Power and the market economy

One of the great virtues of a capitalist market economy has been its ability to bring about the growth of society’s wealth. With this growth of wealth comes an expansion in the capacity of society to satisfy individual needs.

The general increase in societal wealth increases the power of some mem­bers of society to achieve their ends. Wealth means power to. Does it also mean power over others? The remainder of this section explores three ways in which wealth may be related to the power of agents (firms, capitalists, organizations of workers or consumers) within the market. The next section advances an alternate view of power as “conditioned power.”

The idea of wealth as a general category may not be helpful in thinking about power over. Wealth in general leads us to think of money, land, ownership of a house and consumption goods, and investments of diverse kinds. For our purposes it is more appropriate to think of wealth as ownership and control of productive capital. Owning a house may provide little leverage in controlling others. Owning productive capital may provide much more. We explore three areas where wealth may confer power: (1) the market power of firms, (2) the labor contract, and (3) production relations within the firm.

Market power of firms

We have argued that in perfectly competitive markets, economic exchange and power repel each other. With numerous producers and consumers, no one is able to exert influence. However, in imperfect (concentrated) markets, economic agents may have the capacity to influence others. Markets with a few producers in particular industries are not rare. Lindblom, for example, argues as follows:

For big companies in national markets, a common pattern is oligopoly, as in the American automobile industry where four companies account for 99 percent of output or the farm machinery industry where four firms account for over half the output. Perhaps as much as 60 percent of manufactured goods in the United States are produced by enterprises that make their production plans and set their prices in light of their interaction with two or three other dominant firms in their industry. (1977:149)

Large firms in concentrated industries have greater potential power. What does this claim mean and on what basis does it rest? Potential power refers to resources and means of influence that are unexploited; that is, they have not been used. We say that these resources are potential power because they imply an ability (an asymmetric ability) to inflict damage or limit gain. A worker whose only hope lies with a job that only one employer can provide has weak bargaining potential. A labor union bargaining collectively with capital has greater bargaining power than its members would have in­dividually.

In these examples, bargaining power rests on vulnerability, or more pre­cisely on differential vulnerability. In any exchange system, everyone is vul­nerable to some extent. Since everyone expects to gain from exchange, everyone is to some extent vulnerable.

To understand the link between economic concentration and power, it may be helpful to analyze the possibility of exercising power in perfectly com­petitive markets. In a perfectly competitive market, there are numerous producers, consumers, and laborers. Coalitions (of firms, consumers, work­ers) are impossible. Market entry is easy, economic adjustments are instan­taneous, and rents (above average profits) are quickly eroded by competition. Finally, firms produce homogeneous products rather than tailoring them for specializing markets.

In such a market, agents cannot affect overall economic parameters (prices, overall demand) or the behavior of other agents. The important economic variables are data - that is “givens.” Thus technology, preferences, the output of other firms, and the initial distribution of endowments are given. What remains for the firm to decide is the level of output that it should produce.

A perfectly competitive market is characterized by diversity and numerous options, in short by choice. Yet the most striking thing about a competitive market is how little power the agents possess. Spiro Latsis says that “under conditions characterizing perfect competition the decision-maker’s discretion in choosing among alternative courses of action is reduced simply to whether or not to stay in business” (1972:209). Frank Knight elaborates this basic point:

Few critics of capitalism see clearly enough that the entrepreneur in his “control” of production is relatively helpless as to what he shall produce, and where and when and by what instrumentalities and methods - and in particular as to what he shall pay for labor. Under perfect competition he would of course be completely helpless, a mere automatic registrar of the choice of consumers.

The basic point is clear. Competitive markets as sites of social interaction offer no scope for power over others. Indeed, in competitive markets, firms don’t compete. What happens when we relax the assumption of competitive market structure and allow producer concentration?

In oligopoly, there are few producers - that is, a smaller number control larger shares of the market (in total production, sales, and so on). Oligopoly is also characterized by higher barriers to entry and sometimes by producing and selfing heterogeneous products. Barriers to entry seem to be the most impor­tant feature in maintaining the privileged position of the oligopolist. These barriers may have economic origins (such as economies of scale) or they may owe their existence to political practices (such as licenses, subsidies, tariffs). In either case, firms already in the market have an advantage over those outside.

What are the implications of producer concentration for power? Firms that possess a large share of the market are said to possess “market power.” This could mean a number of things. Large firms might be able to affect prices, thus affecting their terms of exchange with others (consumers and other firms). Firms in competitive markets are price takers. Firms in concentrated markets may be price makers. Power in this sense means the capacity to impose a higher price and by implication inferior terms of exchange on other economic agents than would exist under more competitive market conditions.

Large firms might also be able to affect other economic parameters, in­cluding output levels, technology, and even tastes (through allocating re­sources to advertising). The output level under competitive conditions is fixed by the overall demand curve and by cost considerations. Since demand and prices are fixed, the firm produces up to the point where its marginal costs equal marginal revenues. But in oligopoly, a firm may lower its pro­duction level, hence increasing prices.

Finally, firms have the power to affect other firms in oligopolistic envi­ronments. In competitive markets, a firm acts without regard to other firms. The market in general establishes the important economic parameters and any particular firm is treated as if it had no known objectives or strategy. The game-theoretic analogue is a one-person game against nature (Latsis, 1972:210). But in oligopolistic conditions, firms can, by pursuing different strategies, affect what other firms do, how much they produce, their price levels, and even whether they enter or leave an industry.

The key feature of oligopoly is the interdependence among firms. Fewness of firms facilitates but does not strictly determine interdependence. By con­trast, in a competitive market each firm has a dominant strategy, regardless of what others do. Thus, appropriate behavior is determined by anonymous forces (the market - not particular competitors). Interdependence means that the best strategy for a firm is shaped (though usually not uniquely determined) not by the market but by the capabilities and strategies of rival firms. In competitive markets, firms are not rivals in any sense and do not compete. In noncompetitive markets they do.

The interdependence condition opens up a wide assortment of practices and strategies in which firms might engage. Industrial policy becomes a possibility. Receiving a subsidy from government may discourage other firms from entering the market. Predatory pricing strategies offer another possi­bility. A firm may lower its prices in response to the possibility of another firm entering the market, thus driving it out. And strategic policies that include retaliation (in terms of prices, market share policies), either in the domestic or international realm, may become attractive. The literature on strategic trade theory offers numerous examples of practices that firms and governments may follow attempting to gain advantage over other firms and other countries.

Thus, while perfectly competitive markets provide scope for exerting power to achieve certain aims (chiefly regarding wealth), they offer no room for power over other agents. Opportunities to acquire wealth are not “at the expense of” others except in the vacuous sense that everything (including new wealth) could have been used in other ways. Oligopoly opens up op­portunities for power over others. In addition to devoting resources to wealth making, resources can be channeled toward the transfer of wealth (rent seek­ing). Instead of taking price and demand levels as given, they are subject to change. And instead of “deciding” anonymously, firms may devise strategies contingent upon the actions of other firms.

The labor-capital contract

In this section we examine the relations between labor and capital and explore the potential for power relations among them. Inequality of wealth under capitalism gives some the resources to hire others to work for them and requires some to sell their labor in order to acquire the means to satisfy their needs. As Adam Smith put it in 1776:

As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labor adds to the value of the materials. (1937:78)

We can look at this result in two importantly different ways. First, we can treat the buying and selling of labor (the wage contract) simply as one instance of exchange. Since the parties enter into the contract voluntarily, the op­portunity to do so enhances the capacity of each to pursue private interest (one in profit making, the other in acquiring means of consumption). The wage contract enhances the power of all parties, especially when contrasted to coercive forms of labor. The wage contract, since entered into voluntarily, endows neither party with any power over the others. As Marx puts it, somewhat sarcastically to be sure, the labor market appears to be “a very Eden of the innate rights of man” ([1867] 1967a: 167).

The view that employing a worker is an instance of free exchange is widely held in neoclassical economics. Workers desire access to capital so as to earn an income. Owners of capital want to employ workers so as to capitalize on the value of their investment. Owners of labor and owners of capital in effect hire one another on terms that are more or less favorable to each in accordance with the scarcity value of labor and capital. When an employer fires a worker from his or her job, the employer “simply” declines to continue an economic exchange:

What exactly has the employer done? He has refused to continue to make a certain exchange, which the worker preferred to continue making. Specifically, A, the em­ployer, refuses to sell a certain sum of money in exchange for the purchase of B’s labor services. B would like to make a certain exchange; A would not. The same principles may apply to all the exchanges throughout the length and breadth of the economy. (Rothbard, 1970:228-9, italics in original)

This way of looking at the labor market gains credibility the less dependent the worker is on a single employer (in this sense, the more competitive the market). The existence of alternative bidders for the worker’s commodity (labor) makes less plausible the idea that the labor market gives the buyer power over the seller:

Those who identify market with freedom introduce a distinction.... Freedom is abridged only when one person can compel another to do his bidding. In a market system, no particular person compels anyone else to work. People are compelled to work only by the impersonal requirements of the system. (Lindblom, 1977:47)

This conclusion depends, as we have seen, on the freedom of the worker to pass up a job offer from a particular employer. By questioning this freedom, we open up an avenue for the exercise of power to find its way into the labor exchange. This second way of looking at the labor exchange defines an entry point for a power-centered approach to political economy.

Lindblom follows up the statement just cited with the argument that de­pendence of the worker on a particular employer endows the latter with power over the former:

Yet when livelihood is at stake in exchange, as it has been in all market systems so far in history, personal coercion adds to impersonal. If jobs are scarce, anyone who has a job to offer can coerce job applicants.... A person whose style of life and family livelihood for years have been built around a particular job, occupation or location finds a command backed by a threat to fire him indistinguishable in many conse­quences for his liberty from a command backed by the police and the courts. (1977: 47-8)

This sort of example leads Lindblom to a generalization concerning the exercise of power in the market. This generalization provides a criterion that markets must satisfy in order to exclude the exercise of the power of one party over another. According to this criterion “exchange best supports free­dom when every party can choose among offers that do not greatly differ in value from each other or from no exchange at all” (1977:49). This criterion is met when (1) markets (especially the labor market) are competitive and (2) when livelihood does not depend on exchange.

The competitiveness of markets and the degree to which subsistence de­pends on exchange are complex issues. However, a brief word on each is in order. The degree of competition varies throughout different economies, by economic sector, and by region. From the standpoint of the worker, is a market competitive when he or she has numerous choices within a local geographic area (so that changing domiciles is not necessary), within the country as a whole, or within the same industry? In the United States, the places where jobs are disappearing and being created are often very distant from one another. If there is an unemployed worker from Connecticut and an open job in Arizona, should that “opening” be considered as part of the “opportunity set” for this worker?

This last question may be impossible to answer in the abstract. Yet some statements can be made about the relative advantages of capital and labor. Two things are especially important. First, owners of capital are fewer than owners of labor services. Large firms are by definition economic units bring­ing together large quantities of labor, capital, resources, and managerial skills. Thus the ratio of workers to employers is likely to be unfavorable to workers. If workers are unionized, so that they bargain collectively, things are of course different. Our comments are addressed to the case of atomistic competition among workers.

Second, capital is at once more separate from its owner than labor is from laborers. It is also more mobile. This provides a strategic advantage to capital. If workers increase their power over capital, for example through collective bargaining, owners may move their capital elsewhere, including outside the country where its owners reside. Indeed, many firms maintain parallel pro­duction facilities in several countries so as to place themselves in a stronger structural position with respect to labor.

Power within firms

Let us assume that labor and capital markets are competitive. Does it follow that power is not a part of economic life? Not necessarily. A related, but distinct approach to linking the exercise of power to the economy looks not into the market but into the authority relations of the productive enterprise. Marx pioneered this idea when he drew a contrast between what he termed the “sphere of exchange” and the “sphere of production.” While the former might be a veritable “Eden of the innate rights of man,” the latter looks quite different. Once the worker signs the wage contract he gives over to the employer the right to determine what the worker does during the duration of the contract. While the market may counterpose free and independent persons, the enterprise consists of those who do the work and those for whom they work. The latter have broad discretion to determine what the former do. From the lowest level worker to the highest level manager, the enterprise works on the basis of levels of authority and the transmission of decisions in the form of orders. As Max Weber puts it, “the great majority of all economic organizations, among them the most important and most modern ones, reveal a structure of dominancy” (1986:29). This idea forms a central theme in radical political economists’ attempts to link politics to market economy (Bowles and Gintis, 1986:71-9).

Both Marxian and neoclassical political economy recognize a distinctive sphere of organized hierarchy within the economy. This sphere is set apart from the conventional model of market transactions, in which the parties “meet, exchange, and then part with their new holdings...” (Bowles and Gintis, 1986:77). For Marxists, there is the sphere of production, where value is created, and the sphere of exchange, where it is transmitted and realized. For neoclassical economics, there is the market and the firm. In the former, transactions take place as arm’s length economic exchanges. In the latter, they take place within the command structure of the firm. As Ronald Coase put it in “The Nature of the Firm” (1937):

Outside the firm, price movements direct production, which is coordinated through a series of exchange transactions on the market. Within a firm, these market trans­actions are eliminated, and in place of the complicated market structure with exchange transactions is substituted the entrepreneur-co-ordinator who directs production. It is clear that there are alternative methods of co-ordinating production. ([1937] 1988:35-6)

While both Marxian and neoclassical economics agree on the existence of a sphere of hierarchical relations separate from both market and state, they theorize about these relations differently. For neoclassical economics, the firm exists because the costs of transacting in markets exceeds the costs of transacting within economic organizations, for specific types of transactions (especially those where contracts are incomplete, where information is un­certain, and where incentives for opportunism are great). Thus, the firm emerges as an island of conscious economic organization within the overall system of atomistic, free exchange. The overall approach emphasizes effi­ciency and the minimization of transaction costs (see Williamson, 1979).

In Marxian theory, hierarchy is interpreted differently. The focus is not on efficiency and transaction costs but on the antagonism between labor and capital and the need for a hierarchical structure to discipline labor. In his article, “What Do Bosses Do? The Origins and Functions of Hierarchy in Capitalist Production” (1974), Marglin stresses the importance of relations of power rather than efficiency and traces the origin of the firm to “its capacity to enlarge the span and degree of control of the capitalist. The firm is thus explained as an institution of power rather than one that survives due to its cost-cutting efficiency” (Hodgson, 1988:214).

What are the implications for power of recognizing a separate hierarchical sphere in the economy? In the neoclassical tradition, power is minimal. Relations among members of the firm are seen in terms of efficiency, par­ticularly in terms of the contribution of various organizational forms to the minimization of transaction costs. Thus managers and “higher-ups” have little scope for discretion. They are agents whose task is to make and monitor contracts efficiently.

In the Alchian-Demsetz tradition (1972), power disappears. These writers deny that there is any difference between ordinary market exchange and allocation of resources within the firm. The firm is essentially a bundle of contracts where the terms of exchange, including the exchange between labor and capital, are continually negotiated. The employer orders the worker to perform certain jobs just as the worker orders the employer to pay his or her wage. Thus, the power of the firm is a complete delusion:

It is common to see the firm characterized by the power to settle issues by fiat, by authority, or by disciplinary action superior to that available in the conventional market. This is delusion. The firm does not own all its inputs. It has no power of fiat, no authority, no disciplinary action any different in the slightest degree from ordinary market contracting between any two people.... What is the content of the presumed power to manage and assign workers to various tasks? Exactly the same as one little consumer’s power to manage and assign his grocer to various tasks. (Alchian and Demsetz, 1972:777)

At a minimum, one influential branch of neoclassical economics (trans­action-cost economics) minimizes power by making efficiency the central concept. At a maximum, power disappears altogether by interpreting all intrafirm relations as free exchange. There are other viewpoints worth pur­suing. Lindblom, for example, finds the implications of authority structures within firms especially disturbing:

In developing market systems, most gainfully employed people in fact spend their working hours in an authority system - typically an organized business enterprise. The consequent threat to freedom is all the more obvious in large corporations: an organization in which a few men command thousands of others in the standardized patterns of bureaucracy does not nourish freedom. (1977)

The idea here is something like the following: Assume that we enter into a labor contract and thus subordinate ourselves (for a period) to those who own and manage the enterprise in which we work. If we spend a significant proportion of our lives within an authority structure, working to achieve ends that are not our own, unable to exercise any meaningful sense of self­determination, can we successfully sustain our sense of ourselves as free persons? And if we cannot, might this threaten our capacity to be free and self-determining during the time we spend on our own, away from our place of work?

Considerations such as these bring us to the role of conditioned power in the economy, to concern for the way in which a form of economic organization might affect our perceptions of ourselves, our interests, and our choices.