Economist Scores the Costs and Benefits of Monopoly

ARTHUR TWINING HADLEY, The Good and the Evil of Industrial Combination (1897)

The polarized assessment of big business in America often reflected perceptions of the good or evil of monopolies, as Yale economist and president Arthur Twining Hadley underscored in an 1897 article for The Atlantic Monthly, a New England–based journal of culture and ideas. No foe of capitalism, Hadley highlighted the economic benefits of the emerging corporate structure, emphasizing the lower costs of goods and the general trend of rising wages, a view disputed by labor’s advocates. Still, Hadley did acknowledge the limitations of monopoly, or what he called combinations, and offered an economist’s view of how best to control them without undermining the advantages he identified.

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 self-correcting 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 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 over-conservatism 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.…

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.…

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.…

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.…

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.…

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 short-sighted 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, “The Good and the Evil of Industrial Combination,” The Atlantic Monthly 79, no. 479 (March 1897): 377, 383–385.

READING AND DISCUSSION QUESTIONS