One of the cardinal rules of economics is that profit margins in free markets trend relentlessly toward zero. Another rule is that, in this race to the bottom, the small guy always gets squeezed out first. The history of all business is a relentless pattern of technical change, price-cutting, corporate concentration and market saturation.
This is why businesses try so hard to restrain markets whenever they get the chance. Adam Smith, in The Wealth of Nations famously observed that: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
Business people always proclaim the virtue of free markets in principle but they avoid them in practice wherever possible.
My grandfather was president of B.F. Goodrich Canada in the mid-1950s. He was a national figure and widely respected in the business community. When I was studying economics, I often went down to Kitchener to visit him. I once showed him a paper I was writing about international agreements to fix wheat and sugar prices and I asked him if these arrangements made any sense to him.
“Absolutely,” he said. “Nobody ever wins a price war.”
Then he told me about his own experience in price-fixing in 1953.
“We had been meeting secretly with the other tire companies for some time when I received word that the Combines Office was investigating us. I immediately directed that the minutes of our meetings were to be burned. But my secretary was an older man and may not have understood me clearly. When the officers got to his desk it was full of the minutes of those meetings. On the strength of that evidence they filed charges against all of the companies.”
I was horrified. “Were you convicted?” I asked.
“Oh, yes,” he said. “And fined $100,000.”
I was astounded. My grandfather had served as a ‘dollar a year man’ in Ottawa during the war years to ration the national rubber supply. The engraved silver platters on his mantelpiece and the framed citations on his office wall were testament to the respect and affection of his peers. I couldn’t imagine him breaking the law.
Then he explained to me how much damage a price war could do to a business. He had struggled to keep his firm afloat and his franchisees solvent during the dark days of the Depression. The stress of letting an employee go caused his skin to break out in shingles, because a man’s job was often all that stood between his family and starvation. Keeping prices steady was essential.
“Anyway, the business with the Combines Office taught us a lesson,” he said gravely. “We don’t do that anymore.”
“So there’s no more price-fixing?”
He smiled. “We don’t keep minutes.” And then he gave his big booming laugh.
I think of that story whenever I read a piece in the Globe and Mail insisting it is high time we throw out our antiquated supply management program for dairy and let the forces of the global free market give consumers the lowest possible price for milk, butter and cheese. Never mind that the precious free market for dairy in the United States has already pushed profit margins to zero and the world is now awash in milk. Never mind that the small producers are disappearing from the big dairy states south of the border and being replaced by cow cities. Never mind the social upheaval and the environmental consequences of these mega barns.
If Canada scrapped supply management, opened borders and joined that race to the bottom, our dairy industry would eventually disappear because we do not enjoy a comparative advantage in the production of milk. Our climate is too severe and the distances to market are too great.
We all like the idea of free trade, the same way we long for world peace. But it doesn’t exist in very many places. This is because it is a natural human trait to subvert markets and frustrate competition. Unions do it. Every profession, guild or craft protects its turf with the same fierceness that Microsoft protects its software patents. Writers would do it if they could and, of course, so would farmers. But we are so busy selling ourselves cheap that we can’t get the market cornered.
I have a silver rosebowl on my mantelpiece that my grandmother passed down to me. It was presented to my grandfather by the Canadian Chamber of Commerce and it declares him to be the “Man of the Year.” Ironically, the date on the bowl is 1953.
Dan Needles is a writer and the author of the Wingfield Farm stage plays. He lives on a small farm near Collingwood, Ont. His website is www.danneedles.ca
