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<title>C.4 Why does the market become dominated by Big Business?</title>

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<h1>C.4 Why does the market become dominated by Big Business?</h1>

<p>
As noted in <a href="secC1.html#secc14">section C.1.4</a>, the standard capitalist economic model
assumes an economy made up of a large number of small firms, none 
of which can have any impact on the market. Such a model has no
bearing to reality:
</p><p><blockquote><i>
"The facts show . . . that capitalist economies tend over time and 
with some interruptions to become more and more heavily concentrated."</i> 
[M.A. Utton, <b>The Political Economy of Big Business</b>, p. 186] 
</blockquote></p><p>
As Bakunin argued, capitalist production <i>"must ceaselessly expand
at the expense of the smaller speculative and productive 
enterprises devouring them."</i> Thus <i>"[c]ompetition in the economic 
field destroys and swallows up the small and even medium-sized 
enterprises, factories, land estates, and commercial houses for 
the benefit of huge capital holdings."</i> [<b>The Political Philosophy 
of Bakunin</b>, p. 182] The history of capitalism has proven him right. 
while the small and medium firm has not disappeared, economic life 
under capitalism is dominated by a few big firms.
</p><p>
This growth of business is rooted in the capitalist system itself.
The dynamic of the "free" market is that it tends to becomes dominated 
by a few firms (on a national, and increasingly, international, level), 
resulting in oligopolistic competition and higher profits for the 
companies in question (see <a href="secC4.html#secc41">next section</a> for details and evidence). 
This occurs because only established firms can afford the large capital 
investments needed to compete, thus reducing the number of competitors 
who can enter or survive in a given the market. Thus, in Proudhon's 
words, <i>"competition kills competition."</i> [<b>System of Economical 
Contradictions</b>, p. 242] In other words, capitalist markets evolve 
toward oligopolistic concentration.
</p><p>
This <i>"does not mean that new, powerful brands have not emerged [after 
the rise of Big Business in the USA after the 1880s]; they have, but 
in such markets. . . which were either small or non-existent in the
early years of this century."</i> The dynamic of capitalism is such that 
the <i>"competitive advantage [associated with the size and market power 
of Big Business], once created, prove[s] to be enduring."</i> [Paul 
Ormerod, <b>The Death of Economics</b>, p. 55]
</p><p>
For people with little or no capital, entering competition is limited to
new markets with low start-up costs (<i>"In general, the industries which 
are generally associated with small scale production. . . have low levels
of concentration"</i> [Malcolm C. Sawyer, <b>The Economics of Industries and
Firms</b>, p. 35]). Sadly, however, due to the dynamics of competition,
these markets usually in turn become dominated by a few big firms, as
weaker firms fail, successful ones grow and capital costs increase
(<i>"Each time capital completes its cycle, the individual grows smaller in
proportion to it."</i> [Josephine Guerts, <b>Anarchy: A Journal of Desire Armed</b>
no. 41, p. 48]).
</p><p>
For example, between 1869 and 1955 <i>"there was a marked growth in capital
per person and per number of the labour force. Net capital per head rose.
. . to about four times its initial level . . . at a rate of about 17% per
decade."</i> The annual rate of gross capital formation rose <i>"from $3.5
billion in 1869-1888 to $19 billion in 1929-1955, and to $30 billion in
1946-1955. This long term rise over some three quarters of a century was
thus about nine times the original level"</i> (in constant, 1929, dollars).
[Simon Kuznets, <b>Capital in the American Economy</b>, p. 33 and p. 394] To 
take the steel industry as an illustration: in 1869 the average cost of 
steel works in the USA was $156,000, but by 1899 it was $967,000 -- a 520%
increase. From 1901 to 1950, gross fixed assets increased from $740,201
to $2,829,186 in the steel industry as a whole, with the assets of
Bethlehem Steel increasing by 4,386.5% from 1905 ($29,294) to 1950
($1,314,267). These increasing assets are reflected both in the size of
workplaces and in the administration levels in the company as a whole
(i.e. <b>between</b> individual workplaces).
</p><p>
The reason for the rise in capital investment is rooted in the need
for capitalist firms to gain a competitive edge on their rivals. As
noted in <a href="secC2.html">section C.2</a>, the source of profit is the unpaid labour of
workers and this can be increased by one of two means. The first is
by making workers work longer for less on the same machinery (the 
generation of absolute surplus value, to use Marx's term). The second
is to make labour more productive by investing in new machinery (the
generation of relative surplus value, again using Marx's terminology). 
The use of technology drives up the output per worker relative to 
their wages and so the workforce is exploited at a higher rate (how
long before workers force their bosses to raise their wages depends
on the balance of class forces as we noted in the 
<a href="secC3.html">last section</a>). 
This means that capitalists are driven by the market to accumulate
capital. The first firm to introduce new techniques reduces their 
costs relative to the market price, so allowing them to gain a 
surplus profit by having a competitive advantage (this addition 
profit disappears as the new techniques are generalised and 
competition invests in them).
</p><p>
As well as increasing the rate of exploitation, this process has an
impact on the structure of the economy. With the increasing ratio of 
capital to worker, the cost of starting a rival firm in a given, 
well-developed, market prohibits all but other large firms from doing 
so (and here we ignore advertising and other distribution expenses, 
which increase start-up costs even more -- <i>"advertising raises the 
capital requirements for entry into the industry"</i> [Sawyer, <b>Op. Cit.</b>, 
p. 108]). J. S. Bain (in <b>Barriers in New Competition</b>) identified 
three main sources of entry barrier: economies of scale (i.e. increased 
capital costs and their more productive nature); product differentiation 
(i.e. advertising); and a more general category he called <i>"absolute cost 
advantage."</i>
</p><p>
This last barrier means that larger companies are able to outbid smaller
companies for resources, ideas, etc. and put more money into Research and
Development and buying patents. Therefore they can have a technological
and material advantage over the small company. They can charge 
"uneconomic" prices for a time (and still survive due to their resources) 
-- an activity called <i>"predatory pricing"</i> -- and/or mount lavish promotional 
campaigns to gain larger market share or drive competitors out of the 
market. In addition, it is easier for large companies to raise external 
capital, and risk is generally less.
</p><p>
In addition, large firms can have a major impact on innovation and the
development of technology -- they can simply absorb newer, smaller, 
enterprises by way of their economic power, buying out (and thus 
controlling) new ideas, much the way oil companies hold patents on 
a variety of alternative energy source technologies, which they then 
fail to develop in order to reduce competition for their product (of 
course, at some future date they may develop them when it becomes 
profitable for them to do so). Also, when control of a market is 
secure, oligopolies will usually delay innovation to maximise their
use of existing plant and equipment or introduce spurious innovations 
to maximise product differentiation. If their control of a market is 
challenged (usually by other big firms, such as the increased competition
Western oligopolies faced from Japanese ones in the 1970s and 1980s), 
they can speed up the introduction of more advanced technology and 
usually remain competitive (due, mainly, to the size of the resources 
they have available). 
</p><p>
These barriers work on two levels -- <b>absolute</b> (entry) barriers and
<b>relative</b> (movement) barriers. As business grows in size, the amount 
of capital required to invest in order to start a business also increases. 
This restricts entry of new capital into the market (and limits it to firms 
with substantial financial and/or political backing behind them):
</p><p><blockquote><i>
"Once dominant organisations have come to characterise the structure of
an industry, immense barriers to entry face potential competitors. Huge
investments in plant, equipment, and personnel are needed . . . [T]he
development and utilisation of productive resources <b>within</b> the organisation 
takes considerable time, particularly in the face of formidable incumbents
. . . It is therefore one thing for a few business organisations to emerge 
in an industry that has been characterised by . . . highly competitive
conditions. It is quite another to break into an industry. . . [marked by]
oligopolistic market power."</i> [William Lazonick, <b>Business Organisation
and the Myth of the Market Economy</b>, pp. 86-87]
</blockquote></p><p>
Moreover, <b>within</b> the oligopolistic industry, the large size and market power
of the dominant firms mean that smaller firms face expansion disadvantages
which reduce competition. The dominant firms have many advantages over 
their smaller rivals -- significant purchasing power (which gains better service
and lower prices from suppliers as well as better access to resources),
privileged access to financial resources, larger amounts of retained earnings 
to fund investment, economies of scale both within and <b>between</b> workplaces, 
the undercutting of prices to "uneconomical" levels and so on (and, of course,
they can <b>buy</b> the smaller company -- IBM paid $3.5 billion for Lotus in
1995. That is about equal to the entire annual output of Nepal, which has
a population of 20 million). The large firm or firms can also rely on
its established relationships with customers or suppliers to limit the
activities of smaller firms which are trying to expand (for example, using
their clout to stop their contacts purchasing the smaller firms products).
</p><p>
Little wonder Proudhon argued that <i>"[i]n competition. . . victory is assured
to the heaviest battalions."</i> [<b>Op. Cit.</b>, p. 260]
</p><p>
As a result of these entry/movement barriers, we see the market being divided
into two main sectors -- an oligopolistic sector and a more competitive one.
These sectors work on two levels -- within markets (with a few firms in a 
given market having very large market shares, power and excess profits) and 
within the economy itself (some markets being highly concentrated and 
dominated by a few firms, other markets being more competitive). This results 
in smaller firms in oligopolistic markets being squeezed by big business
along side firms in more competitive markets. Being protected from competitive
forces means that the market price of oligopolistic markets is <b>not</b> forced
down to the average production price by the market, but instead it tends to
stabilise around the production price of the smaller firms in the industry
(which do not have access to the benefits associated with dominant position
in a market). This means that the dominant firms get super-profits while
new capital is not tempted into the market as returns would not make the move
worthwhile for any but the biggest companies, who usually get comparable
returns in their own oligopolised markets (and due to the existence of market
power in a few hands, entry can potentially be disastrous for small firms
if the dominant firms perceive expansion as a threat).
</p><p>
Thus whatever super-profits Big Business reap are maintained due to the
advantages it has in terms of concentration, market power and size which
reduce competition (see <a href="secC5.html">section C.5</a> for details).
</p><p>
And, we must note, that the processes that saw the rise of national 
Big Business is also at work on the global market. Just as Big Business 
arose from a desire to maximise profits and survive on the market, so
<i>"[t]ransnationals arise because they are a means of consolidating or
increasing profits in an oligopoly world."</i> [Keith Cowling and Roger Sugden,
<b>Transnational Monopoly Capitalism</b>, p. 20] So while a strictly national
picture will show a market dominated by, say, four firms, a global view 
shows us twelve firms instead and market power looks much less worrisome. 
But just as the national market saw a increased concentration of firms 
over time, so will global markets. Over time a well-evolved structure of 
global oligopoly will appear, with a handful of firms dominating most 
global markets (with turnovers larger than most countries GDP -- which is 
the case even now. For example, in 1993 Shell had assets of US$ 100.8 
billion, which is more than double the GDP of New Zealand and three times 
that of Nigeria, and total sales of US$ 95.2 billion). 
</p><p>
Thus the very dynamic of capitalism, the requirements for survival on
the market, results in the market becoming dominated by Big Business
(<i>"the more competition develops, the more it tends to reduce the
number of competitors."</i> [P-J Proudhon, <b>Op. Cit.</b>, p. 243]). The irony
that competition results in its destruction and the replacement of
market co-ordination with planned allocation of resources is one usually
lost on supporters of capitalism.</p>

<h2><a name="secc41">C.4.1 How extensive is Big Business?</a></h2>

<p>
The effects of Big Business on assets, sales and profit distribution are
clear. In the USA, in 1985, there were 14,600 commercial banks. The 50
largest owned 45.7 of all assets, the 100 largest held 57.4%. In 1984
there were 272,037 active corporations in the manufacturing sector, 710
of them (one-fourth of 1 percent) held 80.2 percent of total assets. In
the service sector (usually held to be the home of small business), 95 
firms of the total of 899,369 owned 28 percent of the sector's assets. 
In 1986 in agriculture, 29,000 large farms (only 1.3% of all farms) 
accounted for one-third of total farm sales and 46% of farm profits. 
In 1987, the top 50 firms accounted for 54.4% of the total sales of 
the <b>Fortune</b> 500 largest industrial companies. [Richard B. Du Boff, 
<b>Accumulation and Power</b>, p. 171] Between 1982 and 1992, the top 
two hundred corporations increased their share of global Gross 
Domestic Product from 24.2% to 26.8%, <i>"with the leading ten taking
almost half the profits of the top two hundred."</i> This underestimates
economic concentration as it <i>"does not take account of privately 
owned giants."</i> [Chomsky, <b>World Orders, Old and New</b>, p. 181]
</p><p>
The process of market domination is reflected by the increasing market 
share of the big companies. In Britain, the top 100 manufacturing companies 
saw their market share rise from 16% in 1909, to 27% in 1949, to 32% in 
1958 and to 42% by 1975. In terms of net assets, the top 100 industrial 
and commercial companies saw their share of net assets rise from 47% in 
1948 to 64% in 1968 to 80% in 1976 [R.C.O. Matthews (ed.), <b>Economy and
Democracy</b>, p. 239]. Looking wider afield, we find that in 1995 about
50 firms produce about 15 percent of the manufactured goods in the
industrialised world. There are about 150 firms in the world-wide motor
vehicle industry. But the two largest firms, General Motors and Ford,
together produce almost one-third of all vehicles. The five largest firms
produce half of all output and the ten largest firms produce three-quarters.
Four appliance firms manufacture 98 percent of the washing machines made in
the United States. In the U. S. meatpacking industry, four firms account for
over 85 percent of the output of beef, while the other 1,245 firms have less
than 15 percent of the market.
</p><p>
While the concentration of economic power is most apparent in the
manufacturing sector, it is not limited to that sector. We are seeing
increasing concentration in the service sector -- airlines, fast-food
chains ,and the entertainment industry are just a few examples. In 
America Coke, Pepsi, and Cadbury-Schweppes dominate soft drinks while 
Budweiser, Miller, and Coors share the beer market. Nabisco, Keebler 
and Pepperidge Farms dominate the cookie industry. Expansions and 
mergers play their role in securing economic power and dominance. In
1996 the number three company in the US cookie industry was acquired 
by Keebler, which (in turn) was acquired by Kellogg in 2000. Nabisco 
is a division of Kraft/Philip Morris and Pepperidge Farm is owned by 
relatively minor player Campbell. Looking at the US airline industry,
considered the great hope for deregulation in 1978, it has seen the
six largest companies control of the market rise from 73% in 1978 to
85% in 1987 (and increasing fares across the board). [<i>"Unexpected 
Result of Airline Decontrol is Return to Monopolies,"</i> <b>Wall Street 
Journal</b>, 20/07/1987] By 1998, the top sixs share had increased by 
1% but control was effectively higher with three code-sharing 
alliances now linking all six in pairs.[Amy Taub, <i>"Oligopoly!"</i> 
<b>Multinational Monitor</b>, November 1998, p. 9]
</p><p>
This process of concentration is happening in industries historically 
considered arenas of small companies. In the UK, a few big supermarkets 
are driving out small corner shops (the four-firm concentration ratio 
of the supermarket industry is over 70%) while the British brewing 
industry has a staggering 85% ratio. In American, the book industry is 
being dominated by a few big companies, both in production and 
distribution. A few large conglomerates publish most leading titles 
while a few big chains (Barnes & Nobles and Borders) have the majority 
of retail sales. On the internet, Amazon dominates the field in 
competition with the online versions of the larger bookshops. This 
process occurs in market after market. As such, it should be stressed 
that increasing concentration afflicts most, if not all sectors of
the economy. There are exceptions, of course, and small businesses
never disappear totally but even in many relatively de-centralised 
and apparently small-scale businesses, the trend to consolidation 
has unmistakable:
</p><p><blockquote><i>
"The latest data available show that in the manufacturing sector the 
four largest companies in a given industry controlled an average of 40 
percent of the industrys output in 1992, and the top eight had 52 
percent. These shares were practically unchanged from 1972, but they 
are two percentage points higher than in 1982. Retail trade (department 
stores, food stores, apparel, furniture, building materials and home 
supplies, eating and drinking places, and other retail industries) also 
showed a jump in market concentration since the early 1980s. The top 
four firms accounted for an average of 16 percent of the retail industrys 
sales in 1982 and 20 percent in 1992; for the eight largest, the average 
industry share rose from 22 to 28 percent. Some figures now available 
for 1997 suggest that concentration continued to increase during the 
1990s; of total sales receipts in the overall economy, companies with 
2,500 employees or more took in 47 percent in 1997, compared with 42 
percent in 1992.
</p><p>
"In the financial sector, the number of commercial banks fell 30 percent 
between 1990 and 1999, while the ten largest were increasing their share 
of loans and other industry assets from 26 to 45 percent. It is well 
established that other sectors, including agriculture and telecommunications, 
have also become more concentrated in the 1980s and 1990s. The overall rise 
in concentration has not been great-although the new wave may yet make a 
major mark-but the upward drift has taken place from a starting point of 
highly concentrated economic power across the economy."</i> [Richard B. 
Du Boff and Edward S. Herman, <i>"Mergers, Concentration, and the Erosion 
of Democracy"</i>, <b>Monthly Review</b>, May 2001]
</blockquote></p><p>
So, looking at the <b>Fortune</b> 500, even the 500th firm is massive (with sales
of around $3 billion). The top 100 firms usually have sales significantly
larger than bottom 400 put together. Thus the capitalist economy is marked
by a small number of extremely large firms, which are large in both 
absolute terms and in terms of the firms immediately below them. This 
pattern repeats itself for the next group and so on, until we reach the
very small firms (where the majority of firms are).
</p><p>
The other effect of Big Business is that large companies tend to become
more diversified as the concentration levels in individual industries
increase. This is because as a given market becomes dominated by larger
companies, these companies expand into other markets (using their larger
resources to do so) in order to strengthen their position in the economy
and reduce risks. This can be seen in the rise of "subsidiaries" of parent
companies in many different markets, with some products apparently
competing against each other actually owned by the same company!
</p><p>
Tobacco companies are masters of this diversification strategy; most people
support their toxic industry without even knowing it! Don't believe it?
Well, if are an American and you ate any Jell-O products, drank Kool-Aid, 
used Log Cabin syrup, munched Minute Rice, quaffed Miller beer, gobbled 
Oreos, smeared Velveeta on Ritz crackers, and washed it all down with 
Maxwell House coffee, you supported the tobacco industry, all without 
taking a puff on a cigarette! Similarly, in other countries. Simply put,
most people have no idea which products and companies are owned by which
corporations, which goods apparently in competition with others in fact
bolster the profits of the same transnational company.
</p><p>
Ironically, the reason why the economy becomes dominated by Big Business
has to do with the nature of competition itself. In order to survive (by
maximising profits) in a competitive market, firms have to invest in capital,
advertising, and so on. This survival process results in barriers to
potential competitors being created, which results in more and more markets
being dominated by a few big firms. This oligopolisation process becomes
self-supporting as oligopolies (due to their size) have access to more
resources than smaller firms. Thus the dynamic of competitive capitalism
is to negate itself in the form of oligopoly.</p>

<h2><a name="secc42">C.4.2 What are the effects of Big Business on society?</a></h2>

<p>
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.
</p><p>
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 <b>planned</b> co-ordination 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.
</p><p>
We agree -- it is oligopolistic <b>competition</b> 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 externalising 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.
</p><p>
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 <b>wider</b> 
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 <b>everywhere.</b>
</p><p>
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 <i>"more concentrated industries generate
a lower wage share for workers"</i> in a firm's value-added. [Keith Cowling, 
<b>Monopoly Capitalism</b>, 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 <i>"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."</i> 
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, <b>Wall Street</b>, 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.
</p><p>
Moreover, the <i>"level of aggregate concentration helps to indicate the degree
of centralisation of decision-making in the economy and the economic power
of large firms."</i> [Malcolm C. Sawyer, <b>Op. Cit.</b>, p. 261] Thus oligopoly
increases and centralises 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 labour 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). 
</p><p>
Also, of course, oligopoly results in political power as their economic
importance and resources gives them the ability to influence government
to introduce favourable 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 -- see 
<a href="secD2.html">section D.2</a>). 
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 favour. Economic power also extends into the 
labour market, where restricted labour 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 (see <a href="secD3.html">section D.3</a>). 
</p><p>
So, with increasing size, comes the increasing power, the power of
oligopolies to <i>"influence the terms under which they choose to operate. 
Not only do they <b>react</b> to the level of wages and the pace of work,
they also <b>act</b> 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"</i> in value/added and national
income. [Keith Cowling and Roger Sugden, <b>Transnational Monopoly 
Capitalism</b>, p. 99]
</p><p>
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.
</p><p>
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 <i>"points to the conclusion
that a redistribution from wages to profits will have a depressive 
impact on consumption"</i> which may cause depression. [<b>Op. Cit.</b>, 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 labour income over-investment
is an increasing problem and aggregate demand cannot keep up to counteract
falling profit shares (see <a href="secC7.html">section C.7</a> 
on more about the business cycle).
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.
</p><p>
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 <b>in spite</b> 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.
</p><p>
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 <i>"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 organisation can withstand a
surprising amount of mismanagement.'"</i> [<b>Accumulation and Power</b>, p. 174]
</p><p>
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 centralised, top-down hierarchical 
organisation. 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.
</p><p>
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. 
</p><p>
The effects of the concentration of capital and wealth on society are very
important, which is why we are discussing capitalism's tendency to result
in big business. The impact of the wealth of the few on the lives of the
many is indicated in <a href="secDcon.html">section D</a> of the FAQ. As shown there, in addition to
involving direct authority over employees, capitalism also involves indirect
control over communities through the power that stems from wealth.
</p><p>
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.</p>

<h2><a name="secc43">C.4.3 What does the existence of Big Business mean for economic theory and wage labour?</a></h2>

<p>
Here we indicate the impact of Big Business on economic theory itself and
wage labour. In the words of Michal Kalecki, perfect competition is
"a most unrealistic assumption" and <i>"when its actual status of a handy
model is forgotten becomes a dangerous myth."</i> [quoted by Malcolm C. Sawyer,
<b>The Economics of Michal Kalecki</b>, p. 8] Unfortunately mainstream capitalist
economics is <b>built</b> on this myth. Ironically, it was against a <i>"background
[of rising Big Business in the 1890s] that the grip of marginal economics,
an imaginary world of many small firms. . . was consolidated in the
economics profession."</i> Thus, <i>"[a]lmost from its conception, the theoretical
postulates of marginal economics concerning the nature of companies [and
of markets, we must add] have been a travesty of reality."</i> [Paul Ormerod,
<b>Op. Cit.</b>, pp. 55-56]
</p><p>
This can be seen from the fact that mainstream economics has, for most of
its history, effectively ignored the fact of oligopoly for most of its 
history. Instead, economics has refined the model of "perfect competition" 
(which cannot exist and is rarely, if ever, approximated) and developed
an analysis of monopoly (which is also rare). Significantly, an economist 
could still note in 1984 that <i>"traditional economy theory . . . offers 
very little indeed by way of explanation of oligopolistic behaviour"</i> in 
spite (or, perhaps, <b>because</b>) it was <i>"the most important market situation 
today"</i> (as <i>"instances of monopoly"</i> are <i>"as difficult to find as perfect 
competition."</i>). In other words, capitalist economics does <i>"not know how to 
explain the most important part of a modern industrial economy."</i> [Peter 
Donaldson, <b>Economics of the Real World</b> p. 141, p. 140 and p. 142] 
</p><p>
Over two decades later, the situation had not changed. For example, one 
leading introduction to economics notes <i>"the prevalence of oligopoly"</i>
and admits it <i>"is far more common than either perfect competition
or monopoly."</i> However, <i>"the analysis of oligopoly turns out to present
some puzzles for which they is no easy solution"</i> as <i>"the analysis of
oligopoly is far more difficult and messy than that of perfect 
competition."</i> Why? <i>"When we try to analyse oligopoly, the economists 
usual way of thinking -- asking how self-interested individuals would 
behave, then analysing their interaction -- does not work as well as 
we might hope."</i> Rest assured, though, there is not need to reconsider 
the <i>"usual way"</i> of economic analysis to allow it to analyse something
as marginal as the most common market form for, by luck, <i>"the industry 
behaves 'almost' as if it were perfectly competitive."</i> [Paul Krugman 
and Robin Wells, <b>Economics</b>, p. 383, p. 365 and p. 383] Which is 
handy, to say the least.
</p><p>
Given that oligopoly has marked capitalist economics since, at least, 
the 1880s it shows how little concerned with reality mainstream economics 
is. In other words, neoclassicalism was redundant when it was first 
formulated (if four or five large firms are responsible for most of the 
output of an industry, avoidance of price competition becomes almost 
automatic and the notion that all firms are price takers is an obvious 
falsehood). That mainstream economists were not interested in including 
such facts into their models shows the ideological nature of the "science"
(see <a href="secC1.html">section C.1</a> for more discussion of the non-scientific nature of
mainstream economics). 
</p><p>
This does not mean that reality has been totally forgotten. Some work 
was conducted on "imperfect competition" in the 1930s independently by 
two economists (Edward Chamberlin and Joan Robinson) but these were exceptions 
to the rule and even these models were very much in the traditional analytical
framework, i.e. were still rooted in the assumptions and static world of 
neo-classical economics. These models assume that there are many producers 
and many consumers in a given market and that there are no barriers to entry 
and exit, that is, the characteristics of a monopolistically competitive market 
are almost exactly the same as in perfect competition, with the exception of 
heterogeneous products. This meant that monopolistic competition involves a 
great deal of non-price competition. This caused Robinson to later distance 
herself from her own work and look for more accurate (non-neoclassical) ways
to analyse an economy.
</p><p>
As noted, neo-classical economics <b>does</b> have a theory on "monopoly," a 
situation (like perfect competition) which rarely exists. Ignoring that 
minor point, it is as deeply flawed as the rest of that ideology. It 
argues that "monopoly" is bad because it produces a lower output for 
a higher price. Unlike perfect competition, a monopolist can set a 
price above marginal cost and so exploit consumers by over pricing. In 
contrast, perfectly competitive markets force their members to set price 
to be equal to marginal cost. As it is rooted in the assumptions we exposed 
as nonsense as <a href="secC1.html">section C.1</a>, this neo-classical theory on free competition 
and monopoly is similarly invalid. As Steve Keen notes, there is <i>"no substance"</i> 
to the neo-classical <i>"critique of monopolies"</i> as it <i>"erroneously assumes 
that the perfectly competitive firm faces a horizontal demand curve,"</i> which 
is impossible given a downward sloping market demand curve. This means 
that <i>"the individual firm and the market level aspects of perfect 
competition are inconsistent"</i> and the apparent benefits of competition 
in the model are derived from <i>"a mathematical error of confusing a very 
small quantity with zero."</i> While <i>"there are plenty of good reasons
to be wary of monopolies . . . economic theory does not provide any of
them."</i> [<b>Debunking Economics</b>, p. 108, p. 101, p. 99, p. 98 and p. 107]
</p><p>
This is not to say that economists have ignored oligopoly. Some have
busied themselves providing rationales by which to defend it, rooted 
in the assumption that <i>"the market can do it all, and that regulation 
and antitrust actions are misconceived. First, theorists showed that 
efficiency gains from mergers might reduce prices even more than 
monopoly power would cause them to rise. Economists also stressed 
'entry,' claiming that if mergers did not improve efficiency any price 
increases would be wiped out eventually by new companies entering the 
industry. Entry is also the heart of the theory of 'contestable markets,' 
developed by economic consultants to AT&T, who argued that the ease of 
entry in cases where resources (trucks, aircraft) can be shifted quickly 
at low cost, makes for effective competition."</i> By pure co-incidence, 
AT&T had hired economic consultants as part of their hundreds of millions 
of dollars antitrust defences, in fact some 30 economists from five 
leading economics departments during the 1970s and early 1980s. [Edward 
S. Herman, <i>"The Threat From Mergers: Can Antitrust Make a Difference?"</i>, 
<b>Dollars and Sense</b>, no. 217, May/June 1998]
</p><p>
Needless to say, these new "theories" are rooted in the same assumptions
of neo-classical economists and, as such, are based on notions we have already 
debunked. As Herman notes, they <i>"suffer from over-simplification, a 
strong infusion of ideology, and lack of empirical support."</i> He notes 
that mergers <i>"often are motivated by factors other than enhancing efficiency 
-- such as the desire for monopoly power, empire building, cutting taxes, 
improving stock values, and even as a cover for poor management (such as 
when the badly-run U.S. Steel bought control of Marathon Oil)."</i>  The 
conclusion of these models is usually, by way of co-incidence, that 
an oligopolistic market acts "as if" it were a perfectly competitive one 
and so we need not be concerned by rising market dominance by a few firms. 
Much work by the ideological supporters of "free market" capitalism is 
based on this premise, namely that reality works "as if" it reflected 
the model (rather than vice versa, in a real science) and, consequently, 
market power is nothing to be concerned about (that many of these "think 
tanks" and university places happen to be funded by the super-profits 
generated by big business is, of course, purely a co-incidence as these 
"scientists" act "as if" they were neutrally funded). In Herman's words:
<i>"Despite their inadequacies, the new apologetic theories have profoundly 
affected policy, because they provide an intellectual rationale for the 
agenda of the powerful."</i> [<b>Op. Cit.</b>]
</p><p>
It may be argued (and it has) that the lack of interest in analysing
a real economy by economists is because oligopolistic competition is 
hard to model mathematically. Perhaps, but this simply shows the 
limitations of neo-classical economics and if the tool used for a 
task are unsuitable, surely you should change the tool rather than 
(effectively) ignore the work that needs to be done. Sadly, most 
economists have favoured producing mathematical models which can say 
a lot about theory but very little about reality. That economics can 
become much broader and more relevant is always a possibility, but to 
do so would mean to take into account an unpleasant reality marked by 
market power, class, hierarchy and inequality rather than logical 
deductions derived from Robinson Crusoe. While the latter can produce 
mathematical models to reach the conclusions that the market is already 
doing a good job (or, at best, there are some imperfections which can 
be fixed by minor state interventions), the former cannot. Which, of
course, is makes it hardly a surprise that neo-classical economists
favour it so (particularly given the origins, history and role of 
that particular branch of economics).
</p><p>
This means that economics is based on a model which assumes that firms
have no impact on the markets they operate it. This assumption is violated
in most real markets and so the neo-classical conclusions regarding the
outcomes of competition cannot be supported. That the assumptions of 
economic ideology so contradicts reality also has important considerations 
on the "voluntary" nature of wage labour. If the competitive model 
assumed by neo-classical economics held we would see a wide range of
ownership types (including co-operatives, extensive self-employment and
workers hiring capital) as there would be no "barriers of entry" associated
with firm control. This is not the case -- workers hiring capital is
non-existent and self-employment and co-operatives are marginal. The 
dominant control form is capital hiring labour (wage slavery).
</p><p>
With a model based upon "perfect competition," supporters of capitalism
could build a case that wage labour is a voluntary choice -- after all,
workers (in such a market) could hire capital or form co-operatives
relatively easily. But the <b>reality</b> of the "free" market is such that
this model does not exist -- and as an assumption, it is seriously
misleading. If we take into account the actuality of the capitalist
economy, we soon have to realise that oligopoly is the dominant form
of market and that the capitalist economy, by its very nature, restricts
the options available to workers -- which makes the notion that wage
labour is a "voluntary" choice untenable.
</p><p>
If the economy is so structured as to make entry into markets difficult
and survival dependent on accumulating capital, then these barriers are
just as effective as government decrees. If small businesses are
squeezed by oligopolies then chances of failure are increased (and so
off-putting to workers with few resources) and if income inequality is
large, then workers will find it very hard to find the collateral
required to borrow capital and start their own co-operatives. Thus,
looking at the <b>reality</b> of capitalism (as opposed to the textbooks) it
is clear that the existence of oligopoly helps to maintain wage labour
by restricting the options available on the "free market" for working
people. Chomsky states the obvious:
</p><p><blockquote><i>
"If you had equality of power, you could talk about freedom, but when
all the power is concentrated in one place, then freedom's a joke. 
People talk about a 'free market.' Sure. You and I are perfectly free 
to set up an automobile company and compete with General Motors. 
Nobody's stopping us. That freedom is meaningless . . . It's just that
power happens to be organised so that only certain options are available.
Within that limited range of options, those who have the power say,
'Let's have freedom.' That's a very skewed form of freedom. The 
principle is right. How freedom works depends on what the social 
structures are. If the freedoms are such that the only choices you
have objectively are to conform to one or another system of power,
there's no freedom."</i> [<b>Language and Politics</b>, pp. 641-2]
</blockquote></p><p>
As we noted in <a href="secC4.html">section C.4</a>, those with little capital are reduced to
markets with low set-up costs and low concentration. Thus, claim the
supporters of capitalism, workers still have a choice. However, this
choice is (as we have indicated) somewhat limited by the existence of
oligopolistic markets -- so limited, in fact, that less than 10% of
the working population are self-employed workers. Moreover, it is
claimed, technological forces may work to increase the number of
markets that require low set-up costs (the computing market is often
pointed to as an example). However, similar predictions were made over
100 years ago when the electric motor began to replace the steam
engine in factories. <i>"The new technologies [of the 1870s] may have 
been compatible with small production units and decentralised 
operations. . . That. . . expectation was not fulfilled."</i> [Richard 
B. Du Boff, <b>Op. Cit.</b>, p. 65] From the history of capitalism, we 
imagine that markets associated with new technologies will go the
same way (and the evidence seems to support this).
</p><p>
The reality of capitalist development is that even <b>if</b> workers invested
in new markets, one that require low set-up costs, the dynamic of the
system is such that over time these markets will also become dominated by
a few big firms. Moreover, to survive in an oligopolised economy small
cooperatives will be under pressure to hire wage labour and otherwise act
as capitalist concerns. Therefore, even if we ignore
the massive state intervention which created capitalism in the first place
(see <a href="secF8.html">section F.8</a>), the dynamics of 
the system are such that relations of
domination and oppression will always be associated with it -- they cannot
be "competed" away as the actions of competition creates and re-enforces
them (also see sections <a href="secJ5.html#secj511">J.5.11</a> and 
<a href="secJ5.html#secj512">J.5.12</a> on the barriers capitalism places
on co-operatives and self-management even though they are more efficient).
</p><p>
So the effects of the concentration of capital on the options open to us
are great and very important. The existence of Big Business has a direct
impact on the "voluntary" nature of wage labour as it produces very
effective "barriers of entry" for alternative modes of production. The
resultant pressures big business place on small firms also reduces the
viability of co-operatives and self-employment to survive <b>as</b> co-operatives
and non-employers of wage labour, effectively marginalising them as true
alternatives. Moreover, even in new markets the dynamics of capitalism are
such that <b>new</b> barriers are created all the time, again reducing our
options.
</p><p>
Overall, the <b>reality</b> of capitalism is such that the equality of opportunity
implied in models of "perfect competition" is lacking. And without such
equality, wage labour cannot be said to be a "voluntary" choice between
available options -- the options available have been skewed so far in one
direction that the other alternatives have been marginalised.
</p>

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