Fritz Machlup, [Discussion on International Cartels] (1946)

Fritz Machlup’s conference discussion contribution addresses three papers: Professor Haley’s analysis of proposed international trade rules, Professor Hamilton’s treatment of corporate personality, and Dr. Terrill’s account of international technological exchange. Its longest sections concern intergovernmental commodity agreements and patent licensing. Across these subjects, Machlup asks whether public institutions can remove restraints on competition without reproducing them under governmental authority. His governing distinction is between protecting organized producers and advancing the interests of consumers, whose dispersed losses seldom generate comparable political pressure.

Machlup opens by contrasting democratic equality with the different standards applied to private cartels and agreements between governments. Changing the parties or the institutional label does not change the economic consequences of restricting trade:

Agreements in restraint of international trade are always beneficial to some people and injurious to others.

He immediately adds that economists generally judge aggregate injury to exceed aggregate benefit, while benefits accrue to concentrated groups and injuries fall upon the masses. This asymmetry explains both pressure for protection and economists’ divergent responses: opposition, service to pressure groups, resignation, or governmental compromise. The discussion consequently treats proposed international rules as products of political bargaining, not simply applications of economic analysis.

The American proposals for expanding trade and employment exemplify such a compromise. They would curb restrictive business practices while allowing politically powerful industries to seek governmental authorization as commodity agreements. Qualification tests promise to limit this concession without closing it altogether. Machlup recognizes the diplomatic calculation: retaining a route to authorized restriction might reduce governments’ resistance to an international convention. Whether this route becomes a narrow exception or an escape hatch depends on the International Trade Organization’s application of the rules.

His response to Haley examines the proposed safeguards. For agricultural commodities, Machlup endorses caution before declaring a surplus burdensome, because premature intervention harms consumers. He also supports excluding surpluses created chiefly by domestic price supports. But he resists Haley’s suggestion that action should precede actual widespread distress: anticipated distress would be an easily abused qualifying condition. For semimanufactured products, he likewise challenges unemployment as a sufficient reason for maintaining high prices:

If an industry is really overexpanded, the emergence of unemployment in the industry may be the one and only method of economic adjustment.

The issue is not whether displaced workers suffer, but whether restricting trade is an appropriate remedy. Lower competitive prices may increase employment internationally while eliminating jobs in inefficient mines or plants. Preserving those operations through commodity agreements makes consumers finance high-cost producers without openly securing their consent. Machlup’s example of Bolivian tin turns apparently technical price management into a question of distributive accountability:

In my judgment, people should know when they are taxed and for what purposes.

He argues that the hidden consumer tax could exceed the cost of generous unemployment benefits paid after prices become competitive. Explicit assistance therefore offers a clearer and potentially cheaper alternative to protection. Nor does representation of consuming countries ensure representation of consumers: processors and importers have distinct interests, while governments respond more readily to organized lobbying than to inarticulate purchasers.

Machlup’s strongest disagreement with Haley concerns the requirement that protected industries undertake adjustment. Haley cautions against interpreting it too strictly; Machlup considers promises of eventual adjustment unreliable:

A mere promise that the “breathing spell” afforded by a commodity agreement will be used for effecting an “adjustment” of the industry is as worthless as all the thousands of “infant industry” assurances were when tariffs were made.

Temporary protection should follow, not precede, adoption of a vigorous resource-reallocation program. Otherwise adjustment language merely legitimizes continued restriction. His shorter response to Hamilton broadens the institutional stakes: treating corporations as acting persons affects not only international combines but competition, concentrated economic and political power, and capitalism’s functioning and survival. Machlup endorses Hamilton’s contribution without developing a separate corporate theory.

The response to Terrill shifts from commodity prices to the circulation of industrial knowledge. Machlup distinguishes widely disseminated basic research from applied research protected by patents, secrecy, or both. He then separates four dissemination mechanisms: unrestricted voluntary disclosure, restricted voluntary licensing, compulsory licensing, and leakage or espionage. Free disclosure is exceptional; leakage is inadequate where patents prevent the use of acquired know-how. The practical choice therefore lies chiefly between voluntary transfer under restrictions and compulsory transfer without them.

Restrictive licensing is understandable as a means of preventing licensees from competing with the owner, but its social costs may outweigh the benefits of disseminating knowledge. Merely prohibiting restrictive clauses could leave patentees unwilling to license at all:

Compulsory licensing then suggests itself as the logical next step.

Machlup rejects the objection that inventors would simply avoid patenting in countries requiring licenses: publication elsewhere would expose the invention without securing local protection. He concedes that some might instead rely entirely on secrecy, but expects patents with reasonable royalties to remain attractive. His footnote acknowledges administrative difficulty, especially the arbitrariness involved in setting royalties, while suggesting that the availability of compulsion would usually induce voluntary unrestricted agreements.

The conclusion favors domestic patent reform over reliance on international enforcement. Compulsory licensing would remove the excuse that access to foreign inventions requires accepting output, sales, or export restrictions. International cooperation might help, but Machlup doubts its vigor. The contribution’s distinctive policy demand is thus to secure adjustment and technological diffusion without allowing either governmental sponsorship or patent ownership to shelter cartel practices.