The tendencies we are to consider which slow down or temporarily reverse a change of spending obviously give no security against a gradual attrition of the dollar and no final security against panicky inflation. Nor do they guarantee that we shall not have a decline in demand to the point of disaster. But they do increase the latitude within which monetary policy can operate without producing results that are too obviously objectionable.
The average person in a healthy economy believes that, basically, economic conditions will not change sufficiently to warrant a radical alteration in his standards of business judgment in the immediate future. If he is thinking of buying certain shares, he will not buy them quite regardless of price. When the cost of building rises, some people go ahead and build anyhow, but some drop out. Most business firms in the market for additional labor and raw materials do not stubbornly insist on buying their planned quota without regard to cost; they may postpone their purchases, or they may use substitutes. If there were not a great deal of give and take and flexibility of plans, it would be hard to see how we could have a well-integrated cost-price structure or a reasonably stable general level of prices. Changes in demand in particular sectors would break up workable price relationships, and a general increase of demand would be self-aggravating and explosive.
The increase of production that generally occurs during a period of increased spending also serves as a stabilizing factor. During the period 1940-43 industrial production more than doubled. Even after the slack has been taken up in the labor supply, the rapid increase of new plant and equipment applying the latest scientific and engineering developments makes possible a further rapid growth of output. Traditionally, new investment has been held to such a low yearly average level that we are just beginning to grasp what a continued high level of investment in industrial research and equipment can do.
A Change in the Attractiveness of Debt Instruments Relative to Other Assets
The monetary authorities by varying the conditions of liquidity can determine the level of rates in the short-term money market and gradually have an important impact on rates in all sectors of the debt structure. Rates on particular classes of debts reflect a great variety of factors. For instance, they reflect the supposed risk involved, special tax considerations, the portfolio preferences of the public in relation to the volume of debts in the various sectors, the degree of competition in the area concerned, the cost of making the loan, and the like. Some debts are especially attractive because they serve as good substitutes for money, and their yields ordinarily reflect that fact in an obvious way. Long-term rates reflect a forecast of future conditions in the money market rather than conditions existing at the moment.
The monetary authorities do not necessarily have some definite level of money rates or bond yields they are trying to make effective, but they generally have limits of tolerance for short rates at least. At a given time there is usually a range of rates which they would regard as consistent with their economic goals, even though they have not decided in advance what the limits of the range would be. Although they largely reject rates as gauges of the monetary pressure they are exerting, they nevertheless have a dominating influence on rates through setting the terms and conditions under which money may be created. For instance, they may have as an immediate goal a net borrowed reserve position for the banks of 600 millions; but the rate level which results from that position at that time is attributable to monetary administration just as truly as though the authorities had deliberately sought that level.
The monetary authorities do not necessarily have some definite level of money rates or bond yields they are trying to make effective, but they generally have limits of tolerance for short rates at least. At a given time there is usually a range of rates which they would regard as consistent with their economic goals, even though they have not decided in advance what the limits of the range would be. Although they largely reject rates as gauges of the monetary pressure they are exerting, they nevertheless have a dominating influence on rates through setting the terms and conditions under which money may be created. For instance, they may have as an immediate goal a net borrowed reserve position for the banks of 600 millions; but the rate level which results from that position at that time is attributable to monetary administration just as truly as though the authorities had deliberately sought that level.
How Money Influences the Rate of Spending
The level of spending and the cost-price structure are not determined statically by certain specifiable magnitudes existing at a moment. An economy is a living thing. What it does is current history and largely a product of recent history, though the impact of events may skip over time in an uneven way. In dealing with practical situations we are well aware of this continuity. We know that people go to work in the morning, spending money to get there, because they have a job. They buy food, clothes, and things for the house, see the doctor, engage to make payments for a house and a car, and the like on the basis of the income they have been getting and expect to get. They make financial investments on this basis too, and sometimes direct investments in buildings, improvements, or equipment. Receiving and spending money in a particular pattern is literally a mode of life with them.
Those who run businesses also have a routine. They have established trade and financial connections and a regular working force. They take for granted that certain basic conditions in the economy will remain very much the same in the immediate future--for instance, consumer spending behavior, the pattern of price relationships, and the general state of business. The sales they expect to make are the main reason for their outlay. Money that is coming in and expected to come in serves both as a profit motive and as a means of making further outlay. As is well known, outlay for capital expansion by business corporations is strongly influenced by their cash flow. This is true also of the capital outlay of small businesses and farmers. The rate of spending is influenced both by the prospect of profits and by the desire to maintain a workable relationship between money receipts and outlay. In deciding what to do on both counts, people are guided by recent experience, and so they make the immediate future somewhat of a reflection, though not an exact image, of the recent past.
Those who run businesses also have a routine. They have established trade and financial connections and a regular working force. They take for granted that certain basic conditions in the economy will remain very much the same in the immediate future--for instance, consumer spending behavior, the pattern of price relationships, and the general state of business. The sales they expect to make are the main reason for their outlay. Money that is coming in and expected to come in serves both as a profit motive and as a means of making further outlay. As is well known, outlay for capital expansion by business corporations is strongly influenced by their cash flow. This is true also of the capital outlay of small businesses and farmers. The rate of spending is influenced both by the prospect of profits and by the desire to maintain a workable relationship between money receipts and outlay. In deciding what to do on both counts, people are guided by recent experience, and so they make the immediate future somewhat of a reflection, though not an exact image, of the recent past.
Findings of the Business Advisory Council
In 1952, the Secretary of Commerce announced the findings of the Business Advisory Council that had studied the antitrust laws to determine the relationship between existing statutes and administrative procedures and public interest. Some of the key points of this report as they relate to competition are summarized below.
To uphold competition was presented as the primary concern of antitrust policy. The Council agreed with the principle of economic freedom as expressed in the Sherman Act, but suggested room for improvement in antitrust policy, interpretation, and administration. The basic problem centered around the inconsistencies between various antitrust statutes themselves and around their various interpretations. Judicial opinions have been widely divergent. The inconsistencies, in turn, create a great deal of confusion for the businessman who cannot be certain whether he is abiding by, or violating, the laws.
The realm of the kind of competition creates uncertainties. Some of the interpretations require "hard" competition so that any easing or lessening of price competition, regardless of the consequences in the industry, is forbidden. Yet, other statutes, such as the Robinson-Patman Act, call for the "soft" competition which rules out price reductions if they injure competitors, although they may otherwise be acceptable to consumer welfare. A potentially unifying force in interpreting the antitrust laws is the Rule of Reason, which is applied where questionable practices are deemed to be reasonable and, consequently, acceptable. Even here problems arise because there are few explicit standards that determine what is or is not reasonable. In fact, some statutes specifically bar the application of the Rule of Reason. Because of the Rule's greater flexibility and opportunity for a "caseby-case" approach, its application is generally favored by businessmen.
To uphold competition was presented as the primary concern of antitrust policy. The Council agreed with the principle of economic freedom as expressed in the Sherman Act, but suggested room for improvement in antitrust policy, interpretation, and administration. The basic problem centered around the inconsistencies between various antitrust statutes themselves and around their various interpretations. Judicial opinions have been widely divergent. The inconsistencies, in turn, create a great deal of confusion for the businessman who cannot be certain whether he is abiding by, or violating, the laws.
The realm of the kind of competition creates uncertainties. Some of the interpretations require "hard" competition so that any easing or lessening of price competition, regardless of the consequences in the industry, is forbidden. Yet, other statutes, such as the Robinson-Patman Act, call for the "soft" competition which rules out price reductions if they injure competitors, although they may otherwise be acceptable to consumer welfare. A potentially unifying force in interpreting the antitrust laws is the Rule of Reason, which is applied where questionable practices are deemed to be reasonable and, consequently, acceptable. Even here problems arise because there are few explicit standards that determine what is or is not reasonable. In fact, some statutes specifically bar the application of the Rule of Reason. Because of the Rule's greater flexibility and opportunity for a "caseby-case" approach, its application is generally favored by businessmen.
Kinds and Degrees of Competition
At this point, a word of caution is essential: although pure competition generally is referred to as the ultimate in competition, this does not mean that the intensity of rivalry among sellers in any other type of market is less. In fact, when there are a few dominant producers, as there are in cigarettes or automobiles, the interfirm rivalry may be considerably more severe than the rivalry between two wheat farmers in a more purely competitive market. It is important, accordingly, to keep in mind the distinction between kinds of competition and degrees of competition, and that the kind does not determine the degree.
Failure to make this distinction has caused a great deal of argument and misunderstanding between economists and businessmen to arise. It has been customary for the former to explain competition in such a way as to mean only pure competition. Any departures from this model are considered to be noncompetitive. The implication is clear: monopoly elements are present and rivalry between producers is nonexistent. The business world, faced by intense interfirm rivalry, reacts by describing the economist as living in an "ivory tower," and by pointing out that there is a significant amount of rivalry between oligopolistic and otherwise imperfectly competitive firms. Now, if it would be more generally recognized that there are different kinds of competition, that the degree of rivalry is not related to the kind, and that pure competition is only one kind of competition, there would be much less ground for controversy between entrepreneurs, economists, legislators, and jurists--especially when public policies toward competition are to be determined.
Failure to make this distinction has caused a great deal of argument and misunderstanding between economists and businessmen to arise. It has been customary for the former to explain competition in such a way as to mean only pure competition. Any departures from this model are considered to be noncompetitive. The implication is clear: monopoly elements are present and rivalry between producers is nonexistent. The business world, faced by intense interfirm rivalry, reacts by describing the economist as living in an "ivory tower," and by pointing out that there is a significant amount of rivalry between oligopolistic and otherwise imperfectly competitive firms. Now, if it would be more generally recognized that there are different kinds of competition, that the degree of rivalry is not related to the kind, and that pure competition is only one kind of competition, there would be much less ground for controversy between entrepreneurs, economists, legislators, and jurists--especially when public policies toward competition are to be determined.
Workable Competition - Economic and Legal Approaches to Competition
The basic reason for considering the economic and legal definitions of competition is to clarify economic concepts that may be of use in establishing legal control of market forces. As a first approximation, a concept of competition must be developed that is workable or effective, even though it may not be exactly pure. Since the underlying philosophy of the free enterprise system recognizes that competition is desirable in order to assure efficiency, lower prices, and increased production, the idea behind workable or effective competition is to set up a model that will give the public the benefit of industrial rivalry even though there may be deviations from the norm of pure competition. In a sense, this amounts to an "economic Rule of Reason"--reasonable competition that is effective or workable.
Workable or effective competition still would not allow any one seller or group acting in concert to have the power to choose a level of profits by manipulating output and subsequent prices. The influence of rival sellers or potential entrants will operate as a check on his actions if he should attempt to exert price jurisdiction. Rivals must be free to compete for the custom of the buyers through price and nonprice competition; no seller may have the power to limit the freedom of his rivals, nor may he hamper freedom of entry into the industry.
Workable or effective competition still would not allow any one seller or group acting in concert to have the power to choose a level of profits by manipulating output and subsequent prices. The influence of rival sellers or potential entrants will operate as a check on his actions if he should attempt to exert price jurisdiction. Rivals must be free to compete for the custom of the buyers through price and nonprice competition; no seller may have the power to limit the freedom of his rivals, nor may he hamper freedom of entry into the industry.
Relationships Between Market Competition and Market Price
Market price, regardless of the kind of competition present, is a price determined by balancing the forces of demand and supply. The kind of competition will exert its influence as it affects demand and/or supply and the relative weight of each of these components in the pricing equation. The balancing may reflect the relative power of one, few, or many sellers. The possible combinations are many, and the resulting prices will reflect them.
Although there are certain pricing characteristics in each kind of competitive market, we start with the basic assumption that each seller is seeking to maximize his net revenue. In markets of pure or perfect competition, there is little that a given producer can do by way of setting market prices since, by definition, he has no price jurisdiction. The market price will be determined by the interaction of market demand and market supply, of which the given firm under question constitutes only an insignificant force. His problem then is this: in face of a given market price, what should be his output? Since the firm can sell any amount, either in large or small outputs, at the same per unit price, how much should be offered will rest on production costs. The important price-determining decisions under these circumstances are industry-wide, as reflected in the industry supply conditions.
Circumstances are quite different in monopoly markets. Here the firm has more or less complete power to set its supply price and needs only to be concerned with market demand. The firm may then vary both its price and output to maximize net revenue. The monopolist must consider both of these at all times, since he is not able to sell any amount of his goods at a predetermined market price. Since his supply curve interacts with the market demand curve, he finds that he can sell more only at lower prices.
Although there are certain pricing characteristics in each kind of competitive market, we start with the basic assumption that each seller is seeking to maximize his net revenue. In markets of pure or perfect competition, there is little that a given producer can do by way of setting market prices since, by definition, he has no price jurisdiction. The market price will be determined by the interaction of market demand and market supply, of which the given firm under question constitutes only an insignificant force. His problem then is this: in face of a given market price, what should be his output? Since the firm can sell any amount, either in large or small outputs, at the same per unit price, how much should be offered will rest on production costs. The important price-determining decisions under these circumstances are industry-wide, as reflected in the industry supply conditions.
Circumstances are quite different in monopoly markets. Here the firm has more or less complete power to set its supply price and needs only to be concerned with market demand. The firm may then vary both its price and output to maximize net revenue. The monopolist must consider both of these at all times, since he is not able to sell any amount of his goods at a predetermined market price. Since his supply curve interacts with the market demand curve, he finds that he can sell more only at lower prices.
Types of Markets
We may begin with a purely competitive market. Such a market is characterized by large numbers, homogeneous products, and freedom of entry. By large numbers we mean that the number of producers is so large that no one producer--or group acting as one--is in a position to exert any (reasonable) influence over price by manipulating output. What may be large in one instance may not be considered such in another. The test is market influence. The products in question must be identical, that is, there are no identifying characteristics which demarcate one producer's goods from another.
This applies to the techniques of selling and the patronage appeals of the seller as well as to the product itself. Hence, price variations will be the only reason to cause buyers to shift from one seller to another. Finally, there must be the freedom to enter into and withdraw from the industry. In the actual markets of today there are few, if any, examples of such a situation, although some agricultural markets and organized security exchanges may be somewhat of an approximation. The foregoing are the prerequisites on the seller's side.
This applies to the techniques of selling and the patronage appeals of the seller as well as to the product itself. Hence, price variations will be the only reason to cause buyers to shift from one seller to another. Finally, there must be the freedom to enter into and withdraw from the industry. In the actual markets of today there are few, if any, examples of such a situation, although some agricultural markets and organized security exchanges may be somewhat of an approximation. The foregoing are the prerequisites on the seller's side.
The Economics of Market Behavior - Markets
A market is that sphere of competitive rivalry within which buyers and sellers meet to effect exchanges. Exactly what constitutes a given market often is uncertain and controversial. Traditional markets outlined by such geographical boundaries as the Pacific Coast or by such classifications of products as wrapping materials do not always serve as adequate guides. A market should include all the firms that have a sufficient and immediate effect on each other so that the actions of each will have direct repercussions on the welfare of the others in a direct manner. This obviously should cover all products that are direct substitutes for each other; the real problem relates to the products that are only indirect substitutes. When should these be lumped into one market or when should they be divided into separate ones?
Both the amount of anything that is offered for sale and the amount that buyers stand ready to buy depend upon price as the ultimate regulator. It is within the general confines of price determination to state that more will be offered for sale as prices rise and that less will be offered as prices fall. Conversely, the amount demanded will vary inversely with price. Since changes in price affect in opposite directions the amounts offered and taken, it follows that at some price these two quantities will be equated. The basic function of price changes is to equate the quantities supplied and demanded, and thereby to clear the market. So long as there is a single price on the market, at a given time for a given commodity, the price that clears the market is called an equilibrium price. Now there are several ways in which the forces of demand and supply may manifest themselves in a market to determine price. Thus markets are characterized and classified by varying degrees of competition among sellers, among buyers, and between sellers and buyers.
Both the amount of anything that is offered for sale and the amount that buyers stand ready to buy depend upon price as the ultimate regulator. It is within the general confines of price determination to state that more will be offered for sale as prices rise and that less will be offered as prices fall. Conversely, the amount demanded will vary inversely with price. Since changes in price affect in opposite directions the amounts offered and taken, it follows that at some price these two quantities will be equated. The basic function of price changes is to equate the quantities supplied and demanded, and thereby to clear the market. So long as there is a single price on the market, at a given time for a given commodity, the price that clears the market is called an equilibrium price. Now there are several ways in which the forces of demand and supply may manifest themselves in a market to determine price. Thus markets are characterized and classified by varying degrees of competition among sellers, among buyers, and between sellers and buyers.
The Economics of Market Behavior What Are Prices?
Probably there is no subject to which the businessman gives more attention than that of prices and their determination and behavior. It is through the price mechanism that the various market forces that determine the nature of transactions are brought together. The successful entrepreneur must adjust his activities to changing market relationships so that a margin will exist between the prices of the things he sells (revenue) and the items he buys (costs). In order to make the managerial decisions that will enhance the success of his enterprise, it is essential that the businessman understand the forces that determine prices. Likewise, it is of equal importance for Government officials and judges to understand the nature of prices, since so many laws are concerned with price behavior.
As a starting point, 'we may state the simple proposition that the price of anything is determined by the interaction of the laws of demand and supply. This proposal immediately suggests that there is a system for determining prices and that arbitrary action alone is an inadequate explanation of price-setting and price movements. The simplicity of the demand-and-supply approach should not mislead one into believing that the price mechanism is a very simple one. There are numerous, complicated and interrelated forces with all sorts of ramifications underlying demand and supply. Neither of these components of price is self-determining; there are a multitude of dynamic forces in constant operation. It is essential, then, to go beyond the proposition of demand and supply and seek out the forces that affect these determinants.
As a starting point, 'we may state the simple proposition that the price of anything is determined by the interaction of the laws of demand and supply. This proposal immediately suggests that there is a system for determining prices and that arbitrary action alone is an inadequate explanation of price-setting and price movements. The simplicity of the demand-and-supply approach should not mislead one into believing that the price mechanism is a very simple one. There are numerous, complicated and interrelated forces with all sorts of ramifications underlying demand and supply. Neither of these components of price is self-determining; there are a multitude of dynamic forces in constant operation. It is essential, then, to go beyond the proposition of demand and supply and seek out the forces that affect these determinants.
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