Fritz Machlup, The Nature of the International Cartel Problem

Fritz Machlup’s published lecture, originally issued in 1945 and republished in 1946, examines international cartels as a problem of economic restriction and postwar public policy. Moving from definition and organizational forms through statistical evidence, economic effects, ethics, and policy, it argues that cartel power must be judged by its consequences for competition, not by its legal form or its organizers’ intentions. Wartime investigations had exposed previously obscure arrangements, while the interruption of trade offered an opportunity to prevent their revival. Machlup’s central warning is that government supervision could entrench the restrictions it purported to control.

His first conceptual move separates economic analysis from legal classification:

Cartels may be defined simply as business arrangements which have the purpose or effect of reducing or regulating competition.

“Arrangements” includes informal understandings, association memberships, and centralized selling agencies, not merely explicit agreements between competitors. Ownership links do not exclude cartel arrangements, although combines can also coordinate conduct without agreements. Likewise, an international cartel need not involve firms domiciled in different countries: an export association within one country can restrict international competition. Definitions based on corporate nationality would invite circumvention through domestic subsidiaries. The relevant boundary is the effect on international trade.

Cartels seek higher net returns, ordinarily through higher prices, but direct price fixing is only one instrument. Territorial divisions create sheltered markets; customer allocations separate buyers; technological restrictions reserve fields of use, often through patent licensing. Such arrangements can suppress potential competition even where no existing rivalry is displaced. Where market division is impracticable, output quotas and capacity restrictions sustain prices that expanding production would otherwise undermine. Machlup distinguishes restrictions on innovation, which he describes as possibly rare, from the more conspicuous restriction of productive capacity.

Organizational form responds to industrial structure and law. Patent licenses can make restrictive obligations enforceable through infringement proceedings; trademark registrations allocate export territories; joint sales agencies centralize prices and orders without requiring direct agreements among producers. Industries with many producers and little product differentiation often require stronger sanctions or government assistance. Apparently unilateral tariffs and trade quotas can themselves implement coordinated international restrictions. The distinction between private cartelization and public commercial policy is therefore porous.

Machlup acknowledges the incompleteness of the evidence. Official estimates placed at least 32 percent of international trade under marketing control in 1937. A study of 333 international patent contracts held by the Alien Property Custodian found market-division provisions in 75 percent. These figures indicate substantial reach without establishing a comprehensive census. His discussion of patents also distinguishes the monopoly granted by an individual patent from the additional power created by pooling patents and extending contractual restrictions across territories and entire product lines.

The economic indictment connects higher prices to reduced consumption, production, and employment. Its employment argument expressly assumes limited labor mobility and wage flexibility, rather than automatic reemployment elsewhere. Export restrictions can also reduce investment opportunities and foreign purchasers’ ability to buy other American goods. Against claims that cartels stabilize economic activity, Machlup distinguishes stable prices from stable production:

Price stability through cartels is no cure for industrial fluctuations; it merely mitigates the cycle for a selected few and aggravates it for others.

Maintaining prices during a downturn shifts adjustment onto output and employment, while transferring burdens to competitive industries, consumers, and taxpayers. Nor does a supposedly moderate stabilized price offer a workable safeguard: the competitive price that would otherwise have prevailed cannot be demonstrated precisely. Machlup similarly challenges “temporary” cartelization as a remedy for excess capacity. Quotas based on capacity can encourage further expansion to improve future bargaining positions. Even rationalization through plant closures may compensate owners through higher consumer prices, while other arrangements preserve inefficient producers by restraining efficient ones.

The ethical discussion separates institutional harm from personal wickedness:

Almost all organizers and members of cartels are convinced that their activities are beneficial for the whole economy.

Machlup’s footnote discloses his own earlier membership in an Austrian paperboard cartel’s council. His argument does not depend on depicting cartelists as dishonest: their defense of protection from “ruinous” competition resembles familiar defenses of tariffs. Equally, distinguishing legitimate monopoly “use” from “abuse” supplies no reliable policy standard. Public officials using cost-plus reasoning could reproduce or exceed private monopoly prices.

The final section rejects substitutes for direct resistance. International agreement against cartels would be desirable, but its absence does not justify American participation. Depression prevention cannot replace antitrust policy: cartels promise gains during prosperity too, although severe losses can intensify political pressure for protection. Registration would improve information, yet publicity might confer legitimacy without preventing restriction.

Government control sanctifies the cartel.

This sentence crystallizes Machlup’s objection to supervised cartelization. Private cartels remain vulnerable to defectors, outsiders, entrants, and public criticism; official sponsorship can shield them from those pressures. The essay’s enduring relevance lies in its insistence that transparency, supervision, and public-interest language do not establish competitive outcomes. Its preferred policy is not better-administered cartel power, but resistance to the restrictions that constitute that power.