Prices According to Law

I

‘The king shall set the price for the purchase and sale of all commodities according to the place of origin and destination, the profit of the seller and the needs of the purchaser. Once in five days or a fortnight, the king shall publish the price of commodities in the market.’

THIS quotation is not from the laws of Utopia, but from the code of Manu, which appeared among the Hindus perhaps two hundred years before the birth of Christ. It was Thoreau who remarked that it is a strange result of civilization that we never find a man engaged in such a simple and natural occupation as building his own house. At first glance, it seems almost equally strange that we do not find the government of the United States engaged in the primitive practice of fixing prices. In courts and police the average citizen has only a remote and secondary interest, but in his household bills his interest is keen and constant. He would take real satisfaction in paying taxes to a government that spent some of the money in keeping down the daily levy by his butcher and his grocer. And if the weight, the quality, and now even the advertising of commodities is regulated, why not the price? To most buyers the price is the main point.

The idea of government regulation of prices has been gaining increasing support. Former President Roosevelt is advocating it, apparently as a disciple of President Van Hise of the University of Wisconsin, who in his book Concentration and Control takes the position that such regulation might be a salutary check upon the power of monopolies. The suggestion does not seem to terrify the managers of great concerns, for Judge Gary of the United States Steel Corporation expressed himself before the Stanley Committee as not averse to it. A natural repository of power over prices would be the Interstate Trade Commission, although the act creating this very important new commission does not grant such authority.

What accounts for the absence of statutory law about prices is, of course, faith in economic law. Historically speaking, this widespread and deeply rooted belief in the efficacy of the law of supply and demand is of recent origin. In 1777 the legislature of Massachusetts, acting at the suggestion of the Federal Congress, passed a law fixing maximum prices for many commodities and authorizing the boards of selectmen to fix prices for other articles. Similar provisions were enacted in New York in 1778. These laws represented an attempt to continue a long-established policy of Parliament. When modern trade and industry began to develop, it was supposed that state or institutional control was necessary to direct the economic efforts of the individual to socially beneficial ends. Throughout the Middle Ages business was everywhere regulated in one way or another in minute detail. In England, when, owing to some sudden change of conditions, prices rose noticeably, statutes were likely to be passed to keep them down. Thus in the middle of the fourteenth century, after the Black Death had decimated the population, the attempt was made to restrict wages to such rates as had formerly been customary; and perhaps in the hope of enabling laborers to live for their former wages, prices also were regulated. The first provisions in regard to prices were rat her vague, but in 1363 a statute was enacted which provided among other things that the price of a young capon should not pass three pence, or of an old hen or a goose, four pence. Under a law of 1533 the price of cheese, of butter and fowl and other necessary victuals, was to be fixed from time to time by certain justices and other officers. As late as 1758 Parliament reenacted the Assize of Bread, regulating the price and make-up of loaves — the law occupying some seventeen pages of the statute book.

The attainment of the economic freedom of the individual is doubtless one phase of the movement toward individual liberty which began with the Reformation. Religious liberty and political liberty were, however, sought before economic liberty. The principles of such liberty, while earlier proclaimed in France, had their first broadly effective exposition in England in Adam Smith’s Wealth of Nations, which was not published until 1776. The underlying and justifying idea of the economics of individualism therein expressed is that the individual, left free to direct his own activities, will conduct the economic process far more wisely and effectively than could any governmental or other controlling agency. He will produce the commodities which are most needed, because he can get the best prices for such commodities. He will always try to get the highest price for his wares; but his profit cannot for any considerable period be large, because large profits will attract other self-directing producers into the field. This will result in a larger output of the commodity, and in order to create a demand for the whole of this output, the producers must make a lower price. This increase in theamount of the product will continue until prices are forced down so as to yield only a fair average return upon the investment required for production, such a return being a necessary element in the cost of production. Thus, when individuals are left industrially free, the play of the forces of demand and supply in the long run fixes the price at the cost of production, and that is the fair or ‘natural’ price.

No view could be more comforting to hold than this now classical view of spontaneous or automatic regulation of production and prices. But most of the comfortable views of our forbears have been abandoned. Must we not also discard their faith in competition?

The offhand answer is almost sure to be ‘Yes.’ And the reasoning of the advocate of the regulation of prices runs somewhat as follows. Fifty or a hundred years ago, when production was on a small scale, there may have been effective regulation of prices through competition. But the improvement of means of communication and transportation, and of methods of production, has ended that idyllic state. Instead of local markets supplied by small local firms, we have nation-wide markets supplied by colossal corporations. Competition between or with such industrial giants proved disastrous, and in order to turn losses into gains, producers inevitably combined. A combination of all producers could raise the price of the product without much regard for the cost of production. To prevent extortion through price-inflation, legislative bodies declared that there should not be combination or monopoly, or in other words, that competition must continue. In spite of the anti-trust laws, combination went on, in obedience to the more imperative mandate of economic law. It would be far wiser now to recognize combination or monopoly than to attempt to restrain it or root it out. Competition, as the regulator of prices, having broken down, fair and just prices should be fixed by the government. This seemed to be the theory and policy of the Progressive party — this bit of progress dating back, as the introductory quotation shows, to early Hindu civilization.

If we are to-day quick to doubt the faith of the fathers, let us also be slow to embrace any new faith; otherwise we may simply substitute new error for old. Before giving ear to the benefits of regulation, is it not well to press an inquiry as to the terms and conditions under which it would be possible, — to be clear as to the price of this plausibly commended remedy? The price of commission regulation is monopoly — not partial monopoly, not monopoly in certain industries only, but complete and permanent monopoly in any field in which producers care to combine. Advocates of regulation seem inclined to emphasize only the restraints which they would impose upon monopoly. It is the primary purpose of this article to set forth the restraints which they would have to remove. A further purpose is to point out the difficulties of dealing with the organization of industry which would follow upon the removal of those restraints.

II

It is obvious that the regulation of monopoly in respect to price, or in any other respect, implies and involves the existence of monopoly. Regulation is totally different from prohibition; the regulation, for instance, of the sale of intoxicating liquor involves the permitting of the traffic. What is not obvious at first glance, however, is that for economic reasons, the successful application of any principles of price-regulation would be impossible unless all producers of each commodity or class of commodities were brought into a single organization or group. The fact is that any commission-fixed price would operate upon some producers with ruinous injustice unless a system of production were adopted under which all producers operated at substantially the same cost of production, or under which each was assured of a proper share of the business. This condition would be possible only under a system of monopoly.

Mark Twain tells us that Adam, when he came to name the different animals in the Garden of Eden, hit upon the right names by a very simple process: ‘That creature looks like a toad. It hops like a toad. By George, I am going to call it a toad!’ It might be supposed that a commission could determine fair prices in the same straightforward fashion. ‘Five cents a pound sounds like a fair price for sugar. It is what we used to pay; it is all that we ought to pay. Let us decree that sugar shall sell for five cents a pound!’ Now, this is apparently what Parliament attempted to do in the fourteenth century with prices in England — to establish as the lawful maximum price the price that had been customary. There was no attempt to determine whether the customary price was just, or whether, even if it had formerly been just, conditions had not so changed that it had ceased to be adequate.

Under normal circumstances, there is but one test or measure of the justice of the price of a commodity, — namely, the cost of producing that commodity, — including in the term ‘cost’ all elements which have to be provided for in order to continue the process of production, — such as reward for business management, and return upon the investment, as well as labor, operating, and maintenance costs. Market price is a mere ratio of exchange: it is an expression, put for convenience in terms of money, of the amount of other commodities which will be exchanged for any one commodity. Actual prices may be just or they may be entirely unjust. A great merit of the competitive process is that it tends to make the market, or actual, price, at least of articles whose value does not depend primarily on their rarity or style, conform in the long run to the cost of production. A regulating commission could not do otherwise than try to secure by its decrees correspondence between the cost of producing commodities and the price of the commodities. It would have in each case to ascertain this cost of production and to fix a price sufficient, and only sufficient, to repay that cost to the producer.

The cost of production is the only basis that public utility commissions have worked out for fixing the rates for the services of railroad, lighting, and other companies. It was at first supposed that the value of the service to the consumer (‘the needs of the purchaser ’) would form a test for rate-fixing, but there is no way of standardizing needs and making them a definite basis for rates. In the great body of decisions as to rates, there is conflict upon many points, —conflict astonishing to those not familiar with the difficulties of the problems, — but as to the great object to be attained in fixing rates, all commissions now seem to agree. That object is to fix rates sufficient and only sufficient to pay the legitimate costs of rendering the service. In other words, they are fixed according to what the Hindu sage referred to as ‘the profit of the seller.’ And they have to be so fixed if the service is to be continued.

For commissions dealing with railway and lighting properties, the task of adjusting rates to cost, while exceedingly difficult, is not ordinarily impossible. What makes it possible is the fact that as a rule each public service company has a monopoly of a certain kind of service in a particular territory, or upon some particular route. This enables the commission to consider all the circumstances of each company and so to adjust a schedule of rates for each company as to yield to the company a fair return and only a fair return for the service rendered. The commission can predict with substantial accuracy what revenue a given rate will actually yield to a company, for the reason that as most of the customers of the company are in effect forced to use its service, the total volume of business of the company from year to year is assured. In the instances in which the commission cannot consider the circumstances of a particular company, but has to fix flat rates applying to more than one company,—as in the case of the rates for competing railroads, or where the volume of business of a company fluctuates sharply, as recently in the case of some of the railroads, — rates fixed by commissions work injustice.

III

A trade commission would then have to establish rates upon the basis of the cost of producing commodities, but the conditions under which it would attempt this are in the main utterly different from the conditions under which public service commissions are acting. Indeed, a railroad commission confronted with the task of fixing the price for, say, shoes, might feel much like the driver of a well-broken team of workhorses who should be asked to move his wagon with a herd of wild mustangs. The object to be attained is clear, — to get an even, steady, dirigible pull on the whiffletrees, — but how to get such a result from that varied assortment of undisciplined and independently operating animals is a wholly new and terrifying problem.

Perhaps the most striking difference between the manner of carrying on public utilities and the manner of producing and marketing commodities is that, while each utility company usually has a monopoly of a certain service, industrial concerns located in different places, and operating under very different circumstances, sell their wares in the same markets. The country’s supply of shoes is said to be produced by some fourteen hundred establishments. This industry is, of course, highly individualized; but if we turn to the other extreme, — steel, — we find that even the vast United States Steel Corporation produces by no means all of the steel product in its own lines. It probably does not produce sixty per cent of the total product. The experience of the past two decades has not borne out the prediction that single concerns would eventually swallow up all the business. It has seemed rather that, if industrial conditions in respect of railroad-rate facilities, credit facilities, and the like, are kept fair for all producers, well-managed independent concerns can maintain and even increase their shares of the business. And every business man recognizes that different concerns in the same industry do not produce their goods at the same cost.

Under present conditions, therefore, a trade commission could not, like a public service commission, establish rates for individual companies, each rendering a distinctive service; it would have to establish flat prices for the total output of various commodities, portions of the output being produced by a number of different companies. Obviously a rate which would yield one company or a group of companies only a fair return, might yield excessive returns to a second company or group of companies, and might mean ruin to a third company or group. Only a few companies would fit the Procrustean bed erected by the decrees of the commission. Even the company or group which might be supposed to receive the normal return under any rate, might at any moment find that owing to some change in the method of production or in the character of the trade, a large part of its business was being taken by competitors, and that under the commission prices it could not make both ends meet. If there had been no limitation of prices, its directors might properly believe that large profits might have been made when conditions were favorable, which would have served to offset the losses later sustained under adverse conditions.

It may be urged that under competition flat prices are established for all, just as they would be established by a commission, and that they operate among producers in just this unequal fashion. But the very object of resorting to commission regulation is to substitute a reasoned and just rule for the soulless grind of economic law. A commission could not limit prices upon the basis of the cost of goods to the more efficient producers without accepting responsibility for the ruin of many worthy enterprises.

No one, however, has seriously advocated the regulation of prices except for monopolies. The advocate of regulation always assumes that monopolies actually exist which would be fitting subjects for regulation. Such an assumption may suffice for popular political discussion, but only a few of the organizations which the public has come to regard as monopolies would be found to have anything like that degree of control of an industry which would make possible the application of price-fixing principles. A concern controlling little over half the output of a commodity may be thought of as a trust or monopoly; yet if the prices of that concern alone were regulated, and its profits restricted, it might easily happen that some of its competitors not subject to regulation might cut deeply into its business. To prevent a company from making large profits and yet leave it subject to all the hazards of competition is to tie its hands and yet compel it to fight.

Mere large-scale production would by no means furnish an adequate basis for price-regulation. Actual monopolies would have to be legally assured. Concerns now merely dominant in their fields would have to be allowed to obtain, either through absorption or combination, substantially complete control. This would involve the active and continuous suppression of competition. In Massachusetts it is provided by law that when a regulated public service company is once established in a particular territory, it cannot be subjected to the competition of some new company unless the regulating commission deems the additional service of that new company necessary for the accommodation of the public. If price-regulation were undertaken, it would be necessary, not merely to bring all existing producers in every regulated industry into a unified group, but also to prohibit the entrance of new concerns into the field unless in the judgment of the commission the additional service was necessary.

Nor could the development of the monopoly be confined to the fields in which large concerns are already dominant. It is sometimes suggested that the production of some commodities can best be carried on by monopolies, while the production of others can be at least equally well carried on by a number of concerns, no one of which controls the whole field. Even assuming that the truth of such a proposition were to-day demonstrated to the satisfaction of economists, the only self-justifying method of determining whether monopoly would for economic reasons become established in any industry, is to remove all legal obstacles to the establishment of monopoly and let the producers themselves decide the question. As a practical matter, if monopolistic combinations for the producers of some commodities are legalized, combinations of the producers of other commodities cannot be branded as criminal. Nor is it conceivable that any commission could be vested with the right to decree peace or war for an industry. To undertake at this time to legalize complete monopolies in fields in which large concerns have become dominant, would be to penalize producers in other fields for their compliance with the anti-trust laws.

Price-regulation involves the establishment of absolute monopolies in the fields in which control is already much concentrated, and also the permitting of monopolies in the fields where competition is now the rule. Let no advocate of such regulation describe himself as the foe of monopoly; he is in fact the stanchest friend and supporter of monopoly.

IV

To have industries in a form permitting the regulation of prices, it would then be necessary to permit or force the organization of industrial monopolies. The right to fix prices to be charged by these monopolies would be a stupendous power over them; yet the difficulties of successfully exercising that power would be very great. To simplify the problems and to lessen the conflicts of interest, government ownership of the monopolies would seem an almost inevitable step.

A federal commission vested with power to fix prices would need to have jurisdiction over the entire business of the regulated corporations. The Interstate Commerce Commission and the courts have attempted to draw a line between interstate business and the intrastate business of the great carriers. The line, however, is not at all clear, and it is recognized that Congress may in effect regulate state commerce if it deems this necessary for the proper regulation of commerce which is interstate. To separate the interstate business from the state business of industrial concerns would be a hopeless task. At the outset, therefore, the control of the Federal government would have to be extended to cover all big business, and to cover it in all its phases. Indeed, this is what is advocated by believers in the policy of regulation.

Now the production and distribution of commodities, even by monopolies, is a far more complex process than the rendering of services in transportation or lighting. Public service companies, in the phrase of business, turn out a finished product, which is sold directly to the consumer. Many industrial concerns, however, like the steel companies, turn out products which are sold to other manufacturers, the finished product of one industry being the raw material of another. The producers of commodities are interdependent, and the fixing of rates for one would involve consideration of many others. An added complication is that price is only one term of the sale of goods, and this term could not be effectually fixed without fixing all other terms of sale. Some of these are the length of credit, discounts for purchases in quantities, method and time of delivery, and the right to return goods.

For business men themselves to determine the actual cost of past production, even for a single concern, is often most difficult. To determine in advance a cost which can be maintained over a considerable interval of time, during which many conditions may change in an unpredictable manner, they would regard as almost impossible. But the greatest difficulties in commission regulation would spring from the fact that the determination of theoretically just costs involves the fixing by the commission of all factors which enter into cost, — not merely the return upon investment, but wages and salaries, and all operating and maintenance charges.

In the earlier years of rate-regulation, the actual expenses of companies were generally accepted as constituting the necessary costs of operation. In recent years, the steadily increasing tendency has been to reject such figures and take instead theoretical figures based upon the commission’s judgment of what costs ought to be. This tendency has been notably manifested in the recent decisions and opinions of the Interstate Commerce Commission. In accordance with this tendency, priceregulating commissions would sooner or later have to determine wages; indeed the increase of wages by boards acting independently of rate-fixing boards is intolerable, and for any long period, impracticable. Furthermore, commissions would have to determine operating methods and business policies, for costs of production depend upon such methods and policies.

It would then be for the commission ultimately to determine the tasks, the working conditions, and rewards of all those interested in any industry, and to lay out the methods to be pursued in that industry. And most important of all, the commission would have to determine the amount of the output of goods in every regulated industry. So long as industries are in private hands, the amount of goods which will be produced depends directly upon the price; if the price is increased, more goods are produced; if the price is decreased, less will be offered. Consumers, therefore, would have to depend for their supply of goods, not upon the quick response of independent producers, but upon the judgment and action of the commission.

The questions most vitally affecting all those interested in any industry — investors, managers, employees, and consumers of the product — would then have to be settled by the price-regulating authorities. All this involves an infinite burden of detail, infinite argument, and also infinite delay, but what is most obvious is that there is so far little ground for even hoping that these problems could be theoretically solved in a manner satisfactory to the different groups interested. The actual outcome would be likely to be political, and politics would consist largely of a struggle for the control of the all-powerful regulating body. The contest would be a contest of wills rather than a contest of ideas or theories. Inevitably, the issue would be drawn between the control of the monopolies by the government and the control of the government by the monopolies. And there is but one probable outcome of such a conflict, and that outcome is the government acquisition of the industrial monopolies. This is precisely what was predicted by Karl Marx: first monopoly, then government ownership. Many acute students of the regulation of public service companies already believe that the complications of regulation even in this limited field will result in government ownership of these companies. The regulation of public service companies is very much simpler than the regulation of industrial companies, and so long as industry remains in private hands, it may be possible to continue this great compromise as to the control of public service companies. If the regulation of monopoly is to be attempted in the complex and everchanging field of general industry, the experience with public service companies affords little ground for challenging the prediction of the founder of modern Socialism.

V

To hold that commission-made prices necessitate monopoly and mean ultimate government ownership, is by no means to maintain that competition is all-sufficient. We cannot believe with the classical economists that industrial freedom necessarily results in commercial and industrial justice. While progress results principally from the spontaneous and free action of individuals, it is also true that civilization rests upon restraints upon the natural and selfish actions of individuals. Restraints are as necessary in the economic field as in every field in which the interests of individuals may conflict, and as conditions become more complex, the restraints must increase in number.

The Sherman law is of course, in one sense, a restraint, and in another sense a guaranty of freedom. In the interest of producers as a whole and of the public, this law prohibits the development of any one concern into a monopoly. Just what degree of growth in size and trade-control, short of monopoly, is prohibited by the act as now supplemented, we do not know. Certainly the act does not commit the country to mere small-scale production, and there is ground to believe that it does not prohibit such developments of size and scope as are necessary or advisable for the highest degree of productive efficiency. There are those who hold that the maintenance of economic freedom, as this law is intended to maintain it, is all that is socially necessary. Experience shows, however, that it is not sufficient to preserve and protect competition; many conditions of competition must be prescribed.

In all civilized countries of to-day, the standards of living are such that enormous quantities of commodities are demanded for daily use. The production of the supply of these depends upon the efforts of countless individuals, efforts constant and laborious. Under an industrial system based on economic freedom, the individual, instead of having a set task at a fixed return, depends for his income upon the reward which others voluntarily make for his services. These services may take the passive form of permitting others to use in some manner something that he could use wholly for his own immediate benefit, or the active form of personal effort, mental or physical. But every individual has the most compelling of reasons for steadily rendering some form of service, and it is the lure of reward which supplies the motive force which operates the vast and complicated commodity-producing machinery. Unless the scale of living is radically changed, the calling out of industrial energy is indispensable. What we now see, however, is that, to call this energy into play, it may not be necessary to permit unlimited rewards for even the most useful producers, and that those engaged in the industrial conflict must submit to rules that minimize injury to others and that insure efforts which are genuinely contributive.

One class of these restraints has long been familiar: restraints from turning either into lower prices for the consumer or profits for the producer, funds which should go to insure proper working conditions for those engaged in labor. Of such character are the factory acts and hours-of-labor acts. A more recent development of somewhat kindred nature takes the form of the acts placing upon industries the financial burdens of industrial accidents and diseases, and also minimum-wage acts. Another and later class of legal restraints seeks to secure through publicity adherence in business to sound financial methods. One of the evils of complete industrial freedom has been that over-eager or unscrupulous business men have dissipated capital of great social value in enterprises which were unsoundly planned or conducted. The loss from this source is comparable to loss from fire: wealth which might be kept in productive use is destroyed. Acts requiring statement to public authorities of the financial operations of businesses hitherto regarded as entirely private, are intended to reduce such loss. The framers of such acts do not, or should not, attempt to prescribe any business methods to be followed: they should rely upon the probability that actions and policies which are subject to report must be such as to stand scrutiny.

No practicable method has been suggested for imposing by law direct limitations upon the rewards of successful producers, although publicity of earnings will tend against excessive profits either through the inviting of competition or through creating fear of some other form of attack. Nor has any method been suggested for the legal establishment of a fairer division between workers in industries and those who manage them or supply the capital.

For the working out of limitations of this character, we must look to those engaged in industry rather than to any other group. As a matter of selfprotection, business men must limit their own profits to returns which bear an intelligible and fair relation to the services rendered, and must establish methods of compensation for their employees which adequately and fairly recognize their great part in the process. In recent years, there has been a striking effort among far-seeing business administrators to solve these and other business problems. Indeed, business management is being gradually transformed from a mere clever striving for immediate profits into a science of production which recognizes the relations of industry to the public and the relations of the different factors within each industrial organization, and attempts to deal with those relations and factors on a broad and firm basis of principle. The establishment by universities of schools of business administration is a recognition and an expression of this movement.

To a large extent reliance for economic justice must always be placed, not upon legal restraints, but upon the self-restraint of those carrying on the industry. Maintenance of civil order depends more upon the law-abiding disposition of the people than upon the strong arm of the police. Political parties have to offer legislative panaceas for all industrial ills, but whatever legal or industrial system may be adopted, we still have to trust largely for justice to the development of a spirit of equity and forbearance among all those engaged in industry; without this there will be loss and hardship under any system. As sound methods and policies are worked out by the more progressive and earnest men who are devoting themselves to these problems, it may be advisable from time to time to enact laws which require the adherence of all producers to the standards made and tested out by the more enlightened.

The development of industrial justice will take time, but there is no short cut. Government control or government ownership of industry does not solve the problems of the relations of producers to consumers or of the suppliers of capital and administrative skill to those engaged in simple labor. Such a change would merely restrict us to political solutions of these problems as opposed to solutions which must be worked out by those engaged in industry and giving their whole thought to the process. And it would subject us to the very real danger of so diminishing the necessity for effort and the scope for ambition as to cause greater loss through failure to call reluctant human energy and inventiveness into play, than now occurs through misdirection of part of that energy.