The American consumer is, in the Great Society, the forgotten man. Antipoverty programs, the closed shop, foreign aid, minimum wage hikes benefit him little and are ultimately at his expense.
The consumer cannot count on the unselfish munificence of the government to look after his interests. Instead, he had best place himself in the hands of the self-serving competitor. The forces of competition alone can be counted on to compel suppliers, in an enterprise system geared to self-interest, to achieve results which will advance the welfare of the consumer.
The vigor of the competitive process is, therefore, our main assurance of social benefit and consumer welfare. Protecting and strengthening the competitive process (which is quite different from protecting the individual competitor) is the white hope of the consumer.
The main peril to competition is not bigness, not concentration, not conglomerates (variegated product lines), not mergers, not even price conspiracies. Instead, the main peril is prejudice: distrust of the competitive system in its modern guise. The roots of this prejudice are basic misunderstandings concerning the economics of consumer welfare. Six economic fallacies are particularly important:
- That competition is declining and is now an untrustworthy control device.
- That competition becomes "cutthroat" unless curbed by government.
- That profits are at the expense of the consumer.
- That advertising makes consumers captive and is economic waste.
- That the best way to take care of the incompetent is to make competition soft.
- That job security is best attained by slowing down economic progress.
Let’s look briefly at each of these misconceptions. Although unobtrusive and eminently respectable, these economic misunderstandings are pervasive and perilous. They are working to undermine the protection that the consumer gets from vigorous competition.
1. Competition Is Declining and Is Now an Untrustworthy Control Device
Looking back nostalgically at the Tom Sawyer economy, we get a glowing glimpse of a structure of competition quite different from today’s. We see small, independent, local business firms by the thousands: the local grist mill, lumber mill, brewery, and carriage shop. What we forget is that each of these glorified competitors had a tight little locational monopoly sheltered by miserable transportation. What we often fail to see in our modern economy is the competition that counts. This competition is outside the purview of the conventional antitrust case. It creeps in on little cat feet, unobtrusively at first. It is not quite respectable at the start (for example, the discount houses and early supermarkets). It often works its beneficial miracles below the surface of consumer consciousness through the vehicle of "value-analysis" by industrial purchasers (such as the revolution in welding, die casting, and oxygen furnaces). Its fiercest fighting front is often the research laboratory. This is the competition that counts because it produces decisive cost savings, usually as a result of revolutionary new technology or spectacular rearrangement of functions, or dramatic displacement by substitutes. Generally speaking, it is outside the purview of the conventional antitrust case and the stereotyped concentration indices.
It is frequently an invader from outer space, that is, from a different industry or a foreign nation.
This is the competition that keeps the American economy among the most competitive in the world and that assures the American consumer a high and rising standard of living.
2. Competition Becomes "Cut-Throat" Unless Curbed by Government
One heritage of the great depression is a generalized fear of excessive competition. This fear leads on to the belief that the government must restrain these excesses by legislating minimum profit margins, for example, state "fair trade" statutes and laws against "selling below cost." This misconception has had an important role in shaping public policy, which is opposed to competition in several sectors of our economy, notably agriculture and transportation. Thus, despite formal professions of faith, the evidence is that we really don’t believe in an enterprise economy — at least in these sectors. The precedent and the preconception that lie behind it are perilous for other sectors of our economy.
"Cut-throat" competition is a bogeyman whose influence is powerful but unwarranted. It is unwarranted because the degenerative tendency is a myth, probably. Even if true, it’s hard to see how competition can really be excessively vigorous from the viewpoint of the national interest. The misconception arises partly from confusing injury to an individual competitor with injury to the competitive process. Competition, if it is effectively to serve the consumer, must injure individual rivals and even annihilate some. And the notion that this elimination of the unfit will inevitably reduce surviving competitors to a sole monopolist is a theoretical extrapolation, unsupported by experience and applicable in only a few industries where scale economies are overwhelming relative to the small size of the market.
3. Profits Are at the Expense of the Consumer
It is almost standard operating practice for people who profess concern for consumer welfare to view corporate profits as being at the expense of the consumer and opposed to his welfare. This antiprofit bias infuses the viewpoints of many officials in big government and particularly of those in regulatory commissions.
We should all recognize that profits are usually an index of success in serving the public. In a competitive industry, most of the profits go to the more efficient suppliers, not to the marginal supplier whose costly output is nonetheless required to satisfy the full demand at the prevailing market price. The consumer gets a bargain in the few profit pennies per dollar he appears to pay. He pays less than appears for two reasons. First, because losses that are not formally book-kept are not offset against reported corporate profits. Second, because equity capital, which is costly, is treated in accounting as a free good. The consumer gets a bargain, not only because corporate profits are partly illusory, but because the hope of profits and fear of losses (what makes the mare go) is the cheapest known form of incentive and remuneration.
4. Advertising Makes Consumers Captive and Is Economic Waste
Appalled by the huge sums spent on the advertising and annoyed by being a part of a captive audience, grieved by the gullibility of all consumers except themselves, and aroused by exposures of the hidden persuaders, many well-meaning reformers believe that advertising disfranchises the consumer and wastefully cancels claim against outrageous counterclaim.
Looking at the matter from the standpoint of the national interest in consumer welfare, we should recognize that advertising economizes leisure and is a cheap way for consumers to pre-shop. The most that advertising can do is to get a person to try the product; and his own experience with it, plus reports from his acquaintances and the synthetic experience of consumer research services, develops immunizing skepticism.
We should also recognize that advertising opens many more doors to new and beneficial competition than it closes. The best weapon against the hidden persuader of one manufacturer’s advertising is that of his competitor, particularly the countervailing power of distributor brands which erode the consumer franchise of a manufacturer’s brand.
5. The Best Way to Take Care of the Incompetent Is To Make Competition Soft
Much anticompetitive legislation and administrative and judicial case law is rooted in the thoroughly American and highly laudable desire to take care of the incompetent. The question is not whether society will look after the unfortunate. In this our society is doing a good job. The danger, instead, is that we will take care of them in the wrong way, that is, in a way that will deter incentives for self-improvement and will block the automatic adjustments of a competitive economy and prevent its serving consumers best. Charitable treatment of the less fortunate will be more efficient and less damaging to the growth and strength of our economy if it is entirely divorced from trying to protect the individual competitor against the consequences of his own non-competitiveness.
6. Job Security Is Best Attained by Slowing Down Economic Progress
The quest for job security is universal. Each of us is very much alive to any peril to our job. Most of us would like to feel that a beneficent government will look after this vital matter and make sure that economic change will not imperil our job.
Unfortunately, the competitive process has few champions and no lobby. The job security of the individual citizen can best be achieved, not by placing roadblocks in the path of technological progress, but instead by removing them. Society is better off to help the individual solve his problem of adapting to economic progress by supplying information, incentives, and opportunities for re-education, rather than by trying to slow down economic progress.
Economic misunderstandings like these six are causing a widespread, almost unconscious prejudice against competition. There is disconcerting reluctance to rely upon competition for the impersonal force which compels individual competitors, each geared to self-interest and trying to increase his own market power, to unconsciously serve society.
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The Crafty Communists
Red China has investments in Hong Kong which exceed that of American firms. These investments are in profit-making going concerns so as to earn hard currencies.
Item from the souvenir book supplied guests of the Peninsula Hotel in Hong Kong.