Concentration, Centralization, And Control
O'Connor, James
Let it be admitted at the outset: If there is a theory of monopoly—in the sense of a unifying explanation with some factual basis of the gradual transformation of competitive into monopolistic...
...it is undoubtedly the inevitable outcome of the increasing complexity of product engineering together with the rise in demand stemming from growing real incomes and an expanding population...
...The reason for this queer state of affairs is simple...
...the future is assured to the "sales minded" graduate...
...It has long been a cliche that the business class rigs the rules of the game...
...export trade associations (1918...
...Let it be admitted at the outset: If there is a theory of monopoly—in the sense of a unifying explanation with some factual basis of the gradual transformation of competitive into monopolistic market organizations— I do not know of it...
...The answer is clearly yes...
...Yet must the competitive model be abandoned for that...
...Thus the competitive model collapses under the weight of its principal assumption...
...3. Joe Bain, Barriers to New Competition(Cambridge, 1956...
...THE NOTION OF CENTRALIZATION, how ever, is on a different logical level altogether...
...The days of the overnight industrial coups—the big combinations around the turn of the century— are over...
...you learn how to get around the law by practicing its enforcement) Executives move freely from the large companies into the regulatory agencies and then back again, their interests and orientation unchanged...
...Here is a socio psychological problem of some significance...
...I am unable to explain the figures in the 50%-75% class, where on balance centralization declined...
...It is not legitimate to deduce a reduction in competition from an observed tendency toward concentration (as, for example, Paul Baran seems to do in a recent essay) rather, one must demonstrate a tendency toward centralization...
...Is it possible to make any pre dictions in connection with the prob able effects of ever-increasing mon opolization...
...Of the largest 200 firms, only one acquiring company out of seven had a single acquisition questioned by the Department of Justice or the FTC...
...In the Alcoa (1950), GMAC (1951), Meat Packing (1954), and DuPont Cellophane cases (1956), the government went down to total defeat...
...As a result, enforcement of the statutes since 1950 has been scandalously lax...
...Just as centralization grows in industries characterized by small as well as large firms, similarly, competitive industries (as defined by low 1947 concentration ratios) are becoming less competitive and monopolistic industries more monopolistic...
...dentifrices (78...
...The Justice Department, the FTC, and the courts between them are evidently no match for business men intent on securing greater control over markets...
...Moreover, the concept of perfect competition—where decision-making is completely decentralized, power dispersed, with market prices playing the role of the Planning Bureau in allocating economic resources—has long been abandoned as the principal test of competition or its absence...
...This, of course, is the interesting question...
...sewing machines (77% and 81...
...What has happened is that rising product demand (stemming in this case from military spending) has raised profit margins and thus attracted new firms into the industry, increasing competition...
...Material wants are not forever unlimited, however...
...To combine, merge, integrate, monopolize raw material supplies and transport facilities, smother sources of price and profit instability—these are my likely responses...
...In short, they are intractable...
...The electrical machinery industry, for example, has been the direct or indirect beneficiary of huge amounts of Defense Department largesse, yet of sixteen industry sub-groups, concentration ratios fell in eleven and rose in only four...
...oil producers (1935...
...A.T...
...like many cliches, this one continues to bear repetition...
...For example, if you take all the firms in manufacturing which employed more than 100,000 workers in 1954, 50% of them (according to the Senate report) are in industries where the concentration ratio is less than 20%, while none are in industries where the ratio exceeds 70...
...agricultural marketing (1937...
...and, more important, firms are assumed to find rational means to their interminable profit seeking...
...But—here as elsewhere—to the business class appearances are useful only to the extent that they successfully obscure reality...
...models of monopolistic competition and oligopoly, developed in the 1930s and 40s by economists of the stature of Joan Robinson, E. H. Chamberlain, and Paul Sweezy, must now be regarded—if the measure of a theory's importance is the extent to which it is put to practical use—as curiosities...
...Clearly, an elaborate theory is unnecessary to explain why the average textile firm is ten (or twenty) times as large today compared with a hundred years ago...
...Unfortunately, Marxists have tended to equate bigness with market power (or to say the same thing in another way, absolute with relative size) and thus have confused the fact of concentration with the effects of centralization...
...In Paul Sweezy's words, centralization means "the combining of capitals which are already in existence," directly implying a reduction in competition...
...This is the kind of information that twenty years ago was kept from the public eye...
...Marx rightly insisted upon the distinction between "concentration" and "centralization...
...Concentration may limit competition, but there is no obvious reason why it should, meaning as it does merely that over time the business unit tends to grow larger in absolute size...
...2 The data seem to support the conclusion that centralization, as a process, is a fact...
...These include: shipping (1916...
...On the one hand, firms in industries where competition is already effectively circumscribed continue to consolidate their position, driving out or merging with marginal firms...
...Unfortunately, the lawyers are ill-equipped to provide the set of rules required by the competitive model...
...Why are some firms stronger than others...
...specific policy implications regarding price discrimination, licensing agreements, and the like...
...Only twentysix of the defunct units merged with small firms...
...Barring a relative increase in Cold War spending, recessions will no doubt become successively more severe...
...On the other hand, centralization is manifest in industries where competition still produces price and output instabilities and uncertainty...
...Unfortunately for contemporary economics, the real world is intractable as well...
...Jr WE HOPE to understand this sustained movement toward further monopolization of the economy, I think we ought to return to fundamentals, by which I mean the theory of competition itself...
...Of these—for illustration—I selected the following at random: light bulbs (93...
...Table II tends to confirm our view that centralization is not confined to a few hard-core monopolistic sectors, rather that it proceeds along a very broad front...
...there is independent evidence as well...
...there is no question but that I will do my best not to compete...
...consumers are expected to read their own interests correctly (who still believes that they do...
...Certainly not, since the obvious policy implication is to write and enforce anti-monopoly legislation, to preserve, promote and extend competition...
...In practice, of course, the tensions between profit-seeking businessmen and those whose job it is to regulate their activities are more apparent than real...
...in fact, economists measure the degree of monopoly (careful economists would say, "the likelihood of monopoly") in a particular industry with the so-called "concentration ratio"— in Marxist terminology it would be the "centralization ratio"—the percentage of total business done by the industry's four largest firms...
...Quite the opposite...
...Men are rational...
...Admittedly, military spending has speeded concentration while at the same time completely distorting the economy's capital structure, but there is no real evidence that centralization has been accelerated...
...it has not been a result of internal expansion of plant.4 I might point out that by 1954, con centration ratios exceeded 75% in over 130 of approximately 850 identifiable manufacturing industries...
...The data point this up...
...I think this is the answer to the question: Why centralization...
...one large firm recently announced that it will be able to give better "service" on the basis of new acquisitions of raw material sources and transport facilities...
...compared with the competitive model, the others lack "empirically testable implications...
...As we would expect, this trend was not seriously challenged by the gov ernment...
...retail trade (1937, 1952...
...In theformer, if the ratio changed by plus or minus two points or less, the industry waslumped under "Did Not Change...
...To take a few examples: typewriters (the ratios in 1947 and 1954 were 79% and 83%, respectively...
...Joe Bain in a careful study of barriers to entry in twenty industries attaches little importance to economies of scale as a limit on competition...
...75% to 100 firms...
...Their interests are by and large identical...
...3 Instead, he places emphasis on product differentiation and control of key resources...
...Steel and automobiles—despite the encouragement the Anti-Trust Division has received from anti-big business elements in Congress—still remain untouchable...
...finishing textiles, except wool (14% and 24...
...salt (83...
...the theory of competition still remains the round hole into which economists persist in forcing the square pegs of economic reality...
...Only in the DuPont-ICI (1951) and United (1954) cases did the Justice Department enjoy moderate successes...
...soap (76...
...1. Paul Baran, "Reflections on Underconsumption," in The Allocation of Economic Resources (Stanford, 1959), p. 56...
...In short, small units were absorbed by large firms at a very rapid rate...
...In short, major sectors of trade, fuel, agriculture, transport, and finance are encouraged not to compete...
...Moreover, as will be shown in a moment, centralization— at least in the 1950s—has been attended mainly by a wave of mergers...
...Suppose I am a rational capitalist, a profit-maximizer...
...the packaging industry expands beyond all rational limits...
...gypsum products (85% and 90...
...In the 1950s, heightened centralization was served largely by an accelerated pace of industrial mergers—the Celler-Kefauver Act of 1950 (which tightened up the statutes on mergers) notwithstanding...
...The only difficulty with this theory is that there is no observable direct relationship between bigness and market power (as measured by "concentration ratio," which we will use as indications of centralization...
...in 1958, 40% of all Defense Department procurer ment contracts went to only ten firms...
...wines and brandy (26% and 38%) are all cases in point...
...Bright young lawyers get their training in the Anti-Trust Division, and then are snapped up by the corporations...
...insurance (1945...
...As monopolist, or party to restrictive agreements, I can gain an overwhelming advantage over any competitive firm, its fate in the hands of Ricardo himself...
...Centralization is evidently a lengthening as well as a deepening process TABLE II: Changes in Centralization in Major Manufacturing Industries, by Degree of Competition United States, 1947-1954 Concentration Ratio Number of Industries in which Concentration Ratio: in 1947 over 75% 50%-75% 25%-50% under 25% Total Rose Fell Did Not Change Total 18 15 24 32 33 28 29 20 104 95 0 33 2 58 7 68 5 54 14 213 Source: Adapted from Concentration in American Industry, Table 56...
...Moreover, the Senate report reveals the lack of correspondence between bigness and market power over time (Table 1...
...IF THE GOVERNMENT has failed to preserve competition by its "enlightened" merger policies, has it promoted competition by dissolution or divorcement proceedings under the anti-trust statutes...
...advertising outlays as a proportion of total costs continue to rise secularly...
...paper and board products (15% and 25...
...In short, Utopia...
...Moreover, sixty-five of these 138 firms were bought up by the largest 200 firms...
...The current merger movement, less dramatic in many ways, is, however, in my view an expresssion of a similar desire for price and profit stability and a minimum of risk...
...The boys just aren't serious about cutting their own throats...
...Where the nature of the industry tends to preserve competition, in retail trade, for example, firms run to the state for protection, and get it in the form of Fair Trade Laws...
...5 Of these, eighty-five were relatively small, forty-two, mediumsize...
...This is already evident in some trade advertising...
...WILL THE NEXT DECADE yield more highly developed forms of monopoly organization...
...and T. (1956), while making minor concessions, held on to its manufacturing monopoly, Western Electric...
...Defined in this way, no one could seriously maintain that concentration is not a permanent feature of capitalist development...
...Central to the theory is the assumption of rationality...
...If anything, the relationship between absolute and relative size is an inverse one...
...the two slumps since 1951, the second more serious than the first, the second leaving in its wake a larger residue of structural unemployment, seem to conform to the expected pattern...
...and railroads (1948...
...Tax disputes are settled to the "mutual satisfaction" of businessmen and the Treasury Department...
...The facts are dramatic enough...
...Strong firms buy up or maneuver into a position of control over weak firms and, as a result, end by commanding a larger share of the industry's business...
...watches (99...
...I think not...
...Steel is the classic example of afirm which has grown spectacularly inabsolute size, yet its share of the industry's business is less now than it wasin 1900...
...plate glass (91...
...During 1947-54, of the nineteen industries in which the average firm emTABLE I: Changes in Centralization in Major 'Manufacturing Industries, by Size of Firm Average Size of Firm (Employees) 100,000 and over 50,000-100,000 20,000-50,000 10,000-20,000 5,000-10,000 less than 5,000 Total United States, 1947-1954 Number of Industries in which Concentration Ratio: Rose Fell Did Not Change Total 6 3 10 19 16 4 10 30 23 15 18 56 17 11 11 39 13 10 11 34 17 9 5 31 92 52 65 209 Source: Adapted from Concentration in American Industry, Table 27...
...Incredible as it may sound, no abstraction—save possibly Keynesian doctrine—still lies nearer the core of contemporary academic economics...
...From 1951-59, 138 of the economy's largest 1,001 manufacturing companies disappeared...
...from 73% to 64% in electronic tubes...
...Clearly, if large firms are able to undersell their smaller rivals on the basis of lower costs, the latter must sooner or later give in to the former, or be driven to the wall...
...Given the growth of excess capacity which accompanies further monopolization, as the economy oscillates between prosperity and recession, the gap between aggregate demand for commodities and industry's capacity to produce will widen...
...The 200 biggest firms accounted for 37% of the business in 1954...
...2. U.S...
...The larger the firm, the greater the play for specialization and "man• agerial efficiencies," the mode refined the division of labor—thus, the lower the unit costs...
...The logic of the competi tive system is embodied in the Sherman, Clayton, and Robinson-Patman Acts...
...As I pointed out earlier, I do not know of any coherent, single explanation of this phenomenon...
...In the latter, these industries were classifiedunder the appropriate column, "Rose" or "Fell...
...In all classes, fewer firms are doing relatively more of the industries' business...
...There is something like a theory of monopoly in Schumpeter, but neither Marxists nor non-Marxists have taken it very seriously...
...I am convinced that economies of scale, leading to lower unit costs and a competitive advantage for the large firm, are not the key to understanding the monopolization process...
...IF THERE IS NO inevitable tendency toward centralization on the basis of economies of scale, must we concede that further centralization is unlikely...
...I think so.• First, monopoly invariably implies higher than competitive prices and smaller than competitive outputs, or to put it another way, excess capacity at the ruling price...
...razor blades and razors (97...
...To begin with, bear in mind that many industries are partially or wholly exempt from anti-trust action...
...The latter procedure, however, significantly underestimates the economy's tendency toward centralization, as a quickcomparison of Table II with Table I will indicate...
...Note that Table I and Table II classification procedures are not perfectly equivalent...
...sales departments operate under increasingly more intense pres sure—engineers are attracted away from productive to non-productive (sales engineering) occupations...
...Consider the logic of this system...
...only 14% of these are in industries where the ratio is less than 20%, while 19% are in industries where the four largest firms do over 70% of the business...
...Obviously, our sense of the absurd is going to be put to new tests...
...rational men are not likely to be happy under conditions of competitive anarchy...
...Under these conditions, it is not misleading to equate a firm's absolute with its relative size...
...Concentration is nothing more nor less than capital accumulation itself, having no real significance for the growth of monopoly (although it plays a major role in the theory of capitalist breakdown...
...For example, the ratio fell from 61% to 41% in electrical measuring instruments...
...seven years before, 30...
...Centralization is thus amenable to rough quantitative measure...
...ployed more than 100,000 workers, centralization rose in six, diminished in three...
...In academic economics there is nothing resembling such a theory, apart from a single ingredient, decreasing costs, which is also associated with Marxism, where it figures importantly in the theory of capitalist development...
...Appearances will be transformed into new rationalizations of monopoly power...
...prefabricated wood products (16% and 32...
...One superficially plausible reason springs to mind: Perhaps the Cold War has something to do with it...
...medium-size companies swallowed up an additional thirty-six...
...I base my judgment on the data presented above, on Table II, and on the analysis which immediately follows...
...thus the Marxists are right but for the wrong reason...
...The United States—alone among the developed capitalist economies— has outwardly accepted this implication...
...However, at the other end of the scale, centralization also rose in twice as many industries as it fell...
...This in turn means that it becomes increasingly difficult —in Marxian terms—to "realize" sur plus value...
...metal cans (81 0...
...only eleven were among the largest one hundred firms in 1951...
...Mainly because centralization supposedly comes about as a result of decreasing costs arising from economies of large scale production...
...Among most practicing economists, the "competitive model" has no rivals...
...Contrast this with all firms employing between 5,000 and 10,000 workers...
...Second, the contradiction between the mythology of free enterprise and the reality of monopoly control will become more dramatic...
...Clearly, if capitalists fail to predict future market demand, or combine factors in uneconomic bundles, consumers suffer, labor suffers, and they themselves face bankruptcy or foreclosure...
...in 1947, only 17...
...There is nothing especially mysterious about this phenomenon...
...According to a recent report of the Senate Subcommittee on Antitrust and Monopoly, Con centration in American Industry—a collection of figures on which I will draw freely throughout this essay— the largest fifty American firms did 23% of the nation's manufacturing in 1954...
...5. Frank J. Kottke, "Mergers of LargeManufacturing Companies, 1951-59," Review of Economics and Statistics, December, 1959...
...What does the theory of competition say...
...Allow consumers to make up their market baskets as they see fit, oblige factors of production to respond to changes in factor prices (by the threat of starvation or monetary loss), let firms, guided by market prices over which they are assumed to have no control, seek maximum re• turns—then commodities will be pro duced at lowest possible costs consistent with diminishing returns and turned over to consumers at prices equal to costs...
...4. For evidence that this development isnot new, see Ben B. Seligman, "Mergerand Monopoly in the U.S.," Dissent, Spring, 1955...
...Why is the difference between bigness and market power obscured in Marxist theory...
...In its place, legalistic definitions of "workable," "fair," and "sufficient" competition have been substituted...
Vol. 7 • September 1960 • No. 4
