How competition produces monopoly               

Allen Myers

Direct Action, Issue 7, December 2008

In its earliest stages, capitalism necessarily began from

what was provided by the feudal economy that preceded

it. This was primarily an extremely low level of

productivity, based mostly on very simple tools and

producers (peasants and artisans) with few skills.

Because capitalism is production for profit by selling to an

anonymous market, unlike feudalism, it sought constantly

to increase production. Initially this was accomplished

primarily through increasing the division of labour.

Production of a commodity that previously had been made

by a single person was divided into a series of tasks,

each performed by a different individual. In his Wealth of

Nations, published in 1776, the English political economist

Adam Smith illustrated the enormous increase in

productivity brought about by the division of labour in pin

manufacture: a single individual, Smith wrote, could not

make 20 pins in a day, but 10 specialised workers

cooperating through a division of labour could make

48,000 in one day.

As the division of labour spread and intensified within the

production processes of more and more commodities, the

tasks performed by each individual worker became more

and more simplified and standardised. This simplification 

made it easy to develop machinery that could do part or

all of what had previously been done by a worker.

For capitalists, replacing workers with machinery reduced

costs and increased output. Competition among

capitalists therefore made it compulsory for every

capitalist to introduce the latest machinery; if they didn't,

they would be undersold by those capitalists who did.

Most of the profits of a business were ploughed back in to

it, to get newer and better machinery to keep up with the

competition. Capitalist development therefore brought

about a huge increase in the productivity of human labour.

But, less obviously, capitalism was also undermining this

process. Over time, competition eliminated the less

successful capitalists and increased the size and 

economic power of the companies that survived. Towards

the end of the 19th century, major parts of the economies

of the most advanced capitalist countries came to be

controlled by a few firms, or only one. Increasingly,

monopolies dominated capitalist economies.

Monopolies are usually hugely profitable. But their profits

depend on ending greatly increased productivity.

Monopolies gain their super-profits by restricting 

production, making the supply of their product fall below

the demand. Because the product is scarce, its price and

the monopoly's profits go up (?). If a monopoly increased

production, its product would become less scarce, and its

monopoly profits would decline. So while a monopoly still

seeks technological improvements that reduce its costs, it

has less and less motive to invest in more productive

equipment (?).

Of course, the power of a monopoly to limit production is

not absolute. There is always at least a theoretical

possibility that if a monopoly gets too far behind the times

technologically, some other capitalist with new technology

might break into the industry. In particular, there is a

danger of some foreign capitalist, perhaps with support

and subsidies from its government, breaking the

monopoly.

It is also the case that monopolies can make things

uncomfortable not only for ordinary people but also for

capitalists operating in other areas, if the product of the

monopoly is important to their own operations. For

example, the antitrust laws passed in the United States in

the late 19th and early 20th century were not totally

opposed by all capitalists, some of whom were worried about being held to ransom by the Rockefeller family's

Standard Oil monopoly (which was partially broken up in

1911 by a Supreme Court ruling). Similarly, throughout

most of the 20th century, developed capitalist countries

that had a steel industry did everything they possibly

could to maintain it, because steel was so fundamental to

production of military equipment, and no country wanted

to be left in a situation where it relied on a potential

enemy (which was any other country) for its military

production.

Still, there is an inherent tendency in capitalist competition

to restrict the growth of productivity and create 

monopolies (?). And the super-profits of monopolies

create a further dilemma: how to reinvest them. These

profits cannot be reinvested in the industry that created

them, because that would undermine further super-profits.

This is the fundamental economic source of imperialism,

which will be the topic of the next article in this series.

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