Another phase of corporate growth is the "integration of industry," that is, the grouping under one control of a whole series of industries. One company may carry the iron ore through all the processes from the mine to the finished prod uct. A railroad line across the continent owns its own steam ers for shipping goods to Asia or Europe. Large wholesale houses own or control the output of entire factories.
§ 15. Profits from monopoly and gains of promoters. There are, however, well-recognized limitations to the econ omy of large production in the single establishment," and of late there has been ever-increasing skepticism as to the net economy actually attributable to combinations. Undoubtedly 9 See Vol. I, pp. 388-393. io See Vol. I, pp. 391-392.
the merging of a number of old plants has sometimes effected an immediate improvement in the weaker ones. A new broom sweeps clean. This movement chanced to be contemporane ous with the developing of "efficiency engineering" and of "scientific cost-accounting," and these better methods, al ready developed and applied in comparatively small plants, could be more quickly extended to the other plants brought into the combination. Moreover, the personal organizations in the separate enterprises had been brought to a high state of efficiendy by the stimulus of competition, and there is rea son to fear that, after some years of centralized bureaucratic organization, much of this efficiency may be lost.
There seems no doubt that the strong motive for forming combinations is the profit to the organizers." Whatever was the more generous motive or more fundamental economic rea son assigned by the promoters, the investing public confi dently expected that higher prices would be the chief result. There are indirect as well as direct gains to the promoters of a combination. There is the gain from the production and sale of goods to consumers, and there is the gain from the financial management, from the rise and fall in the value of stock. The promoters of a combination often expect to make from sales to the investing public far more than from sales to the consumer of the product. A season of prosperity and confidence, when trusts and their enormous profits are con stantly discussed, has an effect on the public mind like that of the gold discoveries in California and in the Klondike. Then is the time for the promoter to offer shares without limit to investors.
§ 16. Monopoly's power to raise prices. There is no doubt that the formation of a combination from competing plants can and does give a control over prices, a monopoly power, not possessed by the separate competing establish ments. The same kind of power might be attained by the
growth of one establishment outstripping all its competitors, 11 See Vol. I, p. 334, on the function of the promoter.
or by a new enterprise coming into the field backed by power ful capitalists. But this would work slower and less exten sive results than does the formation of a combination.
Of course, the fundamental principles of price cannot be changed by a trust; a selling monopoly can affect price only as it affects supply or demand." The strongest trust yet seen has not been omnipotent. Many careless expressions on the subject are heard even from ordinarily careful writers and speakers: "The trust can fix its own prices," "has un limited control," "can determine what it will pay and for what it will sell." This implies that trusts are benevolent, seeing that the prices they charge are usually not far in excess of competitive prices in the past. Such a view overlooks the forces that limit the price a monopoly can charge. If the supply remains the same, no trust can make the price go higher.. The monopoly usually directs its efforts toward af fecting the supply, leaving the price to adjust itself. It can affect the supply either by lessening its own output or by in timidating and forcing out its competitors. It is true that this logical order is not always the order of events. The trust may not first limit the supply and then wait for prices to adjust themselves; it may first raise its prices, but, unless it is prepared to limit the supply in accordance with the new resulting conditions of demand, such action would be vain. The control of the sources of supply is the logical explanation of the higher price, even though the limitation of supply is effected later by successive acts found necessary to maintain the higher price.
The report of the Federal Industrial Commission, which from 1898 to 1901 investigated the trusts, showed'' that im mediately upon their formation the industrial combinations 12 See Vol. I, pp. 80-85, 382-387, 394-396.
is A summary of this evidence is given in the author's "Principles of Economics" (1904), pp. 327-330. A fuller outline of the results of the Commission's conclusions may be found in "The Trust Problem," by J. W. Jenks, who acted as expert in the investigation.
had raised their prices. Prices might be lowered again, but only when and where competition became troublesome, thus causing either "price-wars" or discrimination.