Monopolistic Practices

The criticisms against the profit economy are inadequate.

My argument on some of those criticisms might not be obvious.

So I will explain a few points.

1. Restricting output:

• conserves established positions
• maximizes profits

New things, such as new technologies, can impact the existing structure of an industry.

• This considerably reduces the practices that restrict output

Such effective restrictive practices gain significance in creative destruction.

They would not have such a significance in a state that is:

• stationary or
• of slow and balanced growth

In either of these cases, restrictive strategy would only increase profits at the expense of buyers.

In a balanced advance, it might be the easiest and most effective way of financing additional investment. 1

But in the process of creative destruction, restrictive practices may do much to:

• steady the ship
• alleviate temporary difficulties.

This:

• always turns up during depressions.
• has become popular with governments and their economic advisers as seen in the National Recovery Administration.

The National Recovery Administration has been so much misused and so faultily acted upon.

• Most economists hate it

Those same advisers responsible for this fail to see its much more general rationale.

Any investment entails, as a necessary complement of entrepreneurial action, certain safeguarding activities such as insuring or hedging.

Long-range investing under rapidly changing conditions is like shooting at a target moving jerkily.

• This is especially true under conditions that may change at any moment under the impact of new commodities and technologies,
  Hence it becomes necessary to resort to such protecting devices as:
• patents or temporary secrecy of processes or
• long-period contracts secured in advance

Most economists see these protecting devices as normal elements of rational management.

• These are only special cases of a larger class comprising many others which most economists condemn although they do not differ fundamentally from the recognized ones.

When a war risk is insurable, a firm can collect the cost of this insurance from the buyers of its products.

If there are no facilities for insuring against war, the firm might raise prices.

• This will result in the same restriction that produces excess profits

If a patent cannot be secured then other means may have to be used to justify the investment, such as:

• a price policy that will make it possible to write off more quickly than would otherwise be rational, or -additional investment to provide excess capacity to be used only for aggression or defense.

If long-period contracts cannot be entered into, other means may have to be devised to tie prospective customers.

The government then sees:

• price policies that seem predatory
• output restrictions that seem loss of opportunities to produce

The government does not see that restrictions of this type are, under perennial gale, unavoidable incidents of a long-run process of expansion which they protect rather than impede.

This is like motorcars traveling faster than usual because they have brakes.

2. This stands out most clearly in the case of those sectors of the economy which at any time happen to embody the impact of new things and methods on the existing industrial structure.

The best way to get a realistic idea of industrial strategy is to visualize the behavior of new industries that:

• introduce new commodities or processes (such as the aluminum industry) or
• reorganize an industry (such as, for instance, the old Standard Oil Company).

Such industries are aggressors and wield the weapon of competition.

Their intrusion improves total output in quantity or quality through:

• the new method
• the pressure it exerts on the preexisting firms

But these aggressors require armor for attack and defense other than price and quality of their product.

The largest-scale plans might not materialize at all because of:

• capital requirements
• lack of experience

The conquest to gain monopolistic financial control might run counter to the public’s sense of fair play.

They might be methods to remove obstacles that private property puts in the path of progress.

In a socialist society, that time and space would be no less necessary.

They would have to be secured by order of the central authority.