NOTES

STUDIES O F BRITISH INDUSTRY’

This symposium, written by some of the most competent applied economists in British academic circles, provides an up-to-date picture of manufacturing indnstry. It is difficult to do justice in a review to such a wealth of well-digested information and analysis. Nevertheless there are three phenomena worth commenting upon.

First, there is the state of the nationalization experiment and the problem of public undertakings in general. Public opinion is moving against any extension of nationalization-for solid reasons, it would seem. Take the ccml industry. Here is an industry which all agreed had become unworkable under private enterprise conditions. Unfor- tunately, nationalization has not performed miracles either. I n spite of the f353 millions put into technical reorganization, productivity has improved little over that of 1937; and total mined output, after a post-war spurt, became stationary in the early 1950’s and now shows a small decline. Not all of this failure is due to nationalization. A wasting mineral asset, coal becomes increasingly inaccessible. Never- theless the nationalized industry did not make the most of its oppor- tunities, as Professor Beacham shows. Initially, the drafters of the Act failed to appreciate the implications of making a single board of management responsible for the whole industry. The unforeseen result was to over-centralize a large complex organization and develop the concomitant weaknesses of cumbrous administration, overlapping of functions and confusion of authority and responsibility. Another failure was in the sphere of industrial relations. Had the change-over been handled tactfully the miners might not have been disillusioned to find that management-worker relations (despite legislation for joint consultation) are unaffected by a simple change of ownership. The long-term results of major reorganizations may yet improve the position. But nationalization of coal does not inspire confidence when everything is accounted for. It has been charaherised by indecisive leadership and lack of imagination in handling labour, in public relations, in assessing the public interest in matters of price policy. Finally, a key-defect. The industry has been a victim of politics: too

1. A review article of the two-volume Strucfure of British Industry, edited by Duncan Bum (N.1.E.S.R and Cambridge University Press, 1958). A wider interpretation is taken of the term “structure” than is usual. The essays are not simply analyses of the degree of monopoly and competition; they try t o give a general picture of more than 40 per cent of manufacturing industry and cover “the number, size, scope and interrelations of the firms within each industry; their relations with industries overseas and with the government; the effect of the structure of each industry on its economic performance, its adaptability to markets and to technical change; its contribution to such change, and so on”. The work is intended for the intelligent layman as well as the professional economist. But it may well find its greatest market as a valuable source-book for students of economics despite the price (f4.15.0 sterling for 2 vols.).

126

APRIL, 1959 STUDIES OF BRITISH INDUSTRY 127 many appointments to the Coal Board were determined by “quasi- political considerations or a desire to preserve some balance of inter- ests” and not by ability.

That even long experience teaches little in the public sphere is demonstrated by the control of road and rail transport culminating in nationalization. The 1921 Railways Act originated the mistakes by fixing average rates per mile irrespective of length of haul, nature of the route and regularity of trafEc. And it left unrestricted the road hauliers to undercut selectively and “cream off ’) the lucrative traffic. Both systems should have been regulated or else left free to compete. Either method could have found the appropriate areas of specializa- tion. But nothing, except some restrictive licensing of entry to road transport, was done to reduce the damage done to the railways; and they gradually fell below international standards for want of neces- sary investment and innovation. Then in 1947 the nationalization act, which had its main object in “the eo-ordination of road and rail” did precisely nothing to rectify the long-standing error. The same system of charges was continued and, naturally enough, the financial plight of the railway system worsened. The 1953 denationalising act be- latedly gave the railways freedom to vary freight (but not passenger) charges. But the Railway Executive clearly is made uncomfortable by the prospect of competition. Meanwhile an estimated €120 million programme is required merely to restore efficiency and overcome .

obsolescence. Not all public undertakings have a history of error. Had elec-

tricity and gas been included in the symposium a different picture would emerge. And few would deny that most public utilities and certain service industries are best run by public authorities even if subsidies are required on occasion. Even so, the lessons of public control are not inspiring. For instance, the central planning organiza- tion of the steel industry “can stop things getting done but cannot start them” (Duncan Burn). This in a relatively successful industry. The air corporations are e5cient but one suspects this is due to the internationally competitive charactcr of the industry. The conclusion must be that the British type of nationalization requires careful, selec- tive application. It is not a panacea for problems of co-ordination, of contracting or obsolescing industries, or the promotion of new ones. Still less is it a prophylactic measure against monopoly. Indeed a case could be made to shorn that the vices of the monolithic public corpora- tion-inertia, indecisiveness, empire-building-are also vices of classical monopoly. Had the nationalized industries not been given general statutory monopolies the results could have been much dif- ferent. It is significant that recent policy revisions of the British Labour Party have led i t to abandon the 1945-50 model of the public corporation in favour of government-owned f i r m s competing with and stimulating private enterprise-a method well established in Australia.

Second, it is interesting to contrast the findings on private monopoly in British industry. Taken a t its crudest there is certainly

128 THE ECONOMIO BECORD APRIL

no absolute monopoly of the type that is found in nationalized indus- try. The unsophisticated reader will probably be surprised to learn that even Imperial Chemical Industries shares the industry with eleven other companies and has only 40 per cent of the net output and 30 per cent of the employment in chemicals. Fundamentally, big busi- ness in Britain ia not monopolistic so much as oligopolistic ; and this fact raises the usual theoretical clichb connected with identity of prices, price-leadership, the suspicion that collusion and stagnation is more common than competition. But, interestingly enough, the con- sensus of opinion, as found in this symposium, is little concerned about these possibilities. And the varieties of competition which emerge to compensate the alleged defects of oligopoly are, seemingly, more Significant.

Competition hy type of product ie one such variant. For example, the motor industry has had its periods of intense price-competition. On the other hand, it has increasingly set itself t o provide products which, within definite categories, are largely identical in a technical and utilitarian sense but which compete by offering different qualities of style, a variation in minor accessories, mechanical devices, colour, etc. The same phenomenon exists in electronics goods and household equipment in particular. Monopolistic competition of this character involves what Boulding termed “the principle of minimum differen- tiation”’ : that is, imitating your main rivals as closely as possible but preserving just sutllcient differentiation to make one’s products com- petitive. There is an intimate relationship between this form of com- petition and sales expenditure on advertisement, dealer representation and margins. And the welfare value of much of it is, of course, open to dispute.a Nevertheless, within limits, competition by type of product is a genuine alternative to oligopolistic price-competition. Competition by dternatives is relatively untainted by welfare deficiencies. That is, the competition of products which differ markedly in their technical specifications but which are feasible alternatives over a significant range of applications. The chemicals (including petro-chemicals) and pharmaceuticals industry may almost be described as constructed on a chain of such alternatives ; each individual product apparently monopolised or oligopolised if the technical specification is taken narrowly; but a competitor on a wider defbition of product. Machine tools, aircraft, synthetic fibres and shipbuilding are others which compete by alternatives. Almost aa effective is the element of potential competition.* Competition is potential where the products are not

2. K Boulding, Economic Analysis (revised el), p. 574; compare also T. Sutovsky, Welfare and Competition, Ch. xviii.

3. See E. H. Chamberlin, “Product Heterogeneity and Public Policy”, Amencan Economic.Revkw, May 1950 (proceedings) ; and Alex Hunter, “Product Differentiation and Welfare Economics”, Qwrterly Journal of Economics, Nov. 1955. One odd result in British industry is that the components makers through standardization of parts often have greater economies of scale than the car manufacturers themselves.

4. But less satisfactory to the theorist b u s e while the relationship remains potential it is not measurable by such devices as cross-clasticity of demand.

1959 STUDLES OF BRITISH INDUSTRY 129 alternatives but firms, or industries, are related by the nature of the production process, similarity of raw material or merely their tech- nological “know-how”. I f attractive enough returns appear feasible firms can then shift from one product to another; if necessary into another industry. W. B. Reddaway says of the chemical industry that “this potential competition is almost as effective a curb on monopolistic exploitation as actual production by a rival would be”. And this is evidently so in many oligopolised industries.

A special case is competition through fechnological progress. I ts incidence is very uneven. There is a fairly definite relationship between expenditure on research and development work and commercially successful innovation in industries like synthetic fibres, chemicals and pharmaceuticals and possibly steel. On the other hand, research and development is of little value to the average firm in, for example, wool textiles, pottery or general engineering. And the‘ current fetish for stafEng a laboratory is often a waste of resources which could be better employed in an industrial research association. Thus it appears as though the heavily capitalised, large-firms industries-ur oligopolies -are more often than not the industries which systematically employ technological progress as a competitive force.5 But probably the personal element is as important as expenditures. Research and development are undertaken against a background of gain: a project is judged a failure if not commercially applicable. A t the same time executive and technological personnel are also stimulated by scientific interests of a professional or even academic character, by the creative nature of their efforts, by the potential social advantage of successful innovation. Non-economic values are a t work here ; but professional and business rivalry succeeds in harnessing them to the competitive machine anyway. These attitudes and activities add something signi- ficant to the normal modes of competition-what D. C. Hague describes as the “missionary spirit” of the synthetic fibres industry. The signi- ficance may be judged by the example of the two determined back- room scientists who synthesised terylene; or the firm which spent E84 million developing and putting a particular drug on the U.S.A.- British market; or the history of the oil-refining industry over the last thirty years in its unremitting search for more distillation frac- tions, improved reformulation of the fractions to give better products and the development of by-products from waste materials.

Third, looking at the symposium as a whole, there are sur- prisingly few minor defects. The authors have been encouraged to develop their own interpretation of the material according to in- dividual style. And, although the results are uneven in interest, this is mainly a reflection of the material rather than the authorship. Each

5. It is not intended to argue-8 la Galbraith and Schumpeter-that oligo- poked industries are always or necessarily the technically progressive industries. (The small firm sections of the electronics and machine-tool industries are obvious utceptions.) On the contrary, examination of casu seems to indicate that oligopoly is the rcrult of the operations of technological progress which SO often lead to heavy capitalisation, large indivisibilities of equipment, economies of scale, etc. E

130 THE ECONOMIO BECORD APRIL

is competently handled. The statistical picture is also uneven in quality. Accessibility to figures must have varied considerably ; evi- dently the electronics, coal and motor industries were forthcoming ; chemicals was not.

The only major defect turns on the factors of change,in industry. Wherever relevant or important the authors, rightly, seemed deter- mined to introduce such topics as productivity, research and develop- ment activities, the impact of innovation on competition and growth, the effectiveness of investment planning, etc. These efforts introduced an untidy, even amorphous element into many parts of the symposium. One must admit that such a result is scarcely avoidable. The difficulty is that the examination of change in these empirical studies is super- imposed on the traditional analysis of structure as it affects the degree of monopoly. The material of dynamics is used to embellish a static equilibrium analysis and the result is not fundamentally dif- ferent from previous studies of industry. It is only more compIicated -withal more interesting. Again this is not especially the fault of the authors. That branch of analysis termed the theory of the firm has proved singularly unsuitable for the handling of economic change; indeed it is constructed on no-change assumptions. Instead of em- ploying the maximization principle, plus competition, to determine a profitless price equilibrium, a more satisfactory course for many purposes would be to assume that firms use competition, of various kinds, to enlarge their share of an expanding market (or to maintain their shares of a contracting market). Admittedly, this would give a more eclectic, lem precise technique of analysis. But it at least has the merit that the problems of industrial structure associated with economic change and growth are not evaded. University of Melbourne.

ALEX HUNTER

STRUCTURAL TRENDS I N AUSTRALIAN IMPORTS In the accompanying table imports have been divided into two

classes. Class A comprises imports which are involved in further processing in Australian private and government enterprises, i.e. capital equipment and unfinished goods of all kinds; and Class B comprises finished consumer goods, munitions and consumer goods which do not require further processing even if they are imported in a crude or simply transformed state. The substance of the classification is that class A goods are essential for processing activities in existing public and private enterprises, including government services but excluding the distributive trades. The statistics permit certain broad conclusions to be drawn.

First, since the late 1930’s the value of capital equipment and d n i s h e d goods essential for processing activities has been about 80 per cent of all imports. The years 1949/50 to 1953/54 are excluded because they were relatively abnormal-the proportion rose to as high 88 89 per cent in 1952/53. In addition some finished consumer goods