of production. But even here the break-up of such unions and the re-establishment of individual enterprise is to be witnessed over and over again.
The Concentration of Fortunes
- The proof that there is no tendency to concentrate fortunes lies in the number of... enterprises that have come up... while the individual merchant has almost disappeared from large scale industry, mining, and transport.
- The history of forms of enterprise, from the societas unius acti to the modern joint stock company, is a wholesale contradiction of the doctrine of the concentration of capital so arbitrarily set up by Marx.
- The desire for an increase of wealth can be satisfied through exchange, which is the only method possible in a capitalist economy, or by violence and petition as in a militarist society.
- Nowhere and at no time has the large scale ownership of land come into being through the working of economic forces in the market. It is the result of military and political effort. The non-economic origin of landed fortunes is clearly revealed by the fact that, as a rule, the expropriation by which they have been created in no way alters the manner of production. The old owner remains on the soil under a different legal title and continues to carry on production.
- Land ownership may be founded also on gifts. It was in this way that the Church acquired its great possessions in the Frankish kingdom. Not later than the eight century, these latifundia fell into the hands of the nobility.
- That in a market economy it is difficult even now to uphold the latifundia, is shown by the endeavors to create legislation institutions like the "Fideikommiss" (feoffment in trust) and related legal institutions such as the English "entail."... to maintain large-scale landed proprietorship, because it could not be kept together otherwise.
- Never was the ownership of the means of production more closely concentrated than at the time of Pliny, when half the province of Africa was owned by six people, or in the days of the Merovingians, when the Church possessed the greater part of all French soil. And in no part of the world is there less large-scale land ownership than in capitalist North America.
- The assertion that wealth on the one hand and poverty on the other are ever increasing was... influenced by the idea that the sum of wealth in any society is a given quantity, so that if some possess more others must possess less. As, however, in every society the growth of new riches and the coming into existence of new poverty are always to be found in a conspicuous manner whilst the slow decline of ancient fortunes and the slow enrichment of less propertied classes easily escape the eye.
- It is quite an unfounded hypothesis that in a society based on the division of labour the wealth of some implies the poverty of others.
- We know that Capitalism has not yet abolished all misery in the world.
- Attempts to demonstrate by statistical research the progressive increase of the misery of the masses and the growth of the wealth among a numerically diminishing rich class are no better than these mere appeals to emotion. The estimates of money incomes at the disposal of statistical inquiry are unusable because the purchasing power of money alters.... For where it is not possible to reduce to a common denominator the various goods and services of which incomes are composed, one cannot form any series for historical comparison from known statistics of income and capital.
- Seldom does mercantile and industrial wealth maintain itself in one family for more than two or three generations, unless, by investment in land, it has ceased to be wealth of this nature.
- Fortunes invested in capital do not... represent eternal sources of income. That capital yields a profit, that it even maintains itself at all, is by no means a self-evident fact following a priori from the fact of its existence. The capital goods, of which capital is concretely composed, appear and disappear in production; in their place come other goods, ultimately consumption goods, out of the value of which the value of the capital mass must be reconstituted. This is possible only when the production has been successful, that is when it has produced more value than it absorbed. Not only profits of capital, but the reproduction of capital presupposes a successful process of production. The profits of capital and maintenance of capital are always the result of successful enterprise. If this enterprise fails, the investor loses not only the yield on the capital, but his original capital fund as well.
- In agriculture and forestry the original and indestructible factors of the soil are maintained even though production fails, for faulty management cannot dissipate them. They may become valueless through changes in demand, but they cannot lose their inherent capacity to yield produce. This is not so in manufacturing production. There everything can be lost, root and branch. Production must continually replenish capital. The individual capital goods which compose it have a limited life; the existence of capital is prolonged only by the manner in which the owner deliberately reinvests it in production. To own capital one must earn it afresh day by day. In the long run a capital fortune is not a source of income which can be enjoyed in idleness.
- Investments must be... the result of successful speculation. Capital investment is attached the risk of a total or partial loss of the original capital sum. This is true not only of the entrepreneur's investment, but also of the investment the capitalist makes in lending to the entrepreneur. The moneylender too can, and often does, lose his wealth.
- An eternal capital investment is as non-existent as a secure one. Every capital investment is speculative; its success cannot be foreseen with absolute assurance.
- If, then, capital sums do not grow of themselves, if for their maintenance alone, quite apart from their fructification and increase, successful speculation is constantly required, there can be no question whatever of a tendency for fortunes to grow bigger and bigger. Fortunes cannot grow; someone has to increase them. For this the successful activity of the entrepreneur is needed.
- The more rapid the change in economic environment the shorter the time in which an investment is to be considered as good.
- When rich entrepreneurs wish to perpetuate their wealth in the family they take refuge in land. The descendants of the Fuggers and Welsers live even today in considerable affluence, if not luxury, but they have long ceased to be merchants and have transformed their wealth into landed property. There are no ancient fortunes which thrive in the sense that they continually increase.
The Theory of Increasing Poverty
- Even Kautsky, during the revisionism quarrel, was reduced to conceding that, according to all the facts, it was precisely in the most advanced capitalist countries that physical misery was on the decline, and that the working classes had a higher stander of life than fifty years ago. The Marxians still cling to the theory of increasing poverty purely on account of its propaganda value.
- But intellectually the theory of the relative growth of poverty, developed by Rodbertus, has replaced the theory of absolute growth: "Poverty is a social, that is, a relative concept."
- This thought is derived entirely from the point of view of the State Socialist, which considers a raising of the workers' claims to be "justified" and assigns them a "higher position" in the social order. Against arbitrary judgments of this kind, no argument is possible.
- If Capitalism improves the economic position all around, it is of secondary importance that it does not raise all to the same level. A social order is not bad simply because it helps one more than another. Must one destroy Capitalism which better satisfies from day to day the wants of all people, merely because some individuals become rich and a few of them very rich?
- The general striving of improvement of economic position is a peculiarly characteristic mark of capitalist society.
- Mandeville and Hume, two of the greatest observers of human nature, have remarked that the intensity of envy depends on the distance between the envier and the envied. If the distance is great one does not compare oneself with the envied, and, in fact, no envy is felt. The smaller the distance, however, the greater the envy.
- No other part of economic theory has been so much misunderstood as the theory of monopoly. The mere mention of the word monopoly usually stirs up emotions. Even in the United States the controversy raging over the trust problem has supplanted all impartial discussion of the problem of monopoly.
- The concept "monopoly"... is that contained in the theory of price monopoly. It does not demand that a monopolized commodity shall be indispensable, unique, and without substitute. It assumes only the absence of perfect competition on the side of supply.
- The monopolist cannot ask any price he fancies. The price offers with which he enters the market influence the attitude of the buyers. Demand expands or contracts according to the price he demands,. The one and only peculiarity of monopoly is that, assuming a certain shape of the demand curve, the maximum net profit lies at a higher price than would have been the case in competition between sellers. If we assume these conditions and if the monopolist cannot so discriminate as to exploit the purchasing power of each class of buyers, it pays him better to sell at the higher monopoly price than at the lower competitive price, even though sales are thereby diminished. Therefore, monopoly under such conditions has three results: the market price is higher, the profit is greater, both the quantity sold and the consumption are smaller than they would have been under free competition.
- If there is more of the monopolized commodity than can be placed at the monopoly price the monopolist must lock up or destroy so many surplus units that the remainder may attain the price needed. Thus the Dutch East India Company, which monopolized the European coffee market in the seventeenth century, destroyed some of its stock. Other monopolists have done likewise; the Greek Government, for instance, destroyed currants in order to raise the price.
- That goods which could have satisfied wants, and foodstuffs which could have stilled the hunger of the many, should be destroyed is a state of things which the outraged populace and the discerning economist unite, for once, in condemning.
- Even in monopolistic undertakings, however, destruction of economic goods is rare. The far-sighted monopolist does not produce goods for the incinerator. If he wishes to place fewer goods on the market he takes steps to reduce his output. The problem of monopoly must be considered, not from the point of view of goods destroyed, but from that of production restricted.
- Now the result of this restriction is not that less is produced quantitatively. Capital and labour, set free by the restriction of production, must find employment in other production. For in the long run in the free economy there is neither unemployed capital nor unemployed labour. Thus against the smaller production of the monopolized goods one must set the increased production of other goods. But these, of course, are less important goods... this difference represents the loss of welfare which the monopoly has inflicted on the national economy.
- Apart from the enjoyment of artificial support... we shall find that a monopoly can, as a rule, maintain itself only by the exclusive power to dispose of certain natural factors of production.
- New enterprises may always spring up.
- The progressive division of labour tends towards a condition in which, at the highest specialization of production, everyone will be the sole producer of one or several articles. However, the attempts of manufacturers to extract monopoly prices would... be checked by the appearance of new competitors.
- Experience of cartels and trusts during the last generation completely confirms this. All enduring monopolistic organizations are built up on the power of the monopoly to dispose of natural resources or of particular land sites. A man who tried to become a monopolist without the control of such resources-- and without special legal aids such as tariffs, patents, etc.-- had to resort to all sorts of tricks and artifices to secure even a temporary success.
- Most cartels and trusts would never have been set up had not the governments created the necessary conditions by protectionist measures. Manufacturing and commercial monopolies owe their origin not to a tendency immanent in capitalist economy but to governmental interventionist policy directed against free trade.
- Without the special power to dispose of natural resources, or of advantageously situated land, monopolies could arise only where the capital required to erect a competing enterprise was not able to count on an adequate return. A railway company can achieve a monopoly where it would not pay to build a competing line, the traffic being too small for two lines to be profitable. But while this shows that a few monopolies of this kind are possible it does not reveal a general tendency to their formation.
- The effect of such monopolies, e.g. the railway company or the electric power plant, is that the monopolist may be able, according to the circumstances of the case, to absorb a greater or smaller quantity of the ground rents of adjoining properties.
- In an economy based on private ownership in the means of production, specific primary production is the only field liable to monopolization without special protection from the State. Mining, in the widest sense of the world, is their true domain... almost exclusively organizations built up on a power to dispose of certain kinds of natural resources. These natural resources must be such as are found in relatively few places, for this alone makes the monopoly possible. A world monopoly of potato farmers or milk producers is unthinkable. Potatoes and milk, or at least substitutes for them, can be produced over the greater part of the earth's surface. World monopolies of oil, mercury, zinc, nickel, and other materials can occasionally be formed if the owners of the rare places where they exist can combine; examples of this are found in the history of recent years.
- When such a monopoly is formed the higher monopoly prices replaces the competitive price. The income of mine owners rises, production and consumption of their product fall. A quantity of capital and labour which would otherwise have been active in this branch of production is diverted to other fields.... monopolies would appear to economize consumption of irreplaceable natural resources. People come to deal more thriftly with these precious resources.
- True, a socialist community would have no occasion to restrict production as Capitalism does under monopolies, but this would only mean that Socialism would deal less thriftly with irreplaceable natural treasures, that it would sacrifice the future to the present.
- If, then, we consider the effects of monopoly... we can discover nothing which could justify the assertion that growing monopolization makes the capitalist system intolerable. The monopolist's scope in a capitalist economy free from state interference is much smaller than is commonly assumed; and the consequences of monopoly must be judged by other standards.
Socialism, An Economic and Sociological Analysis, Ludwig von Mises, 1922, http://files.libertyfund.org/files/1060/Mises0069EBk_v5.pdf.