Why competition breeds monopolies

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Economy Class

When I was at university friends who studied economics were told that not only is the boom and slump cycle entirely natural, but that it was also a good thing. One professor said "the economy is like a drunk throwing up the morning after the night before". A slump may not be pleasant, but it was necessary to cleanse the system.

Friedrich Hayek, one of the most famous proponents of free market economics, revelled in the destruction of a slump. For Hayek, slumps just laid the ground for the future production of even greater amounts of wealth. His fellow "Austrian school" economist Joseph Schumpeter talked of the "creative destruction" of the free market. Implicit in this argument is also the idea that nothing changes. It is the boom and slump "cycle" - it just goes round and round eternally and everything central to the system largely stays the same.

What Karl Marx identified was that as capitalism gets older the crises that it experiences also become deeper and longer. In other words, every slump is not simply the same as the last. One reason for this is what Marx called the "concentration and centralisation of capital".

Concentration refers to the way that units of capital grow in size. The small firm becomes the big business, and the big business becomes the giant multinational - provided of course that it can survive the recurrent crises. Centralisation on the other hand refers to the way that smaller firms get wiped out in crisis, leaving those that are left controlling a bigger proportion of the system.

It is worth looking again at what happens in a crisis. As firms go bust, workers are laid off. This means that workers buy fewer goods produced by other firms, while orders for machinery and equipment or new buildings are also cut back, so pushing other firms towards bankruptcy and so on. The slump spreads throughout the economy.

However, there is another impact of the crisis. When some companies go bust their raw materials and machinery can be bought up on the cheap by those firms that survive, helping to boost their output and profitability. A crisis also puts pressure on wages and other labour costs as workers, fearful of losing their jobs, accept worse pay and conditions.

So some profitable firms survive, prosper even, by "cannibalising" other weaker, less profitable competitors that go under in the crisis.

As a result production becomes dominated by fewer but bigger firms. Eventually instead of industries having dozens of small-scale businesses they become dominated by multinational firms.

But this has two consequences for the way crisis interacts with the system.

Firstly, the collapse of huge multinationals will have a much more devastating impact on the economy than, say, one in ten small firms in an industry going bust. The collapse of huge firms risks creating a huge black hole in the economy pulling down vast swathes of the economy with it.

If we imagine the global economy as a big house, with each brick making up different units of capital, a century ago it would only have been small bricks that would be destroyed in a recession. Now it is whole walls worth of bricks, making the whole house ever more unstable. Capitalists may be able to avoid small crises, but only to be eventually hit by an even bigger one.

Secondly, the growth of firms has been accompanied by a tendency for capital and the state to become much more intertwined and mutually dependent. So states look to promote the interests of "their" firms as they battle with foreign rivals, while firms look to the state to provide a skilled and healthy workforce, transport facilities, help in trade negotiations and so on. Firms then pressure the state to protect it from the impact of the crisis.

But if firms are propped up by the state, then the role played by a crisis in cleaning out the system, so boosting the fortunes of profitable companies who survive, is more limited. But this means that the crisis may become much more protracted.

The process of the concentration and centralisation of capital has another consequence - it leads to fewer people owning the world's wealth. In 2008 the sales of the world's biggest 2,000 companies equalled half of total world output. Even if we assume that ten directors sit on each board of these companies, that means that around 20,000 people control half of the world's wealth, out of a global population of over 7 billion.

Of course, Marx did not think that the economic collapse of capitalism was inevitable, despite its ever deeper crises. There is no economic crisis that capitalism cannot get out of provided the working class is prepared to pay for it.