On September 15, 2008, the American investment bank Lehman Brothers filed for Chapter 11 bankruptcy protection under U.S law. As an isolated case, heaps of different reasons can be suggested as to why such a large corporation failed – possibly mismanagement from within or simply just a victim of wider issues within the American housing market. What can’t be ignored, however, was that both the failure and/or success of many multinational corporations contradicted mainstream economic thought on a variety of different fronts during the Global Financial Crisis (GFC) of 2007-8. It happened here in Australia too, with the government bailing out the financial behemoth Macquarie Bank at the height of the crisis (the details of the bail-out are still a state secret). Even seven years after such a shock to the global economy took place, the modern corporation continues to dispel specific ‘truths’ held within mainstream economic theory. The main premise of neoclassical economic thought (i.e. the current mainstream accepted line of economic theory) revolves around mutually advantageous exchanges. Neoclassical thought would be a very hard sell if it wasn’t presented as being to the benefit of everybody involved. Mutually advantageous exchanges ensure the efficient allocation of resources, but depend on a few key requirements and assumptions.
a) The consumers are completely rational and informed beings;
b) The exchange is ‘mutual’ and all parties involved benefit. It is once these two points are met that, according to neoclassical thought, the utopian-esque ‘free society’ is created. But as economist David Bollier points out, were we ever ‘free’ to NOT do the whole bail-out-the-banks/austerity thing? He adds:
Who can seriously talk about a “free market” and “freedom to choose” when taxpayers are being forced to pay trillions of dollars to prop up an ideological fantasy? The impending nationalization of the banking industry – dismissed as a fringe idea only weeks ago [in 2008] – has now been embraced by the likes of Alan Greenspan, Senator Lindsay Graham, George Will and Paul Krugman [all neoclassical adherents].
However, touching on the social Darwinist traits of capitalism, you can see that these days this ‘free society’ based on ‘perfect competition’ has descended into the cannibalism of small firms by larger ones. We all suffer because of it, and I’m going to show you how (as always) in six simple ways that the modern corporation is a walking, talking contradiction of neoclassical thought. As the corporation has evolved in the last two centuries in the western world, the rebel-rousing Trotsky noted that “the competition of capitalist with capitalist imparted a certain very limited reality to the fiction of freedom… “. Competitive attitudes have been further introduced to economic markets worldwide, particularly since the early 1980’s with the onset of economic globalisation and market deregulation. Neoclassical thought was adopted by many Western liberal democracies globally, with varying levels of implementation and success.
1. CORPORATIONS ARE CANNIBALISTIC: A prime example of the cannibalistic nature of neoclassical economics that kinda ruins the assertion of mutually advantageous exchanges is the current duopoly of Coles and Woolworths supermarkets in Australia. Currently controlling about 70% of the grocery market, former Australian Senate representative Bob Katter from the aptly titled Bob Katter Party noted the influential position they hold, so that “if they decide to cut down the amount of money they are going to pay farmers and jack up the price to consumers, they can because there is no competition”. Take the case of Aristocrat, an Australian brand that is well known for its pickled onions – and is currently close to bankruptcy. As Coles and Woolworths represent 60% of business for this family owned company, the big chains were in a position where they could threaten ‘deletion’ of certain lines of product and markdowns in price. As the owner of Aristocrat Barry Fawcett conceded, “If you lost those two customers it would be death, there’s no question at all. You’d have to reconsider whether or not you continued the business”. There were even cases where items by Aristocrat were deleted after they had been delivered. So the ‘Coles vs. Woolworths’ saga continues, but evidence would suggest that everybody from small to large suppliers and also consumers are not provided with an environment where mutually advantageous exchanges can take place. The neoclassical virtue of mutuality in the marketplace collapses when confronted with the dominance of the modern corporation.
2. MORE THAN MEETS THE EYE – COMPETITION IS A CON: According to neoclassical theory, there is no coercion and no intervention by third parties to disrupt or impede the transactions between self-interested buyers and sellers. The price system mediates, even resolves, conflict. Within this argument lies the ideological concept of ‘value theory’. This theory proposes that the cost of a product depends almost solely on the costs involved in producing that product. If this theoretical proposal is implemented within a system encapsulating ‘perfect competition’, the desired results would reflect an empowerment of the consumer. But let us analyse this claim by again addressing the current domination of Coles and Woolworths in the Australian market. In 2012 Coles and Woolworths engaged in what the media dubbed a ‘milk war’, which led to Coles selling their 1L carton of milk for AU$1.00. This cut-throat duopoly has not benefited farmers or suppliers (with Coca-Cola even “feeling the pinch”) – but what about us, the consumers? Well this research notes that after analysing price changes over the period of a year that, “with all the hype around supermarket price wars, you might expect to see a significant reduction in your overall shopping bill. The truth, though, is that discounts do not apply evenly across all products, and some products have actually increased in price.” The author noted that you’ll save… $6 a year. Woopdy fuckin’ doo!
3. THE ‘VALUE THEORY’ FALLACY: The current price war over the cost of milk heavily clashes with the neoclassical implementation of the ‘value theory’. The ‘milk wars’ display that the proper price is not reflected in the price of the product, and that overall the consumers, the producers and the market do not benefit. A great assessment of the modern corporation notes that, “they want to maximise profits for themselves and their shareholders, and they have the money to spend on their interests”. The famous right-wing economist Stigler even stated, when reflecting on a Marxist critique of this particular neoclassical line of thought, “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”. So really, the wealth is concentrated in the hands of a few dominating corporations who can ultimately distort market prices, something you wouldn’t expect to observe according to neoclassical thought. The value theory crumbles when applied to the modern corporation, as these modern firms are so large and extensive that subsidies and artificial pricing are standard practices used to undermine the competition.
4. FAILURE ISN’T REALLY ‘FAILURE’: In neoclassical theory, the economy is (or should be) a set of interconnected and self-regulating markets in which interaction can occur without the need for substantial government regulation. Free-market ideology stresses the undesirability of a substantial role for the state in economic affairs. According to many neoclassical economists, such as Thomas Friedman, in this current globalised world the modern corporation is “free from any nation state or power structure, and beholden to none”. In stating this, Friedman and other neoclassical economists assume that because price competition will be so fierce in a globalised and market-based world “no individual or capitalist firm will have the power to control a significant portion of the market”. Within such a ruthless environment, if a corporation were to struggle or fail, it is of its’ own making. It’s this aspect of neoclassical economics that has significant echoes of social Darwinism, emphasising that the survival of the fittest (corporations) will produce a healthy society. However, in an environment of monopolistic corporations with influential (if not vital) roles to play in an economy, a failure by a modern corporation can spell disaster for economic stability and efficiency. An example of this would be the current situation involving the domination of large ‘local’ banks in the Australian financial market. When assessing claims of neoclassical rejection of state intervention, it should be noted that many perceive the ‘big four’ banks in Australia now as ‘too big to fail’; the notion (and noted guarantee) that the Australian government will maintain the ‘status quo’ and encourage the ‘four pillars policy’ of support. What this means in layman’s terms is this: the big four banks in Australia can literally do whatever the fuck they want, and they are guaranteed unlimited support if everything goes to shit – even if it’s their fault! The modern corporation has become too dominant and important to the overall functioning of the economy (both on a national and international level) that the state ignores their welfare at its own peril.
5. DEMOCRACY – A DIRTY WORD: The emergence of the modern corporation has provided neoclassical thought with another conundrum, and that is that the corporation is inherently ‘undemocratic’. According to the anti-globalisation author Naomi Klein “corporations have grown so big that they have superseded government”. The role of the state can’t be overlooked when assessing the modern role of the corporation, as the state may be the last bastion of restriction on the predatory nature of unfettered capitalism. We seem to have gotten ourselves into the position where “governments are the only institutions with a general mandate to promote the public good with (at least in democratic systems) clear lines of accountability to the general population”. However, dominant neoclassical thought stipulates, “markets are the most effective as well as the most democratic mode of economic organisation that has yet to be developed”. When assessing this claim, it is important to remember under what circumstances the modern corporation has arisen. The modern corporation has flourished under the implementation of neoclassical economics on a global scale, to the extent that it has superseded the expectations of neoclassical thought. No longer is the modern market a ‘democratic mode’ of trade, especially when multinational corporations explicitly undermine and manipulate the role of the state to maintain their own interests, for example, the case of British Petroleum (BP). BP spent vast amounts of money maximising oil production in the Gulf of Mexico and virtually nothing to prepare for the day when its operations might spring a leak. The contradiction that this places the modern corporation in is best summed up as this: “we expect them to be good citizens, but we also expect them to compete”. Confusing much? The modern corporation has evolved into an entity that wants the largest market share it can get, it wants subsidies, and it wants the state to regulate only the competition. American regulators at the Interior Department’s Mineral Management Service had every opportunity to see the risk of a massive oil spill months in advance and did next to nothing to stop it from happening. The democratic branches of government (that function to supposedly represent the interests of the people) had failed in the face of the modern corporation.
6. THE SHOCK DOCTRINE: The argument for supply and demand by neoclassical economists seems to support their claim that markets trend towards equilibrium, but in a marketplace where only a few large firms dominate, it is a dubious claim to make. According to neoclassical thought, every change in the market evokes a response, and each response involves a shift to a new position of equilibrium – like a balancing act. A systemic stability always ends up prevailing – however, in a world of dominant large corporations, changes in the market are no longer incremental, but rather come in violent ‘shocks’ – often with disastrous consequences. In the case of ABC Learning, the shock to the Australian childcare industry honestly couldn’t have been any worse. ABC Learning was an Australian company that was at one stage the largest provider of early childhood education services in the nation, reaching a market value of AU$3.4 billion in March 2006. However, within the upheaval of the GFC, the company went in to administrative receivership. In the case of such a company having near monopoly status on a particular industry, the effects of collapse threatened any possibility of a natural and speedy return to equilibrium. In the case of ABC Learning, over 100,000 children under their care suddenly had nowhere to go due to the near monopolisation of the industry, with the government considering intervention to keep the centres open. ABC Learning, through its consistent acquisition of competitors, had grown to such an extent under the Australian Competition and Consumer Commissions’ (ACCC) approval that it even started using its vast financial resources to support challenges to regulations governing childcare in states and territories across the country. The collapse of such a crucial institution in a monopolised market – and the effects this had on the industry, government, consumers and banks – pisses all over the notion of equilibrium.
The modern corporation can muster too much clout, influence and importance for its sudden removal from the marketplace to not have severely negative consequences. So there you have it ladies and gentlemen – the contradiction of the modern corporation for all to see. And this applies to all of them – from Disney to Delta Airlines to Deloitte. So the next time your mate starts harping on about the virtue of the free market, remind him it’s a dead ideal – we’re now in the world of the all-conquering, all-consuming, all-conniving and all-contradicting corporation.