Competition; W. A. Paton

w. A. PATON AN ECONOMY dominated by indi vidual initiative and private en terprise, as opposed to one con trolled and directed by some form of government, may be character ized broadly as a tripod, with sup porting legs or pillars as follows: 1. Sound money mechanism. 2. Flow of risk capital. 3. Competitive markets. And the structure will collapse if anyone of these basic props is cut down, eliminated, either by a single stroke or by being rotted away. Lenin is reputed to have said that a sure way to destroy capitalism, without firing a shot, is to debauch the currency. He might equally well have pointed out that one way to establish sow. A. Paton is Professor Emeritus of Account ing. and of Economics, University of Michigan. He 1S author (or co-author) of a score of books and many articles, largely in the field of ac counting. Since his retirement at Michigan he ~~s continued his writing and lecturing a~tiv lties and has done part-time teaching at a dozen colleges and universities, in ten states.

cialism is to create a climate which discourages private capital forma tion, especially the crucial layer of risk or venture funds. It may also be insisted that private en terprise will topple, will be trans formed into some form of statism, if the condition of effective com petition in the market network is not maintained. This statement, of course, does nothing more than suggest some fundamental features of the "free", noncollectivist, economic order,. but this will suffice for my limited purpose. The objective here is to discuss briefly the third leg of the stool, the factor of com petition, particularly with a view to punching some holes in the cur tain of confusion and misunder standing shrouding the subject a condition rampant among the rank-and-file, scarcely less in evi dence in managerial and financial circles, and by no means absent 353 354 THE FREEMAN June from the textbooks of the profes sors of economics and the ex pressed views of other groups sup posed to be well informed.

Competition Defined Catering to Customers To begin with I'll attempt to define market competition in a broad sense. CompeNtion is the pressure present in the market which induces producers - all along the economic pipeline, from the initial stages to delivery of the ultimate commodity or service - to endea,vor to meet the ex pressed needs and desires of cus tomers, and as efficiently as pos sible. Put a bit more tersely: Com petition is the force responsible for the urge to serve customers well. In explaining and applying this definition the first step is to note the use of the terms "pressure" and "force" and the absence of any reference to price. This omis sion is not intended to belittle the price-making process and the im portance of competition in this process. But in my view the under lying factor, the primal condition, is an active desire to attract bus iness, a recognition of the need to cater to customers to maintain - and expand - the volume of out put, whatever that may be. And there is widespread failure, nota bly among critics of market activities and results, to appreciate this point.

The urge to serve customers well is not confined to price levels and movements as such, as is so often ass umed. Changes in the physical characteristics of the product, modifications of delivery and post-deli very services, im provement in personal qualities and behavior of producer's staff, particularly at points of order taking and sale, variations in ar rangements regarding payment by the buyer - these are all avenues of influence to customer attitude and behavior. In the retail market, for example, many persons may prefer a clean, orderly store, with pleasant and accommodating per sonnel, to a dingy dis'count loft, with an indifferent attendant, even if the physical product de sired, and available at both places, is a standard make and model of an electric shaver. Some buyers may even enj oy walking on a carpet with a heavy nap, as they move about examining the avail able merchandise.

Beyond doubt, pleasing and con venient packaging and attractive display of goods have an impor tant impact on customers. And why not? Some people object to efforts such as those mentioned to "lure" patrons, but I don't go along with the idea that there is anything wrong with catering to 1973 COMPETITION - WHAT AND WHEN 355 the buyer's inhereut desires and inclinations. The fact that the waitresses are carefully selected and well trained, and provide ex ceptionally courteous and efficient service, is one of the reasons why I usually take my away-from home meals at Bill Knapp's. In short, in private enterprise it should be acknowledged that the customer is king. Product Description Another way of indicating the nature and importance of the tend ency to cater to customers is via careful identification and classi fication of economic goods. A par ticular product, even in the case of commodities, is not merely an arrangement of molecules; it is rather an overall package of phys ical content and related condi tions. Thus a pound of coffee on the retail market, for example, is not just a pound of coffee. The economic product involved varies with the raw materials used, the methods of treatment or manu facture, the package employed, the circumstances of delivery, and other associated conditions. To push the point a little further, a jar of coffee of a particular brand and size, selected by the house wife from a shelf in the superC)market, paid for in cash after standing in line for a varying time, and transported by the buyer to her home, is not the same economic good as a physically equivalent jar left on her door step at a satisfactory hour and for which payment is made after receiving the monthly statement from the grocery store.

Closely defined as suggested, the array of distinctive economic goods available on the market, especially at the final consumer level, constitutes an almost end less list. This fact is widely ne glected in discussions of the state of competitive pressure, especially among those calling for more gov ernment interference in the mar ket process. Effective Competition I particularly want to stress in this piece the need to recognize that effective competition is im perfect competition. Even in so phisticated discussions of the na ture of competitive pressure, and its impact on the market, this point is often neglected or in adequately presented. There is no such thing as instantaneous, ato mistic, "perfect" competition in any market, and we can be thank ful for this. In the first place may be noted the matter of practical details with respect to products and prices. It presumably costs more to transport a Hershey chocolate bar from Pennsylvania to Cali356 THE FREEMAN June fornia than it does to ship it to New York, but it doesn't follow that it would be good sense to try to establish a different price in each of these market areas. There is more material in a large-size pair of socks than in a small-size pair of the same style and quality, but I've never heard of a customer complaining because all the sizes have the same selling price. In contrast the price of the package of corn flakes or other cereal will vary with the amount of the con tents and the· price 9f a carton of "large" eggs is more than that of the "medium" size. In general, it is safe to say, practices such as these are not objectionable, and do not indicate absence of ade quate competitive pressure. It may also be urged that customer re action can be relied upon to bring about prompt modification of un reasonable pricing procedures and schedules.

Much more significant is the necessity for time lags in the processes of product improve ment, price adj ustments, and other changes. It is a blessing, rather than something to be de plored, that making even small changes in business operating methods can't be effected instan taneously throughout the whole structure of production and dis tribution. If the person or firm with a new discovery or idea, major or minor, knew that the instant the improvement was in troduced on the market, or prep arations to introduce it were be gun, everyone else in the field, including newcomers, would im mediately match such action, the incentive to change, development, advance, would largely or entirely disappear. It is the hope of get ting a head-start, gaining an ad vantage with buyers, at least tem porarily, that provides the princi pal spur to the ingenious, the resourceful, the innovative. And, to repeat, this is a blessing, not a bane; it deserves to be encour aged, not curbed.

The condition essential to tech nological progress, and greater output of economic goods, is a climate that provides rewards for the go-getters, the hustlers, the sprinkling of those with new ideas about methods and an urge to promote more efficient operation and improved utilization of avail able resources. When there is no such climate, when interference with initiative, drive, and yearn ing for improvement reaches the saturation point, the march to greater production per capita, to higher living standards, will grind to a halt. One of the major weak nesses in prevailing attitudes is preoccupation with the condition of the weakling, the underdog, and increasing forgetfulness of 1973 COMPETITION - WHAT AND WHEN 357 the important role of the talented, the energetic, the inventive. Cod dling the inefficient and curbing the hustlers is the sure road to a stifling of progress, and an im proved economic condition for all hands, and especially those for whom there is currently such great concern.

Rivalry Among Producers In the above observations no specific reference has been made to rivalry among producers for customer favor. This condition is generally regarded as the very heart of competitive pressure the primary factor that induces sellers to try to serve customers well, either through price adjust ment or in some other manner. I go along with this to a degree. Beyond doubt the presence of other sellers in the market place, actively seeking customer orders, is a major ingredient in the mix of conditions impelling product modification and improvement (in the broad sense already ex plained), and efficient operation as a means to matching or beat ing the prices at which rivals are offering comparable goods. In this connection the pressure of the potenbial competitor should not be overlooked. Where a pro ducer is temporarily without ac tive rivals, but there are no seri ous obstacles to the entry of others into the field, the welfare of the customer - with respect to product quality, price, and so on - may continue to be the dominat ing consideration.

It is perhaps somewhat objec tionable to stretch the term "com petition" to cover other influences than market rivalry that provide protection to customers, that en courage seller subservience to the buyer. But that there are such influences can be readily demon strated, although there is a wide spread tendency to forget this side of the coin. In other words, in a free market the urge to serve the customer well is not solely the result of pressure ex erted by either active or potential rivals. This aspect of market ac tivity may be regarded as a sup plement to competition in the narrower sense, of substantial significance, and deserving more attention than it receives in dis cussions of price-making and seller-buyer relationships and be havior. Single-Producer Situation Demand Elasticity That the producer will be sensi tive to customer needs and atti tudes even in the ahsence of both active and potential rivals in his specific field can be made clear by postulating a situation of this type. Such a producer must still 358 THE FREEMAN June face the fact that the demand for his particular product will almost certainly be elastic. Especially nowadays, with markets loaded with a tremendous range of goods with minor variations in service ability, the customer can reduce or discontinue his purchases of a particular product without great hardship or even inconvenience.

Thus he is protected from bad treatment by the ease with which he can modify his buying prac tices - and the typical producer of some distinctive commodity or service is very much aware of this possibility, and acts accordingly. Just t~y to think of a product at the ultimate consumer level that is so essential to the buyer's welfare that he must have it re gardless of price or attendant con ditions. It is difficult to find good examples, especially if we confine attention to the output of private enterprise. Even in the case of the public utilities, so-called, such as telephone service and electric power, the customer is by no means helpless, aside from the efforts of regulatory agencies. The householder or other consum er of energy, for example, can readily shift from electricity to gas or vice versa, (to say nothing of oil and coal), for at least a portion of his needs. Where elasticity of demand de pends entirely on the possibility of substitution it is not unreason able to say that the producer finds himself confronted by rivals for the customer's buying power, even if rivals are not at the moment offering an identical product on the market. However, it is im portant to note that demand for most specific products is inherent ly elastic to a degree. If plane fares soar the customer may de cide to do less traveling, by air or otherwise. If the price of tele phone service advances sharply the householder with two or more phones may decide to curtail his expenditures for such service by having one or more instruments removed, and he also may restrict the number and duration of long distance calls to children, grand children, and others. The buyer of electric illumination may also readily contract his use of this product by turning off some lights and using smaller bulbs. The plain fact is that we don't have to con sume a particular level - to say nothing of an expanding amount - of most of the array of specific goods and services making up the present-day standard of living. In the absence of actual coercion by some government agency, or a gang of thugs or racketeers, the customer still is sovereign - and without need of aid from govern ment, or consumer advocates and other busybodies.

1973 COMPETITION - WHAT AND WHEN 359 What About Monopoly? Those favoring increasing in terference by government agencies with the activities of sellers and buyers, throughout the economy, and especially in the area of con sumer goods and the retail mar ket, will of course reject the posi tion that the customer is usually able to protect himself from ex ploitation, assuming that he is not subject to intimidation or down right dictation. They allege that producers will enter into agree ments and combine forces to build monopolistic market positions, and that action by government is essential to resist such develop ments, and break up trusts and other combinations, including huge corporations formed through mergers. They point to the long history of Federal antimonopoly legislation, and enforcement pro cedure through the courts and other arms of government, and assume that without these efforts an unbearable structure of mono polistic control of the market ap paratus would have been achieved.

In short, the position is taken that a healthy state of market competition is impossible without government intervention. This is a big subject, and must be dealt with here very briefly. In my judgment a careful exam ina tion of the historical picture and the current state of affairs will disclose that the most deadly influence tending to destroy the effectiveness of the market, and stifle the pressures and factors that afford protection to the buy er, at all market levels, is govern r-nent interference. Indeed, there is good reason for regarding gov ernment as the major culprit, the villain in the woodpile, in foster ing, directly or indirectly, mono polistic conditions that have been sustained .and seriously harmful. On the current scene, many will agree, the tremendous power wielded by labor unions in the market for personal services, rests in large part on enactments of Congress and the procedures of enforcing agencies, plus failure of the police power to curb intimi dation and violence, including wanton property destruction and physical injury - and even death to individuals with the temerity to resist the labor bosses.

It may also be urged that the tide of intervention that has been flowing over our markets like lava, all in the name of protecting buy ers and preserving competition, has discouraged producers from catering to customer desires and making prompt modifications and changes in technology and prod ucts in response to changing con ditions. In the case of the railroad industry, certainly, now flat on its back, stupid and slow regula360 THE FREEMAN June tory action has been an important factor in checking or preventing timely modernization of plant and equipment, prompt price adjust ments, downward as well as up ward, and changes in service schedules and operating methods. Then, more recently, came the crippling impact of vast expendi tures on highway construction, at taxpayers' expense, to facilitate the growth of transportation by motor vehicles. Close scrutiny of the course of "antitrust" legislation and en forcement efforts shows that this continuing crusade to preserve and strengthen competi tive· pres sure in the market structure has not been a success, viewed as a whole. Courts and other enforce ment agencies have shown little awareness of the meaning of com petition, and the related market conditions that serve to keep pro ducers on their toes in the effort to attract customers and expand volume of output. There has been a tendency to assume that uni form prices in a given market area indicate a noncompetitive condi tion, despite the fact that such pricing will surely result from keen and persistent competitive pressure. That it may not be prac ticable to change prices every day, or even every week or month in some fields, is often over looked.

There has been little evidence of an understanding of the plain truth that rivalry among a few large producers can be as vigor ous, and as conducive to customer welfare, as the competitive pres sure engende'red in a field where many are contending for buyer favor. There has been an appall ing lack of understanding of the relation of the operating cost of a particular producer to the com petitive market price of the product. The impact of the long delays in reaching and implementing legal decisions has been harassing and stifling. And decisions in many cases have been impractical to the point of absurdity. For example, when a court orders that company X must "divest itself" of company Y five or six years after the operations and financial structures of the two concerns have been integrated, the decision is hardly short of outlandish in its neglect of economic reality and damaging consequences. Such de cisions are on the same level as would be an annulment of a mar riage after several children have been born to the couple.

In sum, there is reasonable ground for concluding that if gov ernment would follow a hands-off policy, stop the persistent and increasing intervention in the market processes, there would be little need to worry about mono1973 COMPETITION - WHAT AND WHEN 361 polistic tendencies. Left alone, a free market will discipline itself, provide corrective measures in the normal reactions of buyers and sellers. The proper function of government is to prevent intim idation and violence, to protect participants in the economic proc ess from racketeers,· mobsters, and thugs, not to take control away from the producers and consum ers, the· buyers and sellers. Mistaken Views of Market Rivalry The belief that unless the con dition of competition is enforced by government the market struc ture will become monopolistic is not the only mistaken conception that is widely held. Frequently encountered is the notion that market rivalry is inherently bad, cruel, destructive. The history of the free market, it is pointed out, is Iittered with the. wreckage of business firms - especially the "little fellows" - that have failed in the struggle for survival against their strong and ruthless rivals. This attitude is under standable; most of us have in our bones a bit of sympathy for the weak and inefficient. But calling for abatement of rivalry in the economic process is to argue against increasing output of eco nomic goods and a higher stan dard of Iiving.

Market rivalry is rugged, but it is not destructive when broad ly considered. The pressure of rivalry isa major spur to effi ciency, to improvement, in serv ing the consumer - the ultimate goal of all economic activity. True, there are likely to be losers in the competition for the customer's favor, but there is the offsetting factor that laggards are often greatly stimulated by the perform ance of the front runners. Exam ples of this abound in business experience. The management of a particular enterprise, indeed, of ten has reason to be thankful for the pressure toward improvement in methods and products required to meet competition. The view that the free market is a chaotic and noncooperative activity may also be mentioned. Actually the truly free and keenly competitive market is a model of sensitive adaptation, automatical ly, to the ebb and flow of the atti tudes, needs, and varying circum stances of the participants. It is anything but chaotic. And its intricate maze of relationships betweep. producers and customers presents the most remarkable ex ample of cooperation, without coercive direction or control, to be found in human affairs.

Consumerism - Harmful Products Earlier in these comments· I've stressed the importance of cus362 THE FREEMAN June tomer reaction on the market place as a factor in pressuring the producer, the seller, in the direc tion of serving the customer well, even in the extreme case of the absence of a condition of immedi ate or potential rivalry for the buyer's favor. And in line with this position I've expressed con cern over the rising tide of in tervention in the consumer's con duct, ostensibly in his behalf. This "consumerism" movement deserves some further attention, as it represents a serious threat to the maintenance of a competi tive market structure, especially when it takes the form of a great expansion of governmental regula tion and interference. The very essence of a free econ omy, with effective markets, is the right of both buyers and sellers to make decisions, to choose courses of action. The degree to which this right is impaired, is restricted, measures the distance an economy has moved into the socialist morass. Socialism is nothing more nor less than a system under which the state makes the choices rather than the individual participants in the economic process, at both the pro ducing and consuming levels. By the term "state" in this connec tion I have in mind government in all its manifestations - boards, bureaus, commissions, and so on - including cases where the ulti mate power rests in a single des pot, or a small coterie.

I reject outright the conception that the customer - including the ultimate consumer - is a boob, in capable of deciding what to do with his income or other available funds. True, many of us may make careless and unwise decisions at times. If, for example, a particu lar individual impulsively buys a silk shirt for himself when his children are badly in need of more milk the neighbors may re gard this action unfavorably and their critical attitude may be amply justified. But what is the alternative to letting the individ ual buyer assume responsibility? Is there good ground for expect ing that a government board or other agency, with coercive power, will do better than .the typical market participant? An arm of government is made up of human beings, very likely not superior in wisdom and foresight to the aver age member of the governed group - even if good intentions and lack of political motivation are as sumed. Moreover, to come to a decision having substantial merit in the particular case the coercive agency must become familiar with the specific circumstances - and this takes time.

Both historical and current ex perience indicate plainly that the 1973 COMPETITION - WHAT AND WHEN 363 individual participant in the eco nomic process can generally be assumed to be more fully ac quainted with his economic needs and circumstances than an out side agency can be, even after thorough investigation. More over, the individual can act promptly before conditions are modified, whereas there is certain to be delay in reaching and im plementing a determination by a governmental body. The case for substituting government decision making for consumer sovereignty has no solid foundation. There remains the question of how to deal with harmful prod ucts. As we all know, producers may cater to the desire of some individuals to consume dangerous drugs, for example, and may even undertake to stimulate the volume of demand for such drugs. In this connection I think it should be admitted that there is a role for the policeman in the economic process, even where the free mar ket is dominant. But it is a strictly limited role. If it were possible for the adult alcoholic or the drug addict to go off in a corner and destroy himself at his own gait without trespassing on the rights of dependents or anyone else, I would personally be quite willing to see him take such action. But this is far from the actual case.

Take a look, for example, at the frightful carnage on the highways that careful studies show to be attributable to drinking drivers. Here is a clear need for the inter vention of some coercive power, and it is rather astonishing that so little is being done about this outrage. On the other hand, I am very skeptical of the merit of much of the interference with the market by the Food and Drug Adminis tration. Of course nearly every natural or manufactured product is toxic to somebody in some cir cumstances. I've known several people who couldn't tolerate straw berries but this would hardly war rant putting into effect a maze of regulations regarding the grow ing, marketing, and use of such berries. Rivalry among sellers and the reactions of customers are in general a better market regulator than any government agency. Two Other Misunderstandings Regarding labor To conclude these reflections I want to call attention to two other areas where lack of clear thinking is - unfortunately - widespread and damaging.

A serious misunderstanding is partly responsible for the develop ment of monopolistic, noncompet itive conditions in the labor mar ket. Human beings, so the story goes, should not be regarded as 364 THE FREEMAN June commodities, to be priced on the market place like sacks of po tatoes. Instead, there must be established a structure of protec tion for workers composed of strong union organizations on the one hand (to implement collective bargaining, and with power to strike and shut down plants and entire enterprises), and govern ment legislation and enforcement agencies on the other (to provide minimum wage laws, set safety standards, prevent collusion among employers, insure the rights of unions to call strikes and set up picket lines, and so on). All those who don't approve of slavery will of course go along with the view that people are not marketable commodities, but it must be insisted that personal services of all kinds that are re quired in the productive process are economic goods, subj ect to demand and supply influences.

It may also be urged that an important under lying force in pre venting worker exploitation is rivalry among buyers for the service he is able to furnish. Buy ers of services are no less keen in their bidding for a particular kind of service than they are in bidding for a desired physical commodity. There is much evi dence that this force still operates with substantial effect in labor markets, with respect to all grades and types of personal service, despite governmental interference and the coercions represented in prevailing union tactics. In saying this I'm not forgetting the case of the community with only one manufacturing plant and the need for worker mobility. Another major misunderstand ing, widespread in industry, is the notion that workers (people fur nishing personal service, from the top brass to the men on the as sembly line) and the capital fur nishers (those providing the funds to endow the enterprise with the necessary plant facilities and other resources) have con flicting interests, are rivals in sharing the fruits of the economic process. Actually the welfare of the employees of a business is closely linked with and dependent upon that of the owners or other investors. Viewed broadly, as h~s often been pointed out, wage rates tend to vary with the supply of "tools" (capital facilities of all kinds) per man; in other words wages will be high where capital is plentiful and technology ad vanced, and relatively low where there is plenty of labor but equip ment is primitive and limited. As a general truth this can hardly be challenged.

Put somewhat differently, this means that the workers (the per sonal service suppliers) should 1973 COMPETITION - WHAT AND WHEN 365 favor a climate fostering saving and capital accumulation, and hence a level of earning rates for those furnishing funds that will be attractive. The individual worker is in competition, in a sense, with his fellow workers, and thus may well be in favor of a low birth rate and restricted immigration, while at the same time supporting the view that cap ital should command as high a return as the forces of a free, competitive market will afford. The workers and the capital fur nishers are not in contention, or opposition, but are joining hands, so to speak, to make the wheels of business turn rapidly and effi ciently. This does not, of course, gainsay the fact that technological development and advance may cause inconvenience and need for retraining on the part of particu lar groups and classes of those supplying personal services. It also does not deny that the result for investors will vary from losses to occasional exceptional rewards for particular business entities in varying circumstances and inter vals of time.

In my classes I was fond of illustrating this point by imagin ing that the president of a small company, sitting in his office one morning, hears a timid knock on his door. The caller is one of the lowest ranking employees in the factory, and he stands hesitatingly in the doorway, twirling his cap in embarrassment. "Come in, Joe," said the president heartily, "What can I do for you?" Joe was still nervous but finally came out with it. "Sir, I saw in the paper last night that our directors have de cided to cut the quarterly divi dend to the stockholders, and it worried me. Are you sure, sir, that this is necessary? Are we doing all we can for our invest ors?" Without letting my imagi nation carry me further, I might note that probably the president of any company would be so startled by such an experience that he would be in danger of a heart attack. But I submit that Joe was on the right track, and behaving in a rational manner, in accordance with the basic self interest of a worker out in the company plant. ~ IDEAS ON LIBERTY Reflections on the Revolution in France THEY have found their punishment in their success. Laws over turned; tribunals subverted; industry without vigor; commerce expiring; the revenue unpaid; yet the people impoverished.

EDMUND BURKE LEONARD E. READ SISYPHUS in Greek mythology was condemned, as a punishment for his wickedness in this life, to roll a stone from the bottom to the top of a hill. Whenever the stone reached the top it rolled down again. Thus, his task was never ending. The wickedness of Sisyphus was not a case of politico-economic in trigue. But Frederic Bastiat, the eminent French economist, philos opher, and statesman of well over a century ago, dubbed all people sisyphists who, by restrictive measures, tend to make the tasks of life unending. Let us peek into the nature and extent of present-day sisyphists if only to create a desire among ourselves to reread some of the works of the great Bastiat and again to profit by his clarity of thought and simplicity of expres366 sion. 1 His fascinating parables could hardly have been more ap propriate in his time than in ours. The progress of human beings from a state of general impover ishment toward one of relative abundance is impeded by a series of obstaC'les. People who really serve society contribute to the ov ercoming of these obstacles, there by creating abundance. Is it not precisely this kind of service whereby we may judge whether a business or a labor union or a gov ernment policy or official is social or antisocial?