The Peril of ‘Buy American’
It’s not surprising that Democrats in Congress could not resist adding a “Buy American” provision to the fiscal stimulus bill earlier this year. It might seem sensible (or at least politically useful) to ensure that taxpayer dollars would be used exclusively to support American jobs.
But as states and municipalities start spending stimulus money, the idea is starting to look as counterproductive as it should have looked from the beginning. It is sparking conflict with American allies and, rather than supporting employment at home, the “Buy American” effort could ultimately cost American jobs.
Foreign and domestic companies that employ hundreds of workers in this country cannot bid for government projects because they cannot guarantee the American provenance of all the steel, iron and manufactured goods in their supply chain, as the provision requires. Others are scrambling to figure out whether American-made alternatives exist to replace their foreign inputs.
The steel company Duferco Farrell, for example, has cut about 600 jobs in Pennsylvania after it lost orders from its biggest customer because some of its goods are partly produced abroad. The Westlake Chemical Corporation of Houston has lost sales to a Canadian vinyl pipe maker that is cutting back production because it can’t bid for some American jobs.
America’s trading partners expected more of President Obama, who signed a declaration against protectionism at the summit of the biggest nations in April. He convinced Congress to add a clause to its “Buy American” effort promising Washington would meet its international obligations. But cities and some states are not bound by the rules of the World Trade Organization and the North American Free Trade Agreement.
Some allies, and many American companies, expected the president would seek to persuade local governments to abide by federal rules, but in April the Office of Management and Budget issued interim guidelines that offered no such guidance.
In the absence of leadership from the president, the temptation to turn to protectionism is growing. Hundreds of municipalities and some state legislatures have signed on to a “Buy American” resolution pushed by the United Steelworkers union. And the House of Representatives stuck provisions requiring the use of American materials into bills about water quality improvement and new school facilities.
Meanwhile, representatives of Australia, Brazil, Canada, the European Union, Japan and Mexico have been consulting about how to respond to the United States’ protectionist drive. After Canadian companies were barred from bidding for American business, news reports say that some 12 Canadian cities passed ordinances against buying American. And the Federation of Canadian Municipalities is expected to discuss a possible coordinated response at its meeting this month.
Industries like water and wastewater treatment are highly integrated with their Canadian counterparts, with exports to Canada in 2008 worth $6.2 billion and imports worth $4 billion. According to the United States Chamber of Commerce, retaliation by Canadian municipalities could cost American water equipment companies an estimated $3 billion in lost business.
An analysis this year by Jeffrey Schott and Gary Clyde Hufbauer of the Peterson Institute for International Economics in Washington estimated that “Buy American” provisions could “save” 9,000 American jobs — a tiny number compared with the 650,000 jobs supported by foreign government procurement of American exports.
Indeed, whether it is from the point of view of diplomacy or of job creation, “Buy American” is a terrible idea. One that could make the global recession worse.
Militant Unions
Militant Unions Raise Muni Risk
By Steven MalangaIt was not the kind of headline to which investors typically pay attention, but perhaps they should. It said: “Teachers start hunger strike to protest layoffs” atop a story about a nasty battle between the board of education and teachers in Los Angeles over efforts to close a $600 million budget deficit.
Hunger strikes are extreme, but they are just one weapon in an increasingly formidable union arsenal that includes lawsuits and brutal advertising campaigns aimed against budget-cutting politicians. Such tactics are only likely to become more common because states and localities around the country face, by one estimate, more than $350 billion in budget deficits in the next few years, and much of that is concentrated in employee costs. In the lofty world of municipal bond analysis the answer to these problems would be simple: raise taxes, cut costs and keep making those debt payments.
But today’s world is very different. Public employee groups have accumulated so much power in recent years that governments are having trouble trimming budgets, especially burgeoning employee costs, while tax increases on an already-shrinking economy aren’t producing the revenues needed to close budget gaps. That’s created budgetary gridlock in places like California and is one reason why imposing figures like Warren Buffett have started to worry whether the old, reliable municipal bond market isn’t heading for turmoil. “Insuring tax-exempts…has the look of a dangerous business,” Buffett wrote to shareholders earlier this year.
Buffett isn’t alone in worrying about munis. Although the municipal business has always been considered a plain-vanilla market— dependable bonds issued to conservative investors—it has also had its troubling, controversial side. As former Securities and Exchange Commission head Arthur Levitt recently observed in a Wall Street Journal opinion piece, the muni market has long been plagued by allegations of ‘pay-to-play’ in which firms win business not based on expertise but after making contributions to politicians. Legislative efforts to limit the role of political influence in the business have been halfhearted, perhaps because it’s such a gravy train for both politicians and investment bankers.
This intersection of finance and politics has resulted in a steady increase in local debt and, more disturbing, an increase in offerings that circumvent state and local legislative debt limits. States and cities have created a bevy of public authorities and other bodies that they use to issue debt that’s officially off-the-books but still leaves taxpayers on the hook. Several years ago an audit in New York State found that public authorities there had issued some $43 billion in so-called ‘backdoor debt,’ that is, debt not approved by voters--one reason why the state will spend nearly $5 billion this year just to service its debt.
These growing liabilities wouldn’t be half so troublesome except that, as Levitt pointed out, the market isn’t very transparent and reliably produces some controversial “Enron moment” every decade or so. In the 1970s, that moment belonged to New York City, which nearly reneged on its debt obligations under the weight of an unprecedented social welfare spending spree, until the state and the feds bailed out the city. In the 1980s the Washington Public Power Supply System, a municipal corporation created to build power plants in the Northwest, defaulted on $2.25 billion in bonds used to build nuclear plants that never operated (the debt vehicles became known as “Whoops bonds”). In 1994, Orange County in California filed for bankruptcy after it invested some $2 billion of borrowed money in risky derivative instruments that wracked up big losses. In 2006 the city of San Diego settled fraud charges with the SEC after admitting it hid growing pension shortfalls and misled investors about the extent of benefits it had promised to city employees. Tellingly, the city had granted rich benefits enhancements to city employees under the belief that a rising stock market, not taxpayers, would finance the new obligations, and eventually under the weight of those obligations the city declared bankruptcy.
Defenders of the muni market point out that such incidents are rare and that tax-exempt bonds have a far greater repayment rate than corporate bonds.
But if ever there were a market that seemed ready for what Nassim Nicholas Taleb calls a ‘black swan” moment, that is, a big, rare event outside the scope of past experience, it may be the muni market. Levitt observes that the market is far more opaque than investors believe, with inconsistent accounting standards and no central regulator watching over it, which raises the question of whether more San Diego-style surprises will emerge as budget woes intensify.
Meanwhile, Buffett worries that growing political pressure on elected officials—who are getting squeezed between irate taxpayers on the one hand and powerful public employee groups on the other—might prompt a few places to test the idea of reneging on their debt. That, he fears, could lead to a cascade of defaults that would overwhelm insurers who back these bonds: “If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow.”
Concerned about just such a gusher of bankruptcy filings, California’s state legislature is now considering controversial legislation that would require a municipality to get approval from a state commission to file Chapter 9, which is how governments go bankrupt. Muni investors can’t be heartened by the prospect of a rash of such municipal bankruptcies considering the way bondholders have been treated by government in the Chrysler and General Motors filings. I can just hear some politician browbeating muni holders about how they must do their part to help troubled cities out of their fiscal woes by taking 30 cents on the dollar.
For decades the claims of municipal bondholders have been considered the immovable obligations of government finance. But now their interests are in conflict with the new irresistible force of local politics, the public employee unions.
Government Motors
Government Motors will still lobby government
Timothy P. Carney
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| The General Motors headquarters is seen with the moon in the background in Detroit, Sunday, May 31, 2009. (AP Photo/Carlos Osorio) |
General Motors will continue its multimillion-dollar lobbying operation in Washington, even after the federal government takes ownership of it. The automaker may even maintain its high-dollar lobbying contracts with some of the wealthiest and most influential K Street firms.
“We believe we have an obligation to remain engaged at the federal and state levels,” General Motors stated in an e-mail after President Barack Obama announced his plan for the federal takeover of the carmaker, “and to have our voice heard in the policymaking process.”
As a result, some of the jobs that the White House will save with this unprecedented nationalization could be on K Street in downtown D.C., rather than in Detroit.
GM spent $13.1 on lobbying in 2008. In the first quarter of this year, while surviving on federal bailout money, the company’s lobbying tab was $2.8 million.
Washington’s most powerful lobbying firms are among the 14 firms the company employed as of the last filings. None of the firms would comment on whether it would continue to work for GM. An assistant to leading Republican strategist and lobbyist Charlie Black of BKSH & Associates said “Charlie doesn’t know” what effect GM’s bankruptcy will have on the firm’s contract with the automaker.
Assuming GM continues its current lobbying effort, many of K Street’s most storied lobbyists, such as Black, would in effect be working for taxpayer money. One such government contractor would be Stuart Eizenstat at the top-tier firm Covington & Burling, who served in the administrations and on the campaigns of every Democratic president from Lyndon B. Johnson to Bill Clinton. GM hired him and his firm 10 days after Obama’s election.
Ken Duberstein, Ronald Reagan’s former White House chief of staff, is also on GM retainer, as is former Sen. Don Nickles, R-Okla., who served as the majority whip in the upper chamber.
In addition to hiring these outside firms, General Motors operates its own in-house lobbying shop in a pricey office at 101 Constitution Ave. NW, across the street from the Capitol grounds. Under Obama’s plan, taxpayers would in effect cover 60.8 percent of the cost of this operation. The lobbying office referred inquiries to GM’s press office, which replied with two e-mails.
One e-mail outlined its “obligation to remain engaged” and to participate in the policymaking process, citing health care, cap-and-trade, and foreign trade.
When asked specifically whether GM would continue to retain outside lobbyists, a GM spokesman wrote back, “As with all aspects of our business, GM sometimes will use consultants with strong expertise on certain issues. The list of these consultants is public. The use of these consultants is constantly under review.”
By press time, the White House did not respond to two phone messages and an e-mail inquiring whether the president intended to restrict GM lobbying or spending on lobbying while the government owned the company.
The awkwardness of GM, in effect, lobbying its owner, is one of the many conundrums created by the business-government partnerships initiated by President George W. Bush last fall.
If Obama were to place lobbying restrictions on GM — limiting GM employees’ and consultants’ contacts with government officials — that would amount to restricting communication between the company’s management and its shareholders. A related question: Will all discussions between administration officials and GM management continue to count as “lobbying contacts” covered under federal law? Elliot Berke, a government ethics lawyer in Washington, told me, “Nobody really knows what any of this means.”
Insurance giant AIG suspended its entire lobbying practice once the government bought a majority stake in it, terminating all contracts by Oct. 1.
In the first three months of this year, GM lobbied on issues including its own bailout, the stimulus, climate change, transportation funding, air bag laws, fuel-efficiency requirements, prescription drugs, health care reform, cellulosic ethanol, hydrogen-powered cars, fuel cells and Mexican trucks, among others.
GM is a member of the U.S. Climate Action Partnership, a coalition that lobbies Washington for cap-and-trade restrictions on greenhouse gas emissions, as is Chrysler, a USCAP spokesman confirmed Tuesday afternoon. AIG, on the other hand, withdrew from the coalition upon its bailout.
Trying to be a business and a de facto government agency simultaneously won’t be easy, and the problem of lobbying shows why.
GM’s Nationalization
GM’s Nationalization and China’s Capitalists
GM’s restructuring under Chapter 11 includes plans to sell off the Hummer, Saab, and Saturn brands. Well, just one day after GM’s bankruptcy filing, a Chinese firm has come forward with a $500 million offer to purchase Hummer. The prospective buyer is Sichuan Tengzhong Heavy Industrial Machinery Co Ltd, a manufacturing company in western China, which hopes to become an automaker.
Not only is the Hummer offer the first bid for a GM asset in bankruptcy, but the bidder is foreign. Not only is the bidder foreign, but Chinese. And not only is the bidder Chinese, but the Hummer was first developed by the U.S. military. Thus, this is certain to be characterized as a national security matter, and the Committee on Foreign Investment in the United States (CFIUS) will have to review the proposal. There should be little doubt that the economic nationalists will be out in full force, warning CFIUS against transferring sensitive technologies to Red China.
Let me offer two quick points, as the bulging veins in my temples pulsate with disdain for official Washington.
First, if this deal is rejected (even if the bidder is scared away by detractors), any remaining credibility to the proposition that the United States will once again become that beacon on a hill, exemplifying for the world the virtues of free markets and limited government, will vanish into the ether. There has been too much U.S. hypocrisy on free trade and cross-border investment and too much double talk about the impropriety of government subsidizing national champions, that another indiscretion in a high profile case will blow open the already-bowing flood gates to economic nationalism worldwide. Considering that U.S. companies sell five times as much stuff to foreigners through their foreign subsidiaries than by exporting from the United States, investment protectionism is as advisable as nationalizing car companies.
Second, the willingness of this Chinese company to purchase Hummer serves as a stark reminder of what could have been. Had George W. Bush not allocated TARP money to GM last December, in circumvention of Congress’s rejection of a bailout, then GM likely would have filed for bankruptcy on January 1. At that point, there would likely have been plenty of offers from foreign and domestic concerns for individual assets to spin off or for equity stakes in the New GM. There would have been plant closures, dealership terminations, and jobs losses, as there is under the nationalization plan anyway. But taxpayers wouldn’t be on the hook for $50+ billion, a sum that is much more likely to grow larger than it is to be repaid. It is also a sum that will serve as the rationalization for further government interventions on GM’s behalf.
U.S. Stocks Drop on Concern Over Job Losses
U.S. Stocks Drop on Concern Over Job Losses, Earnings Valuation
June 3 (Bloomberg) -- U.S. stocks fell for the first time in five days, extending a worldwide slump, as a report showed employers cut more jobs than forecast and the Standard & Poor’s 500 Index traded at the most expensive in eight months.
Aetna Inc., the third-largest U.S. health insurer, dropped 7 percent on a reduced 2009 earnings outlook. Valero Energy Corp. tumbled 17 percent after forecasting a second-quarter loss and saying it will sell shares. Russia’s benchmark equity index slid 7.6 percent to lead a decline in global equities after the MSCI World Index’s valuation reached a five-year high. Oil fell, while Treasuries and the dollar rose.
The S&P 500, which closed at a seven-month high yesterday, dropped 1.2 percent to 933.75 at 11:27 a.m. in New York. The Dow Jones Industrial Average fell 68.81 points, or 0.8 percent, to 8,672.06. Yesterday, the Dow briefly erased its 2009 loss for the first time since January.
“We’ve had a very strong move in a very short period of time and the economy certainly isn’t green-shooting in a way that justifies a lot of optimism,” said Michael Holland, chairman of New York-based Holland & Co. LLC, which oversees about $4 billion.
The S&P 500 was priced at 15.5 times the earnings of its companies at the start of trading today, the most expensive level since October, after rising for three straight months. Still, that’s lower than the average 19.8 monthly valuation over the past decade.
Jobs Concern
Economic data today showing deeper U.S. job losses and a worse-than-estimated contraction in service industries dragged stock indexes lower. Companies in the U.S. cut an estimated 532,000 workers in May, according to a private report. A government release showed factory orders grew less than expected, while the Institute for Supply Management said its index of service industries was 44 last month, missing economists’ estimates.
The Labor Department’s monthly jobs report, scheduled for June 5, may show payrolls at companies and government agencies shrank by 520,000 in May and unemployment rose to a 25-year high of 9.2 percent, based on a Bloomberg survey of economists.
All 10 industries in the S&P 500 retreated as Federal Reserve Chairman Ben S. Bernanke told lawmakers that large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.
‘Fiscal Balance’
“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”
Aetna slumped 7 percent to $25.35. High medical costs for enrolled health plan subscribers forced the insurer to reduce its 2009 earnings forecast for operating profit to a range of $3.55 a share to $3.70 a share, from an earlier projected range of $3.85 to $3.95 a share, according to a company statement..
Valero fell the most in the S&P 500, dropping 17 percent to $18.64. The largest U.S. refiner said it expects a second- quarter net loss of 50 cents a share and it plans to sell 40 million shares.
Halliburton Co., Sunoco Inc. and Marathon Oil Corp. slid more than 4.4 percent as oil declined for a second day, losing as much as 3 percent to $66.52 a barrel on the New York Mercantile Exchange. A group of S&P 500 pipeline builders, oil drillers and exploration companies slumped 2.8 percent for the steepest drop among the 10 industries in the S&P 500.
Risks ‘Quite Symmetrical’
“The downside and upside risks to equities are now quite symmetrical,” Andrew Garthwaite, an equity strategist for Credit Suisse Group, wrote in a report. He downgraded his stance on U.S. stocks to “market weight” from “overweight” on concern companies are issuing too many shares and the economy may remain weak.
Dish Network Corp., the second-largest U.S. satellite- television provider, retreated 8 percent to $15.86. A judge told the company and EchoStar Corp. to pay TiVo Inc. $192.7 million in damages and interest because their software infringes a patent and to cease selling the service to customers. TiVo surged 46 percent, the biggest gain in four years, to $10.20.
NYSE Euronext Chief Executive Officer Duncan Niederauer said he’s “a lot more confident” the three-month rally in equities is sustainable as trading volume increases. Trading volume in April and May was “quite steady, quite good,” he told Bloomberg News in an interview from Amsterdam.
The S&P 500 has surged 38 percent from a 12-year low on March 9 as the biggest U.S. banks said they were profitable last quarter, President Barack Obama outlined a $787 billion plan to revive the economy and the Treasury unveiled plans to finance as much as $1 trillion in purchases of lenders’ troubled assets.
Treasuries, Dollar Gain
Treasuries rose for a second day, pushing yield on 10-year note down three basis points, or 0.03 percentage point, to 3.58 percent. The dollar rose versus the euro for the first time in five days.
Bill Gross, founder of Pacific Investment Management Co., advised holders of U.S. dollars to diversify before central banks and sovereign wealth funds ultimately do the same amid concern about surging deficits.
The U.S.’s “fortune-producing capabilities seem to be declining, which might suggest that its relative standard of living is doing so as well,” Gross wrote in his June investment outlook posted today on the Newport Beach, California-based firm’s Web site. “If so, the implications are serious.”
Only Criminals Use Honest Money
Only Criminals Use Honest Money
I recently had surgery for appendicitis. Upon seeing me lying in a hospital bed, none of my visitors praised the bed's healing power in curing my illness. All of them understood that although my condition was eliminated at the same time that I lay in bed, lying in bed does not cure disease. They understood that two events occurring simultaneously can be coincidental and unrelated, directly causal, or linked by a third variable or sets of variables.
Obviously, my visitors were not economists or business journalists. Had they been, the media would have quickly been praising bed rest as a cure for appendicitis. That is not far-fetched. Business sections of all newspapers contain such convoluted and illogical sentiments in their articles with headlines such as "Higher Oil Prices Inflame Inflation." Sometimes they even present analogies without even mentioning the associated theory, such as warning that the economy may become "overheated."
Like my visitors, Austrian economists are not fooled, because they reject the idea of empirical data in the validation of theory in the social sciences. Reason is the only tool available for economic discovery. The difference is starkly illustrated by their treatment of the price of oil and price inflation.
Mainstream economists assert that an increase in the price of oil will increase consumer prices. After checking the consumer price index six months after an oil price spike, they proclaim their supposition correct: inflation grew by 4.7% (nobody ever questions the prerogative of government to quantify with divine precision). They consider the inability to isolate cause and effect as irrelevant.
The causal relationship, however, is precisely what interests Austrians. We ask, how can increased oil prices increase all average prices? If people must now spend more on oil, will not prices drop for the goods that they can no longer afford to purchase? However, by embracing empirical "evidence" and overlooking reason, non-Austrian economic schools have cloaked themselves in legitimacy.
In the social sciences, only in extreme and rare circumstances can experiments develop that neutralize all other variables that might contain diluting or aggrandizing effects.
But under such circumstances, might Austrian economic thought be tested and compete, legitimately, on equal footing with the perceived legitimacy of "mainstream" (i.e., Keynesian) economics?
Such a situation may currently exist with prisons in testing the validity of fiat currency. Since money is banned in prisons, the historical use of cigarettes by prisoners as money avers that money requires alternative value (i.e., value apart from its use as money) and proves that our present system of fiat currency (and fractional-reserve banking) is eventually doomed.
Prisoners exchange cigarettes for sex, drugs, gambling, and the killing of other inmates (all other recreational activities being provided free of charge by taxpayers). The cigarettes hold alternative value through their direct consumption (smoking).
And what happens to the experiment when cigarettes are banned? Like a free market moving from a gold to a silver standard, prisoners switch to the next best good that possesses the qualities demanded of money: portability, durability, homogeneity, and divisibility.
The article "Mackerel Economics in Prison Leads to Appreciation for Oily Fillets" published in the October 2, 2008 issue of The Wall Street Journal, revealed the new monetary system in prisons: cans of mackerel, or "mack" in prison nomenclature. Just as a various goods (e.g., gold, silver, copper, rice, salt, peppercorns, large stones, etc.) have long competed in the marketplace to be the standard of currency, so mack had to fend off books of stamps, PowerBars, and cans of tuna.
Fiat money does not exist in prison. Prisoners do not dye sheets of paper green and attempt to circulate them as money. No inmate would accept this as money, not even if the penal equivalent of a Bretton Woods agreement existed between the toughest gangs.
Why is it that criminals continue to use real money in their transactions? Because they have not been fooled otherwise. In The Case Against the Fed, Murray Rothbard detailed the process by which people have been fooled into thinking those green pieces of paper are a proper store of value (the key purpose of money). Once government changed the law to recognize monetary warehouse receipts (dollar bills) as a debtor relationship instead of that of a bailment (the temporary possession of another's property), fractional-reserve banking was born. Fractional-reserve banking is inherently fraudulent.
In contrast, a penitentiary does not include a warehouse issuing receipts for cigarette packs or cans of mack.If they ever do, we know what will follow: fraud (the warehouse issuing notes in excess of deposits), then government-sanctioned fraud, then government-imposed fraud, and finally — The Big House Reserve (perhaps consisting of notes with the warden's picture and Latin phrases).
Incredibly, it is those outside of prison who are truly institutionalized.
Competition
Competition
In nature there prevail irreconcilable conflicts of interests. The means of subsistence are scarce. Proliferation tends to outrun subsistence. Only the fittest plants and animals survive. The antagonism between an animal starving to death and another that snatches the food away from it is implacable.
Social cooperation under the division of labor removes such antagonisms. It substitutes partnership and mutuality for hostility. The members of society are united in a common venture.
The term competition as applied to the conditions of animal life signifies the rivalry between animals which manifests itself in their search for food. We may call this phenomenon biological competition. Biological competition must not be confused with social competition, i.e., the striving of individuals to attain the most favorable position in the system of social cooperation. As there will always be positions which men value more highly than others, people will strive for them and try to outdo rivals. Social competition is consequently present in every conceivable mode of social organization. If we want to think of a state of affairs in which there is no social competition, we must construct the image of a socialist system in which the chief in his endeavors to assign to everybody his place and task in society is not aided by any ambition on the part of his subjects. The individuals are entirely indifferent and do not apply for special appointments. They behave like the stud horses which do not try to put themselves in a favorable light when the owner picks out the stallion to impregnate his best brood mare. But such people would no longer be acting men.
In a totalitarian system social competition manifests itself in the endeavors of people to court the favor of those in power. In the market economy competition manifests itself in the facts that the sellers must outdo one another by offering better or cheaper goods and services and that the buyers must outdo one another by offering higher prices. In dealing with this variety of social competition which may be called catallactic competition, we must guard ourselves against various popular fallacies.
The classical economists favored the abolition of all trade barriers preventing people from competing on the market. Such restrictive laws, they explained, result in shifting production from those places in which natural conditions of production are more favorable to places in which they are less favorable. They protect the less efficient man against his more efficient rival. They tend to perpetuate backward technological methods of production. In short they curtail production and thus lower the standard of living. In order to make all people more prosperous, the economists argued, competition should be free to everybody. In this sense they used the term free competition. There was nothing metaphysical in their employment of the term free. They advocated the nullification of privileges barring people from access to certain trades and markets. All the sophisticated lucubrations caviling at the metaphysical connotations of the adjective free as applied to competition are spurious; they have no reference whatever to the catallactic problem of competition.
As far as natural conditions come into play, competition can only be "free" with regard to those factors of production which are not scarce and therefore not objects of human action. In the catallactic field competition is always restricted by the inexorable scarcity of the economic goods and services. Even in the absence of institutional barriers erected to restrict the number of those competing, the state of affairs is never such as to enable everyone to compete in all sectors of the market. In each sector only comparatively small groups can engage in competition.
Catallactic competition, one of the characteristic features of the market economy, is a social phenomenon. It is not a right, guaranteed by the state and the laws, that would make it possible for every individual to choose ad libitum the place in the structure of the division of labor he likes best. To assign to everybody his proper place in society is the task of the consumers. Their buying and abstention from buying is instrumental in determining each individual's social position. Their supremacy is not impaired by any privileges granted to the individuals qua producers. Entrance into a definite branch of industry is virtually free to newcomers only as far as the consumers approve of this branch's expansion or as far as the newcomers succeed in supplanting those already occupied in it by filling better or more cheaply the demands of the consumers. Additional investment is reasonable only to the extent that it fills the most urgent among the not-yet-satisfied needs of the consumers. If the existing plants are sufficient, it would be wasteful to invest more capital in the same industry. The structure of market prices pushes the new investors into other branches.
It is necessary to emphasize this point because the failure to grasp it is at the root of many popular complaints about the impossibility of competition. Some fifty years ago people used to declare: You cannot compete with the railroad companies; it is impossible to challenge their position by starting competing lines; in the field of land transportation there is no longer competition. The truth was that at that time the already-operating lines were by and large sufficient. For additional capital investment the prospects were more favorable in improving the serviceableness of the already operating lines and in other branches of business than in the construction of new railroads. However, this did not interfere with further technological progress in transportation technique. The bigness and the economic "power" of the railroad companies did not impede the emergence of the motorcar and the airplane.
Today people assert the same with regard to various branches of big business: You cannot challenge their position; they are too big and too powerful. But competition does not mean that anybody can prosper by simply imitating what other people do. It means the opportunity to serve the consumers in a better or cheaper way without being restrained by privileges granted to those whose vested interests the innovation hurts. What a newcomer who wants to defy the vested interests of the old established firms needs most is brains and ideas. If his project is fit to fill the most urgent of the unsatisfied needs of the consumers or to purvey them at a cheaper price than their old purveyors, he will succeed in spite of the much-tallied-of bigness and power of the old firms.
Catallactic competition must not be confused with prizefights and beauty contests. The purpose of such fights and contests is to discover who is the best boxer or the prettiest girl. The social function of catallactic competition is, to be sure, not to establish who is the smartest boy and to reward the winner by a title and medals. Its function is to safeguard the best satisfaction of the consumers which they can attain under the given state of the economic data.
Equality of opportunity is a factor neither in prizefights and beauty contests nor in any other field of competition, whether biological or social. The immense majority of people are by the physiological structure of their bodies deprived of a chance to attain the honors of a boxing champion or a beauty queen. Only very few people can compete on the labor market as opera singers and movie stars. The most favorable opportunity to compete in the field of scientific achievement is provided to the university professors. Yet, thousands and thousands of professors pass away without leaving any trace in the history of ideas and scientific progress, while many of the handicapped outsiders win glory through marvelous contributions.
It is usual to find fault with the fact that catallactic competition is not open to everybody in the same way. The start is much more difficult for a poor boy than for the son of a wealthy man. But the consumers are not concerned about the problem of whether or not the men who shall serve them start their careers under equal conditions. Their only interest is to secure the best possible satisfaction of their needs. If the system of hereditary property is more efficient in this regard, they prefer it to other less-efficient systems. They look at the matter from the point of view of social expediency and social welfare, not from the point of view of an alleged, imaginary, and unrealizable "natural" right of every individual to compete with equal opportunity. The realization of such a right would require placing at a disadvantage those born with better intelligence and greater will power than the average man. It is obvious that this would be absurd.
The term competition is mainly employed as the antithesis of monopoly. In this mode of speech the term monopoly is applied in different meanings which must be clearly separated.
The first connotation of monopoly, very frequently implied in the popular use of the term, signifies a state of affairs in which the monopolist, whether an individual or a group of individuals, exclusively controls one of the vital conditions of human survival. Such a monopolist has the power to starve to death all those who do not obey his orders. He dictates and the others have no alternative but either to surrender or to die. With regard to such a monopoly there is no market or any other kind of catallactic competition. The monopolist is the master and the rest are slaves entirely dependent on his good graces. There is no need to dwell upon this kind of monopoly. It has no reference whatever to a market economy. It is enough to cite one instance. A world-embracing socialist state would exercise such an absolute and total monopoly; it would have the power to crush its opponents by starving them to death.[1]
The second connotation of monopoly differs from the first in that it describes a state of affairs compatible with the conditions of a market economy. A monopolist in this sense is an individual or a group of individuals, fully combining for joint action, who has the exclusive control of the supply of a definite commodity. If we define the term monopoly in this way, the domain of monopoly appears very vast. The products of the processing industries are more or less different from one another. Each factory turns out products different from those of the other plants. Each hotel has a monopoly on the sale of its services on the site of its premises. The professional services rendered by a physician or a lawyer are never perfectly equal to those rendered by any other physician or lawyer. Except for certain raw materials, foodstuffs, and other staple goods, monopoly is everywhere on the market.
However, the mere phenomenon of monopoly is without any significance and relevance for the operation of the market and the determination of prices. It does not give the monopolist any advantage in selling his products. Under copyright law every rhymester enjoys a monopoly in the sale of his poetry. But this does not influence the market. It may happen that no price whatever can be realized for his stuff and that his books can only be sold at their waste-paper value.
Monopoly in this second connotation of the term becomes a factor in the determination of prices only if the demand curve for the monopoly good concerned is shaped in a particular way. If conditions are such that the monopolist can secure higher net proceeds by selling a smaller quantity of his product at a higher price than by selling a greater quantity of his supply at a lower price, there emerges a monopoly price higher than the potential market price would have been in the absence of monopoly. Monopoly prices are an important market phenomenon, while monopoly as such is only important if it can result in the formation of monopoly prices.
It is customary to call prices which are not monopoly prices competitive prices. While it is questionable whether or not this terminology is expedient, it is generally accepted and it would he difficult to change it. But one must guard oneself against its misinterpretation. It would be a serious blunder to deduce from the antithesis between monopoly price and competitive price that the monopoly price is the outgrowth of the absence of competition. There is always catallactic competition on the market. Catallactic competition is no less a factor in the determination of monopoly prices than it is in the determination of competitive prices. The shape of the demand curve that makes the appearance of monopoly prices possible and directs the monopolists' conduct is determined by the competition of all other commodities competing for the buyers' dollars. The higher the monopolist fixes the price at which he is ready to sell, the more potential buyers turn their dollars toward other vendible goods. On the market every commodity competes with all other commodities.
There are people who maintain that the catallactic theory of prices is of no use for the study of reality because there has never been "free" competition or because, at least today, there is no longer any such thing. All these doctrines are wrong.[2] They misconstrue the phenomena and simply do not know what competition really is. It is a fact that the history of the last decades is a record of policies aiming at the restriction of competition. It is the manifest intention of these schemes to grant privileges to certain groups of producers by protecting them against the competition of more efficient competitors. In many instances these policies have brought about the conditions required for the emergence of monopoly prices. In many other instances this was not the case and the result was only a state of affairs preventing many capitalists, entrepreneurs, farmers, and workers from entering those branches of industry in which they would have rendered the most valuable services to their fellow citizens. Catallactic competition has been seriously restricted, but the market economy is still in operation although sabotaged by government and labor-union interference. The system of catallactic competition is still functioning although the productivity of labor has been seriously reduced.
Human Action Scholar's Edition:
It is the ultimate end of these anticompetition policies to substitute for capitalism a socialist system of planning in which there is no catallactic competition at all. While shedding crocodile tears about the decline of competition, the planners want to abolish this "mad" competitive system. They have attained their goal in some countries. But in the rest of the world they have only restricted competition in some branches of business by increasing the number of people competing in other branches.
The forces aiming at a restriction of competition play a great role in our day. It is an important task of the history of our age to deal with them. Economic theory has no need to refer to them in particular. The fact that there are trade barriers, privileges, cartels, government monopolies and labor unions is merely a datum of economic history. It does not require special theorems for its interpretation.
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