Myth #3: Corporate power is benign
Finance is a field of constant innovation, the poster child for the abundance of the free market. The financial system serves many essential roles in our economy and society – allowing us to save for big expenditures and old age, to borrow, to invest, to build up our economies and to bankroll expansion. But despite leaps in technology and computing, the financial system has not increased its productivity in the last 100 years – it is barely more efficient now than it was a century ago.1 And the opportunism and exploitation baked into this system also expose another side to free markets: that those that most need protecting are most vulnerable to the injustices and vicissitudes of the market. Payday lending, subprime mortgages, Credit Default Swaps – each of these is innovative in its own way, but on closer inspection each one relies on persistent imbalance and inequality. They allow the rich to gamble and trade on the vulnerability and desperation of the poor.
It is often claimed that markets are neutral, and the only distortion of power we need be concerned with is market power – the ability of some firms to undermine competition and increase prices above competitive levels. Indeed, competition is thought to dissipate power (Myth #1), as any undeserved power will be competed away by rivals entering the market, and even big companies either face such potential competition or act as if they do. But the market is actually suffused with the power of shareholder value companies that operate not based on efficiency (Myth #2) but in the pursuit of power. That power does not disperse and does not incidentally serve the public interest – it supports an infrastructure that benefits the wealthy and the already powerful.
At least since the Industrial Revolution, we have been debating how to split the proceeds of the economic pie between those who fund it, those who bake it and those who eat it. The solution we have landed on in the Anglo-American capitalist system is brilliantly simple: we let the markets decide. We carve off narrow spaces for public provision – some but not all education, some but not all health care, some but not all national defence – but otherwise it is free markets all the way. Why? Because economic theory ‒ at least the narrow version co-opted by economic policymakers ‒ tells us that free market competition will generate the maximum ‘efficiency’ and everyone, including investors, workers and consumers, will be better off. If there are distributional issues, there is a neat solution: we can grow the size of the pie.fn1
The caveats that the economist would add – that this only works if property rights are fully allocated, if bargaining power is equal, if information is transparent – rarely, if ever, apply in practice. There is also much that this model ignores ‒ idiosyncrasies of human institutions and human behaviour ‒ and still more that the market cannot value and therefore treats as worthless. Nor is it obvious that we actually can grow our way out of this mess, since we appear to have grown our way directly into it.
This focus on the markets also obscures the frequent dissonance between our actions as consumers and our political beliefs, and the reliable inconsistency of our economic decision making, which has been well evidenced by behavioural economists such as Daniel Kahneman. Mark Sagoff writes that:
[L]ike members of the public generally, I, too, have divided preferences or conflicting ‘preference maps’. Last year, I bribed a judge to fix a couple of traffic tickets, and I was glad to do so because I saved my license. Yet, at election time, I helped to vote the corrupt judge out of office. I speed on the highway; yet I want the police to enforce laws against speeding. I used to buy mixers in returnable bottles – but who can be bothered to return them? I buy only disposables now, but to soothe my conscience, I urge my state senator to outlaw one-way containers. I love my car; I hate the bus. Yet I vote for candidates who promise to tax gasoline to pay for public transportation. […] I have an ‘Ecology Now’ sticker on a car that drips oil everywhere it’s parked.2
By placing our faith in the markets we have gone from active participants, custodians and agents of the economic process to passive recipients of the benefits, and harms, of the industrial economy, living on a planet polluted, damaged and stripped bare of its natural bounty. By overlooking power we leave ourselves without an explanation for our planetary stalemate. We regulate companies but only half-heartedly, remaining puzzled when it seems that the market delivers not to everyone with equal generosity but almost exclusively to the already successful and the already wealthy, at the expense of our societies and ecosystems. How did we get here? Why are we so reluctant to purposefully direct the economy towards the public good? How did we become convinced that all we have to do is nothing?
The free market system is built on a modus operandi of passivity: no one has power over the system, the system itself delivers the allocation of resources truly most desired by society. This is a core tenet of free market thinking – the public good will magically materialize if we allow people and companies to selfishly pursue their own interests.
The most famous articulation of this belief can be found in Adam Smith’s ‘invisible hand’: in spite of their natural selfishness – in fact, precisely because of it – the rich will come to share their bounty with the poor by employing them and providing them with goods and services that they can buy with their wages. The rich ‘are led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made had the earth been divided into equal portions among all its inhabitants’.3 Entirely incidentally, accidentally, the richest among us will take care of us all ‒ and fairly, too.
‘It is not from the benevolence of the butcher, the brewer, or the baker,’ Smith tells us, ‘that we expect our dinner, but from their regard to their own interest.’4 The reasoning goes thus: without doing anything (in fact, by actively suppressing the urge to intervene), market forces will themselves deliver the best possible outcome. If chemical companies poison surrounding water supplies, or if the vast green stretches of central Europe are turned into biodiversity wastelands, this must somehow be for the best. Because if it was not, the market would self-correct, by itself. It is Orwellian double-think. Despite every temptation, we must not intervene, lest we miss out on the promised largesse of the market.
Smith’s work was rich with insights into how free markets work, and their limitations, but it is the simplest ideas that have spread the farthest. The invisible hand logic is embedded within theories such as trickledown economics – the rising tide that floats all boats – and marginal productivity theory, which counsels that in free markets every ‘factor of production’, including human beings, will receive its fair reward in line with its economic contribution. Rich people, and profitable companies, are merely passive recipients of their due reward, and we all stand to benefit, indirectly, from their success and selfishness.
In fact, between them, these three notions – the invisible hand, marginal productivity and trickledown – form an unbreakable Gordian knot of mythology that fastens the restraints on public policy and cordons off the free markets from government intervention. These ideas are ostensibly based on the concepts of deservedness, fairness and public benefit, but they are really anchored in success to the successful and freedom to the same. They sit behind the notion that the private sector is efficient; the public sector is wasteful. Regulation distorts the market. People are better at spending their own money than the government. Income taxes discourage effort and cause our brightest minds to flee. We need to pay company bosses high wages and big bonuses if we want to attract the best talent. In a competitive market, only the best companies survive. Dominant companies must be more innovative or they would not be on top. These are all different ways of saying that we can trust competition, free markets can be depended upon implicitly, efficiency will prevail, that more money is always better, and wealth has no opportunity to consolidate. Society will be better off, and any social costs of free markets are worth it.
If free markets are left to run riot, it is assumed that whatever allocation the market delivers, however unequal, however imbalanced, however incomplete and inefficient it appears to be, it must be the best that can be achieved, for it comes with the market’s blessing.
But the world we actually live in is replete with market failures. Whilst consumers get intangible ‘utility’ – supposedly swimming around in a well-provisioned world of cheap stuff ‒ companies and those running and investing in them get cold, hard cash and, if they are able to take advantage of market failure loopholes, far more than their fair share, at our collective expense. With money comes power, the power to do more harm, to earn more money and entrench the status quo. This is efficiency, this is opportunity, this is freedom, this is justice. This is competition.
It is not illegal just to have a monopoly or market power. The law kicks in only if there is some kind of ‘bad’ act to exclude rivals and tamper with the competitive process, to raise artificial barriers to entry or block legitimate competition. The suspect act could be a merger, where it would result in unacceptable market power, or a cartel – which is when multiple firms team up to coordinate their prices or output in order to short-circuit the competition that otherwise exists between them (like Archer Daniels Midland did with lysine in the 1990s) – or it could be what is called ‘monopolization’ in the US, in breach of Section 2 of the Sherman Act, or ‘abuse of dominant position’ in the EU, which triggers Article 102 of the EC Treaty. In general, it is thought that a ‘pristine monopolist’, one that has reached its position of market power without evidence of exclusionary or cartel-like behaviour, should not be punished for the high prices the market will bear.
The argument is often taken even further – to maintain not just that successful monopolists should not be punished but that their presence in the market is actively beneficial because big firms bring with them scale efficiencies and because monopolists have the excess profits to invest in research and development.
Joseph Schumpeter is the economist most closely associated with the notion that monopolistic firms are good for the economy in terms of innovation. At first wary that the bureaucracy of big companies would stifle innovation, he later came to embrace large-scale enterprise as the most powerful engine of economic progress.5 Larger firms have greater incentives and ability to invest in research and development, he said, and temporary market power is essential as a reward for innovation. Not only was perfect competition, in a market comprising many small buyers and sellers, impossible to achieve in real life, it was also inferior. Monopoly would actually lead to higher output and lower prices by virtue of innovation. In fact, according to Schumpeter, the lure of monopoly profits was needed to induce businesses to invest and innovate. The ‘gales of creative destruction’ will ensure continued economic dynamism as each incumbent technology is replaced by the next new disruptor. If the monopoly survives the storm, then it must deserve its position.
What is perhaps most remarkable about this view, with its implicit trust in monopolistic business, is that this theory, this pure assumption, has been firmly settled in antitrust law. In 2004, the US Supreme Court confirmed that ‘The mere possession of monopoly power, and the concomitant opportunity to charge monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices – at least for a short period – is what attracts business acumen in the first place.’6 The pristine monopolist is to be applauded, not vilified.
Conjecture as to how the economy may work has become a truth guiding the belief that it must be regulated only lightly. The evidence, however, does not support Schumpeter.7 Rather, it shows that competition can spur innovation more than monopoly, with the bursts of technological progress following the break-up of AT&T in the early 1980s being the most frequently cited example.
And, in fact, the supposed innovativeness of dominant firms is often due not to private genius and investment but to public investment in basic research – it is not the reward of profit that incentivizes innovation but the foresight and vision of government. Mariana Mazzucato has successfully debunked the image of the innovative private sector, showing that such leaps in technology as are embedded in the internet and the iPhone arose off the back of publicly funded research, given for free to the private sector to market to consumers.8
There are some industries, typically those involving significant research and development outlay, where limited monopoly is tolerated precisely in the hope that it will result in innovation: intellectual property rights, in essence, are a publicly granted monopoly over a particular technology for a limited time, to allow the inventor to recoup their costs and to incentivize investment in the first place. But, not content with limited monopoly, pharmaceutical firms, in particular, have found ways to extend their patent protections, or to gain the benefit of monopoly without having to innovate by buying up patents from other companies. The result is the ratcheting up of the prices of essential drugs like insulin, especially in countries with privatized medical systems. Indeed, the drive for shareholder returns actually causes firms to significantly underinvest in R&D, as they prefer instead to return cash to shareholders through dividends and share buybacks.
The Schumpeterian narrative also downplays the role of power and the possibility of the monopolist entrenching their power, buying up or eliminating their rivals, embedding their own technology in the industry, controlling the dissemination of ideas and the direction of research. The innovative monopolist, like those in the finance industry, will innovate in the direction of power and benefit to shareholders, not necessarily in the best interests of consumers or society. The gales of creative destruction may rage against the monopoly but monopolists can control the weather.
Market-dominating status, which is achieved through superior quality, lower costs and greater innovation, can be locked in by companies erecting barriers to entry, to keep new entrants out ‒ effectively shutting the door behind them. The winner takes it all. And although neoliberals have always placed faith in the idea that the market will self-correct, it turns out that if this happens at all, it happens very, very slowly and not necessarily completely.9 Even cartels, thought to be much less stable and harder to maintain than unilateral power grabs by a monopolist, continue to arise across many industries, with an average lifespan of eight years – which is plenty of time in which to inflict consumer and market harm. Microsoft, dominant for decades, was later joined by Apple, Amazon and Alphabet, but is still one of the most valuable companies in the world. Power persists.
The market power that concerns antitrust is conceived very narrowly as the ability to raise prices and restrict output in carefully defined product markets. But true market power is the ability to act independently and without serious repercussions – independence not just from competitors and consumers but from government and society. The extra profits that are extracted from the market via higher prices can themselves form the basis of power, which can be wielded in all sorts of ways to further the company’s interests, and can be distributed within the company, first and foremost to shareholders.
Clearly, there are limits to what even monopolists can do ‒ and no monopoly lasts for ever ‒ but in the meantime, when companies become so enormous, ubiquitous and powerful, as some appear to be today, they can move beyond the realm of public control. They determine the market; they are the market.
It is not just market power that disappeared under the assumptions of the competitive and easily contestable market. Economic and political power, including the power to influence regulation, and the power to inflict social and environmental harm, also disappeared from our models. Zephyr Teachout and Lina Khan are amongst the very few antitrust scholars linking broader corporate power to industrial concentration.10 They liken the charging of higher-than-competitive prices to the company effectively levying a tax on the citizenry. To any one consumer it may be the difference between paying a few extra pennies for a bar of soap or a bag of sugar, but taken together it allows companies and the individuals behind those companies to amass fortunes. Market power allows them to do it and they get more power by doing so, further cementing their power.
This power manifests itself in what we can roughly categorize as ‘economic power’ and ‘political power’. Economic power is power over the conditions of the market; it is broader than antitrust’s narrow ‘market power’. It may be the bargaining power of the big supermarket chain over suppliers and workers, it may be the power to squash smaller rivals and to force others to play nice.11 Political power is the exercise of influence over the political sphere. It is the manipulation of the political process and the shaping of the regulatory system. There are clearly overlaps, but the key point is that neither currently features in how we administer competition or regulate corporate power today, and both are systematically underestimated.
A major industry player is able to dictate the terms of the market. For example, when Walmart decided that deodorant should no longer be sold in cardboard because the packaging added unnecessary extra cost, it had the power to impose this condition on its suppliers and soon packaging-free deodorant became the industry standard. As one commentator puts it: ‘[W]hole forests have not fallen in part because of the decision made in the Wal-Mart home office at the intersection of Walton Boulevard and SW 8th Street in Bentonville, Arkansas, to eliminate the box.’12 But of course Walmart is the tenth most valuable economic entity in the world, behind just nine countries and above many more.13 Walmart, by virtue of its size and dominance, has state-like power in the markets it operates in. Or consider Uber’s commitment to help all its London drivers to transition to electric vehicles by 2025.14 Or DuPont’s strategy of accepting restrictions on the production of chlorofluorocarbons (CFCs) due to scientific concerns over harm to the ozone layer, and thus abandoning a multibillion-dollar business, but only once it had developed commercial alternatives and the profitability of producing CFCs had fallen.15
A private decision by a corporate entity in its own interests can have the equivalent effect to a law passed by the government. In these cases the companies were able to push the boundaries of social benefit without government intervention. But we are reliant on the public good aligning well with corporate self-interest. Walmart could also significantly restrict the sale of guns in America, if it chose to, but that would harm sales. DuPont could have acted sooner on CFCs.
Meanwhile, platform operators – like Amazon, Deliveroo and Uber – run their own internal markets and set their own rules of the game, impacting not only customers but the livelihoods of gig economy workers and individual merchants. Zero hours contracts, the industry wage and workers’ rights, the path of innovation, the exploitation of financial vulnerabilities – powerful companies have the power to choose how to make their money and, in so doing, they establish the standards and practices for whole industries.
We know what happens when organizations become ‘too big to fail’ ‒ lest we forget the global financial crisis. I had a front-row seat working on the string of bank and building society consolidations that were approved as part of stabilizing the British financial sector, and it was clear that some of these companies had taken on a level of national importance quite separate from their everyday commercial activities.
But this principle does not just apply to failing businesses: companies with any kind of systemic importance, integrated into the economy through supply chains and government contracts, can gain disproportionate power and become ‘too big to regulate’. This is what authorities found when they considered banning Uber in London ‒ due to safety violations ‒ and received a petition signed by several hundreds of thousands of users united in objection. And no wonder Uber is so popular with customers – investors have been subsidizing their rides, acting on the promise that Uber would crush the competition, as it has so easily done, whilst making year on year financial losses. The investors have been hoping they will be able to exit before the vulnerabilities of the business model are revealed, and the recent IPO presented just such an opportunity.
Or think of the failed attempts by governments around the world unable to hold Mark Zuckerberg to account for the ways in which Facebook has been used as a tool to subvert democracy – he refuses to even attend most of their hearings. Or when the state loses control of the provision of public services by outsourcing to private contractors, and then finds that the balance of power has shifted to the companies, when one of the contractors goes bankrupt, jeopardizing the completion of public projects and the jobs of thousands of workers – as happened in the case of Carillion, the UK construction services company, in 2018.
Big companies can take on a life of their own and become co-dependent with the state. This was the sentiment expressed by Charles Wilson, then president and CEO of General Motors, in 1952, during his Senate confirmation hearings as Secretary of Defense: ‘What was good for our country was good for General Motors and vice versa. The difference did not exist. Our company is too big. It goes with the welfare of the country.’16 Imagine the interdependence between the US government and one or other of Amazon or Microsoft if plans go ahead to grant a $10 billion Pentagon contract making one company responsible for handling US military data and communications around the world, this alongside plans to appoint Amazon the default platform for procurement by government agencies in the US.17
Even Alan Greenspan has suggested that companies that are too big to fail are too big to exist.18 In the 1960s, Greenspan bemoaned the loss of monopolies: ‘No one will ever know what new products, processes, machines, and cost-saving mergers failed to come into existence, killed by the Sherman Act before they were born.’19 By 2009 he had changed his tune, from a monopolistic pro-lifer to firmly pro-choice, but not until after he oversaw the biggest financial catastrophe in global history as the chairman of the US Federal Reserve. And what has happened after the financial crisis? Just ten years later, the banks have convinced regulators to loosen rules designed to prevent another collapse. Their influence is undiminished.
Part of the ‘too big to regulate’ phenomenon is the space that these companies occupy in public debate. If someone suggests rapid decarbonization, for example, which, one way or another, is a step we cannot avoid on the path to climate stability, someone else will inevitably say, ‘What about the oil companies?’ or, ‘It’s never going to happen because of vested interests.’ And something worse than actual political corruption or the exercise of overt political influence happens ‒ we give up on the idea of taking action, without even trying. Because the oil companies do not even have to lobby, we almost do it for them by assuming that they will push in a certain direction because of their unending need for profit. It is, we shrug, just how the world works.
Market power can be leveraged into political power as companies seek to exert their influence over the political sphere.20 One straightforward way to do this is to lobby. The drive to make regulation in Europe more efficient in the 1990s proceeded under the banner of ‘Better Regulation’ (‘better’ generally meaning ‘less’) and certain corporations, including British American Tobacco, played an instrumental role in lobbying for the streamlining of the regulatory process in Europe.21 Every year, billions are spent in similar attempts to influence regulators and manipulate elections. Big Oil alone spent $1 billion in the three years following the Paris Agreement to undermine climate action.22 Greenpeace has documented how the coal industry managed to essentially become its own regulator by co-opting the regulatory process, resulting in weaker industry standards than would otherwise have been adopted.23
Teachout and Khan give the example of the 2008 Farm Bill in the US to illustrate how this can work in practice. New rules proposed by the Department of Agriculture would have closely policed how meat packers and meat processors wield their market power against farmers, levelling the playing field between the world’s biggest meat companies and independent farmers. So, as Teachout and Khan write, ‘the meat lobby got working’. By late 2010, the National Chicken Council had commissioned a study estimating that the new rules would cost the broiler industry more than $1 billion. The National Meat Association funded research that raised the spectre of 23,000 job cuts. The American Meat Institute released an even more sensational report threatening costs of $14 billion of GDP, $1.36 billion in lost tax revenue, and 104,000 jobs. Tyson, one of the largest meat processors, submitted a 335-page legal brief, which challenged almost every element of the proposed rules, as well as the agency’s authority to impose it. By the time the final rule was issued, over half of the provisions of the law had been diluted or abandoned. In separate ‘poultry hearings’, held around the country, many farmers did not show up to have their views heard as part of the democratic process of consultation for fear of retaliation by the companies to which they were beholden for their livelihoods. Meanwhile, studies show that, as compared to business interests, citizen groups have little or no independent influence on policy, facing insuperable hurdles to collective action.24
The food system, like the financial system, perhaps because it is so important, seems to be particularly susceptible to this manipulation. At the same time, the market structure amplifies corporate influence. Consolidation is taking place across the agri-food industry on a grand scale, with mega-mergers like Bayer’s $66 billion buyout of Monsanto and the $130 billion merger between Dow and DuPont, covering such diverse parts of the market as seeds, agrichemicals, fertilizers, animal genetics, data and farm machinery.25 Medical journal The Lancet identifies shareholder value and the political power of commercial interests as key drivers of what it calls ‘The Global Syndemic’ ‒ the synergy of three connected global epidemics (obesity, undernutrition and climate change).26 A 2019 OECD report on seed market concentration calls for changes to the intellectual property regime, removal of barriers to entry, and funding for public research.27 These are all sensible, relatively simple ideas, so we must ask why they have not already been implemented. One reason might be that any such regulation must face the lobbying power of an industry that in the last couple of decades has concentrated down from hundreds of competitors to just four. These mega-companies have the resources to shape the industry in their own interests, and we must pity the government officials tasked with going up against them.
There are also other less measurable, and less visible, levers of influence than outright lobbying that companies have at their disposal. In 2018, Facebook admitted to hiring a PR firm to smear George Soros, a principal funder of some anti-tech campaigns.28 Google has been accused of funding research favourable to its own preferred policy positions,29 as well as orchestrating and sponsoring conferences at friendly academic institutions to which regulators are invited and introduced to pro-Google policy positions, even whilst there are ongoing investigations into Google’s conduct by those same regulators.30 One group of researchers was ejected from a Washington think tank because the chairman of Google, a major funder of the institution, did not like a press release praising the European Commission’s multibillion-dollar fines against the company.31
The revolving door operates in the obvious ways that it always has,32 with former and future regulators and politicians landing lucrative jobs with the big firms, but there is also an extent to which being a big, successful, prestigious company creates almost unavoidable links with the elite: so when a US Senator suggests that we should rely on pure self-regulation by the tech platforms,33 we need to bear in mind that his daughter is a privacy manager at Facebook.34
Various investigations have revealed that the oil companies knew the extent of the harm being inflicted on our planet by the burning of fossil fuels as early as the 1970s, but they said nothing or downplayed any evidence that did see the light of day, standing by and profiting whilst we unwittingly napalmed our future. The same thing had happened in the tobacco industry since the 1950s, with the major companies denying any link between smoking and lung cancer long after they knew there to be one, continuing to recruit teenagers to enjoy their ‘lifestyle product’, knowing full well that the addictive properties of nicotine would give the companies a customer for life – at least until said customer’s premature death. This was finally revealed by a cache of six million internal documents released as part of private litigation in the late 1990s, which told the story of decades of deception, in the companies’ own words, causing the World Health Organization to investigate how its own thinking and advice had been compromised over the years by tobacco industry influence.35
Companies are often best placed to understand the costs of industry practices and yet they are under no obligation to share that information – and may even claim that they would be breaching duties to investors if they were to do so. We have to imagine that Google and Facebook are either themselves conducting research or are well aware of any early signs indicating the potential harms of new technologies, from AI to advanced robotics to automated vehicles. There is already evidence that the architecture of the internet, optimized for information storage and display, and designed mostly by white men, is rewiring our brains.36 If tech companies choose to sacrifice our privacy in order to feed their AI, they can make that decision more or less unilaterally. If they knew of any threat to human society posed by the technologies they are busy developing, would they tell us? What about the agribusinesses and the impact of modern farming methods on land harvestability? Or climate change? Or pharmaceutical and health care companies and the effects of mass medicalization?
The influence over the ‘market truth’ is particularly important, given that this is an increasingly determinative input in regulatory decision making. Any ideological bent in academia gets magnified through the administration of law, especially when the administrators are keen to show that they are up to date with the latest theories, and academics are called as witnesses in antitrust court cases to give expert evidence on economic theories. These expert witnesses sometimes earn as much as a thousand dollars an hour.37 Given that each side is usually able to find an economic witness to corroborate their theory of harm or benefit, one wonders if the system would be equally, or perhaps more, effective if the courts were instead to employ a non-partisan clairvoyant to assist with antitrust cases. What counts as the truth seems to be incredibly subjective.
With unnerving influence over news and information, some market actors also have the power to impact the political truth. This is not just the power to lobby, it is the power to change how politics works. From the apparent manipulation of the 2016 US Presidential election to the UK’s referendum on membership of the EU, Facebook in particular has the proven ability to act as a conduit for the alteration of history. In Myanmar, Facebook’s content moderators failed to detect and act upon a systematic campaign of misinformation by the military to garner support for the ethnic cleansing of the Rohingya people, facilitating the genocide.38 Twitter was similarly used to promote government propaganda covering up human rights violations against the minority Uighur people in China in 2019.39 Google has the power to promote anti-abortion advice to women searching for an early termination facility, through misleading advertising.40 Every single day, people around the world watch 700 million hours of videos recommended by YouTube’s algorithms, which are calibrated to chase user clicks no matter how hateful or disgusting the content. The most addicted users drive the content viewed by the rest of the platform and each individual user is lured into the echo chamber of their very own filter bubble. And this power over the political and market truth is only getting stronger as local journalism is crushed by the online news machine.
Companies sometimes also have power over aspects of our personal lives that are normally within the province of the state – whereas the government will expunge any criminal record after a certain number of years, the internet never forgets, unless you fall within the EU’s limited right to be forgotten. They can keep your misdeeds public but they can also make you disappear, digitally, burying your business at the bottom of search results or censuring your posts on social media. Private companies control vast repositories of the digital record of our collective past, as well as the databases on which public administrative decision making and criminal enforcement is sometimes based.
In 1937, James Landis warned that the managers of U.S. Steel and other large corporations ‘possess a coercive force and effect that government even with its threat of incarceration cannot equal’.41 It is chilling to think of the ways in which a private corporation could ruin your life if it was necessary or convenient for it to do so. By contrast, what would it take for any government, say the US government, to shut down Facebook or Google or Amazon? These companies have their own servers, many located outside the US, and there is no ‘off’ switch for the internet.
Of course, smaller companies may attempt all of these paths to influence. But big companies benefit from visibility, systemic importance and economies of scale from lobbying that allow them to get more political bang for their campaigning buck.42 Google, for example, had 120 lobbying meetings with a commissioner, cabinet member or director-general of the EU between 2014 and 2016.43 The networking effect of new technology plays its part. We can imagine that they were more successful in getting their views heard, and getting those meetings in the first place, than smaller, less economically important companies.
These examples of economic and political power show the many creative ways in which the shareholder value company will attempt to boost its profits. The simplistic focus within antitrust on the market power of some companies to increase price misses many variants of power. Many of the tools that powerful companies have at their disposal to subvert the market or the will and norms of society are dismissed as harmless.
What is the link between competition and the negative spillovers of corporate activities? Mainstream doctrine does not make much of a connection. If anything, a monopolist is thought to be less harmful – in raising prices and restricting output, it is assumed that the company with market power will also reduce its pollution or production of other social harms. Equally, a firm in a competitive industry will not have the power or resources to change how the market works, it is thought, whereas a monopolist is able to make changes – to produce a less harmful but more expensive product, without the fear of being undercut.
There are a few issues with this logic. Firstly, this argument is incompatible with the idea that monopolists ramp up production because they enjoy economies of scale. Cows emit methane – a powerful greenhouse gas – and whether cattle are scattered across the countryside or packed together at a big commercial farm makes little difference, so in theory a big farm is no more harmful than many small ones. But the commercial farm exists to exploit both market power and benefits of scale, and may well rear more cows to meet global demand than individual farmers would ever have dreamt of, and do so under less desirable conditions.
Second, even if the monopolist does reduce production, there is no reason to think that the level of spillovers will decrease. The company can switch to a more polluting production process or a more polluting product, and without competition the excess profits earned will not be competed away by a company offering a less polluting alternative. This is linked to the third point, which is that just because a company can afford to do good ‒ due to excess rents extracted through market power ‒ this does not mean that it will. In fact, which brings us to the fourth point, the company with rents to spare can use them to underwrite their externalities and to fight any litigation or regulatory punishment that may one day materialize – as DuPont did in relation to the dangerous chemicals used in Teflon production.44 Similarly, in 2019 Facebook set aside a $3 billion allowance in its accounts for regulatory fines it could see coming down the line (the eventual negotiated fines were $5 billion), and in 2018, eight years after the Deepwater Horizon oil rig blowout, BP cleared room for $1.7 billion of liability and $2 billion of cash payouts relating to the spill, with BP’s Chief Financial Officer assuring investors that such disbursements were ‘fully manageable within our existing financial framework’.45 Plenty of room on the balance sheet for disaster, with clear headroom for profit. A firm with market power and excess rents can afford to face such liability, no sweat. It is just a cost of doing business.
Companies with excess rents can use their profits to influence their regulatory environment – we have seen this in banking as, a mere ten years after global financial collapse, the financial industry is successfully lobbying for post-crisis preventative rules to be relaxed. They can push for more permissive antitrust rules and higher barriers to entry into the market, to shore up their traditional market power, but they can also lobby for lighter environmental regulation or less stringent worker protections. This will be easier to do in a monopolistic or oligopolistic industry, like global fast fashion or car manufacturing or banking, not only because there will be more profits to commit to the exercise but also because it will be easier to coordinate the single or few industry participants in the lobbying effort.
There is an empirical question of whether monopolies pollute more or produce other externalities in greater number than companies facing competition, but there has been little research into the issue – as one might expect, since the problem is assumed away by free market thinking. There is some evidence, though, that dominant firms behave differently during the phase when they are competing for monopoly than they do once their supremacy has been achieved. Facebook offered more privacy protections whilst Google was still in the social networking space, and the market was somewhat competitive, than it did once it dominated the market alone.46
There will be many industries that are usually characterized as highly competitive, like the auto industry, with tight margins and fierce rivalries, which are nevertheless responsible for significant pollution. But, in fact, the auto industry is an oligopoly market with just a few competing players, and they are able to coordinate with each other to increase social harm ‒ for example, by agreeing to delay the introduction of cleaner technologies, as auto manufacturers did in California in the 1950s and possibly again in Europe more recently.47 Other ‘competitive’ industries reach for externalities as a driver of profits precisely because the market will not bear higher prices and there are no barriers to entry behind which a company can protect a monopolistic position. But it is difficult to isolate an example of a market with many small buyers and sellers that has significant externalities – partly because few truly competitive markets exist in the real world (contrary to Myth #1) but also because smaller-scale producers may not have the same opportunity or incentive to degrade their product, working conditions or environment as their monopolistic, large-scale equivalents would.
It will be immediately obvious to anyone with a passing familiarity with the real world that no society has managed to achieve public good through invisible means alone, whatever Adam Smith argued. The regulatory government is often called upon to channel the simultaneously constructive and destructive forces of capitalism. But it is the political ideology of free markets – as distinct from the actual theory of modern economics – that dictates how seriously the free market loopholes are taken and how enthusiastically we act to minimize them. At present, they are not taken seriously enough, as policymakers stick to the mantra of free markets or bust.
Currently, companies ‒ even big companies with huge economic importance ‒ are still only accountable and responsible for their shareholders’ interests. The havoc that this one principle wreaks on the global economy is enormous, and antitrust has played its part in allowing companies to become big with no responsibility for the inevitable consequences. Responsibility has been completely divorced from power, and vice versa. In fact, power has more or less disappeared from the discussion altogether. There are lots of levers to pull to meet the challenges ahead, but how we treat the winners of the race to dominance sets the tone for the whole system. If our biggest and most powerful companies do not have to face responsibility and share power, then no one else will.
What the free market myths are trying to deflect attention from are a few harsh truths. The initial allocation of resources, wealth, skills and talents matter – in fact, they are determinative – and thus should not be ignored. The outcomes of the market are not ‘natural’, they are chosen through commission or omission by society and moulded by those whom the market treats most favourably. Corporate conduct is channelled towards whatever scheme will make the most money, and then the next most, and then the next most, with scant regard for planetary, social and moral boundaries ‒ or any other boundary, except the financial. Capital flows to where there is opportunity, and it competes and wins for itself, and there are real people ‒ and not that many of them ‒ who take home the dividends.
Adam Smith’s ‘invisible hand’, which explained that it is not the benevolence but rather the self-interest of the butcher, the brewer and the baker that guides the market to its best, most efficient outcome, is just one part of the story. The invisible hand may optimize, but it does so based on the existing distribution of wealth and resources. This distribution is not random, it is a choice, and it is chosen by another, equally invisible hand. Economist Adam Ozanne is one of a handful of scholars integrating concepts of power into modern economics. As Ozanne describes:
The first invisible hand promotes efficiency and mutually beneficial outcomes, the second works through conflict and division to promote particular outcomes that benefit some more than others. Thus, extreme levels of poverty and deprivation may persist or deepen while a powerful (and perhaps lucky and hard-working) few – such as today’s bankers and hedge fund managers – receive excessive rewards and bonuses.48
In the words of Robert Reich, ‘The invisible hand of the marketplace is connected to a wealthy and muscular arm.’49 It cannot be said, as some still believe, that the poor deserve their lot. There are two invisible hands at work, and the second has everything to do with power. It is the second one that chooses which version of ‘efficiency’ we arrive at, and for whose benefit.
The free market outcome is presented as optimal, and it is assumed that no one has undeserved power. But the market price and profits delivered by the market reflect not just some existential value but rather the bargain struck between transacting parties and their relative power. Every market price has embedded within it an expression of our free market ideology: power to the powerful, success to the successful, and harm to those who are given no rights or power to protect themselves.
There has always been this fanciful idea that, of course, if the market generates unacceptable outcomes, we can regulate it externally – set the rules of the game in which free market competition can operate – and redistribute the proceeds through taxation. It is a fig leaf offered by free marketeers, but just as quickly taken away again with the insistence that the market does, after all, know best: it gives to those who are most deserving, and benefits us all indirectly, so its methods should be questioned, and outcomes recalibrated, only in extreme circumstances.
We have surely entered such a phase of extreme circumstances, but regulation and redistribution still must counter the objection that any interference with the free market violates the ultimate freedom of property and the right of a person to do with their talents and assets what they will, and good luck to them. Regulation and redistribution will always be in conflict with free markets, freedom for the successful 1 per cent, freedom for the crumb-collecting 99 per cent, and freedom in general. But as long as the second invisible hand chooses the game to be played by the first, the promised efficiency, the promised trickle of social benefit, will continue to accrue to the rich few and not the poor many. Meanwhile, power consolidates: the power to increase the market price, yes, but also the power to control the whole market, determine the boundaries of the market, who gets to play, who does not, and who stands to benefit.
As George Monbiot writes, ‘The freedom that neoliberalism offers, which sounds so beguiling when expressed in general terms, turns out to mean freedom for the pike, not for the minnows’ – the big fish flourish whilst the little fish get eaten.
He adds that:
Freedom from trade unions and collective bargaining means the freedom to suppress wages. Freedom from regulation means the freedom to poison rivers, endanger workers, charge iniquitous rates of interest and design exotic financial instruments. Freedom from tax means freedom from the distribution of wealth that lifts people out of poverty.50
As the neoliberal view captured the intellectual stage, and the state has receded, this freedom has meant freedom for the shareholder and consumer to vote with their wallets, but increasingly fewer opportunities for unmoneyed citizens to vote through government.
As with the recognition that free markets are not really competitive, we may need to step up our regulation of corporate power to take account of not only the many forms of corporate power that permeate the market but also to counter the attempts by corporations to avoid or undermine other regulation – from environmental law and workers’ rights to tax law and financial regulation. To the extent that there will always be some corporate power – the corporation is a naturally powerful vehicle – that power should be shared more evenly, so that it does not merely serve the interests of the already powerful. Our passive trust in big, powerful companies has been abused. Active participation in determining our own futures is the only solution.
Myth #3: Corporate power is benign.
Reality: There are many types of corporate power that allow the powerful to choose how to shape the economy and society in their interests.