Can Capitalism Survive?
By Benjamin A. Rogge
One of the signs of advancing age in the American college professor is a tendency for him to write less and publish more. This seeming paradox is easily explained by the phenomenon of
Collected Works, that is, by what on television would be described as reruns. As in television, no great public outcry is needed to bring forth the reruns; a question from his wife, a polite suggestion from a colleague, and the cut-and-paste operation is under way.I have put together here what I believe to be the best of the rather meager output of my professional career up to this point. For reasons (mostly financial) that always seemed adequate at the moment, I have been more of a speechmaker than a writer. Thus, you will find that many of the pieces in this collection are but speeches put down on paper…. [From the Foreword]
First Pub. Date
Indianapolis, IN: Liberty Fund, Inc. Liberty Fund, Inc.
The text of this edition is under copyright. Picture of Benjamin Rogge: file photo, courtesy of Liberty Fund, Inc.
- Part I, Introduction
- Part I, Chapter 1, Can Capitalism Survive
- Part II, Introduction
- Part II, Chapter 1, The Case for Economic Freedom
- Part II, Chapter 2, The Libertarian Philosophy
- Part II, Chapter 3, Who is to Blame
- Part II, Chapter 4, Paradise in Posey County
- Part III, Introduction
- Part III, Chapter 1, Adam Smith, 1776-1976
- Part III, Chapter 2, Christian Economics: Myth or Reality
- Part III, Chapter 3, College Economics: Is It Subversive of Capitalism
- Part IV, Introduction
- Part IV, Chapter 1, Profits
- Part IV, Chapter 2, The Businessman
- Part V, Introduction
- Part V, Chapter 1, The Labor Monopoly
- Part VI, Introduction
- Part VI, Chapter 1, The Long-Run Economic Outlook
- Part VI, Chapter 2, Alleged Causes of Inflation, Corporate Monopolies
- Part VII, Introduction
- Part VII, Chapter 1, The Problems of Cities
- Part VIII, Introduction
- Part VIII, Chapter 1, Financing Higher Education in the United States
- Part VIII, Chapter 2, The Promise of the College
- Part IX, Introduction
- Part IX, Chapter 1, The Businessman and the Defense of Capitalism
- Part IX, Chapter 2, Reflections on the Election of 1964
- Part IX, Chapter 3, The Foundation for Economic Education, Success or Failure
Part VI, Chapter 2
Alleged Causes of Inflation: Corporate Monopolies
The question before the house is whether inflation is caused, in whole or in part, by the exercise of private market power in the economy. So as to relieve what little suspense there may be, let me hasten to say that the answer to this question is “No.” Inflation is not produced by the assistant manager of the A&P store who marks out 43¢ on the can of beans and replaces it with 47¢. Its source is not to be found in the executive offices of the major oil companies—nor even in the exotic, air-conditioned chambers of the oil ministries of the oil producing states of the Third World. Nor is it to be discovered in the admittedly disconcerting, often violent, actions of the minions of George Meany. Even the God of the rainfall, the wind storm, and the wheat rust is blameless of visiting this affliction upon us.
proximate cause of the inflationary pressures of the day; the real roots of the problem (and the hopes for its solution as well) are to be found in the cluttered closets where people like John Maynard Keynes, Ludwig von Mises, John Kenneth Galbraith, Walter Heller, Milton Friedman, et al., go about (or have gone about) their work. The regression equations developed by the research staff of the St. Louis Federal Reserve Bank may well be some part of the ammunition that will eventually bring down the walls of the inflationists. In other words, it is ideas, whether right or wrong, that finally count, and one of the most important of the mistaken ideas to be disposed of is the one under discussion here: the idea that market power produces inflation and the corollary policy implication that inflation can be reduced or controlled by direct intervention in wage and price setting.
seem to do more to qualify for the modest pay offered to speakers in these meetings.
Market Power and Inflation
if one accepts what I believe to be the most useful definition of inflation. In the tradition of Mises, I believe the most useful way to define inflation is as a situation in which the quantity of money is increasing more rapidly than the output of goods and services (or, more precisely, than the corresponding need for money). The wage and price increases which tend to follow from this are but the symptoms of the situation itself. Thus, if by draconian measures, all the wage-price-interest rate symptoms of inflation could be suppressed, the inflation would still be present, but its symptoms would be in general (though not universal) shortages of goods and services—in queues before the shops of the butcher, the baker, and the candle-stickmaker. As Allen Wallis has pointed out, for the housewife to encounter bare shelves at the fixed price is for her to suffer a fall in the purchasing power of her money just as real as for her to encounter full shelves but at higher prices.
no. The exercise of market power can change (in fact, distort) the use of resources from what would have prevailed in the absence of that market power (e.g., fewer workers employed in construction and, because of that, more workers available for other employments). This could lead to some prices (housing, say) being higher than they would otherwise be, but, by the same token, other prices would be lower than they would otherwise be. There is indeed damage to the consumer interest from this state of affairs, but it is a damage different from (and to be corrected by different means than) the damage from inflation. In insisting that the bite of the rattlesnake does not cause cancer, I am not trying to say a kind word for the rattlesnake. I am only trying to direct the doctor to the correct diagnosis and medication of the ailment.
lag between disturbances in M and responses on the price and wage side? There is some evidence that this may indeed happen in some cases, but so what? It is still not the market power that has
produced the inflation.
Industrial Concentration and Inflation, and it includes a foreword by Yale Brozen of the University of Chicago, research director of the American Enterprise Institute (and incidentally the man who first turned my own eyes in the direction of market economics).
It is frequently argued that industries in which a few firms produce most of the output charge higher prices than they would if the large, component firms were broken into several smaller ones (as was done, for example, with the old Standard Oil Company and the American Tobacco Company early in the century). Whether or not the argument is valid, and much evidence to the contrary has appeared, it does not follow that inflation is a consequence of a highly concentrated industrial structure. Assuming, for the sake of argument, that concentrated industries charge higher prices, we should suffer
rising prices only if industrial concentration were rising. But data for the U.S. economy show average market concentration levels to be fairly stable. That being the case, no connection should be expected between industrial concentration and inflation.
Professor Lustgarten examines the movement of prices of manufacturing industries. He seeks to determine whether prices in the most concentrated industries increase more rapidly than those in the less concentrated industries. He finds that the price behavior of the highly concentrated industries has not been a source of inflation in the United States. According to his data, the prices of these defamed industries have not only
not been a source of inflation, but have risen more slowly than those in the atomistic industries. They have, in fact, been a moderating factor in inflation.
Both theoretical and empirical evidence relating industrial concentration to inflation have been examined. The theoretical arguments were that concentration promotes inflation because it allows sellers to maintain prices when demand declines, to pass on inflationary wage increases, and to avoid competitive pressures to reduce costs. These arguments were found to be inconsistent with the evidence, which showed that prices and unit labor costs have increased more slowly in concentrated industries than in other industries.
concentration and inflation—and this is not equivalent to proving that there is no relationship between
market power and inflation. Their findings may only suggest that there is no real relationship between concentration ratios and the real exercise of market power—a thesis I believe to be almost certainly valid.
real market power might not be related to inflation. To the disappointment of many of you, I suspect, I must reply that it is my firm belief that not only can Gulf Oil and General Motors not produce inflation but neither can it be “manufactured” in the regulatory offices, the tariff commissions, the city halls, or the courts of the land. Again actions taken (or not taken) there can, like the rattlesnake, introduce a poison into the economic system, but the poison is not that of general inflation.
As the American public is learning to its dismay, there are many ways in which government actions can cause or worsen inflation. Large budget deficits and excessively easy monetary policy are usually cited as the two major culprits, and quite properly. Yet, there is a third, less obvious—and hence more insidious—way in which government can worsen the already severe inflationary pressures affecting the American economy.
That third way is for the government to require actions in the private sector which increase the costs of production and hence raise the prices of the products and services which are sold to the public…. Literally, the federal government is continually mandating more inflation via the regulations it promulgates. These actions of course are validated by an accommodating monetary policy.
In theory, the monetary authorities could offset much of the inflationary effects of regulation by attempting to maintain a lower rate of monetary growth. In practice, however, public policy makers, insofar as they see the options clearly, tend to prefer the higher rate of inflation to the additional monetary restraint and the resulting decreases in employment and real output.
Can Inflation Be Cured by Making the Economy More Competitive?
*64 Competition does not need to be created or protected or restored; all that government need do to see that competition prevails is not to get in its way.
not significantly related to the problem of inflation. It follows from this that inflation cannot be reduced or eliminated by actions taken to make the economy more competitive. Moreover, I have insisted that for the nation to turn its policy eyes in that direction would be for it to divert attention from the only area where it must look if it is in fact to bring inflation under control—and, in the process, to be as likely to produce harm as good in the market structures of the economy. Finally I have identified that “only area” where a solution to the problem of inflation is to be found as that of the money supply.
1 or M
2 or M
3? Should all such attempts to create a controlled paper currency be abandoned and replaced by the gold standard? If so, which of the many forms of the gold standard? or should some other commodity standard be put in place?
Industrial Concentration and Inflation (Washington, D.C.: American Enterprise Institute, 1975), p. 1.
The Competitive Economy (1975).
Government Mandated Price Increases: A Neglected Aspect of Inflation (Washington, D.C.: American Enterprise Institute, 1975), p. 3.
Capitalism, Socialism, and Democracy, 3rd ed. (New York: Harper & Row, 1962), p. 99.
The Wealth of Nations (New York: Modern Library, 1937), p. 651.