Competition and Monopoly

Babbage was concerned that there was scope for combination of masters against the public in industries such as water, gas, and railroads where the capital required was very large and the number of competitors limited (ibid.: 312-314). He favoured some form of profit regulation in these situations, although he warned that such schemes should only be implemented with great circumspection. In general, however, Babbage took the view that, in the absence of combinations, competition would not be endangered by the presence of large firms. Babbage’s view of competition was a dynamic one. He saw overproduction as an almost inevitable consequence of competition. Although this had some unpalatable consequences for both masters and workers, in the longer run, it could be beneficial for all:

When too large a supply has produced a great reduction of price, it opens the consumption of the article to a new class, and increases the consumption of those who previously employed it ... It is also certain, that by the diminution of profit which the manufacturer suffers from the diminished price, his ingenuity will be additionally stimulated; that he will apply himself to discover other and cheaper sources for the supply of his raw material; that he will endeavour to contrive improved machinery which shall manufacture it at a cheaper rate; or try to introduce new arrangements into his factory, which shall render the economy of it more perfect (ibid.: 232—233).

If the manufacturer succeeded in these endeavours, all parties would benefit. A larger number of people would consume the article and pay a lower price than before and while the manufacturer’s own profit on each unit of output would be reduced, this would be compensated for by the larger total output so that his overall rate of profit would be nearly the same as before. Workmen’s wages would also return to their normal level. Babbage acknowledged that the occurrence of a glut did not always give rise to new and cheaper methods of production. In such cases, the diminished rate of profits would result in some capital leaving the trade. Ideally, the least efficient firms would leave but firms with superior capital without superior efficiency would be able to support competition for longer and could stay in business with the hope of reimbursing themselves from a higher price when the smaller capitalists had been driven from the market (ibid.: 240).

Babbage was clear that for competitive market pricing to take effect, it was necessary that the whole supply should be distributed over a very large number of smallholders and that there should be a large number of demanders each requiring only a very small quantity. If, on the other hand, the supply was entirely in the possession of one person, he would naturally seek to charge the price that would maximise total revenue. However, in setting the price, the supplier would be guided by the knowledge that an increased price would diminish consumption, and by the desire to realise his profit before a new supply reached the market (ibid.: 143). Although not spelt out in detail, the implication here is that, in normal circumstances, monopoly will only be temporary with high profits attracting new suppliers to the industry in question. This interpretation is reinforced by Babbage’s statement in his autobiography that he had arrived at the principle that ‘even under the circumstances of the most absolute monopoly, the monopolist will, if he KNOWS his own interest and PURSUES it, sell the article that he produced at exactly the same price as the freest competition would produce’ (Babbage 1864 [1991]: 331; upper case in original). In the autobiography, Babbage claimed to have elucidated this principle in an edition of the Economy of Machinery and Manufactures prepared as the basis for a new Italian translation of the work. To date, this work has not been found but clues as to the nature of the argument are provided by Babbage’s discussion of patent laws referred to earlier in which he argued that rather than regarding the patent as a privilege by which a monopoly price could be secured, the producers secured for themselves the fabrication of the patented article by selling it at a price producing the ordinary profits of capital.^[1]

Romano uncovered a draft letter to Senior written in 1841 in which Babbage states his view that ‘the price which will be charged under the most absolute monopoly is, if the monopolist knows his own interest, the same as he would charge under free competition’ (Romano 1982: 398). Babbage informed Senior that he had sent him a manuscript covering the case where the supply the monopolist can produce is unlimited, but he did not elaborate further in the letter. He then went on to argue that, in the case of a fixed supply, the price charged will be that which clears the market because even if government intervened to fix the price at a level below this, the supply would be bought up by a class of middlemen who would sell the units of output at the market clearing price and make a substantial profit in the process. Romano has commented that this example does not explain why the monopolist would charge the competitive price under these conditions. Actually, however, Babbage’s point seems to be that, in conditions of fixed supply, the competitive price is the price which clears the market so that even in this case there is no exception to his rule. We know that Senior’s own theory of monopoly was based on the view that potential competition placed an upward limit on the price a monopolist might charge and that the extent to which potential competition could constrain monopoly power depended on the degree to which all actors had access to the same advantages. The evidence seems to suggest that Babbage’s views were along similar lines.

Babbage and Senior were writing at a time when the Industrial Revolution was in full swing and when the main source of competition was the new firm, the new invention, and the new process of production. Babbage’s view of competition was a dynamic one as also was that of Senior. Although this view was carried forward by Marx, it was gradually submerged by the neoclassical approach pioneered by Cournot and further advanced by Jevons and to an extent also by Marshall. It was rediscovered in the twentieth century first by Schumpeter and later in the contestability approach which became popular in the later part of the twentieth century.

While our discussion so far has focused on division of labour and innovation, information and transactions costs, and competition and monopoly, it is worth noting that Babbage also made some interesting comments on the localisation of industry which he suggested has the effect of diffusing informa?tion about markets, raw materials, and modes of working as well as reducing transactions costs. Although the benefits were such that reasons of considerable weight were required to cause the removal of industry, changes did occur in practice as a result of alterations in sources of energy (from water to coal) and the impact of combinations in refusing a reduction in wages or opposing the introduction of machinery (Babbage 1832 [1835]: 225-234). Babbage also thought that the opinion of workmen that their interests were in conflict with those of their employers was erroneous but he admitted that the commonality of interest was not always obvious. He proposed that this could be rectified by the introduction of a system based on two principles: first, that a considerable part of the wages of each person ‘should depend on the profits made by the establishment’, and secondly, that every person ‘should derive more advantage from applying any improvement he might discover, to the factory in which he is employed, than by any other course of action’ (ibid.: 253-254). While Babbage doubted the willingness of large capitalists to embark on such schemes, he cited examples of industries in which profit sharing was practised and suggested that changes in the law to allow limited liability partnerships would enable such schemes to be taken forward. Given Babbage’s enthusiasm for a graduated division of labour involving the separation of high level and routine work, it is interesting that he also believed that forms of organisation that engaged the interest and loyalty of working people would be conducive to the development of the forces of production.

• [1] Babbage had already arrived at this position when he wrote the long article for Encyclopaedia Metropolitana.