The Good and the Evil of Industrial Combination

THIS is a subject on which it is easy to argue, and hard to judge. The apologist for modern corporate methods can show that the good which they have done and are doing is likely to be permanent, while the evil with which they are accompanied tends to correct itself in the long run. His opponent can answer that this selfcorrecting process is very slow ; and that even if we could be sure that it would work itself out right in the end,— which he is not always disposed to admit, — nevertheless the evils and losses attendant upon the intermediate stages of the process make it a terribly expensive one, both materially and morally. In short, he thinks that society is paying too high a price for its industrial education and improvement; and that more stringent methods of state control would enable us to get at the good results of combination by a shorter road, which would avoid most of the dangers and hardships of the longer one.

The whole question is so complicated, and those who deal with it are so full of cross-purposes, that it is no easy matter to disentangle the different threads of argument and put them in proper relation to one another. Those readers of The Atlantic Monthly who demand “a simple statement of the truth ” are advised to avoid this article, and all others dealing with the same subject. Any such article is likely to be either a complicated statement of the truth or a simple statement of something altogether different.

Much of the confusion with which this subject is attended is due to the use of the word “ combination ” in two quite distinct senses. Combination as opposed to isolation is one thing; combination as opposed to competition is another. In the former sense, it represents an almost unmixed good ; in the latter sense, whatever good it may accomplish is attended with most serious industrial dangers. If a number of producers get together, they can increase the service which they render society. If a number of dealers “ get together,” they are more apt to increase the price charged than the service rendered. The advocates of industrial combination look chiefly at its good effects on economy of production. The opponents of industrial combination lay an exaggerated stress upon its evil effects on equity of distribution ; and in their zeal to abolish these evils they sometimes propose measures so sweeping that their adoption would cripple productive efficiency. To realize the full benefit of modern industrial processes, and at the same time avoid the abuse of the commercial monopoly with which they are so generally attended, is perhaps the hardest economic problem of the day.

The substitution, on a large scale, of combined for isolated production began about the middle of the last century. The inventions of Arkwright and Hargreaves in spinning, and of Cartwright in weaving, resulted in the substitution of textile factories for domestic spindles and looms. A hundred or a thousand operatives working together under a single management could produce so much more than the same operatives working separately that the complete displacement of the old system by the new was only a question of time. This process received a powerful impetus from Watt’s improvements in the industrial use of steam, — improvements which changed the steam-engine from an uncouth pumping-machine to an economical and efficient means of propulsion. Prior to Watt’s invention, factories were confined to localities where water-power was available; subsequent to it, they could be advantageously run wherever cheap fuel was at hand. Early in the present century, the possibilities of industrial consolidation were still further increased by the invention of the railroad. In the era of cheap transportation that followed, fuel and raw materials could be brought to the factory from a greater distance than before, and finished products sold over a greater area. The extent of the market was so widened that there was no limit to the size of the mills save that which resulted from difficulty of organization and supervision. The range of articles made in factories increased enormously. The foundry and the tool-shop took the place of the blacksmith and the cutter in many lines of production. Meantime, the railroad itself, which had been such an important means of stimulating consolidation in other lines, became in its own organization and management the most conspicuous instance of such consolidation. Independent wagoners could not compete with it. Independent canal-boat owners, on all but a few of the most advantageous water-lines, were gradually forced out of business. Independent carriers, running trains of their own on the same line of railroad, and paying tolls for the use of the track as they might for the use of a turnpike or a canal, have been a favorite subject of theorists’ dreams, but never anything more. Independent lines of parallel railroad have involved such waste in construction and abuse in management that they have given place to consolidated systems of constantly increasing size.

It is thought by some observers that this process is reaching its natural limit, and that the use of electricity instead of steam may result in a reaction. Steampower offers the greatest economy in concentration. Electricity affords far more possibility of division and diffusion. But the most that we can reasonably expect from this change is a mitigation of existing tendencies rather than a reversal; for over and above the economy of power resulting from centralized industry, there is an economy due to efficiency of organization, which must continue to give the large producers an advantage. Developments in electricity, like developments in arms, may result in substituting the skirmish line for the massed column, and in giving greater freedom of movement to the component parts of the organization ; they can hardly result in substituting small armies for large ones, or in lessening the responsibility and power of the general in command.

On the whole, this concentration of means of production has tended to the diffusion of means of enjoyment.

That it has benefited consumers by cheapening products no one seriously thinks of denying. It was just because it cheapened products that it won its success in displacing the domestic system of manufacture. This point needs no argument. But that it has done corresponding good to the laborers is by no means so universally conceded. Many persons think that the benefit of the changes has gone to the rich rather than to the poor; that if a man has wealth he can buy more products for his money, but that if he has no wealth he loses by the competition of machinery more than he gains by the cheapening of the products of such machinery ; in short, that the laborer has not received a fair share in the advantages of modern consolidated enterprise.

In spite of its prevalence this view is far from being well founded. Direct statistics of wages show that the general tendency has been toward increase of pay of the laborer, and still greater increase in the purchasing power of what he receives. Even more conclusive than these statistics are the facts derived from an examination of piece prices. Mr. Edward Atkinson, in a somewhat celebrated comparison of the accounts of certain cotton factories in 1840 and 1884, shows that the piece prices paid to labor in the latter year bear a far higher ratio to the amounts set aside for dividends than was the case at the earlier period ; and that, too, though the number of the looms and spindles had vastly increased, while the number of operatives had remained stationary. The piece prices paid for labor per yard, on the goods chosen for comparison, had, it is true, fallen from 1.82 cents in 1840 to 1.18 cents in 1884. But the superior efficiency of labor in spinning and weaving had allowed the laborers to make their output per hour more than three times as great in 1884 as it had been in 1840 ; so that they had at once reduced their hours of labor nearly twenty per cent, and increased their day’s wages more than sixty per cent. Meantime, the capitalist had been forced to reduce his profit per unit of product as fast as the quantity of output increased, and, in spite of all improvements of method, had to content himself with the same valuation of his plant in 1884 that it had borne in 1840.

But to those who distrust statistics — and such persons are by no means few in number or contemptible in intellect — we can bring another line of facts which tend to the same conclusion. In what lines of industry are the wages lowest and the abuses greatest ? Is it in those where modern methods have been most extensively employed, and where machinery with its attendant concentration of power has made the most progress, or is it in those whose methods are survivals from an earlier stage of industrial order ? To this question there can be but one answer. The lowest wages, the most unsanitary conditions, the grossest abuses and oppressions, are not to be found in factories, but in tenement-house industries. It is among the cigar-makers or among the workers in certain branches of the ready-made clothing trade that these matters are at their worst. Yet it is just here that the conditions of employment are most like those which prevailed in earlier industrial periods. The sufferers under the sweating system are not, as is so often charged, the victims of the present industrial order; they are the victims of a survival of past labor conditions into an age which has become familiar with better ones.

The idea that modern consolidated capital and modern machinery tend to compete with labor and displace it is based on a radically wrong conception. Modern machinery is commonly spoken of as “ labor-saving ; ” it is really not so much labor-saving as product-making. It does not, as a rule, enable the community to get the old amount of service with diminished labor ; rather, it enables the community to get a vastly increased service with increased labor. Take the example of the railroad. We speak of it as a cheap means of transportation. Yet, for the amount of traffic per capita which fifty years ago went over our highroads, the railroad would be about the most expensive means of transportation that could possibly be devised. The cost of interest and maintenance on a good railroad per year is greater than the total cost of transportation on any of the old turnpikes; the amount of wages paid by the railroad company for track repairs alone is probably greater than the compensation which all carriers ever received on any wagon-road. But the railroad company, by developing its traffic, can impose a much smaller fraction of these expenses upon each shipment, and thus make the cost per ton or per passenger less, even when the cost per year is greater.

From this state of facts, which is not confined to railroads, but is characteristic of modern consolidated industries, two important consequences follow. In the first place, the supposed reduction in the demand for labor is a myth. There may be a change of direction of labor, which results in the reduction of demand and lowering of wages at certain times or in certain lines of acquired skill ; but the general effect, other things being equal, is to put money wages up rather than down. In the second place, the machinery can be made profitable only by increased use of its products ; and this cannot be attained except by creating a popular sale, by putting them within the reach of the laborer instead of confining their use to the capitalist. It is the plain man rather than the wealthy man for whom articles of consumption have been cheapened. The railroad car is the plain man’s carriage. The factory is the plain man’s purveyor. Modern methods of production and distribution have not cheapened the luxuries of the rich: champagne and yachts show no tendency to fall in price. They have cheapened the comforts available for rich and poor alike. Masses of capital can be made profitable only by mass consumption; mass consumption must come from the masses, and not from the classes. So great is the importance of this truth that any unmassing of industry due to the increased use of electricity may readily involve a danger to the wage-earners ; for it will increase the chance of their becoming purveyors to the rich instead of purveyors to one another.

Up to the present time, investments of capital in machinery, on however large a scale, have tended to create an increased demand for the services of the laborer as a producer, and a yet more conspicuously increased competition for his purchases as a consumer. Not by chance, but by industrial necessity, have the accumulations of wealth in the form of capital, which seemed at first sight so adverse to labor, given the wage-earners as a body an increased share in the public income, and a still more largely increased share in the public enjoyment.

We have thus far considered combinations of capital as organized for the purpose of securing economy in production. But this is not the dominant motive in all such organizations. Many are arranged with the view of securing a monopoly of commercial power in their respective lines rather than a gain in productive power ; to limit output rather than to enhance it, to raise prices instead of lowering them. Such attempts at monopoly are by no means a new thing. They have been made by producers and merchants of every age. But there are certain special conditions which render such combinations to-day stronger and more defensible than they generally have been in the past, and which make the problem of repressing their abuses correspondingly more difficult.

To begin with, the technical gain from concentration of power is so great that a concern which is large enough to employ its labor with the best economy will often be large enough to supply the whole body of consumers in a particular line. In such cases, competition involves duplication of plant and of the expenses attendant upon its maintenance, with no possible advantage in service to the public, — sometimes even with an actual disadvantage. Especially is this true of distributive services. Two telephone exchanges in the same city cannot do their work for the public as well as one. Under these conditions, the effort to realize full economy of production subjects the community to the dangers of monopoly; the effort to legislate against monopoly, so far as it is effective, condemns the public to the burden of uneconomical methods of production and distribution.

Even where technical conditions give room for several independent plants in the same line of industry, the relative smallness of their number increases the pressure for some sort of joint agency which shall enable them to act in harmony in their purchases and sales. It is not that the intensity of competition becomes less when there are few competitors ; it is rather that such competition, when it acts at all, becomes so intense as to entail a loss on all that take part in it. Each competitor arranges his price scale, not by the cost of doing his own business, but by the cost of stealing business from his neighbor. He makes competitive rates which will barely pay the direct cost, in wages and materials, of making the goods or rendering the services immediately involved, and which leave no adequate sum to pay the interest on fixed capital, or even the exj)ense of its maintenance. It has become a well - recognized principle of political economy that charges on fixed capital do not for the moment, at any rate, form an element in a competitive price. But such cut-throat competition cannot be maintained at all points without financial ruin. It must be suspended either at some places or at some times. If it exists at some places, and not at others, we have discrimination, — sometimes in favor of the city against the country, sometimes in favor of the large customer against the small customer, sometimes in favor of the sharper against the honest man. If it exists at some times, and not at others, we have wide fluctuations which interfere with stability of business arrangement, and are only a shade less disastrous in their effect than the discrimination already described. The advocates of combination say that such competition is worse than no competition at all. They claim that in substituting combination for competition as a means of fixing prices they are serving the interests of the consumer and of the laborer no less than of the investor, — the consumer by steadiness of price, the laborer by steadiness of wages and of employment. They repel the idea that such combination will be used to raise prices to an exorbitant figure ; saying that it is for the interest of the owner of a large concern to make large sales, and that to make large sales he must make low prices, competition or no competition. They lay stress on the fact that the most successful combinations, like the Standard Oil Company, have adopted a policy of lowering prices rather than of raising them ; and say that the reverse policy is suicidal, not only from failure to sell the monopolized product, but from the certainty of calling new competitors into being.

The method of combination will vary according to circumstances. If an agreement upon a joint schedule of prices is enough to prevent suicidal competition, this is the simplest means to adopt. But if sales are made through agents, such a price schedule is quite certain to be “ cut” in a manner that no amount of effort on the part of the principals can wholly avoid. In such cases, in order to prevent suspicion of foul play, recourse is had to a “ pool ” or division of traffic ; under which the irregularities of an agent hurt his own company more than its competitors, because they do not enable it to increase its share of the total business. If a pool is rendered inoperative by the unfriendly attitude of the law, recourse is had to yet closer forms of combination. A few years ago, the trust agreement was a favorite legal device to secure this end. Shareholders in competing concerns put their stock into the hands of a common board of trustees, receiving in return certificates which gave them a right to all the earnings of the property, but not to the voting power which the stock itself enjoyed. This power was retained by the board of trustees. The device caught the public attention to such a degree that all combinations, of whatever form, are popularly known as trusts ; but this very attention proved fatal, for trusts were made the target of so much special legislation that few, if any, have continued to exist till the present time. Most of the socalled trusts are large corporations organized for the purpose of holding stock of all the different concerns in a single line of industry, and thus consolidating their managements under one head. The larger the capital required to operate an independent plant economically, the easier will it be to accomplish this object ; for the number of old concerns to be united will be fewer, and the difficulty of starting a new outside competition correspondingly greater.

Thus do the defenders of industrial monopoly represent it as something inevitable, and at the same time generally beneficial. Its opponents tell a different story. They claim that the description thus given emphasizes possible good, and ignores actual evil; that in practice the evil will generally be found to outweigh the good ; and that if combinations are to be regarded as inevitable, they must be subjected to methods of control which will render them less liable to abuse their powers and less able to disregard the rights of others. Even if it be true that their permanent interests are nearly coincident with those of the public, it is still more conspicuously true that they are managed with a view to temporary interests rather than permanent ones. The managers of a monopoly may claim that they are making profits by reducing expenses of production, but in nine cases out of ten some of their methods will be less legitimate than this. They will try to put prices up. They will try to put wages down. They will seek to exploit old methods instead of making the new experiments and applying the new processes which the existence of competition would force upon them. They will use their organized wealth as a means of influencing legislation; demoralizing our politics, and threatening to subvert the principles upon which our government was founded.

The field covered by these charges is so wide that it is impossible properly to examine the evidence within the limits of this article. Especially is this true with regard to the effects on prices and wages. At first glance, it might seem as though the facts given earlier in the article, concerning the reduction in prices and increase of wages in recent years, were sufficient to disprove the charges on these points. But the opponents of monopoly say that these advantages are the result of the earlier stage of the process of industrial combination, before it had reached the point of commercial monopoly. They insist that when an industry passes from the first of these stages to the second, we generally see an increase in price and a curtailment of production.

This is quite true, but it proves less than might at first sight appear. For the times preceding the formation of such monopolies are almost always times of abnormally low prices which could not last indefinitely. In the absence of combination, some of the competing concerns would be forced out of existence, and prices would be raised by the natural shortage of supply, a process which might readily prove more lasting in its results than the artificial curtailment of productions by a pool or a trust. On the other hand, it must be granted, even by the most zealous defender of such combinations, that a new-formed monopoly is apt to use its power to make much higher prices than a far-sighted view of the situation would warrant, and thus to encourage the investment of new capital in the same line ; inviting a repetition of the very evils which it was designed to correct.

The tendency of monopoly to retard the introduction of industrial improvements is, in the opinion of the present writer, a more serious thing than its tendency to allow unfair rates. This aspect of the matter has hardly received proper attention. We have been so accustomed to think of competition as a regulator of prices that we have lost sight of its equally important function as a stimulus to efficiency. Wherever competition is absent, there is a disposition to rest content with old methods, not to say slack ones. In spite of notable exceptions this is clearly the rule. Especially is it true of those organizations whose monopoly has legal recognition and protection. It was most marked in the case of mediaeval guilds in their later stages of development. The monopoly which their members enjoyed was so abused as to stand in the way of industrial progress, until the cry for its abolition became too powerful to resist. The same sort of abuse has been seen sometimes in recent monopolies of capital. The French railroads may serve as a noticeable instance. The government of France was so impressed with the evils due to unnecessary duplication of companies in England, and with the gain that might result from a systematic arrangement of lines, that it gave a few great companies a monopoly of railroad construction and operation in their respective districts. The result has been that much-needed railroads have remained for years unbuilt, that salutary reductions in rates have been delayed, and that the evil effects of combination have been more conspicuous than the good ones. Similar instances of overconservatism might easily be found nearer home, in those industries where a combination has enjoyed patent rights broad enough to protect it against the possibility of outside competition for a term of years ; or where the power of an organization to protect itself against home competition has been reinforced by an unduly high tariff against its foreign competitors. And it is in precisely these cases that the danger of political corruption becomes greatest. If a monopoly finds its power and its profit depending upon favorable legislation rather than upon its superior efficiency in serving the consumers, it will tend to devote more attention to politics and less to business. Each year of such dependence makes the chance of emancipation more remote, and the liability to the use of questionable or corrupt methods greater, than it was before.

Enough has been said on both sides to show the difficulty of passing judgment on the absolute merits or demerits of modern industrial monopoly. It is a somewhat easier as well as a much more important task to examine the relative merits of the different methods of control which have been suggested.

These methods may be grouped under five heads: (1) Direct Prohibition, (2) State Ownership, (3) Limitation of Profits, (4) Control of Prices, (5) Enforced Publicity.

Of direct prohibition, it is enough to say that it has been persistently tried, and has had very little success. State laws, and even national laws, against monopoly exist in plenty. The majority of them are dead letters. A few have affected the form of combination adopted ; but even these have not made any substantial change in the process or in its results. The Interstate Commerce Law has prohibited railroad pools ; in so doing it has simply driven the railroads to adopt other devices for securing the end to which pooling was a means. The legislation of the years 1891 and 1892 led to the dissolution of the Standard Oil Trust; but the Standard Oil Companies have continued to be managed with undiminished unity of aim and centralization of power. In spite of all the present agitation for anti-trust laws, there seems no reason to believe that legislation of 1897 will succeed on lines where statutes of previous years have so signally failed.

State ownership of industry is urged on such a variety of grounds that it would require a separate article, or series of articles, to discuss them all. But on the ground of industrial efficiency and public service, it has not, on the whole, shown itself equal to private ownership. On the question of relative rates there is perhaps room for a good deal of argument on both sides, but on the question of industrial progress there is no comparison between the two systems. All the great inventions of modern times — the steam-engine, the steamship, the railroad, the telegraph, the telephone — have been developed and introduced by private enterprise. Where such inventions were concerned with the means of destroying life, governments have sometimes improved their efficiency ; where they were concerned with preserving life and making it tolerable, governments have been content to follow private companies at a distance. At a time when the majority of governments owned railroads, the air-brake, the interlocking system, and all the other methods incident to the safe handling of fast train service were developed by private enterprise, and were reluctantly introduced, years afterward, by government officials, who found it much easier to avoid running modern trains than to acquaint themselves with the improvements which they involved. In short, government ownership seems to intensify those very evils which we have characterized as the most dangerous consequences of private monopoly. Nor would it appear that it lessens the political corruption with which such organized monopoly is attended. Where such corruption exists, state ownership substitutes one ring for two ; making it easier to keep the evil secret, and correspondingly harder to do any real work in uprooting it.

Limitation of profits has not proved a successful method of dealing with monopolies. It is easy for a company to reduce its profits to the prescribed minimum by diminishing its efficiency and economy instead of by reducing its rates. We have seen how great is the danger of slack service when the stimulus of competition is removed. Limitation of profits enhances this danger by removing the stimulus of self-interest also. It has been more fully tried in England than in the United States ; it is most unqualifiedly condemned by English officials like Lord Fairer, who have had the fullest chance to watch its effects.

Control of prices has worked better than limitation of profits. In fact, it sometimes seems like a necessity. We cannot allow a monopolist to kill all his neighbors for the sake of proving the unwisdom of such a policy to himself. Where the conduct of monopolies has been short-sighted and extortionate, as in the case of railroad rates at noncompetitive Western points immediately after the war, the public has been apt to resort to this remedy. But it is by no means a satisfactory one. In the first place, such rates are very often made too low; and the reduction of service that follows proves a worse evil than the extortion in charge that preceded. This was conspicuously true in the case just quoted. Again, even if the public authorities do their best to make fair rates, the difficulties in determining what is fair, or how far their decisions can continue in force amid the ever changing industrial conditions, constitute a serious bar against their utility. This is especially true in the attempts to regulate prices paid labor, which are sometimes made by boards of arbitration. However fair the theoretical basis of such an award, its practical enforcement is difficult in the extreme. If it be urged that the monopolist is himself subject to the same uncertainty, the answer is that he is experimenting with his own property, and thus has a freer hand to take chances of success, as well as a fuller responsibility to bring the lessons of failure home and indicate better lines of policy for the future.

Where this responsibility for the future can be brought home to the managers of corporate enterprise, it furnishes a better means of control than any of the methods hitherto considered. If, as was indicated at the outset, the permanent interests of the capitalist coincide pretty closely with those of his customers or employers, any agency which shall give force to those permanent interests points the way to a solution desirable for all parties. Where the shortsighted policy is due to corrupt interests within the corporation, which knowingly antagonize the real interests of the investors, it may be restricted by enforced publicity of accounts, or by better laws governing responsibility of directors. The former lessens the opportunity for abuse, the latter lessens the motive. Where the short-sighted policy is pursued in good faith, a better understanding may be promoted by commissions like those in whose development Massachusetts has taken the lead, or perhaps still more effectively by the highest class of judicial decisions. Such agencies serve to create an intelligent public sentiment on matters of business, and one that can be developed in no other way.

It is a slow process to educate a community to the point where we can rely on rational egoism to subserve public good ; but the community which has attained that result, in any department of life, possesses an inestimable advantage. Thanks to the decisions of the courts, supplemented by the influence of a few great writers like Adam Smith, we have pretty nearly reached this stage of development in competitive business. In monopolized business we have not done so. Our capitalists have learned to look a day or a month ahead, but not always a year or a decade. It is when we take it in this connection that we see the full significance of the problem of industrial combination at the present day. It marks a critical phase in the education which a community must undergo to fit itself for the increasingly difficult problems of industrial freedom. If we resort to systems of prescribed rates, we defer this education to a day when it may be a harder process than it is now. If we resort to state ownership, we abandon the hope of such education altogether, and pass from the traditional lines of development of England and America to those of France or Germany. But if we can meet the evils of the present crisis by the creation of a more enlightened public sentiment, we shall be handling the problems of our day as our fathers handled those of their day, and shall leave our children the legacy of a freedom enlarged rather than impaired by the magnitude of the burdens imposed upon it.

Arthur Twining Hadley.