Price Competition and Expanding Alternatives

Dr. North, economist, lecturer, author, currently is an associate of Chancedon, an educational organization dedicated to Christian research and writing. His latest book is An Introduction to Christian Economics, Craig Press, 1973. He is the editor-publisher of the Remnant Review, a fortnightly economic newsletter.

The decisive impetus toward capitalism could come only from one source, namely a mass market demand, which again could arise only in a small proportion of the luxury industries through the democratization of the demand, especially along the line of production substitutes for the luxury goods of the upper classes. This phenomenon is characterized by price competition, while the luxury industries working for the court follow the handicraft principle of competition in quality.

Max Weber¹

We usually think of Karl Marx and Friedrich Engels as the two major critics of the coming of modern capitalist methods of production. Yet in terms of their impact on the thought of mid-nineteenth century European life, the founders of "scientific socialism" were of small importance. It was Lenin and the Bolsheviks who made Marx’s thought, in retrospect, the pinnacle of criticism, the touchstone of anti-capitalism. It was not Marx or the radicals who sat in Parliament and produced the famous Sadler Report of 1831-32, that massive, detailed, and highly biased enquiry into factory conditions in Britain, but rather conservative critics of the New Industrialism, and their temporary allies, reforming liberals. Engels used these reports — the so-called Blue Books — to write his book, Conditions of the Working Class in 1844, the study which was to convert Karl Marx to a theory of class struggle.²

Marx, of course, had no use for reforming liberals like the politician-businessman, Michael Sadler, but he did understand why traditional conservatives would join with socialists in their critique of capitalism. In Marxian terms, the conservatives were representatives of the old feudal order, an order that was being relentlessly, ruthlessly crushed by the new techniques of capitalist production. Theirs was a dying order, Marx believed; the bourgeois capitalists were everywhere triumphant. Conservative reactionaries and soft-hearted ameliorating liberals, he argued, could do nothing to reverse the forces of production and the direction of historical forces, but their critical pamphlets served Marx well as sources of data for his pamphlets. Capitalism did serve one useful purpose, as far as Marx was concerned: it was crushing the reactionary feudal past. Robert Nisbet has commented on this bit of historical irony:

This is why the indictment of capitalism that comes from the conservatives in the nineteenth century is often more severe than that of the socialists. Whereas the latter accepted capitalism at least to the point of regarding it as a necessary step from the past to the future, the traditionalists tended to reject it outright, seeing any development of its mass industrial nature — either within capitalism or in a future socialism — as but a continued falling away from the superior virtues of Christian-feudal society. It was what the socialists accepted in capitalism — its technology, modes of organization, and urbanism — that the conservatives most despised.³

Price Competition

The feature most hated by the older producers was capitalism’s relentless service of the poorer buying public. The division of labor is limited by the extent of the market, Adam Smith had correctly observed, and in order to use the newer, more specialized techniques of production, capitalists had to broaden their markets. The most efficient means of gaining access to new markets was price competition. All the British troops that marched off to India and the Far East in a quest for new markets in the day of England‘s "glory" never matched the market-broadening effects of a 25 per cent discount at home. The producer who could not match this discount steadily was forced out of the market, that is, was forced to give up control of scarce economic resources that could better be used to satisfy the demands of the public in the hands of more efficient producers.

How could poor, uneducated buyers compete against the entrenched wealth of the English landed aristocracy? How could their meager purchases compete against the wealthy man’s competition for the services of producers? How could some dust-covered miner hope to bid scarce economic resources away from the men of wealth? Simply because there were so many of them! As capitalist techniques of production steadily increased the output of the laboring classes, the poor became slightly but steadily less poor. A few pennies here, a few yards of cloth there, multiplied a million times over: no aristocracy on earth was rich enough to withstand this relentless economic pressure of slightly less poor men, when so many of those men were being created by the labor markets of England. As individuals they were poor, especially before 1840, but they were not so poor as they had been in 1780, and here was the new fact of life for producers using the older methods of production. Men who could not afford fine wool suits could now afford a cheap cotton one, and very rapidly it became obvious to English entrepreneurs that it would pay more dividends to start producing hundreds of thousands of cotton garments than a few thousand high priced wool or silk ones.⁴ "The outstanding fact about the Industrial Revolution," wrote Mises, "is that it opened an age of mass production for the needs of the masses. The wage earners are no longer people toiling merely for other people’s well-being. They themselves are the main consumers of the products the factories turn out…. There is in the market economy no other means of acquiring and preserving wealth than by supplying the masses in the best and cheapest way with all the goods they ask for."⁵

Because capitalism, with its free mobility of labor, its right of voluntary contract, its emphasis on personal responsibility, and its supporting ethic of thrift and planning, opens new opportunities for men once locked in a far narrower universe economically, it is resented. A society that places considerable emphasis on considerations of personal and family status — name, rank, family heritage — does not react favorably to the nouveau riche "commoners" who, through a special skill of being able to produce for a mass market through cost-cutting and future-predicting, have become fabulously wealthy. They may be rich, but the only way they can gain status in the old world’s terms is to marry the daughters of high status, falling income nobles and aristocrats, or give employment to younger sons in a primogeniture (eldest inherits all) system.

As ancient families went further into debt to finance their way of life, they had but two choices: become productive themselves in terms of the new mass market demand, or sell their land to those who were. The costs of ownership became too high for many of them; they could no longer tie up hundreds of acres of land in the face of the relentless competition from those millions of little people who kept bidding up the price of productive land by their increasingly large (in the aggregate) ability to purchase goods produced by the land.

Aristocratic Resentment

It obviously was not the poor man who bought the great estate of some noble. Instead, it was the entrepreneur who was serving the needs of the public. The process had been going on for centuries. Sir Thomas More in the early 1500′s resented the herds of sheep that were replacing poor families that could no longer compete in an era when manorial production methods were not productive enough. But with the nineteenth century, the techniques of production became fully capitalist, and the counter-capitalism of the literary conservatives intensified accordingly. Southey, Carlyle, and Ruskin joined the chorus of contempt. Indeed, it was Carlyle who dubbed the new science of political economy with the name which has stuck, the dismal science.

What served as the economic liberation of a whole class of people, these men saw as a form of bondage, the grinding servitude of the factory, with its time schedules, long hours, routinized production, and child labor. What they resolutely refused to see was what would have been the fate of these masses under the old system of production: famine and death. It was Ireland, not England and Scotland, that suffered the famine of 1848-50, and it was Ireland which had not seen the "plague" of factory production.

John Ruskin, the conservative literary critic, summarized the case against capitalism. Ironically, his words have been put on mass-produced cards and inserted into mass-produced picture frames for display on the walls of the highly popular Baskin-Robbins ice cream parlors (31 flavors): "There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man’s lawful prey."

They Agree with Ruskin

The feudal guild members who threw shoes into factory machinery, the Luddites, today’s trade union members on the picket lines, the government-licensed professionals earning $100,000 per year: all agree in principle with Ruskin. The price-cutting entrepreneur who makes a product available for a wider market is the great threat. The man who trims his costs, or finds a cheaper substitute that is preferable to buyers at a lower price, is seen as a cunning thief. Yet in the middle of the last century, he was making products available to men who could otherwise have never dreamed of buying something as fine as the item being offered. A cotton garment that could be laundered simply gave a man an opportunity to attend church or a wedding or a funeral with a dignity he had never before known. And that, perhaps, was his great sin in the eyes of the old feudal aristocracy—the sin of pride on the part of social inferiors who were steadily becoming less inferior economically. The status world of the middle ages was being shattered by the world of free market contracts.

The Threat of Debasement

Conservative social critics saw not only the hard conditions of the factory system — hard in comparison with the life of social criticism, but not in comparison with low productivity subsistence (or less than subsistence) farming —but they also saw the initial effects of mass-produced goods. They were cheap in price and cheap in quality — again, in comparison to the quality standards of the educated social critic. Those who did appreciate the new clothes, better housing, and preferable working conditions seldom wrote tracts; they simply went to work and spent their money. Undoubtedly, there was a standardization of production. However, as the productivity of laborers increased, and as their wages increased, this standardization was left behind for those coming up —Irish immigrants, for example —and variety began to be an economic possibility.

This indicates the nature of capitalism’s powers of social transformation. At first, price competition expands the market. New groups gain access to goods not previously available to them, either because prices were too high before, or because the products did not even exist. As participants in the production process, workers add to other people’s wealth. Producers are buyers; step by step, as output per unit of input increases, as a result of the specialization of production, the wealth of all the participants increases. The initial expansion of buying alternatives itself expands as productivity increases. Some producers may specialize in producing for this newly improved buying public; others may branch out and aim at the still excluded buyers — the next level down.

Henry Ford’s Model T — available in any color, as long as it’s black—makes the automobile available to the masses. But as everyone’s wealth increases as a result of capitalist methods of production-distribution (the two are basically the same process), large numbers of men want some other color. Ford himself failed to recognize this phenomenon of modern capitalism, and his resistance to change — in this case an upgrading of quality and choice —led to the triumph of General Motors. Today, as the most recent figures indicate, General Motors’ share of the auto market in America has fallen below 40 per cent, indicating that it, too, must shift its production standards to meet people’s needs.⁶ (The public, burdened by a shortage of fuel, needs smaller, cheaper cars; energy, it should be pointed out, is an area of government control and influence, and it is becoming an area of relatively decreasing productivity as a result — back to the Model T universe, it seems.)

Consider the advent of the color television set. In 1956, RCA made a color television available to those who could afford some $1500 (1956 prices) — a 16-inch, not very reliable product. A few people bought them. Steadily, the price has come down, yet the quality of the sets has gone up. Today, a Japanese Sony set, some 17 inches in size, costs less than $500 (1974 prices), and is so far advanced in terms of picture quality that the two products can hardly be compared. Price competition and quality competition can proceed together, and do; but the initial breakthrough technologically, while financed by the elite, becomes a mass-consumption product only through price competition. (This, as Hayek argues so forcefully, is an important function of rich elites: the trying out of new products, helping to finance their initial construction, before the bugs are worked out technically.⁷)

How many workers in 1830 could have afforded to spend money in a Baskin-Robbins ice cream parlor? Ice cream was not even invented; the rage began at the end of the nineteenth century. Most workers could not have afforded it. Today, on any Saturday afternoon in the summer, ice cream houses specializing in high quality, "high" price ice cream are probably as crowded as the "cheap" frostee shop across the street. (Those who buy vanilla in the multiple-flavor shops subsidize those, like myself, who will eat nothing but peppermint-stick; the vanilla is far cheaper to produce, yet it is sold at the same price as the 30 other flavors. The one-flavor frostee shops cater to those who just don’t like the other 30 flavors that much, or at least those who don’t like to pay the freight for the other 30 and their buyers.)

Even the most expensive triple-scoop ice cream cone in the "exclusive" and "elitist" ice cream parlors costs only a tiny fraction of a middle class worker’s daily income, in contrast to what the same ice cream cone would cost, proportionately, in some underdeveloped nation, where ice cream really is a luxury good. It is mass production, which involves price competition, that has created the mass wealth that makes possible the relatively cheap ice cream of the officially pro-Ruskin, anti-free market philosophy, 31-flavor stores. (Presumably, the chain really does not know the origin of Ruskin’s philosophy. Ideas, however, do have consequences — serious consequences in a culture that seems to be headed from contract back into status.⁸)

Mass Culture

One feature of free market life which receives far too little attention from most of the market’s defenders is the problem of mass culture. Ortega y Gasset’s Revolt of the Masses spelled it out. In a culture that is officially democratic, and which grants to the common man enormous influence — because its methods of production grant him enormous, historically unprecedented wealth — how can that culture maintain its spiritual, educational, intellectual foundations? Wilhelm Röpke, probably more than any other free market economist, concerned himself with this question. Does the most efficient technique actually serve men best in each and every instance? Were the conservative cultural critics correct in pointing to the debasement of their culture? Does mass production lead to the creation of a mass man — a man who neither understands nor appreciates the benefits of the market?

Röpke’s Humane Economy and Schumpeter’s Capitalism, Socialism and Democracy set forth the problem very well, but the answers in both books are pessimistic. Professor Mises did not often write about this question, but in the one case where he did, he was rather pessimistic:

Whatever is to be said in favor of correct logical thinking does not prove that the coming generations of men will surpass their ancestors in intellectual effort and achievements. History shows that again and again periods of marvelous mental accomplishments were followed by periods of decay and retrogression. We do not know whether the next generation will beget people who are able to continue along the lines of the geniuses who made the last centuries so glorious. We do not know anything about the biological conditions that enable a man to make one step forward in the march of intellectual advancement. We cannot preclude the assumption that there may be limits to man’s further intellectual ascent. And certainly we do not know whether in this ascent there is a point beyond which the intellectual leaders can no longer succeed in convincing the masses and making them follow their lead.⁹

Today, in fact, the problem is as much the fault of the failure of the leaders to understand basic principles as it is the fault of the masses. The free market is not some fully autonomous, self-supporting, self-generating, self-sustaining mechanism. It is the product of acting, thinking, planning men. If they do not know how the economy works — and no serious economist has ever argued that all participants must understand it in order for it to work — then there is only one defense possible: the majority of men must, on principle, leave their fellow men free to act, think, and plan. They may not grasp the nature of the process by which the actions of productive individuals are fused into a coherent, self-correcting economic system. They may not understand the theory of marginal utility. They may not be able to spell out the theory of free trade. But unless they are willing to affirm that principle which every man can grasp — that each man is responsible for his actions, and that therefore each man should be given the right to work out his salvation with fear and trembling — then the magnificent construct known as the free market economy will, in the image of "Mission Impossible," self-destruct. There are no economic fruits without moral roots.

By focusing on economics as if it were the "science, of wealth" rather than the science of human action and human choice, the classical economists did a great disservice to the cause of freedom. They made the case of the conservative anti-market critics that much more reasonable. There is more to life than material consumption; there is more to life than the question of economic efficiency. Economic man was an intellectual construct, but too many economists and too many readers of economic literature failed to see that this construct was and is limited. It can explain some features of life; it can hardly explain them all. The economic man was a stick man, and he made a marvelous target for the critics of capitalism, both conservatives and socialists, who saw their opponents as narrow-minded, materialistic, immoral, uncharitable, destructive churls.

Expanding Human Choice

The defense of the market should be made in terms of its implications for human choice. The free market expands human choice. It enables men to become more productive. In doing so, it increases their power and therefore their responsibility. At first, it may seem to limit men’s choices — only black Model T’s — but in reality it has expanded them — black Model T’s rather than no car at all. As productivity increases, men’s options increase. Since they have increased their range of options, they have simultaneously increased their obligations. Like all blessings, this too is a burden.

Sadly, some modern economists, at least in their published materials, are as naive as the nineteenth-century economists. They seldom consider the grave political and sociological implications of increased wealth. They do not understand that in today’s world, a productive worker (from janitor to scientist) who fails to acknowledge the restraints —moral restraints — necessary to preserve a free market economy, is like a child playing with a loaded pistol. He is armed (with the vote) and should be considered extremely dangerous. He has the power to vote for men promising to relieve him of his responsibilities — thereby relieving him of his power and wealth, he never seems to understand. Men seem to resent the burdens of responsibility as they grow more wealthy, and this is the surest guarantee that they will not grow wealthy forever.

Men make choices. They have ideas. They are responsible. If their ideas are such that they are convinced that the political authorities can best handle the responsibilities of life, then their ideas will lead them into bondage, precisely because they are responsible and they do have the power of choice. Pontius Pilate had the power of choice. He chose to "wash his hands" of all personal responsibility, as if power can be so lightly abandoned. Röpke and Schumpeter were quite correct in their concern for our society: mass man, especially State-educated mass man, has been granted wealth beyond the dreams of Pilate (who never had the opportunity to see reruns of the Beverly Hillbillies in full color). Economic efficiency, in and of itself, guarantees nothing morally or culturally. It only guarantees that more and more men will possess greater and greater options. We should neither underestimate nor overestimate the blessings of efficiency.

¹ Max Weber, General Economic History (New York: Collier, [1927] 1961), p. 230.

² The Sadler Report was followed by two other reports that were far less incendiary and far less critical of the factory system, but few historians have ever heard of them, let alone read them: First and Second Reports of the Commission on the Employment of Children in Factories (1833) and Supplementary Report (1834). Unlike those who testified before Sadler’s committee, these men were under oath.

³ Robert A. Nisbet, The Sociological Tradition (New York: Basic Books, 1966), p. 26.

⁴ Ludwig von Mises, Human Action (3rd rev. ed.; Chicago: Regnery, 1966), pp. 618-19.

⁵ Ibid., p. 619.

⁶ So much for the "indestructible monopoly" theory!

⁷ F. A. Hayek, The Constitution of Liberty (University of Chicago Press, 1960), pp. 44-45.

⁸ Morris C. Shumiatcher, "Status: End Product of Welfare," The Freeman, May, 1972, pp. 297-315.

⁹ Mises, The Historical Setting of the Austrian School of Economics (New Rohelle, N. Y.: Arlington House, 1969), p. 38.