Corporatism is not Free Market Capitalism!

Last Edited - 24 Jan 19

From the outset, opponents of the Free Market have offered a multitude of critiques of the 'evils' of Capitalism.  'Capitalism makes the rich richer and the poor poorer.'  'Capitalism benefits the few at the expense of the many.'  'Capitalism is built on the exploitation of the working class.' 

Etc, Etc . . . . 

Allow me to quote a couple authors:

'In every different branch, the oppression of the poor must establish the monopoly of the rich, who, by engrossing the whole trade to themselves, will be able to make very large profits.'

'People in the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.'

'Where competitors are few, they always end by agreeing not to compete.'

And so the critique of 'capitalism' goes . . . or does it? 

 

You see, these are critiques of corporatism or 'crony capitalism' and the first two quotes are from Adam Smith's 'The Wealth of Nations', written in 1776.  This was 42 years before Karl Marx was born, and by the guy who 'invented' free market capitalism and quoted from his original 'textbook' of free market capitalism.  A Classical Liberal who despised the mercantilism and monopolies encouraged by the British government.

The second quote is from John Stuart Mill, perhaps Classical Liberalism's greatest philosopher, and neatly summarises the problem.  G.K. Chesterton shared the same sentiment when he stated, 'Too much capitalism does not mean too many capitalists, but to few capitalists.'

The point that Smith, Mill and Chesterton all highlight is that 'Free Market Capitalism' requires a 'Free Market'.  When conditions arise where there is insufficient competition in a market, both consumers and workers suffer.  When monopolies, duopolies or oligopolies dominate a sector of the economy, 'market power' ends up in the hands of corporations and their owners.  Prices rise because the demand for profit is unchallenged by consumer choice, the consumer has no choice.  Wages fall because the demand for profit is unchallenged by labour choice, workers have no choice.  With no requirement to serve the fickle choices of a consumer who may turn to a competitor's products, innovation stagnates.

Warren Buffet is a gifted businessman, but he's not a free market capitalist, he's a committed monopolist.  His business model, like much of the business world, is centred about creating and maintaining monopolies which allow him to raise prices and shift wealth from the consumer to the producer, him.  That he's been able to work this way is not his fault, he's simply being a pragmatic businessman, the failure is in the failure of government regulators to enforce anti-trust legislation that prevents monopolies and cartels.

When a sector of the economy is characterised by multiple producers, consumer choice forces them to compete on price, quality and innovative features.  In addition, workers hold market power and employers are forced to offer competitive wages or face a labour shortage as workers abandon them for more lucrative jobs elsewhere in the sector.  Head hunting of talent becomes the norm and employers compete to attract workers with better pay and conditions.

Unfortunately, in a completely unregulated free market, a 'winner takes all' scenario plays out.  The most competitive companies beat out their competition, either buying them out or watching them fail and go bankrupt.  Over time, industries become more and more concentrated with fewer producers and competition disappears.  With less competition, companies are free to raise prices, increase profits and lobby governments for regulatory protections that cement their market power, rendering new entries into the sector more difficult or impossible.

Of course, Socialists of most stripes raise up the 'straw man' example of corporatism to decry free market capitalism.  'See' they shout, 'the evil capitalists are screwing everyone else.'  They never face the truth of the matter, that the problem they are screaming about is the problem free market capitalism was devised to solve, successfully, and which they consistently fail to solve whenever they are given the opportunity.

The socialists, both Marxist and Fascists, adopt a similar solution to this problem, they replace private sector monopolies with public sector monopolies, private sector cartels with public sector cartels.  China has the biggest concentration of monopolies cartels on earth.  The propaganda message is that the state will act as the benevolent arbiter of 'fairness', ensuring workers get fair pay and consumers get fair pricing.  Unfortunately, governments always prove even less efficient than private monopolies and the eventual result is the 'they pretend to pay us, we pretend to work' and perpetual ques outside empty stores that typify life in socialist nations.

Socialist economics are simply corporatism by the state.  The relative wealth gap in socialist states is as bad, or worse, than in 'capitalist' states, with the only difference being that the absolute wealth of the population is much lower.

Free Market Capitalism is the single greatest economic force in human history and the single greatest force for raising humanity out of poverty.  Where a truly free market is maintained, wages are maximised, prices minimised, innovation booms and overall economic growth is maximised.

In order to achieve this end, one must understand the fallacy in the expression, 'too big to fail'.  Too big is failure.  The reality is that 'too big to fail' actually means 'too big not to fail'.  A corporation whose market share is so large that their failure would have a serious negative effect on the economy, is too big and must be reigned in.  What is good for the individual corporation is dangerous for the overall economy, consumers and labour.  It signals a loss of a 'free market'.

In order to summarise the importance of competition to human freedom and equality of opportunity, it is useful to consider the effects of various economic systems in a table:

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To understand this table, it is useful to explain the 'Effects' column by defining the terms:

Competition - The level of competition experienced by an industry.  An example of 'perfect' competition would be 100 companies manufacturing bicycles, all of which have 1% market share.  In such an environment, a seller has no control over price as market competition forces the seller to take the 'market price' as given.  No perfectly competitive environment exists, however below a certain level of industrial competition, an industry can be considered 'concentrated' and the effects of competition begin to diminish as monopolies, duopolies or oligopolies form.

'Fair Market Value' ('market price') - the true market value of products, labour, etc, in a 'perfect' competitive environment.

Market Power of Labour (Wages) - the relative power of workers to negotiate a fair wage with their employers.  Where significant competition is present in an industry, workers have significant mobility between companies in the same or similar job.  This gives them high market power as employers must compete for labour at a 'fair market value'.  When industrial concentration results in a loss in competition, workers have fewer options and employers can get away with paying wages below a 'fair market value'.  The voluntary exchange of labour has become corrupted.

Market Power of Corporation (Pricing) - the relative power of companies to set the price of their products.  In a highly competitive environment, consumers have the power to boycott products priced above 'fair market value'.  This gives consumers high market power and sellers become 'price takers'.  In a highly concentrated environment, consumers have little choice so have no boycott option, giving market power to corporations to price products above a 'fair market value'.  The voluntary exchange of goods has become corrupted.

Market Power of Corporation (Buying) - the relative power of companies to set the price of their suppliers' products.  Where an industry is competitive, companies must compete for suppliers' products, paying suppliers a 'fair market value' for their goods.  Where an industry is highly concentrated, suppliers have little choice in who they may sell to, allowing buying companies to force them to sell at prices below 'fair market value'.

Ease of Startup - the relative ease with which a new company may enter a particular industry.  In a highly competitive industry, excessive regulation that creates barriers to entry are damaging to existing companies who have low market power, so companies tend to oppose restrictive regulation to maintain competitiveness.  Where an industry becomes highly concentrated, existing companies enjoy high market power, making regulations that create barriers to entry an advantage.

Innovation - the tendency of an industry to innovate and create more advance, efficient or desirable products.  In a highly competitive environment, investment in research and development aids a company in attaining competitive advantage as high consumer market power rewards better quality, price, etc.  In a highly concentrated environment, investment in research and development becomes an unnecessary expense as consumer boycott is nullified.

Economic Mobility - the ease with which individual citizens may climb the socio-economic ladder.  Each company within an economic system represents a 'ladder of opportunity' for an individual to climb.  Within a highly competitive environment, the number of these 'ladders of opportunity' is maximised, creating a diverse employment environment that gives the greatest number of people opportunity to seek employment environments in which their personality, individual skills, knowledge, work ethic and creative talents may be used to maximum benefit for both employer and employee.  This maximises the opportunity for socio-economic mobility.  In highly concentrated industries, diversity of employment environments is seriously reduced, reducing socio-economic mobility.

Wealth Generation - the measure of an entire economy's ability to generate greater wealth.  In a highly competitive economic environment, economic performance is maximised, resulting in the highest possible wealth generation.  The combination of relatively high wages and low prices creates greater economic activity and stimulates economic growth.  In a highly concentrated economic environment, economic growth stagnates as lower buying power and higher prices reduces economic activity.

Wealth Inequality - the relative wealth inequality between the poorest members of society and the wealthiest.  In a highly competitive economic environment, wages are maximised and prices are minimised, transferring market power to consumers and away from industry.  Industry owners and investors cannot set prices and wealth transfer from the poor to the rich is limited and dependant on industry efficiency and performance.  In a highly concentrated economic environment, market power shifts to industry, increasing wealth transfer from consumers to industry, regardless of industrial efficiency and/or performance.

Civil/Political Liberty - the measure of an individual citizen's ability to exercise their civil liberties without interference.  In a highly competitive economic environment, workers have significant market power, hurting employers who exert pressure on individual workers for their political views or actions.  This incentivises employers to resist state pressures to censor individual opinion or political activity.  In a highly concentrated economic environment, employees have little market power, removing employer's motivation to resist political censorship or coercion.  Absent this incentive, employers become susceptible to political intimidation and tend toward enforcing partisan political policies and opinions.

In summary, the tendency toward industrial concentration is damaging to workers (labour) and political freedom.  It increases wealth inequality and causes economic stagnation.  This is not free market capitalism (liberal economics) but corporatism or crony capitalism.  Given time and malicious political intent, corporatism opens up opportunity for authoritarian political ideologies to seize control of the political and economic environment, suspending liberal democracy and the protection of fundamental human rights, civil liberties and economic liberty.

Reading List:

'The Theory of Moral Sentiments' - Adam Smith (1759)

'The Wealth of Nations' - Adam Smith (1776)

'Principles of Political Economy' - John Stuart Mill (1859)

'Economics in one Lesson' - Henry Hazlitt (1946/1988) 

'The Myth of Capitalism' - Jonathon Tepper (2018)

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