March 5th, 1995
Lecture Number Ten
I will begin this session by asking two of the most crucial questions of our time. These questions, however, without explanation, sound more innocuous than they sound crucial or critical – which they are. Question one: How can we determine what is a fair price for any product or service? And question two: How can we set the price for any product or service?
I will show you that for each of these questions, there is a progressive answer and a regressive answer. If the regressive answer becomes the prevailing answer for society, then our human species may not long prevail. But if the progressive answer becomes the prevailing answer, then our human species will not only prevail, but it will rise to new levels of peace, prosperity, and freedom.
For the sake of illustration, let’s assume we live in a free society where all people, being free, have the freedom to buy and sell anything they want. Let’s examine this question. Where all people have the freedom to buy and sell, what is the ultimate determination of every price? We can answer this question if we know what is the cause of every price in a free society.
The answer? Every price is an offer to sell that is the outcome of all the subjective value judgments of all the consumers. Anyone who has ever tried to sell a product knows that, in the end, he can only get what someone offers to pay him. It doesn’t matter whether the product is a tarnished bowling ball for sale, let’s say at a swap meet, or a polished Chevrolet truck for sale at a General Motors showroom.
Ladies and gentlemen, the entire marketplace is a social phenomenon of human interaction. A marketplace is where humans gather to make two kinds of offers. Some gather at the marketplace with offers to sell, and others gather at the marketplace with offers to buy. It is humans doing nothing more than making these offers to one another to buy or sell that creates prices and establishes social order.
The marketplace is orderly because it is a voluntary association. When you volunteer to do something, you want to do it, or you wouldn’t volunteer. Sellers create orderly markets because voluntary buyers are attracted to orderly markets and repelled by disorderly markets. A price is an offer to sell something. When a seller says to a prospective buyer, “Here’s my price,” he’s saying. “This is my offer.”
A seller’s offer to sell a product will be greeted with one of two responses. One, a seller offers to sell at a specified price, and the buyer accepts the offer, or, two, the seller offers to sell at a specified price and the buyer rejects the offer. That covers all possibilities. The marketplace is a place, a physical place where social exchanges of two kinds take place. One is offer and acceptance, and the other is offer and rejection.
This entire human action phenomena of the marketplace is bossed by the consumers. Where there’s a free society and the freedom to buy and sell, these consumer bosses determine the success or failure of all sellers. The language of buyer acceptance is familiar to all. You’ve said this many times. “I’ll take a dozen.” “Sign me up.” “Refill my order.” “I’ll take a boxcar.”
The language of buyer rejection is equally familiar. “Who needs it?” “I don’t like the color.” “Well, you know, it’s too small.” “I don’t like the style.” “The service in here stinks.” The sellers are offering the buyers a choice: Brand A versus Brand B versus Brands X, Y, and Z. These buyers are continually judging the potential value to them of the various products and services offered to them by the sellers.
Each individual exercises the choice to buy or not buy, to sell or not sell. Consequently, each individual’s market action or non-action contributes to the formation of market prices. The larger the marketplace and the greater the number of individual participants, the smaller will be the weight of each participant’s contribution to price.
This established price is what guides human action within the marketplace. The buyer’s decision to accept or reject the offers to sell are based upon the price of goods and services. Price guides our choices.
If you live in a city, your choice is between eating at home versus eating out. The price of eating at home includes the price of the food at the market, the price of shopping for the food, the price of preparing the food, the price of cleaning up the mess. All of this versus the price the restaurant charges for, let’s say, similar food, but they do the shopping, preparation, and cleanup. That’s much of what you’re paying for. The price is our guide to where we eat, what we eat, when we eat, and how often we eat. That’s all based on price.
A major point I will continue to stress is that the price of any product or service is only an offer to sell that may or may not be accepted by a buyer. Here is where these offers, measured in prices, come from. Since the value of anything is always in the eye of the beholder, then ultimately it is always the subjective value judgments of individuals that determine the formation of prices.
But in order for any trade to take place, there must be more than a price offer. There must be a price acceptance. Trading takes place where sellers and buyers agree on a price but do not agree on the value to each of what is being traded.
For example, when a farmer trades a load of hay for a rancher’s calf, the farmer places a higher value on the calf than he does on the hay. If he puts more value on the hay than the calf, what would he do? He’d keep the hay.
If the rancher puts more value on the calf than the hay, then of course he, will keep the calf.
Market exchanges take place where both parties to the exchange are seeking greater satisfaction from that exchange. Greater satisfaction for each party comes from the fact that each party attaches a higher value upon what he will get in the trade rather than what he gives in the trade.
If a farmer trades, let’s say, $100 for the rancher’s calf instead of the load of hay, the principle of trade is the same. Thus, price is most commonly expressed in terms of some medium of exchange such as money. Ladies and gentlemen, one of the raging disputes in every society has been over this question, namely: What is a just price? What is a fair price?
More often than not, the answer to the question has been based upon popular superstition, popular dogma. When both superstition and dogma do not get us useful answers, then it’s time to turn to science. Remember that the quality of an answer, any answer, can be no better than the quality of the question that preceded it.
To illustrate, there is something wrong with this question. What is a just price? What is a fair price? The answer to a question can be no greater in quality than the question itself.
The classic one in history, for example: How many angels can dance on the head of a pin? Intellectuals used to spend their lives worrying about such questions. How many angels can dance on the head of a pin? I’m not making it up. How many think it’s 12 angels? All right, we have one person, 12. How many think it’s more than 12? All right.
The point being, if the question is how many angels can dance on the head of a pin, the answer can be of no greater quality than the question itself. Do you see the point? There is a lot wrong with this question.
Here’s how we deal with those questions. There is no such thing as either a fair price or an unfair price for any product anywhere at any time. The entire concept of a just price or a fair price is totally irrational. There are two important keys to understanding price.
One, there’s no such thing as a product that has a built-in or intrinsic price or value.
Two, the asking price is always only a mere offer to sell. Every price is an arbitrary offer made by the owner. A consumer may or may not like the offered price. If the consumer accepts the offered price, the sale takes place at the offered price. But what if the consumer rejects the offered price?
You’ve heard the expression ‘pie in the sky.’ In this case, I would call it price in the sky. For example, the owner of a house says, “The market value of my house is $350,000.” That’s what I call price in the sky. That’s a bunch of baloney. It is merely an offer until there is an acceptance of that offer. When a buyer accepts the offer and pays you $350,000, then the acceptance price and the offer price are the same.
But in the case of a house, the acceptance price or counteroffer is usually less than the offered price, isn’t it? The salient question is this: If every offer price is only an offer, then what is a fair offer, and what is a just offer? Fair price and just price implies that there must also be what? An unfair price and an unjust price. Can any offer to sell be unfair, and if so, what offer price is unfair?
That’s what we’ll look at now. All of this includes, for example, a critical analysis, a qualitative analysis, of conventional wisdom. When anyone claims that a seller’s price is unfair or unjust, all that means, freely translated, is that for whatever reason, he thinks the seller’s offer to sell stated at a specific price is either too high or too low. That’s all it can ever mean.
The value of the product to the seller can only be determined by the seller, and the value to the buyer can only be determined by the buyer. At this point, where there is the freedom to buy and sell, there are only two things that can take place: One, the buyer doesn’t buy, or, two, buyer and seller reach some agreement on price; thus, the seller sells and the buyer buys.
This is a characteristic feature of the free market concept. Then the question arises, how do we lose this free market? How do we lose it? Here’s a way, one of the ways. Someone says, I don’t like the seller’s price. It’s too high. And if it’s too high, it’s unfair. Let’s get somebody to force the seller at gunpoint to sell at a lower price, and if he doesn’t cooperate, shoot him.
Do people do this? Yes. Do intelligent, educated people do this? All the time. And the other variation, someone says, I don’t like the seller’s price because it’s too low, and if it’s too low it’s not fair. Let’s get somebody to force the seller at gunpoint to sell at a higher price, and if he doesn’t cooperate, shoot him. What are people demanding? They are demanding special privilege backed up with a gun.
It’s important for us to comprehend where prices actually come from. First of all, they do not come from nature. Nature does not place price tags on natural resources and certainly not upon the products produced by man. Remember that every price attached to a product by the seller is a mere offer. All prices are offers to sell. That is all that they ever can be, a mere offer from the owner of the product that may or may not be accepted by a consumer or buyer.
The total number of products available for sale to the consumers is always finite, limited, and scarce; scarce in the sense that the consumers would always like to consume more products than are available for consumption or that ever could be available. All of the consumers are actually in competition with each other competing to acquire these scarce products.
And so here’s another principle: Every consumer is in competition with every other consumer to purchase sought-after products. Ultimately, it is the combined, subjective value judgments of all of these individual consumers that determine the formation of prices. If prices are quoted in dollars, then in order to know the meaning of a given price, one must be familiar with the purchasing power of the dollar.
If the product is priced at $10, then in order to understand what the price $10 actually means, one must have knowledge of the price of other products in dollars, and in particular what other products can be also purchased with $10 and what products can be purchased with one-half $10 and twice $10.
If one is going to make purchases in dollars, then it is necessary to be familiar with the prices of those products which one would like to acquire and to form on the basis of this knowledge an opinion about their future prices.
Since the amount of money that the individual consumer possesses is limited, he must make subjective value judgments concerning the price he will be willing to pay for products that will remove his most urgent sources of uneasiness. Of course, all of these competing consumers create what is called a demand for the various sought-after products.
The tendency for the free market is to, as quickly as possible, meet the demands of the consumers for the corresponding supply of products demanded. Hence the familiar economic terms demand and supply. This is a natural outcome of the combined actions of all of those who are buying and selling.
Almost every school person, which in the old days used to be a schoolboy, but now that we’re no longer gender-specific, every school person at some time has been introduced to this market phenomenon. If the supply of a given product increases and the other market factors remain largely unchanged, then the price of the product will drop.
The mere increase in supply will not cause an increase in demand or an increase in sales. What will cause an increase in demand, followed by an increase in sales, in general?
You lower the price. That’s how we move products more quickly. You lower the price. This has been known from the first time anybody sold anything. A lower price will increase the number of people willing to purchase the product. Products that are in demand will always appear more attractive when you lower the price.
This presumes there’s a demand for the product. This is the most effective way in which to increase the demand for the product. To understand the nature of prices, we must recognize that consumers determine more than just the prices of consumer products. Consumers determine more than the price of a dozen eggs, of a television set, or a pair of shoes.
Consumers also determine the ultimate prices of all the tools of production. For example, the selling prices of turret lathes or milling machines will be determined by the selling prices of the consumption products produced by those very machines, the tools of production. This means that every selling price of every product imaginable; trucks, toasters, automatic lathes, shirts, motion picture tickets, factories, golf clubs, is ultimately determined by the subjective evaluations of all the consumer bosses.
This process of buying and selling that establishes all prices is a very important social phenomenon, a phenomenon which is a derivative of human action, is given a name in the market, or it’s given a name actually of the market – a market is a place where people do something. What do you think they do in a market?
They buy and sell products. Product, incidentally, includes services, so we don’t have to say goods and services. Products equals goods and services. Tangible/intangible.
The market, then, is a human action phenomenon. Here it is. Here is the market. The market encompasses all voluntary interactions among men who are striving for the identical goal, the best possible increase in satisfaction. This means that every single individual who voluntarily executes the market exchange has the very same goal, the best possible increase in satisfaction.
This market phenomenon is the sum total of all mutually voluntary human actions, but the exchanges that take place must always be mutually voluntary to be called market exchanges. When a burglar helps himself to your television set, this is not a market exchange. Confiscation in whatever form it takes is not a part of the market phenomenon.
Let’s make some important generalizations concerning these human actors who make up the marketplace. All consumers are in competition with one another. They are always in competition with one another to purchase the always-scarce supply of products. But it’s more than just consumers who compete.
All entrepreneurs are in competition with one another. The entrepreneurs are eager to earn profits. To achieve profits, they must first enter the marketplace as bidders at auction. They will be bidding against each other to acquire, through purchase by the highest bidder, the essential factors of production.
Since land, for example, is a factor of production, the landowners come there to auction off their land. Tools are a factor of production. Tool owners come there to auction off their tools. Others are there to put their labor and various skills up for auction. And so, entrepreneurs are eager to outdo one another by bidding higher prices than their rivals to acquire the very best factors of production.
Of course, the bidding of the entrepreneur is always tempered by what? The realization of the fact that if they allow the total cost of the factors of production to exceed, for example, the price that they can sell the product, they’re going to be in big trouble, and this error will not earn them a profit, it will earn them a loss.
In comparing the social roles of the three super humanitarians, entrepreneur, technologist, and investor, the role of the entrepreneur has been the least understood by the average man and the average educated man. I will summarize in one sentence this very important and essential function of the entrepreneur in the marketplace.
The entrepreneur’s function is to organize all of the factors of production in such a way that the most urgent demands of the consumers are satisfied in the least expensive way. This is one of the very most difficult professions in which to achieve market success. It is so difficult that, historically, entrepreneurial loss has been more common than entrepreneurial profit.
In other words, most entrepreneurs fail. As I’ve said, it is that difficult. Most entrepreneurs fail. If you’re an entrepreneur and you’ve had long-term sustained success, if you’ve been a successful entrepreneur for 25 years, you’re an exception.
Whether the entrepreneur achieves profit or loss, in either case, please note: All of this is accomplished without the necessity of confiscating anything from anyone. The consumers always determine who the entrepreneurial leaders will be. The entrepreneurial leaders chosen by the consumer bosses pave the way toward the blessings of material prosperity for everyone.
The successful entrepreneurs are the first to recognize the large discrepancies in the marketplace between what is now being done compared to what could be done. This means they can see a sharp contrast between what the consumers have versus what they could have. So, the entrepreneur takes an educated guess as to what products the consumers will want. What do they want?
They are then intent upon producing those products that have the potential for earning the highest profits. The high profits benefit the consumers, since this will create a tendency toward a decline in prices. High profits mean a decline in prices. Products that do not have a profit potential simply means consumers have little interest; the entrepreneurs then must restrict production. This will create a tendency toward a rise in prices.
The successful entrepreneur is the one who has the ability to correctly predict the future demands of the consumers. Remember that the entrepreneurs can only make offers to these consumers to sell. The consumer bosses are the bosses of the marketplace through their continual acceptance and rejection of all entrepreneurial offers.
Only where the consumer is boss is there freedom of choice, and only where there’s freedom of choice is there freedom itself. However, if we allow the consumers freedom of choice, one of the arguments against this freedom is that it will also allow such things as cutthroat competition. How many have heard of this?
In popular literature, there’s been much written concerning the alleged evils of so-called cutthroat competition. It is said that a large company deliberately sells their products in a certain location at a price that will just barely earn a profit or at a breakeven price, perhaps, or a price so low there will be losses.
It is said the large company seeks to force a smaller company that manufactures the same or similar product to also cut its prices. It is said the large company has the capital resources to endure losses. Finally, the larger company drives the smaller company out of business, and the larger company establishes a monopoly.
Ignoring the fact that it would be difficult to prove that this was the actual intention of the larger company, let’s assume that it is. Has the larger company harmed the smaller company?
Should the prices offered by the larger company be determined by the management of the smaller company?
That might be one way to solve the problem. Let the management of the smaller company determine the prices of the larger company. That could have some problems, though, couldn’t it?
Should the prices of every company’s products be fixed by its competitors?
You would have total market chaos if you tried to do this.
If the smaller company is experiencing losses, it can only mean one thing: The consumers are unwilling to pay a price for the product that exceeds the cost of production. This happens all the time.
This is exactly the great risk that every entrepreneur has to assume. It goes with the territory. The free market system can only remain the great social solution that it is when the consumer voters can vote every day for the products of their choice. Any company that wants to put its product up for a market vote may do so.
Every day, there is a new market election. No company can afford to rest upon its past achievements. The consumers of today do not give a tinker’s damn about the product achievements of yesterday. The fact that Walter Chrysler’s 1929 Chrysler Imperial Roadster may have been one of the finest motorcars ever built – it certainly was one of the most beautiful – doesn’t mean anything at all to today’s car buyer does it?
The consumers are only concerned with the present and the future. In the example of so-called cutthroat competition, what were the consumers looking for?
What all consumers are looking for, of course, are those products they believe will best increase their level of satisfaction. All other things being equal, when a consumer can get the product for a lower price, this will increase his level of satisfaction.
When consumers switch their market votes from the smaller company’s product to the larger company’s product, what does this mean? When this happens in a free market, it means, even if a firm should go out of business, that this does not impose harm upon people.
Even if the smaller company does experience losses because they cannot successfully compete with the larger company, this does not mean that the larger company has harmed the smaller company.
Webster’s New World Dictionary defines harm as, “hurt, injury, damage; to do harm to.” If, in your role of consumer, you have in the past purchased products from the smaller company, then subsequently switched your vote by purchasing products from the larger company, you have not in any way injured, damaged, or harmed the smaller company.
You do not owe your market vote to the smaller company. The reason you have switched your vote is irrelevant. It may be for no other reason than your favorite Uncle Charlie just went to work for the larger company. So what? If the smaller company goes out of business due to the excessive entrepreneurial loss, then the loss is due to entrepreneurial error, entrepreneurial blunder in forecasting future market conditions.
This is not even something to be ashamed of. The management of the larger company may not have been smarter at forecasting future market conditions. Perhaps they did better only because market conditions turned in their favor. It’s called, sometimes, dumb luck. The consumers could benefit from the failure of the small company since the scarce factors of production can be transferred from a less efficient company to a more efficient company.
And so, ladies and gentlemen, the closest to zero but not zero solution puts the greatest number of production tools into the hands of the most efficient entrepreneurs. If an entrepreneurial venture is inefficient and therefore fails, then it’s the entrepreneurs and investors who suffer from the loss, isn’t it? That’s part of the risk.
Entrepreneurs and investors pay for their own errors in judgment. That’s as it should be. And because the most competent entrepreneurs and investors can still make serious errors in judgment that lead to loss, that’s why the risk is so damn high.
Please note; the larger company was criticized for selling its products at a very low price, sometimes at prices below its cost of production. Almost everybody misses this major point, and that is, almost everyone overlooks the fact that when any firm sells below its cost of manufacture, this is a bonanza to the consumer, isn’t it?
There is no rational reason to deplore this unexpected benefit to the consumer. If any consumer is indignant over the larger company’s method of competition, they can always refuse to consume the product at the bargain price below cost. Instead, they can buy the product at a higher price from the alleged victim of competition, the smaller company.
Isn’t that the perfect way to complain about this? I’ll pay a higher price from the smaller company. I’ll show you. Somebody might do this. But in every case, when the consumers rush to buy the bargains, what does this mean? They’re expressing their satisfaction with free market competition. When all of this is called cutthroat competition, no one even challenges the serious misnomer.
To cut someone’s throat is a contemptible act of violence. In contrast, there is nothing either violent or contemptible that has taken place when the larger company offers superior services at lower prices, especially to consumers who are always after greater satisfaction. That’s what we want.
Remember, the consumer always wants a higher-quality product at a lower price. They always want this. Nevertheless, this argument remains. “Wow, yeah, but the larger company, through sustained selling at a very low price, can drive all of the smaller competitors out of business.” You’ve heard this argument.
When this happens, the larger company, it is said, is not only larger, it is the only company, and only seller means one seller, and one seller means mono polein. That’s the Greek meaning. The monopolist will restrict sales and raise its price to a mono polein price. Mono polein means one seller. Mono polein, or monopoly.
One, of the difficulties with this concept of monopoly is that people do not make a careful distinction as to just how does someone become the only seller of a product or service? There are only two ways to become a one-seller. One, serve the consumer bosses so well that they love you so much that they will only buy your product or service.
Two, impose your product upon the consumers by using a gun to keep out all other competitors. In our society, who uses guns to keep out any would-be competitors? Is it entrepreneurs or bureaucrats?
The question answers itself. For example, the United States Postal Service is the one-seller monopoly of first-class mail. Over the years, to impose this monopoly status, the government has both fined and jailed those who’ve entered the business of private delivery of mail.
The government monopoly of the mails has always been backed up with a gun. In contrast, if an entrepreneur ever becomes a one-seller of a product, it is not done by keeping competitors out with a gun, but rather by offering the consumers the very best products and services at the very lowest prices. What’s wrong with that? Why is that feared so much, abhorred so much?
Perhaps the most popular argument put forth by the advocates of interventionism concerns the question of monopoly and in particular what is called the monopoly price. Let’s look at that quickly. So long as the myths concerning monopolies dominate the thinking of those who have attended high school and college, then there will be no opportunity for the system of the free market to flourish.
As long as the myths concerning the Industrial Revolution are embraced by those who’ve gone to college and high school, it will be impossible for the free market to flourish. That’s why that lecture on the Industrial Revolution was so important, especially if you went to high school or college.
Here’s what happens: As soon as this social panacea, which I call the greatest practical panacea of all time, that is the implementation of this principle, we will find that we can’t implement this practical panacea because the educated classes don’t understand social causality. That’s what prevents it. And so, what we have to do is educate the educated classes.
What the uneducated classes believe is totally irrelevant. These myths on monopoly must be exposed for what they are. It’s mythology. It’s superstition, all kinds of superstition concerning the free market and how it operates. And so, we have to explode these myths and superstitions because all of you have gone to school.
If we don’t do this, it means Homo sapiens, your favorite species and mine, may perish from the Earth. Other than that, it’s not important. But it’s hard – you ought to try this sometime. Try to make a lecture on prices interesting. That is a challenge. That’s what I’m trying to do is to make it interesting so you don’t go to sleep and you don’t tune out.
If you tune out, you won’t get it, and that’s a challenge. In general, also, and I repeat, the longer someone has gone to school and the more well-read he is, the harder it is to entertain him and to keep his attention. Well, you can, at least in principle, if not in fact, have a monopoly in a free market if an individual or group of individuals acquires an exclusive control of a supply of a commodity or factor of production.
However, even in this sense, every market participant is a monopolist if the commodity or service he offers cannot be exactly duplicated by a competitor. For example, the late English actor Laurence Olivier had a monopoly on his acting services. There was only one Olivier. If you wanted him, what price did you have to pay? Olivier’s price. On whose terms? Olivier’s, entirely. In fact, there were certain roles that Olivier refused. No matter how much money they would offer him, he refused to accept the role. In other words, what was he saying? For this role, my price is infinite. You can’t afford it. I don’t want that role. You can take the role and…….
But such monopolies are not considered important. Monopolies like Olivier’s monopoly, well, that’s not important. People don’t lie awake nights worrying about Olivier and his monopoly. The kind of monopoly that seems to evoke the greatest concern is when market conditions permit the monopolist to charge what is called a monopoly price.
However, this condition rarely occurs. Let’s look at what monopoly price means. Monopoly price emerges when a monopolist gains more profit from selling a smaller quantity of their monopolized price than they would from selling a larger quantity at a lower price.
I don’t even know of any case where that’s ever even happened, but people lie awake nights worrying about this, so we’ll deal with it. In other words, you could totally destroy somebody’s arguments in favor of attacking monopolies except for this one issue, and they say, “Yeah, but you haven’t answered my question about the monopoly price,” blah, blah, blah, so we have to cover all the bases.
Ignoring the fact at this point that the monopoly price is highly unlikely to occur in a free market, but assume that there is such a thing as a monopoly price. Then, the first question to that is, so what? After this price is established, the monopoly that comes about in a free market cannot impose itself upon society through the use of compulsion.
It does not have the coercive agencies of the state to establish its permanence. At any time, other firms can enter into the market, offer competition to the monopoly. It’s not even certain that the monopoly can maintain its so-called monopoly price. If they discover that by raising the price, the volume of sales may fall to the point at which profits begin to fall, in order to increase profits, the monopoly would be forced by market conditions to lower its price in order to increase sales in order to achieve higher profits.
Here’s another principle that almost everybody misses, and that is, the goal of the entrepreneur is not to maximize prices. It is to maximize profits. If your goal is to maximize prices, you will maximize yourself out of existence. If you lower the price to increase the volume, it’s no longer a monopoly price, by definition.
If the monopolist continues its so-called cutthroat competition, which means it’s better offer because cutthroat competition is really translated as, they’re continuing to make better offers than their competitors – better offer means lower price, higher quality – this will continue to be a windfall boon to the consumer and will not have any harmful effect at all.
Another related fallacy is the belief that the largest firms are necessarily the strongest and will always have the advantage in a so-called price-cutting war, which is not a war in the first place. Many times, the smaller company is more flexible, not burdened with heavy investments, heavy debt, and better able to cut its costs and compete with the larger company.
But even if a company, through so-called cutthroat competition, can attain a monopoly price, such a lucrative monopoly will attract other entrepreneurs who will attempt to gain a share of the market by undercutting – guess what – the monopoly price. We’ll undercut these guys.
Wherever there is a resumption of so-called cutthroat competition, guess who benefits? The consumers benefit from all the bargain prices. We must not lose sight of the fact that in a free market, even if there is a monopoly or one seller of a product, how did it get to be the one seller? Where the consumer is boss, how do you get to be one seller?
The question answers itself. A monopolist producer does not carry a gun. It can only maintain its market monopoly by keeping its prices low for a long period of time. In order to keep its prices low, it must keep its costs low. But as long as its prices are low, it cannot reap the benefit from its so-called monopoly price, the higher price.
In order to keep out potential rivals, the monopoly must refrain from charging its monopoly price. The very thing the people fear is unlikely to happen anyhow, but they lie awake nights worrying about it, and they use that as a means to justify interventionism. In the end, the so-called cutthroat competition is not the road to an effective monopoly price. Rather, it’s the road to a bonanza for the consumer.
The critics of what they call cutthroat competition raise another argument to promote government interventionism into the market. They say, well, a large company can prevent small companies from entering the market as competitors simply by buying up all the small companies’ production facilities. Perhaps a short period of price-cutting will convince the new small firm of the advantage of selling out.
Thus, the monopolist can avoid the long period of losses. However, the truly efficient small firm can demand such a high price for its assets as to make the entire procedure prohibitively expensive. Any later attempt by the large firm to recover its losses by charging a monopoly price will only invite the entry into the marketplace of new competitors.
Remember, this is a free market. You always have to face new competitors. These, in turn, will have to be bought out again and again and again and again. So the policy of buying out competitors will be even more costly than the cutthroat competition policy, which itself was not a profitable policy.
In the last analysis, there are only two approaches to the determination of the price of any product. The first is through the operation of the free market, wherein all prices are set voluntarily by each participating producer. The second is through violent interventionism in the marketplace, confiscating the participating producer’s choices to voluntarily set prices.
This outlawing of free exchange always results in this undesirable effect, namely, the exploitation of man by his fellow man. You cannot outlaw free exchange without outlawing freedom at the same time. If the system of slavery that is brought about through violent confiscation of choice is to be rejected as a false means, then the only remaining alternative is to establish the system of the free market.
In order for a free market to remain free, the principle of total free exchange must always remain an indivisible whole. In a free market, exchanges of mutual voluntarism, if that is to be the only acceptable approach to setting prices, then even if a firm is able to actually establish a true monopoly price, which I claim is unlikely, but even if they can, then the complete sanctity of that price must be maintained.
If the price is established by a so-called cartel, the principle must apply. Let’s quickly look at this question, because somebody will bring it up – not necessarily you – but at some point, the advocate of interventionism will bring it up – “Well, yeah, but what about cartels?” If you stop to think about it for a while – and I’ll be doing this for the rest of the seminar – what I’m going through now is I’m answering all of the arguments for the maintenance of slavery, that is all of the intellectual arguments why we should maintain involuntary servitude as the foundation of our social structure.
What is a cartel? You’ve heard of cartels. A cartel is an association of business firms in any one industry, which is formed for the purpose of limiting competition in order to substitute monopoly prices for competitive prices. Well, you could generalize and not even have to go through this, because the same thing applies to cartels in any case.
A question I will briefly answer is this; if a cartel deliberately restricts production to try to sell their products at a higher price, then is this action injurious to the consumer? What do you think based on what I’ve already said? It is impossible for any producer to harm any would-be consumer when the producer restricts production.
What products are restricted in a free market to production? In a free market, the production of every single product is restricted out of absolute necessity. The production of every product is restricted for two reasons: One, there is a universal scarcity of all of the factors of production, and, two, for every product for which you increase production, there is a diminishing marginal utility.
I won’t take the time to discuss the law of diminishing marginal utility at this point, but if you want to know about it, ask me about it later. If you have a background in economics, you already know what that means. It is a completely false statement to assume or conclude that a cartel will have some vested interest in the restriction of production beyond that of any other producer of sought-after products.
In the final analysis, every cartel and every producer is confronted with this market phenomenon: As the seller raises the price of his offer to sell, more and more of the buyers respond to the increase in price by saying, hey, we’re not interested. In a free market, it becomes difficult to even maintain a cartel.
The most efficient members of the cartel are always tempted to go out on their own, since they can probably beat the price of the less efficient members, gaining a larger share of the market and, most probably, higher profits for themselves. So even if you have a cartel in a free market, the tendency for them is always to break up anyhow.
As I said, it is very difficult to make this discussion of price appear very interesting, but it would be hard to find a more important subject. The more important the subject, the harder it is to make it appear interesting to intelligent people. The issue, nevertheless, is a very large one. Can the producer of any product ask any price they want for the product they have produced?
The answer can be either yes or no. If the answer is yes, then the producer’s potential choice in this regard has been optimized. They can make price offers to potential buyers from a zero price to an infinite price. Their choices literally approach infinity. Their potential choices have been optimized.
Where the individual’s choices have been optimized, this is where the concept defined in the seminar as freedom also exists. Freedom exists where the individual’s discretion to choose is not confiscated by interventionism. But please note, wherever the individual’s discretion to choose has been confiscated, so has his what been confiscated? His freedom.
But historically, we have not called this loss of freedom slavery unless it fits the stereotyped image of slavery, namely a man forced to do slave labor. Nevertheless, in order to build a science of slavery, we must evolve a precise definition of what it means to be a slave.
A slave is any individual whose discretion to choose is confiscated by interventionism. The primary source of all slavery throughout history has been the forced imposition of government interventionism. But I’ve not said this is good or bad. Maybe by the way I talk you think I have a bias that maybe interventionism is bad, but I haven’t really said whether I think it’s good or bad.
One of the questions we have to answer is, can slavery as a means attain the greatest good for the greatest number? Incidentally, I use the terms slavery and involuntary servitude interchangeably. Should the bureaucrat be the boss or should the consumer be the boss – that’s another way of stating the principal issue of the 21st century.
In a free society the consumer is always the boss. Where the consumer is king, it is his decision alone to accept or reject the entrepreneur’s offers. For the consumer to remain king, the entrepreneur must have the complete freedom to adjust his prices either upwards or downwards in response to the consumer’s demand.
One of the facts of reality that has never been clear to very many people is that all of those people who argue for the continuation and the expansion of government interventionism are at the same time arguing for the continuation and the expansion of slavery. All arguments for the maintenance of interventionism are arguments for the maintenance of slavery, or, if you don’t like the word slavery, servitude.
Believe it or not, in spite of all I’ve said, I am not here to oppose slavery. However, I will apply science to demonstrate this scientific conclusion; If the goal is the greatest good for the greatest number, then no matter what form it may take, slavery is always a false means. Today it’s popular to advocate slavery, especially on the part of the schools.
However, there are few who are sensitive to the fact that it’s actually slavery they are advocating. It’s popular today to advocate slavery because most advocates of slavery believe that slavery will bring about the greatest good for the greatest number. That’s why they advocate slavery, servitude. “This is how we see the greatest good for the greatest number. Can’t make an omelet without breaking eggs, you know.”
Since they have not understood a science of slavery, they have missed this salient point. Interventionism is the one simplex road to slavery. It’s the only way to get there. I’ve already explained the one simplex action we must take if we want to get on the road to prosperity. Well, in order to get onto the road to freedom, one of the things that we must do is refute the various arguments that claim that slavery is a true means to the greatest good for the greatest number.
In that regard, I hope it’s clear to all of you that you cannot defend any kind of price control without at the same time defending the institution of servitude. I hope it comes as no great surprise to you, as we are nearing the halfway of the seminar, that I will be presenting scientific evidence for the complete and total scrapping of the entire concept of slavery, the entire concept of institutionalized servitude.
One of the aims of these four days is to obsolete the entire concept of servitude. But of course, as I said in the beginning, to get it, it takes, in your brain, a paradigm shift. There are many who just assume that if it were not for interventionism of the federal government, then, in the end, there will only be one steel company, one automobile production company, one oil production company.
But even if this circumstance were to occur, it can only mean that the voters of the free market want it that way. As I’ve said, in the last analysis, the consumer must be boss, or there is no freedom. Even if there is only one steel producer, what does that mean? It means that somehow they achieved the market position as a result of providing a super-quality product, a super-quality service, at a very low price.
What’s wrong with that? Who’s threatened by that? Who fears this? Who fears better steel at a lower price? To fear that, you have to be indoctrinated to fear it, because you can’t reach that conclusion on rational grounds. You’ve got to be indoctrinated to fear it. Even if there’s one steel company, if they ever get cocky and let their quality begin to slip, they will immediately be faced with the prospect of what? New competitors, new competition, always waiting, always ready.
In a free society, a free market, there would be nothing to keep out the new, aggressive competitor, foreign or domestic. But even the largest of corporations must continue to maintain their efficiency and the quality of their products and services. If they do not, then they can be voted out of the marketplace like any small company.
For example, consider the fate in the market of the 100 largest industrial corporations in this country back in 1909. Just how successful were these 100 giants after just a quarter of a century later? By 1935, of the top 100 in 1909, just 26 years later, 26 percent of them had completely failed. In other words, they’d gone bankrupt. They were no longer even in existence.
In 1935, of the top 100 in 1909, 60 percent of them were no longer in the giant class. They were no longer in the top 100. That means, of the top 100 largest corporations in the United States in 1909, this is historical fact, within just a quarter of a century, 86 percent of them were either no longer in the top 100 or they had gone out of business altogether. That’s what happened.
Ladies and gentlemen, I asked this question earlier, but maybe we should bring it up again. How many entrepreneurs should be in the steel business? I seem to be hearing a good answer out there. To repeat myself, but to maybe make a bigger point we don’t want 100 percent of the capital and workers in steel. But we don’t want 0 percent. What do we want? Closest to zero but not zero. Now it gets tough. What if instead of steel, the product is aluminum? That’s tough, isn’t it? Do we want 100 percent of the capital and workers in aluminum? No. Do we want 0 percent? No. What’s the answer? Closest to zero but not zero.
How about cellophane? What’s the answer? Closest to zero but not zero. Microphones? Closest to zero but not zero. Shirts? Closest to zero but not zero. That’s where prosperity comes from. Do you see this? That’s where prosperity comes from. If everybody’s in the shirt business, we’re all poor. You do get that?
Well, one of the most retrogressive, regressive mechanisms ever created in the history of American political interventionism is an organization called the antitrust division of the United States Department of Justice. The antitrust department, under the guise of protecting the consumer, has launched a major attack upon the most competent producers in the nation.
It is well known to anyone who has any cognizance of what’s been going on that they have rendered every price that is possible to charge illegal. If you charge any price lower than your competition, that is a crime called by the bureaucrats, cutthroat competition and illegal restraint of trade. This is punishable by heavy fine, triple damages, and/or imprisonment.
On the other hand, if you charge any price above your competition, this is said to be a crime called price gouging. This is punishable by heavy fine and/or imprisonment. If you, on the other hand, charge the same price as your competition, that crime is called collusion or conspiracy, again punishable by heavy fine and/or imprisonment.
Well, finally, if you should ever achieve such a high level of efficiency as to offer your customer such a superior product, such an outstanding service, that all of the buyers in unison, all of the consumer bosses cast their economic vote for you only and nobody else, then, dear friend, you will be attacked and castigated by all as the most evil of all individuals. You, sir, are a monopolist.
To illustrate just a few infamous examples, I’ll give you a couple of cases. In the early 1920s, the DuPont Corporation invested millions of dollars in the development of a new product, one that had never previously existed. They called it cellophane. Some of you have heard of this product.
When they first introduced cellophane to the market in 1926, they priced it at $2.65 per pound. The success was immediate. They could have raised the price and the products still would have sold well. And you say, why didn’t they raise the price? Over the next 20 years, they cut the price 20 times down to only 45 cents per pound. By cutting the price, guess what they did? They increased their sales and profits, both.
At that bargain price, demand grew to $100 million a year. In those days, $100 million for a single product was a lot of money. Just as DuPont was about to expand their capacity to meet the growing demand, the Department of Justice swooped down and sued DuPont for violation of the Sherman Antitrust Act, charging they had a monopoly in cellophane.
DuPont had no choice but to cancel their expansion plans. What was the result? The demand for cellophane far exceeded the supply. I like to point out, if it had not been for DuPont’s research and development, cellophane wouldn’t have been available to anyone at any price would it? Ignoring that, since DuPont is being prevented at gunpoint from being the one seller of cellophane, they must now go out and try to find another manufacturer and seller so there can at least be a bipoly or two-seller.
They want to go from monopoly to bipoly, because if there’s bipoly, there’s no monopoly. Bipoly can be legal and monopoly is illegal. DuPont actively sought to interest others in the manufacture of their cellophane. It took them a year and a half to find a company both willing and able to invest the $20 million necessary to produce cellophane on an economical basis.
Olin Industries of North Carolina was interested, but of course they didn’t know the first thing about manufacturing cellophane. Surprise? Of course not. Therefore, DuPont had to both design and build a cellophane plant for Olin Industries. All of DuPont’s cellophane patents and technological know-how was turned over to Olin Industries.
Why? Because the Department of Justice ruled that it is not in the interest of the American people to have one seller of cellophane. I’d like to point out the American people didn’t seem to mind. They were never forced by DuPont to buy one roll of cellophane. Finally, as many of you know, the most plentiful metal in the Earth’s crust is what? Aluminum. Aluminum is the third most abundant element on the surface of the Earth, but it’s never found in nature as a pure metal. It comes in the form of common clay combined with the two most abundant elements, oxygen and silicon.
For some 7,000 years, attempts had been made to free aluminum as a pure metal from the clay. Finally, in 1807, the famous English chemist, Sir Humphry Davy, named the element aluminum. But even though he used an electrical method to free pure aluminum from the other elements, which is the method we now use, he was unsuccessful in obtaining pure aluminum.
The famous Danish physicist Hans Christian Ørsted, who was the first man to discover the connection between electricity and magnetism, also made some progress with the problem. Finally, by 1855, the French chemist Henri Deville improved the refining technology, bringing the price of aluminum down from $545 a pound to a mere $17 a pound.
When you go to England, don’t be surprised when you take the tour in London to see the crown jewels, you’ll see some aluminum objects and wonder, why are aluminum forks and knives part of the crown jewels? Because, at the time, aluminum was one of the most precious and valuable metals there was, and they’re still part of the crown jewels.
Finally, in 1886, the problem of how to efficiently mass-produce pure aluminum was solved by a 21-year-old American named Charles Martin Hall.
Two years later in 1888, Charles Hall and five other men raised $20,000 and started commercial production of the most plentiful metal in the Earth’s crust, aluminum.
Their factory: an unpretentious corrugated iron shed with only a dirt floor, because even in 1888, $20,000 capital means a pretty small operation. At the time, aluminum was selling for $8 per pound. The humble venture called itself Aluminum Company of America. They started out producing 10 pounds of aluminum a day. They grossed about $80 a day, not profit.
From the beginning, Alcoa had a goal. It was innovation and the perfection of their product. Over the years, they continued to turn out better and better products for less and less money. By the late 1930s, Alcoa, Aluminum Company of America, was producing almost 1 million pounds of aluminum a day. The price was no longer $8 a pound. How many think the price was higher than $8 a pound?
How many think the price was lower than $8 a pound? How many are almost certain the price was lower than $8 a pound? Yes. They had dramatically reduced it to just 2.5 percent of its 1888 price down to 20 cents per pound. For 50 years, half a century, Alcoa continued to improve the quality of its product. They broadened the application for it. They lowered the price. At the very least, I think, Alcoa should be congratulated for its humanitarian achievement of a rather significant magnitude. What do you think?
For half a century, they played a major role in building the wealth of America, which includes your wealth. Their customer’s profited. Alcoa profited. The nation profited. Everyone wins. There’s not one loser. The American buyers of aluminum products loved it. But, dear friends, the one thing our American bureaucracy will not tolerate is true humanitarianism on a grand scale.
You see, what happened was, for 50 years, half a century, there was only one seller of aluminum. What, therefore, can we conclude? They must have all been criminals. How can we explain the fact that there’s only one producer for half a century of such an important product like aluminum that everyone wants?
We’ve been taught in America to fear anyone who becomes a one-seller. So, in 1937, when I was age one, the antitrust division of the Department of Justice sued Alcoa for being a one-seller of aluminum. The trial commenced on June 1, 1938. It continued for over two years until August 14, 1940.
It was the longest trial ever held anywhere in the world. The transcript of the trial ran 50,000 pages. It was printed in 480 volumes and weighed 325 pounds. The antitrust division attacked Alcoa with 140 criminal charges. Alcoa successfully defended itself, even against one of the charges, which was, believe it or not, excessive prices. That was one of the crimes that they were charged with, excessive prices, after bringing it down from 8 dollars a pound to 20 cents a pound.
One of the amazing things in the history of American jurisprudence happened, perhaps one of the most amazing things I know of. The court actually ruled in favor of Alcoa. You can imagine, down at the antitrust division they were absolutely furious over their loss in court, so naturally they appealed the decision that went against them.
Then, on June 12, 1944, the Circuit Court of Appeals reversed the decision of the lower court. Alcoa lost on a single count of the 140 criminal charges. They still won on 139 counts. They only lost on one. The court said Alcoa had monopolized the market for virgin aluminum ingots by excluding competitors. And just how had Alcoa gone about excluding competitors?
Well, the ruling against Alcoa tells us in its own words. Listen carefully. I’m now quoting the court. “Alcoa insists that it never excluded competitors, but we can think of no more effective exclusion than to progressively embrace each new opportunity as it opened and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections, and the elite of personnel,” unquote.
Ladies and gentlemen, would you like me to give you a free translation of what I just read? I’ll give it to you anyhow. Please note very carefully that the august judges ruled it is a crime to embrace new opportunity. It is a crime to build a great organization. It is a crime to have the advantage of experience. It is a crime to have trade connections. And finally, it is a crime to have elite personnel.
That’s what they ruled. Any questions? Good. And they adjourned the court. I would hope I don’t need to say anything else about the irrationality of this entire concept of attacking one-sellers.