Market Capitalism and Elite Rule

August 14, 2003

In his book Capitalism and Freedom Milton Friedman contented that, “a major source of objection to a free economy is precisely that it … gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.” President Ronald Reagan made a similar argument in a 1983 speech, declaring, “I'd like to hear a little more about the courage, generosity, and creativity of business. I'd like to hear it pointed out that entrepreneurs don't have guaranteed annual incomes. Before they can turn a profit, they must anticipate and deliver what consumers want.” Thomas Friedman made a similar point during the 1999 anti-WTO protests, writing in his New York Times column, “you make a difference today by using globalization -- by mobilizing the power of trade, the power of the Internet and the power of consumers to persuade, or embarrass, global corporations and nations to upgrade their standards.”

Such notions are examples of what author Thomas Frank calls “market populism.” According to this ideology, capitalist markets are democratic institutions that "do what people want" and are therefore the best expression of popular will.  Markets are not only mediums of distribution and exchange, but mediums of consent that express the will of the people (or “the consumers”). Elements of the ideology have been around since almost the dawn of capitalism, but was only in the later part of the 20th century that it became dominant.  Today in the United States the idea is accepted almost unquestioningly by a large percentage of the population, especially by politicians and corporate media outlets.

Market populism serves the interests of the capitalist class by obscuring class relations and making it seem that control over the economy is democratic, when it's really dominated by a small elite. In this it is rather similar to electoralism and the idea of a democratic state - it fools the populace into thinking they are in charge when the corporate elite is actually in charge. Market populism ignores the effect of economic inequality, ignores ways in which business can manipulate the situation to their advantage, directly conflicts with empirical evidence, and is based on circular reasoning.

Perhaps the strongest argument in favor of market populism is that corporations seek to make money above all else, and they can best make money by pleasing the consumer. Corporations attempt to maximize profits by providing things people desire and are therefore responsive to public needs. A major problem with this argument is that it ignores the large economic inequalities inherent in capitalism. Corporations attempt to maximize profits by following the money; they therefore tend to be more responsive towards those with the most money. There's no point in trying to sell things to people who have no money – you don't see many marketing campaigns geared towards the homeless.

Companies tend to orient their production towards those with more money, and in a society where the richest 1% of the population has more wealth than the bottom 90% those on the top will have much more influence than those on the bottom. Markets reflect the existing distribution of power and wealth; their mere presence does not instantly make a society egalitarian. If capitalism means "one dollar, one vote" as many capitalists claim then it will be those with the most money who will rule.

Corporations and states are also major consumers, and so will have a significant effect on the market. Since both are authoritarian institutions controlled by an elite, corporate/state influence over the market gives that elite extra influence over the market. As such, the small number of people who run corporations & governments have more power over the economy than ordinary people because of their power to affect corporate/state purchasing decisions and thus affect the overall direction of the economy. When you consider the same wealthy 1% of the population that has disproportionate influence over the market also run corporations and governments, own the majority of stocks, and run most of the institutions companies rely on for loans & capital (banks, etc.) it becomes clear who's really in charge.

The emphasis on “consumers” or “customers” common to market populist rhetoric obscures class divisions and thereby paints an inaccurate picture of reality. Grouping together workers and employers under the label “consumer” obscures the existence of separate classes with separate interests. It creates the illusion that workers and employers are the same and equal, or that there's no significant difference between then or even that they don't exist. In reality, the economy is highly stratified – those on top have substantially more wealth and power than those on the bottom. Capitalist talk about “consumers” being in charge ignores this reality in favor of a fantasy where economic inequality doesn't exist.

Even ignoring all that, it's not always in a company's best interests to do what consumers want. There is a direct contradiction between profitability and giving the customer what they want. The less a company spends on the product/service it provides to consumers the more it will have left over for its own profits. Ripping off consumers can be just as profitable as giving them what they want. If it were up to consumers everything would be free and of high quality, with no advertising or strings attached. Clearly, corporations aren't going to do that, even though consumers want it, because they wouldn't make any money. Thus, at best, the end result represents a compromise between what consumers want and what business wants; therefore market capitalism does not simply do “what people want.”

The factors affecting how much a business can rip off its consumers vs. how much it has to give them what they want are also slanted towards the rich & powerful. The elite can withdraw their substantial investments from companies they don't like, can more easily afford to hire a lawyer to sue for fraud (or other wrongdoing), can use their power & wealth to draw greater attention to corporate wrongdoing (thereby deterring companies from ripping off rich people) and can more easily pressure the government into taking action against a particular company (also acting as a deterrent). The lower in the hierarchy you are the harder it is for you to do any of this, and thus the companies providing you with products/services have a greater incentive to rip you off.

Business can also manipulate the situation so as to affect consumer behavior in a manner favorable to corporate interests; businesses affect consumer behavior at least as much as consumers affect business behavior. Advertising is an obvious example. Companies spend millions every year attempting to manipulate people into purchasing things they otherwise wouldn't buy. In doing so it allows business to short-circuit whatever influence consumers may have by generating their own consumer demand. Corporations would not spend millions on advertising if it wasn't effective.

Another example is the manipulation of the California energy market by Enron and several other companies in 2000-2001. They jacked up electricity prices to exorbitant levels, leading to major profits and rolling blackouts. Enron executives were caught red handed on tape patting themselves on the back over it. Consumers were dead set against it, but Enron and pals were able to manipulate the market to their advantage. It took price controls by the government to put an end to Enron's shenanigans, which helped lead to Enron's downfall by depriving them of a major source of money.

Corporate manipulation also played a key role in the spread of cars in the United States. In the early 20th century the US had a quality public transportation system relying mainly on trolleys and street cars. In order to increase the market for cars General Motors, with the help of a few other companies, embarked on a campaign to weaken and destroy public transportation. GM used its position as a major company to pressure banks not to provide funding to public transportation and to pressure railroads into cutting or shutting down their electric railroads, under the threat of losing GM's business. The company purchased most of the street car companies in the country through front companies, and then proceeded to cut service and shut them down.

GM also hired an army of lobbyists to pressure the government into cutting funding for public transportation and increasing funding for car oriented infrastructure (highways, roads, etc.). As secretary of defense, former GM President Charles Wilson worked with congress to pass the Federal Aid Highway Act of 1956, one of the largest public works projects in US history, which provided $25 billion for car oriented infrastructure. By weakening and eliminating rail based forms of mass transit the automotive industry effectively forced people to purchase cares even though many preferred the old public transportation system. As an earlier GM President, Alfred P. Sloan, said, "We've got 90 percent of the market out there that we can turn into automobile users. If we can eliminate the rail alternatives, we will create a new market for our cars."

Even where such blatant manipulation isn't present, the situation may force consumers into doing things and making purchasing decisions they might not want in a different situation. What we want, and what kinds of things we buy (even buying things at all), is relative to the form of social organization present. For example, if workers are required to work long hours by their corporate bosses, they may end up purchasing more fast food because of time constraints. Even if they otherwise wouldn't want fast food, the conditions imposed upon them place a great deal of pressure to eat fast food.

Another example, a person with a low income may be forced to shop at WalMart even if s/he hates WalMart because s/he cannot afford anything else. WalMart's own low wages help bring that scenario about by forcing the entire wage scale down (other companies must also adopt the same low wages or their lower profits will mean they'll be unable to compete). Background situations like these are the most important determinant of purchasing decisions, not an abstract popular will expressed via markets, yet market populists pretend they don't exist.

Empirical evidence also refutes the idea that capitalist markets "do what the people want." The over eight hundred million people who suffer from chronic malnutrition (even though there is enough food for everyone) certainly do not want to go hungry, nor do most people desire this result. The majority of Americans believe that there is too much violence in the media, yet there is still lots of violence in the media. Most people would prefer there be far less advertising, yet the overall trend is for advertising to become more widespread.

Most people in the “first world” think the price of gasoline is much too high, yet that doesn't stop the oil companies from charging high prices. Liberals denounce this as “price gouging” but it's no different from any other ordinary market under capitalism. Companies always put the price at whatever level generates the maximum profits, and if that means putting the price exorbitantly high then they set the price exorbitantly high.

Empirical evidence against market populism is not limited to the 21st century version of capitalism. The United States in the late 19th century approximated laissez-faire capitalism yet there were plenty of economic things people didn't like - child labor, sweatshops, etc. To believe that capitalism is democratic is to believe that millions of people want starvation, massive advertising and exorbitant gas prices. Just because "the market" brings about certain things does not mean “the people” want those things.

Market populism also ignores the significant role state intervention plays in modern capitalism. In most modern capitalist societies the state interferes with the market whenever it might have an outcome that threatens corporate power or profit; it intervenes in the economy to protect big business. The state pours huge amounts of money into the high-tech industry, biotechnology, pharmaceuticals, agribusiness and many other industries, including not only direct subsidies, which in the US totals around $200 billion annually, but also the development of new technologies by the government. In the US, for historical reasons, subsidies & technological development are done primarily through the military and "defense" spending, what is called "military Keynesianism."

When profitable technologies come about as a result of taxpayer funded research the new technology is privatized and the profits go to corporations. Taxpayers pay for the research, capitalists make money from it. An example is the Internet and computer technology in general. It was originally developed by the military, at taxpayer expense, but when it became profitable corporate America took it over and companies like Microsoft were able to make a fortune off it.

In addition, other forms of state intervention (besides enforcing private property, without which capitalism could not exist) that distort the market to benefit big business include the Federal Reserve, building & maintaining large-scale transportation infrastructure, and bailouts for failing companies. “Free enterprise” really means state handouts for the rich, market discipline for everyone else. Market populism is false because it pretends we live in a market economy, when much of the economy actually has as much in common with centralized planning as it does with the free market.

The underlying “supply and demand” subjective theory of value upon which market populists base much of their ideology is based on circular reasoning. Supposedly, all consumers (“households”) spend their money so as to maximize their “utility” – how much benefit they get from the goods & services they bought. Corporations (“firms”) do the same thing, with the goal of maximizing profits. Firms, as a whole, will produce a certain amount of a particular good depending on the price (the higher the price the more they will produce). Households and/or firms will purchase some amount of a particular good depending on the price (the lower the price, the more they'll buy). Find the point at which these two intersect and, supposedly, that's the price that good or service will tend to sell for.

The flaw comes in when you consider that there are thousands of things you can buy, that these different goods/services are all interconnected and, more importantly, how a household or firm spends its money varies with its income. If a person's income goes up, s/he may change how much of a good/service she buys in a number of ways. S/he can increase the amount of that good she buys, decrease the amount (replacing it with a higher quality good) or buy the same amount. A change in the price of goods/services can also lead to similar changes in spending. The same is true of a corporation: a change in profits or the price of labor (or rent or raw materials, etc.) can cause it to change how much it spends on labor, raw material, etc.

The “supply and demand” model is based on circular reasoning because the income (and thus spending) of households is dependent on the spending of firms, which in turn is dependent on the spending of households. In order to determine how consumers will spend their money (and thereby construct a supply curve) you need to know how corporations will spend their money (because that affects how much consumers will get paid). Yet in order to know how corporations will spend their money you need to know how consumers will spend their money (because that affects how much corporations make). It's a vicious circle.

If you were to set up a group of equations to describe the situation you'd have more variables than equations and thus would end up with a line or a plane or some other object (depending on how many goods there are) rather than a single value for each variable. The “supply and demand” model looks nice when you only look at one commodity, but when you take into account the multitude of different commodities and the fact that income/spending of households and firms are circular you get a whole set of possible prices rather than a single price for each good; the model breaks down.

In order to make the evaluations on how best to maximize their utility each consumer must know the prices of goods and also what their income will be.  But this data is dependent on the evaluation made by each consumer.  It is thus circular - decisions of the consumers depend on the prices, prices depend on the decisions of the consumers.

The vision of capitalism as a free society where people make things and trade them back and forth without hierarchy common to market populist thought is a pure fantasy; it has nothing to do with reality. In real life we don't make widgets and trade them for thingimabobs; we go to work, where there's a chain of command, and take orders from a boss. That's what capitalism is all about. The notion of independent artisans trading their products in a market is just an illusion invented to make capitalism look better; in reality capitalism is a highly stratified system ruled by a small elite.

Market populism invents an internally inconsistent fantasy world and then pretends that the real world has some relationship to it other then that of contradiction.  In real life all capitalist systems are based upon the rule of a tiny oligarchy, which dominates and exploits the rest of the population.  It is an authoritarian system in which most people have little say in major decisions.