CHAPTER IX.
COMPETITION IN THE MARKET
AND THE LAW OF DEMAND AND SUPPLY.
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As we have seen earlier, it is in the nature of capitalist economy that capital must continually chase after profits. When a commodity is scarce and, consequently, is in great demand, some people may be willing and able to pay more for it. Therefore, the producers can raise their prices and make more profit from their sales. This is the main cause of what economists call "demand inflation."
Such a situation attracts more capitalists to invest their capital in the production of such commodity.
Eventually, with the consequent rise in production, the demand becomes satisfied and prices and profits begin to fall. At this stage the competition of the capitalists to stay in business to produce such a commodity becomes more intense. In their efforts to lower the cost of production, they are forced to find new methods and new technology to produce cheaper and in greater quantity. Thus they aggravate their own problems by creating an oversupply of that commodity. Prices and profits fall even further, and in the end it becomes unprofitable for some capitalists to continue production.
Capital begins to fly away from this field of activity. Some capitalists are ruined by competition, some shift their capital to other fields where there is a scarcity, a greater demand, and profits are higher
Therefore, as capital continually chases higher profits, it continually moves from one field of production to another where there is a greater demand.
This continuous fluctuation of capital from one point to another causes a continuous fluctuation in the production of commodities: from under production and scarcity to over production or abundance, with consequent fluctuation of prices, higher when there is a scarcity, lower when there is a glut.
The Japanese capitalists in the1970s have perfectly understood and taken advantage of this law. As they, contrary to our capitalists, have a long term plan for their economic development, instead of playing monopoly with their savings, they have invested heavily all over the world in the development of the production of those commodities and raw materials of which they are lacking.
Now they have 50 percent interest in mines all over the world; they have created a glut, from these mines they have imported stockpiles of raw materials. Now they can sit back and when the contracts are re-negotiated they can dictate the price that they will pay for the raw materials. They can watch mining companies from different countries undercutting each other, increasing production, trying to obtain concessions from their governments, cutting down their work forces to maintain their diminishing profits (this was in the 1970s, now the Chinese are trying to do the same).
By creating a glut, they have created a buyers’ market; they may get small profits from their investments, but they are getting an enormous advantage by the lower price of the raw materials essential to their economy. Now they are doing the same with other commodities. In a saturated competing market the sellers are at the mercy of the buyers. What will the sellers do next to overcome such an intolerable situation in which they find themselves?
In a free market, prices are supposed to continually fluctuate from above the cost of production to below the cost of production. But, in the long term, their average should come close to the real cost that Adam Smith calls the natural price of commodities:
"..Market price is regulated by the quantity brought to market and the effectual demand. When the quantity brought falls short of the effectual demand, the market price rises above the natural; when it exceeds the effectual demand the market price falls below the natural; Natural price is the central price to which actual prices gravitate...."
This, in general terms, is the law of demand and supply which is the natural and self regulating mechanism of the capitalist market.
The law of demand and supply is also the mechanism which automatically regulates the type and quantity of commodities produced, and their share and distribution amongst the various sections of society. .
When a commodity is scarce and in great demand, its price increases, therefore, it is the ability to pay for the commodity, not real need that will automatically determine who will be able to acquire it and who will have to go without it.
It is the effectual demand or the ability to pay, that will also determine which type of goods and services will be produced in preference. Consequently, expensive buildings, luxury goods and services for the richer sections of society may have the priority over the necessities of housing, health and education for the rest of the general public.
Without any plans, the capitalists while chasing higher profits are continually attracted towards producing those commodities which are within the effectual demand of those who can pay for them. Without any malice, the real needs of a society may never be satisfied if there is no profit for the capitalists. This is one of the general causes why the rich tend to become richer and the poor tend to become relatively poorer there is more profit in producing luxuries for those who can pay, than in producing necessities for those who cannot.
As we have seen before, as soon as the demand becomes satisfied and there is overproduction at one point, profits start to decrease and capital, therefore, starts flowing away from this point to another field where there is a higher demand and higher profits. In this way, with all those fluctuations, capitalism manages to keep satisfied the effectual demand for all kind of commodities and services required by those who can pay for them.
Most of this movement of capital takes place through the banking system and through the stock exchange markets. There, the capitalist investors, speculators and gamblers shift their savings or shares from one point of production to another where they think the profits will be higher.
What are the stock markets of the capitalist world if not the modern slave markets of the past under another impersonal form? the market investors buy and sell their shares hoping to get good retuns and make a profit; each share represents a number of people working to produce those profits; the inverstors do not know or do not care to know who is at the other end working for them and for themselves; workers are compelled to seek a master to work for and be able to survive; the difference from the past is that in good times in the developed countries slaves can choose their masters and have a decent life; not so in the poor underdeveloped countries where they are exploited and oppressed as much if not more than in the past.
So far we have considered the law of demand and supply as it would apply in a free market, but, it seems evident, there is not such a thing as a completely free market. In fact, monopolies, cartels, trade unions, business and professional associations, have developed to control production and the commodities and labour markets. Their objective is to bend and exploit the law of demand and supply for the benefit of their particular sections of society. It is the interest of each individual in the market to buy as cheap and to sell as dear as possible.
When the capitalists enter into competition, they cannot stop, they are forced to escalate, and they must end either by winning or losing the contest, or, alternatively, by coming to terms with each other and limiting their competition. Generally speaking, this is what happens most of the time.
Continually harassed by competition, the dream of the capitalist is to become the only producer and the only seller in the market. While he professes his faith in free enterprise and the free market, to be able to survive he is eventually compelled by competition either to eliminate or to join the opposition. As a buyer of commodities he clamors for free competition amongst the producers, at the same time, as a producer, he must do his best to reduce or eliminate the competition.
This natural tendency to form protective associations has always been present. Some of the bigger capitalists by forming monopolies, cartels, corporations, they can control the quantity of certain goods that are produced or brought to market, and they can set their prices to "what the traffic can bear", which means the highest price possible without destroying the market.
The control of production and of the market increases the opportunity for maximizing profits. A monopoly that controls production has a great advantage, but one that controls the markets (the selling outlets) is in a much better position because it is in the middle between the producers and the public. By controlling the selling outlets, a monopolist can force the producers to deal on his own terms. At the same time, by rationing the supply to the consumers he can force them to pay the highest prices that they can afford. In his dealings, the only brake to his exploitation of the producers and the public is the consideration that he may kill the gooses that lay the golden eggs.
In reality, free enterprise and free competition in the market are a contradiction because in the end they must lead to monopolies or agreements.
This is one of the reasons why capitalist governments, notwithstanding their commitment to no interference in economic matters, are forced to intervene with laws and regulations designed to protect some capitalists from the monopolies or unfair practices of the others. But, in the end, most governments become the captives of the economic power of the big monopolies and corporations.
Those capitalist economists and politicians that advocate deregulation would do well to examine the records of the reasons why regulations were adopted in the first place in the years past.
Complete free enterprise and competition eventually lead to the law of the jungle. The nature of the system compels the capitalist to try to become a monopolist and to eliminate the competition which cuts into his profits and threatens his survival in the market.
It should be evident that the same pressures and logic of the commodities' market also apply to the labour market. The law of demand and supply applies equally to labour power because, in the capitalist system, it is a commodity like any other to be bought and sold, and used in the production of profit. Unfortunately for the capitalists, it is a commodity which is embodied in Human beings it is a commodity that can act in its own defence.
All workers, from the labourer to the scientist, are very much conscious of the law of demand and supply. They know that when they are in abundant supply, the price for their labour must decrease, even below the poverty line during a recession.
Consequently, most working people join into trade unions or political and professional associations to try to bend the law of the market in their favour. They try to keep their numbers down, and they join forces in their disputes against their employers. It could be said that the professional associations of lawyers, doctors, architects, etc. are fairly successful monopolies, most trade unions, on the other hand, are not very successful.
In the market, those who have the advantage extol the virtues of free enterprise and competition; those who have not will cry about unfair play and will ask for protection.
It was from their position of advantage and technological superiority that, during the previous centuries, the industrial countries with their gunboat diplomacy advocated and 'enforced' free trade on the undeveloped countries of the world. The Opium War against China is a typical example of the type of free trade practiced during the Industrial Revolution in the good old days of free enterprise.
In conclusion we could say that the dynamic combination of competition in production and in the market is the main mechanism of capitalist development and expansion. From this mechanism originate the compulsion towards monopolies and corporations, the accumulation of capital in ever fewer hands, the explosive development of technology, and, in the end, the saturation of the market, and the transformation of the economy from the servant of society to its ruthless taskmaster.
One more contradictory feature which derives from the law of the market is the logical preference the capitalists have for an environment of abundance where they buy their raw materials and labour, and an environment of scarcity where they sell their commodities. They need a continually expanding environment: an increasing number of people rich enough to buy their products, and a great number of people poor enough to be willing to work for them.
Capitalism to survive needs to maintain the environmental factors that brought it to life; the nature of the system will prevent Capitalism from satisfying all the needs of society, no matter how rich and productive its forces may become. No sooner a need may have been satisfied another one must be created to stimulate the market.
The market is no longer a means to satisfy the needs of society. The sway of the merchants over the last three centuries has perverted the situation: Human society must be sacrificed to satisfy the needs of an economy oriented primarily to satisfy the needs of their mercantile class. If everybody had enough and was satisfied, the capitalist would not be able to increase his sales and continue to make a profit, and he would find difficult to get anybody to work for him: the complete satisfaction of the needs of the society would put him out of business and his workers out of work.
Mercantile Capitalists needs consumers who must be rich enough to buy the products and at the same time poor enough to be forced to work to produce them; therefore within the capitalist socio-economic organism the natural cunning of the merchants has resolved this contradiction by letting the people buy the products by putting themselves in debt.
Whether this situation is good for Humanity or the Environment is another matter.