The following passage on patents, by Lionel Robbins, was called to my attention by Jeff Tucker. This is from Robbins’s 1939 book The Economic Basis of Class Conflict and Other Essays in Political Economy, Part I, “The Interests of Groups and the Interest of Society,” chapter III, “The ‘Inevitability’ of Monopoly,” Section (4), “The Causes of ‘Spontaneous’ Monopoly.” Bold added:
(4) THE CAUSES OF “SPONTANEOUS” MONOPOLY
It is now time to dig rather deeper. So far our analysis has been confined to asking whether, in the absence of direct authoritarian restriction of competition, the sphere of monopoly is ubiquitous; and it has appeared that this is certainly not the case. In surveying the various types of production, we have found areas of competition and areas of monopoly; but there can be little doubt that on any quantitative test, such as proportion of world population employed or value of output produced, the competitive area would be considerably the larger. We have, however, found much monopoly which, directly at any rate, has not been deliberately imposed by state action, and if we are properly to appreciate its significance and to assess propositions concerning its inevitability, it is necessary to enquire further concerning its origin. We must enquire concerning the causes of monopoly.
Now the desire for monopoly is more or less general. Monopoly means higher gains, less effort, more security than competition. There are few men who do not covet such a position or who, if they see a chance of achieving it, deliberately refrain from making the attempt. “People of the same trade”, said Adam Smith, “seldom meet together, even for merriment and diversion but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”1 The representatives of the modern trade associations may say that they have changed all that. But the reasons they adduce are slender; and their actions belie their claims.
But it is one thing to want monopoly. It is quite another thing to be able to achieve it. If producers are able to induce governments deliberately to prohibit competition, well and good. But if this fortunate event does not occur, it is only under certain conditions that the attempt to secure monopoly is likely to be successful. The world is a wide place. The gains of monopoly are tempting to outsiders. Fortunately for the rest of humanity, there is usually a plentiful supply of would-be interlopers and blacklegs. Combinations which are not enforced by the sanction of the state are in danger of breaking down. To understand the continuance of monopoly, therefore, we have to enquire what are the conditions which conduce to its survival. We have to ask to what extent these conditions can be regarded as natural, to what extent they are the indirect result of policy.
(i) We may start with conditions which are obviously “natural”. If the supplies of any natural resource are concentrated in one place, or in a small number of places, it is easy for them to gravitate into the hands of one control or of a very limited number; and there is a strong incentive to action which will bring this about. We have seen already that this is the case in certain extractive industries. One can easily conceive of worlds in which the physical constitution of the planet would give rise to widespread monopoly of this type. But in our own, while such conditions are important in certain narrow lines, in modern times, they have not been responsible for any but a small fraction of the area of “spontaneous” monopoly.
(ii) Somewhat similar, and probably quantitatively much more important, is the influence of costs of transport. We have seen that position in space may, in certain circumstances, be regarded as constituting a unique source of supply. Even where exact position is not of great importance, in areas where demand is small, single units of supply — local shops or brickworks for example — may have positions of monopolistic power. It is important to observe that the extent of this power will depend essentially upon costs of transport from other areas. The middle ages must have been honeycombed with this kind of monopoly; and the deliberate restriction of transport development on the roads in our own time must be regarded as a factor tending to sustain it where it still persists. The lower the cost of transport, the less the danger of local monopoly.
(iii) Thirdly comes the influence of technique. We have seen already that, in the sphere of the so-called public utility enterprises, there are types of service where the technical conditions of production are such that competition between more than a small number of producers is unlikely and monopoly is very probable. The same conditions prevail in certain types of manufacturing industry. Where the economies of large-scale production are very great and where the equipment is very specialized, the number of establishments is likely to be few and the degree of potential competition small. In the most general analytical terms, we may describe these conditions as conditions of extensive indivisibility of the mechanism of production. The advantages of superior technique cannot be reaped on a smaller scale. Where such conditions prevail, there monopolies, or at least monopolistic conditions, are probable.
Now it is probable that in some lines of industry, in recent years, the evolution of technique has been such as to extend the area of conditions of this sort. But there is no inevitability about this. In other lines, technical evolution has proceeded the other way. We have seen already how, in the field of land transport, the invention of the internal combustion engine introduced technical conditions once more permitting a wide extension of effective competition. Examples of this kind could be multiplied.
Moreover these technical advantages of large-scale production have obvious limits. There is always a point beyond which increases in scale of output are attended by no further gain in efficiency, and may indeed easily be attended by considerable loss due to the increased difficulties of administration. This fact is well attested by experience. We hear much of the technical economies of combination while combination is being negotiated. But we hear much less when the combination is achieved, and the results are seldom conspicuous in costs. Speaking generally, it is safe to say that, outside the public utility group, it is rare, in industries of any magnitude of output, for the economies of large-scale production not to be exhausted long before a monopolistic position is achieved. The gains of monopolistic combinations are chiefly due, not to technical economy, but to monopolistic buying and selling.
But why, then, is monopolistic combination to be found at all outside the comparatively limited group where the “natural” conditions favourable to monopoly, already enumerated, prevail? This brings us to influences of a more artificial nature.
We have seen already that much of the monopoly at present prevailing — quantitatively considered, indeed, probably the larger part — is due to direct governmental intervention. The vast structure of agricultural marketing controls which all over the world have come into being in the last few years is of this nature. So are such arrangements as the British coal quotas, the various international raw material restriction schemes, the totalitarian export controls, the many consolidations of interests which, in the last war and in the course of preparations for the next, have been instigated by governments, and so on. These are obviously artificial in origin. They spring from no technical necessity. But they are not our immediate concern at present. At this stage we are seeking for less obvious artificial conditions which conduce to monopoly even in the absence of such direct measures.
(i) We may notice, first, influences springing from the nature of the law relating to property and contract. The framework of law within which free, enterprise is permitted to function is not the simple matter which the incautious terminology of certain early enthusiasts for the so-called “system of natural freedom” might lead us to suppose. On the contrary, it is matter of the utmost complexity; and it is very easy for apparently slight differences in legal codes to give rise to extensive differences in industrial organization. In Germany, for instance, the law regarding restraint of trade has been much less severe than in Great Britain. Long before the Great War, rules had been established in Germany which made cartel agreements enforceable in the courts; there can be little doubt that this was one of the more important reasons why monopolistic conditions were so much more prevalent in Germany than elsewhere. The state definitely favoured combination; and the law was developed accordingly.
Again, we may take as an example the law relating to joint-stock companies. It would be wrong to contend that the invention of limited liability has always told in favour of the consolidation of monopoly. But there certainly seems reason to suppose that the development of the law relating to holding companies, especially in the United States, has tended in this direction. There is nothing “natural” about such a development. Given a different state of public opinion it might be otherwise. But, given present conditions, monopoly has been facilitated.
Similarly, in the more minute ramifications of legal systems the close student of industrial organization can recognize a multitude of small inflections, upon each of which a whole range of monopolistic practices depend. Judgments upholding particular forms of tying clauses, deferred rebates, trade boycotts and the like are all influences conducive to monopoly, not necessarily implied by the general concept of free contract, which in all sorts of subtle ways can be invoked to support the limitation of competition and which are so invoked continually.2
(ii) We may next consider the rôle of restrictions on international trade. These tend to promote monopoly in two distinct ways.
In the first place, they narrow the market. If the number of sources of supply within any national area is small, the existence of restrictions on import creates monopolistic conditions. In the absence of restriction, competition may be reasonably effective. If restriction is present, the situation may be totally changed.
But beyond this, the existence of such restriction is an actual incentive to the formation of monopoly. In an area open to world competition, the elasticity of potential supply from outside may well be so great that it is not worth while for the national producers to attempt concerted action. They are much better advised to concentrate upon the efficiency of their own establishments. But if supplies from outside are restricted, the position is changed. A national combination may be effective. International arrangements with foreign competitors become much more practicable. Moreover, the very fact that restriction is contemplated as lying within the range of accepted national policy, is a spur to concerted action for purposes of political pressure. The competitors come together to finance the appropriate political measures. What begins in the lobbies is not slow to work through to the board-rooms: the tariff is the father of the trust.
It is perhaps possible to exaggerate the importance of this factor. Certainly the free-trade propaganda which attributes all monopoly to protection has been guilty of exaggeration.3 As we have seen, there are many other causes of monopoly. But it is notorious that the growth of monopoly in the last seventy years has everywhere been closely associated with the growth of protection. In those countries where protection has been high, such as Germany and America, monopoly power has been prominent; whereas in those countries which remained more or less open to world supplies, monopoly has been a much less serious problem. In Great Britain, which in our own day has changed from a free-trade to a protectionist policy, the contrast is especially significant. Before 1931 monopoly or monopolistic conditions existed in certain restricted spheres. But over the wide field of manufacturing industry it was not a conspicuous phenomenon. Since 1931 it has become endemic. The manufacturers of Great Britain, who in the past, under the healthy stimulus of competition, have done so much to raise the general standard of living, both at home and abroad, have become, as it were overnight, more interested in the production of political privilege than in the production of goods and services.
(iii) The influence of tariffs is well known. Much less well known but not commensurately less important is the influence of patents. It is probable that even professional economists have greatly under-estimated this factor. Yet a patent is an obvious monopoly; the patentee has exclusive rights and, where patented processes are involved, conditions are necessarily monopolistic. This influence has many ramifications. Not merely does it directly protect the manufacturer of patented articles; it also permits the creation of a whole network of tying contracts, forced joint supply, resale price maintenance and other trade practices, not particularly conspicuous in themselves but cumulatively highly conducive to the consolidation of monopolistic conditions. Indeed it is so important an influence that it is no exaggeration to say that special lines of expertise exist, not to forward the progress of invention but merely to devise variations in productive processes permitting the continuation of this form of monopoly power.
It may be urged, however, that the patent system in its present form is an indispensable condition of progress; that if patents were not granted as they are granted now there would be no spur to technical invention. If this were true, our present classification would be erroneous. The granting of patents would have to be regarded as “natural” to a system of private property and free enterprise; and to classify it as “artificial”, although literally accurate, would be contrary to the spirit of our analysis.
But this belief is certainly erroneous. We may leave undiscussed the question whether if there were no patent rights of any kind there would be an inadequate flow of invention; although, as Professor Plant has shown,4 consideration of the procedure in many branches of industry where patents are not involved suggests that the argument here is by no means all on the side of supporters of the retention of the patent system. But it is really quite ridiculous to suggest that any modification in the present law would necessarily have this consequence, that the thing is naturally sacrosanct. The patent system in its present form is a highly artificial creation emerging from a process of legislation in which the role of pressure groups and muddled thinking has been unfortunately only too prominent: and no convincing argument has yet been put forward to show that the abolition of the present system and the substitution of a “licence of right” system whereby, after a very short period, anyone might use a patent on paying a licence fee to the inventor, would be unjust to inventors or diminish the flow of invention. But certainly it would sweep away the whole network of monopolistic practice which rests on the present system.
Consideration of the patent system leads naturally to the last condition conducive to the existence of monopoly which has to be mentioned in this connection, existing business prestige. Each particular firm has its own reputation for quality and service; and, if this reputation is high, it may well confer upon its products a status of uniqueness involving a position of some monopolistic power. Moreover, in the very process of economic change, the fact that a producer is first in the field with a new product means that, for the time being at least, his position may be monopolistic.
At first sight such cases might appear to have a close relation to the case of monopolistic positions due to patents. But there is this important difference: that, in these cases, there is no legal exclusion and that the position is obtained only in virtue of the performance of services which are preferred.5 The gains which come from a reputation for uniqueness of service and from more rapid anticipation of public demand are gains which definitely conduce to efficiency and variety: without begging the question whether such efficiency could be otherwise evoked in a system in which private enterprise was abolished, it may safely be concluded that they are necessary to the operation of a system in which private enterprise persists. In our present universe of discourse, therefore, we may classify such factors as “natural” rather than artificial.
(5) THE POLITICAL INEVITABILITY OF MONOPOLY
We embarked upon our survey to examine the truth of the view that at the present day the conditions of production are such as to make a predominance of monopoly inevitable. If the facts which have been cited are correct and if the analysis of these facts is well founded, then, it is submitted, the answer to this question must be negative. We have found indeed that monopoly predominates over a large part of the field at the present day. But we have found that much of this has been imposed by deliberate state intervention; and in the area of “spontaneous” monopoly which remains, we have found that a large part, probably the larger part, is the indirect product of policy. There are indeed “natural” conditions favourable to monopoly in certain parts of the field, the distribution of certain natural resources, the costs of transport to areas of small demand, the technique of certain forms of production; and, in the absolute sense, these are quantitatively sufficiently important to give rise to serious problems of ownership and control. But relatively their quantitative importance is not large. In a world in which there was no state creation of monopoly, no forms of law favouring restraint of trade, no barriers to trade, and a patent system conducive to competition, the area of spontaneous and long-lasting monopoly would be small compared with the area of effective competition. The theory of the technical inevitability of monopoly is not in accordance with the facts.
Nevertheless, under present conditions, the extent of monopoly is great, so great indeed that we may well ask if there is not some other kind of inevitability at work. Monopoly may not be technically inevitable. But is it not politically inevitable?
This question may have different answers, according to the exact meaning we attach to the idea of political inevitability.
If it is meant that at the present day people are so convinced of the technical inevitability of monopoly that they will offer no resistance to its encroachments, and indeed facilitate its creation, there are very good grounds for the argument. It may well be that constant reiteration of the theorem that monopoly is inevitable has actually made that theorem come true, in defiance of the technical conditions of production — a fitting outcome of standing Hegel on his head. From this point of view the political inevitability of monopoly may be admitted as a strong probability, and those intellectuals who enjoy being right, in the sense of having shouted with the crowd, may be neglecting valuable opportunities of prestige by not shouting even louder now.
But if it is meant that in a regime in which there is no encouragement of monopoly, direct or indirect, the interest of groups of producers in manipulation of the market must inevitably be politically preponderant over the diffused interest of the rest of the community, the proposition is not so plausible. No-one who has studied the operation of the urge towards monopoly is likely to under-estimate its power or its lack of scruple. Men as producers are active in pursuit of their own interest; as consumers they are too often passive. The price of freedom is a vigilance which twentieth-century man, doped with overmuch misery or enjoyment, has shown small disposition to afford, and which the intellectuals from whom he takes his lead have done little to evoke. Nevertheless the victory of the pressure groups is not inevitable. In a community in which they receive little support from the state and in which intellectual leadership does its job, their conspiracies against the public would not be at all difficult to meet. In a community in which they have been allowed and encouraged to consolidate and in which intellectual leadership has lost its way, their influence is much more powerful. But resistance is not hopeless. In fact to any who can stand aside from the unrealities of contemporary party dogmas it must be clear that such resistance is a much less hopeless policy than the alternatives now pursued. A policy of removing the artificial conditions making for monopoly and of controlling the relatively small area of “natural” monopoly which would then exist,6 still offers much more chance of practical success than the policy of encouraging monopoly to grow in the hope that, when it has become ubiquitous, it will become less dangerous and easier to manage. The belief that once monopoly is established all round it will be easy to control is indeed widely held. But it runs counter to all experience. It is based on no reasonable presumption. Its prevalence only serves to hasten the coming of the servile state.
Note a few things. First, Robbins flat out admits that patents are artificial monopoly grants by the state—a characterization often bitterly denied by many modern-day proponents of patent, who view them as natural and property rights (see Are Patents and Copyrights Monopolies?). Second, he has an odd comment that if patents somehow were indispensable to technical progress they should be viewed as a natural part of the system of private property and free enterprise, not some artificial monopoly grant. This is an odd argument, but in any case he rejects this claim as being absurd, since it is clear that without the existing patent system there could still be innovation. In fact, third, he urgers the abolition of the patent system and replacing it with some system of compulsory licenses, an reform I have suggested previously as well as a way to greatly reduce the harm done by the system (How to Improve Patent, Copyright, and Trademark Law).
- Wealth of Nations (Cannan’s Edition), vol. i, p. 158. [Note: the next two sentences rarely accompany a quotation of the first: Smith goes on to say: "It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary". —SK] [↩]
- This paper is not concerned with monopolistic combinations among the suppliers of various forms of labour services. But it is interesting to note that here, too, there is an extensive substratum of special legal provisions facilitating their existence. The exclusive practices of many of the professions are unthinkable without special legal privilege. And it is well known that, without a series of special modifications of the law (especially the law of torts), the powers of trade unions would be entirely different. [↩]
- As I myself have been accused of the belief that tariffs are the only cause of monopoly, I may perhaps take this opportunity of stating that I do not hold this view, that I never have held it, and that nothing that I have ever written on the subject will bear this interpretation. [↩]
- “The Economic Theory Concerning Patents for Inventions” (Economica, February 1934). [↩]
- It is sometimes urged that the provision of new products closely-related to products already on the market — a process sometimes referred to by the somewhat sinister name of product differentiation — is itself a source of waste and misdirection of productive factors, and that it would be better from the point of view of consumers if this were prevented, to allow more mass production of existing products. So long as price competition is permitted, so that consumers may choose between relatively dear new products and relatively cheap old products produced on mass-production lines, I see no argument in favour of this view that is not ultimately authoritarian in origin. The so-called evils of product differentiation only arise when price competition is not permitted. [↩]
- I have said nothing in the foregoing paper on this problem, which is too complicated to be dealt with incidentally. Broadly speaking, my attitude is as follows. The best way to deal with monopoly is to create conditions of competition by removing the obvious legislative and administrative limitations. But where this is not sufficient, I am by no means opposed to definite state action to prevent or to control monopoly. In those cases where technical conditions make monopoly inevitable I am definitely in favour of regulation if suitable methods can be devised. If I might take the present case of the British railways as an example, I would be in favour of removing all limitations where road competition can be effective. But where road competition is not permitted or where for technical reasons it is impossible, control of rates and such matters as undue preference seems to me to be obvious prudence. The claim of the railways to be freed from control themselves while a tight control is maintained, via the licence system, upon competition from the road hauliers is so palpably antisocial, so obviously the reverse of a square deal for the public, that, were it not for the great power of the interests involved, it would be unbelievable that it should be taken seriously. [↩]