Finance Capital, Hilferding 1910


Price determination by the capitalist monopolies
and the historical tendency of finance capital

Partial combinations represent a further stage of concentration. They differ from the earlier form of concentration, which involved the destruction of the weaker enterprises, by the fact that in this case the combination of plants and enterprises is not necessarily accompanied by a unification of ownership; but they do not imply any fundamental change in the conditions of competition. In so far as their costs are lower than those of other enterprises, or of their own enterprises before they were combined, they are more effective in the competitive struggle; and if the combinations are sufficiently numerous and large, so that they produce the greater part of the total output, then their costs of production will have a decisive influence upon prices. Hence the combinations tend to depress prices. This does not prevent the advantages of combination from bringing an extra profit to the combined enterprises, and indeed this is taken for granted.

It is a different matter in the case of monopolistic combinations, the cartels and trusts. Their purpose is to raise the rate of profit, which they can achieve primarily by raising prices once they are in a position to eliminate competition: The question then arises: how are cartel prices determined? This problem is usually confounded with that of monopoly price in general, and there has been much controversy about whether a monopolistic combination is really a monopoly, or whether its monopolistic character is limited in some way, and if so, whether the prices fixed by such combinations must be equal to or lower than monopoly prices. The latter would themselves be determined, however, by the reciprocal relationship between costs of production and volume of output on the one hand, and prices and the volume of sales on the other. The monopoly price would be that price which makes possible a volume of sales such that the scale of production does not increase the costs of production so greatly as to reduce the profit per unit significantly. A higher price would reduce sales, and hence the scale of production, thus raising costs and reducing the profit per unit of output; a lower price would reduce profit so greatly that even the greater volume of sales would not compensate for it.

The indeterminate and incalculable factor, where monopoly prices prevail, is demand. It is impossible to say how demand will respond to an increase in price. Monopoly price can indeed be fixed empirically, but its proper level cannot be apprehended in an objective theoretical manner, only grasped psychologically and subjectively. For this reason the classical school of economics, in which I also count Marx, excluded monopoly price, that is, the price of goods the supply of which cannot be expanded at will, from their reasoning. The favourite pursuit of the psychological school, on the contrary, is to 'explain' monopoly prices, which it chooses to do by regarding all prices as monopoly prices, on the ground that all goods are limited in supply.

Classical economics conceives price as the expression of the anarchic character of social production, and the price level as depending upon the social productivity of labour. But the objective law of price can operate only through competition. If monopolistic combinations abolish competition, they eliminate at the same time the only means through which an objective law of price can actually prevail. Price ceases to be an objectively determined magnitude and becomes an accounting exercise for those who decide what it shall be by fiat, a presupposition instead of a result, subjective rather than objective, something arbitrary and accidental rather than a necessity which is independent of the will and consciousness of the parties concerned. It seems that the monopolistic combine, while it confirms Marx's theory of concentration, at the same time tends to undermine his theory of value.

Let us examine this more closely. Cartelization is a historical process which affects the various branches of capitalist production in sequence, as the conditions become favourable. We have already seen how the development of capitalism tends to create such conditions in all branches of production. Other things being equal - that is, assuming that the banks have attained the same degree of influence in all industries, in the same phase of the industrial cycle, and that the organic composition of capital is the same for all industries - a particular branch of industry will be more ripe for cartelization the larger the capital and the smaller the number of the individual enterprises which constitute it.

Let us assume that these conditions are first attained in the extraction of iron ore; that iron ore mines are cartelized and raise their prices. The immediate result is an increase in the rate of profit for the mining enterprises. The higher sale price of iron ore, however, means a higher cost price for the pig-iron producers. But this has no immediate effect on the sale price of pig-iron, the market for which has not been changed by the cartelization of the iron ore mines. The ratio of supply and demand, and hence prices, remain the same. The rise in the cartel's rate of profit thus has as its consequence a fall in the rate of profit of the pig-iron producers. But what does this mean?

Theoretically, the following consequences might ensue. Capital flows out of the sphere with the lower rate of profit into the sphere with the higher rate of profit. Capital which was previously invested in pig-iron production would now be used in iron ore mining. Competition would then emerge in iron ore mining and would be all the sharper because of the contraction of pig-iron production. The price of ore would fall while that of pig-iron rose, and after a period of fluctuations during which the cartel would probably have disintegrated, the previous conditions would be restored. But we already know that it is precisely in such branches of production as these that the inflow and outflow of capital will encounter almost insurmountable obstacles, and so this route toward equalizing the rate of profit cannot be followed.

The cartel prices are important only to those pig-iron producers who have to buy their ore on the market, and in order to avoid the effects of cartelization the pig-iron enterprises need only take over iron ore mines themselves. In this way they become independent of the cartel and their rate of profit returns to its normal level. Those enterprises which first become vertically integrated undertakings will also make an extra profit as compared with the others, who are obliged to pay higher raw material prices as well as the trading profit of the ore merchants. The same is true, however, of iron ore mines which have extended their activities to pig-iron production, for as vertically integrated enterprises, they too have an advantage in competition with non-integrated firms. The cartel thus proves to be a very powerful stimulus to combination, and hence to the further concentration of capital. The stimulus makes itself felt most strongly in those branches of industry which buy and process the products of the cartel.

The preceding account shows how the trend toward combination is brought about or intensified by certain features of the business cycle. This trend is reinforced and at the same time modified by cartelization. A monopolistic combination can maintain high prices even during a crisis, whereas that would be impossible for its non-cartelized customers. In the case of the latter the effects of the crisis are aggravated by the impossibility of reducing their production costs by buying raw materials more cheaply. In such periods the pressure upon non-cartelized firms to obtain cheap raw materials from mines which they own themselves -becomes particularly strong, but if they do not succeed a whole row of otherwise viable, technically well-equipped concerns will be unable to survive. They must either go bankrupt or sell out cheaply to an iron ore mining enterprise, for which the acquisition of the plant at a low price guarantees future profitability.

But there is also another way open to the pig-iron industrialists. They confronted the combined power of the mine owners as isolated individual producers, who for this reason were powerless in face of the rising cost of raw materials. They were equally powerless when it came to incorporating the increased cost of raw materials into the price of pig-iron. All this changes as soon as they themselves form a cartel. They are then in a position to face the mining cartel as a united body and to assert their power as customers. On the other side, they can themselves now fix the selling price of their products and raise their rate of profit above the norm. In practice, both the above-mentioned roads are being followed, vertical integration as well as cartelization, and the outcome of this process is likely to be a vertically integrated monopolistic combine of iron ore and pig-iron producers.

It is evident that this process is bound to spread to the subsequent buyers of pig-iron, and will penetrate one branch of capitalist production after another. The influence of the example set by cartels is widely diffused. The immediate effect of cartelization is a change in the rate of profit for the cartels at the expense of other capitalist industries. These different rates of profit cannot be equalized by the transfer of capital, because cartelization means that the competition of capitals for spheres of investment is restricted. The limitation of the free movement of capital by various economic factors or property relations (such as a monopoly of raw materials) is indeed a precondition for the abolition of market competition among sellers. Equalization of the rate of profit can only take place by participation in the higher rate of profit through self cartelization, or through the elimination of cartels by vertical integration. Both methods involve a growth of concentration and thus facilitate further cartelization.

If, however, further cartelization is impossible for any reason, what effect does the cartel price then have, and what can we say about its level. We have seen that the increase in the rate of profit resulting from the higher cartel price can only be achieved by the reduction of the rate of profit in other branches of industry. The cartel profit is, in the first place, nothing but a participation in, or appropriation of, the profit of other branches of industry. There is a tendency, as we know, for the rate of profit to fall below the social average in branches of industry in which small capitals are employed and where there is considerable fragmentation of production. Cartelization reinforces this tendency, and depresses still further the rate of profit in these branches. Just how far it can be depressed depends on the nature of the industry. If there is an excessive reduction in the rate of profit capital responds by withdrawing from these spheres, as it can do without too much difficulty in view of the technical form of the capital in such industries.

The real difficulty begins with the problem of where this capital shall go, since the other branches of production in which small amounts of capital might be invested are similarly exploited by the cartelized industries.[1] The eventual outcome is that the profit of the capitalists in these industries, who still appear to be independent, becomes nothing more than a supervisor's salary, and these capitalists become, in fact, employees of the cartel, intermediary capitalists or entrepreneurs analogous to the intermediary masters of the handicraft period.

In fact, the cartel price depends upon demand, but this is itself capitalist demand. Theoretically, therefore, the cartel price must in the end be equal to the price of production plus the average rate of profit. But this average rate has undergone a change. There is one rate for the large cartelized industries and another for the spheres of small-scale industry which have become dependent upon them; and the capitalists in the cartelized industries rob the latter of a part of their surplus value, so reducing their income to a mere salary.

Nevertheless, this kind of price fixing, like the single or partial cartel itself, is only provisional. Cartelization involves a change in the average rate of profit. The rate of profit rises in the cartelized industries and falls in the non-cartelized ones, and this discrepancy leads to new combinations and further cartelization. For those industries which remain non-cartelized the rate of profit continues to fall. The cartel price will rise by the same amount above the price of production as it has fallen below the price of production in the non-cartelized industries. In so far as there are joint-stock companies in the non-cartelized industries, their prices cannot fall below c + i (cost price plus interest), because otherwise the investment of capital would be impossible. Thus the increase in the cartel price is limited by the extent to which it is possible to reduce the rate of profit in the non-cartelized industries. Among the latter the rate of profit is equalized at a low level through the competition of capital for spheres of investment.

The rise in the cartel price does not leave the price of non-cartelized products unaffected. The change arises from the equalization of the rate of profit among the non-cartelized industries. If non-cartelized industry were to form a combination of its own the price of non-cartelized products would not change. The same price would then produce a lower rate of profit than before, because the price of raw materials (that is, the cost price) had risen. If, previously, the price of the product was 100 and the rate of profit 20 per cent, the latter would now fall to 10 per cent because the cost price which was 80 will have risen to 90 as a result of cartelization. But since the cost price increases in different proportions in various non-cartelized industries in accordance with the organic composition of their capital, an equalization must occur. Those industries which use large quantities of raw materials, the price of which has been increased by cartelization, have to raise the price of their products, while those which use less will be able to reduce prices. In other words, the price of production will rise in industries in which the organic composition of capital is above the average,[2] fall in industries in which it is below the average, and remain unchanged in industries which have an average organic composition of capital. Attention is usually focussed only upon the rise in price, and it is assumed that any increase (in production costs) can be passed on without further ado to the consumers. But a rise in costs of production may lead, under certain circumstances, to a fall in price.

There are also some other peculiarities of price formation. Let us assume that the capital of the cartelized[3] industries amounts to 50 billions. If the rate of profit is 20 per cent, the price of production will be 60 billions, of which, let us say, 50 billions would be bought by non-cartelized industries. Their production price, at the same rate of profit, would also amount to 60 billions, and the value of the total product would therefore be 120 billions. But the cartelized industries have raised their rate of profit, and hence reduced that of the non-cartelized industries, say to 10 per cent. Their profit is reduced because they must now pay 55 billions instead of 50 billions for raw materials. (I leave out of account here the variable capital which has no bearing on this example.) But if the cartel now gets 55 billions instead of 50 billions, it must likewise get 66 billions instead of 60 billions. Prices must be the same not only for capitalist consumers but for all consumers. In accordance with our assumptions, therefore, the final 10 billions which go directly to consumers will be sold for 11 instead of 10 billions. Thus the consumers pay the old prices for the non-cartelized products and higher prices for the cartelized products. A part of the cartel profit comes therefore from the consumers, that is to say, from all the non-capitalist groups which derive their income from other sources. But the higher prices may lead consumers to reduce their consumption. Here we encounter the second limitation upon cartel prices. A price rise must, in the first place, allow the non-cartelized industries a rate of profit sufficient for them to continue production. Second, it must not reduce consumption too severely. This second limitation depends in turn upon the amount of income at the disposal of the classes which are not directly productive. But since productive consumption is far more important than unproductive consumption for cartelized industry as a whole, the first limitation is the decisive one.

The reduction of profit in the non-monopolized industries is bound to retard their development. The fall in the rate of profit means that new capital will flow very slowly into these branches of production. At the same time, however, this fall involves a much more intense struggle for markets, which is all the more dangerous since the small margin of profit can be wiped out by a comparatively slight reduction in price. There is also a further consequence: where the superior power of the cartelized industries enables them to reduce profit to a mere managerial salary there is no longer any scope for organizing joint-stock companies, since both promoter's profit and dividends can only be paid out of the balance remaining after the managerial salary has been paid. Thus cartelization tends to retard the development of the non-cartelized industries, but at the same time it intensifies competition and hence the tendency toward concentration in these industries, until a point is finally reached when they are also ripe for cartelization, or for incorporation into an already cartelized industry.

Free competition promotes a constant expansion of production as a result of the introduction of improved techniques. For the cartels, such technical improvements also involve a rise in profit. They are obliged to introduce these improvements, for otherwise there is a danger that some outsider will get hold of them and will use them in a renewed competitive struggle against the cartel. Whether such a danger materializes depends upon the type of monopoly the cartel has established. A cartel enjoys a high degree of protection against fresh competition if it has a monopoly of the natural conditions of production (for example, in the case of a mining syndicate) or if its production requires a very high organic composition of capital, so that a new enterprise would need enormous capital resources which could be provided only by the banks, who would not want to act against the interests of the cartel. In this case technical improvements mean an extra profit, which is not eliminated by competition, and the prices of products do not fall. The introduction of improved techniques does not benefit consumers, but only the tightly organized cartels and trusts. Technical improvements might, of course, lead to increased output, the disposal of which would required a reduction in price in order to expand consumption, but this is not necessarily the case. It would be quite possible for the steel trust, for example, to apply the new techniques in some of its plants, so that their production would then suffice to meet the entire demand at existing prices, and to close down other plants. Prices would remain the same, production costs would fall and profits would increase, but there would be no expansion of production, and the technical improvements would simply lay off workers who would have no prospect of finding other employment. The same thing can happen in a cartel type of organization. The largest concerns introduce the improvements and expand their production; in order to do so, and still remain in the cartel, they buy up the quotas of the smaller concerns and then close them down. The technical improvement has been put into effect, and at the same time has brought about further concentration, without any expansion of production.

Cartelization brings exceptionally large extra profits,[4] and we have seen how these extra profits are capitalized and then flow into the banks as concentrated sums of capital. But at the same time cartels tend to slow down capital investment; both in the cartelized industries, because the first concern of a cartel is to restrict production, and in the non-cartelized industries because the decline in the rate of profit discourages further capital investment. Consequently, while the volume of capital intended for accumulation increases rapidly, investment opportunities contract. This contradiction demands a solution, which it finds in the export of capital, though this is not in itself a consequence of cartelization. It is a phenomenon that is inseparable from capitalist development. But cartelization suddenly intensifies the contradiction and makes the export of capital an urgent matter.

If we now pose the question as to the real limits of cartelization, the answer must be that there are no absolute limits. On the contrary there is a constant tendency for cartelization to be extended. As we have seen, the independent industries become increasingly dependent upon the cartelized industries until they are finally annexed by them. The ultimate outcome of this process would be the formation of a general cartel. The whole of capitalist production would then be consciously regulated by a single body which would determine the volume of production in all branches of industry. Price determination would become a purely nominal matter, involving only the distribution of the total product between the cartel magnates on one side and all the other members of society on the other. Price would then cease to be the outcome of factual relationships into which people have entered, and would become a mere accounting device by which things were allocated among people. Money would have no role. In fact, it could well disappear completely, since the task to be accomplished would be the allocation of things, not the distribution of values. The illusion of the objective value of the commodity would disappear along with the anarchy of production, and money itself would cease to exist. The cartel would distribute the product. The material elements of production would be reproduced and used in new production. A part of the output would be distributed to the working class and the intellectuals, while the rest would be retained by the cartel to use as it saw fit. This would be a consciously regulated society, but in an antagonistic form. This antagonism, however, would concern distribution, which itself would be consciously regulated and hence able to dispense with money. In its perfected form finance capital is thus uprooted from the soil which nourished its beginnings. The circulation of money has become unnecessary, the ceaseless turnover of money has attained its goal in the regulated society, and the perpetuum mobile of circulation finds its ultimate resting place.

The tendencies towards the establishment of a general cartel and towards the formation of a central bank are converging, and from their combination emerges the enormous concentrated power of finance capital, in which all the partial forms of capital are brought together into a totality. Finance capital has the appearance of money capital, and its form of development is indeed that of money which yields money (M - M') - the most general and inscrutable form of the movement of capital. As money capital it is made available to producers in two forms, as loan capital or as fictitious capital. The intermediaries in this process are the banks, which endeavour at the same time to convert an ever increasing part of this capital into their own capital, thus endowing finance capital with the form of bank capital. This bank capital becomes increasingly the mere form - the money form - of actually functioning capital, that is, industrial capital. At the same time as finance capital eliminates the division between bank capital and productive capital, commercial capital also increasingly loses its independence, and within industrial capital itself the progress of combination among previously separate and independent branches of production breaks down the barriers between different spheres. The social division of labour - the division into diverse spheres of production which were only integrated as parts of the whole social organism through exchange - is constantly diminished, while on the other hand the technical division of labour within the combined enterprises continues to advance.

Thus the specific character of capital is obliterated in finance capital. Capital now appears as a unitary power which exercises sovereign sway over the life process of society; a power which arises directly from ownership of the means of production, of natural resources, and of the whole accumulated labour of the past, and from command over living labour as a direct consequence of property relations. At the same time property, concentrated and centralized in the hands of a few giant capitalist groups, manifests itself in direct opposition to the mass of those who possess no capital. The problem of property relations thus attains its clearest, most unequivocal and sharpest expression at the same time as the development of finance capital itself is resolving more successfully the problem of the organization of the social economy.


[1]At the same time there is a change in the nature of cartel profit. It still consists of unpaid labour, surplus value, but in part of the surplus value which workers employed by other capitalists have produced.

[2]I refer here, of course, only to the average organic composition of capital in non-cartelized industries, not to the composition of the total social capital.

[3]The original text has 'non-cartelized', but this is clearly an error. [Ed.]

[4]An interesting form of extra profit for a cartel can be seen in the following instance. Until the 1890s, America was almost the sole supplier of shoe machinery to German industry. The American factories which supplied these machines to Germany organized a combination, the 'Deutsche Vereinigte Schuhmaschinen-Gesellschaft' (DVSG). The machines are not sold, but are leased out at a fixed royalty. A Factory which wants to procure a machine has to sign a contract for a term of 5 to 20 years. 'The contract requires the supplying firm to install the machine, to repair it without charge, to introduce all the latest improvements and to supply spare parts at reasonable prices. In return, the shoe manufacturer pays a flat rate rent which more or less covers the cost of producing the machine, and in addition a periodic sum for every 1,000 revolutions of the machine . . . . These payments amount to 15-25 pfennigs per pair of shoes, which the manufacturer has to pay to the DVSG, a tribute on a scale which we can only conceive when we learn that in 1907 "three shoe factories in Erfurt employing 885 workers and working mostly with these machines, paid 61,300 marks for their use over a period of one year".' K. Rehe, Die deutsche Schuhgrossindustrie, p. 32. The interesting aspect is that the use of these machines gave German manufacturers an extra profit because it gave them an advantage over their competitors. The American trust obliges them to give up a part of this extra profit, but not all of it, since there would then be no reason to use the machinery. The stipulation of an annual rental makes it easier for them to acquire the machines, and increases the manufacturer's dependence upon the trust because he is now tied to this machine. All new improvements in the machinery are immediately applied, increasing the extra profit and along with it the manufacturer's turnover as well as the payments to the trust which thus acquires a part of someone else's extra profit. The main beneficiary of the improved techniques was the trust. The users of the machines benefited to a much lesser extent, and the consumers least of all.