IV.Free Enterprise and Free Prices

IV. FREE ENTERPRISE AND FREE PRICES Mass prosperity and national greatness require mass production. Mass production requires mass enterprise. Mass enterprise requires business democracy. Business democracy requires free exchange. Recipe for Revolution To destroy a nation's prosperity and to overturn its economic and political institutions it is necessary only to create sufficient discontent among producers concerning the terms on which they exchange their services. This discontent leads to a. restriction of price competition and b. inflation of currency and credit. Restriction of price competition (including wage competition), whether through private organizations or through legislation, leads to: 1. restriction of output, strikes, shutdowns and class warfare; 2. mass unemployment and idle capacity (see below, pp. 94-95, 118-119); 3. popular demands for new government agencies to: protect the public against the greed of private monopolies; carry out restrictive, price-maintenance schemes on behalf of small producers and unorganized workers; and give jobs and relief to the unemployed.

Inflation of the currency or credit to finance a costly program of public works or military preparedness results in: 1. creating a supporting army of party workers and voters for the bureaucracy ; 2. enabling government to buy support through judicious location of projects, through purchase of "surplus commodities," and through highwage policies on public works; and 3. making the banking system and credit structure dependent on continuance of the restrictionist and inflationary policies. These ingredients are sufficient for a complete political overturn.

FREE ENTERPRISE AND FREE PRICES 23 Conflicts between the various producer organizations, logrolling for new government projects, and pressure for new restrictions on competition bring representative institutions and methods into disrepute. Delays in legal procedures and unpopular decisions bring the courts into disrepute. Popular clamor grows for a disinterested head of state to protect the public against the greed of private pressure groups and to cut through the delays and redtape of the bureaucracy. Mass unemployment, restricted opportunity for able young men, rising taxes and mounting debts create a crisis for which dictatorship seems the only solution. The United States has tasted this revolution cake. In the spring and summer of 1933 we ate a sizable slice of it and we have continued nibbling at it ever since. Various other nations took much more of it than did we. But the people of Germany swallowed the whole ugly mess.

Price Maintenance and Revolution in Germany For two generations, or more, before Hitler's rise to power, price maintenance restrictions on competition had been destroying economic liberty and creating the chronic mass unemployment and discontent which gave the Nazis their opportunity.* Associations of producers, called "cartels," under government supervision, fixed prices of commodities. To maintain these prices they fixed quotas of production, limited output and repressed new enterprises which might undercut the vested interests. Wages were determined for a time by collective bargaining. Costly conflicts between the "irresistible forces" of trade unions and the "immovable bodies" of employers, however, finally led to government wage-fixing through labor courts and compulsory arbitration. Subsidies, tariffs, quotas, barter agreements, government loans and government commodity purchases controlled foreign trade.

Widespread government ownership of many forms of business, including mines, theaters, pawnshops, meat-shops, warehouses, utilities and the railroads, still further reduced freedom of bargaining and increased price rigidities. Prices of government services (taxes and license fees) were high and rigid because of deficits on government enterprises and elaborate programs for public works and "social security." •Cf. Frank Munk, The Legacy of Nazism, (Macmillan Co., 1943), Ch. V.

24 DO WE WANT FREE ENTERPRISE? Agriculture was subjugated by government loans, marketing pools to buy "surpluses," cooperative producers' organizations to restrict supply, and government aid in converting grain fields to pasture lands. A large and costly bureaucracy enforced the economic controls, administered the government enterprises, and sucked dry the sources of new capital. The legislative bodies were split into numerous factions and blocs representing various conflicting interests, chiefly economic. The resulting logrolling, class legislation and class conflicts brought representative institutions into public disrepute. Rigidities of prices and wage rates prevented necessary adjustments between occupations and lines of production. When the worldwide depression of 1930 struck Germany, its producers were unable to make the adjustments of costs and prices necessary for recovery. Production and employment declined while producers quarreled over the terms of trade, that is, over prices and wage rates. This made many Germans ready to welcome the "strong man" who promised to stop the class conflicts and put people to work.

Similar conditions in Italy had prepared the way for Mussolini and his Fascists in 1922. Scientific Looting Nazism and Fascism took over industrial systems built by private enterprise and converted them to war purposes. Totalitarianism, however, has proved less efficient than free enterprise both in peacetime trade and in wartime production. 1. With all her totalitarian trading tricks Germany increased her exports only 8 per cent in the years 1933 to 1938 inclusive, as against a 28 per cent increase in United Kingdom exports, and an 84 per cent increase in United States exports during the same period. American blast furnace production per worker in 1937 was 3^2 times that of Germany, and in iron and steel products our output per worker was 4 times that of the German workers. In automobile production our advantage was 4 to 1, in radio sets 7 to 1, and in coal production 2 to 1. 2. Initial military successes of Germany were due to the fact that from 1935 to 1939 she spent twice as much on war production as the United Kingdom and France combined.

At their best the totalitarians never have matched the per capita FREE ENTERPRISE AND FREE PRICES 25 production of war materials which the United States and England have achieved with far less coercion and regimentation of their peoples. Nazism and Fascism retained private ownership, lengthened hours of labor, stopped strikes and reduced trade union restrictions on employment and output. They did not, however, restore freedom for private enterprise. For cartel and union restrictionism they substituted bureaucratic regimentation, so that producers were even less free than before to offer their goods and services to the highest bidders. Thus these systems reduced still further the opportunities and incentives for individual initiative. By fostering a war. psychology and by inflationary trickery and fraud, the totalitarians increased employment. But instead of promoting mass thrift and investment they looted the nation for the war machine and its masters. And, instead of restoring economic flexibility and opportunity for private enterprise, they increased the rigidity of the price system and ordained for all producers the bureaucratic goosestep. This ossification of the national economy would have prevented Germany from winning world dominion in peacetime competition. It was useful only for one purpose —the blitzkrieg.

Economic Liberty Depends on Flexible Prices "Adapt or die" is a law of life which applies to nations as well as to animal species. Progressive peoples must encourage change. Oxcart and horse-and-buggy industries must give way to railroad, automobile and aircraft industries. Handworkers must give way to machinists and machine operators. Millions of farm boys and girls must become factory workers, business workers and professional workers in towns and cities. Contracts must be revised to distribute losses in depressions and gains in booms; methods must be improved to reduce costs; new economies must be effected to maintain or restore credit depleted by errors in investment. How readily can such changes be made if they require consent of monopolistic organizations of producers or permission of government officials and boards? If a nation is to have the benefits of mass enterprise, the changes incident to progress must be brought about chiefly by individuals freely making their own bargains and arrangements with one another as to what and how they shall produce and trade.

26 DO WE WANT FREE ENTERPRISE? Wanted: Automatic Traffic Lights If individuals are to choose their own occupations they must be given signs and signals so that they may know what occupations are most in demand relatively to supply. They must also be given incentives, or rewards, to persuade them to follow the signals. Prices for commodities and services provide both signals and incentives. When demand for a commodity increases relatively to supply, the price rises, profits increase, demand for labor expands, and wages rise in that industry. This increase in prices, profits and employment draws capital and labor into production of the scarce commodity. Production increases until the price and income premiums in that industry disappear. High prices also encourage consumers to economize scarce commodities and search for cheaper substitutes. A decrease in demand, causing a decline in price, has the opposite effects. It leads to a decrease in output.

Monopoly and government price-fixing destroy freedom of exchange, freedom in production, and freedom in consumption. Prices can be raised above the competitive level only by restricting the amount offered for sale. Prices can be kept below the competitive level only by restricting the demand (rationing). Either form of restriction limits individual opportunity to produce and consume. Both types of restriction require coercion to make them effective. Should Costs Determine Prices? Producers often demand that government prevent prices from falling below "costs." Wageearners ask that wages be raised to keep pace with rising living costs. Distributors ask for laws to enforce a certain markup to cover costs.

FREE ENTERPRISE AND FREE PRICES 27 Manufacturers demand tariff duties to "equalize" costs as against foreign competitors. (See below, p. 80.) Professional workers sometimes justify high charges on the ground that they are necessary to cover costs of training. But first let us ask, "What costs should be used as a basis for price fixing?" Should we take the costs of the less efficient, high-cost firms, in poor locations, with a small volume of business ? In that case we encourage inefficiency. Or should we take the costs of the more efficient, low-cost firms, with good locations and a large volume of business ? In that case we are likely to put out of business certain producers whose efforts are needed to help meet demand. Should we use as our guide, the costs of the shops catering to the "quality" trade, or those of the less pretentious shops serving the general public. Only the free workings of demand and supply on price can give a quick and democratic answer to these questions.

Secondly, we must realize that a rise in prices causes a rise in costs. 1. A rise in prices for oranges raises the cost of land suitable for growing them. It raises the value of labor used in picking them. A fall in prices has the opposite effects. Therefore, when producers say their costs are high it may mean that demand has been high and profits good, resulting in a high markup of land values and other costs. 2. Price maintenance frequently stimulates competition in advertising, or "service." This raises costs and leaves producers no better off than before. However, consumers are likely to be worse off. They get less benefit from the advertising and "service" than they would have received from the lower prices which free price competition would have set. 3. Price maintenance which places prices above their competitive level reduces volume of sales and in this way often raises costs so that producers are no better off than before.

4. Raising one man's selling prices raises his customers' costs. This makes necessary an increase in their selling prices and leads tc another increase in the first man's costs. Attempts to guarantee general prosperity by guaranteeing producers a certain markup over costs are as futile as efforts to lift ourselves by the bootstraps. Yet price cutting is sometimes uneconomic and destructive.

28 DO WE WANT FREE ENTERPRISE? Controlling Cutthroat Competition 1. Discriminatory price cutting for the purpose of establishing a trade monopoly is subject to prosecution under state and federal antitrust laws, as it should be.* This does not mean that every producer who cuts prices below costs in order to drive a competitor out of business is guilty of "unfair competition." Sometimes there is room only for one producer in a local market, as, for example, in case of a newspaper in a small town. In that case, when two producers want the same market, "cutthroat competition" is the only way under free enterprise to decide who is to get it. In case such competition is likely to establish a monopoly in a line vital to the community's prosperity, government may declare the industry a "public utility" and grant a franchise, or permit, to one party or the other. In return for this grant of monopoly the favored producer must submit to government regulation of his charges and methods of operation.

Such grants of monopoly and government intervention, however, should be kept to a minimum and used only as a last resort. They should be confined to "natural monopolies" in the production of services vital to the community's prosperity. That is because every extension of the public utility principle adds to the cost and complexity of government, increases economic rigidities, reduces the adaptability of the national economy, and retards progress in the industry so controlled. In most cases cutthroat competition leading to a small-scale local monopoly is less costly and less obnoxious than the government regulation necessary to prevent it. On the other hand, cutthroat competition which may be permissible between moderate-sized business rivals should be outlawed when used in a discriminatory way by a widespread and powerful combination or concern. Then discriminatory price cutting becomes a means for establishing monopoly, not merely in a local market, but in a line of commerce or industry. Profits of monopoly in one area may be used to support discriminatory price cutting and establishment of monopoly elsewhere. Such price cutting is forbidden by the antitrust laws of the United States and few persons wish to see this safeguard of competition removed.

The antitrust restrictions on price cutting, however, are very different from the effects of the so-called "fair trade" laws and "unfair practices" acts. Instead of preventing growth of monopoly such laws restrict competition and legalize policies precisely similar to those of the monopolistic combinations which the antitrusts laws are designed to prevent. (See below, pp. 89-95.) *Price discrimination refers to price differences not accounted for by differences ingrade, quality, quantity, production costs, selling costs or transportation costs. Even underthis definition not all price discrimination should be a concern of government. Only whenprice discrimination ia creating a monopoly in a given line of trade should it be outlawed, FREE ENTERPRISE AND FREE PRICES 29 2. Standards of quality should be enforced by government when such enforcement is necessary to protect health or prevent the grosser forms of fraud.

Price maintenance, however, does little or nothing to eliminate unsanitary conditions, as, for example, in case of barbers or physicians, or to eliminate fraud, as in the case of drugs. It may even increase fraud by encouraging advertising of nonexistent or insignificant differences in quality. In such cases the fraud or unsanitary conditions should be attacked directly through setting of minimum standards, not through restriction of price competition. Furthermore, it should be recognized that raising minimum standards also raises minimum prices and reduces the quantity which consumers can buy. High quality is a fine thing, but of what use is it to the consumer who gets little or none of the goods because of their high prices? 3. Our main reliance for raising standards and reducing fraud must be education of producers and consumers, through schools, trade associations, chambers of commerce, "better business" bureaus and factual advertising by competitors.

Competition for the patronage of informed consumers will reform or eliminate dishonest producers more quickly and effectively than government regulation. This does not mean that consumers must be educated to appreciate all of the technical details of the products they buy. Often it is enough that buyers and sellers learn to appreciate the value of a seller's reputation for fair dealing. 4. Exchange of information concerning costs and selling prices, together with education in cost accounting, helps to reduce that type of price cutting which sometimes results from ignorance on the part of producers. Producers who cut prices below cost because they do not know their own costs are not likely to do any great share of the business in any line because they tend rapidly to eliminate themselves. True, others may come in to take their places, but such producers, because of their inefficiency and inexperience, are a petty annoyance rather than a major business problem. In time of depression they are often blamed for a general decline in price levels which is due to far different causes.

5. In "sweated" lines the only real remedy for low wages is a change in the balance between the demand for and supply of labor. Workers employed in so-called "sweatshops" are typically those with little skill who do hand labor or work on simple machines. Often they are illiterate and foreign speaking, possessing only skills which are relatively abundant, e.g., skill in needle work.

30 DO WE WANT FREE ENTERPRISE? Merely closing the sweatshops or passing minimum wage laws sends these workers into other employments even worse paid, or else reduces them to some form of dependency and beggary. The real remedy lies in educating these wage earners for better paid work or encouraging investment of new capital in the industry to equip the workers with better machinery and to bid up the price of their labor. 6. Every producer must be prepared to meet and win out against a certain amount of "dirty competition" without resorting to similar unfair practices himself. The controls needed to prevent all unfair competition would be so costly and restrictive as to stop all enterprise and progress. 7. Organized price maintenance aggravates business depressions. Price levels decline during a business depression, but this decline is a symptom of declining spending power, not the cause. When buyers have less money to spend, a policy of price maintenance merely reduces the number of units of goods and services which people can buy. It therefore aggravates the decline in output and employment, which is the real evil of business depressions. (See below, pp. 94-95, 118-119.) Protect the Price Cutter Freedom to cut prices as well as to raise them is necessary to ensure economic efficiency and progress.

1. By cutting prices the more efficient firm grows at the expense of the less efficient. The more progressive firm impels others to adopt the better methods or go out of business. Thus the general public gets cheaper goods and increased buying power. 2. Cutting prices of goods which are relatively abundant brings about contraction in these lines. At the same time it encourages expansion in other lines by: a. reducing costs of production for suppliers of the scarcer goods, b. giving buyers more money to spend on them. Thus it helps preserve or restore such economic balance between various lines of production as provides the maximum quantity of satisfactions from the productive resources available. 3. Price differentials between commodities or services in the same line often or usually are accompanied by differences in quality of goods or extent of services, or both. This permits closer adaptation of commodities and services to the varied wants of consumers.

For example, there is about as much difference between haircuts FREE ENTERPRISE AND FREE PRICES 31 as between the various makes of automobiles, and it is just as unreasonable to enforce the same prices in the one case as the other. 4. Price cutting is an economical and efficient method of introducing goods and services of new concerns which cannot give their customers certain satisfactions offered by long-established firms, such as the prestige of well-known labels or assurance of time-honored reputations. From the consumers' standpoint this is an advantageous and economical method of promoting a new business. From the competitors' standpoint it is no more costly than an effective advertising campaign. However, since price cutting is often less costly than an effective advertising campaign, it enables new enterprises to get started with less initial capital and less promotional expense than would otherwise be necessary.

Thus it favors smaller business units and promotes competition necessary for preserving free enterprise. Free exchange and free prices open the door to more efficient methods, to the economies of mass production and to the opportunities of new industrial and commercial frontiers. When our pioneering forefathers struck out across the seas, into the forests and over the plains and mountains, they accepted whatever their own efforts and Dame Fortune brought them. They gave up the security and comforts of the stay-at-homes in the hope that someday they or their children might be more free, more secure and more prosperous. They braved dangers, learned new ways of making a living, and subsisted on a scale far below that now considered minimum for health and decency. What would have been the history of America had no one been permitted to subject himself to such risks and privations? Suppose parents, labor organizations and governments had said, "No one shall go exploring or prospecting until he can be guaranteed 30, 40, or 50 cents per hour. No homesteader shall work more than 40 hours per week.

No one shall plow new land and raise a crop until all producers are guaranteed parity prices." Would our frontiers have been pushed westward along a 2,500-mile front at an average rate of 10 miles per year for 250 or 300 years? Would we at the same time have been building the world's richest nation and caring for a population increasing by leaps and bounds? It is not necessary to turn back the clock and subject ourselves to all the hardships and poverty endured by our ancestors. But if we want liberty for our people to explore life's opportunities and to prospect for better ways of living we must let them succeed or fail as the results of their own bargains and their own efforts.

32 DO WE WANT FREE ENTERPRISE? Only as producers agree to work together for what they can earn in free competitive markets can a people develop the industry and enterprise which build national prosperity and greatness. It may be our fond wish that everyone should live in peace and plenty. But it won't be achieved by limiting investment, work and production in order to maintain prices, profits and wage rates. Economic progress requires freedom for each producer to expand output. This freedom is of little use, however, unless producers are also free to trade their surpluses. This means they must be free to arrange and accept terms of exchange, prices and rates of pay, which satisfy those who are making the trades—themselves. Do we really want such freedom of enterprise and exchange? Or do we prefer some kind of "parity program" ?