We have now dismantled the six myths of free market competition, which means we are ready to face reality.
Myth #1: Free markets are competitive.
Reality: Free market competition creates power. In fact, ‘competition’ has come to be synonymous with domination and corporate power.
Myth #2: Companies compete by trying to best respond to the needs of society.
Reality: Companies compete for power, for the benefit of their shareholders, in ways that harm society.
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.
Myth #4: We already control corporate power with antitrust.
Reality: Modern antitrust condones corporate power.
Myth #5: The law requires companies to maximize financial value for shareholders.
Reality: The law is being wilfully misinterpreted to our collective detriment as it does not require companies to maximize shareholder profit.
Myth #6: We are all shareholders; we all benefit from corporate focus on shareholders’ interests.
Reality: Most shareholders are already wealthy.
With these realities in hand, the primordial blind spot of free market competition can be seen more clearly: competition is a race to power, and companies compete in part by producing social and environmental spillovers they do not have to pay for. Our models of competition minimize or ignore these aspects of competition, and it is on this basis that the antitrust regime does not, after all is said and done, produce markets that could genuinely be called ‘competitive’ or ‘efficient’. Markets are instead highly concentrated and replete with social and environmental harms. Competition by itself will not spread power and make everyone better off; instead, we must actively contain any power that arises from market distortions and share out the residual corporate power that we cannot contain to stakeholders so that they may be empowered to protect their own interests.
But these realities do not yet take up the same space that the myths, with their decades of augmentation, have come to occupy – they need their own accompanying narrative and logic to bind them to the structure of twenty-first-century capitalism.
Corporate capitalism currently operates completely untethered from the state that supports it, almost in an attempt to be as much the opposite of command and control, state-governed socialism as possible. But it turns out that, in order to have the best of both worlds – the progress and industry of capitalism, and the socialization of competition and markets – we can take a middle ground. Private corporations can remain in private hands, guided not by the central arm of the state but by the decentralized will of stakeholders embedded within companies.
The aim is to attempt to reap the benefits of fruitful competition by aligning companies to the public interest whilst avoiding the entropic inequality, injustice and negative spillovers that otherwise suffuse and overwhelm the economic system. The free-flowing flood of money and power could be replaced with a controlled irrigation system, directing the creative ability of capitalism towards the cultivation of desired and desirable projects and enterprises.
This can be achieved through a structural change in corporate capitalism, designed to dissipate power through a much more broadly conceived system of antitrust, striking at both the heart and periphery of corporate power. Whatever power cannot be dispersed should be shared, through participatory mechanisms empowering people to engage actively in the stewarding of the markets.
In Part Two of this book, I will present an agenda for this new regime: ‘stakeholder antitrust’. Stakeholder antitrust comprises two elements.
Together, these elements will help to ensure that competition really does work in the interests of the public.
There are two separate conversations taking place amongst those looking to reform capitalism: on the one hand, some are calling for greater antitrust enforcement to tackle monopoly power and increase competition, and on the other hand, some are looking to soften the harshness of competition by promoting corporate social responsibility. What has not been fully appreciated is that these cannot be two separate policy streams. Market power, left unchecked, will undermine responsibility. Creating more competition will only lead to more spillovers ‒ and the accumulation of power, yet again ‒ if we do not change how firms operate in the economy.
Neither corporate governance, which deals in the responsibilities of companies, nor antitrust, which deals in power, have been adequately serving the public interest ‒ in large part due to a failure to connect the two. Responsibility for all to make money has not served the public interest. Power to the powerful has not served the public interest.
Corporate power was originally controlled through corporate law, which set out the permissible scope of action and mandated responsibility for companies as a condition of their existence – the penalty for going beyond permitted action or for abdicating responsibility was the dissolution of the company. In the past, whenever antitrust was deemed inadequate to contain corporate power, there were proposals to use corporate law to restrain large and powerful companies by removing their limited liability, or by requiring some companies to obtain a specific charter from the government, thereby putting them under the supervision of the state.1
Even some in the Chicago School, generally opposed to incursions on corporate freedom, have supported such measures. Henry Simons, one of the School’s founders and a Mark I Chicagoan, at one point suggested that all corporations should have the amount of property they own limited, to ensure that no single corporation dominates an industry.2 But even Mark II Chicagoan Aaron Director, Friedman’s brother-in-law and Robert Bork’s inspiration, similarly called for an end to the ‘unlimited power of corporations’, not through antitrust, of which he was deeply suspicious, but through corporate law, by limiting the size of corporations, circumscribing the scope of corporate activities, and more.3
It may seem odd that Chicagoans wanted to go further than Sherman Act antitrust to limit corporate activities but actually it was the opposite. Using corporate law as antitrust is like flicking an on and off switch – either the company complies with the restrictions of its corporate charter or it will be dissolved. By contrast, with its granular assessment of economic harm and price effects, modern antitrust could be seen as actually requiring more intervention in markets – the arbitrary governmental meddling that Bork derided as useless and damaging.
Relatively few scholars have made the connection between antitrust and corporate governance, despite the origins of antitrust in corporate law.4 What goes on inside the firm is thought to have no bearing on what happens out on the market.
But given the mutually reinforcing nature of shareholder value and monopoly power, it seems we have missed an opportunity to tackle corporate power at home, on its own turf – inside the company – and to surface responsibility not just towards shareholders but to all those affected by the company’s activities. Power and responsibility should be reunited, through corporate law and antitrust, otherwise any siloed attempts to mitigate ruthless competition or dissipate corporate power will fail. This is the core principle of stakeholder antitrust and the basis of a new vision for regulating corporate power in free markets by recognizing, finally, the blind spot of capitalism: that free market competition, unrestrained, allows for the accumulation of power and the transmission of harm.
For a comprehensive response to corporate power we must draw from both the competition and corporate governance spheres, creating a new framework for the control of corporate power – stakeholder antitrust – comprised of both competition and corporate law regulation.
The primary role of the competition regulators will be to enforce, with a renewed seriousness, a reinvigorated antitrust regime that tackles corporate power, broadly construed, head on. Beyond conventional market power over price, regulators will target economic and political power, and the mechanisms that allow companies to leverage the one into the other.
Corporate law will be used to remove the hypnotic hold of shareholder value from the biggest, most powerful and most systemically important companies, in three areas:
The idea is not to return to pre-twentieth-century chartering for every company: only the most powerful companies will get this treatment. The regulatory scheme can also be updated in other ways. Instead of using corporate law as a crude tool to snuff out power, greater nuance will be admitted into the analysis by creating a symbiotic relationship between the competition regulator and a new corporations regulator: the competition regulator can identify the most problematic companies and markets, referring them to the corporate regulator for remedy, whilst the corporate regulator pinpoints excess power that can be dissipated through competition or through stakeholder participation. We can draw on over a century of experience in assessing competitive tactics to refine our response to corporate power, conscious always of the inbuilt biases of previous scholarship. The nineteenth-century corporate charters will also be updated to reflect the modern realities of globalization and dispersed shareholdings plus the modern concerns of climate breakdown and social justice.
Power, everywhere, must not be left to accumulate and mature, otherwise only the powerful will be free.