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Published online by Cambridge University Press: 07 November 2014
Economic literature of the past decade suggests, and most economists would surely agree, that there are two fundamental economic problems: unemployment and monopoly. Together, enforced idleness of resources and maldistribution of resources due to monopolization of all kinds are responsible for whatever gap exists between actual and potential national real income. They account for a good deal of the inequity of income distribution as well. Economic policy has as its chief concern the elimination of monopoly without loss of efficiency, and the elimination of unemployment without inflation or misuse of resources.
The post-war period will present these two basic problems in aggravated form. Exigencies of war have led to increased concentration of industry, which could easily crystallize into enhanced monopoly power. With half our national income now generated by war expenditures, the task of maintaining full employment while shifting production from things that win wars to things that promote welfare will be of unprecedented magnitude. At the same time, vast new holdings of cash and other liquid resources, combined with the backlog of demand for both consumers' and producers' goods that will have accumulated, will constitute a grave threat of inflation. The balance of the economy, which must be maintained by what Professor Lerner has aptly called “functional finance,” will be delicate indeed.
This article suggests an approach to post-war tax policy designed to meet these problems. While the setting is Canadian, the analytical tools and even the policies proposed would be applicable to the British or American scenes with minor modifications.
1 Persuaded by Dr.Weintraub's, gentle chiding (“Monopoly Equilibrium and Anticipated Demand,” Journal of Political Economy, 06, 1942, p. 427)CrossRefGoogle Scholar, in this article I shall use the term “monopoly” as I previously used the term “non-perfect competition” to mean any type of departure from perfect competition. However, I shall continue to use “monopolistic competition” for monopoly due to differentiation, and “oligopoly” for monopoly due to small numbers of sellers, and “same commodity” will mean technical identity, for the reasons set forth in my “Elements of Indeterminacy in the Theory of Non-perfect Competition” (American Economic Review, Sept., 1939). “Unemployment” as I use it here includes “disguised unemployment” in the form of a marginal productivity lower than under optimum conditions, for any reason other than monopoly.
2 Lerner, A. P., “Functional Finance and the Federal Debt” (Social Research, 02, 1943).Google Scholar
3 Robinson, Joan, Economics of Imperfect Competition (London, 1933), pp. 164–5.Google Scholar Mrs. Robinson attributes the scheme to an examination paper written by her husband. Considering the general acceptance by later economists of Adam Smith's dictum that a tax on profits cannot be shifted and Cournot's clear demonstration that a subsidy on output will lead a monopolist to expand output, it is remarkable that this “tax-and-bounty” scheme should have waited so long for precise formulation.
Professor Dalton, it is true, hit upon the idea of “a tax whose total amount diminishes with output” as a device for stimulating monopolists to expand production ( Principles of Public Finance, London, 1936, p. 60 Google Scholar) but this tool is haphazard compared to Mrs. Robinson's. Professor Pigou proposes a system of bounties to industries operating under decreasing costs and taxes on industries operating under increasing costs, both in his Economics of Welfare (chap. XI, London, 1932)Google Scholar and in his Public Finance (chap, VIII, London, 1928).Google Scholar However, he considered his system applicable only under “simple competition,” and rejected fiscal controls of monopoly altogether: “Where self-interest works, not through simple competition, but through monopoly, fiscal intervention evidently ceases to be effective. A bounty might, indeed, be so contrived as to prevent restrictions of output below what is socially desirable, but only at the cost of enabling the monopolist to add to his already excessive profits a large ransom from the State” (Economics of Welfare, p. 336). This dictum has been echoed by Dr. Benham in a recent article (“What Is the Best Tax System?” Economica, May, 1942): “Such imperfections should be removed by direct action.”
4 A species of tax-and-bounty plan exists in British Columbia law, which imposes a tax on cutting lumber, but grants a rebate on all timber processed within the province.
5 While his analysis is somewhat muddled for the contemporary reader by his terminology and by his concepts of “representative industry” and “equilibrium firm,” Professor Pigou's definition of optimum as the point where “marginal social net product” equals “the central value of marginal social net products” no doubt means the same thing as equation of price with marginal cost. However, his discussion makes it quite clear that he thinks in terms of minimizing average cost more than in terms of equating marginal cost and price. In his “simple competition” context, there is, of course, no conflict between these two norms and the equation of price with average cost. Professor Pigou also qualifies his support for the scheme with the proviso that “the funds for the bounty can be raised by mere transfer that does not inflict any indirect injury on production” (Economics of Welfare, p. 224) and with the warning that administrative difficulties might outweigh the benefits of the plan (Public Finance, p. 119).
6 The maximization of the war effort is seldom a single end. The concept of “total war” is a dynamic one which involves increasing sacrifices by the civilian economy as the war progresses. At each stage, the economic problem is to maximize the war effort within the limits imposed by the willingness to make sacrifices as it exists at the moment. Moreover, the avoidance of post-war disturbances is also a rival aim in most countries, even after several years of war. We are assuming implicitly in this analysis that social policy takes no direct account of the desire to minimize post-war maladjustment, but does so indirectly by taking into consideration any such desires on the part of entrepreneurs, consumers, workers, and so forth, as expressed in their economic decisions. If a government decides that, say, half the national income is all it can ask its people to sacrifice to the war effort at the present stage of the war, and accordingly recaptures half of income paid out by fiscal means, it cannot also determine how the remaining half should be spent, without making the sacrifice greater than the electorate will accept.
7 This case shows how different actual policy might be when equation of marginal cost and price is the accepted criterion instead of equation of average cost and price. For if the former criterion were adopted, with the curves shown in Figure 1, this firm would be subsidized-and-taxed in a manner designed to make it increase its output, instead of being forced out of business as it would be if the latter criterion were followed.
8 It is worth remembering, however, that these difficulties are inherent in the problem itself, and are common to all solutions in greater or lesser degree.
9 Mr. Weintraub has already demonstrated that the estimated and actual demand curves must be the same at the point of actual operation ( Journal of Political Economy, 06, 1942, p. 432 Google Scholar).
10 “Demand under Conditions of Oligopoly” (Journal of Political Economy, Aug., 1939).
11 Some indication of the complexity of these interactions between monopolized markets has been given in Dunlop, J. and Higgins, B. H., “Bargaining Power and Market Structures” (Journal of Political Economy, 02, 1942)CrossRefGoogle Scholar and in A. J. Nichol, “Monopoly Supply and Monopsony Demand” (ibid., Dec., 1942).
12 Further complications arise if entrepreneurs are influenced by other motives besides the desire to maximize profits, especially if the production function is not linear and homogeneous so that a surplus above the sum of (marginal productivity) × (number of units) for all factors may exist even under perfect competition. I shall not attempt to deal with these problems here. I have tried to outline an approach to such problems in my “Elements of Indeterminacy”; in a “Reply” to Professor Lynch (American Economic Review, June, 1940); and in “The Incidence of Sales Taxes” (Quarterly Journal of Economics, Aug., 1940).
13 In Figure 2, AC is average cost, SC 1 average cost plus the selling cost that produces the demand curve D 1, SC 2 average cost plus the selling cost that produces the demand curve D 2, PP′ is the price. SC 1 is accordingly the equilibrium average-plus-selling cost, and output is OM 1. Now suppose a tax is imposed on selling costs, so that the curve of average costs plus selling costs plus tax which produces the demand curve D 1 becomes SC′1, the curve which produces demand D 2 becomes SC′2, etc. The equilibrium cost curve will now be SC′2, which represents a lower expenditure on selling costs than SC 1, but sales will be reduced to OM 2.
14 (Ottawa, 1937), especially pp. 267-8, 494-9.
15 Cf. Dunlop, and Higgins, , “Bargaining Power,” especially p. 25.Google Scholar On effects of monopoly in the construction industry, see the various Hearings, Reports, and Monographs of the Temporary National Economic Committee, especially Hearings, Part II, Construction Industry, and Towards More Housing, monograph no. 8.
16 In war-time, when differences between the entrepreneurial and the social concept of “costs” are more serious, the adjustments brought about by the use of this device may be too imperfect for safety. The authority could widen the range of control by combining the plan with a price ceiling. By varying the maximum price, the shape and position of the total profits curve, and so the point where it intersects the curve of net gains after payment of taxes, could be moved back and forth over a considerable range of outputs. To obtain production at levels higher than those falling within this range, the authority could allow rebates on increases in output beyond the maximum attainable by the device itself. To encourage production at lower levels, a flat 100 per cent excess profits tax could be combined with rebates on reduced production.
17 Incentive Taxation (New York, 1936).Google Scholar
