This brief paper seeks to deal with the question of the market relative to institutions, both in terms of their ability to utilize and mobilize skills as well as develop into oligopolies. The issue here is that true economic growth can only be guaranteed by the small firm.
In the 20th century, there have been three very general approaches to economic growth: the first, the anarchic free market, second, central planning, and third, a functioning market economy with strong state intervention. The first is very difficult to find, the second was made infamous by the old Soviet bloc, and the third seems to be the most dominant, a market system with substantial state interference to bring about certain outcomes the market is deemed incapable of providing.
Libertarians and allied groups have held that the market, in itself, is sufficient to meet all economic needs. In this paper, the specific need is general–the need for economic growth and development. The market is the best means of bringing this about because it makes the best use of resources and is best situated to meet demand, that is, economic growth must be people centered, and hence, should derive from demand and the marketplace democracy that it implies.
If the market is considered “necessary and efficient” for economic growth, this means no other institution is necessary other than what the market requires. This requires firms, that is, organizations of capital and labor that “absorb risk” within the market structure (Nichols, nd). The market demands that there be many of these firms because the more firms, the more intense the competition, and the more intense the competition, the greater the variety of products and the lower the price.
But there is another reason for the necessity of firms, this is the fact that the information economy and the high technology sectors move too fast for anything else. This is to say that the firm permits the mobilization of specialized labor that is necessary to keep up in a large and expanding market (Nichols, nd). This is centrally important: a large number of firms are important because they can mobilize these specialized skills as well as seek to utilize different skill sets for the development of the possibilities of the information age and its technological specializations. There cannot be a single firm doing this, or even a small number due to the fact that the high technology sector moves so quickly, incentives for adjustment need to be a huge part of the market structure: as firms move towards monopoly, such incentives proportionally decrease. In other words, while a market cannot function under a oligopoly or monopoly by definition, the high tech sector of the modern economy, due to the speed of its development, forces firms to move quickly. Smaller, more dispersed firms can do this far better than a monopoly of oligopoly, since it will be the firm, rather than the market, that makes these decisions.
One might hold that today’s semi-statist economy in the west is in fact, an oligopoly. The high tech sector is controlled by a relative handful of firms that manage demand, and, some might argue, actually crate the demand. This is the problem of oligopoly, one goes from responding to demand to the “management” of it. Hayek spent his career making the distinction between a theoretical knowledge of how economics work to the actual functioning of billions of individuals each making decisions. The former is based on neat models and a slew of theoretical assumptions, the latter, anarchic. The former is the mentality of the firm, the other, the reality of the market. Firms seek to become monopolists in order to impose a set of demands upon the market (Hayek, 1945).
Libertarians such as Hayek or Rockwell hold that the institution is different from the market, and that institutions begin to develop a logic of their own that is not market based. But that is just the problem, institutions, that is, firms, seek to regulate or manage demand rather than respond to it. Even more, “responding” to demand is an ambiguous phrase in that demand can never really be “operationalized” and made amenable to the theoretical grounding of institutionalized life. Rockwell (2003) uses the example of war games and the actual functioning of war. He holds that the war games that acted as the basis for military strategy in the Gulf War incorporated all the assumptions of the military establishment and the state it works for.
War Games refers to planning, the actual war, the market. The two often do not meet. But the firm is no different in many respects, especially in the world of oligopoly, than any other central planning structure, and suffers from the same debilities. War games are programmed to create opponents who act in predictable ways, ways that are inherent to the program. But this is precisely the point of Hayek, theoretical assumptions cannot be used in such programs because the acts of individuals cannot be known in advance, and the preferences of the aggregate of individuals can take an infinite number of possible outcomes.
In dealing with issues concerning the environment or the use of fossil fuels, the same model applies. This is to say that the market, dealing with the greater and greater expense of the traditional fuels, will begin developing methods of creating synthetics and other innovations to deal with the problem. If the environmental situation is such an issue, the market will respond, forcing firms to utilize their specialized skills to meet the problem (Frazier, 2008). If fossil fuels become harder and harder to find and their political costs become too high, then only the market can create the solution, since the firm that develops cheap, renewable energy the best will profit handsomely in the market (Turner, 1997). The greatest incentives of profit and market share will drive the search for new forms of energy. If anything, it has been the state’s interest in oil, and the oligopolist’s closeness to it, far more than the private sector that has maintained an unhealthy reliance on overseas forms of crude oil. The close relations between the major oil firms and the western governments have crated a worse case situation where the interest in maintaining US hegemony in the Middle East and Africa is the same thing as keeping the oil oligopoly’s profits high. A truly free market, with relatively small firms existing free of state interest would have solved this problem generations ago: oligopoly is another matter in that all monopolists or oligopolists seek state protection. In other words, the pattern is that one large firm or a small group of large firms has a tendency to seek the protection of the state. The state protects the unearned profits, i.e. rents, of the oligopoly. Hence a truly free market of many, many small producers would actually be able to respond to demand in a free market rather than managing demand, or even creating it.
If Hayek is correct, and the aggregate demand of millions of people cannot be understood by any planning agency, then the world of large scale capitalism also falls under that anathema. Large firms in an oligopolic environment tend to impose their version of economic life on a complex market: planning is planning whether private or public, and in reality, that distinction falls apart once oligopoly rears its head. The arguments of the free market do not apply to the current situation in America, where a relative handful of powerful high tech firms and media moguls create a world where demand is invented and hence, the preferences of the firm seek to become hegemonic over the preferences of the population. Small firms respond to the market, large firms seek to create it. This can be seen with the classic oligopolies such as American automobiles, airlines, beer, books, energy, computers and agriculture where the oligopoly tends to both vertical and horizontal integration and seek to manipulate the “shelf life” of their products as well as the basic mentality of the population they exploit (Hannaford, 2007).
Therefore, while the market is a necessary and sufficient institution for economic growth, the drawback is the development of oligopoly, which may be both the cause and the effect of state intervention and the rent seeking mentality of all successful businesses. The oligopolist is a parody of the market and uses its unearned rents to stifle innovation and economic growth. Hence, the libertarian attack on the “state” is misplaced when the very distinction between private and public power is under attack.
Frazier, Bart (November 26, 2008). “Global Warming, Central Planning and the Free market.” Freedom Daily.
Hannaford, Stephen (2007) “Basic Principles of Oligopolies.” Oligopoly Watch. (www.oligopollywatch.com)
Hayek, F (1945) “The Use of Knowledge in Society.” The American Economic Review 35, 519-530
Nichols, Kreg (nd) “The Changing Nature of the Firm” AMA-gi 1 (www.hayek.org.uk)
Rockwell, Llewellyn (2003) “War and Central Planning.” The Free Market, 21 (www.mises.org)
Turner, Frederick (1997) “The Merchant of Avon.” Reason. (http://www.reason.com/news/show/30189.html)