Risk, Uncertainty, and Profit - Free

Part II, Chapter VIMinor Prerequisites for Perfect CompetitionIn Part Two we have attempted an analytical construction of a perfectly competitive society, with a view to determining the precise meaning of thetheoretical tendencies of a private property, free exchange organization of society, and especially the conditions necessary to the realization ofthose tendencies. The abstract conditions first enumerated in chapter III represented in part divergencies in degree only from real life, and were inpart arbitrary abstractions from fundamental characteristics of the pecuniary organization made for the purpose of a separate study of theconstituent elements. Those of the latter type have been dealt with in chapters IV and V, and the result, up to the present point, is an outline pictureof the essentials of a perfect competitive system. *105 The first, rather preliminary, objective of the study has thus been achieved, as far as theauthor is prepared or feels it advisable to go. The second and more fundamental purpose is to contrast this ideal, perfect competition with the factsof ordinary life, to examine the limitations of the general principles developed, and to inquire as to the directions in which they must besupplemented by detailed, empirical data before completely applicable conclusions can be drawn.But it is not the intention to cover this field with any great degree of exhaustiveness. Only one of the theoretical simplifications is to be studied indetail, the assumption of perfect knowledge. Part Three of the essay will be devoted to a discussion of the meaning and consequences ofuncertainty, the incompleteness and inaccuracy of the beliefs and opinions upon which economic conduct is based. But it is desirable to have as abackground some brief notice of the other abstracted factors. *106It will readily be seen that many of the objections to the pure theory of distribution commented upon in chapter IV relate to these necessary scientificidealizations, and have real significance as limitations on the completeness and accuracy of the generalizations of theory. They are not, therefore,valid objections to the theory and have been advanced as such only because of the common failure to comprehend the nature of scientificreasoning, the meaning and use of general principles. This is especially applicable to the first point to be noticed, the assumption of continuousvariability in the magnitude of all factors dealt with. The question of the size of the "marginal unit" is clearly relative to that of the flexibility of industrialorganization, and the two must be considered together. When we give up the illicit procedure of funding productive agents into "factors" and dealwith the actual competing units on their own account, this problem becomes of practical significance and constitutes an effective limitation on theapplication of the theory. In the case of labor especially, with which we are here particularly concerned, the human individual is a very effective unit;not only does he bargain as a unit, but he cannot practically be divided up between different establishments, and the range of occupations in whichhe can engage in any short interval of time is also very narrowly restricted. He may also be in a high and surprising degree unique; he does notalways shade off by imperceptible gradations from one variety to another to the extent that perfect competitive imputation demands. His numbers(in proportion to the number of variants) are not nearly always so large as to make an individual a negligible fraction of a group of similars. *107As a consequence of the appreciable dimensions of the natural agent, the flexibility of the economic organization as a whole is restricted, and thecriticism made by Mr. J. A. Hobson and Professor Wieser against the productivity theory is true to a considerable extent in many individual cases.There are many productive organizations consisting of small numbers of rather unique agents which very effectively supplement each other and arenot so effectively demanded elsewhere. In such a case competition does not afford means of distributing the entire yield of the group among itsmembers; an appreciable part of it resists automatic division and remains a joint product, dependent on the peculiar effectiveness of the particularorganization. Many partnerships illustrate this point. Imputation goes as far as the group, giving that its proper income, but fails to distributeaccurately within it. In case of a partnership this division between the members is usually made on ethical grounds or on the basis of "bargainingpower," sheer personal force. In industry at large the special product of the organization above that competitively assigned to its components islikely to go, largely at least, to the entrepreneur, though bargaining power or the strategic situation always plays a large part in the proceedings.The same factors give rise to a peculiar difficulty in dealing with the law of diminishing returns. When any agent is by its physical nature or anyparticular circumstances available only in relatively large blocks, so that only a few, perhaps only one, is used in a single competitive organization,the technological features of particular combinations may cause apparent exceptions to the "law" at some points; these may be apparent forcertain sections of the curve for the simple reason that one element is not subject to decrease and the best proportions can be secured only byincreasing the other elements. A conspicuous example is the case of railways, the principal crucial "agent" being the right of way. If the demand fortransportation were large enough to require an indefinite number of tracks the curve would be smoothed out and would ultimately show increasingcosts from the other elements in the equipment. So with gas or water mains, until a certain size has been reached, and many similar cases. Thefact of limited divisibility is responsible for all differences in the economy of operation of establishments of different sizes. The amounts of certainagencies or elements in the operations not being continuously variable, other things have to be proportioned to them to get the best ratio, thusimposing restrictions on the size of the plant as a whole. Many, if not most, of these questions of size ultimately come back to the human being as arelatively indivisible unit.Preliminary to a discussion of predatory activity, or acquisition which is not production, we must again refer to the question of the ethicalimplications of the productivity analysis. The purely causal meaning of productivity in a scientific explanation of economic phenomena is apt to beconfused with social or moral issues which belong in an entirely different sphere. We have insisted that the word "produce" in the sense of thespecific productivity theory of distribution, is used in precisely the same way as the word "cause" in scientific discourse in general. But the word"cause" itself is vague in ordinary speech, and it is natural that confusion should arise in regard to the economic synonym. For example, thesocialists, with no lack of suggestion and justification from the loose usage of words by economists of non-socialistic schools, have insisted that allwealth is "produced" by labor. We need do no more than mention the names of Smith and Ricardo in this connection, while among contemporarywriters Professor Taussig exemplifies the same practice, expressly stating that labor produces all wealth, but may not be entitled to all. *108 Weshould say that the reverse is more correct, that labor does not "produce" all wealth, but may be entitled to all, on ideal grounds.Inasmuch as any assertion of a cause and effect relation between particular events is always (as already pointed out) made on the ground of somespecial human interest or "bias," there is much justification for such usage, but this only makes the more imperative, a clear separation from the"scientific," use of causal terminology. Thus it is quite proper to say, in ordinary speech, that the cook "prepares" the meal, that the opening of the