Responsa of the Week: Free Entry and Competition
Dedicated by Melvin Fastow of Bayside NY in memory of his wife Susan Ruth Fastow on the occasion of her third yahrzeit.
A weekly series by Dr. Meir Tamari about responsa regarding business ethics issues.
In order to demonstrate the work of the halakhic system and its moral considerations regarding a variety of issues in business and economics, I will present a number of responsa drawn from the literature. These represent questions addressed either by laymen or by rabbis or communities to rabbinical authorities and their answers. They cover a period of close to 2000 years and reflect Jewish life in all the countries of the Diaspora. Even though the answers may vary and conflict with each other so that one cannot draw behavioral conclusions from them, they demonstrate Jewish thinking and values in this field.
The restrictions on competition in the case of Arunda or Marufiya were applied in some areas while other Jewish community did not recognize them. Even where they were recognized, any indication that they were not in the interests of the community caused them to be annulled. We should realize that such restrictions on competition exist throughout the modern world, in the form of licensing, public utilities or natural monopolies. The attitude of halakha to such modern forms remains the same. On the one hand there has been an investment either in research and development or in capital infrastructure, that has created a property right that has to be protected, while on the other hand the freedom of others to do with their property as they wish and the welfare of society have to be considered. The existence of such restrictions should not blind us to the understanding that generally speaking the halakhic attitude was in favor of free entry. This is both because everybody may do with their property as they wish as long as it does not conflict with the rights of others, and because the public good is usually best served by competition. Where it was in the community’s interest, then monopoly rights were granted to individuals. For instance, where the market for a certain kosher product or service was not large enough for more than one supplier, competition would not be allowed. After all, Torah is not an economics textbook, but is rather a religious, moral and communal ideal.
“It is permitted for a person to set up shop alongside shop, bathhouse alongside bathhouse, etc., and the existing firms cannot prevent it. The new firm can argue that, “you conduct your business on your property and I do the same” (Baba Bathra 21b). This was codified as law in all the Codes.
This ruling seems to contradict another ruling in the same source that a fisherman has to remove his nets as far as fish can swim, from the net that another fisherman had spread before him. Similarly, existing firms should be able to prevent others from enticing their customers by establishing similar businesses. Rabbenu Tam explained that, unlike fish, customers were free to come and go and therefore the original storekeeper had, unlike the fisherman, not acquired a property right in them.
The following three responsa come to discuss whether considerations may limit this principle of free entry, even where no issue of investment exists.
Reuven signed an agreement with the newspaper Yediot Achronot to reprint and sell books of the Talmud. The newspaper subsequently canceled the agreement and made a similar deal with Shimeon. Reuven claims protection against hasgat gevul. [Appearing in the Torah (Deuteronomy, 19:14), as an injunction against moving or stealing a neighbors landmark, it became one against infringing on another’s livelihood.]
We have decided against Reuven as there is no justification for such protection. The Talmud in the case of a street that is closed on the three sides [with limited economic possibilities] and a person opens a similar business to one that is already there, he can be prevented from doing so. It is true Rabbi Huna ben Yehoshua does not agree. However, where the customer has to pass the new store to get to the old one, even Rabbi Huna ben Yehoshua [who agrees to competition resulting only in a reduction in profit] agrees that he can be prevented from opening it, as the livelihood of original storekeeper is being completely cut of.
However, the Chatam Sofer has interpreted that this only applies to a situation where there are objective conditions that prevent customers from reaching the other store. (Teshuvot Chatam Sofer, Choshen Mishpat, section 79).
We have decided that this case is not similar to a street closed on three sides and it is not clear that the plaintiff’s livelihood is completely cut off. So Reuven cannot prevent the newspaper and Shimeon from carrying out their project (Piskei Din, Batei Hadin Harabbanim, Tel Aviv, 1957).
It is noteworthy that the court did not make any comment on the ethical aspect of the newspaper breaking the agreement with Reuven. Even if this was not relevant from a strictly legal point of view, there is a long tradition of rabbinic authorities as judging the moral aspects of a case, as behooves religious judges interpreting the word of G-d. This is especially pertinent in the case of broken contracts in view of the biblical injunction, “Thou shall guard the utterances of thy mouth.” A framework of not keeping one’s word is conducive to creating a general dissipation of the individual’s moral obligations and encouraging a wide spectrum of immoral actions. So halakhic disapproval of voided contracts is a bulwark against this. Rabbi Eliezer in the Talmud already said that a person who changes his or her mind [and alters their agreements in economic activities] is as heinous as one who worships idols (Mechilta, Shmot 22:27). These need not be a flagrant abrogation of contractual obligations but may be shrewd and subtle subterfuges or insidious behavior. We can see this in the comment of Rashi to the saying of Rabbi Eliezer as referring to one who alters his or her voice in order to defraud. In keeping with general halakhic behavior, this was not allowed to remain mere piety but was translated into binding law. “One who reneges on the agreed transaction [or contract even where no resulting monetary loss was caused] does an act not befitting a Jew. This applies both to a buyer and to the seller. Whoever reneges on an agreement even if they only paid part of the purchase price [so that the deal may be considered not to have been completed] becomes liable to the rebuke of Misheparah. [A publicly administered ceremony whereby it is affirmed that the same G-d who exacted payment from the generation of the Flood, the people of Sodom and the people of Egypt will not let a person who does not keep their word, go unpunished]” (Shulchan Arukh, Choshen Mishpat, section 204, sub-sections 1-4).
Sometimes the competition takes the form of taking away the existing firm’s workers. In the heyday of the high-tech industry, the war for skilled employees led to rapid turnover.This raises moral questions in addition to the economic ones, over and beyond the question of the knowledge that the workers may take with them. Our question concerned the owner of a button factory who wished to prevent a competitor opening a similar factory and using his employees. The Rabbi who forwarded the question sought to prevent the competition on the grounds that it was forestalling. One who intervenes in negotiations and offers better conditions is known as an evil-doer.
Forestalling is forbidden only where the original parties would otherwise have completed their transaction. However, as long as the seller does not want to sell to the original buyer or a buyer does not want to buy from the seller, there is no forestalling. It is also wrong to see the competitor as lacking in Divine Providence for taking the workers. After all, the workers had never agreed to work forever nor had the original employer agreed to retain them forever. However, the hiring was on a contingency basis so that if either of them wished to employ others or to go to work for another, they are not lacking in faith, as would be the case of those who broke an agreement.
Just as in the case of the new storekeeper who can say to the veterans, “whichever customer comes to you will do so and whosoever comes to me will do so”, so too, all employers are fully free to employ these workers. This is not similar to the case where both parties to a transaction have already agreed a third party cannot intervene, because without his intervention the transaction would have been completed.
The complaint that the new workers may be less skilled or more expensive, is also not tenable. We know that one is free to hire a more skilled teacher and dismiss the present one [so it is permissible to compete for the more qualified workers] (Avnei Nezer, [Chassidic Admor of Sochochow, 19th Century, Poland], Choshen Mishpat, section 17).
Some of the founding members of a synagogue have left to form a new one nearby. The Rabbi argues that this will leave him without a livelihood. To sell the building would entail a substantial loss while to renovate it would be exorbitant.
Neither the members nor anybody else has the right to establish a new synagogue in close vicitiny. This is a clear case of hasgat g’vul.
The argument that, “I am free to do with my property as I desire and you to do with your property as you desire”, that justifies competition, does not apply where the injured party has their livelihood destroyed. (Rashi considers that even a reduction in the standard of living of a competitor would not be allowed, not merely a mere loss. The Chatam Sofer would prevent the entry of a new firm if it would reduce the established firms earnings below the average of their peers). Furthermore, competition would be allowed where a substantial loss would be suffered by the new entrants if they were denied free entry. Here no such commercial loss is going to be suffered by preventing the establishment of a new synagogue.
In spiritual matters we have a ruling that whereas it is possible for another Rabbi to gather pupils, in order to spread Torah, this is restricted to those cases where there is no infringement on the livelihood of the Rabbi already entrenched in the community.
Sources: Iggrot Moshe, Choshen Mishpat, section 38 (Rabbi Moshe Feinstein, 1895-1986, New York.)
This column presents general principles for approaching business ethics topics. For specific guidelines, please refer to a halachic authority.
Dr. Meir Tamari is the former chief economist of the Office of the Governor at the Bank of Israel, and the founder of the Business Ethics Center of Jerusalem.