7. Patents and Copyrights

Turning now to patents and copyrights, we ask: Which of the two, if either, is consonant with the purely free market, and which is a grant of monopoly privilege by the State? In this part, we have been analyzing the economics of the purely free market, where the individual person and property are not subject to molestation. It is therefore important to decide whether patents or copyrights will obtain in the purely free, noninvasive society, or whether they are a function of government interference.

Almost all writers have bracketed patents and copyrights together. Most have considered both as grants of exclusive monopoly privilege by the State; a few have considered both as part and parcel of property right on the free market. But almost everyone has considered patents and copyrights as equivalent: the one as conferring an exclusive property right in the field of mechanical inventions, the other as conferring an exclusive right in the field of literary creations.⁹³ Yet this bracketing of patents and copyrights is wholly fallacious; the two are completely different in relation to the free market.

It is true that a patent and a copyright are both exclusive property rights and it is also true that they are both property rights in innovations. But there is a crucial difference in their legal enforcement. If an author or a composer believes his copyright is being infringed, and he takes legal action, he must “prove that the defendant had ‘access’ to the work allegedly infringed. If the defendant produces something identical with the plaintiff's work by mere chance, there is no infringement.”⁹⁴ Copyrights, in other words, have their basis in prosecution of implicit theft. The plaintiff must prove that the defendant stole the former's creation by reproducing it and selling it himself in violation of his or someone else's contract with the original seller. But if the defendant independently arrives at the same creation, the plaintiff has no copyright privilege that could prevent the defendant from using and selling his product.

Patents, on the other hand, are completely different. Thus:

You have patented your invention and you read in the newspaper one clay that John Doe, who lives in a city 2,000 miles from your town, has invented an identical or similar device, that he has licensed the EZ company to manufacture it. . . . Neither Doe nor the EZ company . . . ever heard of your invention. All believe Doe to be the inventor of a new and original device. They may all be guilty of infringing your patent . . . the fact that their infringement was in ignorance of the true facts and unintentional will not constitute a defense.⁹⁵

Patent, then, has nothing to do with implicit theft. It confers an exclusive privilege on the first inventor, and if anyone else should, quite independently, invent the same or similar machine or product, the latter would be debarred by violence from using it in production.

We have seen in chapter 2 that the acid test by which we judge whether or not a certain practice or law is or is not consonant with the free market is this: Is the outlawed practice implicit or explicit theft? If it is, then the free market would outlaw it; if not, then its outlawry is itself government interference in the free market. Let us consider copyright. A man writes a book or composes music. When he publishes the book or sheet of music, he imprints on the first page the word “copyright.” This indicates that any man who agrees to purchase this product also agrees as part of the exchange not to recopy or reproduce this work for sale. In other words, the author does not sell his property outright to the buyer; he sells it on condition that the buyer not reproduce it for sale. Since the buyer does not buy the property outright, but only on this condition, any infringement of the contract by him or a subsequent buyer is implicit theft and would be treated accordingly on the free market. The copyright is therefore a logical device of property right on the free market.

Part of the patent protection now obtained by an inventor could be achieved on the free market by a type of “copyright” protection. Thus, inventors must now mark their machines as being patented. The mark puts the buyers on notice that the invention is patented and that they cannot sell that article. But the same could be done to extend the copyright system, and without patent. In the purely free market, the inventor could mark his machine copyright, and then anyone who buys the machine buys it on the condition that he will not reproduce and sell such a machine for profit. Any violation of this contract would constitute implicit theft and be prosecuted accordingly on the free market.

The patent is incompatible with the free market precisely to the extent that it goes beyond the copyright. The man who has not bought a machine and who arrives at the same invention independently, will, on the free market, be perfectly able to use and sell his invention. Patents prevent a man from using his invention even though all the property is his and he has not stolen the invention, either explicitly or implicitly, from the first inventor. Patents, therefore, are grants of exclusive monopoly privilege by the State and are invasive of property rights on the market.

The crucial distinction between patents and copyrights, then, is not that one is mechanical and the other literary. The fact that they have been applied that way is an historical accident and does not reveal the critical difference between them.⁹⁶ The crucial difference is that copyright is a logical attribute of property right on the free market, while patent is a monopoly invasion of that right.

The application of patents to mechanical inventions and copyrights to literary works is peculiarly inappropriate. It would be more in keeping with the free market to be just the reverse. For literary creations are unique products of the individual; it is almost impossible for them to be independently duplicated by someone else. Therefore, a patent, instead of a copyright, for literary productions would make little difference in practice. On the other hand, mechanical inventions are discoveries of natural law rather than individual creations, and hence similar independent inventions occur all the time.⁹⁷ The simultaneity of inventions is a familiar historical fact. Hence, if it is desired to maintain a free market, it is particularly important to allow copyrights, but not patents, for mechanical inventions.

The common law has often been a good guide to the law consonant with the free market. Hence, it is not surprising that common-law copyright prevails for unpublished literary manuscripts, while there is no such thing as a common-law patent. At common law, the inventor also has the right to keep his invention unpublicized and safe from theft, i.e., he has the equivalent of the copyright protection for unpublicized inventions.

On the free market, there would therefore be no such thing as patents. There would, however, be copyright for any inventor or creator who made use of it, and this copyright would be perpetual, not limited to a certain number of years. Obviously, to be fully the property of an individual, a good has to be permanently and perpetually the property of the man and his heirs and assigns. If the State decrees that a man's property ceases at a certain date, this means that the State is the real owner and that it simply grants the man use of the property for a certain period of time.⁹⁸

Some defenders of patents assert that they are not monopoly privileges, but simply property rights in inventions or even in “ideas.” But, as we have seen, everyone's property right is defended in libertarian law without a patent. If someone has an idea or plan and constructs an invention, and it is stolen from his house, the stealing is an act of theft illegal under general law. On the other hand, patents actually invade the property rights of those independent discoverers of an idea or invention who made the discovery after the patentee. Patents, therefore, invade rather than defend property rights. The speciousness of this argument that patents protect property rights in ideas is demonstrated by the fact that not all, but only certain types of original ideas, certain types of innovations, are considered patentable.

Another common argument for patents is that “society” is simply making a contract with the inventor to purchase his secret, so that “society” will have use of it. In the first place, “society” could pay a straight subsidy, or price, to the inventor; it would not have to prevent all later inventors from marketing their inventions in this field. Secondly, there is nothing in the free economy to prevent any individual or group of individuals from purchasing secret inventions from their creators. No monopolistic patent is necessary.

The most popular argument for patents among economists is the utilitarian one that a patent for a certain number of years is necessary to encourage a sufficient amount of research expenditure for inventions and innovations in processes and products.

This is a curious argument, because the question immediately arises: By what standard do you judge that research expenditures are “too much,” “too little,” or just about enough? This is a problem faced by every governmental intervention in the market's production. Resources—the better lands, laborers, capital goods, time—in society are limited, and they may be used for countless alternative ends. By what standard does someone assert that certain uses are “excessive,” that certain uses are “insufficient,” etc.? Someone observes that there is little investment in Arizona, but a great deal in Pennsylvania; he indignantly asserts that Arizona deserves more investment. But what standards can he use to make this claim? The market does have a rational standard: the highest money incomes and highest profits, for these can be achieved only through maximum service of consumer desires. This principle of maximum service to consumers and producers alike—i.e., to everybody—gov-erns the seemingly mysterious market allocation of resources: how much to devote to one firm or to another, to one area or another, to present or future, to one good or another, to research as compared with other forms of investment. But the observer who criticizes this allocation can have no rational standards for decision; he has only his arbitrary whim. This is especially true of criticism of production-relations. Someone who chides consumers for buying too much cosmetics may have, rightly or wrongly, some rational basis for his criticism. But someone who thinks that more or less of a certain resource should be used in a certain manner or that business firms are “too large” or “too small” or that too much or too little is spent on research or is invested in a new machine, can have no rational basis for his criticism. Businesses, in short, are producing for a market, guided by the ultimate valuations of consumers on that market. Outside observers may criticize ultimate valuations of consumers if they choose—although if they interfere with consumption based on these valuations they impose a loss of utility upon consumers—but they cannot legitimately criticize the means: the production relations, the allocations of factors, etc., by which these ends are served.

Capital funds are limited, and they must be allocated to various uses, one of which is research expenditures. On the market, rational decisions are made in setting research expenditures, in accordance with the best entrepreneurial expectations of an uncertain future. Coercively to encourage research expenditures would distort and hamper the satisfaction of consumers and producers on the market.

Many advocates of patents believe that the ordinary competitive conditions of the market do not sufficiently encourage the adoption of new processes and that therefore innovations must be coercively promoted by the government. But the market decides on the rate of introduction of new processes just as it decides on the rate of industrialization of a new geographic area. In fact, this argument for patents is very similar to the infant-industry argument for tariffs—that market processes are not sufficient to permit the introduction of worthwhile new processes. And the answer to both these arguments is the same: that people must balance the superior productivity of the new processes against the cost of installing them, i.e., against the advantage possessed by the old process in being already built and in existence. Coercively privileging innovation would needlessly scrap valuable plants already in existence and impose an excessive burden upon consumers. For consumers’ desires would not be satisfied in the most economic manner.

It is by no means self-evident that patents encourage an increased absolute quantity of research expenditures. But certainly patents distort the type of research expenditure being conducted. For while it is true that the first discoverer benefits from the privilege, it is also true that his competitors are excluded from production in the area of the patent for many years. And since one patent can build upon a related one in the same field, competitors can often be indefinitely discouraged from further research expenditures in the general area covered by the patent. Moreover, the patentee is himself discouraged from engaging in further research in this field, for the privilege permits him to rest on his laurels for the entire period of the patent, with the assurance that no competitor can trespass on his domain. The competitive spur for further research is eliminated. Research expenditures are therefore overstimulated in the early stages before anyone has a patent, and they are unduly restricted in the period after the patent is received. In addition, some inventions are considered patentable, while others are not. The patent system then has the further effect of artificially stimulating research expenditures in the patentable areas, while artificially restricting research in the nonpatentable areas.

Manufacturers have by no means unanimously favored patents. R.A. Macfie, leader of England's flourishing patent-abolition movement during the nineteenth century, was president of the Liverpool Chamber of Commerce.⁹⁹ Manufacturer I.K. Brunel, before a committee of the House of Lords, deplored the effect of patents in stimulating wasteful expenditure of resources on searching for untried patentable inventions, resources that could have been better used in production. And Austin Robinson has pointed out that many industries get along without patents:

In practice the enforcement of patent monopolies is often so difficult . . . that competing manufacturers have in some industries preferred to pool patents; and to look for sufficient reward for technical invention in the . . . advantage of priority that earlier experimentation usually gives and in the subsequent good-will that may arise from it.¹⁰⁰

As Arnold Plant summed up the problem of competitive research expenditures and innovations:

Neither can it be assumed that inventors would cease to be employed if entrepreneurs lost the monopoly over the use of their inventions. Businesses employ them today for the production of nonpatentable inventions, and they do not do so merely for the profit which priority secures. In active competition . . . no business can afford to lag behind its competitors. The reputation of a firm depends upon its ability to keep ahead, to be first in the market with new improvements in its products and new reductions in their prices.¹⁰¹

Finally, of course, the market itself provides an easy and effective course for those who feel that there are not enough expenditures being made in certain directions. They can make these expenditures themselves. Those who would like to see more inventions made and exploited, therefore, are at liberty to join together and subsidize such effort in any way they think best. In that way, they would, as consumers, add resources to the research and invention business. And they would not then be forcing other consumers to lose utility by conferring monopoly grants and distorting the market's allocations. Their voluntary expenditures would become part of the market and express ultimate consumer valuations. Furthermore, later inventors would not be restricted. The friends of invention could accomplish their aim without calling in the State and imposing losses on a large number of people.

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¹This applies not only to specific types of goods, but also to the allocation between present and future goods, in accordance with the time preferences of the consumers.

²Of course, we may formally salvage the concept of “consumers’ sovereignty” by asserting that all these psychic elements and evaluations constitute “consumption” and that the concept therefore still has validity. However, it would seem to be more appropriate in the catallactic context of the market (which is the area here under discussion) to reserve “consumption” to mean the enjoyment of exchangeable goods. Naturally, in the final sense, everyone is an ultimate consumer—both of exchangeable and of nonexchangeable goods. However, the market deals only in exchangeable goods (by definition), and when we separate the consumer and the producer in terms of the market, we distinguish the demanding, as compared to the supplying, of exchangeable goods. It is more appropriate, then, not to consider a nonexchangeable good as an object of consumption in this particular context. This is important in order to discuss the contention that individual producers are somehow subject to the sovereign rule of other individuals—the “consumers.”

³W.H. Hutt, “The Concept of Consumers’ Sovereignty,” Economic Journal, March, 1940, pp. 66–77. Hutt originated the term in an article in 1934. For an interesting use of a similar concept, cf. Charles Coquelin, “Political Economy” in Lalor's Cyclopedia, III, 222–23.

⁴To be consistent, currently fashionable theory would have to accuse Crusoe and Friday of being vicious “bilateral monopolists,” busily charging each other “monopoly prices” and therefore ripe for State intervention!

⁵See chapter 8, p. 516 above.

⁶In the words of Professor Mises:

That the production of a commodity p is not larger than it really is, is due to the fact that the complementary factors of production required for an expansion were employed for the production of other commodities. . . . Neither did the producers of p intentionally restrict the production of p. Every entrepreneur's capital is limited; he employs it for those projects which, he expects, will, by filling the most urgent demand of the public, yield the highest profit.

An entrepreneur at whose disposal are 100 units of capital employs, for instance, 50 units for the production of p and 50 units for the production of q. If both lines are profitable, it is odd to blame him for not having employed more, e.g., 75 units, for the production of p. He could increase the production of p only by curtailing correspondingly the production of q. But with regard to q the same fault could be found by the grumblers. If one blames the entrepreneur for not having produced more p, one must blame him also for not having produced more q. This means: one blames the entrepreneur for the fact that there is a scarcity of the factors of production and that the earth is not a land of Cockaigne. (Mises, Planning for Freedom, pp. 115–16)

⁷Ibid., p. 115.

⁸Much error would have been avoided if economists had heeded the words of Arthur Latham Perry:

Every man who puts forth an effort to satisfy the desire of another, with the expectation of a return, is . . . a Producer. The Latin word producere means to expose anything to sale. . . . We must rid ourselves at the outset of the notion . . . that it is only to be applied to forms of matter, that it means . . . to transform something only. . . . The fundamental meaning of the root-word, both in Latin and in English, is effort with reference to a sale. A product is a service ready to be rendered. A producer is any person who gets something ready to sell and sells it. (Perry, Political Economy, pp. 165–66)

⁹R.H. Coase, in an illuminating article, has pointed out that the extent to which transactions take place within a firm or between firms is dependent on the balancing of the necessary costs of using the price mechanism as against the costs of organizing a structure of production within a firm. Coase, “The Nature of the Firm.”

¹⁰This spurious distinction was brought into wide currency by Thorstein Veblen and continued in the happily short-lived “technocracy” movement of the early 1930's. According to his biographer, this distinction was the keynote of all Veblen's writings. Cf. Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking Press, 1949), III, 438 ff.

¹¹On the “orthodox” neglect of cost limitations, see Robbins, “Remarks upon Certain Aspects of the Theory of Costs.”

¹²Cf. Mises, Human Action, p. 367.

¹³As Professor Benham states:

Firms which have produced a relatively large share of output in the past will demand the same share in the future. Firms which are expanding—owing, for example, to an unusually efficient management—will demand a larger share than they obtained in the past. Firms with a greater “capacity” for producing, as measured by the size of their . . . plant will demand a correspondingly greater share. (Benham, Economics, p. 232)

On the difficulties faced by cartels, see also Bjarke Fog, “How Are Cartel Prices Determined?” Journal of Industrial Economics, November, 1956, pp. 16–23; Donald Dewey, Monopoly in Economics and Law (Chicago: Rand McNally, 1959), pp. 14–24; and Wieser, Social Economics, p. 225.

¹⁴For illustrations of this instability in the history of cartels, see Fairchild, Furniss, and Buck, Elementary Economics, II, 54–55; Charles Norman Fay, Too Much Government, Too Much Taxation (New York: Doubleday, Page, 1923), p. 41, and Big Business and Government (New York: Double-day, Page, 1912); A.D.H. Kaplan, Big Enterprise in a Competitive System (Washington, D.C.: Brookings Institute, 1954), pp. 11–12.

¹⁵These terms will be explained below.

¹⁶Clearly, the very term “equal” is unusable here. What does it mean to say that lawyer Jones’ ability is “equal” to teacher Smith's?

¹⁷From his Address to the Civic Federation Conference on Trusts, held in Chicago, September 13–16, 1899, Chicago Conference on Trusts (Chicago, 1900), pp. 253–54, reprinted in Benjamin R. Tucker, Individual Liberty (New York: Vanguard Press, 1926), pp. 248–57. Said a lawyer at the conference:

The control of prices can be brought about permanently only by such a superiority in the methods of manufacture as will successfully defy competition. Any price established by a combination which enables competitors to make a reasonable profit will soon encourage such competition as will reduce the price. (Azel F. Hatch, Chicago Conference, p. 70)

See also the excellent article by A. Leo Weil, ibid., pp. 77–96; and W.P. Potter, ibid., pp. 299–305: F.B. Thurber, ibid., pp. 124–36; Horatio W. Seymour, ibid., pp. 188–93; J. Sterling Morton, ibid., pp. 225–30.

¹⁸Does our discussion imply, as Dorfman has charged (J. Dorfman, Economic Mind in American Civilization, III, 247), that “whatever is, is right”? We cannot enter into a discussion of the relation of economics to ethics at this point, but we can state briefly that our answer, pertaining to the free market, is a qualified Yes. Specifically, our statement would be: Given the ends on the value scales of individuals, as revealed by their real actions, the maximum satisfaction of those ends for every person is achieved only on the free market. Whether individuals have the “proper” ends or not is another question entirely and cannot be decided by economics.

¹⁹If all the factors and resources are absolutely controlled by the State, it makes little difference if, legally, the State owns these resources. For ownership connotes control, and if the nominal owner is coercively deprived of control, it is the controller who is the real owner of the resource.

²⁰The only author, to our knowledge, that looks forward to One (voluntary) Big Cartel as a potential ideal is Heath, Citadel, Market, and Altar, pp. 184–87.

²¹Cf. Mises, Human Action, p. 592.

²²The same confusion exists in the laws concerning monopoly. Despite constitutional warnings against vagueness, the Sherman AntiTrust Act outlaws “monopolizing” actions without once defining the concept. To this day there has been no clear legislative decision concerning what constitutes illegal monopolistic action.

²³We are, of course, not considering here particular uncertainties of agriculture resulting from climate, etc.

²⁴For further discussion, see Murray N. Rothbard, “The Bogey of Administered Prices,” The Freeman, September, 1959, pp. 39–41.

²⁵On the contrary, the consumers control Macy's to the extent that the store desires monetary income. Cf. John W. Scoville and Noel Sargent, eds., Fact and Fancy in the T.N.E.C. Monographs (New York: National Association of Manufacturers, 1942), p. 312.

²⁶One reason often given for ascribing “control over price” to Ford and not the small wheat grower is that Ford is so large that his actions affect the market price of his product, while the farmer is so small that his actions do not affect the price. On this, see the critique below of “monopolistic competition” theories.

²⁷Economists have often charged, for example, that consumers who will pay a higher price for the same good at a store with a more pleasant atmosphere are acting “irrationally.” Actually, they are by no means doing so, since consumers are buying not just a physical can of beans, but a can of beans sold in a certain store by certain clerks, and these factors may (or may not) make a difference to them. Businessmen are far less motivated by such “nonphysical” considerations (although good will affects their purchases too), not because they are “more rational” than consumers, but because they are not concerned, as consumers are, with their own value scales in deciding their purchases. As we have seen above, businessmen are generally motivated purely by the expected revenue that goods will bring on the market. For an excellent treatment of the definition of “homogeneous product,” see G. Warren Nutter, “The Plateau Demand Curve and Utility Theory,” Journal of Political Economy, December, 1955, pp. 526–28. Also see Alex Hunter, “Product Differentiation and Welfare Economics,” Quarterly Journal of Economics, November, 1955, pp. 533–52.

²⁸Professor Lawrence Abbott, in one of the outstanding theoretical works of recent years, demonstrates also that as civilization and the economy advance, products will become more and more differentiated and less and less homogeneous. For one thing, greater differentiation occurs at the consumer than at the producer level, and the expanding economy takes over an increasing proportion of goods once made by the consumer himself and therefore supplies more finished goods than raw materials to the consumer than formerly (bread rather than flour, sweaters rather than wool yarn, etc.). Thus, there is greater opportunity for differentiation.

Furthermore, to the familiar charge that business advertising tends to create differentiation in the consumer's mind that is not “really” there, Abbott replies incisively that the reverse is more likely to be true and that advancing civilization increases the consumer's perception and discrimination of differences of which he was previously ignorant. Writes Abbott:

as man becomes more civilized, he develops greater powers of perception with regard to quality differences. Subjective homogeneity may exist even when objective homogeneity does not, due to the inability or unwillingness of buyers to perceive differences between almost identical products and discriminate between them. . . . As a society matures and education improves, people learn to develop more acute powers of discrimination. Their wants become more detailed. They begin . . . to develop a preference, say, not simply for white wine, but for 1948 Chablis. . . . People generally tend to underestimate the significance of apparently trivial differences in fields in which they are not expert. An unmusical person may be unwilling to concede that there is any difference in tone between a Steinway and a Chickering piano, being unable himself to detect it. A nongolfer is more likely than a habitual player to believe that all brands of golf balls are virtually alike. (Lawrence Abbott, Quality and Competition [New York: Columbia University Press, 1955], pp. 18–19, and chap. I)

Also see ibid., pp. 45–46 and Edward H. Chamberlin, “Product Heterogeneity and Public Policy” in Towards a More General Theory of Value (New York: Oxford University Press, 1957), p. 96.

²⁹Oddly, despite the reams of literature on monopolies, very few economists have bothered to define monopoly, and these problems have therefore been overlooked. Mrs. Robinson, in the beginning of her famous Economics of Imperfect Competition, saw the difficulty and then evaded the issue throughout the rest of the book. She concedes that under careful analysis either a monopoly would be defined as every producer's control over his own product or monopoly could simply not exist on the free market at all. For competition exists among all products for the consumer's dollar, while very few articles are rigorously homogeneous. Mrs. Robinson then tries to evade the issue by falling back on “common sense” and defining monopoly as existing where there is a “marked gap” between the product and other substitutes the consumer may buy. But this will not do. Economics, in the first place, can establish no quantitative laws, so that there is nothing we can say about sizes of gaps. When does the gap become “marked”? Secondly, even if such “laws” were meaningful, there would be no way to measure the cross-elasticities of demands, the elasticity of substitution between the products, etc. These elasticities of substitution are changing all the time and could not be measured successfully even if they all remained constant, since supply conditions are always changing. No laboratory exists where all economic factors may be held fixed. After this point in her discussion, Mrs. Robinson practically forgets all about heterogeneity of product. Joan Robinson, Economics of Imperfect Competition (London: Macmillan & Co., 1933), pp. 4–6. Also cf. Hunter, “Product Differentiation and Welfare Economics,” pp. 547ff.

³⁰Quoted in Richard T. Ely and others, Outlines of Economics (3rd ed.; New York: Macmillan & Co., 1917), pp. 190–91. Blackstone gave almost the same definition and called monopoly a “license or privilege allowed by the king.” Also see A. Leo Weil, Chicago Conference, p. 86.

³¹The onrush of monopoly grants by Queen Elizabeth I and Charles I provoked resistance from even the Crown's subservient judges, and, in 1624, Parliament declared that “all monopolies are altogether contrary to the laws of this realm and are and shall be void.” This antimonopoly spirit was deeply ingrained in America, and the original Maryland constitution declared that monopolies were “odious” and “contrary to . . . principles of commerce.” Ely, Outlines of Economics, pp. 191–92. Also see Francis A. Walker, Political Economy (New York: Henry Holt & Co., 1911), pp. 483–84.

³²Francis Wayland, The Elements of Political Economy (Boston: Gould & Lincoln, 1854), p. 116. Cf. this later definition by Arthur Latham Perry: “A monopoly, as the derivation of the word implies, is a restriction imposed by a government upon the sale of certain services.” Perry, Political Economy, p. 190. In recent years this definition has all but died out. A rare current example is: “Monopoly exists when government by its coercive power limits to a particular person or organization, or combination of them, the right to sell particular goods or services. . . . It is an infringement of the right to make a living.” Heath, Citadel, Market, and Altar, p. 237.

³³As Weil stated: “Monopolies cannot be created by association or agreement. We now have no letters patent giving exclusive right. . . . It is therefore wholly unjustifiable to use the term monopoly as applied to the effects of industrial consolidation.” Weil, Chicago Conference, pp. 86 f.

³⁴For example, Edward H. Chamberlin, Theory of Monopolistic Competition (7th ed.; Cambridge: Harvard University Press, 1956), pp. 57 ff., 270 ff.

³⁵It might be objected that these concepts are vague and give rise to problems. Problems do arise, but they are not insuperable. Thus, if one man is named Joseph Williams, does this preclude anyone else from having the same name, and is any future Joseph Williams to be considered a criminal? The answer is clearly: No, so long as there is no attempt by one to impersonate the other. In short, it is not so much the name per se which an individual owns, but the name as an affiliate of his person.

³⁶For clear expositions of the theory of monopoly price, see Mises, Socialism, pp. 385–92, and Human Action, pp. 278, 354–84; Menger, Principles of Economics, pp. 207–25; Fetter, Economic Principles, pp. 73–85, 381–85; Harry Gunnison Brown, “Competitive and Monopolistic Price-Making,” Quarterly Journal of Economics, XXII (1908), pp. 626–39; and Wieser, Social Economics, pp. 204, 211–12. In this particular case, “neoclassical” includes “Austrian.”

³⁷Mises, Human Action, p. 278.

³⁸Thus:

The mere existence of monopoly does not mean anything. The publisher of a copyright book is a monopolist. But he may not be able to sell a single copy, no matter how low the price he asks. Not every price at which a monopolist sells a monopolized commodity is a monopoly price. Monopoly prices are only prices at which it is more advantageous for the monopolist to restrict the total amount to be sold than to expand sales to the limit which a competitive market would allow. (Mises, Human Action, p. 356)

³⁹Here we abstract from monetary expense or “money cost” considerations. When the producer is considering sale of already produced stock, such past monetary expenses are completely irrelevant. When he is considering present and future production for future sale, present money-cost considerations become important, and the producer strives for maximum net returns. At any rate, some A′point will be set, whatever the actual configuration of money costs, unless, indeed, average money costs are falling rapidly enough in this region to make the “competitive point” the most remunerative after all. It is curious that it is precisely the condition of falling average cost that has given the most worry to anti-monopoly writers, who have been concerned that one given firm in any industry might grow to “monopoly” size because of this condition. And yet, if it is “monopoly price,” not monopoly, that is particularly important, such worry is clearly unfounded. On the general unimportance of cost considerations in monopoly theory, see Chamberlin, Theory of Monopolistic Competition, pp. 193–94.

⁴⁰We are devoting space to analysis of monopoly-price theory and its consequences because the theory, though invalid on the free market, will prove very useful in analyzing the consequences of monopoly grants by government.

⁴¹As Mises warns:

It would be a serious blunder to deduce from the antithesis between monopoly price and competitive price that the monopoly price is the outgrowth of the absence of competition. There is always catallactic competition on the market. Catallactic competition is no less a factor in the determination of monopoly prices than it is in the determination of competitive prices. The shape of the demand curve that makes the appearance of monopoly prices possible and directs the monopolists’ conduct is determined by the competition of all other commodities competing for the buyers’ dollars. The higher the monopolist fixes the price at which he is ready to sell, the more potential buyers turn their dollars toward other vendible goods. On the market every commodity competes with all other commodities. (Mises, Human Action, p. 278)

⁴²We are not discussing here the generally conceded point that monopoly profits are capitalized in capital gains to the shares of the firm's stock.

⁴³To attain a monopoly price, the factor-owner must meet two conditions: (a) He must be a monopolist (in the sense of definition 1) over the factor; if he were not, the monopoly gain could be bid away by competitors entering the field; and (b) the demand curve for the factor must be inelastic above the competitive-price point.

⁴⁴This is the underlying assumption in Mrs. Joan Robinson's Economics of Imperfect Competition.

⁴⁵Bidding takes place among numerous firms in various industries, not only among firms in the same industry.

⁴⁶An amusing instance of this concern is this argument for compulsory legal cartelization by West German industrialists: “that the so-called unrestricted competition would produce a catastrophe in which the stronger industries would destroy the weaker and establish themselves as monopolies.” Create an inefficient monopoly now to avoid an efficient monopoly later! M.S. Handler, “German Unionism Supports Cartels,” New York Times, March 17, 1954, p. 12. For other such instances, see Charles F. Phillips, Competition? Yes, but . . . (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1955).

⁴⁷What of the allegedly vast “financial power” of a big firm, rendering it impervious to cost? In a brilliant article, Professor Wayne Leeman has pointed out that a larger firm will also have larger volume and will therefore suffer greater losses when selling below cost. Having a larger volume, it has more to lose. What is relevant, therefore, is not the absolute size of the financial resources of the competing firms, but the size of their resources in relation to their volume of sales and expenditures. And this changes the conventional picture drastically. Wayne A. Leeman, “The Limitations of Local Price-Cutting as a Barrier to Entry,” Journal of Political Economy, August, 1956, pp. 331–32.

⁴⁸After investigating conditions in the retail gasoline industry (one particularly subject to allegedly “cutthroat” competition), an economist declared:

Some people think that leading marketers occasionally reduce prices to drive out competition so that they may later enjoy a monopoly. But, as one oil man has put it, “That is like trying to sweep back the ocean to get a dry place to sit down . . . .” [Competitors] . . . never scare, and never hesitate for long, and would move in immediately when prices were restored, offering little opportunity to a single marketer to recoup his losses. (Harold Fleming, Oil Prices and Competition [American Petroleum Institute, 1953], p. 54)

⁴⁹Leeman, “The Limitations of Local Price-Cutting,” pp. 330–31.

⁵⁰A leading oil executive told Leeman: “We have invested too much in plant and equipment in this area to want to invite in a host of competitors under an umbrella of high prices.” Ibid., p. 331.

⁵¹Leeman points out, in a striking refutation of one of the myths of our age, that this is precisely what happened to John D. Rockefeller.

According to a widely accepted view, he softened up small competitors in the oil business by a period of intensive price competition, bought them out for a song, and then raised prices to consumers to make up his losses. Actually, the softening-up process did not work . . . for Rockefeller usually ended up paying . . . so handsomely that the sellers, often in violation of promises made, proceeded to build another plant for its nuisance value, hoping again to collect a reward from their benefactor. . . . Rockefeller after a time got tired of paying . . . “blackmail” and . . . decided that the best way to hold the dominant position he wanted was to keep profit margins small all the time. (Ibid., p. 332)

Also see Marian V. Sears, “The American Businessman at the Turn of the Century,” The Business History Review, December, 1956, p. 391. Moreover, Professor McGee has shown, after an intensive investigation, that in not one instance did Standard Oil attempt “predatory price-cutting,” thus destroying the Standard Oil myth once and for all. John S. McGee, “Predatory Price-Cutting: The Standard Oil (New Jersey) Case,” The Journal of Law and Economics, October, 1958, pp. 137–69.

⁵²Leeman concludes, quite correctly, that large rather than small firms dominate many markets, not as a result of victorious cutthroat competition and monopolistic pricing, but by taking advantage of the low costs of much large-scale production and keeping prices low in fear of potential as well as actual rivals. Leeman, “The Limitations of Local Price-Cutting,” pp. 333–34.

⁵³We have found in the literature only one hint of the discovery of this illusion: Scoville and Sargent, Fact and Fancy in the T.N.E.C. Monographs, p. 302. See also Bradford B. Smith, “Monopoly and Competition,” Ideas on Liberty, No. 3, November, 1955, pp. 66 ff.

⁵⁴In the case of depletable natural resources, any allocation of use necessarily involves the use of some of the resource in the present (even considering the resource as homogeneous) and the “withholding” of the remainder for allocation to future use. But there is no way of conceptually distinguishing such withholding from “monopolistic” withholding and therefore of discussing a “monopoly price.”

⁵⁵See the reference to Abbott, Quality and Competition, in note 28 above.

⁵⁶On “natural monopoly” doctrine as applied to the electrical industry, see Dean Russell, The TVA Idea (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1949), pp. 79–85. For an excellent discussion of the regulation of public utilities, see Dewing, Financial Policy of Corporations, I, 308–68.

⁵⁷See Mises:

Prices are a market phenomenon. . . . They are the resultant of a certain constellation of market data, of actions and reactions of the members of a market society. It is vain to meditate what prices would have been if some of their determinants had been different. . . . It is no less vain to ponder on what prices ought to be. Everybody is pleased if the prices of things he wants to buy drop and the prices of the things he wants to sell rise. . . . Any price determined on a market is the necessary outgrowth of the interplay of the forces operating, that is, demand and supply. Whatever the market situation which generated this price may be, with regard to it the price is always adequate, genuine, and real. It cannot be higher if no bidder ready to offer a higher price turns up, and it cannot be lower if no seller ready to deliver at a lower price turns up. Only the appearance of such people ready to buy or sell can alter prices. Economics . . . does not develop formulas which would enable anybody to compute a “correct” price different from that established on the market by the interaction of buyers and sellers. . . . This refers also to monopoly prices. . . . No alleged “fact finding” and no armchair speculation can discover another price at which demand and supply would become equal. The failure of all experiments to find a satisfactory solution for the limited-space monopoly of public utilities clearly proves this truth. (Mises, Human Action, pp. 392–94; italics added)

⁵⁸The first to point out the error in the common talk of “monopoly wage rates” of unions was Professor Mises. See his brilliant discussion in Human Action, pp. 373–74. Also see P. Ford, The Economics of Collective Bargaining (Oxford: Basil Blackwell, 1958), pp. 35–40. Ford also refutes the thesis advanced by the recent “Chicago School” that unions perform a service as sellers of labor:

But a union does not itself produce or sell the commodity, labour, nor receive payment for it. . . . It could be more fitly described as . . . fixing the wages and other conditions on which its individual members are permitted to sell their services to the individual employers. (Ibid., p. 36)

⁵⁹A restrictionist, rather than a monopoly, price can be achieved because the number of laborers is so important in relation to the possible variation in hours of work by an individual laborer that the latter can be ignored here. If, however, the total labor supply is limited originally to a few people, then an imposed higher wage rate will cut down the number of hours purchased from the workers who remain working, perhaps so much as to render a restrictionist price unprofitable to them. In such a case it would be more appropriate to speak of a monopoly price.

⁶⁰Cf. Mises, Human Action, p. 764.

⁶¹See Charles E. Lindblom, Unions and Capitalism (New Haven: Yale University Press, 1949), pp. 78 ff., 92–97, 108, 121, 131–32, 150–52, 155. Also see Henry C. Simons, “Some Reflections on Syndicalism” in Economic Policy for a Free Society (Chicago: University of Chicago Press, 1948), pp. 131f., 139 ff.; Martin Bronfenbrenner, “The Incidence of Collective Bargaining,” American Economic Review, Papers and Proceedings, May, 1954, pp. 301–02; Fritz Machlup, “Monopolistic Wage Determination as a Part of the General Problem of Monopoly” in Wage Determination and the Economics of Liberalism (Washington, D.C.: Chamber of Commerce of the United States, 1947), pp. 64–65.

⁶²See Murray N. Rothbard, “Mises’ Human Action: Comment,” American Economic Review, March, 1951, pp. 183–84.

⁶³The same is true, to an even greater extent, of measures of governmental intervention in the market. See chapter 12 below.

⁶⁴See James Birks, Trade Unionism in Relation to Wages (London, 1897), p. 30.

⁶⁵See James Birks, Trades’ Unionism: A Criticism and a Warning (London, 1894), p. 22.

⁶⁶We can deal here only with the directly catallactic consequences of labor unionism. Unionism also has other consequences which many might consider even more deplorable. Prominent is the fusing of the able and the incompetent into one group. Seniority rules, for example, are invariable favorites of unions. They set restrictively high wages for less able workers and also lower the productivity of all. But they also reduce the wages of the more able workers—those who must be chained to the stultifying march of seniority for their jobs and promotions. Seniority also decreases the mobility of workers and creates a kind of industrial serfdom by establishing vested rights in jobs according to the length of time the employees have worked. Cf. David McCord Wright, “Regulating Unions” in Bradley, Public Stake in Union Power, pp. 113–21.

⁶⁷Students of labor unions have almost universally ignored the systematic use of violence by unions. For a welcome exception, see Sylvester Petro, Power Unlimited (New York: Ronald Press, 1959). Also cf. F.A. Hayek, “Unions, Inflation, and Profits,” p. 47.

⁶⁸On the nature and consequences of these various criteria of wage determination, see Ford, Economics of Collective Bargaining, pp. 85–110.

⁶⁹See the excellent critique by Hutt, Theory of Collective Bargaining, passim.

⁷⁰On the Ricardo effect, see Mises, Human Action, pp. 767–70. Also see the detailed critique by Ford, Economics of Collective Bargaining, pp. 56–66, who also points to the union record of hindering mechanization by imposing restrictive work rules and by moving quickly to absorb any possible gain from the new equipment.

⁷¹In particular, see Edward H. Chamberlin, Theory of Monopolistic Competition, and Mrs. Joan Robinson, Economics of Imperfect Competition. For a lucid discussion and comparison of the two works, see Robert Trif-fin, Monopolistic Competition and General Equilibrium Theory (Cambridge: Harvard University Press, 1940). The differences between the “monopolistic” and the “imperfect” formulations are not important here.

⁷²Recently, Professor Chamberlin has conceded this point and has, in a series of remarkable articles, astounded his followers by repudiating the concept of pure competition as a welfare ideal. Chamberlin now declares: “The welfare ideal itself . . . is correctly described as one of monopolistic competition. . . . [This] seems to follow very directly from the recognition that human beings are individual, diverse in their tastes and desires, and moreover, widely dispersed spatially.” Chamberlin, Towards a More General Theory of Value, pp. 93–94; also ibid., pp. 70–83; E.H. Chamber-lin and J.M. Clark, “Discussion,” American Economic Review, Papers and Proceedings, May, 1950, pp. 102–04; Hunter, “Product Differentiation and Welfare Economics,” pp. 533–52; Hayek, “The Meaning of Competition” in Individualism and the Economic Order, p. 99; and Marshall I. Goldman, “Product Differentiation and Advertising: Some Lessons from Soviet Experience,” Journal of Political Economy, August, 1960, pp. 346–57. See also note 28 above.

⁷³This definition of the demand curve to the firm was Mrs. Robinson's outstanding contribution, unfortunately repudiated by her recently. Triffin castigated Mrs. Robinson for evading the problem of “oligopolistic indeterminacy,” whereas actually she had neatly solved this pseudo problem. See Robinson, Economics of Imperfect Competition, p. 21. For other aspects of oligopoly, see Willard D. Arant, “Competition of the Few Among the Many,” Quarterly Journal of Economics, August, 1956, pp. 327–45.

⁷⁴For an acute criticism of monopolistic-competition theory, see L.M. Lachmann, “Some Notes on Economic Thought, 1933–53,” South African Journal of Economics, March, 1954, pp. 26 ff., especially pp. 30–31. Lachmann points out that economists generally treat types of “perfect” or “monopolistic” competition as static market forms, whereas competition is actually a dynamic process.

⁷⁵And the product differentiation associated with the falling demand curve may well lower costs of distribution and of inspection (as well as improve consumer knowledge) to more than offset the supposed rise in production costs. In short, the AC curve above is really a production-cost, rather than a total-cost, curve, neglecting distribution costs. Cf. Goldman, “Product Differentiation and Advertising.” Furthermore, a genuine total-cost curve would then not be independent of the firm's demand curve, thus vitiating the usual “cost-curve” analysis. See Dewey, Monopoly in Economics and Law, p. 87. Also see section C below.

⁷⁶See Chamberlin, “Measuring the Degree of Monopoly and Competition” and “Monopolistic Competition Revisited” in Towards a More General Theory of Value, pp. 45–83.

⁷⁷See J.M. Clark, “Competition and the Objectives of Government Policy” in E.H. Chamberlin, ed., Monopoly and Competition and Their Regulation (London: Macmillan & Co., 1954), pp. 317–27; Clark, “Toward a Concept of Workable Competition” in Readings in the Social Control of Industry (Philadelphia: Blakiston, 1942), pp. 452–76; Clark, “Discussion”; Abbott, Quality and Competition, passim; Joseph A. Schumpeter, Capitalism, Socialism and Democracy (New York: Harper & Bros., 1942); Hayek, “Meaning of Competition”; Lachmann, “Some Notes on Economic Thought, 1933–53.”

⁷⁸See the above citations by Clark; and Richard B. Heflebower, “Toward a Theory of Industrial Markets and Prices” in R.B. Heflebower and G.W. Stocking, eds., Readings on Industrial Organization and Public Policy (Homewood, Ill.: Richard D. Irwin, 1958), pp. 297–315. A more dubious argument—the flatness of the firm's demand curve in the relevant range—has been stressed by other economists, notably A.J. Nichol, “The Influence of Marginal Buyers on Monopolistic Competition,” Quarterly Journal of Economics, November, 1934, pp. 121–34; Alfred Nicols, “The Rehabilitation of Pure Competition,” Quarterly Journal of Economics, November, 1947, pp. 31–63; and Nutter, “Plateau Demand Curve and Utility Theory.”

⁷⁹But cf. Abbott, Quality and Competition, pp. 180–81.

⁸⁰The author first learned this particular piece of analysis from the classroom lectures of Professor Arthur F. Burns, and, to our knowledge, it has never seen print.

⁸¹Harrod, Economic Essays, p. 149.

⁸²After arriving at this conclusion, the author came across a brilliant but neglected article pointing out that interest is a return and not a cost, and showing the devastating implications of this fact for cost-curve theory. The article does not, however, apply the theory satisfactorily to the problem of monopolistic competition. See Gabor and Pearce, “A New Approach to the Theory of the Firm,” and idem, “The Place of Money Capital.” While there are a few similarities, Professor Dewey's critique of the “excess capacity” doctrine is essentially very different from ours and based on far more “orthodox” considerations. Dewey, Monopoly and Economics in Law, pp. 96 ff.

⁸³Since the erroneous but popular theory of “countervailing power,” propounded by J.K. Galbraith, falls with the monopolistic-competition theory, it is unnecessary to discuss it here. For a more detailed critique of its numerous fallacies, see Simon N. Whitney, “Errors in the Concept of Countervailing Power,” Journal of Business, October, 1953, pp. 238–53; George J. Stigler, “The Economist Plays with Blocs,” American Economic Review, Papers and Proceedings, May, 1954, pp. 8–14; and David McCord Wright, “Discussion,” ibid., pp. 26–30.

⁸⁴Chamberlin, Theory of Monopolistic Competition, pp. 123ff. Chamberlin includes in selling costs advertising, sales expenses, and store displays.

⁸⁵See Mises, Human Action, p. 319. Also see Kermit Gordon, “Concepts of Competition and Monopoly—Discussion,” American Economic Review, Papers and Proceedings, May, 1955, pp. 486–87.

⁸⁶It is surely highly artificial to call bright ribbons on a packaged good a “production cost,” while labeling bright ribbons decorating the store selling the good as a “selling cost.”

⁸⁷Cf. Alfred Nicols, “The Development of Monopolistic Competition and the Monopoly Problem,” Review of Economics and Statistics, May, 1949, pp. 118–23.

⁸⁸See Mises:

The consumer is, according to . . . legend, simply defenseless against “high-pressure” advertising. If this were true, success or failure in business would depend on the mode of advertising only. However, nobody believes that any kind of advertising would have succeeded in making the candlemakers hold the field against the electric bulb, the horsedrivers against the motorcars. . . . But this implies that the quality of the commodity advertised is instrumental in bringing about the success of an advertising campaign. . . . The tricks and artifices of advertising are available to the seller of the better product no less than to the seller of the poorer product. But only the former enjoys the advantages derived from the better quality of his product. (Mises, Human Action, pp. 317–18)

⁸⁹See Wicksteed, Common Sense of Political Economy and Selected Papers, I, 253 ff.

⁹⁰It is difficult to conceive of a case, in reality, to which such a restriction imposed on buyers (called “perfect price-discrimination”) would apply. Mrs. Robinson cites as an example a ransom charged by a kidnapper, but this, of course does not obtain on the free, unhampered market, which precludes kidnapping. Robinson, Economics of Imperfect Competition, p. 187 n.

⁹¹See Mises, Human Action, pp. 385 ff.

⁹²An example is medicine, where the government helps to restrict the supply and thus to prevent price-cutting. See the illuminating article by Reuben A. Kessel, “Price Discrimination in Medicine,” The Journal of Law and Economics, October, 1958, pp. 20–53. Also see chapter 12 below on grants of monopoly privilege.

⁹³Henry George was a notable exception. See his excellent discussion in Progress and Poverty (New York: Modern Library, 1929), p. 411 n.

⁹⁴Richard Wincor, How to Secure Copyright (New York: Oceana Publishers, 1950), p. 37.

⁹⁵Irving Mandell, How to Protect and Patent Your Invention (New York: Oceana Publishers, 1951), p. 34.

⁹⁶This can be seen in the field of designs, which can be either copyrighted or patented.

⁹⁷For a legal hint on the proper distinction between copyright and monopoly, see F.E. Skone James, “Copyright” in Encyclopedia Britannica (14th ed.; London, 1929), VI, 415–16. For the views of nineteenth-century economists on patents, see Fritz Machlup and Edith T. Penrose, “The Patent Controversy in the Nineteenth Century,” Journal of Economic History, May, 1950, pp. 1–29. Also see Fritz Machlup, An Economic Review of the Patent System (Washington, D.C.: United States Government Printing Office, 1958).

⁹⁸Of course, there would be nothing to prevent the creator or his heirs from voluntarily abandoning this property right and throwing it into the “public domain” if they so desired.

⁹⁹See the illuminating article by Machlup and Penrose, “Patent Controversy in the Nineteenth Century,” pp. 1–29.

¹⁰⁰Cited in Edith Penrose, Economics of the International Patent System (Baltimore: Johns Hopkins Press, 1951), p. 36; see also ibid., pp. 19–41.

¹⁰¹Arnold Plant, “The Economic Theory concerning Patents for Inventions,” Economica, February, 1934, p. 44.