The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Voryf.fo. 131 fj ) X ^ . BOARD OF FEDERAL GOVERNORS RE5ERVE SYSTEM Office Correspondence Chairman Eecles Lauchlin Currie Date jmy 1959 Subject: Industrial P o l i c y and Economic S t a b i l i t y Attached are some reflections of Dr. Sweezy on the '•monopoly11 problem. I think you w i l l f i n d i t of interest. Alan R. Sweezy July 7, 1958 INDUSTRIAL POLICY AM) ECONOMIC STABHITT In the past the Government1 s concern with i n d u s t r i a l policy has arisen entirely out of a desire to protect consumers and small businessmen against the power of large business. Recently, however, students have come to r e a l i z e that price and production p o l i c i e s are relevant to variations i n general economic a c t i v i t y and i n the national income. The object of t h i s paper i s to explore t h i s r e l a t i o n . Extreme P o l i c i e s In cua&*ent discussion of the so-called "monopoly problem" there has been a tendency to urge one of two extreme p o l i c i e s : (a) a trust-busting crusade, (b) "self-government" i n industry. a. Trust-bustinff - So f a r as the achievement of greater economic s t a b i l i t y i s concerned, the object of a trust-busting crusade would be to make prices f l e x i b l e . The argument of the trust-busters i s that because prices i n many Important industries are i n f l e x i b l e , they f a i l to perform t h e i r function as part of the economic system9 s mechanism of adjustment to change. (See Gardiner C. Means* "Industrial Prices and t h e i r Relative Inflexibility.") Change i s concentrated on the r e a l variables, that i s , on production and employment. Greater price f l e x i b i l i t y would not i n i t - s e l f prevent recessions i n demand and i n a c t i v i t y , so the argument goes, but i t would greatly mitigate their severity. -2- The disadvantages of t h i s approach to the problem of securing greater economic s t a b i l i t y are of two sorts* In the f i r s t place, i t accepts periodic shrinkages i n t o t a l purchasing power as inevitable. aim i s merely to mitigate their severity. Its This i n i t s e l f i s an unwarranted admission of defeat, since there i s every reason to believe that a national policy aimed at the maintenance of continuing prosperity can be successf u l l y worked out. But even measured by i t s own more limited objective, a trust-busting policy i s not l i k e l y to be e f f e c t i v e . I t i s important to examine the bases for t h i s conclusion before turning to the discussion of the more ambitious policy of sustaining purchasing power at a continuing high l e v e l . (1) I t would be quite impossible to enforce through- out industry pure competition of the type we have i n the markets f o r agricultural commodities. Pure competition im- p l i e s that each producer contributes so small a part of the t o t a l output that his influence on the price i s negligible. This means that i t would not be s u f f i c i e n t i n our major i n dustries to break up the existing firms into a mere twenty or t h i r t y smaller concerns. be necessary. Hundreds, and even thousands, would A s u p e r f i c i a l knowledge of technical conditions i n industries such as automobiles, a g r i c u l t u r a l machinery, petroleum r e f i n i n g , e l e c t r i c a l machinery, steel, and so forth, i s s u f f i c i e n t to show that i n industries of t h i s sort nothing remotely approaching so large a number of competitors i s possible. In actual f a c t , we f i n d that three or four, or at most a dozen, major competitors dominate the industry. Moreover, -3- each one of them i s l i k e l y to have special advantages which d i f f e r e n t i a t e him or his product from the others. These advantages may consist i n an advertised product (cigarettes), a favorable location (railroads), control of raw materials supply (steel), control over d i s t r i b u t i o n outlets (agricultural machinery, motion p i c t u r e s ) i n any case they constitute monopoly elements which are inherent i n the structure of competition i t s e l f . But t h i s i s perhaps laboring a point that w i l l be readily conceded by the advocates of more vigorous anti-trust law enforcement. In i t s more sophisticated form t h e i r argument i s that, although complete f l e x i b i l i t y i s impossible, we can have greater f l e x i b i l i t y and that every step i n t h i s direction i s a l l to the good. The more competitors there are, the more l i k e l y i s someone to break away and start price cutting. Thus a dozen competitors are better than six and six are better than two. Also, the more vigorous i s the prosecution of a l l types of concerted action, the more d i f f i c u l t i t i s for an industry to hold i t s members i n l i n e . The advocates of trust-busting r e l y , In other words, on the chiselers and on secret price concessions to weaken price control i n the face of f a l l i n g demand. (2) The degree of f l e x i b i l i t y that can actually be ex- pected as a result of such a policy i s severely limited. f l e x i b i l i t y i n periods of depression i s most marked i n the In- -4" durable goods industries. Spokesmen f o r these industries, however, have repeatedly expressed the b e l i e f that the demand f o r their products i s highly i n e l a s t i c i n periods of f a l l i n g national income. are mistaken. There i s no reason for thinking that they Because of i n e l a s t i c demand, competition i n these industries quickly becomes "ruinous". Overhead costs constitute a r e l a t i v e l y high proportion of a l l costs and prices can go very low Indeed before they f a i l to cover out-of-pocket expenses. This means simply, of course, that forcing prices down to direct costs i n industries of t h i s type, i . e . , i n dustries where demand i s i n e l a s t i c and overhead costs high, would force these industries to accept huge losses. This, i n turn, means that the pressure to defeat the Governmentfs policy would inevitably be very strong. Ways of circumventing the a n t i - trust laws are already well developed (price leadership, sharing the market, cultivation of sentiment against price cutting). In a period when business i s losing money, attempts to prove v i o l a t i o n of the anti-trust laws are furthermore bound to be d i f f i c u l t . (3) Another disadvantage of a vigorous trust-busting campaign would be i t s probable effect on wages and labor organization. Pressure by the Government on prices would, with few exceptions, be transmitted by industry into pressure on wages. This l a t t e r pressure would—except i n the rare cases when i t could be linked with a guarantee of increased employment—seriously endanger the organizational gains labor has made i n the l a s t few -5- I years, since i t i s d i f f i c u l t to hold an organization together i n the face of narked wage reductions. The attitude of the membership i s that they do not need a union to take wage cuts and that they see no sense i n the added expense of paying union dues. (4) To be r e a l l y effective deflation of prices and costs must be general. Debts and salaries must be reduced as w e l l as prices and wages. There i s l i t t l e prospect, however, with the constitutional guarantees enjoyed by creditors i n t h i s country, that an a l l around deflation couia be put into e f f e c t . Such an attempt would run into the strong opposition of i n s t i t u t i o n a l investors such as insurance companies, savings banks, and trust companies. (5) To be r e a l l y effective deflation should proceed at different speeds i n different l i n e s . The prices of durable goods should f a l l faster than prices of non-durable goods. Incomes of wage earners and other 100-percent consumers should f a l l slower than other incomes. In both these cases i t i s obvious that the desirable rates of change are precisely the opposite of those that would be l i k e l y to prevail. (6) The short-run effect of the kind of price reductions anti-trust policy could bring about might do more harm than good. Prices would be forced down piecemeal and against strong opposition. Buyers would consequently tend to hold o f f , waiting for them to f a l l further. This would, temporarily at least, intensify -6- depression and make further reductions necessary to compensate for the decrease i n purchasing power distributed. In other words, unless price and cost deflation i s both prompt and general, which anti-trust policy cannot possibly make i t , there i s l i t t l e prospect that i t w i l l s i g n i f i c a n t l y a l l e v i a t e depressions. In the case of Australia i n the l a s t depression, the deflation was both an a l l around one and effected i n one move. Furthermore, i t was combined with a strong upward stimulus i n the form of a large increase i n exports. The Australian policy was thus entirely different from a p o l i c y of enforced f l e x i b i l i t y through application of the anti-trust laws. Anti-trust policy i s purely negative. I t i n h i b i t s agreement and r e l i e s on the "natural* workings of competition to bring about the desired r e s u l t . (7) F i n a l l y , a policy of relying on price and wage reduc- t i o n s — i t must be repeated here that the two w i l l generally go together—is bound to have undesirable s o c i a l and p o l i t i c a l effects. Since i t r e l i e s on the ordinary pressures of the market, i t i n t e n s i f i e s the c o n f l i c t between the various groups and interests i n the community. Each group must necessarily f i g h t as hard as i t can against taking any reduction at a l l . Buyers t r y to force the largest possible concessions from s e l l e r s and employers from labor. Sellers and labor i n turn r e s i s t yielding any more than they can help. Any group that i s successful i n i t s resistance i s passed by and the pressure -7- concentrated on less strongly organized groups. b. Self-government i n Industry - Advocates of self-government i n industry usually think i n terms of a revival of the type of organization which prevailed i n the steel and other well-organized industries under the N. R. A. Opponents of such a course raise the objection that i t would put power i n the hands of industry representatives, which they would be unlikely to use i n the public interest. Since i n d u s t r i a l i s t s are primarily concerned with making as good a p r o f i t showing as possible, they would use their powers of "self-government* to reinforce r e s t r i c t i v e policies. They would tend not only to r e s t r i c t output and to keep prices up i n the face of f a l l i n g demand, but also to raise prices unduly i n periods of r i s i n g demand. Another objection to i n d u s t r i a l self-government i s that i t would inevitably tend to r e s t r i c t new investment, p a r t i c u l a r l y by outsiders, and thus to retard technological progress. Experience both with the N. R. A. codes and with European cartels i s cited i n support of a l l these objections. I t i s impossible to deny the force of the arguments against granting industry anything l i k e f u l l powers of self-regulation. The p r a c t i c a l problem i s rather to devise ways and means of r e a l i z i n g the potential advantages of a higher degree of i n d u s t r i a l organization, while at the same time avoiding i t s dangers. This i s , of course, a d i f f i c u l t task which c a l l s for a careful weighing of a l l the factors i n volved. In what follows an attempt w i l l be made to analyze the potential benefits of cooperative effort i n industry and to suggest ways of guarding -8- against i t s familiar dangers. An Experimental Middle P o l i c y In the preceding section we have explained the disadvantages and dangers of either of the extreme p o l i c i e s proposed i n current discussion of i n d u s t r i a l policy. Instead of taking either of the extremes we need rather to steer an experimental course between them. Such a course would involve retention of the anti-trust laws, with modifications, however, to allow greater f l e x i b i l i t y i n their application. The object would be to allow cooperation where i t i s needed and to i n h i b i t i t where i t i s harmful. In order to implement a discriminating policy of this type i t would be necessary, of course, to secure much information not now available as to how price and other i n d u s t r i a l p o l i c i e s are actually determined. The p o l i c y recommended here involves no sharp break with the general trend of p o l i c y over the l a s t decade. I f we omit the brief period of the N. R. A. codes, the direction of policy has been toward a modification of anti-trust procedure with the object of not only prohibiting monopoly but also of improving competition. The Federal Trade Commission has put increasing emphasis i n i t s a c t i v i t i e s on enforcing f a i r methods of competition. The anti-trust laws have been used to attack monopolistic practices rather than monopoly i t s e l f . approach to the problem. This indicates a more discriminating The pure logic of anti-trust policy recognized no middle ground between monopoly and competition. to restore competition by breaking up monopoly. The task was simply The present attitude, -9- however, recognizes that the two cannot be separated i n actuality and that the object of attack should be the way monopolistic power i s used rather than the mere existence of such power i t s e l f . We are recommending here the further exploration of t h i s l i n e of attack, esp e c i a l l y with respect to i t s bearing on the problems of maintaining stable prosperity. 1. Objective - We have seen that there i s l i t t l e hope of avoid- ing economic distress through an attempt to enforce price f l e x i b i l i t y , A policy of maintaining stable prosperity must be concentrated rather on a direct stimulation of community expenditure through measures designed to keep consumption and investment at continuing high levels. On the consumption side, income taxation combined with Federally supported health and other s o c i a l services offers an effective means of increasing the proportion of t o t a l community expenditures that goes into consumption channels. Since consumption remains r e l a t i v e l y stable, i n the absence of disturbing factors elsewhere i n the economic system, such a policy would be a s t a b i l i z i n g influence. On the investment side, there i s a vast f i e l d for the expansion of publicly controlled investment a c t i v i t y . A vigorous program of public investment should be able to provide outlets for the community's savings f o r many years to come. Industrial policy plays a subordinate but very important part i n t h i s scheme of things. Its primary objective must be to remove obstacles i n the way of securing f u l l employment of human and material resources through the program for i n creasing and maintaining the community's expenditures. This means, i n practice, that price policy must be concentrated on preventing price r i s e s which might n u l l i f y increases i n aggregate demand. -10- 2. What are "excessive* price rises? - There i s perhaps a danger i n current discussions of the recovery problem of going too f a r and condemning a l l price r i s e s as excessive. Such an attitude would imply, of course, complete abandonment of prices as part of the systemfs mechanism of adjustment. a position. There i s no need, however, to take so extreme As w i l l be shown below, a rough d i s t i n c t i o n can be made between necessary and excessive price increases. With further analysis and experience t h i s d i s t i n c t i o n should become s u f f i c i e n t l y clear to serve as a guide to policy. For purposes of policy formulation "excessive" price rises should be divided into two groups; (a) those resulting from the opera- t i o n of the "natural" forces of supply and demand, and (b) those resulting from decisions of policy of organized i n d u s t r i a l groups. In practice "natural" and " a r t i f i c i a l " forces are usually combined and i t w i l l be one of the major tasks of policy-executing bodies i n the future to distinguish the one from the other. The necessity for making a d i s t i n c t i o n l i e s not i n any difference i n the effects of the two types of price increases—the one can be quite as damaging to sustained recovery as the other—but rather i n the different kinds of treatment they require. XJndue price increases which result from the decisions of strongly organized i n d u s t r i a l groups are c l e a r l y a f i t subject f o r restraining action on the part of the Government. be adapted to t h i s purpose. The anti-trust laws could probably The only change that would be needed would be a r e d e f i n i t i o n of the grounds for action. Emphasis should be l a i d on the percentage of capacity being used (qualifications of t h i s c r i t e r i o n -11- w i l l be discussed below) rather than on the proof of collusion. In other words, the attack should be a direct one on the undesirable effects of the policy i n question rather than an indirect one on the means used i n carrying i t out. Excessive price rises caused by shortages of supply r e l a t i v e to increased demand c a l l f o r treatment of an entirely different sort. Here prohibition of the increase i n prices would be quite f u t i l e i n oases of t h i s kind. E f f o r t s must be directed to removing the eauses of the increase. As already pointed out, not a l l price rises can be considered excessive. Where they are the result of l a s t i n g changes i n the relation of demand to supply they must be considered a necessary feature of a new long-run adjustment i n the a l l o c a t i o n of economic resources. I t i s only where the excess of demand i n r e l a t i o n to supply i s temporary that public policy must be concerned with iremedial measures. A few i l l u s t r a t i o n s from recent experience w i l l make t h i s point clearer. I n 1937, competitive sales pressure by the major automobile companies resulted i n the concentration of demand into an unnecessarily short period. This concentration was bad i n i t s e l f since i t was bound, under the circumstances, to be followed by a f a l l i n g o f f of demand the following year (as many customers as possible were persuaded to advance the date of buying a new car). I t was also bad because i t put a sudden s t r a i n on productive f a c i l i t i e s , w h i c h resulted i n the crowding of additions to plant capacity into the shortest possible period. I n addition, i t resulted i n a temporary bulge of demand f o r the steel and other -12- inaterials-supply industries, which created a similar situation of s t r a i n i n them. In the steel industry the sudden European rearmament demand i n t e n s i f i e d the effect of the automobile demand. Added to both was an unusual inventory demand, which was likewise bound to be temporary. Steel prices rose sharply i n response to these forces—organized groups i n the industry, both employers and labor, may have accentuated the r i s e , but were i n large part merely taking advantage of the extraordinary demand for their product—with adverse effects elsewhere, especially on building activity. In the case of building, there seems to have been nothing sudden or inherently temporary about the increase i n demand. were rather on the supply side. The d i f f i c u l t i e s The labor supply had been depleted by the long depression and shortages quickly developed i n various s k i l l e d trades. The effect of these shortages was undoubtedly intensified by the short-sighted p o l i c i e s of l o c a l craft unions. But a comparison of the experience of 1937 with that of the 1920 f s, when unions were l i k e wise strong i n the building trades and wages rose but gradually, indicates that the shortages must have been the more fundamental factor. Equally serious for the continued expansion of building a c t i v i t y was the r i s e i n the prices of building materials, which was due partly to the p o l i c i e s of organized groups and partly to shortages of supply i n r e l a t i o n to increased demand. The seriousness of shortages of supply i n r e l a t i o n to expanding demand depends on (a) the rate of increase i n demand; (b) the extent of the deficiency i n supply and the d i f f i c u l t y of developing new sources; -13- and (c) the degree of foresight exercised i n preparing f o r the increase i n demand. Public policy aimed at securing the smoothest possible expansion i n demand and i n production would have to pay attention to a l l three of these factors. I t would concentrate, according to the circumstances of the particular case, on the ones which seemed most amenable to treatment. There i s no p o s s i b i l i t y , of course, of entirely eliminating temporary bulges i n demand and shortages i n supply. The best that can be hoped for i s a mitigation of the extremes we have recently experienced. Direct public stimulation of consumption and investment must remain the primary instrument f o r sustaining prosperity. But an industrial policy of the type indicated here i s an essential adjunct of the basic f i s c a l policy. An interesting example of what can be done along the l i n e s suggested here i s provided by the B r i t i s h housing policy of the early 1920 f s. In i t s f i r s t annual report the Ministry of Health had the following to say: n The end of the War found the building trade enormously below the strength required to deal with housing and the very large arrears of building work. So f a r as housing schemes are concerned the situation i s that there are p r a c t i c a l l y no schemes i n progress on which an adequate supply of labour i s employed. The result i s that progress on schemes, which have already begun, i s delayed, the commencement of work for which contracts have been signed i s hindered, contracts are prevented from being signed, and the price of tenders i s being forced up#w The M i n i s t r y ' s f i r B t step was the formation of a Special Committee comprising four representatives of the leading building trade -14- tinions to assist i n solving the problems associated with the scarcity of labor. This action i s one of many i l l u s t r a t i o n s of the extent to which trade unionism i s recognized as an integral part of B r i t i s h i n d u s t r i a l organization. E f f o r t s made to increase the supply of labor were successful, as i s shown by the fact that the number of s k i l l e d workers employed on building projects increased from 8,000 i n A p r i l 1920, to 27,000 i n October 1920, and 63,000 i n A p r i l 1921. In addition, the Ministry pursued a discriminating policy i n granting subsidies. In July 1922, the Ministry summarized i t s policy as follows: "Authority for the erection of additional houses was given only after careful consideration of the r e l a t i v e needs of each area, the preparation of those needs which would be met by the programme already authorised, the progress to date, the a v a i l a b i l i t y of the necessary skilled labour, and the prices obtainable by competitive tenders for small numbers of houses." These are merely indications of the type of policy pursued, the details of which would clearly reward much more detailed study. Two important points stand out, however, from the sketchy material which i s readily available: (l) The Ministry of Health pursued a conscious policy of coordinating the expansion of demand with a corresponding expansion i n supply, and (2) the Ministry r e l i e d on the participation of those engaged i n the industry i n helping to solve the industry 1 s problems. The extent to which the price increases of early 1937 should be attributed to the monopolistic power of organized business i s probably exaggerated i n current discussions of the subject. from a f a i l u r e to distinguish the question: Much confusion results What would have happened had a greater degree of competition prevailed? from the entirely different -15- question: What would hare been the desirable policy for organized i n - dustry to pursue i n the interest of sustained recovery? The answers to the two questions are by no means the same. Tinder conditions of free competition price tends to approximate the added, or marginal, cost of turning out an increment of product. As demand increases beyond a certain point, marginal cost i s l i k e l y to r i s e sharply. At the same time, p r o f i t s w i l l increase, since the higher price corresponding to the higher marginal cost, applies to a l l the units of the industry 1 s output. This r i s e i n marginal cost and i n price may occur moreover, before the industry i s producing at anything l i k e f u l l capacity Although price increases at low levels of capacity u t i l i z a t i o n , e.g., i n steel and lumber under N. E. A., may well be i n excess of any increase i n marginal cost, this i s less l i k e l y to be true at high levels of u t i l i z a t i o n . The fact that prices rose sharply i n many highly com- p e t i t i v e markets l a s t year strengthens t h i s conclusion. I f competitive behavior i s to be taken as the sole c r i t e r i o n , there would thus seem to be l i t t l e prospect of s i g n i f i c a n t l y moderating price r i s e s i n periods of rapidly Increasing demand. A recent comment by the Economist on the price policy of the B r i t i s h Iron and Steel Institute i s instructive i n t h i s connection: "Steel Prices P o l i c y . — . . . So f a r the B r i t i s h Iron and Steel Federation has succeeded i n preventing an inordinate marking-up of prices which often occurs tinder competitive conditions during a period of stringency. Although B r i t i s h prices were raised substantially at the beginning of May, the prices charged i n a number of other countries were increased much more. Since prices were l a s t raised, costs of production have advanced further. Thus, between A p r i l and October, a representative grade of coke rose from -16- L 1 l i s . 6d. t o t 1 16s. 6d. per ton at the ovens. Similarly, freight rates for ore have shown a heavy increase. The Bona-Middlesbrougb rate, f o r example, has r i s e n from 10s. 6d. to 17s. 6d. per ton. In addition, wage rates have increased, though so f a r the Advance has been r e l a t i v e l y small. Altogether, i t has been established that the cost of production of pig i r o n has r i s e n by some 10 per cent, since A p r i l . Moreover, as supplies of materials have been purchased for some time ahead, the recent decline i n foreign scrap and freight rates i s not l i k e l y to be reflected i n the costs of the industry i n the near future. Wages, moreover, may tend to r i s e further rather than f a l l . U n t i l recently i t had been widely anticipated that iron and steel prices would be raised at the turn of the year. In the past few weeks, however, the demand for steel abroad, especially i n the United States, has shown a marked decline. Meanwhile, lack of information concerning the future of B r i t i s h prices after the turn of the year introduced an element of uncertainty into businessmen*? calculations and many plans, consequently, were held-up. The B r i t i s h Iron and Steel federation was thus on the horns of a dilemma. Obviously, a further increase i n prices at t h i s stage would have precipitated a decline i n demand. Despite the r i s e i n costs since l a s t A p r i l , therefore, the Federation has f i n a l l y decided to leave prices unchanged. Last Monday i t was announced that the nine associations covering the main basic steel products had decided to maintain current quotations u n t i l the end of next year. On the whole, the announcement has been received with satisfaction i n the market, for the assurance of a stable price level for a long period enables i n d u s t r i a l i s t s to plan ahead...... n This was a case when a high degree of organization had the effect of modifying rather than accentuating the tendency toward a r i s e i n price. Other instances i n which centralized control exerted a s t a b i l i z i n g influence are furnished by the aluminum and n i c k e l industries. 1929 1935 1936 1957 Aluminum $25.90 #21.27 #19.71 #18.42 #19.38 #20.58 #21 #21 #21 Nickel #0.35 #0.35 #0.35 1950 #0.35 1951 #0.35 1952 #0.35 1955 #0.35 1954 #0.35 #0.35 As against the fact that prices i n these industries remained i n f l e x i b l e i n the face of f a l l i n g demand must be placed the fact that they were equally stable i n the face of r i s i n g demand. Their behavior certainly cannot be counted among the disturbing influences of l a s t year's r i s e . Criticism of the p o l i c i e s of organized industry i s usually based on an implied acceptance of competitive behavior as the standard of what i s desirable. According to t h i s view, such s t a b i l i t y as that exhibited by B r i t i s h iron and steel prices would have to be condemned. The idea that price should r i s e with marginal cost i s based, however, on a theory of long-run d i s t r i b u t i o n of resources which has l i t t l e relevance to short-run problems. The interesting thing about the decision of the B r i t i s h Iron and Steel Institute i s that an attempt was made to estimate the future trend of demand. Had the conclusion been that demand was l i k e l y to continue for some time at a high level, prices would undoubtedly have been advanced. But since the prospect was f o r a decline i n the near future, prices were l e f t unchanged. 3. A policy f o r the promotion of economic s t a b i l i t y - going discussion can be summarized as follows: The fore- "excessive" price rises—excessive, that i s , from the point of view of maintaining the flow of purchasing power—are of two kinds: ( l ) those that would occur under conditions of free competition, and (2) those that are due to the exploitation of monopolistic power. For the problem of maintaining prosperity the f i r s t type i s probably much more important than the second. -18- The second type occurs c h i e f l y where there i s a change from an unorganized, or disorganized, to an organized condition i n an i n dustry and where the industry i s suffering from a considerable amount of excess capacity. The N. R. A. codes furnish a number of examples. I t i s important to remember i n t h i s connection that the Government was not only encouraging organization but was also emphasizing the necessity f o r higher prices. The great mistake of the N. R. A. period was probably not so much the i n d u s t r i a l policy i n i t s e l f as the Government f s f a i l u r e to expand purchasing power to the extent required by i t s industrial policy. The f i r s t type of price increase i s p a r t i c u l a r l y important i n periods of strong demand. Due to the widespread r i s e i n marginal costs, i n turn traceable to r i s i n g raw material prices and wages and to the appearance of physical bottlenecks as f u l l capacity u t i l i z a t i o n i s approached, prices r i s e even where there i s no restraint on competition. The fact that a certain degree of organized action i s discernible i n the way prices are advanced i n industries l i k e steel, does not mean that prices would r i s e less i f competition were f r e e r . reverse i s l i k e l y to be true. In f a c t , rather the Industries i n which some sort of organized control exists frequently show a disposition to keep prices stable i n periods of peak demand. Action to moderate "excessive" price rises of the "natural" sort—that i s , price rises brought about by essentially temporary constellations of demand and supply—can be of two kinds. First, -19- efforts can be made to smooth out both the increase i n demand and the response of supply through advance planning, and second, control over prices can be used to moderate increases i n periods of temporary stringency. Both types of action would, of course, require the co- operation of a l l members of the industry. The problem i s thus to permit and encourage concerted action where i t i s needed and at the same time to guard against i t s potential dangers. The following suggestions are advanced as a possible way of attaining these two objectives: (a) In order to provide machinery f o r cooperative a c t i v i t y i n planning for the elimination of obstacles to the expansion of output and employment, industry councils should be established i n the industries of major importance for the maintenance of prosperity. The councils should be composed of representatives of a l l the firms i n the industry and of an equal number of labor representatives. Labor has an even more v i t a l stake i n measures to secure stable prosperi t y than have management and investors. I t s participation i n the work of the industry councils i s consequently of prime importance. Labor representation, however, i s meaningless unless labor i s strongly organized. Spokesmen for labor have repeatedly emphasized that recognition i s a necessary basis for cooperation. In the spring of 1937 labor organizations i n the basic industries were fighting f o r their existence and were i n no position to -20- take account of the broad economic effects of their struggle. Now that i n most of these industries strong unions are established, the situation i s entirely d i f f e r e n t . Union leaders, particularly i n the large i n d u s t r i a l unions, hare shown a deep interest i n the general problems of their industries and of the economic system as a whole. standing examples.) (Hillman, Murray, Lewis are out- Among other things, the fact that these unions are showing as much concern with the needs of their unemployed as of their employed members i s of profound s o c i a l significance. The work of the councils should include study of market trends; supervision of sales pressure to prevent undue concentration of demand; study of the available and prospective supply of labor and materials and the planning of ways to meet deficiencies; the planning of additions to plant capacity i n anticipation of increases i n demand. The councils should also act i n an advisory capacity i n the matter of price increases i n periods of r i s i n g demand. They should be charged with the duty of c o l l e c t i n g information on the extent to which plant capacity i s being u t i l i z e d and on the nature of the unused capacity (how much of i t i s obsolete, poorly located, or i n bad condition). They should likewise analyze the behavior of costs and the probable trend of demand. In general, their efforts should be directed to preventing price increases which w i l l have to be reversed within a short time, Rationing of consumers through increase i n the length of deliveries, although undesirable i f i t can be prevented, i s probably preferable to an increase i n price where the j u s t i f i c a t i o n for the increase i s l i k e l y soon to disappear (either because demand i s l i k e l y to f a l l o f f or supply f a c i l i t i e s to increase). F u l l p u b l i c i t y should be given the work of the councils and interested persons outside the industry, p a r t i c u l a r l y consumers, given an opportunity to make their views known to the councils. (b) To supervise and aid the industry councils an i n d u s t r i a l commission should be created as an agency of the Government. Representatives of the commission should participate i n the regular work of the several industry councils. The functions of the commission should be: (1) to work with the f i s c a l agencies of the Government i n formulating p o l i c i e s to maintain the national income at a high l e v e l j (2) to help the industry councils i n analyzing business trends and i n determining price p o l i c i e s ; (3) to guard against abuses of the freedom for cooperative action enjoyed by the industry councils J J In discharging t h i s l a t t e r function the commission would, of course, have to have access to f u l l information on costs and capacity u t i l i z a t i o n . 1/ In cases where i t considered that concerted Certain industries l i k e the railroads and building, both of tremendous importance for prosperity, require special measures. The function of the industrial commission would be to cooperate M t h other agencies i n working out plans for the extensive reorganization needed i n these industries. -22- action was being taken to raise prices unduly, i t could recommend action under the anti-trust laws to the Department of Justice. The anti-trust laws would be suspended, i n other words, only so long as an industry council continued to have a clean b i l l of health from the commission f o r i t s a c t i v i t i e s . Power to invoke the anti-trust laws could be supplemented by cooperation between the i n d u s t r i a l commission and both the Procurement Division of the Treasury and the T a r i f f Commission. In England the prices of building materials were apparently kept within the bounds of moderation i n the recent boom partly through hints that t a r i f f s would be reduced i f price increases were excessive. In summary, the foregoing recommendations are based on the thesis that the goal of stable prosperity can be best served not by attempts to reverse the trend of i n d u s t r i a l organization, but rather by developing i n Industry a broader type of economic r e s p o n s i b i l i t y . This requires, f i r s t , the assumption of responsibility by the Government for the general objective of maintaining national income; second, the establishment of machinery for cooperative a c t i v i t y of a constructive sort i n the key industries i n the economy; and third, the use of existing instrumentalities by the Government to prevent the power of organization being used i n ways that would r e s t r i c t purchasing power and obstruct the f u l l employment of resources.
@FedFRASER