Finance Capital, Hilferding 1910

12

Cartels and Trusts

The ways in which combinations of capitalist enterprises are formed have been considered from three aspects. The distinction between horizontal and vertical combinations is one of a purely technical kind, and we have observed how the formation of such combinations depends upon diverse technical and economic causes.

The distinction between partial and monopolistic combinations rests upon the difference in their position on the market; whether they determine prices, or on the contrary have to conform to market prices. In this connection it should be noted that the ability to control prices does not depend upon all enterprises of the same type being brought into a combination. It is enough if the combination controls that part of the output which is indispensable for meeting market demand during all phases of the business cycle, and can keep its costs of production lower than those of the outsiders. Only then will the restriction of production which is necessary in a depression fall upon the outsiders, while prices need only be reduced to the level where they cover the cartel's costs of production.

Finally, the distinction between a consortium and a merger is simply one of formal organization. The consortium is based upon an agreement between two or more previously independent enterprises, while a merger is the unification of two or more enterprises in a new enterprise. This contrast is only one of organizational form, and tells us nothing about the substance of the difference, which depends upon the content of the agreement upon which the consortium is based. At all events, an agreement limits in certain respects the independence of the participating enterprises, while in a merger their independence is abolished altogether. But there is no sharp line of distinction between limited independence and complete loss of independence. The more an agreement limits the independence of the enterprises taking part in a consortium, the more its economic consequences lead them towards a merger. Furthermore, the restrictions upon the independence of an enterprise may proceed in a number of different ways. First, the organization of an enterprise can be established contractually in such a way that its management is obliged to submit to supervision by a common, central body which restricts certain kinds of competition in the sphere of circulation by establishing uniform terms and conditions of payment, etc. ; that is to say, by standardizing the 'conditions' on which trade is transacted. Subsequently, restrictions may be imposed which affect economic and business practices.

The terms of an agreement establishing a monopolistic consortium are defined by its purpose, which is to increase profit by raising prices. The simplest way of doing this is to enter into a price agreement. But prices are not arbitrary; they depend upon supply and demand. A mere price agreement will only be effective in periods of prosperity when prices tend to rise, and even then only to a limited extent. Higher prices encourage an expansion of production, the supply increases, and in the end the price agreement cannot be maintained, so that this type of cartel usually collapses, at the very latest when a depression arrives.[1]

If the cartel is to endure the agreement must go further and bring about a relationship between supply and demand such that the agreed market price can be maintained. It must therefore regulate the supply and set production quotas. The pursuit of such a policy is certainly in the interest of the cartel as a whole, but not always in that of the individual members, who could lower their production costs by expanding production, and are constantly tempted to circumvent the cartel regulations. The best protection against such evasions is to remove the function of selling the product from the members, and to assign it to a central sales agency of the cartel.

The greater certainty of control, however, is not the only consequence of such measures. They also suspend any direct dealings between the individual enterprises and their customers while the cartel is in existence, and so eliminate the commercial independence of these enterprises. The cartel thus binds its members together not only by the terms of the agreement, which can easily be broken or circumvented at any time, but by common economic arrangements. A member enterprise which leaves the cartel has to renew relations with its customers, re-establish its sales outlets; and such attempts may well fail, or succeed only at considerable cost. In this way the cartel acquires greater stability and permanence. A cartel which is transformed from a simple agreement among its member enterprises into a commercial unit through the elimination of their commercial independence is called a syndicate. The syndicate form of combination is possible, however, only if it is a matter of indifference to customers which of the cartelized enterprises they patronize, and this, in turn, presupposes a certain standardization of production, which is a prerequisite for the establishment of a more tightly knit, durable and disciplined organization such as a syndicate. Incidentally, this explains why it is much more difficult to cartelize enterprises which produce speciality articles, since they derive an extra profit from the use of trade marks, patents, and the like, and the elimination of competition is therefore less important for them. They are only forced to enter into a cartel or combination themselves in cases where the industries which supply them with raw materials have been cartelized. In general, cartelization brings about a greater simplification of production.[2]

In a rather simplified and schematic form the development of the substance of agreements in monopolistic consortia may be depicted as follows, though of course it should be borne in mind that one or other stage in the process may be missed out. The first, weakest form, which is in fact a preparatory stage, is that which Grunzel calls a 'cartel of conditions' [see footnote 2 - Ed.]. Next comes the joint regulation of prices, but in order to maintain the level of prices the appropriate supply must also be determined. Price regulation, if it is not to be simply spasmodic and transitory, therefore requires that production should be regulated. In order to prevent circumventions of the agreement, it has been found desirable to transfer responsibility for marketing from the individual enterprise to a collective body of all the enterprises, in the form of a sales office. Thus each enterprise loses its commercial independence and its direct contact with customers. The agreement is also maintained more effectively if the profits do not go to the enterprise which actually produced them, but are distributed among all the participants according to some predetermined formula. Similarly, the purchase of raw materials may also be undertaken on a collective basis. Finally, there may eventually be interference with the technical autonomy of the individual firms. Poorly equipped factories may be closed down, while others may be made to specialize in certain products for which they are especially suited by reason of their technical equipment or their proximity to appropriate markets.[3] All these developments can occur in consortia, through the conclusion of agreements. But this type of consortium differs from a merger only in the sense that its organization is more top-heavy. It is therefore misleading to regard a cartel and a trust as mutually exclusive alternatives. The cartel form of organization can limit the independence of the participating enterprises to such a degree that it becomes practically indistinguishable from a trust. The real question is rather what advantages are offered in return for the restriction of independence. If there are such advantages the trust has them from the very outset, whereas in the case of a cartel they depend upon the nature and consequences of the agreement on which it is based.[4]

The monopolistic association is an organization for economic domination, and there is therefore a close analogy with the organizations of state domination. The relation between cartel, syndicate, and trust thus resembles that between a confederation, a federal state and a unitary state. The manner of speaking which lauds the cartel as 'democratic' by contrast with the trust appears in all its absurdity if one thinks of applying the same notion to the late German confederation.

The trust has an advantage over the cartel in fixing prices. The cartel is obliged to base its fixed price on the price of production of the most expensive producer among its member firms, whereas for the trust there is only one uniform price of production in which the costs of the more efficient and less efficient concerns are averaged out. The trust can set a price which allows it to maximize its output and make up for its small profit per unit by the volume of its turnover. Furthermore, the trust can close down the less profitable concerns much more easily than can the cartel. When production has to be cut down, the trust can effect this exclusively in the high-cost enterprises, and thus reduce average costs of production; and conversely, when there is an expansion of production it can concentrate the increase in the technically more efficient firms. As a rule, the cartel has to distribute the increased production evenly among its member enterprises. In this way, the technically superior enterprises gain, from the prices fixed by the cartel, extra profits which are not averaged out through competition, since the cartel excludes this, and seem to assume the character of a differential rent. The difference from ground rent consists in the fact that the least efficient enterprise, unlike the worst agricultural land, is not needed in order to meet market demand. The marginal enterprise can be closed down if its production can be transferred to more efficient concerns. Since the cartel price is meanwhile maintained, however, increased production means extra profit for the low-cost producers, and it becomes profitable to discontinue production in the high-cost plants. But in that case the 'differential rent' disappears and only the high cartel profit remains.

Differences in cost of production are especially important in cartels which produce raw materials, because the amount of ground rent (or mine rent) is a crucial item in their production prices. In such cases, therefore, we find, on the one hand, a very marked tendency to close down the less profitable enterprises (specifically those which yield a smaller ground rent), and on the other, a tendency to maintain high prices, which in turn entails a relatively severe limitation of output. A natural monopoly also helps to make such a policy effective. High raw material prices then have an effect upon prices, and also upon the volume of production in the processing industries.

Footnotes

[1]It is the type of cartel which Engels had in mind when he wrote: 'The fact that the rapidly and enormously growing productive forces grow beyond the control of the laws of the capitalist mode of exchanging commodities, inside of which they are supposed to move, this fact impresses itself nowadays more and more even on the minds of the capitalists. This is shown especially by two symptoms. First, by the new and general mania for a protective tariff, which differs from the old protectionism, especially by the fact that now the articles which are capable of being exported are the best protected. In the second place, it is shown by the trusts of manufacturers of whole spheres of production for the regulation of production and thus of prices and profits. It goes without saying that these experiments are practicable only so long as the economic weather is relatively favourable. The first storm must upset them, and prove that, although production assuredly needs regulation, it is certainly not the capitalist class which is fitted for that task. Meanwhile the trusts have no other mission but to see to it that the little fish are swallowed by the big fish still more rapidly than before.' Capital, vol. III, pp. 142-3, footnote by Engels. [MECW, 37, p122n]