Figure 1: caricature of Wibaut
(source: autobiography Levensbouw)
Of old the social-democracy has defended the opinion, that the economy is subject to the progressing concentration of industries. More and more combinations (trusts and cartels) were supposed to form, which would lay the foundation for political imperialism. The present column studies this doctrine by means of two sources, namely Trusts en kartels by F.M. Wibaut and Das Finanzkapital by R. Hilferding. Their prediction is compared with modern economic ideas about collusion and concentration. Although it is true that often the perfect competition is absent, the apocalyptic vision of the future is totally unsound.
Already in 1878 in the Netherlands the Sociaaldemocratische Vereeniging was formed1. Its chairman was the well-known Hendrik Gerhard, whose activism dates back to the First Socialist International. In 1881 the Sociaaldemocratische Bond is established, and in 1888 the league enters parliament in the person of Ferdinand Domela Nieuwenhuis. Yet the league is more an interest group than a political party with her own ideological program. The movement is intellectually insignificant, and mainly conforms itself to the powerful German social-democrats. The German movement disposes of authoritative thinkers in the persons of Karl Marx and Friedrich Engels. It is important for the present column, that Marx attaches a deciding importance to the concentration of power in the private enterprises. The necessity to reduce the costs of production forces the enterprises to perpetually increase their scale of production.
It is obvious that the industrial concentration has consequences for the social structure, because that process slowly undermines the perfect competition. Therefore it is logical, that the subject is placed on the agenda during the congresses of the Second Socialist International, starting at the congress of 19002. It is typical for the Dutch social-democrats, that they still lack the intellectual capability to autonomously analyze the economic developments. Even the thinkers of the magazine De Nieuwe Tijd, such as Rudolph Kuyper and Pieter Wiedijk, ignore the subject3. Only in 1903 the first social-democratic study about concentration is published, namely the book Trusts en kartels by Floor Wibaut4. In the following years Wibaut continues to regularly publish about the concentration, but without developing new insights5. This shows that even a quarter of a century after the rise of the Dutch social-democracy she still depends on individuals.
In Trusts en kartels Wibaut describes the emergence of entrepreneurial combinations, which then in the Netherlands are still called associations of entrepreneurs. The goal of the combinations is to make mutual arrangements, so that the perfect competition is eliminated, and therefore the total profit can be increased. According to Wibaut the combination is the only manner to prevent, that the enterprises incur losses. He states that the affection of the profits is inevitable, which is obviously not true. Your columnist assumes, that here Wibaut conforms himself to the theory of Marx, which predicts a structurally falling rate of profit. Wibaut believes, also in accordance with the theory of Marx, that enterprises are forced to increase their scale of production in order to reduce their costs. Merely the progressing mechanization is able to continually raise the labour productivity.
In the cartel the united enterprises make arrangements about the production, but they otherwise remain autonomous. In the trust the united enterprises lose their independence, and merge into a single large enterprise, so that each member becomes a share-holder. Wibaut does not make a principal distinction between the cartel and the trust. He states that the choice for one of these forms of organization is mainly dictated by the laws of the concerned state. Namely, some states impose restrictions on the formation of cartels. The primary goal of trusts and cartels is the maximization of profit. This can be done in two ways: savings can be made on the costs, and the product price can be raised. The second way is obviously merely effective, as long as the market share of the combination is sufficient to effectively influence the price.
Not every agreement will result in a combination. Consider agreements about the standardization of products, which limit the differentiation. It is curious that Wibaut identifies trusts and cartels exclusively with the existence of a falling rate of profit. There must be overproduction. In his view a prospering branch, that wants to raise the profit by means of mutual agreements about price and production, is not a combination. He adds, that in such a situation the urge to increase scales is absent6. The limitation of the concept of combinations is strange, and is probably due to dogmatism. Since the year 1880 the formation of combinations increases immensely in all industrial states (notably Germany and the United States of America (USA), and to a lesser extent in Great-Britain). Wibaut mentions illustrious names, such as Standard Oil and the United States Steel Corporation.
The savings on costs is realized by establishing a collective sales office. Then the number of salesmen can be reduced drastically, and moreover less expenses are made on advertising. And the office staff can usually be reduced as well. Furthermore, henceforth each factory supplies merely the clients in his immediate surroundings, so that the costs for transport are diminished. If desired the trust can even close the least profitable factories. Besides, it can appoint the then most successful entrepreneur in the combination as its general director. The product price is manipulated by restricting the sales of products. The cartel determines for each affiliated entrepreneur the amount of product, that may yearly be manufactured. The sales office is obliged to buy the production of the affiliated enterprises.
All in all Wibaut prefers the trust above the cartel. The trust can introduce the best production techniques in the whole organization. It can build large factories, so that the production profits from advantages of scale. And it can integrate vertically in a fairly simple manner, that is to say, buy its ancillary suppliers and/or clients. At the time the vertical integration was a weapon against possible competitors. For instance, the American robber barons bought the rail roads, so that they could raise the transport tariffs for their competitors. In this era Rockefeller could pay a dividend of 50% on his shares! Nowadays such malversations are legally prohibited, so that the vertical integration has become less popular. The present enterprises retreat to their core activities, where they can excel.
The combinations offer additional stability to the affiliated enterprises. The buyers and clients pay for this by means of the high (product) price, because the savings of costs are not completely passed on to them. Often the profit of the enterprises after the affiliation makes a stepwise jump upwards. This all in all increases the value of the enterprises. Especially in the USA this was anticipated in the capitalization of the combination. In other words, after the affiliation more shares are sold than the value of the enterprises at that moment justifies. At the time this led to speculative behaviour by the banks and investors, such as C.M. Schwab and J.P. Morgan. Sometimes it failed, so that many small savers were left behind penniless.
The book Trusts en kartels is mainly filled with many examples of the rise of trusts and cartels everywhere in the world. This is a dull matter, and its significance is not clear. For, the global rise of combinations does not imply, that henceforth they will control the global economy. Wibaut does not even try to calculate their contribution to the gross domestic product. Incidentally, this is probably impossible, because at the time the necessary statistical data were not yet collected. Lacking a better alternative, Wibaut uses a far-fetched argument for demonstrating the dominance of the combinations. Namely, when somewhere a combination is formed, then she obtains a preponderance of power with regard to her ancillary suppliers and clients. Therefore the ancillary suppliers and clients can only improve their bargaining position by forming their own combinations.
Sometimes the ancillary suppliers try to escape from the combination by establishing their own cooperation, which takes over the production of the combination. Wibaut rejects this idea, because in the long run the cooperation can not compete with the combination. All in all Wibaut believes that the combinations, and especially the trusts, improve the capitalist mode of production (see p.171). And on p.178 he is positive about the transformation of competing entrepreneurs into allies. This eliminates the tricks, manipulations and mutual deceit, that is common in perfect competition. That is a moral victory. It is true that the combinations continue to intrigue towards outsiders, and often they can suffocate small competitors by means of their enormous market power. The combinations usually pay fairly decent wages, and the job security increases. Therefore on p.212 and p.227 he states that it makes no sense to fight the combinations by means of legislation. The affiliation is simply a necessity (see p.219).
Wibaut can discern just one solution, namely the transfer of the combinations into collective property. But that will take some time. Herman de Liagre Böhl gives in his biography Wibaut de machtige a rather sarcastic commentary about the meekness of Wibaut7: "Wibaut presents the nationalizations as a revolutionary deed out of nowhere. According to Trusts en kartellen nothing must be done". And: "His book was a rather scholastic elaboration of a resolution about trusts and cartels, which in 1900 had been accepted by the congress of the Socialist International in Paris". He adds that Wibaut himself as a manager in the timber trade participates in his own cartel. Thus the advocated standpoint coincides with his self-interest. In any case, here Wibaut defends a position, that is more conservative than the then liberal view!
Since the publications of Wibaut about the industrial concentration do not answer all questions, it is worth searching elsewhere in the social-democratic literature for more explicit explanations. A leading document is the book Das Finanzkapital, which was published in 1910 by the SPD-politician Rudolf Hilferding (incidentally, from an Austrian origin)8. This work is theoretically more sound than Trusts en kartels by Wibaut, and incidentally also covers a wider collection of themes. Contrary to Wibaut, Hilferding mainly limits his studies to the German Empire. Nevertheless, Hilferding believes that his conclusions have a universal validity. The depth of his analysis has the unexpected effect of showing that the then social picture of the social-democracy is actually based on speculations and even wishful thinking.
Hilferding builds his arguments on the theory of Marx. Just like Wibaut (and at the time perhaps the whole social-democracy) Hilferding believes that in the coming decades the general average rate of profit in the industry will exhibit a falling tendency. He simply copies this hypothesis from Marx, without examining the controversial character of the statement. Finally this is supposed to lead to bankruptcies, and therefore the entrepreneurs prefer to concentrate their activities in the form of combinations. Hilferding and Wibaut largely agree in their description of the combinations (cartels and trusts, horizontal and vertical, sales offices etcetera). Hilferding merely plays down the need for overproduction in the establishment of cartels9. The main difference between both authors is Hilferding's focus on the specifically German situation, and on imperialism.
Hilferdings defines the financial capital (in the German language Finanzkapital) as the whole of banking, commercial and industrial capital. At the time the German banks are deeply involved in the industry. For instance, a bank only gives a credit to an enterprise, when she may appoint a representative in its board of supervisory directors. It is true that only the shareholder companies have such a management structure, but precisely this type increases in numbers. So the banks intervene in the policy of the enterprise. Their ideal is stability and the minimization of risk. This motivates them to further the formation of cartels. Besides it is common in Germany, that the banks themselves are active in the trade of shares and futures. In fact the banks partly take over the function of the exchange in stocks and shares. Thus the interests of the banks and industries become intertwined.
The banks can obviously only speculate with their own capital, due to the risks involved. Therefore the banks also benefit from an increased scale. Besides, the number of extremely wealthy Germans is small, so that they are not serious competitors for the banks on the stock exchange. The investment capital for the industry must mainly come from the savers of the banks. In other words, the banks represent the owners. The industrial cartels in turn subjugate the commerce to their interests. Then the industry can dictate the market price of its product. Branches without cartels are subject to competition and have a relatively low profit. Their enterprises are vulnerable, and may soon become the victim of a cartel10. Thus each cartel is a gigantic block of power. In the last resort a single cartel could dominate the entire German economy (p.349).
Here Hilferding notes, that the concentration must not necessarily follow this German model. In the United States of America (in short USA) the concentration in the industry and commerce increases significantly, although there the banks are less powerful. The formation of trusts and cartels is stimulated, when the state decides to levy customs tariffs on foreign import. Thanks to the tariffs they can push up their product price above the price on the world market, so that they make an extra profit. In the era of Hilferding, Great Britain still advocates free trade, whereas Germany and the USA protect their domestic markets (notably against English products!). Therefore in the latter two states the combinations are extremely popular. The accumulation of capital is accelerated by it.
It has just been remarked, that the theory of Hilferding is special due to her analysis of imperialism. When the developed markets protect their domestic markets by means of customs tariffs, then this hinders their mutual trade. At the time especially Germany and the USA are the villains in this respect. Therefore these states must find new markets for their export products. They try to create them by colonizing the globally under-developed regions. This is only possible when their state power increases due to additional armament, which if desired can be paid partly from the high import tariffs. They want to build op their own trade imperium. The state intervenes in the economy, first with the customs tariffs, and next with military pressure and force. The colonies are exploited in a cruel manner, and their reserves of raw material are plundered.
Hilferding believes, that a state with an imperialistic policy is stronger than a state, that advocates free trade. It has monopolistic industries, which are richer and consequently also technologically superior. A military-industrial complex is formed, which guarantees a military dominance. In short, monopolistic imperialism gives an advantage. Thus Hilferding is convinced, that finally Great Britain will be forced to also abandon the free trade. All large trade blocks are mutually involved in a fierce global competition, and oppose each other in an implacable hostility.
For a moment Hilferding seems to recognize the nuances in his vision of the future. Namely, he states that in imperialism the global capital becomes more and more mobile. The trade blocks begin to invest in each other's foreign enterprises, and that has a reconciling effect (p.499). And in each trade block some groups of entrepreneurs plead in favour of more free trade. But all in all Hilferding is not convinced, and certainly not with regard to Germany, where he observes a nationalistic fanaticism. The nation supports en masse her cartels and armies. The reader may remember that De Liagre Böhl advocates political action to guarantee the free trade. But actually Hilferding resigns himself, just like Wibaut. He believes that the monopolistic imperialism is an improvement in comparison with free trade and a natural development, which can not and must not be reversed. For, the production becomes social.
Even worse, he would also welcome the disappearance of the shopkeepers, small entrepreneurs and private farming. The monopolistic capitalism is the highest form of capitalism. In chapter 25 (the conclusion) Hilferding admits that there are disadvantages. The concentration of the industries leads to cartels, and these cause rising prices and nationalism. The power of the state increases, among others due to armament, and a real chance of large wars emerges. Hilferding expects, that the citizens will finally no longer accept this development. They will try the revolt the system. Here the proletariat (the working class) has a pioneering role, and it will replace the capitalist state by its own dictature. Thus socialism is born, as the highest form of civilization.
Your columnist expects that the reader will be as flabbergasted by this apocalyptic prediction as he himself is. It is obvious that such a development can not be excluded, but many forces oppose it. Other options are at least as probable as Hilferding's. For instance, his colleague and congenial Karl Kautsky believes that a peaceful imperialism is possible, and he calls it ultra-imperialism11. And Hilferding hardly cites statistical data to support his arguments, even less than Wibaut. Therefore it is unclear whether the concentration indeed advances in such a vigorous manner as he himself suggests. Even when it is admitted that at the time the concentration and colonialism are very actual, it is nevertheless difficult to understand how this theoretician could get loose from reality to such an extent. Incidentally, the reproach of wild dogmatism concerns the whole traditional social-democracy12.
In modern times it is clear that the industrial concentration is not a universally obligatory development. Everywhere the shopkeepers and small entrepreneurs are alive and kicking, whereas the individual farms turn out to be the best operational structure in agriculture and cattle-breeding. The theory of monopolistic imperialism was a chimera, which was used to deceive the citizens. The Great Depression since 1929 has made clear that the protection of the domestic economy by the state is hurtful for all states. Nowadays states try to realize as much free trade as possible. Nevertheless, in some branches the concentrated industrial operation keeps its ground, which is generally called the oligolpoly. It is useful to study the findings of modern economics with regard to oligopolies. For this purpose your columnist again consults the book Industrial organization in context by Stephen Martin, which has already been mentioned in a preceding column about the oligopoly13.
Martin refers to the formation of a cartel as a collusion. She is an agreement, which can be formal or silent. In the latter case the enterprises carefully observe each other's actions, and subsequently take this into account in their own operations. Wherever possible they try to realize the monopoly price for their product. The state will commonly prohibit overt agreements of collusion. Therefore it occurs regularly, that enterprises make secret agreements. Then their bookkeeping must take into account the possibility, that the collusion is discovered and punished with a fine. That can be rewarding, because the cartel can keep the product price high. According to Martin on p.202 cartels turn out to on average keep the sales price 25% above the cost price. This number is called the Lerner index of market power.
In situations of a secret collusion on average six enterprises are involved (p.206). Such collusions are sometimes maintained for several decades. Collusions are conceivable in any form or seize. There are indications, that sometimes large enterprises tolerate small competitors on their market merely to conceal the true concentration of market power. Another form of concentration is the enterprise, that is the first to introduce a new product on the market (at the moment AppleRT comes to mind). Such an enterprise starts with a high product price, and subsequently will slowly expand its market buy reducing the price. Here it must also take into account the trade in second-hand products. Martin mentions as an example the market for aluminum (p.217). Monopolies are rarely absolute!
Another form of concentration is the oligopoly, where a single enterprise has sufficient power to enforce its own sales on the rest. This is called a Stackelberg oligopoly. A cunning form of concentration is the deterrence of possible new entrants on the market. For, a newcomer must make certain startup costs, the so-called sunk costs. Now the oligopoly must (be able to) make the product price so low, that the newcomer can not earn back these sunk costs. This strategy is naturally only possible, as long as this price of deterrence is above the production costs of the oligopoly. Therefore the potential newcomer must estimate what those production costs are. Reversely, the oligopoly has an interest in concealing its true production costs (see p.222-228)!
An alternative for the cartel is the price leadership by one of the involved enterprises. Then the other enterprises are price followers. This also illustrates, that the theory of the traditional social-democracy is much too dogmatic. According to Martin half of the largest hundred enterprises in 1912 has disappeared in 1995 (p.231). He suggests that perhaps large enterprises have a temporary competitive advantage. Nevertheless the entrepreneurship sometimes degenerates into a disgusting phenomenon, like Wibaut rightly concludes. For instance, the dominant enterprise can conquer the market by means of predation. Notorious was at the time Standard Oil of Rockefeller, which destroyed regional competitors by temporary selling below the product price. This is called a price war. Incidentally, trusts and cartels have also applied this strategy. They have even stated during inquiries, that their strategy is sound and natural!
This predatory behaviour leads to considerable damage for the consumers. It has been an important reason to henceforth forbid collusions. The consumers themselves are too myopic to boycott the predator-producer. A somewhat less cruel strategy of a combination or oligopoly is to be secretive about her profits. This prevents that newcomers are drawn to the market. Fake firms can be established to feign the illusion of a fierce competition. It is even possible, that the enterprise colludes with the trade union for raising the wages and thus increasing the costs for the competition (p.253)! Remember the struggle of the unions of airline pilots. A variety of this strategy is the political lobby for more strict environmental regulations, in order to protect the domestic enterprises. It is not all gold, that glitters.
Another find is the bundling of products. The enterprise can force its consumers to buy two products at once in a single sale. This is profitable in situations, where a competitor has a cheaper offer for one of the products. For, when the consumer also needs the other product, then he is obliged to buy the bundle. When the competitor has been pushed from the market, then subsequently the consumers can merely buy the bundle, even those who do not need the other product. The reader will undoubtedly know examples of this strategy from his own experience. It may now be clear, that on many markets of products and services the supply is not at the lowest costs. That is evidently a bad thing. Nevertheless, this situation is much better than the monstrous picture of economic concentration, which was presented by the traditional social-democracy as their truth.
In retrospect it may be concluded, that the then experts of social-democratic origin have a twisted view on industrial concentration. In itself such a risk is unavoidable during a process of truth-finding. It is more painful, that Wibaut even decades later still insists on his erroneous ideas. Thus in 1920 the socialization committee, which he chairs, defends the statement, that branches structurally tend to concentrate. The committee expects, that thanks to the concentration the costs of production will fall. Product differentiation is rejected. It has a sceptical attitude towards perfect competition, because she would allow backward enterprises to survive. It is not recognized, that competition furthers efficiency, which will be lost after the socialization of the enterprises. In this manner the committee willingly remains blind for the economic insights of that time.
To be fair it must be admitted, that then the Dutch social-democracy is in an awkward position. Her dominant German sister SPD had always paved the ideological way, but since 1929 in the Great Depression the SPD is increasingly hindered in her activities by the rising fascism. In the Dutch political system the roman-catholic pillar is a somewhat congenial spirit, and that makes it attractive to copy the idea of corporatism. Therefore the social-democracy develops in a direction, that in the neighbouring states does not emerge. After the Second Worldwar the corporatistic institutions of the state turn out to be a failure. However,although the Dutch course may be understandable, the fact remains that the leading social-democratic politicians like Troelstra, Wibaut and Schaper have completely misjudged the developments14. Even the restrictions on free trade are observed with satisfaction. De Liagre Böhl is right to be critical in this respect.
Moreover, the impression is created, that the social-democrats (also the foreign ones) have embraced the concentration theory in a rather opportunistic manner, because she fits well with their ambition of a complete socialization. They suggest, that the entrepreneur can be replaced by a system of bureaucrats. In reality the concentration theory was at the time already controversial, and too speculative to justify a political revolution of society. The theory of imperialism suffers from the same defect. Hilferding is also carried away by this dogmatism, in a dangerous manner. An as soon as such a dogma has established itself, it is hard to abandon it again. In the Netherlands the reorientation occurred in 1947, when the PvdA was founded, and in Germany only in 1959, when the Program of Godesberg was published. So the reader be warned for preachers, who pretend to know it all.
In retrospect both the concentration theory and the theory of imperialism turn out to contradict the true developments. It is true that sometimes an industrial concentration occurs, but definitely not in all branches. Moreover, the life of a combination is always limited. Free trade and the spirit of free enterprise are advantageous and desirable for all states. At the same time it must be concluded, that the economy does sometimes not exhibit free competition, where the cheapest producer wins the struggle for the market. The market share is defended with many underhand and sometimes illegal means. In the end power decides. But this picture, although unpleasant, does not at all resemble the infernal apocalypse, that has been sketched by the traditional social-democracy15.