To the Editor:

If I understand them, Messrs. Clurman and Seligman have three objections to the enterprise economy and they score my failure to give them proper consideration:

1. Business is extensively monopolized, and monopoly means concentration of economic power.
2. It is absolute rather than relative income that is relevant to the matter of equality, and the absolute income of the poor is inadequate.
3. The structure of the economy is faulty: it thrives on scarcity (Mr. Clurman); it is subject to contraction (Mr. Seligman).

Now, the real test of monopoly is not mere bigness but the extent of collusion among firms, and the amount of monopoly is measured by the proportion of national income produced by collusive industries. In order to determine the significance of monopoly it is therefore necessary: (1) to discover the presence of collusion, and (2) to measure the output of collusive industries in relation to total output.

Mr. Seligman’s information on family holdings is suggestive of collusion, but not probative. Such facts were collected about fifteen years ago by the National Resources Committee and left their impression on many. What failed to leave the proper impression was the Committee’s great reluctance to diagnose collusion from these facts alone. Yet even if collusion had been shown, in itself it would not have measured the extent of monopoly. No effort was made to measure the proportionate output of monopolistic industries, and this, one must insist, is a critical issue. To say that a billion or x-billions worth of products are produced under monopoly is meaningless until one knows the comparable total production of the economy.

It is also of little importance that there are a certain number of companies whose capital exceeds a billion dollars. What is important is whether these firms act competitively or monopolistically and what their share of the total output is. The proportion of the labor force employed by large firms is more to the point, and the data show no conclusive evidence of monopoly (See G. J. Stigler, Five Lectures on Economic Problems, p. 50). The proportion of total business income received by corporations is of course irrelevant, because corporations are not necessarily monopolies.

The facts about monopoly have become more adequate since my article was written, in a study by G. Warren Nutter, The Extent of Enterprise Monopoly in the United States, 1899-1939 (University of Chicago Press). Mr. Nutter states that the proportion of national income produced in 1937 under conditions of monopoly was about 15 per cent; that produced under conditions of workable competition, 60 per cent; while the remainder is attributable to government. The corresponding percentages for 1899 are 17, 76, and 7.

These figures, as Mr. Nutter explains, are subject to qualification, and they err, it seems to me, in the direction of overstating the amount of monopoly. Mr. Nutter defines a monopoly as an industry in which the four largest firms produce 50 per cent or more of that industry’s output. This measure of concentration is not evidence of monopoly (i.e. collusion) but rather of the absence of competition. The distinction is important for the kinds of questions raised by Messrs. Clurman and Seligman, who seem to believe that the economy is directed by a relatively few corporations. It is not in fact; one unqualified conclusion emerges from Mr. Nutter’s study, namely that there is no evidence to show that monopoly is the prevalent form of private enterprise. Nor is there evidence to show that it was more common in 1937 than fifty years ago.

There are other than enterprise monopolies, and they offer the more important problem. While competitive output declined from 76 to 60 per cent of the national product between 1899 and 1937, the government’s output increased from 7 to 25 per cent. Governmentally sponsored cartels have increased, and monopoly in the labor market is extensive. These facts may not go well with an enthusiasm for a political direction of the economy, but they may as well be recognized.

There are reasons for the common exaggerated notion of the extent of monopoly among private enterprises. One is that revelations of collusive practice are much more sensational (and much more in harmony with predispositions) than information about the extent of competition. Accusations of monopoly are facile rhetoric for crusaders and vote-gatherers. The government frequently interests itself in the matter, because monopoly has always been considered a problem in America, while competition has always been something to be praised in public—and, if possible, to be stifled in private. The presumed “mountains of evidence” of “the pervading influence” of monopoly actually prove very little. Most of it is of no value whatever in answering the critical questions of the extent of collusion and its relative importance. Upon inspection, the evidence reduces to two or three studies, only one of which Mr. Nutter found to be helpful (Competition and Monopoly in the American Economy by Clair Wilcox). Those who are certain that private monopoly is extensive must either have private evidence not available to economists or have reached their conclusion by avoiding the critical questions.

(The Temporary National Economic Committee’s statement on monopoly is ambiguous, and my interpretation of it may very well be mistaken, as Mr. Seligman contends. The phrase, “291 [products], or more than one-sixth of the sample,” may refer to the total value of all manufactured products monopolized, or it may be an error of some sort. It cannot refer to the number of products, which was 1,807, as “more than one-sixth” of 1,807 is surely not comprised by 291. I should be reluctant to dismiss my reading of the phrase were it not, however, that Mr. Nutter’s calculations are more complete; according to them, 39 per cent of the value of all manufactured goods were produced in 1937 by industries in which four firms produced 50 per cent or more of the output. The TNEC statement refers to industries dominated by one—not four firms.)

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As troublesome as the arithmetic of monopoly seems to be, it is less trying than the arithmetic of income distribution. Both correspondents say that it is misleading to measure inequality by the percentage of total income received by each fifth of all consuming units. I am afraid this is the only simple way in which it can be measured. Inequality is a relative magnitude that, by definition, is measurable only as a percentage. In Mr. Clurman’s example, the rich men increased their income by 69 per cent while the poor increased theirs by 100. Now the absolute difference in incomes is great (whether or not allowance is made for price changes), and the lowest income is only a small fraction of the highest. These are the facts, I suspect, that the correspondents wish to emphasize. It cannot be denied that there are rich and poor in the economy, as there always will be as long as income is not distributed equally. My point is that the disparity is less than it once was, and that it has been diminishing for as many years as we have income figures for.

Additional data on the point have become available since my article was written, in a study by Simon Kuznets, Shares of Upper Income Groups in Income and Savings (Occasional Paper 35, National Bureau of Economic Research). A noteworthy feature of this study is its information on the share of total income received by the richest one per cent (approximately one and a half million people) of the population. In 1919, it was 14 per cent; in 1929, 17 per cent; in 1939, 13 per cent; in 1945, 10 per cent. The share received by the lower 95 per cent in these same years was 74, 68, 72, and 80 per cent. The minimum family income of the richest one per cent was, in 1919, $12,000; in 1929, $16,000; in 1939, $12,000; in 1945, $20,000. No figures are given for the minimum income of the poorest. Average family income (for the entire population) in the same years was $2,500, $2,700, $2,100, and $4,600. Among the richest one per cent, 52 per cent of income came from wages, salaries, and entrepreneurial earnings, and 48 per cent from dividends, interest, and rent.

Another contribution of Mr. Kuznets’ study is an estimate of the distribution of income-yielding property, or that part of the national capital yielding a money income. The 5 per cent of the population (comprising approximately 7,500,000 people) receiving the highest income owns about half of all individually owned capital yielding a money income; it owns more than 75 per cent of all stock, 40 per cent of all bonds, and about 40 per cent of all rental property. “Hence [Mr. Kuznets writes] the inequality in the ownership of income-yielding capital is much greater than the inequality in the distribution of current income.” He estimates the arithmetical effects on the distribution of income which would come either from confiscating all money income from capital or from redistributing it equally: the relative share of total income going to the lower 95 per cent would be increased from 75 to 81 per cent as a result of confiscation, and to 83 per cent by an equal distribution, while the share of the richest one per cent would be reduced from 13 to 8 per cent by confiscation, and to 7 per cent by an equal distribution. (The figures are for 1919 to 1938.)

From the facts of monopoly and of the distribution of income and capital, I read the plain implication that economic power is not concentrated in the hands of a few private enterprises or families. There being no evidence of extensive collusion among private enterprise, there is no evidence of concentrated control over assets. Since the distribution of income-yielding capital is quite different from the distribution of total income, there is no evidence that a few families by their wealth can determine what goods shall be produced and who shall receive them. Actually, the meaning of “economic power” is quite complex, and I am unable, by the most sympathetic inferences, to find any recognition of this in either Mr. Seligman’s or Mr. Clurman’s letter.

Mr. Kuznets’ study also considers the effect of the business cycle on income distribution, a point raised by Mr. Seligman. Although the share going to the lower 95 per cent usually shrinks in a depression, that going to the richest one per cent does not always increase. Federal Reserve Board studies show that in the recession of 1949, the relative position of the poor remained constant, that of the richest declined, while the relative position of the middle-income groups improved. Hence, we should go astray were we to take seriously Mr. Seligman’s figures on the increase in 1949 of the percentage of consuming units receiving $3,000 or less.

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Whatever the significance of absolute money income as a measure of welfare, it has no significance as a measure of inequality. Those who wish to offer the money—or real—income of the poor as proof that the enterprise economy is wanting, have two things to do. One is to establish a criterion of adequate money income. The criterion would be wholly arbitrary, because individual needs cannot be measured objectively, and because they are continually changing. Serious efforts to erect such a standard have resulted in the past in a “subsistence” or “decency” budget which reflects no more than convention, and that in an uncertain way. The second thing to do must be to show that an alternative to the enterprise economy can provide a higher real income and more equitable distribution. This, admittedly, is a large requirement. A beginning might be made by inquiring whether state-administered economies have ever obtained the same rate of increase in productivity as enterprise economies have.

The increase in America over the past ten years—2½ per cent annually—seems not to have impressed Mr. Clurman, who describes ours as an “economy of scarcity.” This is wholly true, not only of American capitalism, but, unfortunately, of every other economic system yet known. Every nation is faced with scarcity because the labor and capital available for production are much less than that needed to produce all the things we want. An “economy of abundance,” if the term is considered meaningfully, is one in which at a zero price the supply of goods exceeds their demand—that is, everything is free. Until this ideal situation comes into being, we shall have to make the best of scarcity by an economical use of our resources. We shall do well to recognize that some labor, and capital, is less productive than other and in consequence will earn less than the average.

The lowest income class in the economy, which in 1948 received $2,000 or less, consists of six major groups according to information gathered by the Reserve Board and the Census Bureau. They are: Negroes, the aged, the disabled, persons physically and mentally of low productivity, certain farming groups, and individuals from broken families. No single cause accounts for their distress. Discrimination, neglect, indifference, inefficiency, immobility, exploitation, personal troubles, lack of opportunity or training or education, and sheer bad luck—all are operative factors. Some of the poor are so only temporarily; the composition of each income class is constantly changing. Others among the poor remain poor, and it is they who present the real problem of poverty and injustice that the enterprise economy (or any other kind) must face. I do not see that we are nearer to a solution by presuming that poverty is the result of the iniquity of the rich.

Mr. Seligman appears to believe that the American economy cannot maintain its present growth and eventually must go into decline. If he means that a depression is inevitable, he must have great faith in the mechanical perfection of his economic theory. Few others are as confident of their doctrine. If he means that the economy is permanently threatened by underemployment, he is in a less dubious area. Whether this danger comes from the very structure of the economy or only from perversions of it depends on how one estimates its reality and magnitude. It may be observed that discussion of this point among economists has given place in recent years to a greater attention to its opposite—chronic inflation instead of deflation. It is also recognized that it is possible to have both inflation and unemployment. The probability of unemployment of this kind depends on the extent of monopoly, particularly among labor unions. The effect of inflation depends, in part, on the distribution of income. Both aspects of the problem will be more clearly understood by a responsible treatment of the facts.

William D. Grampp
Chicago, Illinois

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