The Bigness Complex: Industry, Labor, and Government in the American Economy, Second Edition (Stanford Economics & Finance) - Softcover

Adams, Walter; Brock, James W.

Softcover

ISBN 10: 0804749698 ISBN 13: 9780804749695

Publisher: Stanford Economics and Finance, 1986

Synopsis

The Bigness Complex confronts head-on the myth that organizational giantism leads to economic efficiency and well-being in the modern age. On the contrary, it demonstrates how bigness undermines our economic productivity and progress, endangers our democratic freedoms, and exacerbates our economic problems and challenges.

This new edition has a thoroughly updated variety of issues, examples, and new developments, including government bailouts of the airline industry; regulation of biotechnology; the fiasco of recent electricity deregulation; and mergers and consolidations in oil, radio, and grocery retailing. The analysis is framed in the timeless context of American distrust of concentrations of power. The authors show how both the left and the right fail to address the central problem of power in formulating their diagnoses and recommendations. The book concludes with an alternative public philosophy as a viable guidepost for public policy toward business in a free-enterprise democracy.

About this title

About the Author

The late Walter Adams was President and Distinguished Professor of Economics at Michigan State University. James W. Brock is the Moeckel Professor of Economics at Miami University in Oxford, Ohio. Adams and Brock have also co-authored The Tobacco Wars, The Structure of American Industry, Antitrust Economics on Trial, Adam Smith Goes to Moscow, and Dangerous Pursuits: Mergers and Acquisitions in the Age of Wall Street.

From the Back Cover

The Bigness Complex confronts head-on the myth that organizational giantism leads to economic efficiency and well-being in the modern age. On the contrary, it demonstrates how bigness undermines our economic productivity and progress, endangers our democratic freedoms, and exacerbates our economic problems and challenges.
This new edition has a thoroughly updated variety of issues, examples, and new developments, including government bailouts of the airline industry; regulation of biotechnology; the fiasco of recent electricity deregulation; and mergers and consolidations in oil, radio, and grocery retailing. The analysis is framed in the timeless context of American distrust of concentrations of power. The authors show how both the left and the right fail to address the central problem of power in formulating their diagnoses and recommendations. The book concludes with an alternative public philosophy as a viable guidepost for public policy toward business in a free-enterprise democracy.

Excerpt. © Reprinted by permission. All rights reserved.

The Bigness Complex

Industry, Labor, and Government in the American EconomyBy WALTER ADAMS JAMES W. BROCK

Stanford University Press

Copyright © 2004 Board of Trustees of the Leland Stanford Junior University
All right reserved.
ISBN: 978-0-8047-4969-5

Contents

List of Tables and Charts..............................................................ixPreface................................................................................xiPart I. The Problem of Power...........................................................11. Power and Public Policy............................................................32. Economists and Power...............................................................11Part II. The Apologetics of Power......................................................233. Operating Efficiency...............................................................294. Innovation Efficiency..............................................................465. Social Efficiency..................................................................63Part III. The Political Economy of Power: A Historical Perspective.....................776. The Revolution of 1776: American Government........................................797. The Revolution of 1776: British Economic Policy....................................88Part IV. Competition and the Control of Power..........................................958. The Role of Antitrust..............................................................979. Cartels............................................................................10510. Monopoly...........................................................................12311. The Merger Problem.................................................................14412. Horizontal Mergers and Joint Ventures..............................................15313. Vertical Mergers...................................................................16414. Conglomerate Mergers...............................................................17415. The Limitations of Antitrust.......................................................184Part V. Government Intervention and Private Power......................................20116. The Regulation of Power............................................................20317. Airlines: Regulation and Deregulation..............................................20918. The Limits of Deregulation.........................................................22219. The Protection of Power............................................................23720. The Bailout of Power...............................................................253Part VI. The Coalescence of Power......................................................26921. The Labor-Industrial Complex.......................................................27222. The "Sports-Industrial" Complex....................................................284Part VII. Public Policy Alternatives...................................................29923. The Neo-Darwinist Vision...........................................................30124. The Neoliberal Vision..............................................................30825. A Public Philosophy................................................................316Notes..................................................................................327Index..................................................................................379

Chapter One

Power and Public Policy

Power always thinks it has a great Soul, and vast Views, beyond the Comprehension of the Weak, and that it is doing God's Service, when it is violating all his Laws. John Adams

REPORTS ON THE STATE of the American economy are filled with anxiety and unease: a "new economy" stock market bubble bursts, "correcting" trillions of dollars from pensions and retirement accounts; spectacular revelations emerge of fraud, corruption, and looting in corporate suites, aided and abetted by some of the nation's most prestigious accounting and financial concerns; an agonizingly prolonged economic slump defies categorization as either recession or recovery; an epic merger-mania during the 1990s fused the biggest firms in one industry after another, dramatically increasing concentration of control throughout the economy; turmoil in the Middle East, once again, raises the specter of gyrating energy prices that threaten an automotive economy dependent on sales of gas-guzzling sport-utility vehicles; an avowedly free trade, free market administration promulgates steel tariffs and a $170 billion agriculture subsidy program; prices for prescription medicines skyrocket; a catastrophic fling with deregulation of electric power wreaks havoc in California; millionaire athletes and billionaire team owners hold fans and communities hostage to their financial demands; major airlines collapse into bankruptcy. The list seems endless.

Somehow we seem incapable of dealing with problems that are essentially structural in nature. In Washington, politicians react in their accustomed manner. They choose to ignore these problems, devoting their energy instead to passionate debates about abortion, the wording of the Pledge of Allegiance, and stem cell research. Or they treat symptoms of the problem with makeshift, ad hoc, cosmetic palliatives. On Wall Street, the corporate elite are staggered by "Enronitis" in what are described as some of the most dismal years in the annals of American corporate history: having "squandered hundreds of billions of dollars on doomed mergers, vacant dot-com warehouses, and thousands of miles of useless fiber-optic cable," their "rickety empires are falling to pieces"-events that the British Economist says have prompted a "widespread questioning of the usefulness of the executive class." In academia, economists are more concerned with esoteric model building, the latest graffiti of the trade, and refining the most sophisticated apologia for the status quo than with the real world and its problems. For aficionados of the Theater of the Absurd, the script is all too familiar.

There is, to be sure, no dearth of prophets proclaiming the path to salvation. Packaged in superficial sound bites, and couched in the parlance of liberal chic or conservative platitudes, the shibboleths of our day are little more than ideological cant. On both the Right and the Left of the political spectrum, they are based on assumptions that are incongruent with the structural realities of the American economy. Their fatal flaw, we submit, is that they ignore the political economy of power.

On the Right, the culprit is Big Government. "Government-imposed mandates and regulations suppress wages, and excessive taxation of capital and investment stifles economic growth and job creation," Newt Gingrich's "Contract with America" ringingly declared. Onerous taxes and regulations "threaten the competitiveness of American industry" and "stifle entrepreneurial activity." Big Government punishes people "for being productive by hitting them with big tax increases," while rewarding others "for being unproductive by giving them entitlements." Government regulations "damage the economy and undermine values and morale." If we would only slash government spending, cut taxes, and pare back regulation, then, the Right is sure, the "entrepreneurial talent, the managerial talent, the creative talent of men and women that is now boxed into mediocrity would be unleashed and would flourish.... There's no telling what we can accomplish if only the government would get out of the way and let us load the wagon." These advocates see no danger in a policy of laissez-faire because they believe the free market will automatically regulate economic activity, inexorably meting out appropriate rewards and punishments. In their world, corporate size and power can safely be ignored. After all, in their world corporations become big only because they have served consumers better than their rivals have, and only because no newcomers have been good enough to challenge their dominance. Should a corporate giant become lethargic and no longer bestow its economic beneficence on society, it will wither and die. This is the "natural law" they believe governs economic life. It commands obedience to its rules. It brooks no interference by the state.

To students of history, this Weltanschauung is stale wine in old bottles. It is a throwback to the age of social Darwinism and the theories of its high priests-Herbert Spencer in England and William Graham Sumner in the United States. Like latter-day Calvins, they preached the predestination of the social order and the salvation of the industrial elite through the survival of the fittest. Economic life was governed by the laws of natural selection, which preserved the most efficient forms and condemned the less efficient to extinction. Institutions, according to Sumner, are the evolutionary outgrowth of natural forces, "not the artifacts of human purpose or wit." Man, he wrote, had "no more right to life than a rattlesnake; he has no more right to liberty than any wild beast; his right to the pursuit of happiness is nothing but a license to maintain the struggle for existence if he can find within himself the power with which to do it." Such is nature's way. To attempt to refashion it by legislation would be "the greatest folly of which a man can be capable." To insist on change in the natural order of things-to tamper with evolution by attempts at social reform-would mean to "take from the better and give it to the worse," and to "deflect the penalties of those who have done ill and throw them on those who have done better." Obviously, said Sumner, such a policy would be foolish and antisocial. (It would be the height of folly, for example, to curb "the captains of industry and the capitalists" who, if successful, amass "great fortunes in a short time." To Sumner, "there are no earnings which are more legitimate or for which greater services are rendered to the whole industrial body.") Far better, therefore, to eschew reform and refrain from meddling. As for the proper role of government, it was twofold: respect for the inviolability of private property rights and an uncompromising adherence to laissez-faire.

On the Left, there is a similar tendency to search for a bogey man. Here the bte noire is society's failure to engage in cooperative long-run economic planning-a failure compounded by a dysfunctional tradition of animosity and distrust among government, business, and labor. "Capitalism's biggest weakness," Lester Thurow charges, "is its myopia. It intrinsically has a short time horizon." There is no recognition "that anyone must invest in the plant and equipment, skills, infrastructure, research and development, or environmental protection that are necessary for national growth and rising individual standards of living. There simply is no social 'must' in capitalism." In what he sees as a new economic age of "man-made brainpower industries," government must play "a central role in supplying the three inputs-human skills, technology, and infrastructure-that will determine the success or failure of twenty-first century capitalism." A major obstacle in constructing the new "communitarian capitalism" required for this new age, Thurow says, is that in the United States "banks cannot own industrial firms, and businesses cannot sit down behind closed doors to plan joint strategies" for fear of running afoul of the antitrust laws. He urges us to "coalesce for success," and in so doing to assign government a key role as economic catalyst and engine. Robert Reich agrees. What we must build, Reich says, is a new kind of "collective entrepreneurialism," together with a new ideology of "positive economic nationalism." It must transcend traditional animosities and distrusts and be "premised on the importance of the values of conciliation and community" as the touchstone for success in a new economic age. We must recognize, he urges, that economic success "is coming to depend critically on how well people collaborate within large and complex organizations."

Like the proposals of the Right, these prescriptions from the Left are not new. A century ago, labor leader Samuel Gompers dismissed government policies against monopolies and cartels. "We have seen those who know little of statecraft and less of economics urge the adoption of laws to 'regulate' interstate commerce, 'prevent' combinations and trusts," he charged, but the state "is not capable of preventing the legitimate development or natural concentration of industry." Strong unions, he advocated, would neutralize the power of the trusts while enabling labor to bargain for a larger share of the economic gains generated by the industrial giants. Herbert Croly, a leading progressive of the day, was certain that monopolistic trusts marked "an important step in the direction of the better organization of industry and commerce." He advised scrapping the nation's antitrust laws in favor of a new national policy aimed at nurturing "a more positive mode of action and more edifying habit of thought" among corporations and labor. Surveying the monopolization of the American economy in that earlier age, proponents on the Left proclaimed in biblical tones that we "have left the Egypt of competition ... and are now wandering in the desert of monopoly, which we must pass through to reach the promised land of universal cooperation."

Alas, neither today's Right nor the neoliberal Left recognizes that massive power concentrations have transformed economic life. As a result, both succumb to what G. K. Chesterton once identified as the fatal flaw in all utopian schemes-"they take the greatest difficulty of man and assume it to be overcome, and then give an elaborate account of the overcoming of the smaller ones."

Notwithstanding ideological fulminations about "natural selection" and "survival of the fittest," it is a fact that industrial giants have taken the place of autonomous market mechanisms in coordinating the activities of the economy and allocating its resources. "In many sectors of the economy," Alfred D. Chandler (a conservative economic historian) has pointed out, "the visible hand of management [has] replaced what Adam Smith referred to as the invisible hand of market forces." As the mammoth corporation "acquired functions hitherto carried out by the market, it became the most influential group of economic decision makers." In this context, a policy of untrammeled laissez-faire means that society is delegating the power to plan, the power to decide, and the power to control to private organizations whose power is not subject to systematic social accountability. Cynics might characterize it as private communism.

Likewise, the advocates for more collectivist arrangements seem blissfully unaware that public policy is not made in a vacuum, that government is not an independent social institution immune to the depredations of private interest groups that have the power to influence, if not dictate, its decisions. In an economic world dominated by concentrated industry groups, the government is not some Olympian authority decreeing public policies it believes will promote the common good. Instead, subject to a cacophony of diverse pressures, it tends to fall victim to the "soft options" advocated by a consensus of powerful interest groups. Policy makers, for example, might be persuaded that steel import quotas are damaging to steel buyers, to the national economy, and even to the long-run health of the domestic steel industry, but they are bludgeoned by a coalition of steel management and organized labor into contriving protectionist trade policies that are contrary to the public interest. Under these circumstances, encouraging more coalescing power only increases the incentives for private power blocs to exert even greater control over the governmental decision-making process. At the same time it provides few safeguards against the perversion or subversion by those groups of the goals it ostensibly aims to achieve.

This book was originally published in the 1980s because we believed, unlike most mainstream economists, that an attempt to analyze power in a political economy context was important and long overdue. The book has been revised, updated, and reissued in the belief that developments during the years since then have served to corroborate and reinforce the original validity of this thesis, for at least four important reasons. First, power does exist. It may appear in many guises-economic or political, personal or organizational, private or public. Power, to paraphrase Justice Louis Brandeis, may be exerted upon rivals, upon buyers or upon sellers, upon employers or upon employed. It may be exerted through force or fraud or agreement. It may be exerted through moral or through legal obligations, through fear or through hope. It may exist, although it is not manifested in any overt act, and even though there is no intent to restrain, coerce, or oppress. Power may be exerted through words of advice, seemingly innocent and perhaps benevolent, when uttered under circumstances that make advice equivalent to command. For the essence of power is dominance. And dominance may arise simply from disproportionate size. It entails an absence of effective constraints, a freedom from accountability, and a relative immunity from sanctions.

Second, such power comprises far more than the ability to influence price in a particular market, that is (in the jargon of the economist), to raise price above marginal cost. The power of concern here is broader, deeper, and more problematic. It includes the capacity to obstruct technological advance; to manipulate the alternatives from which society is allowed to choose; to coerce society to accede to its demands through threats to shut down facilities or to relocate them elsewhere; to infiltrate government agencies with influential decision makers drawn from the industries ostensibly being regulated; and to obtain government bailouts when collapsing giants are considered to be too big and too important to be allowed to fail. It is, in other words, the discretion to determine how society's resources shall be used, the rules by which the economic game shall be played, and the kind of society in which we shall live.

Third, economic power is primarily rooted in organizational structure, which in turn has a decisive influence on economic performance. For more than a half century, for example, the American steel and auto industries were organized as tight oligopolies and manifested the performance deficiencies of this kind of industry structure: Entry was minimal or nonexistent. Innovation was slow, hampered by the bureaucratic dry rot that tends to accompany monopolistic and oligopolistic gigantism. Inefficiency flourished. And pricing was directed at uniformity and inflexibility, except in an upward direction, and anything but market-determined. In both fields, the advent of foreign competition rendered the consequences of decades of these entrenched power structures woefully apparent. A price had to be paid for years of noncompetitive conduct and lackluster performance. Both industries' travails may have been self-inflicted, but it ultimately was society that had to pay the piper. The social dilemma became a Hobson's choice: allow these key industries to collapse or implement costly government bailouts-directly in the form of outright subsidies, or indirectly in the form of import restrictions and government assumption of workers' pensions. In either event, concentrated power in private hands clearly has profound social consequences and entails sizable social costs.

(Continues...)

Excerpted from The Bigness Complexby WALTER ADAMS JAMES W. BROCK Copyright © 2004 by Board of Trustees of the Leland Stanford Junior University. Excerpted by permission.
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Edition details

• Publisher: Stanford Economics and Finance
• Publication date: 1986
• Language: English
• ISBN 10: 0804749698
• ISBN 13: 9780804749695
• Binding: Paperback
• Edition number: 2
• Number of pages: 400