All Commentary
Saturday, January 1, 1966

Misconceptions About Consumer Welfare

The American consumer is, in the Great Society, the forgotten man. Antipoverty programs, the closed shop, foreign aid, minimum wage hikes benefit him little and are ultimately at his expense.

The consumer cannot count on the unselfish munificence of the government to look after his in­terests. Instead, he had best place himself in the hands of the self-serving competitor. The forces of competition alone can be counted on to compel suppliers, in an en­terprise system geared to self-in­terest, to achieve results which will advance the welfare of the consumer.

The vigor of the competitive process is, therefore, our main assurance of social benefit and con­sumer welfare. Protecting and strengthening the competitive proc­ess (which is quite different from protecting the individual competitor) is the white hope of the con­sumer.

The main peril to competition is not bigness, not concentration, not conglomerates (variegated product lines), not mergers, not even price conspiracies. Instead, the main peril is prejudice: dis­trust of the competitive system in its modern guise. The roots of this prejudice are basic misunder­standings concerning the econom­ics of consumer welfare. Six eco­nomic fallacies are particularly important:

  1. That competition is declining and is now an untrustworthy control device.
  2. That competition becomes “cut­throat” unless curbed by gov­ernment.
  3. That profits are at the expense of the consumer.
  4. That advertising makes con­sumers captive and is economic waste.
  5. That the best way to take care of the incompetent is to make competition soft.
  6. That job security is best at­tained by slowing down eco­nomic progress.

Let’s look briefly at each of these misconceptions. Although unobtrusive and eminently re­spectable, these economic misun­derstandings are pervasive and perilous. They are working to un­dermine the protection that the consumer gets from vigorous com­petition.

1. Competition Is Declining and Is Now an Untrustworthy Control Device

Looking back nostalgically at the Tom Sawyer economy, we get a glowing glimpse of a structure of competition quite different from today’s. We see small, in­dependent, local business firms by the thousands: the local grist mill, lumber mill, brewery, and carriage shop. What we forget is that each of these glorified com­petitors had a tight little loca­tional monopoly sheltered by mis­erable transportation. What we often fail to see in our modern economy is the competition that counts. This competition is outside the purview of the conventional antitrust case. It creeps in on lit­tle cat feet, unobtrusively at first. It is not quite respectable at the start (for example, the discount houses and early supermarkets). It often works its beneficial mira­cles below the surface of consumer consciousness through the vehicle of “value-analysis” by industrial purchasers (such as the revolu­tion in welding, die casting, and oxygen furnaces). Its fiercest fighting front is often the research laboratory. This is the competition that counts because it pro­duces decisive cost savings, usual­ly as a result of revolutionary new technology or spectacular re­arrangement of functions, or dra­matic displacement by substitutes. Generally speaking, it is outside the purview of the conventional antitrust case and the stereotyped concentration indices.

It is frequently an invader from outer space, that is, from a differ­ent industry or a foreign nation.

This is the competition that keeps the American economy among the most competitive in the world and that assures the Ameri­can consumer a high and rising standard of living.

2. Competition Becomes “Cut-Throat” Unless Curbed by Government

One heritage of the great de­pression is a generalized fear of excessive competition. This fear leads on to the belief that the gov­ernment must restrain these ex­cesses by legislating minimum profit margins, for example, state “fair trade” statutes and laws against “selling below cost.” This misconception has had an impor­tant role in shaping public policy, which is opposed to competition in several sectors of our economy, notably agriculture and transpor­tation. Thus, despite formal pro­fessions of faith, the evidence is that we really don’t believe in an enterprise economy — at least in these sectors. The precedent and the preconception that lie behind it are perilous for other sectors of our economy.

“Cut-throat” competition is a bogeyman whose influence is pow­erful but unwarranted. It is unwar­ranted because the degenerative tendency is a myth, probably. Even if true, it’s hard to see how com­petition can really be excessively vigorous from the viewpoint of the national interest. The mis­conception arises partly from con­fusing injury to an individual competitor with injury to the com­petitive process. Competition, if it is effectively to serve the con­sumer, must injure individual ri­vals and even annihilate some. And the notion that this elimina­tion of the unfit will inevitably reduce surviving competitors to a sole monopolist is a theoretical ex­trapolation, unsupported by ex­perience and applicable in only a few industries where scale econ­omies are overwhelming relative to the small size of the market.

3. Profits Are at the Expense of the Consumer

It is almost standard operating practice for people who profess concern for consumer welfare to view corporate profits as being at the expense of the consumer and opposed to his welfare. This antiprofit bias infuses the viewpoints of many officials in big govern­ment and particularly of those in regulatory commissions.

We should all recognize that profits are usually an index of suc­cess in serving the public. In a competitive industry, most of the profits go to the more efficient suppliers, not to the marginal sup­plier whose costly output is none­theless required to satisfy the full demand at the prevailing mar­ket price. The consumer gets a bargain in the few profit pennies per dollar he appears to pay. He pays less than appears for two reasons. First, because losses that are not formally book-kept are not offset against reported corpo­rate profits. Second, because eq­uity capital, which is costly, is treated in accounting as a free good. The consumer gets a bar­gain, not only because corporate profits are partly illusory, but be­cause the hope of profits and fear of losses (what makes the mare go) is the cheapest known form of incentive and remuneration.

4. Advertising Makes Consumers Captive and Is Economic Waste

Appalled by the huge sums spent on the advertising and an­noyed by being a part of a cap­tive audience, grieved by the gul­libility of all consumers except themselves, and aroused by expo­sures of the hidden persuaders, many well-meaning reformers be­lieve that advertising disfran­chises the consumer and waste­fully cancels claim against out­rageous counterclaim.

Looking at the matter from the standpoint of the national inter­est in consumer welfare, we should recognize that advertising econo­mizes leisure and is a cheap way for consumers to pre-shop. The most that advertising can do is to get a person to try the product; and his own experience with it, plus reports from his acquain­tances and the synthetic experi­ence of consumer research ser­vices, develops immunizing skep­ticism.

We should also recognize that advertising opens many more doors to new and beneficial com­petition than it closes. The best weapon against the hidden per­suader of one manufacturer’s ad­vertising is that of his competitor, particularly the countervailing power of distributor brands which erode the consumer franchise of a manufacturer’s brand.

5. The Best Way to Take Care of the Incompetent Is To Make Competition Soft

Much anticompetitive legislation and administrative and judicial case law is rooted in the thorough­ly American and highly laudable desire to take care of the incom­petent. The question is not whether society will look after the unfortunate. In this our society is doing a good job. The danger, instead, is that we will take care of them in the wrong way, that is, in a way that will deter incentives for self-improvement and will block the automatic adjustments of a competitive economy and pre­vent its serving consumers best. Charitable treatment of the less fortunate will be more efficient and less damaging to the growth and strength of our economy if it is entirely divorced from trying to protect the individual competitor against the consequences of his own non-competitiveness.

6. Job Security Is Best Attained by Slowing Down Economic Progress

The quest for job security is universal. Each of us is very much alive to any peril to our job. Most of us would like to feel that a beneficent government will look after this vital matter and make sure that economic change will not imperil our job.

Unfortunately, the competitive process has few champions and no lobby. The job security of the in­dividual citizen can best be achieved, not by placing road­blocks in the path of technological progress, but instead by removing them. Society is better off to help the individual solve his problem of adapting to economic progress by supplying information, incentives, and opportunities for re-education, rather than by trying to slow down economic progress.

Economic misunderstandings like these six are causing a wide­spread, almost unconscious preju­dice against competition. There is disconcerting reluctance to rely upon competition for the imper­sonal force which compels individ­ual competitors, each geared to self-interest and trying to in­crease his own market power, to unconsciously serve society.


The Crafty Communists

Red China has investments in Hong Kong which exceed that of American firms. These investments are in profit-making going concerns so as to earn hard currencies.

Item from the souvenir book supplied guests of the Peninsula Hotel in Hong Kong.

  • Mr. Dean is President of Joel Dean Associ­ates, a firm of economic and management consultants, and is Professor of Business Eco­nomics in the Graduate Faculties of Political Science and the Graduate School of Business of Columbia University.