FYI, this is a follow up from this thread.
Conservative economists love to argue the supremacy of the market, i.e., no power can (or rather should) exercise control over the market especially in respect to prices. They state that all prices are set by the market and that manipulation is only an aberration. “Enron is the exception, not the rule.” Facts suggest otherwise. The government will punish business. The market rarely does. The main cause of bankruptcy is not failure in the market, but failure by management. “roughly 90 percent of small business failures are a result of poor management”. PDF, page 3.
And one of the main reasons for corporations* is to seek power over the market and manipulate for their purposes. Of course the polite term is ‘risk management’. But that is the ultimate end – to minimize risk by immunizing the corporation from the vagaries of the price market. Thus we see futures markets and hedging, supplier contracts, and other measures of protection. Corporations also seek market share and economies of scale in order to have market power. But my current complaint is not with the practices, but with those that state the practices do not exist. If the above measures did not exist, the market would appear very different, so to claim that no manipulation of the markets exist strikes me as very disingenous.
*Most corporations are very small and chose incorporation because of all the legal advantages, not because of any inherent advantage. Those legal benefits could be applied to a different form of business. Those corporations are not the ones I have problems with. My criticisms are for the medium and large cap firms that have the ability to achieve influence over the market while claiming that they do not.
Corporations also immunize themselves from outside forces by practicing oligarchy. The average corporation is based on a oligarchic model of governance. Power is concentrated in the board members and upper management. It uses a thin veneer of ‘democratic’ shareholder elections to maintain that power. But the slate of candidates are hand-picked by the powerbrokers, not the shareholders. In cases of hostile takeovers, speech is suppressed. The campaign is waged in the ‘foreign’ press. ‘Domestic’ supporters are often 'forced into exile,'i.e., laid-off if they dont toe the party line. But again, my complaint is with those that would argue that corporations are not oligarchies, or worse, IMHO, that they should be.
I believe that modern corporations have grown out of control because they are oligarchies. There also appears to be a modern myth that this the best form of business organization and that they can do no wrong. From the point of view of the oligarchs, certainly. From the viewpoint of democracy, I hold they will inherently corrupt the system because of their undemocratic nature. They are sociopathic in that they do not care about society as an end in itself. Their sole concern is to maximize profit, and that is the only ‘rational’ concern they should have. If they have to ‘rape’ society to achieve that profit, they blame the victim for allowing itself to be raped rather than the corporations check themselves.
Yet many companies exist to provide an exceptional service or product, and only seek to a get sufficient return on investment to enable an ongoing concern. They work with all of their stakeholders to ensure mutual benefit for all parties, but this is rarely taught in business school.
I hold that partnerships and co-ops are far more ethical and democratic forms of business and should receive the attention that corporations now hold in commerce and under the law. Co-ops are not even mentioned in most business texts. Partnerships are held to only be valid for white-collar firms.
Caveat. This is an ongoing subject for myself and something that I am devoting much of my academic study to. So my research is less than I would like and these present more opinions and hypotheses than conclusions. But I think they are worthy of debate, especially in this early stage.
So do you agree or disagree with the above? Why, or why not?
Thanks,
No. Most economists (liberal or conservative) argue that market forces are always present, and you can’t cheat them by fiat. It’s not a desire to save the abstract concept of “the market” but a recognition that the laws of economics operate no matter what the government does.
What’s the difference? “The market” punishes companies with management that makes poor decisions. That’s always going to happen.
And yet the shareholders can vote howeve they want. Most simply ignore the ballots or vote along the lines of recommendation of the board. How are you going to change that?
We could make new rules about how BoDs are constructed. There isn’t anything anti-market about that, and I don’t know that econoimcists (conservative or liberal) would object. In fact, my impression is that they’d applaud a tightening of the rules. Strict Libertarians might object, but how many of those are around? They’re objection would be one based not on ecomonic principles but on philosophical principles of freedom and non-coercion.
I’m probably one of the most “pro-market” posters on this board, and I wouldn’t disagree with that. I think the problem is more of an issue for the largest corporations, but that’s a quibble. Generally speaking, I think you’re right. And I think most economists do, too.
The thing is, though, that restricting CEO pay isn’t going to necessarily translate into better pay for the average worker exceptin inasmuch as it makes the corporation more competitive and profitable and improves the economy as a whole. Wages are set by the labor market, which has little to do (directly) with executive pay. I think it’s laughable that people in “that other thread” just assumed that if you limitted CEO pay that the extra money would automatically go to the workers. Why would it?
That’s not quite correct. The market is supreme in maximizing the needs and wants of the people, however it does not guarantee that everyones needs and wants are met. IOW, the market will generate the most amount of wealth but that does not mean it will be distributed equally.
Also, think of market forces like other natural forces like…say…gravity. Companies will be pulled towards whatever generates lower costs and higher revenues. You can resist those forces, just like you can resist gravity, but you will need to expend energy (or in the case of business, capital).
The term you are looking for is oligopoly, not oligarchy. An oligarchy is a form of government while oligopoly is an economic model (somewhere between monopoly and perfect competition).
Also, the US Federal budget is like $2.8 trillion (2007) which is an order of magnitude above the largest company (ExxonMobile at $350 billion), just to put things in perspective for you.
The oligarchy model is a common one because in many industries there is a natural tendency for a small number of large player to emerge through consolidation and economies of scale. This is especially true in very capital intensive industries like automotive or aerospace. The classic example of an oligarchy would be Coke, Pepsi and whoever is a distant third in the soft drink space.
That’s not what risk management is. Risk management is assessing and mitigating risk. That risk can take various forms - litigation, financial risk, etc. It has nothing to do with “seeking power over the market”. That would be what we in the business community call “marketing”.
They claim no such thing. In fact, many companies specifically state one of their strategic goals is to dominate their marketplace. They attempt to do this through acquisition, marketing and advertising as well as providing superior products or services. Many companies (Walmart, Dell or GE for example) have such a strong market position that they can influence their suppliers to ultimately provide cheeper and better products for their end customers.
I suspect your beef is with companies that attempt to influence the market through predatory tactics or collusion. Most of that kind of behavior is illegal as a violation of anti-trust legislation. Which is not to say that people don’t try it anyway.
Enron was criminal fraud, not manipulation of the market. And your cite from the CFTC in no way shows that Enron is the rule. Given the number of companies in America, the list is surprisingly small. So your premise is false.
I could go on, but I’m not doing your homework for you.
Yes, Enron was finally brought down by criminal fraud - for what? Manipulating their income and assets to manipulate their share prices, and they engaged in pretty large scale manipulation in the energy markets.
And I’ll throw in the SEC too.PDFpage 23. There’s another 700 or so. And thats just for straight manipulation, not other types of fraud. Considering how many agents they have, they dont seem to have to look far to find malfeasance. Granted they did go down quite a bit in 2005. That enough homework for you?
If I was talking about corporate control of society, or the rule of three, oligopoly would be correct. But I am talking about how corporations govern themselves, not others. Oligarchy is the right model.
Correct, marketing is all about (though not just about) creating markets where none existed. Forgot about that aspect of ‘being subject to market forces.’ It certainly helps when you define the market itself. But what is financial risk but exposure to market risks.
No, as I said, my beef is with those that claim businesses never manipulate the market, but as you succinctly stated, they do so in myriad ways.
My beef is also with those that forget that the ‘efficient market hypothesis’ is still a hypothesis. And I sincerely doubt it will ever be more than that except in its weakest form.
I will let the better pros handle the business aspect and they seem to be doing well.
However, as an aside in the scientific sense, your statement above caused some brain shorting when I read it.
A hypothesis is a proposed explanation that can be tested. If the hypothesis fits the facts reasonably well, it may become a theory which I think is the word that you used. However, even that usage sounds alarmingly close to people that say that evolution is just a “theory” or global warming is just a theory. A theory isn’t a guess or a hunch that people throw out. It is a model that gets added to and revised endlessly and may even get thrown out eventually as new facts come in. Theories can never be promoted to anything else. Even gravity for example, is a theory and always will be.
Agnostic Pagan, lad, it appears a couple posts upwind that you are having a sharp exchange of opinions with yourself. Be advised, mental hygiene wise, this is not a good thing. It is the only form of masturbation provably unhealthy.
So are you talking about corporate internal management structure?
Well there’s nothing wrong with creating a market where none existed. You invent something, you try to convince people that it might be useful.
Maybe you could be a bit more specific? There’s good market manipulation like advertising or targeted marketing. Then there’s bad market manipulation like collusion or price fixing.
I hate applying the “sociopath” model to corporations because I don’t think it applies. I think it also relives the decision makers of their responsibilities. A corporation may have legal status as a “person”, however, it is still run by actual people who should be held responsible for those decisions.
Companies exist to make money by meeting the wants and needs of society. It is governments job to define the parameters in which these companies operate. And it is the people’s job to define their government and corporation with their votes and their dollars.
That point might be a bit weak, if I could think of an instance wherein corporados made their profit by means actually damaging to society and public health. Ponder, ponder…nope, can’t think of a thing. Darn, I guess that point stands.
I don’t think you understand my point. A corporation is simply a machine that turns raw materials into goods and services (hopefully for a profit). Generally those goods and services are things people want and need - groceries, medicine, clothes, iPods, DVD players, whatever.
Actual people decide whether to push dangerous drugs through or to dump toxic waste illegally. The “company” doesn’t decide to commit these acts. Some executive makes a decision and they should be held accountable for those decisions.
A corporations power comes from the fact that it does provide a huge benefit. If you employ 5000 people in a small city, it’s in everyone’s interest to keep you happy.
I believe smoking is not addictive
I believe smoking is not addictive
Etc. Execs selling and distributing a product they know is harmful and addictive,and lying in front of congress.
Enron not unique in crime ,but in degree. It was the biggest but Corporate Crime Reporter Here are the stars of the 1990s. This is pre Enron.
They cheat. The government must be diligent in stopping them.
Tax shelters allowed corps to illegally,unethically and immorally avoid taxes. Many were stopped but estimates were they illegally avoided 250 bill in taxes yearly . They just reinvent themselves and keep going.
What a lot of people seem to forget is that the market is made up of a lot of individuals and not an omnipotent presence that knows what is best for all. Yes, prices are set by the market based on how much of a demand there is for a good or service and how much of a supply we have or whether or not we have the needed labor force. Do you have evidence that this typically isn’t the case?
This might be a little tough to swallow but managment is part of the equation when it comes to talking about the market. The market is an abstract representation of producers, consumers, supply, demand, etc. so the market can never fail, only people can fail.
As others have already pointed out this isn’t necessarily a bad thing. If I, as a CEO, comission a study to see how I can apply the new technology created in our R&D labs as well as how to market them then I’m taking steps to to management my risk. After all, I’m probably going to have to sink a lot of capital into a factory and recruiting the labor force necessary to create this brand new product. Better that I should go in prepared, no?
What companies say they don’t do their best to protect their assets?
Uh, ok, why wouldn’t those different forms of business still have the same problems we see with corporations?
Can you name any that claim they have zero control over the market?
That sounds an awful lot like the structure of every business model. If I form a partnership how many people do you think will be in charge? How ever many full partners I happen to have I suppose. If I form my own company without partners then how many people are going to be in charge? Just one. The fact that relatively few people in a company have most of the power doesn’t strike me as something to rail against.
Got an alternative to an oligarchy?
From the point of view of who else? Wal-Mart can’t do a damn thing right according to many people who actively protest to keep them from building new stores in towns across the United States. If I had a dime for every time someone (usually a Mac user) pissed and moaned about Microsoft I’d have 1/10th the money Bill Gates has. Sure, there are some who say corporations can do no wrong, but I don’t think the majority of people have this attitude.
Since when is any business democratic?
I don’t see why democracy is such a great thing to strive for in a business. Furthermore, I don’t see how a partnership wouldn’t be considered it’s own oligarchy. Unless of course everyone is an equal partner but that doen’t make much sense in the long run, does it?
As per Enron an anomaly
Citigroup
Halliburton
Anderson
Worldcom
Tyco
Global crossing
Adelphia
Xerox
Aol time warner
Kmart
Quest
It is how business is done. We need a government to represent the interests of the people.Corporations certainly don’t represent people or America either.
Not quite. Most conservative economists are well aware that a functioning market requires some regulation. What conservatives typically believe is that it is the function of the government to make sure the market is functioning properly. Hence SEC rules, anti-trust legislation, and legislation aimed at correcting honest market failures. ‘Market Failure’, in the sense I’m talking about, does NOT mean “I don’t like what the market is producing”, but some barrier to exchange that prevents prices from reflecting the true cost and demand for a good or service. For example, a monopoly on a road going out of town, or asymmetric information that prevents one side or the other from knowing what it needs to know to set prices rationally.
What conservatives generally don’t believe is that the market should be manipulated and controlled by government in order to achieve specific social outcomes.
The market is massive. Manipulation IS an aberration. Think of all the myriad goods and services you pay money for. How many of them do you believe have prices distorted by evil corporations?
If you look into the nature of prices on any product, you are far more likely to find it changed because of government manipulation than any scheming or collusion or fraud by business.
Wow. This is so off the mark I don’t know where to begin. Well okay, I’ll begin with Enron. What punishment did the government levy? A couple of guys went to jail. It was the MARKET that killed Enron. Its share price crumbled overnight.
Not only that, but the market suddenly saw a risk in Enron-style fraud, and punished EVERY company that had a similar business model. GE shares took a major hit because of its intertwining network of companies and GE capital business. As a result, GE had to restructure its accounting, open its books to auditors, and sell off some companies that looked a little too Enron-y. In fact, all the major conglomerates did the same thing. The market acted swiftly and decisively, while the government did almost nothing.
That’s small businesses you’re talking about. Started by individuals with no management training, typically. This surprises you?
BTW, if companies never failed I would be very worried. A dynamic, healthy market requires companies to fail while others succeed. If that didn’t happen, it would mean that no risks were being taken, and there would be much less innovation.
Risk management has nothing at all to do with this. Risk management would be doing things like buying insurance policies, diversifying your product line, preparing disaster readiness plans, maintaining cash reserves for emergencies and to see you through slowdowns in the market, etc.
Corporations do not ‘seek power over the market’. They seek market share within the market - a totally different thing. And there’s nothing wrong with a company seeking to build its market share. That’s what drives them to excel. My company is trying to do that with our current product right now. I’ve attended all kinds of planning meetings where we look at nice slides showing our projected increase in market share. And how are we doing it? Through making a better product, and then using advertising and direct sales staff to attempt to convince our customers that our product truly is better than the competition’s. You have a problem with that?
Ridiculous. Every company is susceptable to the vagaries of the market. Big companies have economists that project things like recessions and slowdowns in various industries, so that the company can prepare to scale back costs and ride out the storm. Our business presentations always include our economists’ estimates of overall growth in our market segment and what the economy as a whole is expected to do in the next year. We don’t control the market - we ride along with it.
What this tells me is that you don’t really know what a futures market is, what function it serves, and why it’s valuable. Supplier contracts? You have a problem with a company contracting with a supplier for guaranteed delivery of goods at a known price? What, are they supposed to just hope from quarter to quarter that someone will be there to provide the raw materials they need to stay in business?
Of course they do, and that’s a very good thing. Economies of scale are one of the big forces that have driven down costs and provided us with our tremendous standard of living. What on earth is wrong with economies of scale?
And you keep saying ‘market power’ instead of ‘market share’. The former term is very loaded - it implies that these companies can somehow strongarm the market and bend it to their desire. The other simply means that a company has managed to convince X number of people to purchase its products over its competitors.
You are using ‘manipulation’ in an incredibly broad sense. Tell me - am I ‘manipulating’ the market if I improve the quality of my product, and then advertise the improvement in the hope that I’ll get more customers? Am I ‘manipulating’ the market if I revamp my inventory practices to cut my operating costs so that I can lower my prices and undercut the competition?
Am I manipulating the market if I create a new ad campaign that seeks to convince customers to buy smaller cars - because my small cars are better than my big ones?
And most of them do not. IBM once held a huge percentage of the market in computers. Its name was almost synonymous with ‘computer’. Then it made a few strategic mistakes and saw upstarts like DEC and Data General eat into its minicomputer market, and Apple and the clones eat into its PC business. Huge companies like RCA Victor and Electrohome failed to compete with the Japanese, and were completely eliminated from the television industry they once dominated.
If you want to find companies that are insulated from the forces of the market, you typically will find that they have their insulation courtesy of the government. The steel industry wants tariffs to protect it from competition. Milk tariffs and subsidies protect milk producers from competition. Wheat boards and subsidies protect farmers from competition. Even things like local building codes are often manipulated by industry influence into protecting existing companies from competition.
How on earth does the internal management practice of a company protect it from competition? If it’s not an efficient way to govern, the company will lose market share. If it is, it will gain market share. There’s nothing magical about a board of directors that insulates a company from the vagaries of the market.
I’m baffled by this one. You have some examples? Of course you know that the biggest reason for secrecy around takeovers is due to SEC regulations, right?
Begging the question. First prove the assertion that ‘modern corporations have grown out of control’. Especially since it seems to me that all the trends in the past decade have actually increased consumer choice and improved the functioning of the markets. The internet has done much to reduce asymmetries in information. Globalization has reduced local dominance by corporations. Overnight, inexpensive shipping has reduced the monopoly power of local business to increase prices. Venture capital has made it easier to start up new companies to compete with existing ones.
I don’t know of anyone saying either of these things. Frankly, how a business organizes itself internally is of little interest to me, because it’s irrelevant to anyone not inside the company. A company is like a black box - raw goods go in one end, products come out the other. If someone can successfully build a business organized around a hippy commune, more power to him.
Okay, you’re misusing ‘oligarch’ again, using a loaded term that doesn’t fit, simply because it’s loaded. When typically discussing an oligarchy, we’re talking about a small group colluding together to control an industry or a market. You are using it in the sense that a company is an ‘oligarchy’ because it has a board of directors. That allows you to use the loaded term ‘oligarch’ in the same way that we might talk about the oligarchs in Russia. But in fact, in terms of the market place, these companies do not form an oligarchy.
Man, you’re just full of loaded terms. “Rape” society? Sociopathic? Undemocratic? Wow. I say we just line them all up and shoot the sociopathic bastards.
Of course in reality land, it’s much more complex. Corporations are not sociopathic - they are simply organizations focused on making and selling products and services. But they can be incredibly charitable. In my company, we organize food bank drives several times a year, and the corporation matches all funds collected. The corporation has internal web sites set up listing all the charitable activities it is involved in. It gives employees days off with pay if they want to work for habitat for humanity. It gives millions of dollars in aid to Africa, and gave 10 million bucks to the World Trade Center victim’s fund. If you ask me, my company is far too involved in charity - judging by the number of annoying corporate E-mails I get asking me to contribute to all the various charitable efforts it has underway.
Is this spoken from your experience in business school? Or your study of the curriculum of most business schools? My guess is that you don’t actually have a clue what is taught in business school. Here’s a hint: What they typically teach is how to make an exceptional service or product, and how to get sufficient return on investment to enable an ongoing concern. They’re also taught how to maximize value for the mutual benefit of the company and its stakeholders.
A publically held company with a board of directors has to open its books, make SEC filings, and in general comply with a whole bunch of regulations that are not applicable to partnerships and co-ops. Are you sure that’s what you want?
What are you studying?
I think you need to spend more time studying how the market actually works before drawing sweeping conclusions about what must be done to ‘fix it’.
Corporations do not thrive on competition. They hate it. They want and seek control . Buyouts , takeovers and mergers are intended to limit competition. They have been occuring at an incredible rate the last few years. This of course results in fewer firms in each field. It does not serve the consumer. If not stopped ,the natural tendency is oligarcy and monopoly.
Of course every corporation wants to crush the competition! That’s no secret. It’s for that reason that we distinguish between legal methods of doing that (by offering better goods or services) and illegal methods (stealing IP, blowing up the competitions’ factories, etc.). We make anti-competitive practices illegal even though we don’t make being a monoply, per se, illegal.
Sure, there is often an overly chummy relationship between BoDs and upper management. I personally don’t like that, which is why I don’t invest in such companies. The truth is, the investors often don’t take the time to understand the companies they invest in. But whose fault is that?
Do you know what economies of scale are? It is not always efficient to have 100 different versions of the same company. Especially companies that are capital intensive (that means they use a lot of expensive manufacturing equipment) like automotive or aerospace.
In fact, Oligopoly (it’s not oligarchy) is a natural progression for most industries. A new industry will often start off with a large number of small competetors. As they grow, they will start to merge until you have a smaller number of large players. It’s not necessarily a bad thing and as long as there isn’t collusion, there will still be competition which ultimately benefits the consumer.
And there IS anti-trust legislation to keep companies from consolidating to the point where they completely eliminate competition so, once again, I’m not sure what your point is.
And again, your point is unclear. Companies here have broken laws and were punished for it. What more do you want? I wish we could make people stop being jerks, but we can’t. That’s why we have lawyers and auditors and agencies like the SEC.
Now if you’ll excuse me, I have to buy some top-hats, monocles and those $$$ bags for my bosses.
Two points. People who claim it is rare are wrong. These guys are the tip of the iceberg. There are lots of them less famous,and a lot more doing illegal and unethical practices now.
Second is that that is the system. It has evolved into into corporations doing everything they can do avoid a fair and equitable system.
There are corpoprations set up in the Caymans ,whose only footprint is a mailing address. They avoid their tax bill by falsification. Many corps have used tax shelters to avoid taxes. The corp rate that people claim is 35 is actually under 10 and dropping. They have systemized tax evasion and corruption.
They have bought the political system with political funding and lobbying. The people no longer have representation. Their avoidance results in the people paying more.
Oligarchies do not compete with products but increase their profits by scamming the system.
To give an example, there were once dozens of car makers in the US. Evolving economies of scale in many different areas (R&D, production, interchangeable parts, marketing, to name a few) showed that many cars firms are inefficient. Fewer firms are more efficient. Efficiency is good for you, the consumer, and the car makers. [As an economist, I have noticed that many people often see a win/lose situation when in fact a win/win is possible]
Furthermore, there can still be fierce competition in even a dualopoly, which is an oligopoly with two firms. Read up on the cola wars. Even today, Coke and Pepsi fight like a good karate guy and a bad karate guy who killed the good karate guy’s sensei. Both spend millions on advertising and compete vigorously on price. If these firms had as much market power as you claim, this would not be necessary. Similar battles are waged in cigarettes, autos, airplanes, mp3 players, you name it. Of course, when there is collusion present, we have a problem. Despite your claim, all but the most fringe libertarian economists recognize the need for the law (government) to prohibit such collusion. Many people don’t think the oil industry is competitive. If you are one of these people, I would suggest you come to work with me for a day. Firms that deal in a commodity are often as close to perfect competition as you can get.
If you indeed really mean oligarchy and not oligopoly, I guess I don’t really know what you’re talking about.
Since you claim to have an academic interest in the subject I would suggest looking at a copy of “Economics of Strategy” by Besanko and some other Northwestern boys. The first chapter deals with the evolution of competition given the structure of markets in the US from 1810 to the present. Other market structures as well as corporate governance and strategy are also detailed in later chapters. “Reinventing the Bazaar” is another good read about the history and magnificence of markets and is a popular press title as opposed to a textbook.
