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From
Chapter 10: High Capital Requirements as an Indicator of Low Prices and the Intensity of
Competition (p. 376)
This excerpt is taken from George Reisman, Capitalism: A Treatise
on Economics. Ottawa, Illinois: Jameson Books, 1996. Copyright © 1996 by George
Reisman. All rights reserved. May not be reproduced in any form without written permission
of the author. The following limited exception is granted: Namely, provided they are
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In connection with this discussion [viz., the meaning of freedom and of freedom of
competition], it should be realized that the existence of high capital requirements as a
condition for being able to compete does not constitute a "barrier to entry" in
any legitimate sense, despite the frequency of the claim that it does. The fact that in
present conditions it may take a billion dollars or more to build a competitive-sized
automobile factory or steel mill does not represent a violation of the freedom of entry or
competition. On the contrary, it is the result of the fact that in order to be profitable,
it is necessary to produce at low costs, thanks precisely to the freedom of competition.
The high capital is necessary only in order to produce on a large scale and with the use
of capital-intensive methods of production, both of which are means of achieving low costs
of production. If the achievement of low costs of production were not necessary, then
neither would be the substantial sums that must be invested to reduce costs. High capital
requirements would not exist.
What makes it necessary to achieve low costs of production is the fact that others, who
employ large sums of capital and who thereby achieve low costs of production, sell at
correspondingly low prices, which makes it impossible to succeed in the business while
producing at the high costs resulting from the lack of sufficient capital. In the simplest
possible terms, the high capital of General Motors and the other major automobile
companies does, indeed, stop people with capitals as limited as those of neighborhood
grocers from producing automobiles. This is as it should be. In order for people to be
able to succeed in the automobile business with such limited capitals, automobiles would
have to be produced without the aid of substantial machinery or the use of such things as
moving assembly lines (which require a very large volume of output). As a result, they
would have to be produced at an extremely high cost, comparable to the cost that existed
in the early years of the industry. And thus they would have to sell at correspondingly
high prices.
It also follows from this discussion that in order to achieve the competitive
advantages of the possession of a large capital, a firm must sell at prices that
reflect its low costs of production. If it does not, then it opens the door to firms with
smaller capitals and higher costs of production, that can then succeed in the business and
possibly accumulate the capital necessary themselves to achieve the lower level of costs.
Thus, high capital requirements are the result of the freedom of competition, which
results in low costs of production and low prices, and which necessitates the possession
of a substantial capital where that is the means of achieving low costs and low prices.
High capital requirements are an illustration of the principle that under the freedom
of competition and the freedom of entry the only way one keeps others out of a field is by
producing better and more economically. Where the freedom of competition and the freedom
of entry are violated, on the other hand, it is the better, more economical producers,
including those with larger capitals, who are kept out--by means of the initiation of
physical force.
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