All Commentary
Tuesday, April 1, 1986

A Bad Time for Giants

The Reverend Dr, John K, Williams has been a teacher and is a free-lance writer and lecturer based in North Melbourne, Australia.

Big can be beautiful, if we let the market and consumer demands decide.

Samuel Goldwyn once remarked that he would like to make a film “which begins with an earthquake and works up to a climax.” In so speaking, the film mogul gave voice to the spirit of an age which positively valued the big, the spectacular, and the colossal, an age in which the slogan, “The bigger, the better!” accurately expressed a widely held attitude.

Today, popular sentiment has undergone a change. The world, by and large, looks with suspicious eyes at bigness. Large nations, large cities, and large corporations are portrayed as sources of mischief. General Motors can do nothing right. The college president planning expansion is an “empire builder.” A squatter holding out in an abandoned tenement building against developers is an heroic David taking on a gargantuan Goliath. “Small,” we are informed, “is beautiful,” and the converse of that somewhat breathtaking generalization is that “Big is ugly.” It is a bad time for giants.

Critics of market capitalism in a classically liberal social order are conspicuous among those who equate “bigness” and “badness.” Market capitalism, it is claimed, has undergone a mutation. Once upon a time it may have been true that the market curbed the activities of businessmen and industrialists, but no more. Market capitalism has given way to “late capitalism” or “monopoly capitalism.” Giant corporations have rid themselves of the constraints imposed by Lilliputian consumers, and today stride the world. They manipulate the masses and treat governments as playthings. The big, the bad, and the ugly rule.

It is easy, and legitimate, to dismiss socialists who so characterize market capitalism. Whatever else market capitalism in a liberal society may be or do, it maintains institutions relatively free from the organisms of the state, the most massive concentration of power in human history. Socialists, in advocating an economic system coordinated by political edicts as against market forces, are advocating rule by a giant to end all giants: an all- present, all-powerful, and allegedly all-know-ing giant. For such people to deplore the large institutions characterizing modern capitalist nations is, surely, the height of inconsistency.

Yet, not all people who assert that market capitalism has undergone a metamorphosis advocate a socialist alternative. The claim that market capitalism in a liberal society is inherently unstable merits thoughtful examination, whether or not that claim is accompanied by the prescription of an alternative socio-economic system.

How Big Is “Too Big”?

The simplest version of the claim that market capitalism generates excessively large and unconscionably powerful corporations is grounded not in any economic or social theory, but in ordinary perception. An Australian church paper recently editorialized thus: “Giant corporations move in a world ordinary people do not understand. The balance sheets of these corporations casually refer to projects involving hundreds of millions of dollars. Corporate structures are complex and impersonal. What can these corporations know of the needs and frustrations of the average person? How can such a person, dwarfed by massive conglomerates, sensibly be described as free?”

Clearly, these rhetorical questions can be taken seriously and answered. Yet so to do in a sense misses the point. An attitude is being expressed rather than an argument being developed. The attitude is composed of suspicion, of resentment, and even of fear.

The words “big” and “small” are relational terms. A “big” dog is simply a dog larger than most dogs; a “small” house is simply a house smaller than most houses. Hence, when someone asserts that a corporation is “too big,” the question, “Big in relation to what?” must be asked. Simply, the claim that a corporation is “too big” in the sense that the corporation is big in relation to a solitary individual, is little more than an expression of the sort of disquiet some people experience when observing the vastness of the Grand Canyon. The claim, as noted, is understandable. Nonetheless, it is irrational.

Perfect Competition

In sharp contrast to this nonrational, almost phobic suspicion of the large corporation, a highly abstract and intellectual framework can function as a context for antagonism to such a corporation. This framework, elaborated in most standard economic textbooks, is the theoretical model described as the “perfectly competitive” or “purely competitive” market.

The world depicted in this model is far removed from what observedly is the case in developed, capitalist nations. In this theoretical world, no firm’s activities have any appreciable effect upon the market, nor does any firm so satisfy consumers that entry into the market might prove difficult for people planning to produce and trade the same good or service. My ten-year-old nephew, Patrick, who breeds parakeets in a small aviary at the bottom of his parents’ garden and sells these, is probably a producer of sorts whose activities satisfy these criteria. The activities of General Motors or of I.B.M. would not.

Again, the parakeets bred and sold by my nephew are, despite his protestations to the contrary, very much like any other parakeet, and thus comply with a further criterion for perfect competition: the product traded must be homogeneous, indistinguishable from that traded by any firm manufacturing the same sort of good or providing the same sort of service. As noted, even my nephew insists that his parakeets are, by virtue of the secret mixture of seed he feeds them and the love he gives them, “better” than other parakeets sold in the market. Certainly, most firms in the real world diligently strive to produce goods differentiated from those of their fellow producers.

Most startlingly, participants in a perfectly competitive market are quite unlike the fallible, fumbling, finite beings one encounters in the real world; sellers and buyers alike possess, in the world of perfect competition, perfect knowledge and unerring foresight. Confronted by a vast array of possible choices, all of which are somehow known to them, they infallibly and instantaneously select the optimum option. No unwanted situations arising out of human ignorance or errors of judgment exist.

This abstract, theoretical model has very limited applicability in the real world. The absence of a plethora of tiny firms manufacturing or providing an absolutely homogeneous product or service is in no sense ominous. No static model depicting an ideal allocative outcome of market processes captures the essence of a capitalist economy. Joseph Schumpeter puts it well: “Capitalism. . . is by nature a form or method of economic change and not only never is but never can be stationary.” Indeed, Schumpeter is worth quoting at length. “In capitalist reality as distinguished from its textbook picture . . . . [the] kind of competition which counts . . . [is] competition from the new commodity, the new technology, the new source of supply, the new type of organization.” This form of competition “acts not only when in being but also when it is merely an ever-present threat. It disciplines before it attacks.

The abstract model of a perfectly competitive market depicts a situation in which all potential mutually beneficial transactions have been realized. A state of equilibrium obtains. In the real world of changing circumstances and human finitude, disequilibrium is the reality. The absence of equilibrium generates in a market economy systematic entrepreneurial activity that tends to eliminate existing imbalances, moving the situation closer to an hypothesized state of equilibrium defined by the market data which obtained prior to the beginning of this entrepreneurial activity. Yet before this activity results in even an approximation to this hypothesized equilibrium state, the data of the market will have changed. People’s tastes will have altered; available resources will be marked by different relative scarcities; new technologies will have been born; new ideas will have emerged. A new state of disequilibrium exists. Further entrepreneurial activity is thus generated. On and on the process goes. Market capitalism can, in other words, only be understood in terms of ongoing market processes, not any particular static allocative outcome of these processes.

Non-Market Decision Making

H ad one asked a typical mainstream economist some two decades ago to outline a desirable program of governmental economic management, he or she probably would have insisted upon fiscal and monetary policies to promote macroeconomic stability. Some sort of antitrust legislation, regulation, or nationalization of natural monopolies would be proffered. Subsidization of various activities productive of positive externalities (especially education and research), and taxation policies promoting greater economic equality, would also be eagerly promoted.

More recently, however, mainstream economists have seriously questioned the theories of so-called “market failure” and of governmental behaviors informing such a program. It is conceded that such abstract and simplified models as the perfectly competitive market assume away institutional details which may in fact fulfill an extremely useful purpose. More significantly, it has become clear that while governments eagerly embrace rationalizations for intervention in the market—and that many economists are no less eager to elaborate such rationalizations—governments have their own purposes. The dynamics of political processes are such that the outcomes of intervention may be quite other than those intended by economists. Similarly, bureaucracies have built-in incentive structures which largely determine the way they perform. Some disillusioning observations have led to a heightened interest in comparative institutional analysis, in which deterministic theories of the performance of market, government, and bureaucratic institutions are deduced from their underlying incentive structures, on the assumption that decisionmakers are rational and desirous of improving their own situations.

Insights provided by this sort of analysis confirm what Ludwig von Mises long ago asserted, namely, that non-market decision-making entities have serious deficiencies with respect to the weighing or reg istering of individual preferences, the taking of a long-term point of view, operating at a low cost, and, generally, achieving an allocation of resources closer to that suggested by an ideal of perfect coordination than does an unfettered market. In short, many mainstream economists working within the framework of perfect competition now argue that intervention is warranted only when they allegedly totally default, not when they allegedly marginally default.

The notion of perfect competition does, in emphasizing ease of entry into and exit from the market, serve as a reminder that any alliance between government and any set of market participants, union or business, is anathema, jeopardizing freedom of market entry. The maximum wage laws that cursed the political economy called mercantilism, and the minimum wage laws cursing most Western nations today, are cases of such an alliance. So are tariffs, quotas, price-maintenance schemes, subsidies, laws dictating shopping hours, price controls, and the plethora of regulations today fettering most Western economies. That the market continues to operate when so bound and burdened is testimony to its hardiness. How long it can continue to operate when its nervous system—changing relative money prices—is subject to ever-increasing distortion, is not, however, clear.

One thing, however, is clear. Antagonism to large corporations based upon the disparity between the actual operation of market economies and the defining characteristics of perfectly competitive or perfectly contestable markets is misguided and misplaced.

“Late Capitalism”

During the late 1950s, Ludwig von Mises delivered a series of lectures on economic topics to Argentinean audiences, subsequently published as Economic Policy. He did what only a master of any academic discipline can do: simplify complex issues without distortion. He commenced his first lecture thus:

Descriptive terms which people use are often quite misleading. In talking about modern captains of industry and leaders of big business, for instance, they call a man a “chocolate king” or a “cotton king” or an “automobile king.” [Yet] . . . a chocolate king does not rule at all; he serves. He does not reign over conquered territory, independent of the market, independent of his customers. The chocolate king—or the steel king or the automobile king or any other king of modern industry—depends on the industry he operates and the customers he serves. This “king” must stay in the good graces of his subjects, the customers; he loses his “kingdom” as soon as he is no longer in a position to give his customers better service and provide it at lower cost than others with whom he must compete.

The vision is clear. Consumers, by their decisions to buy or abstain from buying, determine what is produced and in what quantities. Ultimately they determine the prices at which goods are sold, the choice of means whereby goods are produced, and the remuneration received by all participants in the productive process.

Such, say many contemporary critics of market capitalism, was once the ideal and perhaps once was the reality. But no more. Large corporations have dethroned the consumer. These critics range from socialist politician Michael Harrington to Marxist-Leninist economist Paul Sweezy. But perhaps John Kenneth Galbraith best reflects the general attitude.

Writes Galbraith: “So far from being the controlling power in the economy, markets [are] more and more accommodated to the needs and convenience of business corporations.” Corporations are controlled not by consumers, but by the faceless, anonymous “experts” constituting what Galbraith calls the technostructure, people possessing the information and expertise necessary to design a product, to acquire capital, to modify people’s taste, and so on. Informed by this technostructure, corporations exercise an unchallenged sovereignty. The giant has flexed his muscles, freed himself of all constraints, and thus today exercises unfettered power both nationally and internationally.

Galbraith’s views, eloquently expressed, brilliantly advertised, and attractively packaged, have successfully been sold to many members of the general public, and to countless “fringe” academics and influential journalists. Most economists have manifested considerable sales resistance. Professor Harold Demsetz asserts, “The only conclusion permitted by [my] investigation is that Galbraith’s notions are remarkably consistent in their inability to find confirmation . . . . Columbus had a great deal more corroboration for his belief that he found the Indies than Galbraith has for his discovery of the new industrial state.” George J. Stigler and James Kindahl, in a major study commissioned by the National Bureau of Economic Research, conclude, after exhaustive investigation, that the claim that “prices of concentrated industries do not respond to reductions in demand” runs counter to all the evidence.

In sum, the economic attack on large corporations collapses. The desperate attempts to demonstrate that large corporations need no longer seek to serve consumers have failed and failed dismally. Indeed, as simple an exercise as the persual of the Fortune top 500 companies over a period of time suffices to raise a question mark against their simplistic, but widely accepted, assertions. Of the original 500, only 285 remained two decades later; 159 had merged, 50 had either gone bankrupt or shrunk, and 6 could not be classified, the data necessary for classification being unavailable. So much for the unchallengeable sovereignty of the modern corporation!

The Transnational

But what, it may be asked, about these malicious, monstrous corporations which feast at tables groaning under the bounty secured by global plunder: transnational corporations? Are they not, in the words of Richard Barnett and Ronald Miller, “disturbers of the peace on a global scale”? Did not the Sixth Assembly of the World Council of Churches, held during 1983 in Vancouver, declare its avowed opposition to transnational corporations, insisting that the world’s “market system as a whole . . . [is] incompatible with our vision of a just, participatory and sustainable society” and rapturously applaud Jan Pronk, Deputy General Secretary of the United Nations Conference on Trade and Development, when he informed a plenary session of the Assembly that the New International Economic Order would bring to all people the advantages of “international democratic socialism”—albeit not explaining how that cabal of tyrannies could establish a democratic order of any kind whatsoever? Does not everybody know that transnational corporations today constitute “the spearhead of U.S. imperialism”?

Oddly, not everyone does know that. The Marxist-Leninist dictator of Zimbabwe, Robert Mugabe, apparently does not know how terrible transnational corporations are, for when visiting New York in August, 1980, he pleaded with the heads of transnational corporations to invest in Zimbabwe, stating, “Union Carbide has done much good for Zimbabwe. Why can’t other companies as well?” John Kenneth Galbraith does not know how evil such corporations are: in an article published in 1978 in the Harvard Business Review he ridiculed the obloquy typifying most discussions about transnational corporations. (Such support, admittedly, is ominous: If Galbraith approves of transnational corporations there must, surely, be something suspect about them. The careful reader of Galbraith’s article will observe, however, that Galbraith perceives in transnational corporations organizations large enough and powerful enough totally to bypass consumers and deal the coup de grace to whatever remains of consumer sovereignty. Since Galbraith deplores the tastes of the masses and dreams of a day when intellectuals sharing his values control socio-economic systems, the complete elimination of any vestiges of consumer sovereignty is to be desired. Galbraith fails dismally to demonstrate that transnational corporations can so defy the rule of consumers. He does demolish most of the fashionable objections to such corporations.)

Interestingly, some economists commissioned by the International Labor Office in 1975 to prepare a series of studies on transnational corporations, documented some embarrassing truths. They noted that such corporations had created two million jobs in developing nations, usually had replaced expatriate managers with host-country nationals as soon as was feasible, and scrupulously had respected the host country’s social values and labor relations practices.

Indeed, transfers of wealth effected by transnational corporations have demonstrably been of more assistance to the people of developing nations than have most government to government transfers. Such private transfers are considerable. There is the transfer of capital involved in building factories and plants. There is a transfer of human capital, host country nationals acquiring new and valuable skills. Wages paid to employees can, given sensible taxation policies, lead to saving, capital accumulation, and the creation of local industries. Typically, when transnational corporations invest in a developing nation, schools and hospitals are erected and considerable funds are invested in infrastructure, such as roads and sewerage.

Some Telling Arguments

Strangely, some of the most telling arguments in favor of trans-national corporations are unwittingly provided by their opponents. Richard Barnett notes that the power of such corporations is a function of their capacity to internationalize planning, financing, production, and marketing. Has he not heard of comparative advantage? Is it not desirable that the different strengths of different nations should be linked? Is not a world of interdependent nations a safer world, as well as a wealthier world, than a world of unrelated nations desperately struggling to achieve self-sufficiency? Again, the Brandt Commission laments the “ability of [transnationals] to manipulate financial flows by use of artificial transfer prices” and notes that such corporations “have been able to race ahead in global operations and out of reach of effective controls by nation-states or international organizations.”

Informing this condemnation of transnational corporations is a fiction: that the interests of rulers and the interests of the ruled invariably coincide. This is, admittedly, a useful fiction from the point of view of the rulers, but it is a fiction nonetheless. Governments busily inflating the money-supply of a nation are doubtlessly assisted in their task by stringent exchange controls. The economy of the nation—and hence the vast majority of the nation’s people—does not benefit. Protectionism and the savage customs duties protectionism demand feed economic inefficiency and high prices. Do these realities benefit the people? Bluntly, at long last governments, largely thanks to transnational corporations, are being forced to compete. Such is cause for hope, not dismay.

Yet such hope is conditional. When governments and corporations form an unholy alliance and substitute an invisible handshake for the invisible hand of the market, mischief is afoot. Many corporations today bask in special privileges and actively enjoy an alliance with government. When such alliances exist, either in a developed or a developing nation, an obscenity has been spawned.

To suggest that an admittedly deplorable overlap between corporations and governments calls for the total subordination of a nation’s economy to the state, is an obvious non sequitur. It also proposes as a remedy a more deadly variant of the disease from which Western nations today suffer. That remedy—and its name is socialism—has, after all, been tried. It has reduced once wealthy nations to destitution. It has transformed liberty into slavery. It has destroyed the only means a people possesses for so allocating scarce resources that food sufficient for all to eat is produced and the specter of poverty is exorcised.


Small is beautiful.” Sometimes it is. Sometimes, however, it is disastrous. Warm-blooded animals in a cold environment must be above a certain size or they will perish. That is why there are polar bears, but no polar mice.

The same can be said about organizations and the economic environment. The free market, and that presupposes a limited but strong government respecting the autonomy of each citizen and protecting the God- given liberties of all, alone can determine what size is the “right size” for any business or industry. So long as growth enables a corporation better to serve its customers, such growth is desirable and such growth will continue. When growth lessens a corporation’s capacity to serve the people, a red light is flashing. That corporation must cut back, or its days are numbered. Sadly, but understandably, the temptation is for the corporation to plead with government to save it from the unpleasant alternative of painful change or destruction.

Consistent advocates of the free market in a free and open society must say “No!” to such pleas. Neither we nor anyone else can say in advance what size is the “right size” for a particular business enterprise. Yet we can say, and say with confidence, that the free working of the market will enable that “right size” to be discovered. Hence, when corporations and the State start coyly flirting, we do well to appoint ourselves to the “spoilsport” role of chaperones. A love affair almost guaranteed to produce mutant giants or dwarfs must, in all charity, be nipped in the bud!

  • The Reverend Dr. John K. Williams has been a teacher and is a free-lance writer and lecturer in North Melbourne, Victoria, Australia. He was resident scholar at FEE from April to October of this year.