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Tuesday, March 14, 2023

Are ‘Big Businesses’ Bad?

There's two sources of "bigness" people don't consider.

Image Credit: Pixaby

When we hear the term “Big Business,” it’s common to associate it with greed and exploitation. However, the truth is, in business, “big” doesn’t necessarily mean “bad.” The key question is: how did the business become big? And, more specifically, did it grow through value-creation or through government-granted privilege?

Value-Creating Big Business

This may come as a surprise, but one example of a business that (at least initially) became big through value-creation was John D. Rockefeller’s Standard Oil Company in the late 19th and early 20th century.

At one point Standard Oil owned 90 percent of the oil refineries in the United States. Although it dominated the market, that didn’t mean it did so through nefarious means.

Voluntary Support

Despite his reputation as a “robber baron,” Rockefeller did not grow Standard Oil by exploiting customers. He did so by providing them value. In a letter Rockefeller wrote to a partner, he said that he wanted to provide “the best [oil]… at the lowest price.” He achieved that goal as the numbers show. Between 1859 and 1869 oil prices fluctuated wildly between a high of $9.59 and a low of $0.49 per barrel. This created an unpredictable and risky market for customers. But after Rockefeller established Standard Oil in 1870 he was able to decrease prices and stabilize them for customers. (See Figure 1)

Figure 1

Open Competition

Rockefeller also didn’t have any government help when he established and grew Standard Oil. Many companies today are given a competitive advantage by the government, including through subsidies and tariffs. But Rockefeller outdid competitors for a time by establishing a smart business plan, doing his homework, and ultimately, focusing on providing value to the customer.

Most companies during the Pennsylvania oil rush were focused on oil surveying and digging, which was riskier because of its variable costs, but could make a man rich overnight. Rockefeller took a different approach, deciding instead to focus on researching better ways of refining oil.

This strategy proved to be profitable. He was able to use his research to buy “sour” oil fields no one else wanted and remove the impurities from the oil using his special refining techniques. He was also able to negotiate railroad discounts by promising 60 carloads of oil daily to railroad owners. It was strategic business moves like these that made it possible for Rockefeller to provide customers with oil quickly and cheaply.

For a brief time in 1890 Standard Oil dominated 90 percent of the oil market. However, Rockefeller was never able to surpass that level due to ever-present competitors. As Murray N. Rothbard wrote:

“[N]ew independent refiners were attracted to the petroleum industry by Standard’s high profit margins. Whereas there was a total of 67 refiners in 1899, they had more than doubled to 147 by 1911.”

The Rockefeller family did later get enmeshed with the government, but Rockefeller’s first major company got big (for a time) by outperforming his rivals in creating value for voluntary customers.

Government-Privileged Big Business

The same cannot be said for many other big businesses, however.

Take the modern food industry, for example. A report from The Guardian showed that a staggering 80 percent of the food we consume comes from only five companies: Kraft Heinz, General Mills, Conagra, Unilever, and Delmonte. These together are referred to as “Big Agriculture” or “Big Ag” for short. But, unlike Standard Oil, these big businesses did use nefarious means to grow dominant.

Involuntary Support

Part of Big Ag’s dominance comes from government subsidies.

Since the Great Depression, staple crop production has been subsidized by the US government. Farmers that produce these crops are still paid our tax dollars today. In 2019, it was found that a shocking 1/5th of farm income came from government subsidies. These subsidies make it cheaper for these Big Ag companies to operate, giving them a leg up on competitors.

Subsidies are a form of involuntary support. Unlike customers, taxpayers who support big businesses through subsidies have no choice in the matter. Money, if left in the pockets of consumers, could be spent on goods that they want produced. Big Ag and its companies are propped up by dollars that consumers didn’t give them.

Tariffs

Tariffs are another way Big Ag stays big through government privilege.

Shortly after World War I, US agricultural interest groups lobbied the government for protection against food imports because European food producers were outcompeting them. This led to the Hawley-Smoot Tariff Act which put fees on food imports.

These food tariffs gave US food companies an “at home” advantage. The problem with tariffs is that they hamper competition from foreign countries. This leads to higher prices for consumers.

Tariffs prevent lower prices and may even raise them. If European food companies were allowed to compete in the American food market then U.S. food companies would have to adapt to provide a better deal to consumers. But, if U.S. food companies are left in a “trade vacuum”, they can unfairly sustain, or even raise their prices for American consumers.

Lobbying

Crony industries like Big Ag often get these special favors through lobbying.

In 2022, $27.27 million was spent on lobbying by food and beverage manufacturers. And, in the book The China Study, there’s a baffling account of sugar companies blackmailing the World Health Organization into raising sugar consumption ranges past the healthy level in global health guidelines:

“[T]he U.S.-based Sugar Association and the World Sugar Research Organization, who ‘represent the interests of the sugar growers and refiners, had mounted a strong lobbying campaign in an attempt to discredit the [WHO] report and suppress its release…’ According to the Guardian newspaper of London, the U.S. sugar industry was threatening ‘to bring the World Health Organization to its knees’ unless it abandoned these guidelines on added sugar. WHO people were describing the threat ‘as tantamount to blackmail and worse than any pressure exerted by the tobacco industry.’ The U.S.-based group even publicly threatened to lobby the U.S. Congress to reduce the $406 million U.S. funding of the WHO if it persisted in keeping the upper limit so low at 10%!”

In a later passage, the author mentions that the ranges for sugar consumption are actually different outside of the US indicating that these sugar interest groups succeeded in their blackmailing. “[W]e now have two different upper ‘safe’ limits: a 10% limit for the international community and a 25% limit for the U.S.”

It’s not often that these special interest groups show their true colors, but when they do, it’s truly terrifying how far they’ll go to sustain profits, even if it’s not in the best interest of consumers.

The Takeaway

The takeaway here is when companies have a way to give themselves an advantage, they’ll take it.

In a free market, this can be a good thing. Rockefeller saw opportunities to refine oil better and cheaper than ever before and he used that to his advantage. Not only did he become rich, but he did so by providing higher quality oil at lower prices for his consumers. In a free market value-creation reigns supreme and it benefits all parties.

In a regulated market, however, companies can gain unfair advantages. They get involuntary support via subsidies, use tariffs to cripple competition, and they lobby to try and get more government support or even misinform consumers. Under crony capitalism, corruption reigns supreme and it benefits only one side.

Are big businesses bad? It depends on whether they got big through politics or through the market.