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

As noted in 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 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 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 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 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 six’s 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 industry’s 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 industry’s 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 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 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 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 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 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 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 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 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 J.5.11 and 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.