           C.4 Why does the market become dominated by Big Business?

   As noted in [1]section C.1.4, 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:

     "The facts show . . . that capitalist economies tend over time and
     with some interruptions to become more and more heavily
     concentrated." [M.A. Utton, The Political Economy of Big Business,
     p. 186]

   As Bakunin argued, capitalist production "must ceaselessly expand at
   the expense of the smaller speculative and productive enterprises
   devouring them." Thus "[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." [The Political Philosophy of Bakunin, 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.

   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 [2]next section 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, "competition kills competition." [System of Economical
   Contradictions, p. 242] In other words, capitalist markets evolve
   toward oligopolistic concentration.

   This "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." The dynamic of capitalism is such that the
   "competitive advantage [associated with the size and market power of
   Big Business], once created, prove[s] to be enduring." [Paul Ormerod,
   The Death of Economics, p. 55]

   For people with little or no capital, entering competition is limited
   to new markets with low start-up costs ("In general, the industries
   which are generally associated with small scale production. . . have
   low levels of concentration" [Malcolm C. Sawyer, The Economics of
   Industries and Firms, 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 ("Each time capital completes its cycle, the individual grows
   smaller in proportion to it." [Josephine Guerts, Anarchy: A Journal of
   Desire Armed no. 41, p. 48]).

   For example, between 1869 and 1955 "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." The annual rate of gross capital formation rose
   "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" (in constant,
   1929, dollars). [Simon Kuznets, Capital in the American Economy, 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. between individual workplaces).

   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 [3]section C.2, 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 [4]last section). 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).

   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 -- "advertising raises the
   capital requirements for entry into the industry" [Sawyer, Op. Cit., p.
   108]). J. S. Bain (in Barriers in New Competition) 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 "absolute cost advantage."

   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 "predatory pricing" -- 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.

   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).

   These barriers work on two levels -- absolute (entry) barriers and
   relative (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):

     "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 within 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." [William Lazonick, Business
     Organisation and the Myth of the Market Economy, pp. 86-87]

   Moreover, within 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 between workplaces, the undercutting of prices to
   "uneconomical" levels and so on (and, of course, they can buy 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).

   Little wonder Proudhon argued that "[i]n competition. . . victory is
   assured to the heaviest battalions." [Op. Cit., p. 260]

   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 not 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).

   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 [5]section C.5 for details).

   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
   "[t]ransnationals arise because they are a means of consolidating or
   increasing profits in an oligopoly world." [Keith Cowling and Roger
   Sugden, Transnational Monopoly Capitalism, 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).

   Thus the very dynamic of capitalism, the requirements for survival on
   the market, results in the market becoming dominated by Big Business
   ("the more competition develops, the more it tends to reduce the number
   of competitors." [P-J Proudhon, Op. Cit., 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.

C.4.1 How extensive is Big Business?

   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 Fortune 500 largest industrial companies. [Richard
   B. Du Boff, Accumulation and Power, 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%, "with the leading ten taking
   almost half the profits of the top two hundred." This underestimates
   economic concentration as it "does not take account of privately owned
   giants." [Chomsky, World Orders, Old and New, p. 181]

   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.),
   Economy and Democracy, 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.

   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). ["Unexpected Result of
   Airline Decontrol is Return to Monopolies," Wall Street Journal,
   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, "Oligopoly!" Multinational Monitor,
   November 1998, p. 9]

   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:

     "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.

     "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."
     [Richard B. Du Boff and Edward S. Herman, "Mergers, Concentration,
     and the Erosion of Democracy", Monthly Review, May 2001]

   So, looking at the Fortune 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).

   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!

   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.

   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.

C.4.2 What are 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 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.

   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 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.

   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 centralisation of decision-making in the economy and the
   economic power of large firms." [Malcolm C. Sawyer, Op. Cit., 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).

   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 [6]section D.2). 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
   [7]section D.3).

   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 labour
   income over-investment is an increasing problem and aggregate demand
   cannot keep up to counteract falling profit shares (see [8]section C.7
   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.

   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 organisation 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 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.

   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.

   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 [9]section D 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.

   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.

C.4.3 What does the existence of Big Business mean for economic theory and wage
labour?

   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 "when its actual status of a handy
   model is forgotten becomes a dangerous myth." [quoted by Malcolm C.
   Sawyer, The Economics of Michal Kalecki, p. 8] Unfortunately mainstream
   capitalist economics is built on this myth. Ironically, it was against
   a "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." Thus, "[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." [Paul Ormerod, Op. Cit., pp. 55-56]

   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 "traditional
   economy theory . . . offers very little indeed by way of explanation of
   oligopolistic behaviour" in spite (or, perhaps, because) it was "the
   most important market situation today" (as "instances of monopoly" are
   "as difficult to find as perfect competition."). In other words,
   capitalist economics does "not know how to explain the most important
   part of a modern industrial economy." [Peter Donaldson, Economics of
   the Real World p. 141, p. 140 and p. 142]

   Over two decades later, the situation had not changed. For example, one
   leading introduction to economics notes "the prevalence of oligopoly"
   and admits it "is far more common than either perfect competition or
   monopoly." However, "the analysis of oligopoly turns out to present
   some puzzles for which they is no easy solution" as "the analysis of
   oligopoly is far more difficult and messy than that of perfect
   competition." Why? "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." Rest assured, though, there is not need to reconsider the
   "usual way" of economic analysis to allow it to analyse something as
   marginal as the most common market form for, by luck, "the industry
   behaves 'almost' as if it were perfectly competitive." [Paul Krugman
   and Robin Wells, Economics, p. 383, p. 365 and p. 383] Which is handy,
   to say the least.

   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 [10]section C.1 for more discussion of the
   non-scientific nature of mainstream economics).

   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.

   As noted, neo-classical economics does 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 [11]section C.1, this neo-classical theory on
   free competition and monopoly is similarly invalid. As Steve Keen
   notes, there is "no substance" to the neo-classical "critique of
   monopolies" as it "erroneously assumes that the perfectly competitive
   firm faces a horizontal demand curve," which is impossible given a
   downward sloping market demand curve. This means that "the individual
   firm and the market level aspects of perfect competition are
   inconsistent" and the apparent benefits of competition in the model are
   derived from "a mathematical error of confusing a very small quantity
   with zero." While "there are plenty of good reasons to be wary of
   monopolies . . . economic theory does not provide any of them."
   [Debunking Economics, p. 108, p. 101, p. 99, p. 98 and p. 107]

   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 "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." 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, "The Threat From Mergers: Can Antitrust
   Make a Difference?", Dollars and Sense, no. 217, May/June 1998]

   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 "suffer from
   over-simplification, a strong infusion of ideology, and lack of
   empirical support." He notes that mergers "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)." 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: "Despite their inadequacies, the new apologetic theories have
   profoundly affected policy, because they provide an intellectual
   rationale for the agenda of the powerful." [Op. Cit.]

   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).

   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).

   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 reality 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.

   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 reality 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:

     "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." [Language and
     Politics, pp. 641-2]

   As we noted in [12]section C.4, 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.
   "The new technologies [of the 1870s] may have been compatible with
   small production units and decentralised operations. . . That. . .
   expectation was not fulfilled." [Richard B. Du Boff, Op. Cit., 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).

   The reality of capitalist development is that even if 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 [13]section F.8), 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 [14]J.5.11 and
   [15]J.5.12 on the barriers capitalism places on co-operatives and
   self-management even though they are more efficient).

   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 as
   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 new barriers are created all
   the time, again reducing our options.

   Overall, the reality 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.

References

   1. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC1.html#secc14
   2. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC4.html#secc41
   3. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html
   4. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC3.html
   5. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC5.html
   6. file://localhost/home/mauro/baku/debianize/maint/anarchy/secD2.html
   7. file://localhost/home/mauro/baku/debianize/maint/anarchy/secD3.html
   8. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC7.html
   9. file://localhost/home/mauro/baku/debianize/maint/anarchy/secDcon.html
  10. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC1.html
  11. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC1.html
  12. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC4.html
  13. file://localhost/home/mauro/baku/debianize/maint/anarchy/secF8.html
  14. file://localhost/home/mauro/baku/debianize/maint/anarchy/secJ5.html#secj511
  15. file://localhost/home/mauro/baku/debianize/maint/anarchy/secJ5.html#secj512
