VII. Participating Idleness

CHAPTER VII

PARTICIPATING IDLENESS

(1) Resources are in participating idleness when their idle existence confers the right to participate in monopoly-revenues

WE COME next to the consideration of a condition which can very easily be mistaken, in some circumstances, for “pseudoidleness.” We shall call it “participating idleness.”¹ The condition arises when, as the result of a price higher than the competitive, resources remain attached to, or are induced to attach themselves to an occupation in which they are not actually employed. The inducement which prevents their scrapping is the fact that their owners acquire the privately or legally conferred right of participation in the monopoly-revenues or the chance of so doing. The right is usually contingent upon some productive services actually being offered in the monopolized field by the participating individual or firm. And some of the services available may actually be utilized. But the resources providing those services are either only partially employed or else only intermittently employed. To discuss this question we must make use of the largely self-explanatory conceptions of “enforced idleness” and “withheld capacity,” whose full significance we shall endeavor to make clear later.

(2) Participating idleness may arise under a restrictive quota scheme

“Participating idleness” in equipment is not always easily distinguishable as such in practice. Consider the case of machinery which is not working because of restrictive quotas imposed by a cartel in response to a fall of prices. Such equipment may remain unscrapped for various reasons. It is when its continued idle existence is due to the fear that quota rights will be lost if the capacity is exterminated, that participating idleness may arise. Participation rights may, of course, be obtained in other ways. For instance, arrangements may be come to enabling the plant to be scrapped. Compensation (in the form of a capital sum or its equivalent) may be paid to those who exterminate specialized productive capacity. But when compensation arrangements of this type are not resorted to, participating idleness is likely to occur.

(3) Resources may actually attach themselves in idleness to a monopolized trade because of participation rights obtainable

The extreme form arises when resources are deliberately specialized—although it is recognized that they will remain idle—because, given the existing methods of determining quotas, the right to contribute a large output, or the right to continue with the present output, is thereby secured. The “quota” is, of course, always economically indeterminate.² But the associated interests must have some formula for distribution, however arbitrary, or the whole scheme for exploiting the community will break down. They can be observed in practice to fall back upon the idea of “reasonableness.” According to this principle, the “just” output for any individual or firm seems to be one which stands in some relation to past output and existing capacity³ But each potentially competing enterprise which merges its interests within a restriction scheme will still endeavor to enhance its own rights within it. Hence a firm in this position will often insist upon retaining its capacity, or will even deliberately add to its capacity with a view to pleading for a bigger quota. In this way there arises one of the most interesting forms of “participating idleness.” In the parallel case which concerns labor, we shall see that the distributive principle seems to be vaguely related to the equal moral right of each individual. This is absent in the case of the firm. Past output is frequently the apparent determining factor; but the amount of equipment possessed is also felt to give the right (on occasion, perhaps, the power) to contribute a certain output.

(4) Unless complete mergers are possible, unused capacity is likely to be maintained for “quota-hunting”

Unusued capacity of such a nature seems to be of considerable practical importance in the modern world. Several economic phenomena typical of contemporary society arise out of it. The struggle for a “just” distributive arrangement among owners of potentially competing resources conflicts with arrangements for the curbing of productive power. In the case of a merger in which there is complete absorption of all competitors or former interlopers, it appears to be relatively easy to keep production in check and destroy capacity. But with cartels, price-rings and looser forms of association, the interests which submit to collective control are often reluctant and rebellious, threateningly dissatisfied with their quotas. It is for this reason that “withheld capacity” is likely to be preserved. The retention of actual capacity is expected to confer or to win rights of participation. And capacity may frequently be actually expanded for the same reason, a process commonly alluded to as “allotment hunting” or “quota hunting.”

(5) Since participating idleness militates against harmonious output restriction, other distributive arrangements may be sought

With equipment, it is usually recognized, however, that other distributive arrangements are possible. Indeed, there may be a strong motive for such arrangements. There nearly always exists the feeling that such “surplus capacity” ought to be got rid of. It is recognized that the psychological effect of large quantities of idle equipment militates against the “loyal” maintenance of prices. When this point of view asserts itself, another aspect of the idleness is coming to light, namely, its aggressive” potentialities. Now whilst, as we shall see, the “aggressive” aspect strengthens the monopoly in that it defends it from external interlopers, the internal situation is frequently precarious unless the distributive scheme is accepted as patently just by all those who are subject to it. If it is not felt to be just, then each member with idle resources seems to be constantly menacing the rest. The mere existence of “participating idleness” in these circumstances may, therefore, prevent the preservation of good internal relations within an output-curtailing group, just as armaments intended to bring security to individual nations appear at times likely to precipitate war. So long as “excess capacity” exists, the cartel organizers have a delicate task. It follows that, when practicable, a sort of disarmament scheme is brought into effect. The actual scrapping or physical destruction of plant is arranged with a view to removing the incentive for “allotment hunting.” Or, less drastically, internal financial arrangements lead to an agreement not to provide for depreciation or renewal of the less favorably situated plant, so that the “surplus capacity” is gradually wiped out. These internal quarrels between potentially competing interests are, however, always in danger of being patched up and the plundering of consumers given a greater measure of permanence. As peace is to the advantage of all nations considered collectively, so the preservation of the monopoly is to the advantage of the members of the restriction scheme considered collectively. If the members can only have confidence in one another’s integrity, then the presence of “participating idleness” will bring no disadvantage over and above the loss of interest on the scrap value of the “withheld capacity”; and as we shall see later, the corresponding “aggressive” function in respect of interlopers from outside will make its continuance an advantage. It will not affect the immediate optimum price for the output of the monopolist group; but it will make a higher long-run optimum possible.

(6) Interloping resources may be attracted in to share in the chance of employment in a monopolized field. The consequent participating idleness may be illustrated by the example of petrol retailing

Possibly the most important cases of “participating idleness” are those in which there are no struggles for distributive rights other than the reliance upon a certain chance of sharing in the spoils. The condition may exist when there is no effective restriction on entry into a privileged field of production. The owners of the idle resources know that through their existence and disposition, a certain chance of sharing in the benefits of a particular restrictionism will be achieved. In this instance, therefore, no question of quotas arises. A good illustration of “participating idleness” of this type in equipment is found in the provision of petrol supply stations when the retailers own or hire the apparatus. Let us assume, for simplicity, that there is competition between the companies producing and supplying petrol (i.e., competition except among the retailers themselves) so that the virtually standard nature of petrol is recognized, and that therefore separate tanks and pumps for the different brands of rival companies do not exist. Tacit or formal monopoly may still rule in the relations among the retailers themselves, and be expressed in tacit or formal price maintenance. If such relations have influenced the charge for retailing petrol in any district, and there have been no completely effective arrangements preventing interlopers from invading the market, more equipment is likely to be provided than would have been set up under competition. For there are benefits to be reaped by participation in the monopoly revenues, and the mere provision of equipment confers the chance of sharing in them. Hence the process continues, successively diluting the shares obtained by each participant. The theoretical limit is set by the situation which exists when the chance of employment (the average degree of utilization) has fallen to an extent which equates the value of an investment in the monopolized field with an investment outside. Such a theoretical limit would tend to be approached only when interlopers could really intervene successfully; and if this were so, any tacit monopoly would break down. That is, unless custom or coercion fixed the price of petrol, it would fall to a level which would be inconsistent with any idle plant other than that in “pseudo-idleness” (the case discussed in chap, III, para. 11). Contemporary social arrangements very seldom permit so economical a process, however, and a measure of participating idleness under which the earnings of exploitation are fairly widely diffused is the most common phenomenon in the retailing of petrol. The condition is manifested in more idleness or more scanty use being made of part or all of the plant than is required by the indivisibility of the efficient unit of apparatus.⁴ There is some extra capacity which, in the absence of the price agreement or tacit understanding, it would never pay to provide. For, so long as the price maintenance persists, all interloping equipment renders unprofitable (ceteris paribus) the utilization of an exactly equal capacity (on the assumption, of course, that the most profitable output is known). In these circumstances, interlopers insert a quantum into the output of services; they do not add to the output.⁵ An identical situation exists whenever we get that duplication or multiplication of plant which propagandist and other confused literature refers to as “the wastes of competition.⁶

(7) Participating idleness may easily be confused with pseudo-idleness or aggressive idleness

We must recognize that in equipment the preservation of “excess capacity” under monopoly may often be due to other motives than the achievement of “participating” rights. It is difficult to interpret actual situations. “Pseudo-idleness,” in particular, may be mistaken for “participating idleness.” Thus, the associated owners of equipment may want to have it available at a later date because they think that a revival of demand will then make an expansion of output profitable. They may believe this, even if they have a complete monopoly of their specific product. And they are even more likely to be reluctant to give up (i.e., despecialize by scrapping) productive capacity if it is their policy to forestall the intervention of potential interlopers when better times arrive; for to pursue this policy they must not unduly exploit their monopoly in response to expanding demand, and they will then be glad to have the reserve plant available. But “aggressive idleness” is probably even more easily confused with “participating.” We shall return to this question.

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1 It has been difficult to find a wholly appropriate term for this condition, the adjectives “induced” and “distributive” both having some advantages. But after some deliberation, the term “participating” has seemed most realistic.

2 That is, there are no determinants in the price mechanism which apportion output among those who share in the benefits of monopoly. From the social standpoint the division must be arbitrary.

3 On the question of “reasonableness” and the “just” quota, see W. H. Hutt, “Nature of Aggressive Selling,” Economica (August, 1935): 315–16.

4 Efficient, that is, in relation to any local concentration of demand.

5 See Hutt, “Nature of Aggressive Selling,” p. 315.

6 We must remind the reader that if the geographical (spatial) distribution of demand plus the indivisibility of the efficient unit of apparatus causes intermittent utilization there is no wastefulness present. There is “pseudo-idleness.”