The Case for Free Enterprise

Steven Cord

[Reprinted from Incentive Taxation, Spring 1978]

Freedom and equality are the two standards for judging the moral worth of anything -- our economic system included. By these two standards, how does free enterprise fare?

Take freedom first. Which economic system allows producers to produce what they will, and consumers to buy whatever is available? Obviously, free enterprise.

It is the system by which the exchange of goods is done by free consent of the parties involved. A government-directed economy, on the other hand, authorizes some people to choose what others will produce and consume.

"To each the fruits of one's labor," is the free enterprise dictum. To take away those fruits against the worker's or capitalist's will and redistribute them according to the will of some government bureaucrat, as socialism and communism would do -- that is slavery to the degree it is done. If a worker owns his labor, then he owns what his labor can produce, and he can legitimately exchange his labor for the labor of others; and what others are willing to give him for his labor in a free market is his just wage.

And in this way we can justify the private ownership of capital (factories, machinery, etc.). After all, capital is the product of labor; in fact, is it not saved-up past labor? And if labor can be privately owned, then so can capital.

Determining the just value of wages and profits should present no major problem. Let the free market decide. When that is done, then wages and profits become the measure of how well the worker and capitalist are satisfying the needs of others.

Free enterprise de-centralizes economic power into the hands of many producers and many consumers as they make their innumerable free exchanges. In this way we avoid the danger of dictatorship which arises from centralizing economic power into the hands of government officials who already have the political power.

There are only two basic ways to distribute wealth: by free exchange of producers and consumers, workers and employers -- or by force, as special interest groups contend with each other, seeking subsidies, higher prices, higher wages and other special privileges with no guide but greed and guile, and how long will democracy last under such ripping and tearing pressures?

Equality

Equality, too, is served by free enterprise. The system requires that no producer can monopolize the supply of a commodity, thus limiting the equal freedom of choice of others in their producing and consuming. Under free enterprise, the only limit on our free choice is our ability to pay; and so society is required to end discrimination in the marketplace on any grounds other than ability to pay.

In a socialist economy, a government bureaucrat has greater power than others -- he is more than equal -- in determining who gets what and at what price. And the consequence is that we are less than equal.

Efficiency

By the test of economic efficiency, the free enterprise economy wins also. The pricing system induces labor and capital to flow to where they are most needed. If computers are in short supply, for example, then computer wages and profits will be high, thus attracting labor and capital from other sectors of the economy -- appliances, let us say, or education -- where wages and profits are low. From the latter sectors, labor and capital would be positively repelled.

So we have a two-fold action, of attraction and repulsion, causing the gradual redistribution of economic resources from where they are least needed to where they are most needed. The redistribution takes place as naturally as water seeking out its level; or perhaps more like molasses doing so, since it does take a little time for labor and capital to redistribute themselves throughout the economy.

This efficient allocation of labor and capital is done automatically. Could a government agency do it as well, and without violating the freedom of individuals?

Competition: Alive & Well

Vigorous competition is the life of a free market. It rewards the producer who can best satisfy the consumers. It penalizes waste with threat of bankruptcy. It drives prices down to the cost of production. Fine, but does competition really exist in today's economy? If you had any doubts about the matter, consider these facts:

• The increase in conglomerate mergers have done little to decrease competition. If a conglomerate owns a food manufacturing concern and an auto parts company, wherein is competition affected?
  
• Many detailed studies of the actual pricing policies of large companies in concentrated industries show that "they are likely to achieve lower prices over time than less concentrated industries." (see J. Fred Weston, UCLA, presentation before the U.S. Price Commission, 4/6/72; also L.W. Weiss' 1970 study for the Antitrust Division as presented before the Joint Economic Committee on 7/10/70; but bear in mind that these studies use B.L.S. price statistics which show more rigidity because they use list prices and not the real prices reflecting discounts, extra services, free goods, etc., nor do they reflect long-term quality improvement, so that these concentrated industries display .more price lowering than even the studies indicate.) And it is good to know that European studies confirm the American ones (see Louis Philips, "Effect of Industrial Concentration: A Cross Section Analysis for the Common Market," Amsterdam, 1971).
  
• Six studies of monopoly in this country and abroad show that the impact of monopoly is slight indeed: one study (Harberger) concluded that eliminating monopoly in the U.S., and thereby making more efficient the allocation of resources, would raise income by no more than 1/13 of 1 per cent (American Economic Review, 6/66, p. 393).
  
  Net profits after taxes are only about 8% of G.N.P., and monopoly or semi-monopoly profits are only a small part of that 8%. The impact of monopoly on our economy today cannot be very great.
  
  
• If an industry has exceptionally high profits for a long period of time, then that would be proof it is not fully competitive. But only a few industries enjoy such long-term high profits and they are unique in having high barriers to entry; i.e., it was difficult for new competitors to enter the industry because of patent monopolies, control of natural resource lands, or very high initial investment requirements (auto-making, for instance).
  
  Such high-barrier industries account for about 10% of total manufacturing output -- and manufacturing itself is less than a third of our total G.N.P., and the other two-thirds is generally acknowledged to be more competitive than even the manufacturing sector!
  
  High growth and high efficiency industries also have high profit returns, but only temporarily and besides these conditions deserve higher profits. Some industries are highly concentrated -- i.e., the top eight firms produce most of the output -- but such industries also tend to have high growth, high efficiency and high barriers-to-entry. Once we eliminate those factors, high concentration is seen by itself to have little effect on long-term profitability. Mere concentration by itself doesn't indicate lack of competition. It may only indicate a free preference by consumers for certain goods and services.
  
• Nor has there been a significant decline in competition over the years. There has been no increase in the high-barrier industries, nor since 1945 has the output of the concentrated few-competitor industries increased faster than the economy at large.
  
  The leading authority in this area, Professor M.A. Adelman of M.I.T., suggests that the concentration of industry in the United States varies slightly from year to year, changing "at the pace of a glacial drift."
  
  The market percentage of value added for the four largest firms in the 50 largest industries changed as follows, 1947-1970:
  
  

  increased	17
  no real change (under 3%)	18
  decreased	15

  
  (Source: U. S. Statistical Abstract, 1973, pp. 706-709)
  
  According to one experienced observer, Henry M. Schachter, "In almost no major consumer goods category ... is there a brand on top today which held that position ten years ago." (Alvin Toffler, "Future Shock," pp. 70-1)
  
  There are only three major networks, but it is well known how fiercely they compete for higher Nielsen ratings for their shows. The consumer is surely king.
  
  
• Affluence and better transportation have increased competition. With the car, consumers now have many more stores to choose from. Producers invade each other's market (little of that before 1890). Constant growth allows room for new competitors, and new inventions and management techniques threaten old leaders.
  
• Price competition is not the only kind of competition: our auto makers, for example, compete vigorously on style, sales, advertising, service, quality and technological innovations.
  
• Considerable inter-industry competition exists (and is growing): there is competition between TV and furniture, autos and fur coats, cotton-wool-artificial fibers, oil-coal-gas, paper-glass-aluminum-steel in the container business; supermarkets and drug stores, etc.
  
• Considerable competition exists within corporations for jobs and advancement. The high pressure of corporate executive life is proof of this.
  
• Then there's countervailing power: big buyers neutralize big producers (General Foods can't intimidate A&P, nor can GM intimidate Firestone, etc.).
  
• Growing imports threaten monopolies.
  

Perfect competition does not exist in America today, but it is still the dominant force in our economy, and it shows no signs of fading away. It is healthy enough to make socialism unnecessary. And vigorous anti-trust action can continue to keep our economy competitive.