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.