Passion for Socialism

A society based on sharing and caring.

Passion for Socialism

A society based on sharing and caring.

The Effects of Big Business
on Society


Unsurprisingly many pro-capitalist economists and supporters of capitalism try to downplay the extensive evidence on the size and dominance of Big Business in capitalism.

Some deny that Big Business is a problem - if the market results in a few companies dominating it, then so be it (the "Chicago" and "Austrian" schools are at the forefront of this kind of position – although it does seem somewhat ironic that "market advocates" should be, at best, indifferent, at worse, celebrate the suppression of market co-ordination by planned coordination within the economy that the increased size of Big Business marks). According to this perspective, oligopolies and cartels usually do not survive very long, unless they are doing a good job of serving the customer.

We agree – it is oligopolistic competition we are discussing here. Big Business has to be responsive to demand (when not manipulating/creating it by advertising, of course), otherwise they lose market share to their rivals (usually other dominant firms in the same market, or big firms from other countries). However, the response to demand can be skewed by economic power and, while responsive to some degree, an economy dominated by big business can see super-profits being generated by externalizing costs onto suppliers and consumers (in terms of higher prices). As such, the idea that the market will solve all problems is simply assuming that an oligopolistic market will respond "as if" it were made up of thousands and thousands of firms with little market power. An assumption belied by the reality of capitalism since its birth.

Moreover, the "free market" response to the reality of oligopoly ignores the fact that we are more than just consumers and that economic activity and the results of market events impact on many different aspects of life. Thus our argument is not focused on the fact we pay more for some products than we would in a more competitive market – it is the wider results of oligopoly we should be concerned with, not just higher prices, lower "efficiency" and other economic criteria. If a few companies receive excess profits just because their size limits competition the effects of this will be felt everywhere.

For a start, these "excessive" profits will tend to end up in few hands, so skewing the income distribution (and so power and influence) within society. The available evidence suggests that "more concentrated industries generate a lower wage share for workers" in a firm's value-added. [Keith Cowling, Monopoly Capitalism, p. 106] The largest firms retain only 52% of their profits, the rest is paid out as dividends, compared to 79% for the smallest ones and "what might be called rentiers share of the corporate surplus - dividends plus interest as a percentage of pretax profits and interest - has risen sharply, from 20-30% in the 1950s to 60-70% in the early 1990s." The top 10% of the US population own well over 80% of stock and bonds owned by individuals while the top 5% of stockowners own 94.5% of all stock held by individuals. Little wonder wealth has become so concentrated since the 1970s [Doug Henwood, Wall Street, p. 75, p. 73 and pp. 66-67]. At its most basic, this skewing of income provides the capitalist class with more resources to fight the class war but its impact goes much wider than this.

Moreover, the "level of aggregate concentration helps to indicate the degree of centralization of decision-making in the economy and the economic power of large firms." [Malcolm C. Sawyer, Op. Cit., p. 261] Thus oligopoly increases and centralizes economic power over investment decisions and location decisions which can be used to play one region/country and/or workforce against another to lower wages and conditions for all (or, equally likely, investment will be moved away from countries with rebellious work forces or radical governments, the resulting slump teaching them a lesson on whose interests count). As the size of business increases, the power of capital over labor and society also increases with the threat of relocation being enough to make workforces accept pay cuts, worsening conditions, "down-sizing" and so on and communities increased pollution, the passing of pro-capital laws with respect to strikes, union rights, etc. (and increased corporate control over politics due to the mobility of capital).

Also, of course, oligopoly results in political power as their economic importance and resources gives them the ability to influence government to introduce favorable policies – either directly, by funding political parties or lobbying politicians, or indirectly by investment decisions (i.e. by pressuring governments by means of capital flight. Thus concentrated economic power is in an ideal position to influence (if not control) political power and ensure state aid (both direct and indirect) to bolster the position of the corporation and allow it to expand further and faster than otherwise. More money can also be plowed into influencing the media and funding political think-tanks to skew the political climate in their favor. Economic power also extends into the labor market, where restricted labor opportunities as well as negative effects on the work process itself may result. All of which shapes the society we live in; the laws we are subject to; the "evenness" and "levelness" of the "playing field" we face in the market and the ideas dominant in society.

So, with increasing size, comes the increasing power, the power of oligopolies to "influence the terms under which they choose to operate. Not only do they react to the level of wages and the pace of work, they also act to determine them. . . The credible threat of the shift of production and investment will serve to hold down wages and raise the level of effort [required from workers] . . . [and] may also be able to gain the co-operation of the state in securing the appropriate environment . . . [for] a redistribution towards profits" in value/added and national income. [Keith Cowling and Roger Sugden, Transnational Monopoly Capitalism, p. 99]

Since the market price of commodities produced by oligopolies is determined by a mark-up over costs, this means that they contribute to inflation as they adapt to increasing costs or falls in their rate of profit by increasing prices. However, this does not mean that oligopolistic capitalism is not subject to slumps. Far from it. Class struggle will influence the share of wages (and so profit share) as wage increases will not be fully offset by price increases – higher prices mean lower demand and there is always the threat of competition from other oligopolies. In addition, class struggle will also have an impact on productivity and the amount of surplus value in the economy as a whole, which places major limitations on the stability of the system. Thus oligopolistic capitalism still has to contend with the effects of social resistance to hierarchy, exploitation and oppression that afflicted the more competitive capitalism of the past.

The distributive effects of oligopoly skews income, thus the degree of monopoly has a major impact on the degree of inequality in household distribution. The flow of wealth to the top helps to skew production away from working class needs (by outbidding others for resources and having firms produce goods for elite markets while others go without). The empirical evidence presented by Keith Cowling "points to the conclusion that a redistribution from wages to profits will have a depressive impact on consumption" which may cause depression. [Op. Cit., p. 51] High profits also means that more can be retained by the firm to fund investment (or pay high level managers more salaries or increase dividends, of course). When capital expands faster than labor income over-investment is an increasing problem and aggregate demand cannot keep up to counteract falling profit shares. Moreover, as the capital stock is larger, oligopoly will also have a tendency to deepen the eventual slump, making it last long and harder to recover from.

Looking at oligopoly from an efficiency angle, the existence of super profits from oligopolies means that the higher price within a market allows inefficient firms to continue production. Smaller firms can make average (non-oligopolistic) profits in spite of having higher costs, sub-optimal plant and so on. This results in inefficient use of resources as market forces cannot work to eliminate firms which have higher costs than average (one of the key features of capitalism according to its supporters). And, of course, oligopolistic profits skew allocative efficiency as a handful of firms can out-bid all the rest, meaning that resources do not go where they are most needed but where the largest effective demand lies. This impacts on incomes as well, for market power can be used to bolster CEO salaries and perks and so drive up elite income and so skew resources to meeting their demand for luxuries rather than the needs of the general population. Equally, they also allow income to become unrelated to actual work, as can be seen from the sight of CEO's getting massive wages while their corporation's performance falls.

Such large resources available to oligopolistic companies also allows inefficient firms to survive on the market even in the face of competition from other oligopolistic firms. As Richard B. Du Boff points out, efficiency can also be "impaired when market power so reduces competitive pressures that administrative reforms can be dispensed with. One notorious case was . . . U.S. Steel [formed in 1901]. Nevertheless, the company was hardly a commercial failure, effective market control endured for decades, and above normal returns were made on the watered stock . . . Another such case was Ford. The company survived the 1930s only because of cash reserves stocked away in its glory days. 'Ford provides an excellent illustration of the fact that a really large business organization can withstand a surprising amount of mismanagement.'" [Accumulation and Power, p. 174]

This means that the market power which bigness generates can counteract the costs of size, in terms of the bureaucratic administration it generates and the usual wastes associated with centralized, top-down hierarchical organization. The local and practical knowledge so necessary to make sensible decision cannot be captured by capitalist hierarchies and, as a result, as bigness increases, so does the inefficiencies in terms of human activity, resource use and information. However, this waste that workplace bureaucracy creates can be hidden in the super-profits which big business generates which means, by confusing profits with efficiency, capitalism helps misallocate resources. This means, as price-setters rather than price-takers, big business can make high profits even when they are inefficient. Profits, in other words, do not reflect "efficiency" but rather how effectively they have secured market power. In other words, the capitalist economy is dominated by a few big firms and so profits, far from being a signal about the appropriate uses of resources, simply indicate the degree of economic power a company has in its industry or market.

Thus Big Business reduces efficiency within an economy on many levels as well as having significant and lasting impact on society's social, economic and political structure.

Thus capitalism is not the free market described by such people as Adam Smith – the level of capital concentration has made a mockery of the ideas of free competition.


Source  |  The Anarchist Library



Passion for Socialism


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