Large Corporations: Victory or Defeat of Free Markets? How the Expansion of Corporations is Undermining Market Economies
Mantas Bureika (ID: 12237981)
Master’s Thesis in Political Science: Political Economy
Supervisor: Assoc. Prof. Dr. Annette Freyberg-Inan Second Reader: Prof. Dr. Eric Schliesser
University of Amsterdam – Graduate School of Social Sciences Amsterdam
Abstract
In this thesis, I argue that large corporations represent both the victory and the defeat of free markets. More specifically, my research question is: How is this possible? On the one hand, the corporate giants signal the free markets’ victory because they could grow large precisely due to being the ‘winners’ of market competition. On the other hand, winning this competition brings significant monopoly power that eventually limits the freedom of markets, representing their defeat. Recent findings by Bajgar et al. (2019) indicate that more than three-fourths of European industries and a slightly lower share of North American industries (excl. Mexico) became more concentrated since the beginning of the 21st century. Studies like this clearly show that the expansion of corporations deserves more attention and therefore, this work mostly focuses on the part of the argument that considers large corporations to reflect the defeat of free markets. Conventional economics, which I present in Chapter 2, outline that as they capture higher shares of markets, firms tend to produce fewer goods more expensively, allocate a significant amount of resources to activities not directly related to their core businesses, use unfair advantages to grow further, and produce less innovation. Yet, the negative effects of corporate expansion are not limited to those stemming from monopoly power. Providing a novel contribution to the literature, I argue that the growth of corporations undermines economies also because their larger size, both in terms of scope and scale, leads to internal inefficiencies. Applying the arguments I develop in Chapter 3, four aspects become clear: (1) the number of different goods or services a single firm can produce efficiently is limited; (2) expanding bureaucracies worsen internal flows of information; (3) growing firms become less responsive to external information; and (4) due to organisational inertia, large corporations are less capable of producing radical innovation. In a broader context, as I show in Chapter 4, the expansion of corporations at least partially contributes to ‘bullshit jobs’, slowing productivity growth, and rising income inequality. In general, as corporate growth appears to be the long-term consequence of the underregulation of markets, my thesis encourages governments to step-up their regulatory efforts as this is the only way to preserve the benefits of market economies and save them from a possible social backlash.
Table of Contents
1. Introduction ...4
2. More Free Markets -> Less Free Markets ...8
2.1. Markets’ Self-destructive Tendencies ...8
2.2. What Happens After ...10
3. Large Corporations: Clearing the Path Towards Central Planning? ...14
3.1. Why Firms Cannot Be A Blueprint For A Planned Economy ...14
3.1.1. Unsuitable role models ...15
3.1.2. Getting the right information ...17
3.1.3. Investment and innovation ...19
3.1.4. Democratic planning is still planning ...21
3.1.5. Examples of national planning ...23
3.1.5.1. Soviet Union ...23
3.1.5.2. Chile ...25
3.1.5.3. The NHS ...26
3.2. How Expanding Corporations Are Undermining Their Own Efficiency ...27
4. Consequences of Expanding Capitalist Planning ...32
4.1. ‘Bullshit Jobs’ ...32
4.2. Slowing Productivity Growth ...34
4.3. Rising Income Inequality ...36
1. Introduction
The penultimate episode of South Park’s (1998) second season reaches its climax when the boys double down on their impactful school presentation and conclude that “big corporations are good!” “Because without corporations,” they continue, “we wouldn’t have things like cars and computers and canned soup” (19:19-19:27). Fast forward 20 years, and the two-part finale of the show’s season 22 begins by denouncing the working conditions endured at an Amazon Fulfillment Center, whose workers, as illustrated by Merle Travis’s song Sixteen Tons, “owe [their] soul[s] to the company store” (South Park 2018, 0:55-3:08). Arguably, such a u-turn in the depiction of corporations reflects today’s climate, where they are increasingly growing in size and dominating Western economies. A recently published special report by The Economist (2018a) draws attention precisely to this phenomenon. According to the data obtained by the newspaper, $660 billion of excess profits were up for grabs last year, with 72% and 26% of the sum being absorbed by American and European firms, respectively. Compared to historic levels, these figures are exceptionally high (Ibid.).
Essentially, the presence of excess profits means that markets are not in their equilibria and indicates that there is too little competition. This leads to various kinds of problems. For instance, as pointed out in another section of The Economist’s (2018b) report, real wages in the US would grow by 6%, should excess profits fall at least to their historic levels because recovering competition would also give people more choice where to work. People’s income would rise to an even larger extent if the country managed to restore its slowing productivity growth (Ibid.). Another sign showing the shortage of competition is concentration. On this matter, Bajgar et al. (2019) report that between 2000 and 2014, the sales of the top 4 firms in European countries increased by 4 percentage points (or 20%) in an average industry, while the growth in the US and Canada was 8 percentage points (28%). Overall, more than three-fourths of European industries, and just below three-fourths of North American industries (excl. Mexico), became more concentrated (Ibid.).
The two previous metrics are related to the fact that developed countries have been experiencing a fall in labour’s share of GDP. To explain this trend,1 Autor et al. (2017) present a model which posits that industries are increasingly becoming dominated by ‘superstar firms’. Possibly aided by new business opportunities provided by globalisation, the spread of information technologies that allow consumers to better compare products and prices, and network effects that make platforms like social media more desirable because of other users, the ‘superstar firms’ can now benefit from their advantages in product quality, efficiency or innovation to an even greater extent (Ibid.). Such companies are also more profitable, meaning that their worker compensation accounts for a smaller fraction of their contribution to GDP than in ‘non-superstar firms’ (Ibid.). Consequently, as the ‘superstar firms’ augment their
market share, labour’s share of GDP is decreasing throughout the whole economy (Ibid.). This is supported by the authors’ data.
Bajgar et al. (2019) stress that their findings on increasing concentration in Europe and North America are not an undisputable result of too little competition (pp. 9-10). In fact, buoyant competition in the past might be the main cause of today’s concentration (Ibid.). Similar ideas are presented in the conclusion of Autor et al.’s (2017) paper, noting that anti-competitive forces are probably not the engine which drives industry concentration in the first place (pp. 25-26). However, the authors do not reject a more ambiguous story and encourage to ponder the possibility that, for the ‘superstar firms’, outcompeting rivals on superior efficiency and innovation is only the first step, which is followed by maintaining their position through the abuse of market power (Ibid.).2 This possibility is an important building block for my thesis as I argue that large corporations represent both the victory and the defeat of free markets. More precisely, the research question I answer in this work is: How is this possible? On the one hand, large corporations reflect the victory of free markets because their ability to grow is often precisely the result of ‘winning’ the market competition. On the other hand, even introductory economics textbooks warn against allowing big firms to exercise their market power as this may lead to all sorts of negative effects or, in the worst-case scenario, to individual firms capturing entire markets. That is not all, however, as there is another layer to the story. Besides deteriorating competition, the presence of large corporations increases the share of economic planning in the economy at the expense of market relationships since, as explained by Coase (1937), firms are essentially the bastions of planning. Combining this with the arguments and evidence demonstrating that planning of large scale and scope could never work, it is logical to expect that the expansion of corporations should make them increasingly difficult to manage. This idea is a novel contribution to the existing literature, and therefore, in this thesis, I primarily focus on the side of the argument that considers large corporations to represent the defeat of free markets. To narrow it down, the following chapters explore how the expansion of corporations undermines the efficiency of economies.
Before moving on, I have to define several key terms in order to avoid confusion. First, by ‘firm’, I mean an organisation that has its own legal identity and conducts business in the market, usually by selling goods or services. A typical firm seeks to maximise its profit.3 A ‘corporation’, then, is simply “a large company [firm] or group of companies that is controlled together as a single organi[s]ation” (Cambridge Dictionary n.d.).
Another important term is ‘efficiency’, to which The Economist (n.d.) refers as “[g]etting the most out of the resources used”. To understand it better, it is useful to consider ‘efficiency’ in a dynamic, rather
2 Market power (or monopoly power) allows firms to influence prices, meaning that they are not solely decided by supply and demand.
3 I constructed my own definition since those provided elsewhere, of which I read many, do not appear to be satisfying. Coase (1937) refers to the firm much more accurately, but for a significant part of my thesis, his definition is too technical, and I also use it in a more specific context in Chapter 3.
than static, way, especially because my thesis looks into the changes in efficiency as well. A firm can become more efficient in a few ways. If it cannot alter its inputs, the firm may increase its efficiency by either managing to produce more goods or services, or improving the quality of the goods or services it already produces. If the amount and quality of the firm’s production stay the same, it might become more efficient by finding a way to achieve them by using fewer resources. These examples show that being efficient means maximising the average quantity and quality of production for each unit of inputs used. The same logic also applies when the whole economy is considered instead of a single firm. Next, it has to be clear from the beginning that ‘market’ is “[a]n actual or nominal place where forces of demand and supply operate, and where buyers and sellers interact (directly or through intermediaries) to trade goods, services, or contracts or instruments, for money or barter” (BusinessDictionary n.d.). The actions of the mentioned buyers and sellers are guided by prices (Hayek 1945, p. 526), while the prices themselves emerge out of supply and demand. This means that, taken together, all individual economic decisions function as a cycle and comprise markets. Consequently, ‘free markets’ are markets in their purest form where supply is supposed to align itself with demand without any intervention. In reality, however, governments are also instrumental in manufacturing their markets by providing institutions, regulations and necessary public goods for their functioning (Brousseau & Glachant 2014, Ch. 1).
The concept of ‘free markets’ is crucial for defining different economic systems. I treat them as existing on a spectrum, as depicted in Figure 1. On the end marked by ‘pure market economies’, regulations are non-existent and the government’s role is mostly limited to policing and national defense. Moving towards the right side of the figure, economies with manufactured markets may broadly be called ‘market economies’. These can be distinguished from one another according to the extent to which their markets are ‘free’. Finally, the opposite end of the spectrum is marked by ‘planned economies’ where markets are virtually non-existent. They entail that decisions concerning aggregate production, aggregate consumption, and prices are made by the government4 and planned in advance, instead of allowing the aggregate outcomes to arise from individual decisions.
Figure 1. The spectrum of economic systems.5
4 The government does not necessarily have to be a copy of currently existing (representative) democratic or authoritarian governments; it might as well be just a mechanism for direct democracy, meaning that all planning may actually be done by citizens.
5 Obviously, the figure is not an attempt to present all possible economic arrangements correctly – its sole purpose is to clarify my argument. For example, the right half of ‘market economies’ could as well include ‘mixed economies’ and ‘socialist economies’, but these are not important for the thesis.
Pure market economies Planned economies Market economies
Currently, Western market economies are much closer to being ‘pure’ than ‘planned’. Regulation was instrumental for manufacturing markets in the three decades after the end of World War II, yet, from approximately the 1980s, the US and the UK led the shift to a completely different regulatory paradigm (Buch-Hansen & Wigger 2010; Stucke & Ezrachi 2017). Contrary to the ‘embedded liberalism’ of the post-war period, where regulation sometimes even promoted concentration in order to pursue national or social goals, the ‘neoliberalism’ that came after focused on pure competition and freeing the markets from the government (Buch-Hansen & Wigger 2010). ‘Embedded liberalism’ relied on macroeconomic thinking that took into account the interests of broader society, while ‘neoliberalism’ builds on microeconomics, thus primarily considering the perspective of individual firms (Ibid.). The fact that ‘neoliberalism’ is the dominant paradigm of today has important consequences.
There is reason to believe that one of them is the increasing levels of concentration. In the first part of Chapter 2, I show that free markets, if not properly overseen, have a tendency to destroy themselves by leading to monopolies. This has been, if not known, then at least argued for the past 250 years. The second part of Chapter 2 then outlines what happens as a result of concentration. Chapter 3 is based on an argument recently made by Phillips and Rozworski (2019), who claim that today’s large corporations are a blueprint for much more extensive economic planning in the future. I completely disagree and spend a considerable amount of space to present my objections. By turning this argument around, I arrive at a more detailed theory on why the increasing complexity of planning in expanding corporations is harmful from the perspective of economies. Finally, in Chapter 4, I dwell on some macroeconomic phenomena that illustrate my theory, such as ‘bullshit jobs’, slowing productivity growth, and rising income inequality. I conclude my Thesis in Chapter 5, encouraging market economies to step up their regulatory activities. Excessive freedom of markets not only facilitates monopolies, but also creates conditions for large firms to grow unsustainably, with negative effects on public welfare.
2. More Free Markets -> Less Free Markets
In essence, large corporations represent the defeat of free markets because free markets are exactly what allows them to gain monopoly power. It is nothing new to argue that in the long-run, unrestricted competition creates various kinds of problems and eventually fades as only a limited number of firms is left standing. What is often overlooked, however, is that this view is shared not only among various left-wing or Marxist intellectuals, but has also been expressed by those who, in fact, support free markets. Many 20th century economic liberals lost this nuance, although it is present even in the writings of Adam Smith. Therefore, in this chapter, I only present a centuries’ old case that free markets have a self-destructive nature. To supplement this, I mostly rely on more contemporary economic studies and outline what happens after this nature manifests itself. This includes fewer goods and services being produced more expensively, inefficient resource allocation, unfair competition, and less innovation. 2.1. Markets’ Self-destructive Tendencies
“To widen the market and to narrow the competition, is always the interest of the dealers,” writes Smith (1776, p. 200), for whom markets are a natural consequence of human existence. At the same time, however, he acknowledges that business interests are hardly the same as those of society at large, encouraging people to be cautious and resist any potential regulations that would allow merchants to keep their prices above the level decided by free competition. Even though in this passage Smith talks about laws, formal regulations are definitely not the only way in which businessmen seek to achieve the ultimate goal of monopoly. Another means for that, which is perfectly consistent with the conclusions of Autor et al. (2017) and Bajgar et al. (2019), is innovation. Giving an example of a dyer who has learned to produce the same colour two times more cheaply, Smith (1776) provides the illustration that each businessman will always try to capture a larger share of the market even without resorting to politics (p. 51). The dyer hides his discovery for as long as possible since he is now able to earn excess profits by keeping the same prices. Should he share the new method of making the colour with others, the total supply would soon increase, driving down the price (Ibid.). In modern days, this resembles the scramble for patents as by possessing them, firms at least become monopolists in narrow markets and for limited amounts of time. If the laws imposing these very limits did not exist, free markets would lead to prolonged monopolies of the most competitive, and this is exactly what signals their own destruction.
A complicated thing about competition is that it drives innovation. As Schumpeter (1943) writes, competition does not merely incentivise producers to seek improvements in costs or quality of their products, but it creates little revolutions and opens up entirely new markets while rendering the existing ones obsolete (pp. 83-84). This ‘creative destruction’, as coined by the author, pushes capitalism and free markets along the path of incessant progress. Yet, the long-term predictions are still pessimistic. For one thing, technological progress is making innovation easier, which means that the role of the entrepreneur who is able to think out of the box is being replaced by trained specialists (Ibid., p.
132-134). Eventually, economic progress becomes automatic, and “[b]ureau and committee work tends to replace individual action” (Ibid.). As firms indeed seek to automatise progress, this is embodied by large corporations which, having achieved that goal, overtake or drive away smaller, less automated and less innovative, producers (Ibid.). The inevitable result, then, is less competition, and thus less free markets. Moreover, Schumpeter (1943) expects the attack on small- and medium-sized firms to lead to a political backlash against the whole system of capitalism (pp. 138-142). To some extent, this may already be happening in the US – a country that has one of the freest markets in the world. Currently, socialist Bernie Sanders has a real chance of winning the presidency, 51% of young Americans view socialism positively (Newport 2018), while recently elected Alexandria Ocasio-Cortez is receiving a lot of attention for her work in the House of Representatives.
The ultimate resistance to free markets is also the core point of Polanyi’s (1944) argument. According to him, pure market economies cannot exist in reality at all because if they did, they would leave humanity and its environment in ruins (pp. 3-4). This is because their functioning requires everything, including people (classified as ‘labour’), to be up for sale and subject to the movements in supply and demand (Ibid., pp. 75-76). In other words, it is crucial for free markets that people’s social relations are embedded in the economy (Ibid., p. 60). On the contrary, before the advent of capitalism, the economy had always been embedded into society, meaning that people’s behaviour could be explained by social, rather than economic, reasoning (p. 48). An example of this might be acting in the interest of the community (Ibid.). The fact that unfettered market forces threaten the entire social fabric motivates people to resist them (Ibid., pp. 76-77). Indeed, societies have always protected themselves by checking markets with regulation (Ibid., pp. 79-80; 136), although at times when this was not enough, more drastic measures were necessary. In Polanyi’s (1944) analysis, these measures begin with English royal families slowing down economic progress in order to help people to adjust to the enclosures, and end with the rise of fascism. Almost 40 years after the shift to the ‘neoliberal’ regulatory paradigm, similar reactions are increasingly evident today. From the protests of Occupy Wall Street and Gilets Jaunes to the election of Donald Trump and Brexit, it is clear that people are unhappy with their market economies.
Interestingly enough, despite their differences, all three authors presented above share the idea that without proper oversight, markets are bound to fail. Even Smith (1776) concedes that regulation might not be such a disaster if it concerns life’s necessities (p. 116). I would argue that it is the only way to prevent markets from destroying themselves. This brings me back to the narrative that is central to my thesis, which, at the end of this section, can already be seen in a broader context. To reiterate, it is indeed very plausible that large corporations arrived at where they are by outcompeting other firms on their merits, such as higher efficiency and higher innovativeness. Yet, as the lack of regulation allowed them to build up and exercise market power, they are already past the whole process of competition by ‘creative destruction’ and can cling onto their positions primarily by erecting market barriers, while all of this is even easier when the corporate giants can afford to acquire their competitors. The previously
addressed Amazon once started as a bookstore and eventually became the largest online retailer simply by being better. In the light of the reports about it not paying profit taxes (Ingraham 2019) or subjecting its workers to horrible conditions (Godlewski 2018), the question now is if it is willing to (try to) remain better. And there are dozens of others like Amazon.
2.2. What Happens After
Having explored the natural tendency of free markets to eventually eliminate themselves – the principal and underlying reason why monopolies emerge – it is equally important to establish what happens after these monopolies are already in place. Of course, pure monopolies, where there is strictly one seller of a certain type of good or service, are not very common. Nevertheless, large corporations still possess significant market power and are able to act much like monopolies. Smith (1776) was probably the first to put monopoly on the opposite side of the spectrum to free competition. He argues that prices under the former arrangement are as high as it is possible to extort from consumers, while under the latter, the prices are as low as it is possible for the sellers to stay in business (Ibid., p. 52). In fact, there is already a consensus that excessively high prices are an essential feature of monopolies.
For instance, a microeconomics textbook that I read during my undergraduate studies confirms that “the price will be higher and the output lower if a firm behaves monopolistically rather than competitively” (Varian 2010, pp. 445-446). This stems directly from the fact that monopolies usually recognise their own market power and set the price and output with an eye on maximising profits (Ibid., p. 439). This means that people who buy the same goods (or services) from the monopolist more expensively than they would under more competitive market structures are not the only ones ending up worse off. Worse off are also those who cannot afford the goods if they are sold in a monopoly, but would happily purchase them in a market structure where they are cheaper. Therefore, monopolies do not merely profit by ripping off their customers. Besides, they generate deadweight losses to society, which represent the economic welfare lost exactly because fewer goods are produced more expensively. And prices are just a more convenient tool of analysis. What is represented by higher prices might as well be lower amounts or qualities of the products that are sold at the same price as under free competition.
However, even though the deadweight losses can be neatly presented in graphs, they do not reflect the full extent of damage that monopolies do to the economy. Tullock (1967) provides an explanation for why this is the case with an analogy of theft. It works since on the surface, a thief only takes something from another person without reducing the total quantity of that something (Ibid., p. 228; monopoly does that through the deadweight losses, yet much more wealth is actually transferred than lost). In spite of this, the very presence of thieves creates various kinds of costs: both monetary and time investments in theft, private protection against it (e.g in the form of door locks), and public spending on police (Ibid., p. 231). Everything is still counted towards the GDP, although, if there was no theft, these resources could go to activities that actually improve people’s lives. Tullock (1967) writes that this is similar to
investing in the activities of monopolising (p. 231), which is only partially true as, referring to the previous section, spending on innovation in order to win the competition on merits is not necessarily bad. Yet, the analogy is very valuable considering the defensive efforts of the already existing monopolists, including various ways to prevent new firms from entering the market, and sizable sums spent on lobbying and corporate lawyers (Ibid.). Furthermore, increasing abuse of market power should, at least in theory, spark reactions from the competition authorities (Ibid., p. 232).
One more area of damage not represented by graphs in economics textbooks concerns the unequal playing field that makes monopolies’ expansion to new markets or industries much easier. Say, a firm that has a monopoly in Market A wishes to enter Market B, which is competitive. As opposed to the latter market’s incumbent firms, the monopolist has a steady flow of profits without any significant pressures from Market A and can use this position to increase its share in Market B. First, the monopolist can use some of these profits to cover the losses in Market B while is undercuts the incumbents by offering artificially low prices. An example concerning new markets occurred when Walmart attempted to do exactly the same in Germany until it was hit with a lawsuit by the country’s Federal Cartel Office, compelling it to sell essential food products more expensively (Andrews 2000). Second, the monopolist can transcend its power through bundling if the goods in Markets A and B are complementary. In 2001, Microsoft saw itself fighting a case against the US authorities because the company, which had a near-monopoly in operating systems, compelled computer manufacturers to pre-install its own web browser (Brinkley 2000). Considering that during the advent of the Internet, browsers often still had to be obtained at a physical store, this created an unfair advantage for Microsoft’s product. These are just a few examples, although they clearly indicate that monopoly makes consumers worse off not only in the hypothetical Market A, but may also do so in Market B, Market C, etc.
Finally, the lawsuit against Microsoft also illustrates the reasoning for why monopolists would stifle innovation. In fact, Microsoft decided to engage in anticompetitive behaviour by compelling hardware producers to pre-install its browser not only in order to expand in a new market. It also did so because innovation by its competitors could have changed the entire playing field. On a deeper level, a competing browser made by Netscape was so innovative that it could run Java programs without requiring an underlying computer operating system, which may have challenged Microsoft Windows’ domination in the market (Gilbert & Katz 2001, p. 27). Consequently, Microsoft chose a conservative approach and moved to protect its core business instead of trying to match Netscape in innovativeness. Yet, one still cannot completely generalise from this case since, in academic work, the debate on whether free markets are more suited to innovation than monopolies does not appear to be settled. In this regard, scholars such as Loury (1979) often treat Smith (1776) and Schumpeter (1943) as opposing each other. Loury (1979) calls this a “conflict between two great traditions”, where for Smith, monopolies are no good for anything, while for Schumpeter, the hope of gaining (at least temporary) monopoly power acts as an incentive to innovate (p. 395). Williamson (1965) looks at this issue by analysing the largest firms in concentrated industries. According to one hypothesis, they have scale
advantages, better access to financing, and at the same time realise that this is also true about their competitors, all of which pushes them towards innovating (Ibid., p. 67). On the other hand, it is equally possible that, in the long run, the largest firms opt to preserve their shares of monopoly power and keep stable relations among each other, thus limiting innovation (Ibid., p. 68), similar to what happened with Microsoft. Williamson’s (1965) empirical analysis points towards his second hypothesis, indicating that the industry’s largest firms are the less innovative, the more market power they have. Yet, the story is not that simple, and the two ‘traditions’ outlined by Loury (1979) appear to be two sides of the same coin. His own analysis indicates that firms’ innovative efforts are maximised when there is healthy competition but they have some monopoly power. A much more recent study by Aghion et al. (2005) supports this as the authors find a robust inverted-U-shaped relationship between competition and innovation that is skewed towards competition (see Figure 2). Hence, the perfect market arrangement seems to be somewhere in between free competition and monopoly, although it is closer to the former.
Figure 2. The relationship between competition (x-axis) and innovation (y-axis) (Aghion et al. 2005, p. 720).6 It is definitely possible to find even more disadvantages of monopolies, compared to more competitive markets, but at this point, the fact that monopoly is clearly undesirable for consumers is the most important. Yet, one must not forget that it is the process of competition itself which often creates monopolies as dominant firms become market leaders by being more competitive. Schumpeter (1943) observes that “big business may have had more to do with creating that standard of life than with keeping it down” (p. 82), and the cars, computers, and canned soup mentioned by South Park (1998) attest to the validity of this claim. The conclusion which stems from the ideas presented so far is that the world really needs competition. After all, ‘creative destruction’ is driven by the desire to become a monopoly. It is just that the light at the end of this tunnel should never be achieved, meaning that a proper regulatory framework must keep high-performing firms in check so that the tunnel still exists.
6 A higher Lerner index represents more competition (1 – perfect competition), while more citation weighed patents represent more innovation.
As a fan of sports, and as a person who considers it a gold mine for analogies to everything else in life, I find one useful here as well. Imagine the start of a football league season, where one club, named Monopoly FC, has been so competitive during the previous years that it now has all the best players in the world. During, say, the first half of the season, the club naturally plays the best possible football and wins the most points in the league. Then, as the second half goes on, both the coaches and the players of Monopoly FC start to realise that they are indeed the best and no one will be able to catch them in the table. If this seems so easy, and if the team has a comfortable lead against its second-placed rivals, it can definitely afford to put a bit less effort in the remaining games or rest some important players who worked hard during the majority of the season. They may even experiment with new tactics and try out some young players with an eye on the next season, but essentially, Monopoly FC is not as good as it was in the beginning. Add a few more seasons when the club wins its league easily, and it might start investing in its basketball team, BC Monopoly, since the prize money that comes from the football league title is not enough. Would the story be different if Monopoly FC had not acquired all, but only a few of the best players? In this case, it would have to fight for the title until the last day, and always look for new ways to beat its opponents, living in constant fear that the rivals will invent some new tactics themselves. Most likely, this would already be a story not of Monopoly FC, but of Competitor 1 FC that has to fight against Competitor 2 FC, Competitor 3 FC, and so on.
3. Large Corporations: Clearing the Path Towards Central Planning?
The previous chapter presents what is already known and has been observed for centuries. Smith (1776) and Schumpeter (1943) make it clear that free markets, if unchecked, have a tendency of self-destruction since they eventually create monopolies, which, as revealed by economic research, negatively affect societal welfare in a number of ways. Monopolists produce fewer goods and sell them for a higher price, allocate a significant amount of resources to unproductive activities, exploit unfair advantages for expansion, and create less innovation. Meanwhile, Polanyi (1944) goes even beyond economics and adds that unchecked free markets threaten to destroy societal relations as they require everything to be up for sale. For Polanyi (1944) and Schumpeter (1943), a logical long-term conclusion to free markets is socialism. Therefore, the main message of Chapter 2 is that in order to preserve markets and their ensuing benefits that stem from competition, economies must limit their freedom.
In the following sections, I take a different turn and show that large corporations represent the defeat of free markets also because the lack of regulatory oversight creates an environment where firms can grow past their efficient size. Here, I approach my research question from the opposite side of the ‘pure market economies-planned economies’ spectrum (see Figure 1), and focus on an argument recently made in People’s Republic of Walmart by Phillips and Rozworski (2019). In a nutshell, the authors maintain that, as opposed to free markets, economic planning works and, in fact, thriving corporate giants, such as the already mentioned Walmart and Amazon, are the living proof. Thus, according to Phillips and Rozworski (2019), planning under capitalism provides a blueprint for a future socialist economy. As already mentioned in the introduction, I cannot agree with this position, but it is exactly my counter-arguments that eventually allow me to expand the case against the regulatory status-quo. By responding to Phillips and Rozworski (2019), I argue that economic planning of large scope and scale can never work. This leads to the conclusion that under the ‘neoliberal’ paradigm, incessant growth only makes corporations larger, and hence more poorly (managed) planned economies. 3.1. Why Firms Cannot Be A Blueprint For A Planned Economy
Phillips and Rozworski (2019) deserve credit for reminding the often forgotten truth that firms are indeed places where economic planning is in its full capacity. After all, firms’ decisions are made within their hierarchies of managers and workers. This insight was originally produced by Coase (1937), who, by trying to construct a definition of the firm, discovered that “the distinguishing mark of the firm is the supersession of the price mechanism” (p. 389). It would indeed be strange to imagine a situation where, for example, one team would have to pay another team for lending out its member in order to complete a project even though they both sit in the same office and work towards the same goal.7 Coase (1937) observes that using the price mechanism is costly since one has to find out the market prices and negotiate separate contracts for every single task, which is especially relevant concerning workers (pp.
390-392). Thus, fewer long-term (or indefinite) contracts, under which the employees commit to performing various kinds of tasks for the entrepreneur, prevail against a plethora of short-term specialised contracts, and the firm emerges (Ibid.). The nature of these long-term contracts is such that firms resemble little planned economies. However, this fact is by no means an encouragement for creating national planned economies, contrary to what Phillips and Rozworski (2019) claim.
Essentially, this section is devoted to countering their argument. Below, I present four sets of ideas supporting my claim that planning of large scope and scale cannot work. First, I argue that one could not repurpose corporate planning practices for national economies due to differences in scope, and explain why Amazon and Walmart are simply bad examples to use. Second, I discuss the importance of information flows between producers and consumers, and show that central planners could not ensure them as successfully as markets. Third, I revisit investment and innovation, where planning also faces significant disadvantages. Fourth, I dwell on the authors’ desire to make economic planning democratic but draw the conclusion that this does not appear to be feasible. Finally, I turn to the real-life examples of national planning provided by Phillips and Rozworski (2019) which, in fact, only confirm my arguments. In sum, since firms can be considered planned economies, the arguments presented below are instrumental for constructing my theory on how the expansion of corporations is making their internal planning less efficient.
3.1.1. Unsuitable role models. In the words of Phillips and Rozworski (2019), “We plan. And it works” (Ch. 1).8 There is definitely no denying that, and the two main examples on which the authors build their case – Walmart and Amazon – seem compelling. Concerning Walmart, the authors were so fascinated by its logistic efficiency and its success in making the whole supply chain behave like a single firm, that they decided to name their book after the corporation.9 Amazon’s case is not much different as it is called a ‘master planner’ due to its logistical and technological innovations as well. Phillips and Rozworski (2019) even allow themselves to state that “Amazon offers techniques of production and distribution that are just waiting to be seized and repurposed” (Ch. 4). However, the catch lies in this quote itself since Amazon does not actually produce most of what it sells and is only a giant retailer. The same applies to Walmart. Therefore, what these two corporations are good at, and where their planning works, is in distributing goods, which is clearly not enough for a planned economy of much broader scope. Essentially, Amazon and Walmart are leaders when it comes to logistics, but, contrary to what the authors claim, socialism is not all about logistics. Someone has to actually produce the goods for the likes of Amazon and Walmart to move around.
8 The electronic version of Phillips’s and Rozworski’s (2019) book that I managed to obtain does not have fixed page numbers. Therefore, in my citations, I can only accurately refer to specific chapters. The same issue concerns the books by Graeber (2018) and Gordon (2016), cited in Chapter 4.
9 “While there are indeed financial transactions within the supply chain, resource allocation among Walmart’s
vast network of global suppliers, warehouses and retail stores is regularly described by business analysts as more akin to behaving like a single firm [sic]” (Phillips & Rozworski 2019, Ch. 2).
Their cases indicate that planning is possible combining a limited number of areas, and this does not really allow to extrapolate beyond the confines of a single firm, however large it may be. The fact that Amazon and Walmart are very competitive retailers does not mean that they would be equally competitive producers of canned soup. It is simply impossible for a single entity to coordinate the production and distribution of everything, and this is exactly why there are no success stories about centrally planned national economies. I address the case studies of Phillips and Rozworski (2019) later in this section, therefore, for now, a few much smaller-scale examples will suffice. There have been plenty of leading companies that failed to adapt to changes in their own industries, hinting at an even higher possibility of the same fate marking the expansion to other industries, and the ultimate planned economy would eventually have to expand to numerous, if not all, industries. A firm responsible for one of the spectacular failures is Nokia. Once the leader in mobile phones, it completely lost its edge when smartphones came about, and the primary reason was that Nokia smartphones were just not good enough. It was a similar story with the social media platform Google+ which does not exist anymore mainly because its competitors provide much better functionality. The list goes on and on, suggesting that an extensive planning apparatus still could not replace firm specialisation.
By arguing that Amazon and Walmart offer hope for effective economic planning, Phillips and Rozworski (2019) fail to realise that a country is not a company. In an article of this exact name, Krugman (1996) gives two answers to why business reasoning is not equal to economic reasoning. The first one, he writes, is that entrepreneurs generally succeed by capitalising on specific strategies relevant to their own situation, while what matters for managing economies are the underlying principles as economists care about the general picture (p. 43). According to his more complex explanation, firms can be described as ‘open systems’, while countries are ‘closed systems’. Being open, firms are not defined by their size since their market share can change significantly in just a couple of years or because (subject to constraints, of course) they can hire or fire as many workers as they wish (Ibid., pp. 44-50). On the other hand, even if the same processes happen country-wide, they take a considerable amount of time (Ibid.). All of this means that businesses and countries experience economic changes in a different way – if the firm becomes more profitable because of the overall growth of Industry A, it will likely hire more workers for both Industry A and Industry B due to spillover effects, while on the macroeconomic level, higher employment in Industry A will almost necessarily reduce it in the other industries (Ibid.). Krugman’s (1996) analysis highlights the tension between the interests of businesses and those of society, which touches upon my overall argument. In this specific case, it also confirms that one cannot run a country as a single firm. An economy is far more complex and does not behave in the same way as a firm that is only a small part of the economy.
Furthermore, Amazon and Walmart are bad examples to use for the support of country-wide economic planning due to their treatment of workers. Besides the excerpt from South Park and Godlewski’s (2018) story about Amazon cited earlier, Phillips and Rozworski (2019) themselves acknowledge these shortcomings of the two ‘master planners’. In fact, they spend an entire section only to describe how
“Amazon [depends] on horrible working conditions, low taxes and poor wages” (Ch. 4),10 while in Walmart’s case, they write that it “regards union busting not only as a necessary accompaniment to their enterprise, but places it at the very core of their business model” (Ch. 1). Do the authors want a planned economy where people are exploited? They probably do not, and, in fact, they extensively point out throughout the book that they support more democratic forms of planning (which I consider in more detail later). Yet, if squeezing the last cent out of the employees’ and tax payers’ pockets is a necessary condition for planning to work effectively on a somewhat larger scale, there is even less chance of implementing it in a democratic fashion. Revisiting Walmart’s adventure in Germany, which has much stricter labour laws than the US, the firm’s reluctance to adhere to collective bargaining agreements seriously damaged its image and was one of the many reasons why it left the country with losses (Christopherson 2007, pp. 460-461).
3.1.2. Getting the right information. I must admit that so far, I have omitted one important aspect of Phillips’s and Rozworski’s (2019) argument which is related to the fact that an effective flow of information between producers and consumers is necessary for the economy to properly function. In other words, the more producers know about the consumers’ demand, and the more people know about the existing supply (e.g. market prices and product quality), the closer the markets are to their equilibria. Phillips and Rozworski (2019) recount the whole ‘Calculation debate’, which occupied the minds of the 20th century intellectuals who explored the feasibility of economic planning (Ch. 2-3). The free marketers’ camp appears to have won this battle of ideas, arguing that no other system can disseminate information as effectively as markets. Probably the most sophisticated case is presented by Hayek (1945), who is also referenced in the book. He asserts that only people themselves have the full knowledge of their own circumstances, and there is no way for a central planner to obtain all this information (pp. 519-520). Because of this, each individual is in the best position to quickly adapt to any changes in his situation, instead of having to wait while the planner will process all the aggregate data and make a macro-level decision (Ibid., p. 524). The only problem that people cannot act on their own knowledge alone but need some insight into their surroundings is solved by prices (Ibid., pp. 524-527). Even if not always perfectly, they communicate any changes relevant to either producers or consumers and do it more smoothly than a central planner (Ibid.).
To Phillips and Rozworski (2019), however, such a verdict that free markets are superior to economic planning is unconvincing. First, they point out that markets do not always actually provide all the necessary information, and the information they do provide may also be incorrect (Ch. 3). This is true, and the previous chapter of my thesis perfectly illustrates why it is necessary to tame free markets. Yet, as long they are guided by appropriate regulation, I see no logic behind the claim that imperfectness of free markets invites central planning. The second and the most important point of the authors’ critique
10 The full and accurate quote is: “While Amazon may depend on horrible working conditions, low taxes and poor
wages, it nevertheless functions” (Phillips & Rozworski, Ch. 4). It seems more likely that it functions (or preserves
is that Hayek ignores the economic planning which takes place inside firms (Ibid.). In fact, Phillips and Rozworski (2019) observe that modern capitalist planning, at the forefront of which are Walmart and Amazon, increasingly relies on sophisticated technology, including big data that was not available at the time when Hayek wrote. While vast flows of information allow Walmart to optimise its logistics, Amazon’s case is yet more telling (Ibid.). Since it is an online retailer, it stores hardly comprehensible amounts of customer data that powers its very effective recommendation and demand estimation systems (Ibid., Ch. 4). With continuing progress in computer science and mathematics, the case that data on people’s desires can one day be successfully gathered by a central planner in order to estimate demand and direct supply indeed sounds quite compelling. Nevertheless, even in the presence of the most accurate technologies, there remain several shortcomings.
In general, Hayek’s (1945) omission of planning inside firms is not necessarily relevant. If one sees firms as equivalent to individuals when their engagement in markets is concerned, his argument that free markets ensure the best use of local knowledge still holds. In this case, an economy might be imagined from the perspective of a Martian who observes the Earth through a telescope identifying social structures, as in Simon’s (1991) thought experiment:
The firms reveal themselves, say, as solid green areas with faint interior contours marking out divisions and departments. Market transactions show as red lines connecting firms, forming a network in the spaces between them (p. 27).11
As the red market lines would connect individuals, they connect firms, or firms and individuals, in the same way (see Figure 3). A firm is then simply some people teaming up in order to achieve better results in the market, and whether they plan inside their team does not make any difference. Thus, the fact that firms mostly utilise their local knowledge remains. This is an appropriate place to revisit Krugman (1996), who notes that the majority of large corporations are centred on a specific technology or a specific approach that is only applicable to a limited number of markets (p. 44). This suggests that there is really no way to eliminate the role of local knowledge and account for it in the planning system. A future planned economy would extensively rely on big data, although it is clearly impossible to codify all the information that is present in markets. Among other features, it includes firms’ and businessmen’s relationships with local communities, their entrepreneurial insight, and their intuitive ability to estimate demand that is not based on data. There is also value in what does not happen, as exemplified by a customer who takes an item into her hands but eventually decides not to buy it. While the employees present at the store see this, there is no way in which a computer could account for such a situation if it does not take place online. In the end, many shortcomings add up, and predictions relying primarily on data would resemble the guesses of those analysts who, in the build-up to the Great Recession of 2008, believed that the economy was doing just fine.
11 Interestingly, this is nearly the exact picture that I had in my notebook before I stumbled upon this quote while reading Phillips and Rozworski (2019).
Figure 3. A Martian’s view of the Earth’s social structures (adapted from Simon 1991).
On top of that, there are three problems that Phillips and Rozworski (2019) acknowledge themselves (Ch. 4). First, even considering what they can do, the aforementioned technologies that drive Walmart, and especially Amazon, are still far from being sufficiently sophisticated for planning beyond single corporations. For now, big data remains clouded by a lot of uncertainty. Second, planning inside firms currently relies on prices and interactions generated by the market economy which means that more systemic changes have to be implemented before corporate planning can be repurposed for the national level (Ibid.). Yet, having in mind that effective planning may require worker exploitation, it is possible that it can only be achieved on a somewhat larger scale in the market system. Lastly, there is potential for a plethora of privacy issues with data collection, ranging from annoying ads to unlawful surveillance (Ibid.). I would add that a central planning database would create another pile of security concerns. Various hacks and data leaks already happen today, and higher amounts of information stored by a single user would only make the spoils of cyberattacks more attractive. Because of all this, a high level of trust in the state (or another kind of planning authority) would be the prerequisite for economic planning, and this could not be achieved easily.
3.1.3. Investment and innovation. Phillips and Rozworski (2019) insist that, same as with production and distribution, economic planning is already responsible for a large chunk of investment and innovation (Ch. 5). Supposedly, this reflects another area in which free markets should give way to economic planning. On a more abstract note, the authors support J. W. Mason’s idea12 that finance – a vehicle for investment – is a central planner of capitalism in general (Ibid.). More precisely, it is the financial institutions, such as banks, which determine where the economic surplus will be allocated, and these institutions are nothing other than the bastions of planning (Ibid.). An obvious example is that banks decide whether to accept various loan requests, and all of these small investment decisions determine the profits of tomorrow (Ibid.). Next to interest rates and financial regulation, financial
12 Since the authors do not provide exact citations in their book, I can only mention J. W. Mason’s name here. This is also the case with a few other names that I refer to later.
institutions comprise an important pillar for setting future expectations about the economy, which have a profound influence on the present (Ibid.). Indeed, the argument sounds interesting, although it actually reinforces my own point against central planning in the literal sense as it seems superfluous (and potentially harmful).
That finance can be considered a de facto central planner is a perfect manifestation of what Smith (1776) means by the famous ‘invisible hand’ – each individual acting in their own interest, but collectively fuelling the whole economy without even consciously intending it (p. 349). In this case, the individuals are the financial institutions, whose profit-seeking behaviour under the rules imposed by interest rates and regulation adds up to the role of the central planner, as described above. Therefore, some sort of planning already occurs more or less naturally. Why is there a necessity to force it? This would only require a lot of additional resources, and it is very unlikely that explicit planning would allocate investment in a better way than it is, or could be, achieved in market economies. One may contend that, contrary to private banks, a planning authority would distribute finance more equitably, although this is what regulation is for – to check that private behaviour translates to societal good. To show that market economies are also preferable to economic planning in terms of allocating investment, I have to consider the reasons why they (would) yield more and higher-quality innovation. In modern theories, economic growth is heavily dependent on total factor productivity (TFP), which is itself determined by the level of various kinds of innovations (Helpman 2004, Ch. 4).
Phillips and Rozworski (2019) point out that under capitalism, “[p]rojects will be taken up if and only if they are thought to be profitable”, meaning that unprofitable innovations will often fail to see the light of day (Ch. 5). For the authors, such a system, where people will only invent and create for their own material gain, is undesirable. Yet, they think so because they cannot see past the individual and do not think in terms of the whole economy. As discussed in Chapter 2, the short-term prospect of profit and the longer-term prospect of monopoly power are the main incentives for the amount of innovation that occurs today, and they drive ‘creative destruction’. It is not that economic planning would result in previously unprofitable innovations. Even if it did, much more innovation would be lost that could only be produced as a consequence of ‘creative destruction’ since there is no ‘creative destruction’ without market competition. Both Nokia smartphones and Google+ became the victims of this process. Had they been produced in a planned economy, there would have been nothing to destroy them, and people would have had to settle for clearly inferior products. An array of smartphones that run on Android and iPhone, or Facebook and Twitter, outcompeted their rivals by offering better design and functionality. This could not have happened without their creators thinking ‘out of the box’ and questioning if the existing products are really the best that anybody can offer.
Furthermore, it is not merely the lack of competition that would hinder the process of innovation in planned economies. Thinking out of the box would also be much less prevalent due to organisational inertia, which, for the purposes of my argument, can be defined as organisations’ inflexibility, inability
to adapt to external changes (e.g. in demand) and inability to collectively question existing internal rules and norms. Hannan and Freeman (1984) maintain that the likelihood for organisations to experience inertia increases with their size (p. 158). Naturally, large organisations require more extensive delegation of tasks, thus making change more difficult (Ibid.). Kelly and Amburgey (1991) find support for Hannan’s and Freeman’s (1984) hypothesis, even if it is weak. This is important because a planned economy would be the largest possible organisation. Relating all of this to innovation, I have to revisit Schumpeter’s (1943) ideas previously presented in Chapter 2. He writes that significant inventions can only occur as a result of entrepreneurship, but entrepreneurship is a ‘distinct economic function’ in itself as it “lie[s] outside of the routine tasks which everybody understands and [...] because the environment resists in many ways that vary, according to social conditions [...]” (p. 132). Therefore, organisations’ ability to produce innovation appears to be related to inertia because in a sense, at least completely new inventions have to be discovered outside the prevalent system. This would not be possible in planned economies as everyone would belong to this system, and competitive incentives to step outside of it would not exist. Planned economies would eventually be consumed by organisational inertia, which makes their prospects to innovate particularly grim.
I must concede that, in today’s reality, the process of innovation is more complicated as ‘creative destruction’ does not occur in a vacuum. Phillips and Rozworski (2019) correctly indicate that innovation is social, meaning that it does not solely depend on the light-bulb moments of inventors (Ch. 5). These are only the last step in the process, which involves many contributions by ordinary workers, managers, or abstract ideas (Ibid.). Furthermore, the most important innovations, especially the ones that have not yet been applied, are often produced by researchers who work for the state (Ibid.). Here, the authors rely on the work by Mazzucato (2013). She draws attention to the fact that the state is not only indispensable in funding the basic research that firms build upon, but also facilitates the spread of knowledge through intermediary institutions, and allows the commercialisation process to go as smoothly as possible (Ibid.). Furthermore, many states invest in risky areas where businesses do not dare and thus participate in the ‘creative destruction’ on an equal footing (Ibid., p. 24; 57). The crucial role of the state is undeniable, and Chapter 2 already establishes that one cannot simply leave everything to free markets. Yet, this does not mean that the state could also perform the roles of firms that benefit from the innovation systems that it creates. More precisely, the state, or any mechanism of economic planning, could not match the application and commercialisation of research since only the firms are driven by profit-seeking incentives. Attempting to differentiate from competitors in order to gain mini-monopolies, private business seems to be much better suited to developing incremental innovation. Hence, the social aspect of innovation is important in adding more nuance to the argument, but it still only provides grounds for ‘manufacturing’, not eliminating, markets.
3.1.4. Democratic planning is still planning. An alternative answer to why there is a necessity to impose a conscious mechanism of central planning on the financial system and, indeed, the whole economy, is that such a kind of planning could be done in a more equal way than the current planning
inside firms. This derives from Phillips’s and Rozworski’s (2019) consistent emphasis that the capitalist planning they want to repurpose has to become democratic. Building on Karl Marx, Phillips and Rozworski (2019) reject Coase’s conclusion that firms emerge as a means to save on transaction costs, and side with the notion that hierarchical relationships inside firms are simply the reflection of how market economies work, their main goal being profit that stems from the exploitation of workers (Ch. 3). Moreover, the authors even insist that a planned economy coordinated by workers instead of bosses or bureaucrats would be more efficient than market economies (Ch. 2). Here, they rely on the work of Elinor Ostrom who, throughout her academic career, investigated many instances of communities successfully managing their common-pool resources (such as fisheries or forests), and proved that this is indeed possible (Ibid., Ch. 3). However, while she rejects the rational choice approach, which posits that government will always be more efficient in solving ‘tragedies of the commons’, Ostrom does not provide a single and definite answer that democratic management of these resources must work (Ostrom 2010). She only outlines a set of general principles that have to be adapted to particular circumstances, and the fact that one community succeeds in doing so does not mean that another one will succeed as well. Effectively managing common-pool resources appears to be difficult, and hence it is unlikely that a national economy could be managed as an aggregation of numerous commons or, still less likely, as a single large-scale commons.
Unfortunately, Phillips and Rozworski (2019) never clearly spell out how exactly this democratically planned economy should function. Yet, even if they only imply that commons or some kind of community-owned firms would have a prominent role, it is not difficult to reject their utopian vision. According to the authors, a democratically planned economy would be more productive since, under capitalism, people naturally tend to put in as little effort as possible because they have “little or no say over their work, often [have] no deeper sense of collective responsibility and [know] that the profit from what they do ends up in someone else’s pocket” (Ch. 3). Furthermore, Phillips and Rozworski (2019) mention that there are studies showing that “a flatter hierarchy makes for better teamwork and greater productivity” (Ibid.).13 All of this sounds nice, but again, it does not automatically follow that the whole economy could function efficiently if it was populated by democratic cooperatives. There is a high chance that for the economy to operate as best as it can, it has to allow all kinds of organisation of production to be applied. Indeed, these are the findings of an impressive literature review conducted by Anderson and Brown (2010), who conclude that “the answer to the question of whether steeper hierarchies help groups function better is: “it depends”” (p. 64). It depends on the type of the group’s tasks, its leaders, the effect of power on the leaders’ psychology, how the chosen structure affects people’s motivation, and whether the structure encourages coordination (Anderson & Brown 2010). Therefore, the economy needs not only democratic cooperatives, but also hierarchical firms in all their variations.
13 They do not distinguish any specific ones, but after a quick search, Zwick (2004), Cristini et al. (2003), and others confirm the statement.
Phillips and Rozworski (2019) also maintain that a successful planned economy requires continuous contribution from both consumers and producers, and without it, economic planning would not work (Ch. 8). However, even if everything was completely automatised (which it could not be, as I write in sub-section 3.1.2), people would still have to put a lot of effort into the whole process of planning because the decisions would not be made automatically – people would have to participate. And it is obviously naïve to expect constant participation from everyone as even the course of history shows that direct democracy eventually gave way to its representative form. On top of that, it is still quite difficult to persuade people to play a part in governance despite the fact that elections take place once every few years and voting requires little effort – on average, only 65.7% of eligible voters turn out to choose their representatives in national parliaments (International IDEA 2019).14 Then, it is no wonder that steeper hierarchies sometimes work better than the flatter ones. On the other hand, Phillips and Rozworski (2019) acknowledge the situation and write that “[f]irst there must be a fundamental transformation of the relations and structures of society” before democratic planning could work (Ch. 8). This does not sound feasible and would require decades of social engineering or still more time if human psychology is going to change on its own. In the former case, what is there to assure that social engineering would work, or that it is even what people would support? This would definitely require a top-down approach, which is the opposite of what democratic planning is meant to be. If people are left to change naturally, there is simply no way to know when and if, at all, this is going to happen.
3.1.5. Examples of national planning. In the earlier sub-sections, I avoid the state-level examples of economic planning used by Phillips and Rozworski (2019) on purpose. Indeed, these instances reflect pretty much all theoretical arguments presented and countered up to this point, but as the authors devote a significant amount of space to them, they require a separate discussion. Therefore, I consider the instances of planning in the Soviet Union, Chile, and the United Kingdom in more detail in the paragraphs that follow. Contrary to the authors’ belief, these cases only add more nails to the coffin of central planning.
3.1.5.1. Soviet Union. Obviously, the Soviet Union provides the most extensive example of
economic planning of large scale and scope as it existed for the greater part of the 20th century. This project clearly did not work out, but Phillips and Rozworski (2019) try to redeem it by claiming that Soviet planning was ruined by authoritarianism (Ch. 7). It is true that the dictatorial regime contributed to damaging the flow of information in the economy, as exemplified by repressions against the peasants who were more competent than the government experts, or against other professionals that were politically inconvenient despite their much more valuable contribution to economic planning (Ibid.). Among all of this, there was also violence against political opponents, including the Great Purge that Joseph Stalin implemented in the three-year period until 1938. Life in constant fear undoubtedly
14 Among countries available in the dataset, I selected those that have a Freedom House score of 3.0 or less (and thus are considered ‘free’), and whose latest elections for which data are available were held no earlier than 2014. This gives a sample of 82 countries. When those with less than 1 million inhabitants are eliminated, the average turnout drops to 63.9%.
contributed to the Soviet Union’s eventual demise. The country’s productivity growth rates peaked in the 1950s and steadily declined before turning negative in the 1980s primarily because it under-invested in replacing its physical capital (Popov 2010). As Popov (2010) explains, instead of modernising existing factories and equipment, the Soviets opted for building more of the same since the planners were constantly pressed by the regime to meet production targets, and capital replacement would have undermined that. In the long-run, the Soviet Union was left with a lot of capital that was either worn-out or technologically old and unproductive (Ibid.).
On the other hand, the short-term goals were so urgent also because if the Soviets had not invested in so much new capital, they would have faced severe shortages due to the flaws in economic planning itself (Ibid.). Popov (2010) maintains that “[t]he whole planning procedure looked like an endless chain of the urgent decisions forced by emergency shortages of different goods [...]” (p. 10). Of course, Phillips and Rozworski (2019) would probably say that it was still authoritarianism that led to these shortages, but there is a deeper irony in their argument. If they claim that capitalist planning inside firms, which is often authoritarian, provides the basis for state-wide (and even global) economic planning, how is authoritarianism the principle obstacle to planned economies? Planning clearly works in authoritarian firms! It is fair to say that authoritarian planning is undesirable, but this does not make it unfeasible. Again, one could argue that democratic firms would plan even better, although, as shown by researchers such as Anderson and Brown (2010), there is no basis to support any definitive claims. In fact, Phillips and Rozworski (2019) try address their own hypocrisy by very briefly stating that, as opposed to Walmart, the Soviets did not entirely know what to do at the outset, and the real period of planning only took place in the 1950s and early 1960s under Nikita Khrushchev (Ch. 8). His rule was marked by giving more control to separate countries’ economies and a slight liberalisation of other spheres (Ibid.). The authors laud various advances in people’s daily lives, next to achievements like the launch of Sputnik or sending the first man and woman to space (Ibid.). They also stress that it was the Soviet scientists who came up with accounting and planning techniques, as well as algorithms used in many large corporations today (Ch. 7). However, as North, Wallis and Weingast (2013) point out in their book, even the poorest countries in the world can grow for short periods of times, and the real challenge is to sustain that growth (p. 6). The Soviet economy did not have a solid foundation, especially after its productivity growth started declining. It is also not difficult to explain the Soviet Union’s initial advantage in the ‘space race’ or the discoveries that came from it. As this particular area was important ideologically, it naturally attracted a significant amount of investment – same as the Soviet military during World War II when the rest of the country was starving.15 In a country with a vast amount of natural resources, something had to be good. Nevertheless, after the initial effects of economic liberalisation faded, the Soviet Union gradually fell apart.
15 In the 1970s, about 75% of the Soviet Union’s R&D investment focused on arms and space races, which meant that its financing of innovation actually relevant to people was more than two times smaller than in the Western countries (Freeman 1995).
