<h2>CHAPTER 44</h2>
<h3>FREE COMPETITION AND STATE ACTION</h3>
<h4>§ I. COMPETITION AND CUSTOM</h4>
<div class="sidenote">Definition of economic freedom</div>
<p>1. <i>Economic freedom exists when men's goods or their own services may
be exchanged as they choose, without hindrance.</i> Competition is but
another expression for economic freedom. Where men are <i>free</i> to
exchange their goods and to get the best price they can, and actually do
so, they are said to compete. The action of men in the mass follows
pretty regular lines, corresponding to certain abiding motives. If one
man dictated all industry, a very fragmentary science of economics would
be possible; but the mass of men act according to some rule and are free
so to act. When men are free to bring their goods to a market and get
the best price possible, a single market price results.</p>
<p>When cost of production was believed to be the regulator of value, it
was said that the law of value laid down was true "within the limit of
free competition." Market price varied ceaselessly from cost of
production, and whenever it did "the law of value" as then formulated
was admittedly invalid or inapplicable. The law of monopoly price was
supposed to be in marked contrast to the law of competitive prices. The
law of prices, as followed in our study, stated in<span class="pagenum"><SPAN name="Page_423" id="Page_423">[Pg 423]</SPAN></span> terms of marginal
utility, is equally valid in competitive and in monopolistic conditions
if there is merely one-sided, or buyers', competition. Two-sided
competition is not the sole, though it is the usual condition, which the
economist takes account of in reasoning on the problem of price.
Anything that keeps men from exchanging what they have for the best
price, interferes with competition. Some of these hindrances have been
noted, others are now to be.</p>
<div class="sidenote">Economic freedom vs. equality of efficiency</div>
<p>2. <i>Economic freedom does not mean equality of power or of efficiency.</i>
It was said in discussing monopoly that it was not to be understood to
be merely either scarcity or superiority. To speak of the class of
laborers of ability above that of the average day laborer as having a
monopoly is certainly a confusion of monopoly with the scarcity of
efficiency. The term competition is not easy to define in practice; for
it is not easy to see just what part of a man's inability to exchange is
due to his own lack of efficiency, and what to things outside of himself
which prevent him from exchanging his labor. But the thought is clear
that free competition—economic freedom—is limited whenever men are
hindered by any power outside themselves from using their economic power
as they prefer. The limitations of competition, thus understood, are
essentially social limitations, imposed by other men either
unconsciously by custom, convention, tradition, or consciously by force
or by laws. When, among Polynesian tribes, the custom of taboo
prevailed, by which certain things were reserved to the rulers and were
forbidden to the common man, there was a limitation on his economic
freedom. Contrast such limits with those set by the penury of nature.
The savage may like best to hunt, but if there is no game, he must fish;
he may like best to make arrowheads, but in need of food he must dig
roots. Economic action is limited by lack of knowledge and skill; the
resources of nature lie unused under the feet of savages who are
suffering from their lack. These are limitations not of economic freedom
but of economic efficiency.</p>
<p><span class="pagenum"><SPAN name="Page_424" id="Page_424">[Pg 424]</SPAN></span></p>
<div class="sidenote">Limitation by custom in early society</div>
<p>3. <i>In early society custom limits economic freedom in many ways.</i> The
savage is not a man without law; he is bound in many ways to prescribed
lines of conduct. Primitive custom usually takes on a religious
sanction, and every member of the tribe is compelled to do as his
fathers have done and as his neighbors are doing. He is not free to
choose. Custom in some ways is favorable to the welfare of society, for
it limits the power of masters and rulers, preserves the rights of
individuals to common property, and is in the interest of the weak as
well as of the strong. In an age of force if it were not for custom, he
who had might on his side could take all. So in early society even
economic relations were complex and yet almost fixed—changing only
slowly from generation to generation. Every such social custom that
limits the choice of men limits economic freedom.</p>
<div class="sidenote">Limitation by custom in the Middle Ages</div>
<p>4. <i>Custom ruled a large share of the industrial life of the Middle
Ages.</i> Political and economic interests were not clearly divided in the
Middle Ages. Land was the all-important kind of wealth. Military and
other public services were performed by the vassal, who thus at the same
time paid his taxes and the rent of the land. The landlord was at once
the ruler, the receiver of rents, and the collector of taxes. The rent,
however, was not a competitive price, but consisted of the dues and
services the forefathers had been accustomed to pay. This limited
slavery, like all other slavery, was wasteful, as it did not give to the
individual the strongest motive to increase the quantity and to improve
the quality of his service. Trade became limited in almost every
direction. Crafts and gilds arrogated to themselves the right of
employment in their industries. No matter what talent the son of a
peasant might show, he usually found it impossible and always found it
difficult to follow the occupation of his choice. Privilege pervaded all
the life of that time. In such conditions economic friction is great.
Men are kept in trades below their ability, while others gain command of
monopolistic and unearned returns.</p>
<p><span class="pagenum"><SPAN name="Page_425" id="Page_425">[Pg 425]</SPAN></span></p>
<p>Yet through all the Middle Ages ran the forces of competition. The
inefficiency of customary services was a constant invitation to
competitors. Men were striving to break over the barriers of custom and
prejudice. The strife for freedom was the vital economic force even of
the Middle Ages. The industrial history of that time is largely the
story of the struggle of the forces of competition against the bounds of
custom.</p>
<h4>§ II. ECONOMIC HARMONY THROUGH COMPETITION</h4>
<div class="sidenote">Effect of modern forces on custom</div>
<p>1. <i>The industrial events following the discovery of America
strengthened the forces making for economic freedom.</i> Discoveries in the
Western hemisphere opened up a wide field for the adventure and
enterprise of Europe. Commerce is the strongest enemy of custom, and new
opportunities gave a rude shock to the conservatism both of the manor
and of the village. With the rapid growth of industry and manufactures,
old methods broke down. In an open market custom declines; it flourishes
best in sheltered places. Further, the movement of thought in the
Reformation and the spirit of the time, expressing the principle of
personal liberty, allowing the individual to follow his own opinions and
take the consequences, were favorable to competition. Despite these
facts the restraints of the national governments on trade continued
great, in some respects increasing during the seventeenth and eighteenth
centuries, in France, Holland, and England. The regulation before
attempted by towns and villages was employed on a larger scale by
national governments with their commercial systems. The colonies in
America were used for the economic ends of the "mother countries" and
for the selfish interests of the home merchants in Europe. The American
Revolution was one of the bitter fruits of the English policy of trade
restriction.</p>
<div class="sidenote">Adam Smith's influence</div>
<div class="sidenote">The philosophy of natural law</div>
<p>2. <i>Adam Smith's work advocating greater economic freedom had a profound
influence upon public thought.</i> "The<span class="pagenum"><SPAN name="Page_426" id="Page_426">[Pg 426]</SPAN></span> Wealth of Nations," the first
great work on political economy, was published in the year 1776. That
was the "psychological moment," as public thought was so prepared for it
that it had its maximum possible influence. The year of the American
Declaration of Independence gave the most striking object lesson on the
evils of a selfish colonial policy that interfered on a grand scale with
economic freedom. The old customs had become ill fitted to life, ill
adapted to the rapid industrial changes that were going on. What was
needed in many directions, both in politics and in industry, was
negative action by the government, the repeal of the old laws, the
overthrow of old abuses. The French Revolution, following a few years
later, emphasized this thought in the political field. The philosophers
of the time believed in a "natural law" in industry and politics. The
reformers of the time wished to throw off the trammels of the past and
to give men opportunity to exert themselves "naturally." In America the
old abuses never had taken deep root, as the conditions of a new
continent were not favorable to monopoly and privilege. Although the
movement for the repeal of medieval laws has continued in Europe from
1776 till the present time, yet to-day custom is stronger in Europe than
in America. Serfdom was not abolished until the nineteenth century in
Austria and southeastern Europe, and not until a few years ago in
Russia. Many economic and cultural forces furthered this movement, but
the most powerful intellectual force in its favor was the work of Adam
Smith. So strong an impression did Smith's book make, that in the minds
of men "free trade" became almost identical in thought with political
economy, whereas that was but the temporary economic problem of the
eighteenth century.</p>
<div class="sidenote">The doctrine of the economic harmonies</div>
<p>3. <i>The doctrine of the "economic harmonies" is the extremest form of
belief in the virtues of competition.</i> Every truth in political
philosophy finds some exaggerated expression. The main task of the
student is to determine what shade of gray things are, rather than
whether they are white<span class="pagenum"><SPAN name="Page_427" id="Page_427">[Pg 427]</SPAN></span> or black. The belief in the benefits of
competition and the virtues of economic freedom found expression in the
doctrine of "the economic harmonies." This is the faith that if men are
left entirely free to do as their interest dictates, the highest and
best efficiency for all will follow; it is the belief that the economic
interests of all men are in harmony. The most striking evidence in
support of this thought is the stimulating effect of self-interest
freely working in the field of competition. Each strives to do what will
bring him the largest return, and the price others pay measures their
estimate of the service. Each seeking his own interest is led to make
himself more useful to others. Thus are men stimulated to sacrifice, to
invention, to preparation; thus is zeal animated and are efforts
sustained.</p>
<div class="sidenote">Good social effects of self-interest</div>
<p>Through self-interest the working force is distributed over the field of
industry wherever it is most needed. The remarkable adjustment of
industry to the needs of each neighborhood is brought about by
individual motives, not by centralized authority. It is not mere chance
that produces this harmony. Wherever consumers settle, stores are
started and factories are built. Wherever work is to be done, men come
in about the right number to do it. Skill is adjusted to needs by the
delicate measurement of the market rate of wages. Competition gives a
definite rule of price—certainly the only definite impersonal rule;
some say the only just rule. The competitive price must be appealed to
even in arbitration. It is the standard to which things tend constantly
to adjust themselves in an open market.</p>
<div class="sidenote">Conflicting interests in the business world</div>
<p>4. <i>Experience shows that the economic interests of men are only partly,
not wholly, in harmony.</i> That there is a great measure of truth in the
statements just made, all must admit; but their application is limited.
They are partial truths, never to be ignored, but quite false if taken,
without modification, as practical rules of conduct. There are three
species of competition in every market: that between sellers, that
between buyers, and that between sellers on the one hand<span class="pagenum"><SPAN name="Page_428" id="Page_428">[Pg 428]</SPAN></span> and buyers on
the other. It is to the interest of the buyers that the sellers shall be
numerous, eager, and freely competing. It is to the interest of the
seller that supply shall be small, that sellers shall be united, and
that buyers shall compete sharply. If at any point free competition is
hindered, even the disciple of economic harmony must expect a discordant
result. But in reality competition is rarely quite complete on both
sides, and when it is not, the weak suffer. Men do not start with fair
and equal opportunities. All that they may be entitled to under
competition may be so little that social sympathy seeks to better the
result; hence poor relief, public and private. Society as a whole has an
interest in the outcome of the individual's economic struggle. It cannot
see men starving or driven into crime. But the argument need not be
confined to such crude and extreme cases, for wherever economic
interests are not in harmony and it is possible to further the social
welfare, will not society be justified in acting?</p>
<h4>§ III. SOCIAL LIMITING OF COMPETITION</h4>
<div class="sidenote">Imperfections of economic freedom</div>
<p>1. <i>Undoubted evils result from some forms of competition under the
conditions actually existing.</i> Complete freedom must remain a somewhat
abstract ideal, and actual conditions must be recognized. Entire freedom
of choice means freedom to make mistakes, a privilege whose enjoyment
society cannot always permit. The child should be raised to good
citizenship, and entire freedom of choice makes that impossible or
improbable. The freedom of choice of the insane, the feeble-minded, and
the criminal, cannot be recognized. Even where competition is the ideal
of sound adult humanity, it is not to be too suddenly or extremely
applied. The inequality of faculties, the prevailing dishonesty, the
mass of inherited abuses, cannot be either ignored or at once ended. The
immigrant from Europe, plunged into the trying conditions of city life,
suffers in health and in morals, and often becomes<span class="pagenum"><SPAN name="Page_429" id="Page_429">[Pg 429]</SPAN></span> a burden upon
society. One of many competitors may drive competition to an evil
extreme. The "problem of the twentieth man" is presented when nineteen
men desire to limit competition in ways not socially harmful, as by
closing shops on Sunday or in the evening, and the one man refuses. The
appeal to economic harmony often is the cry of "peace, peace, where
there is no peace." The highest social result may be attained now by
limiting, again by directing, in other cases possibly by fostering,
competition.</p>
<div class="sidenote">Forces opposing competition</div>
<p>2. <i>The main rivals of competition are custom, religion, morality,
combination, and state action.</i> The first three of these were the
strongest forces in the past and they are still operating; but
combination and state action are more characteristic of the present. The
influence of custom, of morality, and of religion on value, has been
touched upon at several points in our study; that of combination has
been recently and more fully discussed. But state action, one of the
most important of all the limitations, has been reserved for the
concluding portion of our work.</p>
<div class="sidenote">The state's part in directing competition</div>
<p>3. <i>It is a function of the state to determine in part the ways in which
men shall exert their powers.</i> This is not the sole function of the
state, nor is its influence toward this end exclusive. The state puts
limits to the physical rivalry of men. In the distant past no doubt
physical rivalry between men was an agent of progress. The strong drove
out the weak; physical contest developed more vigorous limbs, keener
senses, and higher sagacity. To-day it is one of the principal functions
of the state to suppress the physical contest between men. The citizen
is surrounded with a network of rules and regulations of which he is
hardly conscious. Most men easily avoid coming into contact with the
police and feel no irksomeness in the control of the civil courts. The
state regulates economic interests in many other ways; it controls the
building of streets; it inspects the material and construction of
houses; it forbids acts injurious to the public welfare; it regulates
the issue of money; it determines the<span class="pagenum"><SPAN name="Page_430" id="Page_430">[Pg 430]</SPAN></span> manner in which credit may be
extended, the forms of taxation, and the direction which trade may
legally take. The state has a part in shaping great industries of a
public or semi-public nature, such as waterworks, railroads, and the
postal system.</p>
<div class="sidenote">Aim and failings of state action</div>
<p>The state is as wise as the men who constitute it. Men make mistakes,
therefore men collectively will make them. The state regulates and
limits—now wisely, now foolishly; but its aim is to preserve the
benefits of competition without its evils, to lift the competition to a
higher plane, and, by determining the direction in which men shall put
forth their efforts, to give a higher and truer economic freedom.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_431" id="Page_431">[Pg 431]</SPAN></span></p>
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