Price Competition and Expanding Alternatives; G. North

Engels used these reports - the so-called Blue Books - to write his book, Conditions of the Work ing Class in 1844, the study which was to convert Karl Marx to a theory of class struggle. 2 2 The Sadler Report was followed by two other reports that were far less in cendiary and far less critical of the fac tory system, but few historians have ever heard of them, let alone read them: First and Second RepoTts of the Commission on the Employment of ChildTen in Fac tories (1833) and SupplementaTy RepoTt (1834). Unlike those who testified before Sadler's committee, these men were under oath. Dr. North, economist, lecturer, author, currently is an associate of Chalcedon, an educational organization dedicated to Christian research and writing. His latest book is An Introduction to Christian Economics, Craig Press, 1973. He is the editor-publisher of the Remnant Review, a fortnightly economic newsletter.

467 468 THE FREEMAN August Marx, of course, had no use for reforming liberals like the poli tician-businessman, Michael Sad ler, but he did understand why traditional conservatives would join with socialists in their cri tique of capitalism. In Marxian terms, the conservatives were representatives of the old feudal order, an order that was being relentlessly, ruthlessly crushed by the new techniques of capitalist production. Theirs was a dying order, Marx believed; the bour geois capitalists were everywhere triumphant. Conservative reac tionaries and soft-hearted ameli orating liberals, he argued, could do nothing to reverse the forces of production and the direction of historical forces, but their crit ical pamphlets served Marx well as sources of data for his pamph lets. Capitalism did serve one use ful purpose, as far as Marx was concerned: it was crushing the reactionary feudal past. Robert Nisbet has commented on this bit of historical irony: This is why the indictment of cap italism that comes from the conser vatives in the nineteenth century is often more severe than that of the socialists. Whereas the latter ac cepted capitalism at least to the point of regarding it as a necessary step fronl the past to the future, the tradi tionalists tended to reject it outright, seeing any development of its mass industrial nature - either within cap italism or in a future socialism - as but a continued falling away from the superior virtues of Christian-feudal society. It was what the socialists accepted in capitalism - its technol ogy, modes of organization, and ur banism - that the conservatives most despised. 3 Price Competition The feature most hated by the older producers was capitalism's relentless service of the poorer buying public. The division of la bor is limited by the extent of the market, Ada.m Smith had correct ly observed, and in order to use the newer, more specialized tech niques of production, capitalists had to broaden their markets. The most efficient means of gaining access to new markets was price competition. All the British troops that marched off to India and the Far East in a quest for new mar kets in the day of England's "glory" never matched the mar ket-broadening effects of a 25 per cent discount at home. The pro ducer who could not match this discount steadily was forced out of the market, that is, was forced to give up control of scarce eco nomic resources that could better be used to satisfy the demands of 3 Robert A. Nisbet, The Sociological Tradition (New York: Basic Books, 1966), p. 26.

1974 PRICE COMPETITION AND EXPANDING ALTERNATIVES 469 the public in· the hands of more efficient producers. How could poor, uneducated buyers compete against the en trenched wealth of the English landed aristocracy? How could their meager purchase's compete against the wealthy man's com petition for the services of pro ducers? How could some dust covered miner hope to bid scarce economic resources away from the men of wealth? Simply be cause there were so many of them! As capitalist techniques of production steadily increased the output of the laboring classes, the poor became slightly but steadily less poor. A few penI)ies here, a few yards of cloth there, multi plied a million times over: no aristocracy on earth was rich enough to withstand this relent less economic pressure of slightly less poor men, when so many of those men were being created by the labor markets of England. As individuals they were poor, espe cially before 1840, but they were not so poor as they had been in 1780, and here was the new fact of life for producers using the older methods of production. Men who could not afford fine wool suits could now afford a cheap cotton one, and very rapidly it became obvious to English entre preneurs that it would pay more dividends to start producing hundreds of thousands of cotton gar ments than a few thousand high priced wool or silk ones.4 "The outstanding fact about the Indus trial Revolution,"wrote Mise'S, "is that it opened an age of mass production for the needs of the masses. The wage earners are no longer people toiling merely for other people's well-being. They themselves are the main consumers of the products the factories turn out.... There is in the market economy no pther means of ac quiring and preserving wealth than by supplying the masses in the best ·and cheapest way with all the goods they ask for ."5 Because capitalism, with its free mobility of labor, its right of voluntary contract, its em phasis on personal responsibility, and its supporting ethic of thrift and planning, opens new oppor tunities for men once locked in a far narrower universe economi cally, it is resented. A society that places considerable· emphasis on considerations of personal and family status - name, rank, fam ily heritage - doe'S not react fa vorably to the nouveau riche "com moners" who, through a special skill of being able to produce for a mass market through cost-cut4 Ludwig von Mises, Human Action (3rd rev. ed.; Chicago: Regnery, 1966), pp. 618-19.

5 Ibid., p. 619.

470 THE FREEMAN August ting and future-predicting, have become fabulously wealthy. They may be rich, but the only way they can gain status in the old world's terms is to marry the daughters of high status,falling income nobles and aristocrats, or give employment to younger sons in a primogeniture (eldest in herits all) system. As ancient families went fur ther into debt to finance their way of life, they had but two choices: become productive themselves in terms of the new mass market de mand, or sell their land to those who were. The costs of ownership became too high for many of them; they could no longer tie up hundreds of acres of land in the face of the relentless competition from those millions of little peo ple who kept bidding up the price of productive land by their in creasingly large (in the aggre gate) ability to purchase goods produced by the land. Aristocratic Resentment It obviously was not the poor man who bought the great estate of some noble. Instead, it was the entrepreneur who was serving the needs of the public. The process had been going on for centuries.

Sir Thomas More in the early 1500's resented the herds of sheep that were replacing poor families that could no longer compete in an era when manorial production methods were not prod ucti ve enough. But with the nineteenth century, the techniques of produc tion became fully' capitalist, and the counter-capitalism of the lit erary conservatives intensified accordingly. Southey, Carlyle, and Ruskin joined the chorus of con tempt. Indeed, it was Carlyle who dubbed the new science of polit ical economy with the name which has stuck, the dismal science. What served as the economic liberation of a, whole class of peo ple, these men saw as a form of bondage, the grinding servitude of the factory, with its time schedules, long hours, routinized production, and child labor. What they resolutely refused to see was what would have been the fate of these masses under the old system of production: famine and death.

It was Ireland, not England and Scotland, that suffered the famine of 1848-50, and it was Ireland which had not seen the, "plague" of factory production. John Ruskin, the conservative literary critic, summarized the case against capitalism. Ironically, his words have been put on mass produced cards and inserted into mass-produced picture frames for display on the walls of the' highly popular Baskin-Robbins ice cream parlors (31 flavors): "There is hardly anything in the world that 1974 PRICE COMPETITION AND EXPANDING ALTERNATIVES 471 some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man's lawful prey." They Agree with Ruskin The feudal guild members who threw shoes into factory machin ery, the Luddites, today's trade union members on the picket lines, the government-licensed profes sionals earning $100,000 per year: all agree in principle with Ruskin.

The price-cutting entrepreneur who makes a product available for a wider market is the great threat. The man who trims his costs, or finds a cheaper substi tute that is preferable to buyers at a lower price, is seen as a cunning thief. Yet in the middle of the last century, he was mak ing products available to men who could otherwise have never dreamed of buying something as fine as the item being offered. A cotton garment that could be laun dered simply gave a man an oppor tunity to attend church or a wed ding or a funeral with a dignity he had never before known. And that, perhaps, was his great sin in the eyes of the old feudal aristocracy the sin of pride on the part of so cial inferiors who were steadily becoming less inferior economi cally. The status world of the mid dle ages was being shattered by the world of free market contracts. The Threat of Debasement Conservative social critics saw not only the hard conditions of the factory system - hard in compari son with the life of social criti cism, but not in comparison with low productivity subsistence (or less than subsistence) farming but they also saw the initial effects of mass-produced goods.

They were che'ap in price and cheap in quality - again, in com parison to the quality standards of the educated social critic. Those who did appreciate the new clothes, better housing, and pref erable working conditions seldom wrote tracts; they simply went to work and spent their money. Un doubtedly, there was a' standardi zation of production. However, as the productivity of laborers in creased, and as their wages in creased, this standardization was left behind for those coming up Irish immigrants, for example and variety began to be an eco nomic possibility. This indicates the nature of capitalism's powers of social transformation. At first, price competition expands the market. New groups gain access to goods not previously available to them, either because prices were too high before, or because the prod ucts did not even exist. As par ticipants in the production proc ess, workers add to other people's 472 THE FREEMAN August wealth. Producers are buyers; step by step, as output per unit of input increases, as a result of the specialization of production, the wealth of all the participants increases. The initial expansion of buying alternatives itself expands as productivity increases. Some producers may specialize in pro ducing for this newly improved buying public; others may branch out and aim at the still excluded buyers -. the next level· down.

Henry Ford's Model T - avail able in any color, as long as it's black-makes the automobile avail able to the masses. But as every one's wealth increases as a result of capitalist methods of produc tion-distribution (the two are basically the same process), large numbers of men want some other color. Ford himself failed to rec ognize this phenomenon of mod ern capitalism, and his resistance to change - in this case an up grading of quality and choice led to the triumph of General Mo tors. Today, as the most recent figures indicate, General Motors' share of the auto market in Amer ica has fallen below 40 per cent, indicating that it, too, must shift its production standards to meet people's needs.G (The public, bur dened by a shortage of fuel, needs smaller, cheaper cars; enG So much for the "indestructible monopoly" theory! ergy, it should be pointed out, is an area of government control and influence, and it is becoming an area of relatively decreasing pro ductivity as a result - back to the Model T universe, it seems.) Consider the advent of the color television set. In 1956, RCA made a color television available to those who could afford some $1500 (1956 prices) - a 16-inch, not very re liable product. A few people bought them. Steadily, the price has come down, yet the quality of the sets has gone up. Today, a Japanese Sony set, some 17 inches in size, costs less than $500 (1974 prices), and is so far advanced in terms of picture quality that the two products can hardly be com pared. Price competition and qual ity competition can proceed to gether, and do; but the initial breakthrough technologically, while financed by the elite, be comes a mass-consumption prod uct only through price competi tion. (This, as Hayek argues so forcefully, is an important func tion of rich elites: the trying out of new products, helping to finance their initial construction, before the bugs are worked out tech nically.7) How many workers in 1830 could have afforded to spend money 7 F. A. Hayek, The Constitution 0/ Liberty (University of Chicago Press, 1960), pp. 44-45.

1974 PRICE COMPETITION AND EXPANDING ALTERNATIVES 473 in a Baskin-Robbins ice cream parlor? Ice cream was not even invented; the rage began at the end of the nineteenth century. Most workers could not have af forded it. Today, on any Saturday afternoon in the summer, ice cream houses specializing in high quality, "high" price ice cream are probably as crowded as the "cheap" frostee shop across the street. (Those who buy vanilla in the multiple-flavor shops subsidize those, like myself,who will eat nothing but peppermint-stick; the vanilla is far cheaper to produce, yet it is sold at the same price as the 30 other flavors. The one flavor frostee shops cater to those who just don't like the other 30 flavors that much, or at least those who don't like to pay the freight for the other 80 and their buyers.) Even the most expensive tri ple scoop ice cream cone in the "ex clusive" and "elitist" ice cream parlors costs only a tiny fraction of a middle class worker's daily income, in contrast to what the same ice cream cone would cost, proportionately, in some underde veloped nation, where ice cream really is a luxury good. It is mass production, which involves price competition, that ha.s created the mass wealth that makes possible· the relatively cheap ice cream of the officially pro-Ruskin, anti-free market philosophy, 31-flavor stores. (Presumably, the chain really does not know the origin of Ruskin's philosophy. Ideas, how ever, do have consequences - seri ous consequences in a culture that seems to be headed from contract back into status. 8) MCiSS Culture One feature of free market life which receives far too little atten tion from most of the market's de fenders is the problem of mass culture. Ortega y Gasset's Revolt of the Masses spelled it out. In a culture that is officially demo cratic, and which grants to the common man enormous influence - because its methods of produc tion grant him enormous, histori cally unprecedented wealth - how can that culture maintain its spirit ual, educational, intellectual foun dations? Wilhelm Ropke, probably more than any other free market economist, concerned himself with this question. Does the most effi cient technique actually serve men best in each and every instance?

Were the conservative cultural critics correct in pointing to the debasement of their culture? Does mass production lead to the crea tion of a mass man - a man who neither understands nor appreci ates the benefits of. the ma.rket? 8 Morris C. Shumiatcher, "Status: End Product of Welfare," The Freeman, May, 1972, pp. 297-315.

474 THE FREEMAN August Ropke's Humane Ec'onomy and Schumpeter's Capitalism, Social ism and Democracy set forth the problem very well, but the answers in both books are pessimistic. Pro fessor Mises did not often write about this question, but in the one case where he did, he was rather pessimistic: Whatever is to be said in favor of correct logical thinking does not prove that the coming generations of men will· surpass their ancestors in intellectual effort and achievements. History shows that again and again periods of marvelous mental accom plishments were followed by periods of decay and retrogression. We do not know whether the next genera tion will beget people who are able to continue along the lines of the gen iuses who made the last centuries so glorious. We do not know anything about the biological conditions that enable a man to make one step for ward in the march of intellectual ad vancement. We cannot preclude the assumption that there may be limits to man's further intellectual ascent.

And certainly we do not know whether in this ascent there is a point beyond which the intellectual leaders can no longer succeed in con vincing the masses and making them follow their lead. 9 Today, in fact, the problem is as 9 Mises, The Historical Setting 0/ the Austrian School of Economics (New Ro chelle, N. Y.: Arlington House, 1969), p.38. much the fault of the failure of the leaders to understand basic principles as it is the fault of the masses. The free market is not some fully autonomous, self-sup porting, self-generating, self-sus taining mechanism. It is the prod uct of acting, thinking, planning men. If they do not know how the economy works - and no serious economist has ever argued that all participants must understand it in order for it to work - then there is only one defense possible: the majority of men must, on principle, leave their fellow men free to act, think, and plan. They may not grasp the nature of the process by which the actions of productive individuals are fused into a coherent, self-correcting economic system. They may not understand the theory of marginal utility. They may not be able to spell out the theory of free trade.

But unless they are willing to affirm that principle which every man can grasp - that each man is responsible for his actions, and that therefore each man should be given the right to work. out his salvation with fear and trembling :...- then the magnificent construct known as the free market economy will, in the· image of "Mission Impossible," self-destruct. There are no economic fruits without moral roots. By focusing on economics as if 1974 PRICE COMPETITION AND EXPANDING ALTERNATIVES 475 it were the "science of wealth" rather than the science of human action and human choice, the clas sical economists did a great dis service to the cause of freedom. They made the case of the con servative anti-market critics that much more re'asonable. There is more to life than material con sumption; there is more to life than the question of economic effi ciency. Economic man was an in telIectual construct, but too many economists and too many readers of economic literature failed to see that this construct was and is limited. It can explain some fea tures of life; it. can hardly ex plain them all. The economic man was a stick man, and he made a marvelous target for the critics of capitalism, both conservatives and socialists, who saw their opponents as narrow-minded, materialistic, immoral, uncharitable, destructive churls.

Expanding Human Choice The defense of the market should be made in terms of its implications for human choice. The free market expands human choice. It enables men to become more productive. In doing so, it increases their power and there fore their responsibility. At first, it may seem to limit men's choices - only black Model T's - but in reality it has expanded themblack Model T's rather than no car at all. As productivity in creases, men's options increase. Since they have increased their range of options, they have simul taneously increased their obliga tions. Like all blessings, this too is a burden. Sadly, some modern economists, at least in their published ma terials, are as naive as the nine teenthcentury economists. They seldom consider the grave politi cal and sociological implications of increased wealth. They do not understand that in today's world, a productive worker (from jani tor to scientist) who fails to acknowledge the restraints moral restraints - necessary to preserve a free market economy, is like a child playing with a loaded pistol. He is armed (with the vote) and should be considered extremely dangerous. He has the power to vote for men promising to relieve him of his responsibili ties - thereby relieving him of his power and wealth, he never seems to understand. Men seem to resent the burdens of responsibility as they grow more wealthy, and this is the surest guarantee that they will not grow wealthy forever.

Men make choices. They have ideas. They are responsible. If their ideas are such that they are convinced that the political au thorities can best handle the re476 THE FREEMAN August sponsibiilties of life, then their ideas will lead them into bondage, precisely because they are respon sible and they do have the power of choice. Pontius Pilate had the power of choice. He chose to "wash his hands" of all personal respon sibility, as if power can be so lightly abandoned. Ropke and Schumpeter were quite correct· in their concern for our society: mass man, especially State-educated mass man, has been granted wealth beyond the dreams of Pilate (who never had the opportunity to see reruns of the Beverly Hill billies in full color). Economic efficiency, in and of itself, guaran tees nothing morally or culturally. It only guarantees that more and more men will possess greater and greater options. We should nei ther underestimate nor overesti mate the blessings of efficiency. I) AProperDistrust w. ALLEN WALLIS THOSE who distrust governments are right. For governments every where undertake to do many things that cannot be done by governments - least of all by democratic gov ernments - and they even under take to do some things that can not be done at all, either by gov ernmental or nongovernmental means. Governments readily prom ise good incomes, good health, good morals, good taste, and good reMr. Wallis is Chancellor of the University of Rochester. These are excerpts from his remarks at the 124th Annual Commencement, May 12, 1974.