But, competition is possible only if capitals multiply and are held by many different people. It is only possible to generate a large number of capitals as a result of multilateral accumulation, since capital in general stems from accumulation. But, multilateral accumulation inevitably turns into unilateral accumulation. Competition among capitalists increases accumulation of capitals. Accumulation -- which, under the rule of private property, means concentration of capital in few hands -- inevitably ensues if capitals are allowed to follow their own natural course. It is only through competition that this natural proclivity of capital begins to take shape.
We have already seen that the profit on capital is in proportion to its size. If we ignore deliberate competition for the moment, a large capital accumulates more rapidly, in proportion to its size, than does a small capital.
This means that, quite apart from competition, the accumulation of large capital takes place at a much faster rate than that of small capital.
But, let us follow this process further.
As capitals multiply, the profits on capital diminish, as a result of competition. So, the first to suffer is the small capitalist.
"In a country which had acquired its full complement of riches, ... as the ordinary rate of clear profit would be very small, so the usual market rate of interest which could be afforded out of it would be so low as to render it impossible for any but the very wealthiest of people to live upon the interest of their money. All people of small or middling fortunes would be obliged to super-intend themselves the employment of their own stocks. It would be necessary that almost every man should be a man of business, or engage in some sort of trade."
[ Smith I, p. 86 ] This is the situation most dear to the heart of political economy.
"The proportion between capital and revenue, therefore, seems everywhere to regulate the proportion between industry and idleness. Wherever capital predominates, industry prevails: wherever revenue, idleness."
[ Smith, p. 301 ] But, what about the employment of capital in this increased competition?
"As the quantity of stock to be lent at interest increases, the interest, or the price which must be paid for the use of that stock, necessarily diminishes, not only from those general causes, which make the market price of things commonly diminish as their quantity increases, but from other causes which are peculiar to this particular case.
"As capitals increase in any country, the profits which can be made by employing them necessarily diminish. It becomes gradually more and more difficult to find within the country a profitable method of employing any new capital. There arises, in consequence, a competition between different capitals, the owner of one endeavoring to get possession of that employment which is occupied by another.
"But, on most occassions he can hope to jostle that other out of this employment by no other means but by dealing upon more reasonable terms. He must not only sell what he deals in somewhat cheaper, but, in order to get it to sell, he must sometimes, too, buy it dearer.
"The demand for productive labor, by the increase of the funds which are destined for maintaining it, grows every day greater and greater. Laborers easily find employment, but the owners of capitals find it difficult to get laborers to employ. Their competition raises the wages of labor and sinks the profits of stock."
[ Smith p. 316 ] The small capitalist, therefore, has two choices: he can either consume his capital, since he can no longer live on the interest -- i.e., cease to be a capitalist; or, he can himself set up a business, sell his goods at a lower price, and buy them at a dearer price than the richer capitalist, and pay higher wages, which means that he would go bankrupt -- since the market price is already very low as a result of the intense competition we presupposed. If, on the other hand, the big capitalist wants to squeeze out the smaller one, he has all the same advantages over him as the capitalist has over the worker. He is compensated for the smaller profits by the larger size of his capital, and he can even put up with short-term losses until the smaller capitalist is ruined and he is freed of this competition. In this way, he accumulates the profits of the small capitalist.
Furthermore: the big capitalist always buys more cheaply than the small capitalist, because he buys in larger quantities. He can, therefore, afford to sell at a lower price.
But, if a fall in the rate of interest turns the middle capitalists from rentiers into businessmen, conversely the increase in business capitals and the resulting lower rate of profit produce a fall in the rate of interest.
"But, when the profits which can be made by use of a capital are diminished... the price which can be paid for the use of it... must necessarily be diminished with them."
[ Smith p. 316 ]
"As riches, improvement, and population, have increased, interest has declined", and consequently the profits of stock; "...after these are diminished, stock may not only continue to increase, but to increase much faster than before.... A great stock, though with small profits, generally increases faster than a small stock with great profits. Money, says the proverb, makes money."
[ Smith p. 83 ] So, if this large capital is opposed by small capitals with small profits, as in the case under the conditions of intense competition which we have presupposed, it crushes them completely.
The inevitable consequence of this competition is the deterioration in the quality of goods, adulteration, spurious production, and universal pollution to be found in large towns.
Another important factor in the competition between big and small capitals is the relationship between fixed capital and circulating capital.