CHAPTER X WITHHELD CAPACITY

(1) “Withheld capacity” or “diverted resources” arise from voluntary monopolization

“WITHHELD CAPACITY” arises when the State, or an individual or firm owning a “natural monopoly,”¹ or a firm uniting the ownership and control of competing resources, or a group of individuals or firms acting in collusion, cut down the output under their control with a view to securing the private benefits of contrived scarcities.² In so doing they obviously reduce the degree of utilization of the resources at their disposal in the particular productive process restrained. The phenomenon of “withheld capacity” will then exist if, for some other reason, the redundant resources are neither scrapped nor devoted (whilst specialized) to some alternative occupation. Resources which do find some other uses are (as we have just pointed out) “diverted resources.” They represent “waste” but there is no “idleness.” Whenever a cartel reduces quotas or agrees to pay a bonus to a member in return for the non-utilization of the whole or some part of his plant, then the “withheld capacity” type of “participating idleness” will be brought about; or, if substitute utilization is resorted to, there will be “diverted resources”; or the “redundant” resources will be scrapped. Reductions of the working day with “work-sharing” motives are, as we have seen, a parallel in respect of labor.³ “Withheld capacity” (like “enforced idleness”) can only exist in isolation when it is left as “valueless resources” in respect of non-competing utilization. It may then be said to be in its “pure” state. To be so regarded, equipment must have no positive net scrap value. If it is not in its “pure” state then it must be explained as being in “pseudo-idleness” in respect of substitute employments, or in “preferred idleness” (in the case of labor), or in “participating idleness.”

(2) Mr. Keynes’s conceptions, “expectation of return” and “disutility,” cause the distinctions which we have to discuss to be overlooked

Mr. Keynes’s approach to the problem attempts to make complete abstraction of “withheld capacity” because of the notion of “expectation of return” which he regards as determining “the level of employment.” If by “level of employment” is meant the degree of utilization of a given set of resources induced by a certain expectation of return in any industry, then it will be different according to the extent to which social institutions permit the autonomous or collusive contrivance of scarcities. Surely, then, the first stage of discussion should be focused on such institutions. The amount of natural resources or equipment offered employment in any industry of homogeneous production will be greater in the absence of a restrictive labor policy bearing on that industry; and the amount of employment of labor in such an industry will be greater in the absence of monopolistic arrangements among the owners of natural resources and equipment. Hence the study of idleness should concentrate on such restrictions, i.e., withholdings of capacity. In the actual world, the most effective collusion for restriction of production is that arranged jointly among cooperant as well as competing parties. In other words, capacity is widely withheld under “joint monopoly,” rather than as a unilateral policy resulting in less “employment” being offered to the opposing parties. Apparently failing to see the significance of this, Mr. Keynes has unwittingly made “effective demand” depend on the productive power which the entrepreneurs who control productive power allow to be effective. “Effective demand,” according to him, is the aggregate proceeds “which the entrepreneurs expect to receive, inclusive of the incomes which they will hand on to the other factors of production, from the amount of current employment which they decide to give.”⁴ His “effective demand” is, in short, consistent with, but just as useless as, his conception of “disutility” as “covering every kind of reason which might lead a man, or a body of men, to withhold their labor rather than accept a wage which had to them a utility below a certain minimum.”⁵ And other writers have followed him in this sterile approach. Thus, Mr. R. F. Harrod takes as his “determinant,” “any consideration relevant to the decision whether to do a given piece of work.”⁶ Unfortunately, “inducement to work” so defined not only places a screen round all the distinctions which this essay seeks to emphasize, but in particular diverts attention from the fact that considerations of private profit may induce a withholding of capacity for other reasons than the “utility” of leisure or the avoidance of “disutilities” other than the loss of monopoly revenue.

(3) If the monopolists’ optimum outputs are everywhere attained before depression, the further withholding of capacity in depression cannot be simply explained

The motive to withhold capacity has a more complex significance than may appear at first. When the money demand for a product is falling, a privately serious distributive situation may develop for the owners of an enterprise. That is, their proportion of the receipts may fall. Now if an entrepreneur has throughout taken the maximum advantage of price and output agreements and has been charging the monopolists’ optimum price for the product, he may be unable to resist a decline in the revenues of his firm by simply cutting output. A further restriction may not help him at all. For price depression must be in part expressed through entrepreneurs in other lines of consumption undercutting for the consumers’ favor. Hence the demand schedule for his product is not only likely to fall but to present no less elasticity over the relevant compass. In other words, his optimum output may not fall at all when producers in supposedly non-competing lines are observed to be competing. Thus, a theatre and cinema monopoly may find that it pays to lower charges for admission in times of depression to a level which results in approximately the same number of attendances. Given the obviously valid assumption that demand schedules are not independent of one another, there are no grounds for assuming that monopolists’ optimum outputs will fall, on the whole, in times of what may be called “pure price depression.”

(4) A “pure” price depression does not make the withholding of capacity more profitable

The discussion of this point nearly forces us into a field which we here wish to avoid, namely, the problem of “demand in general.” But we draw no controversial conclusions. Let us assume that the “depression” is purely a price depression, with no initial withholding of capacity⁷ We can imagine the price depression to arise owing to an increased demand for an inelastic supply of money and money substitutes. The effect of this will be that money incomes, i.e., the money valuation of the services of all resources, will fall. Ceteris paribus, the effect upon demand schedules will be a mere change of scale. E.g., in the simplest case of a “costless” commodity the fall of demand can be represented as on the diagram below, in the shift from D₁ to D’₁. In spite of the fall, the optimum monopoly output remains at OQ₁, the optimum price changing from Q₁P₁ to Q₁P’₁ If it is argued that the relative demand for different types of services must necessarily be affected, then, if there is no withholding of capacity (and it is this phenomenon which we have to explain), some demand schedules will fall to, say, the position D₂ (i.e., a fall in relation to the new scale, so to speak) with the appropriate optimum outputs OQ₂. But others will rise to the position D₃, with appropriate outputs OQ₃. The aggregate effect seems likely to be neutral. The presence of contractual obligations, avoidable costs, and specificities does not affect this conclusion; outputs OQ₂ will be larger than they would otherwise be in consequence of specificities, and outputs OQ₃ smaller.⁸

(5) Interloping is not less easy during pure price depression

It may be thought that the tendency towards monopolistic restriction of output is likely to be strengthened during price depressions by the reduced probability that interlopers will find it worth their while to construct new specialized equipment. Receipts may be well above avoidable costs for those who already own equipment, whilst they are below them for interlopers, who must incur the cost of new equipment before they can compete, and to whom, therefore, such cost is “avoidable.” But this view assumes that the prices of the services which can make the equipment do not fall to an extent which makes interloping just as profitable. Only the withholding of such services would, in general, make interloping relatively unprofitable. The market value of existing equipment may maintain the same relative value to new equipment in times of price depression.

(6) The withholding experienced in practice is due firstly to the relations of monopolistic cooperant producers

Why is it, then, that an increase of idleness is such a common response to trade depression? There appear to be two sets of reasons. The first arises out of the relations between cooperant producers who can share to some extent in monopoly-revenues. If the whole chain of producers at all stages of the productive process were acting collusively⁹ and rationally in response to the demand schedule for the final product, the considerations we discussed in paragraphs 3 to 6 would still apply That output (or that price) determined by marginal receipts and marginal costs for the whole group would be to the advantage of the whole. (The division of the maximized net aggregate receipts is a subsidiary matter.) And in times of price depression, the optimum output would, ceteris paribus, be unchanged. But such perfectly collusive arrangements do not exist. Machinery for ideal collusion cannot be set up. Hence the maintenance of the price of the unfinished commodity at one stage, by one cooperant producer, may be to his advantage. The price he fixes does not affect, of course, that price for the final product which could produce the largest margin between aggregate receipts and expenses. But it does affect the avoidable expenses of each subsequent producer. This is simply because his claim on the value of what is finally sold is expressed in terms of price per unit.

(7) The incentive, among cooperant monopolists, to arrange their collective optimum output is defeated in the scramble to preserve individual revenues

Unless there is some recognition of the collective private loss which is incurred in that way, and so the introduction of some collusive mitigation of the situation, the position can arise that a further withholding of capacity is profitable at each successive stage towards the final product. Such a situation is more likely to be present, at any stage, the less effective competition happens to be. The private disadvantageousness of the cumulative restriction from the point of view of the whole chain of producers creates an incentive towards the exercise of “reasonableness.”¹⁰ That is, there is an incentive towards collusion with a view to mitigating the results of general over-restrictionism, and if enlightenment happens to accompany this incentive, agreements and bargains resulting in the cutting of prices to consumers, and to producers at successive stages, are likely to eventuate. Now this will mean for each producer an output greater than that indicated by marginal receipts and marginal expenses before such agreements. The price fixed at any stage through negotiation may result in the demand or the supply schedule for the unfinished product rising. The extent to which this is possible cannot itself be expressed in schedules. The output of each cooperant producer and the price he obtains are as indeterminate as his share of the monopoly revenues. It seems therefore that it is the absence of institutions to facilitate the required negotiations for the optimum outputs which can cause the further withholding of capacity in times of depression. A fall of prices can precipitate a new scramble among cooperant monopolists to get as large a proportion as possible of the aggregate monopoly revenues. It may be set afoot by what are usually quite innocently motivated attempts by each to maintain his former money revenues. If the output of the final product had formerly been the optimum for the whole chain, the new output will clearly be below it. From the social point of view, however, there are grounds for assuming that the further withholding is not so serious as this suggests. For it appears probable that the monopolists’ optimum output is often exceeded in normal times.

(8) The withholding is due secondly to outputs having previously exceeded the monopolists’ optimum, probably owing to “reasonable” and not maximum profits having been sought

This brings us to the next conceivable explanation of the withholding of capacity in depression. It is possible that, in spite of the monopolistic organization of modern society, it would be wrong to suppose that the maximization of private profits is generally or frequently the goal of entrepreneurs; or, if it is, in a vague way, the object of their policy, that they are fairly unsuccessful in attaining their aim. What seems to happen is that most often the aim of producers enjoying a monopoly position is that of earning “reasonable” not maximum profits. The typical output under monopolistic conditions is above the monopolists’ short-run optimum and quite frequently above the long-run optimum. Whether this is due to a fear of the consequences of public indignation, or to a fear of giving undue encouragement to interlopers, or to a sincere feeling of responsibility towards consumers, or to a belief that a price only slightly higher than that which has ruled in the past is obviously “fair,” the fact seems to be that few firms have really conceived of the notion of the monopolists’ optimum price, still less have they tried to seek it. Even in cost accounting the conception has never intruded, and until economic analysis has some impact upon the minds of business men and accountants, it will hardly affect conscious policy. Moreover, under what has been called the “tacit monopoly” or “oligopoly” relationship, the same holds true. In these circumstances, the apparently competing firms are pursuing the policy which is loosely described by the words “live and let live.” They act “reasonably” by refraining from price-cutting, in the knowledge that they would all suffer if they did start cutting prices. Such a situation is probably nothing more than the result of the rather passive, uncritical acceptance of a customary and therefore supposedly “reasonable” price. The monopolists’ optimum price of the product for the group as a whole under tacit collusion is, in the abstract, as determinate as under formal monopoly. But in the actual world that we know, the entrepreneurs concerned can hardly be regarded as groping to find it. All they want is “fair” prices, “remunerative” prices, prices which will enable their profits to expand in accordance with their “reasonable” expectations. Hence actual prices in those circumstances must often fall much below the short-run optimum and probably below the long-run optimum also; and when depression comes the entrepreneurs find that they are in a position to minimize their losses by withholding capacity.

(9) A group may withhold capacity in its short-run interest, and against its long-run interest

But even when the withholding of capacity which most effectively protects the earning power of a producing group in the short-run is contrary to the long-run interests of those in it, the policy is still likely to be practiced. For in times of depression, entrepreneurs may often be dominated by the short-run situation. In respect of policy determined by company directors anticipating angry meetings of shareholders, this is very likely. For reasons such as these, therefore, an almost universal phenomenon of trade depression is the widespread attempt “not to spoil the market” (as the phrase goes), or to retain “fair” and “remunerative” prices.¹¹ Those policies are nearly always thought of in terms of the securing of prosperity. But it is obvious that “prosperity” in those terms spells “waste,” and the “waste” may be manifested in “idleness.”

(10) Irrational withholding of capacity is particularly likely owing to the practical indeterminateness of the monopolists’ optimum

Such irrational withholding by monopolists is particularly likely for another practical reason. Even if we imagine that the notion of the monopolists’ optimum is vaguely or clearly understood by those entrepreneurs who are confronted with circumstances which can make restriction of output profitable; even if we assume that such entrepreneurs have some grasp of the connected notions of marginal receipts and marginal costs (which define the optimum); it does not appear probable that the long-run optimum will be located except in the roughest possible manner. In practice, the aim of maximizing profits must be pursued through halting, experimental price changes. And entrepreneurs’ price strategy must be formulated in the knowledge that the short-run reactions will give a most uncertain indication of ultimate results. Furthermore, the trial and error of immediate policy must itself determine in part what the most profitable eventual price should be, through its repercussions upon tastes, consumers’ views about price reasonableness, and interloping and substitutional development. This being so, it seems probable that although the long-run maximization of profits may on occasion be an ideal which is sought as rationally as is practically conceivable, the actual position will be but vaguely determinable by entrepreneurs. Hence a strong temptation to follow short-run policies may be expected to arise in times of difficulty. That is, it is especially probable that in a proportion of cases the further withholding of capacity will appear to be the most likely means of easing private (e.g., from the point of view of a firm) distributive difficulties. Trade depression is therefore liable to be met by the maintenance (or only slight lowering) of prices which have seemed “fair” and “reasonable.” This is possibly a very important cause of price and wage-rate inertia in certain monopolized industries, and so of the withholding of capacity during trade depression in those industries.

(11) Withheld capacity may be “individually rational” but “collectively irrational”

Now it is obvious that, whether privately justified or not, the “withholding of capacity” can never be to the advantage of all producing groups, considered collectively, if they all pursue the policy. That is, it cannot benefit society.¹² On the other hand, it may well benefit some groups considered individually, if they can follow it and the producers of other things (for which they are consumers) are unable to do so. Hence, it may be individually rational whilst collectively irrational. But the policy of one group which simply refrains from restriction cannot thereby force other groups to abandon their restrictive policies. Only collective action through the State can prevent the holding back of productive power in the private interest.

(12) Withheld capacity may be “individually rational” and irrational for the group

Moreover, as we have seen in paragraphs 6 and 7, in respect of the relations between producers in the different cooperant stages of production a similar situation can exist. The producers at one stage cannot force those at other stages to drop restrictive policies by merely themselves refraining from restricting. To evade such a monopoly, they must find (or be known to be in a position to find) interlopers who may be induced to break into the monopolized cooperant field of production. But private or State powers of coercion frequently make this impossible. It follows that, in times of depression, and under States which encourage or tolerate restrictionism, the maintenance of prices (i.e., the withholding of capacity) is often the most advantageous response from the private point of view. And the output for the industry may frequently be brought, therefore, below the optimum for the industry as a whole. In such cases the withholding may be said to be “individually rational” but irrational for the group. “Reasonableness” alone will enable withheld capacity to be re-utilized and the optimum for the industry as a whole to be reached, unless collective action through the State dissolves all restrictions.

(13) When indivisibilities are large, the withholding of capacity may not, in rare circumstances, conflict with the consumers’ sovereignty ideal

In one set of circumstances, the withholding of capacity by an individual entrepreneur has some apparent justification in the light of the consumers’ sovereignty ideal, namely, in all those cases in which price discrimination by a natural monopolist is to any extent defensible. Such cases are, we believe, of negligible importance in practice;¹³ but for completeness we must mention them here. For simplicity, let us consider the situation in the absence of price discrimination. The problem arises owing to what has been called the “technical factor,” the indivisibility of the efficient unit of supply of certain kinds of equipment. For example, a machine capable of producing 100 units of service a day may be purchased, whilst only 50 units of service are actually required, the reason being that a smaller machine is unobtainable at all, or unobtainable except at a higher cost. Hence, with a constant demand, there will be some continuous “surplus capacity.” If this “surplus capacity” has no hire value, it merely represents pseudo-idleness. If it has hire value, it appears at first to represent withheld capacity. But if competitors actually had the right to bid for its unutilized services in that case, they might be able to undercut the original entrepreneur. The “full employment” of that plant, if the sense defined in chapter 1 is crudely interpreted, might result in its capital value falling to less than was originally paid for it. It is theoretically possible, therefore, that only the ability to prevent interlopers from using that capacity in such cases would lead to the enterprise being undertaken at all. Under existing institutions, of course, natural monopoly already gives more than sufficient protection when this situation is in any measure present; and under competitive institutions, a limited right to “withhold capacity,” if that term is really justified in this sort of case, could be conferred on an entrepreneur by contract prior to investment, when clear cut indivisibilities acting in the manner here described could be proved. In such a case, the contractually permitted idleness ought to be regarded as pseudo-idleness, just as a patent restriction which is really in the consumers’ interest ought not to be regarded as leading to a contrived scarcity in the light of the consumers’ sovereignty ideal. There is really “full employment” of a piece of equipment in our sense if those who voluntarily make use of its product are called upon to pay a sum the expectation of which is the minimum required to make its provision profitable.¹⁴

(14) Mr. Keynes’s “involuntary unemployment” may be intended to refer to the case of withheld labor capacity which is “collectively irrational”

We can now return to Mr. Keynes’s conception of “involuntary” unemployment. In chapter vi, we pointed out that the workers’ alleged resistance to wage-rate reductions and their alleged acquiescence in a rise in the cost of living might not be due to “irrational preferences.” Such a situation could be due, instead, to irrational policies, which is an entirely different question. It is obvious from our discussion in paragraphs 11–12 that there is no essential irrationality in respect of restrictive or exclusive policies judged by standards of private advantage. But there may be gross blindness in the failure to work for the collective removal of restrictions and exclusions which may be collectively burdensome to all; and other practical circumstances may lead to misconceived policies. We agree with Mr. Keynes (if this is his suggestion) that grave misconceptions frequently bear on policy in the field of labor whenever the workers endorse, or their leaders formulate, policies which withhold or exclude labor. The collective aspect of restrictionism may not be seen and the workers may be injured by their intended protections. In endeavoring to obtain the maximum earnings for themselves their attention may be focused on money-rates. What earnings can purchase for the recipients may be but dimly envisaged as a connected result. And the “cost” relationship of one industry to another may be equally vaguely perceived. If the leaders of organized labor really understood how private restrictionism burdened the laboring classes as a whole, they might recommend wage-rate reductions to prevent a futile, self-stimulating and cumulative withholding of capacity. But widespread reciprocal action, involving also the mitigation of restrictions imposed in the defense of dividends, might be necessary to make such a policy seem superficially tolerable.

(15) Mr. Keynes’s conception seems to be based on the assumption that the power to withhold capacity cannot be restrained and that the resulting idleness can be avoided only through monetary policies

The “involuntary unemployment” which Mr. Keynes discusses may possibly be meant, then, to refer to “collective irrationalities” in the sense which we have just discussed. If so, he seems to be arguing that restrictionism in the labor market constitutes an insurmountable barrier, and that readjustments eliminating “involuntary unemployment” can be obtained only through the “real” rates of earnings of labor being reduced in a tactful way, i.e., by leaving money wage-rates untouched, a stratagem which can be best accomplished by inflating prices through monetary policy. Unless this is a misinterpretation of his view, he cannot rightly compare orthodox economists (who hold that restrictionism—whether rational or irrational—cannot be taken for granted) with “Euclidean geometers in a non-Euclidean world, who discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight.”¹⁵ Those orthodox writers who have sought to apply classical theory to social problems have thought in terms of institutions, human knowledge and the observed conduct of men. Experience of these things has never led to their being expressly described as inevitable by the critics of orthodoxy. How far can the social scientist so regard them? Suppose the source of rigidity in the labor market has to be ascribed to the necessity for saving the face and preserving the livelihood of trade-union leaders; or suppose it is believed to be due to the fact that the finance of a large political party and the maintenance by it of an immediately purposeful and popular program necessitates the continued belief on the part of the masses that wage-cuts represent the exploitation of the “have-nots” by the “haves”; or suppose we feel that the origin of such rigidity lies deeper and involves capital organization and ideologies as much as it does those of labor; are we, as practical economists or sociologists, to accept these facts as natural or as inevitable and so treat them as fundamental assumptions?

(16) The economist cannot regard the withholding of capacity as inevitable

The politicians may have to regard certain irrational monopolistic policies as inevitable during the present age. And as pure theorists, we may find it convenient, on occasion, to reason from the assumption that a rigidity based on palpable social blindness is unavoidable. If so, we must state that assumption explicitly. But as realistic students of society, we have to face the truth that such rigidities are based on institutions which it appears to be within the power of society to change. The politicians may well retort that to be frank about this issue is to display a pathetic political naivety; that to question the sanctity of the right of “collective bargaining” must of necessity condemn the social scientist to impotence. But that can hardly deter those of us who are not selling policies in return for power. We need not, indeed we must not, accept the view that because the leaders of labor will not advise a strike for increased wage-rates against a rising cost of living, whilst they will be forced to resist wage-cuts, an inflationary policy is justified in the light of some accepted social ideal. As realistic students of contemporary institutions, are we not bound to recognize the stark fact that the system whose effects it is hoped to avoid by the inflation stratagem remains unshaken? Of course, Mr. Keynes’s case for the monetary policies he recommends rests upon much more subtle arguments than those which we have here examined; and he would certainly deny that his suggestions can rightly be called “inflationary.” But it does appear to be crude reasoning of this type which is most likely to win for his point of view the support of “practical men.”

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1 On the distinction between “natural monopoly” and “natural scarcity” see W. H. Hutt, “Natural and Contrived Scarcities,” South African Journal of Economics (September, 1935). See also Appendix to this chapter on “The Conceptions of ‘Collusive’ and ‘Natural’ Monopolies.”

2 In the case of the State, and when the resources are State-owned, taxation may be the motive.

3 Of course, slow running in the case of plant and ca’ canny in the case of labor may mean that there is no increase in the hours of conspicuous idleness. “Idling” may not be visibly recognizable as “idleness.” But the problem is obviously similar. The “waste” is of the “idleness” type, not of the “diverted resources” type.

4 J.M. Keynes, General Theory of Employment, Interest and Money (New York: Harcourt Brace, 1935), p. 55.

5 Ibid., p. 6.

6 R. R Harrod, The Trade Cycle (London: Oxford University Press, 1936), pp. 9-10.

7 That is, we assume that the quantity theory in its simplest form is operative.

8 We cannot here discuss the supposed repercussions of the rise in the rate of interest upon the propensity to consume or to buy durable goods; for although it can be argued that a new preference for less physical consumption (e.g., of things other than leisure), or a new preference for more security (liquidity), can precipitate valueless resources, there are no grounds for assuming that they can lead to the further withholding of capacity in relation to the new preferences.

9 We use the terms “collusive,” “collusion,” etc., with no suggestion of nefarious design, but in the sense of “cooperative,” “cooperation.” The latter terms would, unfortunately, have been even more misleading.

10 See below, chap. XI, para. 1.

11 As a rule, the notion of “not spoiling the market” is hardly a rational one; it usually implies nothing more definite than is conveyed by the phrase “cut-throat competition.” But it may have a more definite meaning. This arises from the belief that a temporary fall in price may result in an increased elasticity of demand for a product at prices above that to which it falls. Such a phenomenon would be explicable on the grounds that purchasers get used to the lower price, come to regard it as just or as the correct price, adjust their other expenditure to it, and in further ways come to acquire an outlook which leads them to spend relatively less in buying the commodity when it returns to its former price. The loss in such a case is a private one, however. We must remain neutral on the question of the goodness of such a situation. But if, as the effect of the temporary fall, taste and preference are materially and widely altered, it may be interpreted as a desirable thing. We can regard it as having stimulated an experiment in the distribution of individual spending power leading to a deliberate change in that distribution. The fear of spoiling the market must be distinguished from the fear of causing the monopoly to break by price cutting.

12 It might be urged in criticism of this sort of assertion that it is based on an analysis which ignores the financial consequences of value changes. In the world as it actually is, the withholding of capacity might be held to be socially beneficial if used to obviate bankruptcies, insolvencies, forced sales and recapitalizations with all their disturbing effects upon financial markets. But all sorts of otherwise indefensible policies could be defended on similar grounds, namely, that they preserve a distributive situation due to faulty capitalization policy in the past from violent change and from consequent destructive repercussions. How far it is justifiable to ignore the long-run effects of protecting entrepreneurs from the consequences of their own erroneous actions we cannot here discuss; for we are not attempting to deal with the expediencies which must dominate practical policies. We are simply concerned to make clear all the issues which should be considered in the formulation of policies.

13 See on this point Hutt, “Discriminating Monopoly and the Consumer,” Economic Journal (March, 1936).

14 If price discrimination is practiced, in the circumstances which justify that practice, full (i.e., optimum) employment may exist in spite of capacity being apparently withheld from those purchasers from whom the higher price is demanded, and in spite of that capacity being apparently left as “diverted resources” (i.e., utilized for the benefit of those purchasers from whom the lower prices are demanded.) But defensible discrimination (or the parallel withholding of capacity under uniform charging) is really nothing more than a means of enabling those classes of consumers for whom certain goods or services satisfy relatively urgent wants to induce entrepreneurs to invest the necessary capital. Discrimination enables the entrepreneur to recoup himself for such capital expenditure from the consumers who pay the higher price. After a while, that capital must be regarded as paid off, however; and then continued idleness may entail real withholding of capacity, and continued discrimination must entail real withholding of capacity and diversion of resources. Keynes, General Theory, p. 16.

15 Keynes,General Theory,p.16.

APPENDIX TO CHAPTER X

ON THE CONCEPTIONS OF “COLLUSIVE” AND “NATURAL” MONOPOLIES

IN THIS DISCUSSION, we have used the term “monopolist” to cover controllers of natural monopolies as well as controllers of collusive monopolies. A monopoly is “natural” when it does not depend upon any amalgamation of interests through the purchase of competing resources or any other form of contractual or tacit collusion. In practice, the natural monopolist is one who owns some unique source of supply, or enjoys what the present writer has called “the advantage of site and size” (i.e., “geographical advantage” or “scale of production advantage”). Now, every entrepreneur confronted with a downward sloping long-run demand schedule is a monopolist unless his autonomy is limited in some other way. And one method of attempting to limit such autonomy in the case of natural monopoly, is public utility control. The object of public utility control is presumably to restrict entrepreneurial powers in such a way as to convert a monopolistic situation into a competitive one. We use the term “competitive” because the attempt is clearly to enable the disposal of the resources at the entrepreneurs command, not according to private interest, but in accordance with the interests of society; and the free movement and utilization of resources, regardless of private interests which are thereby injured, is what orthodox economists have in fact meant by competition. That was, by implication, the traditional meaning of the term until recent abstract expositions started applying adjectives like “monopolistic,” “imperfect” or “impure” to “competition.” Distinctive names may be more appropriately applied to the institutions within which the essentially homogeneous force of competition tends to bring about an equilibrium. One does not talk about “buoyant,” “imperfect” or “impure” gravity because there are balloons and aeroplanes.

The natural monopolist is in a position to benefit by allowing scarce resources or scarce available services to be wasted; and he is in a position also to exclude resources from coming in to cooperate in the field under his control. That is, he can limit investment to his own advantage. But he is in that position because of existing institutions. Hence Mr. Kaldor’s suggestion¹⁶ that the notion of “institutional” monopolies should be confined to those based on “restriction of entry,” and that natural monopolies (arising from economies of scale) should cease to be termed “monopolies” seems to be based upon misconceptions. Natural monopolies equally exist because institutions permit them. And they restrict “freedom of entry” in exactly the same way that collusive monopolies do. This is most clear in respect of the amount of cooperant resources which they allow in. Their demand for such resources is limited by the identical principles which limit collusive monopolists’ demand for cooperant resources. But even when they waste part of the supply of “costless” but scarce homogeneous products (e.g., a mineral water spring, part of whose output is allowed to run to waste), they do so by “restricting entry” in the sense that they deny access to the supply. And when natural monopolists “withhold capacity,” they do so for the same reasons as collusive monopolists, and with the same effects.

We have thought it necessary to make this point because there seems to be a rather vague tendency in some academic quarters to suggest that, because natural monopoly exists, and because to some extent almost all productive activities enjoy some uniqueness, attempts to create competitive institutions must be visionary. Such a view implies that withheld capacity is inevitable when it depends upon natural monopoly. We do not accept that view, although we cannot here discuss the institutions necessary to limit the autonomy of natural monopolies, just as we have not here been concerned with the actual means of dissolving collusive monopolies. But we admit that the problem of public utility control has so far received even less satisfactory discussion than the problem of antitrust policy in respect of amalgamations and associations. And it may well be that control of the former constitutes a much more practically difficult problem than control of the latter. Nevertheless, the framers of social policy who are concerned with the idleness of resources and its connected problems need not be unduly perturbed by such difficulties. For apart from the large public utilities (which are in any case usually protected also by collusive agreements or legal enactment), natural monopoly can be observed in practice to be of relatively small importance in comparison with collusive monopoly.

In the absence of collusive monopoly (in conspicuous or unrecognized form) there can be little withholding of capacity.¹⁷ It is true that each individual in the labor market may, in addition to purchasing leisure, endeavor to maximize his earnings by holding back his services. But only in the case of rare skills, such as those of virtuoso musical performers, can any importance be attached to this possibility.

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16 N. Kaldor, “Professor Chamberlin on Monopolistic and Imperfect Competition, “Quarterly Journal of Economics 3 (May, 1938 ): 523‒29.

17 The reader must be reminded that the withholding of stocks has nothing to do with the withholding of capacity. Stocks of commodities are only withheld in our sense when their liquidation is proceeding at a rate slower than that required by the social interest (that is, under the consumers’ sovereignty criterion, consumers’ interest). See chap. III, para. 13.