The Principles of Political Economy

Henry Sidgwick

Book 3

The Art of Political Economy

Chapter 2

The System of Natural Liberty Considered in Relation to Production

§4. On the other hand, private enterprise may sometimes be socially uneconomical because the undertaker is able to appropriate not less but more than the whole net gain of his enterprise to the community; for he may be able to appropriate the main part of the gain of a change causing both gain and loss, while the concomitant loss falls entirely upon others. Thus a company A having made an expensive permanent instrument---say a railway---to the advantage both of themselves and of their fellow-citizens, it may be the interest of another company B to make a new railway somewhat more convenient for the majority of travellers---and so likely to draw the lion's share of traffic from A---even if the increment of utility to the community is outweighed by the extra cost of the new railway; since B will get paid not merely for this increment of utility, but also for a large part of the utility that A before supplied.

A still more marked divergence between private interest and public interest is liable to occur in the case of Monopoly: since, as we have seen, a monopolist may increase his maximum net profit or make an equal profit more easily, by giving a smaller supply at a higher price of the commodity in which he deals, rather than a larger supply at a lower price, and so rendering less service to the community in return for his profit. At the same time, though a monopoly in private hands is thus liable to be economically disadvantageous from a social point of view, there is in certain cases a decided economic gain to be obtained by that organization of a whole department of production under a single management, which inevitably leads to monopoly; either because the qualities required in the product are such as unity of management is peculiarly qualified to provide---as in the case of the medium of exchange---or merely from the saving of labour and capital that it renders possible. And it may be observed that cases of this kind tend to increase in number and importance, as civilization progresses and the arts of industry become more elaborate. Thus the aggregation of human beings into large towns has rendered it economically important that the provision of water for the aggregate should be under one management; and the substitution of gas for candles and oil-lamps has had a similar economic effect on the provision of light.

The practical importance of the conflict of private and social interests just mentioned is much increased by the extent to which total or partial monopoly may be affected by Combination---especially when we consider that it may be the interest of the combining producers not only to limit the amount of the utilities that they produce, in order to raise their price, but also to resist any economies in production which may tend to decrease the demand for them. It should be observed that wherever payment is not by results, it may easily be the interest of any individual labourer in any particular job, to extend uneconomically the amount of labour required, or to give as little work as he can in the time (supposing that harder work would be more irksome). But it is only where some combination of labourers exists, or custom partially sustained by combination, that it can be any one's interest on the whole to do this; since if the price of his services were settled by open competition, a labourer so acting would lower the market value of his services. And it is to be observed that the same progress of civilization which tends to make competition more real and effective, when the circumstances of industry favour competition, also increase the facilities and tendencies to combination.

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