When Capitalism Is Bad For The Capitalist

We are all familiar with the complaints of those who bemoan the negative tendencies and consequences of a capitalism run amuck. Most of these negative attributes center around the plight of the poor or  the degradation of the environment. But there’s another purported category of detrimental capitalist fallout. The loser in this third category is neither laborer nor spotted owl– but the capitalist himself.

In a capitalist economy, money inevitably attracts money like an ever-growing magnet attracting more and more iron-filings, with success feeding upon success until, in every economic area, behemoths of industry arise to dominate the scene. These great tyrannasauri tower above the remaining small businesses until these businesses, too, are swallowed up by the one or two giants left to rule the particular industry.

There are an individualized constellation of reasons why any one particular company begins to grow at a faster rate than its competitors. But whatever those initial growth-factors are, the more a business grows, the more advantageous becomes its position vis-a-vis its competitors.

One advantage Marx notes, in a collection of essays which have come to be called the Economic and Philosophic Manuscripts of 1844, is that “the big capitalist always buys cheaper than the small one because he buys bigger quantities.”  Lower input costs means that he can make more profit-per-unit than his smaller competitors, thus improving his relative position– or he could also simply choose to under-price the competition, making their financial position relatively worse.

The larger capitalist can also weather business downturns better than a small business can.  With his larger and more diverse holdings, says Marx, the big business can “bear temporary losses until the smaller capitalist is ruined.” The dark side of this advantage is that a large company could sell one of its lines of product at a razor-thin profit-margin, compensating for its lack of marginal income with its savings or from the income derived from other product-lines.  The company could even choose to sell at a loss (though, depending on the laws, they may have to hide this fact with some creative accounting); smaller competitors will not be able to match such predatory pricing, and will eventually be driven out of business, often during a recessionary time, when the final financial life-line snaps.  In this way, the giant business inherits the customers of the smaller business, and can then raise its prices back up to the more natural mark-up. “In this way,” writes Marx, “he accumulates the small capitalist’s profits.”

Additionally, large businesses possess financing advantages over the small guy. For instance, with access to large amounts of credit available when needed, the big business does not have to keep on hand a lot what Marx calls (or at least is translated as calling) “ready money.” When small businesses go under, it is often due less to generally low revenues than to a “cash-flow problem”– that is, the timing of the money-in and money-out do not line up, with loan-payments or other bills coming due too closely together or at the wrong season revenue-wise.

There’s also the secondary benefit of more abundant credit– large businesses can borrow money and then use the money to buy in even greater bulk for even greater discounts, thus increasing their pricing advantages.

A big business also can afford the financial layout for large factories, reaping the efficiency benefits of the assembly line and of returns-to-scale. Additionally, a business may acquire assets in the businesses both upstream and downstream from its product, thus becoming its own supplier as well as its own retailer and cutting out the expense of middle men. Once upon a time, this used to be regulated against in America under the crime of “vertical monopoly”– but today, vertical monopolies are basically not prosecuted. I do not believe the term “vertical monopoly” was in use in the early 1800s (just as it is really not in use today), but Marx did speak of the lessening of competition “when capital is enabled by its size to combine different branches of production,” and likewise when “capital and landed property are united in the same hand.”

Due to all these and other advantages accruing to big business, Marx in 1844 was already warning us that “the necessary result of competition is the accumulation of capital in a few hands.”  That is, although it may sound counterintuitive, far from discouraging the concentration of wealth and power, capitalism has a tendency to drive markets TOWARD monopoly.

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