The Principles of Political Economy, by John Stuart Mill

Chapter 4

Of Competition, and Custom

§1. Under the rule of individual property, the division of the produce is the result of two determining agencies: Competition, and Custom. It is important to ascertain the amount of influence which belongs to each of these causes, and in what manner the operation of one is modified by the other.

Political economists generally, and English political economists above others, have been accustomed to lay almost exclusive stress upon the first of these agencies; to exaggerate the effect of competition, and to take into little account the other and conflicting principle. They are apt to express themselves as if they thought that competition actually does, in all cases, whatever it can be shown to he the tendency of competition to do. This is partly intelligible, if we consider that only through the principle of competition has political economy any pretension to the character of a science.So far as rents, profits, wages, prices, are determined by competition, laws may be assigned for them. Assume competition to be their exclusive regulator, and principles of broad generality and scientific precision may be laid down, according to which they will be regulated. The political economist justly deems this his proper business: and as an abstract or hypothetical science, political economy cannot be required to do, and indeed cannot do, anything more. But it would be a great misconception of the actual course of human affairs, to suppose that competition exercises in fact this unlimited sway. I am not speaking of monopolies, either natural or artificial, or of any interferences of authority with the liberty of production or exchange. Such disturbing causes have always been allowed for by political economists. I speak of cases in which there is nothing to restrain competition; no hindrance to it either in the nature of the case or in artificial obstacles; yet in which the result is not determined by competition, but by custom or usage; competition either not taking place at all, or producing its effect in quite a different manner from that which is ordinarily assumed to be natural to it.

§2. Competition, in fact, has only become in any considerable degree the governing principle of contracts, at a comparatively modern period. The farther we look back into history, the more we see all transactions and engagements under the influence of fixed customs. The reason is evident. Custom is the most powerful protector of the weak the strong; their sole protector where there are no laws or government adequate to the purpose. Custom is a barrier which, even in the most oppressed condition of mankind, tyranny is forced in some degree to respect. To the industrious population, in a turbulent military community, freedom of competition is a vain phrase; they are never in a condition to make terms for themselves by it: there is always a master who throws his sword into the scale, and the terms are such as he imposes. But though the law of the strongest decides, it is not the interest nor in general the practice of the strongest to strain that law to the utmost, and every relaxation of it has a tendency to become a custom, and every custom to become a right. Rights thus originating, and not competition in any shape, determine, in a rude state of society, the share of the produce enjoyed by those who produce it. The relations, more especially, between the landowner and the cultivator, and the payments made by the latter to the former, are, in all states of society but the most modern, determined by the usage of the country. Never until late times have a right to retain his holdings, while he fulfils the customary requirements; and thus become, in a certain sense, a co-proprietor of the soil. Even where the holder has not acquired this fixity of tenure, the terms of occupation have often been fixed and invariable.

In India, for example, and other Asiatic communities similarly constituted, the ryots, or peasant-farmers, are not regarded as tenants at will, nor even as tenants by virtue of a lease. In most villages there are indeed some ryots on this precarious footing, consisting of those, or the descendants of those, who have settled in the place at a known and comparatively recent period; but all who are looked upon as descendants or representatives of the original inhabitants, and even many mere tenants of ancient date, are thought entitled to retain their land, as long as they pay the customary rents. What these customary rents are, or ought to be, has indeed, in most cases, become a matter of obscurity; usurpation, tyranny, and foreign conquest having to a great degree obliterated the evidences of them. But when an old and purely Hindoo principality falls under the dominion of the British Government, or the management of its officers, and when the details of the revenue system come to be inquired into, it is usually found that though the demands of the great landholder, the State, have been swelled by fiscal rapacity until all limit is practically lost sight of, it has yet been thought necessary to have a distinct name and a separate pretext for each increase of exaction; so that the demand has sometimes come to consist of thirty or forty different items, in addition to the nominal rent. This circuitous mode of increasing the payments assuredly would not have been resorted to, if there had been an acknowledged right in the landlord to increase the rent. Its adoption is a proof that there was once an effective limitation, a real customary rent; and that the understood right of the ryot to the land, so long as he paid rent according to custom, was at some time or other more than nominal.1 The British Government of India always simplifies the tenure by consolidating the various assessments into one, thus making the rent nominally as well as really an arbitrary thing, or at least a matter of specific agreement: but it scrupulously respects the right of the ryot to the land, though until the reforms of the present generation (reforms even now only partially carried into effect) it seldom left him much more than a bare subsistence.

In modern Europe the cultivators have gradually emerged from a state of personal slavery. The barbarian conquerors of the Western Empire found that the easiest mode of managing their conquests would be to leave the occupation of the land in the hands in which they found it, and to save themselves a labour so uncongenial as the superintendence of troops of slaves, by allowing the slaves to retain in a certain degree the control of their own actions, under an obligation to furnish the lord with provisions and labour. A common expedient was to assign to the serf, for his exclusive use, as much land as was thought sufficient for his support, and to make him work on the other lands of his lord whenever required. By degrees these indefinite obligations were transformed into a definite one, of supplying a fixed quantity of provisions or a fixed quantity of labour: and as the lords, in time, became inclined to employ their income in the purchase of luxuries rather than in the maintenance of retainers, the payments in kind were commuted for payments in money. Each concession, at first voluntary and revocable at pleasure, gradually acquired the force of custom, and was at last recognised and enforced by the tribunals. In this manner the serfs progressively rose into a free tenantry, who held their land in perpetuity on fixed conditions. The conditions were sometimes very onerous, and the people very miserable. But their obligations were determined by the usage or law of the country, and not by competition.

Where the cultivators had never been, strictly speaking, in personal bondage, or after they had ceased to be so, the exigencies of a poor and little advanced society gave rise to another arrangement, which in some parts of Europe, even highly improved parts, has been found sufficiently advantageous to be continued to the present day. I speak of the métayer system. Under this, the land is divided, in small farms, among single families, the landlord generally supplying the stock which the agricultural system of the country is considered to require, and receiving, in lieu of rent and profit, a fixed proportion of the produce. This proportion, which is generally paid in kind, is usually, (as is implied in the words métayer, mezzaiuolo, and medietarius,) one-half. There are places, however, such as the rich volcanic soil of the province of Naples, where the landlord takes two-thirds, and yet the cultivator by means of an excellent agriculture contrives to live. But whether the proportion is two-thirds or one-half, it is a fixed proportion; not variable from farm to farm, or from tenant to tenant. The custom of the country is the universal rule; nobody thinks of raising or lowering rents, or of letting land on other than the customary conditions. Competition, as a regulator of rent, has no existence.

§3. Prices, whenever there was no monopoly, came earlier under the influence of competition, and are much more universally subject to it, than rents: but that influence is by no means, even in the present activity of mercantile competition, so absolute as is sometimes assumed. There is no proposition which meets us in the field of political economy oftener than this-that there cannot be two prices in the same market. Such undoubtedly is the natural effect of unimpeded competition; yet every one knows that there are, almost always, two prices in the same market. Not only are there in every large town, and in almost every trade, cheap shops and dear shops, but the same shop often sells the same article at different prices to different customers: and, as a general rule, each retailer adapts his scale of prices to the class of customers whom he expects. The wholesale trade, in the great articles of commerce, is really under the dominion of competition. There, the buyers as well as sellers are traders or manufacturers, and their purchases are not influenced by indolence or vulgar finery, nor depend on the smaller motives of personal convenience, but are business transactions. In the wholesale markets therefore it is true as a general proposition, that there are not two prices at one time for the same thing: there is at each time and place a market price, which can be quoted in a price-current. But retail price, the price paid by the actual consumer, seems to feel very slowly and imperfectly the effect of competition; and when competition does exist, it often, instead of lowering prices, merely divides the gains of the high price among a greater number of dealers. Hence it is that, of the price paid by the consumer, so large a proportion is absorbed by the gains of retailers; and any one who inquires into the amount which reaches the hands of those who made the things he buys, will often be astonished at its smallness. When indeed the market, being that of a great city, holds out a sufficient inducement to large capitalists to engage in retail operations, it is generally found a better speculation to attract a large business by underselling others, than merely to divide the field of employment with them. This influence of competition is making itself felt more and more through the principal branches of retail trade in the large towns; and the rapidity and cheapness of transport, by making consumers less dependent on the dealers in their immediate neighbourhood, are tending to assimilate more and more the whole country to a large town: but hitherto it is only in the great centres of business that retail transactions have been chiefly, or even much, determined, by competition. Elsewhere it rather acts, when it acts at all, as an occasional disturbing influence; the habitual regulator is custom, modified from time to time by notions existing in the minds of purchasers and sellers, of some kind of equity or justice.

In many trades the terms on which business is done are a matter of positive arrangement among the trade, who use the means they always possess of making the situation of any member of the body who departs from its fixed customs, inconvenient or disagreeable. It is well known that the bookselling trade was, until lately, one of these, and that notwithstanding the active spirit of rivalry in the trade, competition did not produce its natural effect in breaking down the trade rules. All professional remuneration is regulated by custom. The fees of physicians, surgeons, and barristers, the charges of attorneys, are nearly invariable. Not certainly for want of abundant competition in those professions, but because the competition operates by diminishing each competitor’s chance of fees, not by lowering the fees themselves.

Since custom stands its ground against competition to so considerable an extent, even where, from the multitude of competitors and the general energy in the pursuit of gain, the spirit of competition is strongest, we may be sure that this is much more the case where people are content with smaller gains, and estimate their pecuniary interest at a lower rate when balanced against their ease or their pleasure. I believe it will often be found, in Continental Europe, that prices and charges, of some or of all sorts, are much higher in some places than in others not far distant, without its being possible to assign any other cause than that it has always been so: the customers are used to it, and acquiesce in it. An enterprising competitor, with sufficient capital, might force down the charges, and make his fortune during the process; but there are no enterprising competitors; those who have capital prefer to leave it where it is, or to make less profit by it in a more quiet way.

These observations must be received as a general correction to be applied whenever relevant, whether expressly mentioned or not, to the conclusions contained in the subsequent portions of this treatise. Our reasonings must, in general, proceed as if the known and natural effects of competition were actually produced by it, in all cases in which it is not restrained by some positive obstacle. Where competition, though free to exist, does not exist, or where it exists, but has its natural consequences overruled by any other agency, the conclusions will fail more or less of being applicable. To escape error, we ought, in applying the conclusions of political economy to the actual affairs of life, to consider not only what will happen supposing the maximum of competition, but how far the result will be affected if competition falls short of the maximum.

The states of economical relation which stand first in order to be discussed and appreciated, are those in which competition has no part, the arbiter of transactions being either brute force or established usage. These will be the subject of the next four chapters.

1 The ancient law books of the Hindoos mention in some cases one-sixth, in others one-fourth of the produce, as a proper rent; but there is no evidence that the rules laid down in those books were, at any period of history, really acted upon.

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Last updated Friday, March 7, 2014 at 23:09