Post #17 – Survival Of The Biggest

Another bank in Australia posts record profits… yawn. Spice it up a little corporate Australia! Throw a few ‘poor returns’ or a ‘setback’ in there to show us paupers at the bottom that the game isn’t completely rigged in your favour. It makes you wonder, should these monolithic corporations really be rewarded with billions of dollars solely for being the biggest and baddest motherfuckers every financial quarter? Are they worthy of such obscene amounts of wealth? I mean, they haven’t invented a cure for cancer or patented an engine that runs on thin air – they’re a bank. Yet I frequently hear defensive phrases come from otherwise intellectually sound people justifying these obscene profits by saying things like: ‘these corporations must be there (and earning that much) because they’re the best at what they do – they’ve earned it!’

But how much truth is in that argument?

It is a popular misconception that the phrase ‘survival of the fittest’ can be attributed to the founder of evolutionary theory, Charles Darwin. However it was actually a bloke by the name of Herbert Spencer who first penned this phrase, and it was written to refer to his own economic theories – not biology. So is survival of the fittest in economics a good thing? And what does this ‘competition’ shit that economists’ always talk about mean anyway? Better yet, how do both mainstream and Marxist economists’ understand ‘competition’? Follow me into this peculiarly slippery and dark rabbit-hole and we shall see.

MAINSTREAM ECONOMIC INTERPRETATION: So let’s start off by looking at the idea of ‘perfect competition’. The concept of competition is synonymous with the idea of self-regulating markets in which buyers and sellers interact freely in an open market. This isn’t to say that the state has no role to play, as even the famous right-wing economist Hayek believes the functioning of competition requires the organisation of ‘certain institutions’, “some of which can never be adequately provided by private enterprise”. But at its core, the state should only be there to facilitate mutually advantageous exchanges and thus ensure the most efficient allocation of resources. It should be noted though, that many neoclassical (mainstream) economists advocate no state intervention at all, as the state can add “uncertainty and instability to the economic system”. So with limited or no state intervention, the prospect of ‘perfect competition’ within the market is created. This type of competitive economic structure, according to neoclassical thought, “would probably lead eventually to a stable income distribution”. Though, considering their unwillingness to commit to this end-result I think emphasises that the concept of competition in the economy is not there necessarily to create a more equal society, but to remove all impediments in the mobility of the factors of production. On the proviso that consumers are completely rational and informed beings, it boils down to self-interest. It is once these boxes are ticked (according to neoclassical thought) that the ‘free society’ is truly created.

MARXIST INTERPRETATION: Marxists, on the other hand see competition as a by-product of the pursuit and accumulation of capital. Marx provides the analogy of ‘free competition’ to that of a sorcerer “who is no longer able to control the powers of the nether world whom he has called up by his spells”. According to Marx, the competition is not truly between the capitalists, as stressed by neoclassical thought, but between what he classifies as the ‘lower strata of the middle class’ and the bourgeoisie (the rich). He reasons that the middle class, or ‘petit bourgeois’ gradually sink into the proletariat (poor, working class) because their minuscule amount of capital can’t fairly compete with the scale of ‘Modern Industry’ and is therefore “swamped in the competition with the large capitalists”. So it is not that Marxist thought opposes competition in the economy, but that it seeks to highlight the fundamental flaw that “the profit motive lies at the heart of the process”.

WELL… DO THEY AGREE ON ANYTHING?: Despite the opposing views of both schools of thought, many aspects of competition within a modern economy are uncontroversial and agreed upon by both sides. For example, in regards to the model of ‘perfect competition’, both schools would agree that ‘price competition establishes such limits’ when referring to price gouging by certain corporations. The neoclassical economist Stigler even concedes this point by stating “the Marxists did not press this point: both the labor theory of value and the doctrine of equalisation of profit rates require competition”. Also, at the core of both schools of thought is concern for the people within this competitive market place. Where they differ is in their interpretation of the individual (essentially, you and I). The Marxist emphasis is on people and how the economy structures their interests. Classical economists have been accused (no less by Marx himself) of referring to the individual as ‘a commodity’; but a particular emphasis on the individual as a ‘consumer’ in a competitive market is a more fitting explanation of how neoclassical thought perceives those within the society. Another point of agreement is in their adoption of ideological purity, in that they detest the partial adoption and/or implementation of their philosophy. Both the neoclassicals’ and the Marxists’ hate all this wishy-washy pick’n’choose shit – it’s either their way or the highway. This can best be highlighted in the rejection by both sides of your standard democracies ‘embryonic elements’. For example, modern societies most would associate as capitalist (i.e. Britain, Sweden etc) have partial feudal (i.e the Royal Family and all that glimmery goodness) and socialist elements (i.e the welfare state) alongside the dominant mode of production (i.e the stock market, industry and trade).

An adoption of the purist neoclassical line of thinking may theoretically lead to a ‘perfect society’ if all their rules are followed. However, going back to Stigler again, he reckoned that the best part of the Marxist critique of this neoclassical line of thought was this:

It is my impression that their most common, and most influential, charge was that competition led to a highly objectionable, and perhaps continuously deteriorating, distribution of income.

Such a statement would support Marxian ideology, which strives for a more egalitarian society, devoid of aggressive competition between capitalists. The Marxists champion wealth and abundance for everybody because they believe that if no dominant class is controlling the economic surplus for its own purposes – then democracy can be extended to the economy; everybody wins. Once true democracy is extended to a market economy (i.e. through workers co-ops and enterprises) the drive for cut-throat economic competition ceases to exist in its current form. So lets have a look at how survival of the fittest functions in the ‘real world’…

AUSSIE BANKS VS FOREIGN BANKS – A BLOODBATH: Competitive attitudes have been introduced to economic markets worldwide, particularly since the early 1980’s with the onset of economic globalisation. Neoclassical thought was adopted by many Western-style democracies globally, with varying levels of implementation and success. A telling analysis of foreign banks in Australia through the period of deregulation in the 1980’s illustrates this point. With overseas competition encouraged by more wanky neoclassical economists than you can poke a stick at, the popular assumption was that an influx of foreign banks would benefit the rigid Australian banking scene and ultimately stimulate the economy. What happened instead, was that the “foreign banks were the cannon fodder of deregulation” – the biggest banks in the world essentially got ripped to shreds. Even though their sole role was to create competition, you can only compare the influx of foreign banks into the Australian market to front line troops sent in to “attack the formidable bulwarks of oligopoly… set up by the incumbent domestic banks”. It was widely reported at the time that the domestic banking system went through a heightened period of acquisition and take-over bids just before the arrival of foreign banks. Coincidence? Me thinks not. The Aussie banks knew what was coming and went on the offensive. So by the time the foreign banks arrived to enter the recently deregulated market, the major domestic banks had increased their share of the sector and further entrenched their positions. So just to provide an example – before the onslaught of foreign banks in Australia, Westpac went through a bunch of mergers and increased their market share to 32% by 1985. To highlight their lucrative entrenched position within the Australian banking sector, exactly 30 years later Westpac has posted a first-half profit of $3.52 billion (in 2013), a 10% increase from the previous year. So what neoclassic thought predicted would result in a move toward ‘perfect competition’ in fact resulted in the exact opposite. It resulted in a massive increase in credit resulting in severe market distortion and economic uncertainty. The foreign banks mostly got their arses kicked on Australian soil and the domestic banks firmed their grip on market. None of this benefited the consumer and it certainly can’t be classified as a fucking great outcome… well, except for the Aussie banks that is. As the radical economist Trotsky once wrote, “the competition of capitalist with capitalist imparted a certain very limited reality to the fiction of freedom…”

TOO BIG TO FAIL: When assessing the failure of large multinational banks to flourish in the Australian market, it should be noted that many perceive the ‘big four’ banks in Australia now as ‘too big to fail’. What this phrase entails is the notion (and noted guarantee) that our fucking government will maintain the ‘status quo’ and encourage the ‘four pillars policy’ of support. So just to clarify – if you run a small business and screw up, you go bust (and most likely, deservedly so) – but if you’re bank, you’ve literally got a gold-plated guarantee that you’re a protected species and the state will bend over backwards to see you stick around. Although neoclassical thought rejects the notion that this in any way reflects their preferred economic objectives, as I’ve highlighted it was the adoption of their recommended economic policies that led to this shitty mess in the first place.

So there you have it people – competition is a furphy, and also a little bit toxic and muddled up too. Both neoclassical and Marxist thought recognise the benefits of increased competition in the economy, but it is only neoclassical thought that fails to acknowledge its near-impossible implementation to achieve the coveted goal of ‘perfect competition’. This is aggravated by their failure to properly acknowledge (as highlighted by the Australian banking sector) when things don’t go according to theory. Include mainstream economics’ inability to actually demonstrate how it benefits us on a day to day basis, and you can only come to one conclusion… their record profits might be awesome for them and their shareholders – but the benefits are a lot less evident for those of us that don’t have ‘CEO’ or General Manager listed on our CV’s.

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