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Now, it’s worth noting that for all the vitriol that high-income individuals tend to attract, they aren’t the only ones whose wealth and power can generate such strong feelings of resentment. Often it’s their employers – the companies themselves – that receive the most backlash of all, with many critics questioning why these big corporations should even be allowed to exist in the first place. Wouldn’t our society be better off if everyone just worked in small independent operations, or worked autonomously as artisans and craftspeople and so on, rather than everything being consolidated into these giant firms? In fact, isn’t that how the market is supposed to work best, with a maximum number of individual actors competing against each other? Well, actually, not always. Up to this point, we’ve only been talking about all the different areas in which market competition works more efficiently than central planning and coordination. But there are some places where some degree of central planning and coordination can actually be more efficient in market terms – and one of those places, ironically, is within the firm itself. As it turns out, it can often be a lot cheaper and easier to produce a particular product if everyone involved in its production – from manufacturing to marketing to customer service – is working together under one roof, rather than having to go to the trouble of negotiating separate transactions with each other for every individual step of the process. As Posner and Weyl summarize:

[Despite the idea of central planning traditionally being associated with communism in the nineteenth and early twentieth centuries, a certain kind of] planning wound up being as important to capitalism as it was to any dream of a socialist utopia. Social critics were not the only ones increasingly frustrated with the way landowners, small-business people, and other property owners stood in the way of economically valuable projects. As many economists have pointed out, creating large-scale enterprises consistently requires putting together a variety of moving parts, each controlled by a local monopolist. Entrepreneurs were frustrated by monopoly problems at every turn. If they tried to expand their factories, a landowner would hold out. If they tried to build a railroad, thousands of local politicians tried to extract a pound of flesh. Every small supplier of oil, coal, or parts would waste endless hours bargaining with them or trying to take advantage of them.

Nobel Laureate Ronald Coase called these frustrations the “transaction costs of the market.” He explained that to avoid this chaos, business people formed large corporations that would own many assets, such as factories and parcels of land, and employed many workers whom the head of the corporation could centrally direct to accomplish its goals without constant negotiation.

By keeping transaction costs to a minimum, big corporations were – and are – able to function a lot more efficiently than if all the different people responsible for different aspects of production were operating separately as independent firms. But reduced transaction costs aren’t the only advantage to be gained from this kind of consolidation and coordination. As corporations grow in size and scope, so too does their ability to take advantage of other efficiency bonuses like economies of scale and more specialized divisions of labor. As Taylor explains:

“Economies of scale” is the jargon for saying that, in certain cases, a larger firm can produce at a lower average cost than a smaller firm. A tiny factory that produces only one hundred cars a year will have much larger production costs per car than a factory making ten thousand cars, which can take advantage of specialization and assembly line production. The concept of economies of scale helps make sense of how the world works. Without economies of scale, every little city and town would have tiny little factories for making very small numbers of cars, refrigerators, clothing, and other products. But in a world that takes advantage of economies of scale, regions produce one kind of thing in large numbers and trade with other regions that produce something else. The division of labor doesn’t happen only within a firm; it happens also within economies and even across countries. For example, auto manufacturing is not spread evenly across the United States, but happens mostly in a north-south corridor reaching from Michigan to Alabama.

And Elizabeth Anderson adds:

The technological changes that drove the Industrial Revolution involved huge concentrations of capital. A steam-­powered cotton mill, steel foundry, cement or chemical factory, or railway must be worked by many hands. The case is no diff­erent­ for modern workplaces such as airports, hospitals, pharma­ceu­ti­cal­ labs, and computer assembly factories, as well as lower-­tech workplaces such as amusement parks, slaughterhouses,­ conference hotels,­ and big-­box retail stores. The greater efficiency of production using large, indivisible capital inputs explains why few individual workers can afford to supply their own capital, [and why] the enterprises responsible for most production are not sole proprietorships.

Now, to be clear, just because bigger companies can do a lot of things more efficiently than smaller companies doesn’t automatically mean that every company should therefore be a big corporation – because after all, there are still some things smaller companies often do better. You’ll sometimes hear people talk about the “explore-exploit” tradeoff, which refers to the choice between, on the one hand, seeking out new ideas and trying original solutions to problems (“explore”), and on the other hand, taking the knowledge that’s already available and using it in the most efficient possible way (“exploit”). When it comes to economic dynamism, having widespread competition among a whole lot of small entrepreneurs can be a great way of discovering new ideas and opening up new market niches – i.e. making the most of the “explore” side of the dichotomy. Nevertheless, once those new ideas and market niches are discovered, it’s generally the efficiency and economies of the scale provided by big corporations that are best able to exploit those ideas in order to deliver goods and services to the wider market most cheaply and effectively.

In fact, in some cases these advantages are so great that when it comes to really large-scale, long-term kinds of projects, big corporations can excel in both the “explore” and “exploit” modes even more effectively than smaller businesses can. If a particular corporation makes large enough efficiency gains that they’re able to somewhat separate themselves from the pack of competitors, that bit of cushion they’ve created can enable them to explore certain new avenues which they might not have had the spare resources to afford investigating if they were still being forced to cut every cost to the bone just to survive in a competitive market. As Alexander writes:

Companies in an economic environment of sufficiently intense competition are forced to abandon all values except optimizing-for-profit or else be outcompeted by companies that optimized for profit better and so can sell the same service at a lower price.

But once companies get big enough to have substantial economies of scale, these pressures can start to ease a bit, and they can give themselves a bit of breathing room to actually devote some resources to the “explore” mode, rather than just trying to squeeze out every cent of immediate profit at the expense of everything else. Well, they’re always still trying to maximize profits, of course, but they’re able to do so in a more expansive way, which involves taking more of a long view relative to the otherwise overwhelming short-term pressures of the market. Alexander continues:

Traditionally, monopolies have been among the most successful [research and development] centers. The most famous example is Xerox; it had a monopoly on photocopiers for a few decades before losing an anti-trust suit in the late 1970s; during that period, its PARC R&D program invented “laser printing, Ethernet, the modern personal computer, graphical user interface (GUI) and desktop paradigm, object-oriented programming, [and] the mouse”. The second most famous example is Bell Labs, which invented “radio astronomy, the transistor, the laser, the photovoltaic cell, the charge-coupled device, information theory, the Unix operating system, and the programming languages B, C, C++, and S” before the government broke up its parent company AT&T. Google seems to be trying something similar, though it’s too soon to judge their outcomes.

These successes make sense. Research and development is a long-term gamble. Devoting more money to R&D decreases your near-term profits, but (hopefully) increases your future profits. Freed from competition, monopolies have limitless slack, and can afford to invest in projects that won’t pay off for ten or twenty years. This is part of Peter Thiel’s defense of monopolies in Zero To One.

An administrator tasked with advancing technology might be tempted to encourage monopolies in order to get more research done. But monopolies can also be stagnant and resistant to change; it’s probably not a coincidence that Xerox wasn’t the first company to bring the personal computer to market, and ended up irrelevant to the computing revolution. Like [biological organisms that] will not evolve in conditions of perfect competition or perfect lack of competition, probably all you can do here is strike a balance. Some Communist countries tried the extreme solution – one state-supported monopoly per industry – and it failed the test of group selection. I don’t know enough to have an opinion on whether countries with strong antitrust eventually outcompete those with weaker antitrust or vice versa.

Alexander is right to point out that there can be major downsides to corporate consolidation along with upsides. Aside from the risk of bigger companies becoming stagnant and overly set in their ways, there’s also always the danger that their concentration of market power will lead to reduced competition and therefore reduced choice for consumers – i.e. a less free market. If they grow so large and so dominant that they attain outright monopoly status, then the downsides become even more pronounced, since at that point (unless they’re constrained by government regulation) they’ll have the ability to freely overcharge customers who will have no alternative but to buy from them. And likewise if they attain monopsony hiring status in a particular labor market; as the only employer, they’ll be able to pay their workers far less than their full market value, since those workers will have no alternative employment options to choose from. We’ve talked about this a fair bit already, and we’ll get into it even more in the next post. But despite the validity of these concerns when it comes to full-on monopolies, it’s also worth pointing out that most big corporations aren’t true monopolies – they still have to compete in relatively competitive markets – so a lot of these criticisms about holding down wages for workers and jacking up prices for consumers don’t actually apply to them to nearly the extent that their harshest critics claim. In fact, compared to smaller mom-and-pop operations, big corporations actually tend to be better in these departments, precisely because their economies of scale make them so much more productive and efficient at what they do. As Hazlitt points out:

We know as a matter of experience that it is the big companies—those most often accused of being monopolies—that pay the highest wages and offer the most attractive working conditions. It is commonly the small marginal firms, perhaps suffering from excessive competition, that offer the lowest wages.

Robert D. Atkinson and Michael Lind elaborate:

The depredations of a few job cutters have earned Big Business a reputation for heartless streamlining, but employment at large businesses is in fact steadier than at small businesses. In 2015, small enterprises were four times more likely to lay off their workers than large ones. Workers employed by large firms also earned more—on average, 54 percent more than workers at small companies. Companies with more than 500 employees offer 2.5 times more paid leave and insurance benefits and 3.9 times more in retirement benefits than workers at firms with fewer than 100 employees. Large firms are also more likely to be unionized, and they employ a greater share of women and minorities than small firms do, making Big Business an unlikely enemy of progressives.

Likewise, although big corporations are often accused of exploiting their market power to gouge their customers with high prices (after having forced their competitors out of business), in reality they most often maintain their market power precisely by offering lower prices to their customers and maintaining those low prices consistently. As Sowell explains:

One of the remarkable theories which has become part of the tradition of anti-trust law is “predatory pricing.” According to this theory, a big company that is out to eliminate its smaller competitors and take over their share of the market will lower its prices to a level that dooms the competitor to unsustainable losses, forcing it out of business when the smaller company’s resources run out. Then, having acquired a monopolistic position, the larger company will raise its prices— not just to the previous level, but to new and higher levels in keeping with its new monopolistic position. Thus, it recoups its losses and enjoys above-normal profits thereafter, at the expense of the consumers, according to the theory of predatory pricing.

One of the most remarkable things about this theory is that those who advocate it seldom even attempt to provide any concrete examples of when this ever actually happened. Perhaps even more remarkable, they have not had to do so, even in courts of law, in anti-trust cases. Nobel Prizewinning economist Gary Becker has said: “I do not know of any documented predatory-pricing case.”

Yet both the A & P grocery chain in the 1940s and the Microsoft Corporation in the 1990s were accused of pursuing such a practice in anti-trust cases, but without a single example of this process having gone to completion. Instead, their current low prices (in the case of A & P) and the inclusion of a free Internet browser in Windows software (in the case of Microsoft) have been interpreted as directed toward that end— though not with having actually achieved it.

Since it is impossible to prove a negative, the accused company cannot disprove that it was pursuing such a goal, and the issue simply becomes a question of whether those who hear the charge choose to believe it.

Predatory pricing is more than just a theory without evidence. It is something that makes little or no economic sense. A company that sustains losses by selling below cost to drive out a competitor is following a very risky strategy. The only thing it can be sure of is losing money initially. Whether it will ever recover enough extra profits to make the gamble pay off in the long run is problematical. Whether it can do so and escape the anti-trust laws as well is even more problematical— and anti-trust laws can lead to millions of dollars in fines and/or the dismemberment of the company. But, even if the would-be predator manages somehow to overcome these formidable problems, it is by no means clear that eliminating all existing competitors will mean eliminating competition.

Even when a rival firm has been forced into bankruptcy, its physical equipment and the skills of the people who once made it viable do not vanish into thin air. A new entrepreneur can come along and acquire both, perhaps at low distress sale prices for both the physical equipment and the unemployed workers, enabling the new competitor to have lower costs than the old— and hence to be a more dangerous competitor, able to afford to charge lower prices or to provide higher quality at the same price.

As an illustration of what can happen, back in 1933 the Washington Post went bankrupt, though not because of predatory pricing. In any event, this bankruptcy did not cause the printing presses, the building, or the reporters to disappear. All were acquired by publisher Eugene Meyer, at a price that was less than one-fifth of what he had bid unsuccessfully for the same newspaper just four years earlier. In the decades that followed, under new ownership and management, the Washington Post grew to become the largest newspaper in the nation’s capital. By the early twenty-first century, the Washington Post had one of the five largest circulations in the country.

Had some competitor driven the paper into bankruptcy by predatory pricing back in 1933, that predatory competitor would have accomplished nothing except to enable the Post to rise again, with Eugene Meyer now having lower production costs than the previous owner— and therefore being a more formidable competitor.

Bankruptcy can eliminate particular owners and managers, but it does not eliminate competition in the form of new people, who can either take over an existing bankrupt enterprise or start their own new business from scratch in the same industry. Destroying a particular competitor— or even all existing competitors— does not mean destroying competition, which can take the form of new firms being formed. In short “predatory pricing” can be an expensive venture, with little prospect of recouping the losses by subsequent monopoly profits. It can hardly be surprising that predatory pricing remains a theory without concrete examples. What is surprising is how seriously that unsubstantiated theory is taken in anti-trust cases.

Again, I don’t want to let big corporations completely off the hook here – because there really are a lot of valid criticisms that can and should be leveled at them for the harms that they often do. What I do want, though, is to make sure that these big corporations are actually being criticized for the right things. And I don’t think that the mere act of growing large enough to achieve efficiency-boosting economies of scale – usually as a result of selling a product that’s extremely popular with customers – is necessarily one of those things that should automatically draw criticism in and of itself, particularly not when it leads to higher wages for workers and lower prices for customers. If a company is providing greater benefits to its workers and customers than any of its competitors are able to, then it should be able to thrive – because after all, achieving that kind of outcome is the whole point of the market economy in the first place.

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