A Bad Time for Giants; J. K. Williams

accurately expressed a widely held attitude. Today, popular sentiment has undergone a change. The world, by and large, looks with suspicious eyes at bigness. Large nations, large cities, and large corporations are portrayed as sources of mischief. General Motors can do nothing right. The college president planning expansion is an "empire builder." A squatter holding out in an aban doned tenement building against developers is an heroic David taking on a gargantuan Goliath. "Small," we are informed, "is beautiful," and the converse of that somewhat breathtaking generalization is that "Big is ugly." It is a bad time for giants. Critics of market capitalism in a classically liberal social order are conspicuous among those who equate "bigness" and "badness." Mar ket capitalism, it is claimed, has undergone a mutation. Once upon a time it may have been true that the market curbed the activities of businessmen and industrialists, but no more. Market capitalism has given way to "late capitalism" or "monopoly capitalism." Giant cor porations have rid themselves of the constraints imposed by Lilliputian consumers, and today stride the world. They manipulate the masses and treat governments as playthings. The big, the bad, and the ugly rule.

It is easy, and legitimate, to dismiss socialists who so characterize market capitalism. Whatever else market capitalism in a liberal society may be or do, it maintains institutions relatively free from the orga nisms of the state, the most massive concentration of power in human history. Socialists, in advocating an economic system coordinated by political edicts as against market forces, are advocating rule by a giant to end all giants: an all-present, all-powerful, and allegedly all-know ing giant. For such people to deplore the large institutions character izing modern capitalist nations is, surely, the height of inconsistency.

Yet, not all people who assert that market capitalism has undergone a metamorphosis advocate a socialist alternative. The claim that mar ket capitalism in a liberal society is inherently unstable merits thought ful examination, whether or not that claim is accompanied by the pre scription of an alternative socio-economic system. w >Ioa::« zz« 2:rrw (1) 127 T he simplest version of the claim that market capitalism gen erates excessively large and unconscionably powerful cor porations is grounded not in any economic or social theory, but in ordinary perception. An Australian church paper re cently editorialized thus: "Giant corporations move in a world ordi nary people do not understand. The balance sheets of these corpo rations casually refer to projects involving hundreds of millions of dollars. Corporate structures are complex and impersonal. What can these corporations know of the needs and frustrations of the average person? How can such a person, dwarfed by massive conglomerates, sensibly be described as free?"

Clearly, these rhetorical questions can be taken seriously and an swered. Yet so to do in a sense misses the point. An attitude is being expressed rather than an argument being developed. The attitude is composed of suspicion, of resentment, and even of fear. The words "big" and "small" are relational terms. A "big" dog is simply a dog larger than most dogs; a "small" house is simply a house smaller than most houses. Hence, when someone asserts that a corporation is "too big," the question, "Big in relation to what?" must be asked. Simply, the claim that a corporation is "too big" in the sense that the corporation is big in relation to a solitary individual, is little more than an expression of the sort of disquiet some people experience when observing the vastness of the Grand Canyon. The claim, as noted, is understandable. Nonetheless, it is irrational. How Big Is "Too Big"?

128 Perfect Competition I n sharp contrast to this nonrational, a.lmost phobic suspicion of the large corporation, a highly abstract and intellectual frame work can function as a context for antagonism to such a cor poration. This framework, elaborated in most standard economic textbooks, is the theoretical model described as the "perfectly competitive" or "purely competitive" market. The world depicted in this model is far removed from what ob servedly is the case in developed, capitalist nations. In this theoretical world, no firm's activities have any appreciable effect upon the mar ket, nor does any firm so satisfy consumers that entry into the market. might prove difficult for people planning to produce and trade the same good or service. My ten-year-old nephew, Patrick, who breeds parakeets in a small aviary at the bottom of his parents' garden and sells these, is probably a producer of sorts whose activities satisfy these criteria. The activities of General Motors or of LB.M. would not.

Again, the parakeets bred and sold by my nephew are, despite his protestations to the contrary, very much like any other parakeet, and' thus comply with a further criterion for perfect competition: the prod uct traded must be homogeneous, indistinguishable from that traded by any firm manufacturing the same sort of good or providing the same sort of service. As noted, even my nephew insists that his par akeets are, by virtue of the secret mixture of seed he feeds them and the love he gives them, "better" than other parakeets sold in the mar ket. Certainly, most firms in the real world diligently strive to produce goods differentiated from those of their fellow producers. Most startlingly, participants in a perfectly competitive market are quite unlike the fallible, fumbling, finite beings one encounters in the real world; sellers and buyers alike possess, in the world of perfect competition, perfect knowledge and unerring foresight. Confronted by a vast array of possible choices, all of which are somehow known to them, they infallibly and instantaneously select the optimum option.

No unwanted situations arising out of human ignorance or errors of judgment exist. This abstract, theoretical model has very limited applicability in the real world. The absence of a plethora of tiny firms manufacturing or providing an absolutely homogeneous product or service is in no sense ominous. No static model depicting an ideal allocative outcome of market processes captures the essence of a capitalist economy. Joseph Schumpeter puts it well: "Capitalism ... is by nature a form or method of economic change and not only never is but never can be stationary." Indeed, Schumpeter is worth quoting at length. "In capitalist reality as distinguished from its textbook picture, ... [the] kind of compe tition which counts ... [is] competition from the new commodity, the new technology, the new source of supply, the new type of organi zation." This form of competition "acts not only when in being but also when it is merely an ever-present threat. It disciplines before it attacks. "

The abstract model of a perfectly competitive market depicts a sit uation in which all potential mutually beneficial transactions have been realized. A state of equilibrium obtains. In the real world of changing circumstances and human finitude, disequilibrium is the reality. The absence of equilibrium generates in a market economy systematic en trepreneurial activity that tends to eliminate existing imbalances, mov"Marketcapitalismcan only be understood in termsof ongoingmarketprocesses,not anyparticularstaticallocativeoutcome of theseprocesses." ing the situation closer to an hypothesized state of equilibrium defined by the market data which obtained prior to the beginning of this en trepreneurial activity. Yet before this activity results in even an ap proximation to this hypothesized equilibrium state, the data of the market will have changed. People's tastes will have altered; available resources will be marked by different relative scarcities; new tech nologies will have been born; new ideas will have emerged. A new state of disequilibrium exists. Further entrepreneurial activity is thus generated. On and on the process goes. Market capitalism can, in other words, only be understood in terms of ongoing market processes, not any particular static allocative outcome of these processes.

129 A BAD TIME FOR GIANTS H ad one asked a typical mainstream economist some two decades ago to outline a desirable program of govern mental economic management, he or she probably would have insisted upon fiscal and monetary policies to pro mote macroeconomic stability. Some sort of antitrust legislation, regulation, or nationalization of natural monopolies would be proffered. Subsidization of various activities productive of positive externalities (especially education and research), and taxation policies promoting greater economic equality, would also be eagerly promoted. More recently, however, mainstream economists have seriously questioned the theories of so-called "market failure" and of govern mental behaviors informing such a program. It is conceded that such abstract and simplified models as the perfectly competitive market - assume away institutional details which may in fact fulfill an extremely useful purpose. More significantly, it has become clear that while gov ernments eagerly embrace rationalizations for intervention in the mar ket-and that many economists are no less eager to elaborate such rationalizations-governments have their own purposes. The dynam ics of political processes are such that the outcomes of intervention may be quite other than those intended by economists. Similarly, bu reaucracies have built-in incentive structures which largely determine the way they perform. Some disillusioning observations have led to a heightened interest in comparative institutional analysis, in which de terministic theories of the performance of market, government, and bureaucratic institutions are deduced from their underlying incentive structures, on the assumption that decisionmakers are rational and desirous of improving their own situations.

Insights provided by this sort of analysis confirm what Ludwig von Mises long ago asserted, namely, that non-market decisionmaking entities have serious deficiencies with respect to the weighing or reg istering of individual preferences, the taking of a long-term point of view, operating at a low cost, and, generally, achieving an allocation of resources closer to that suggested by an ideal of perfect coordination Non-Market Decision Making 130 THE FREEMAN APRIL 1986 "Late Capitalism" than does an unfettered market. In short, many mainstream econo mists working within the framework ofperfect competition now argue that intervention is warranted only when they allegedly totally default, not when they allegedly marginally default. The notion of perfect competition does, in emphasizing ease of entry into and exit from the market, serve as a reminder that any alliance between government and any set ofmarket participants, union or busi ness, is anathema, jeopardizing freedom of market entry. The maxi mum wage laws that cursed the political economy called mercantilism, and the minimum wage laws cursing most Western nations today, are cases of such an alliance. So are tariffs, quotas, price-maintenance schemes, subsidies, laws dictating shopping hours, price controls, and the plethora of regulations today fettering most Western economies.

That the market continues to operate when so bound and burdened is testimony to its hardiness. How long it can continue to operate when its nervous system-changing relative money prices-is subject to ever increasing distortion, is not, however, clear. One thing, however, is clear. Antagonism to large corporations based upon the disparity between the actual operation of market economies and the defining characteristics of perfectly competitive or perfectly contestable markets is misguided and misplaced. D uring the late 1950s, Ludwig von Mises delivered a series of lectures on economic topics to Argentinean audiences, subsequently published as Economic Policy. He did what only a master of any academic discipline can do: simplify complex issues without distortion. He commenced his first lecture thus: Descriptive terms which people use are often quite misleading. In talking about modern captains of industry and leaders of big business, for instance, they call a man a "chocolate king" or a "cotton king" or an "automobile king." [Yet] ... a chocolate king does not rule at all; he serves. He does not reign over con quered territory, independent of the market, independent of his customers. The chocolate king-or the steel king or the auto mobile king or any other king of modern industry-depends on the industry he operates and the customers he serves. This "king"

must stay in the good graces of his subjects, the customers; he loses his "kingdom" as soon as he is no longer in a position to give his customers better service and provide it at lower cost than others with whom he must compete. The vision is clear. Consumers, by their decisions to buy or abstain from buying, determine what is produced and in what quantities. Ul timately they determine the prices at which goods are sold, the choice of means whereby goods are produced, and the remuneration received by all participants in the productive process. Such, say many contemporary critics of market capitalism, was once the ideal and perhaps once was the reality. But no more. Large cor porations have dethroned the consumer. These critics range from so cialist politician Michael Harrington to Marxist-Leninist economist Paul Sweezy. But perhaps John Kenneth Galbraith best reflects the general attitude.

Writes Galbraith: "So far from being the controlling power in the economy, markets [are] more and more accommodated to the needs and convenience of business corporations." Corporations are con trolled not by consumers, but by the faceless, anonymous "experts" constituting what Galbraith calls the technostructure, people possess ing the information and expertise necessary to design a product, to acquire capital, to modify people's taste, and so on. Informed by this technostructure, corporations exercise an unchallenged sovereignty. The giant has flexed his muscles, freed himself of all constraints, and thus today exercises unfettered power both nationally and internationally. Galbraith's views, eloquently expressed, brilliantly advertised, and attractively packaged, have successfully been sold to many members of the general public, and to countless "fringe" academics and influ ential journalists. Most economists have manifested considerable sales resistance. Professor Harold Demsetz asserts, "The only conclusion permitted by [my] investigation is that Galbraith's notions are re markably consistent in their inability to find confirmation .... Co lumbus had a great deal more corroboration for his belief that he found the Indies than Galbraith has for his discovery of the new in dustrial state." George J. Stigler and James Kindahl, in a major study commissioned by the National Bureau of Economic Research, con clude, after exhaustive investigation, that the claim that "prices of concentrated industries do not respond to reductions in demand" runs counter to all the evidence.

In sum, the economic attack on large corporations collapses. The desperate attempts to demonstrate that large corporations need no longer seek to serve consumers have failed and failed dismally. Indeed, as simple an exercise as the persual of the Fortune top 500 companies over a period of time suffices to raise a question mark against their simplistic, but widely accepted, assertions. Of the original 500, only 285 remained two decades later; 159 had merged, 50 had either gone bankrupt or shrunk, and 6 could not be classified, the data necessary for classification being unavailable. So much for the unchallengeable sovereignty of the modern corporation! B ut what, it may be asked, about these malicious, monstrous corporations which feast at tables groaning under the bounty secured by global plunder: transnational corporations? Are they not, in the words of Richard Barnett and Ronald Miller, "disturbers of the peace on a global scale"? Did not the Sixth As sembly of the World Council of Churches, held during 1983 in Van couver, declare its avowed opposition to transnational corporations, insisting that the world's "market system as a whole ... [is] incom patible with our vision of a just, participatory and sustainable society"

and rapturously applaud Jan Pronk, Deputy General Secretary of the United Nations Conference on Trade and Development, when he in formed a plenary session of the Assembly that the New International Economic Order would bring to all people the advantages of "inter national democratic socialism" -albeit not explaining how that cabal of tyrannies could establish a democratic order of any kind whatso ever? Does not everybody know that transnational corporations today constitute "the spearhead of U.S. imperialism"? Oddly, not everyone does know that. The Marxist-Leninist dictator 131 A BAD TIME FOR GIANTS The Transnational 132 THE FREEMAN APRIL 1986 Some Telling Arguments of Zimbabwe, Robert Mugabe, apparently does not know how terrible transnational corporations are, for when visiting New York in August, 1980, he pleaded with the heads of transnational corporations to invest in Zimbabwe, stating, "Union Carbide has done much good for Zim babwe. Why can't other companies as well?" John Kenneth Galbraith does not know how evil such corporations are: in an article published in 1978 in the Harvard Business Review he ridiculed the obloquy typ ifying most discussions about transnational corporations. (Such sup port, admittedly, is ominous: If Galbraith approves of transnational corporations there must, surely, be something suspect about them. The careful reader of Galbraith's article will observe, however, that Gal braith perceives in transnational corporations organizations large enough and powerful enough totally to bypass consumers and deal the coup de grace to whatever remains of consumer sovereignty. Since Galbraith deplores the tastes of the masses and dreams of a day when intellectuals sharing his values control socio-economic systems, the complete elimination of any vestiges of consumer sovereignty is to be desired. Galbraith fails dismally to demonstrate that transnational cor porations can so defy the rule of consumers. He does demolish most of the fashionable objections to such corporations.) Interestingly, some economists commissioned by the International Labor Office in 1975 to prepare a series of studies on transnational corporations, documented some embarrassing truths. They noted that such corporations had created two million jobs in developing nations, usually had replaced expatriate managers with host-country nationals as soon as was feasible, and scrupulously had respected the host coun try's social values and labor relations practices.

Indeed, transfers of wealth effected by transnational corporations have demonstrably been of more assistance to the people of developing nations than have most government to government transfers. Such private transfers are considerable. There is the transfer of capital in volved in building factories and plants. There is a transfer of human capital, host country nationals acquiring new and valuable skills. Wages paid to employees can, given sensible taxation policies, lead to saving, capital accumulation, and the creation of local industries. Typ ically, when transnational corporations invest in a developing nation, schools and hospitals are erected and considerable funds are invested in infrastructure, such as roads and sewerage. S trangely, some of the most telling arguments in favor of trans national corporations are unwittingly provided by their op ponents. Richard Barnett notes that the power of such cor porations is a function of their capacity to internationalize planning, financing, production, and marketing. Has he not heard of comparative advantage? Is it not desirable that the different strengths of different nations should be linked? Is not a world of interdependent nations a safer world, as well as a wealthier world, than a world of unrelated nations desperately struggling to achieve self-sufficiency?

Again, the Brandt Commission laments the "ability of [transnationals] to manipulate financial flows by use of artificial transfer prices" and notes that such corporations' 'have been able to race ahead in global operations and out of reach of effective controls by nation-states or international organizations."