Karl Pribram, Controlled Competition and the Organization of American Industry (1935)

Published in the May 1935 Quarterly Journal of Economics, Karl Pribram’s article examines the New Deal’s industrial codes as instruments for transforming competition. Its five sections move from definitions through two principles of industrial regulation to the characteristics of cartelization and its consequences for recovery. The central argument is that protecting individual trades’ profitability does not necessarily restore economic balance: organized industries may secure their own position by transferring losses elsewhere. European experience illuminates this danger, although Pribram explicitly rejects treating German cartelization as a blueprint for American developments.

Pribram first distinguishes “fair” competition, traditionally understood as honest business practice, from the broader meaning attached to it under the New Deal. The codes combine labor protections with restrictions on commercial competition. He sets aside minimum wages, maximum hours, and workers’ rights to isolate the price-regulating arrangements conceded to employers:

Controlled competition, as understood by the codes of fair competition, means, broadly speaking, direct or indirect interference with prices and with the price structure by cooperative action on the part of employers or, if no agreement between a trade and the executive can be reached, by government decision.

This definition locates industrial “self-government” within a framework of public authorization and enforcement. Pribram then distinguishes the monetary system—relations among prices, costs, incomes, and other value magnitudes—from the “real exchange system” of output, capacity, sales, and employment. These interdependent systems furnish his analytical distinction between the cost principle, initially directed at prices, and the cartel principle, which regulates physical supply to sustain profitable prices.

The cost principle appears in standardized accounting, prohibitions on selling below cost, filed prices, and minimum-price rules. Of 677 codes examined in an official report, 560 contain provisions concerning minimum prices or cost methods. Their governing reversal is succinct:

Whereas under a system of free competition adaptation of costs to prices is imperative, this tendency is considerably weakened by controlled competition of this kind.

Sound accounting is useful, but guaranteeing cost recovery is another matter. Firms differ in efficiency, product mix, and exposure to cheaper substitutes; some small enterprises survive precisely through price cutting. More fundamentally, capitalist enterprise depends on bearing risks and offsetting losses against earlier profits. Enforcing profitable prices during general deflation can preserve inflated capital valuations and obstruct adjustment. Evidence of price rigidity predating the codes also suggests that accounting rules alone cannot explain administered prices.

The cartel principle addresses this problem by adjusting production and sales to the demand available at profitable prices. It necessarily entails some degree of monopolistic control, however narrowly public discussion defines “monopoly.” Open-price schemes can facilitate tacit coordination among leading firms; freight and basing-point provisions can insulate regional markets. Pribram distinguishes increasingly extensive controls: restraints on capacity expansion, operating-time or inventory limits, disposal of surplus equipment, and production pools with allocated quotas. Thus arrangements presented as alternatives to explicit price fixing may nevertheless supply its practical foundation.

His comparison with Europe explains cartelization historically rather than treating cooperation as inevitable progress. Integrated combinations generally flourish in expanding markets; cartels of independent competitors arise from crisis and contraction. Their economic purposes also differ. A unified concern can pursue efficiency under a single profit-making direction, whereas a cartel must reconcile members with divergent costs and interests, commonly protecting the highest-cost producers it retains. Output restrictions may themselves raise unit costs, intensifying these conflicts. American codes exhibit comparable tendencies, although conservation of exhaustible resources can provide genuine public grounds for regulation. Pribram also traces a revealing administrative shift: constituencies initially organized around processes or materials to standardize labor conditions increasingly follow products and markets, preparing the institutional ground for collective market control.

The final section turns this institutional analysis into a critique of recovery policy. Organized trades pursue partial equilibria defined by their members’ profitability, not the equilibrium of the economy as a whole:

It is an illusion to believe that disturbances of the general equilibrium can be cured by establishing partial equilibria limited to definite markets.

When basic industries resist falling prices, downstream producers inherit rigid costs and other sectors bear greater adjustment. Nor does price stability establish stability of production or employment:

Rigid administered prices are paralleled by heavy fluctuations of production and employment.

Pribram supports this contention with European experience and American price-and-production evidence, while preserving the report’s qualifications about differences among commodities and market circumstances. His objection extends beyond excessive prices or profits. Even “normal” profits can be harmful if a protected trade shifts depression losses onto others. Judging cartels by whether prices cover members’ costs misses both differences in efficiency and their wider effects. Their changing forms, incomplete control, and varying behavior across the business cycle also make adequate administrative supervision exceptionally difficult.

The conclusion challenges the claim that cartelization represents a “higher” economic order. Such a judgment lacks an assured economic foundation and would require evidence that prolonged depression, rather than renewed expansion, is becoming structurally dominant. Pribram’s alternative remains conditional: if monetary and credit disturbances largely determine severe depressions, reform of those mechanisms could weaken the pressure for collective monopolies. The article’s enduring conceptual contribution is to separate industry-level planning from economy-wide coordination, and price protection from the stabilization of productive activity.