(c) Copyright 1998: Graham L. Strachan
Time now to consider whether economic rationalism really is ‘neo-classical free market economics’ risen from the dead, or whether it is something else. It will be recalled that a genuine free market was a market of potentially unlimited numbers of small/medium sized businesses (entrepreneurial not corporate), competing on a more or less equal footing, in a marketplace which newcomers could freely enter, and in which none could control price, supervised by a sovereign government. In such a market consumer demand would inspire entrepreneurs to start business and develop new products which competition would then ensure were of highest quality and sold to the consumer at the lowest possible price. That was the theory (1)
However, the moment big business came into being, from about 1865 onwards(2), a true free market became impossible. Through the legal fiction of the ‘corporate personality’ (by which the law regards a corporation as a person) corporations could own other corporations. This permitted monopoly capitalists to buy up companies with money borrowed from banks, and to consolidate them into ever-growing conglomerates capable of eliminating competition, manipulating markets, preventing newcomers from entering them, controlling prices, and exerting pressure on governments for concessions. In the presence of big business the ‘free’ market inevitably resulted in OLIGOPOLY: market domination by a few large firms, with a number of smaller competitors struggling for survival in unequal competition with them(3).
Oligopoly has all the disadvantages of outright monopoly. Tacit agreements develop between the oligopolists whereby they avoid outright price wars (which would be damaging to all) and engage instead in high profile jostling over market share through expensive advertising campaigns of the type regularly seen on TV. Nobody seriously suggested that oligopoly was a competitive free market, or that it could deliver the benefits of a competitive free market(4).
Economist J.K.Galbraith wrote: ‘....a vast difference separates oligopoly from the competition of the competitive model....the power exercised by a few large firms is different only in degree and precision of its exercise from that od a single-firm monopoly....not only does oligopoly lead away from the world of competition....but it leads toward the world of monopoly. In the....oligopoly, the practical barriers to entry and the convention against price competition have eliminated the self-generating capacity of competition’. Even standard textbooks say, ‘[It is necessary] to distinguish between the characteristics of a purely competitive market and those of....oligopoly’(5).
Observe, then, how that Australian bible of economic rationalism, The Hilmer Report: National Competition Policy (1993) defines the new ‘free market’ which will carry the world into the 21st century:
‘Early economic work suggested that large numbers of competitors were important for the effective working of competitive forces. However in some cases competition between a few large firms may provide more economic benefit than competition between a large number of small firms.’[p.3].
What the Hilmer Report is defining as the new replacement ‘free market’ is patently OLIGOPOLY. Not only that, but the claim is that it will provide MORE economic benefit than a genuine free market. (The author does add ‘in some cases’, a qualification soon overlooked by economic rationlists. There will be no other cases. And the question goes begging: of ‘more economc benefit’ to whom? The general public, or big business?).
The Report then claims that all the classic advantages of a genuine free market will accrue from oligopoly. According to Hilmer, it will ‘provide the spur for businesses to improve their performance, develop new products and respond to changing circumstances....offer the promise of lower prices and improved choice for consumers and....increased employment opportunities for the community as a whole [Hilmer Report p.1]. It even tends to promote equal treatment of workers according to race and sex [Hilmer Report p.5]. How politically correct!
Galbraith, on the other hand, states unequivocally that, with oligopoly, ‘There is no longer any certainty of technical advance....prices no longer reflect the ebb and flow of consumer demand....and it leads to profitable and comfortable stagnation’(6). It leads to worse than that, as will be shown in forthcoming articles.
One of the reasons the world threw out free market economics in the first place and adopted the Mixed Economy model was because an unregulated market, in the presence of big business and without government intervention, led inexorably to OLIGOPOLY. It became apparent that without government policies to protect the wider community, big business would ultimately end up owning and controlling all the economic assets and activity within nations, and ultimately the world. Now oligopoly is back, redefined as the new ‘free market’ in a policy known as ‘economic rationalism’ which governments in debt seem obliged to implement(7), and the ‘rational’ element of which forbids concern for its social effects(8). By now it should be becoming apparent what economic rationalism is really all about. More next week.