Barry C. Lynn: All Publications, Events and Press

Cornered

Erin Drankoski — Sun, 10 Jan 2010 09:34:00 -0500

Regular Harpers and Financial Times contributor Barry C. Lynn paints a genuinely alarming picture: most of our public debates about globalization, competitiveness, creative destruction, and risky finance are nothing more than a cover for the widespread consolidation of power in nearly every imaginable sector of the American economy.

How Detroit Went Bottom-Up

Erin Drankoski — Mon, 28 Sep 2009 10:47:00 -0400

In the spring of 2005, David Stockman at last reaped the reward of the monopolist.

Stockman, who once served as Ronald Reagan's budget director, spent two decades on Wall Street preparing for this moment. After stints at Salomon Brothers and the Blackstone Group, Stockman in 1999 set up his own private investment fund, Heartland Industrial Partners. He then used Heartland to shape a set of companies -- mainly in the automotive sector -- each dedicated to dominating a particular group of production activities.

Beyond the Free Trade Agreement Impasse

Cecille Isidro — Thu, 07 May 2009 06:48:00 -0400

A New America Event
05/07/2009 - 12:15pm

Please join Lori Wallach and Todd Tucker in a discussion of their book The Rise and Fall of Fast Track Trade Authority.

The digital version of the book is available at www.FastTrackHistory.org.

The Policies That Ruined the Auto Industry

Cecille Isidro — Mon, 01 Dec 2008 16:03:00 -0500

A lot of people are angry at the Detroit Three automakers, including many members of Congress. And why not?

GM, Ford and Chrysler seem still too bloated and old-fashioned, their workers too pampered. For too long the carmakers have failed to design and bring to market the smaller and more fuel efficient vehicles we now want to buy. Yet it is important to put the blame where it really belongs, not on management or labor, but on Congress.

The Predator State

Communications — Mon, 06 Oct 2008 04:15:00 -0400

A New America Event
10/06/2008 - 12:15pm

As the myth of the free market is overcome by current events, James K. Galbraith's new book explains both its rise and fall. His description of the dynamic and troublesome interaction between the public and private sectors is timely, instructive, and ultimately devastating. The rise of a free market ideology blurred both the distinction between these sectors and the growth of government. It did so in ways that not only contributed to greater wealth and income inequality, but also directly… more

POSTPONED: The Monopolist Assault on Entrepreneurs

Communications — Thu, 29 May 2008 12:15:00 -0400

A New America Event
05/29/2008 - 3:15pm

**This event has been postponed until further notice. We apologize for any inconvenience.**

The yeoman tradition—in which the small property owner and the entrepreneur represent an American ideal—inspired many of the nation’s founders, Thomas Jefferson most notably. Yet today, deregulation and a lax interpretation of anti-trust law make it increasingly difficult for small businesses to even access local markets. Mega chains may be ruthlessly efficient in driving down prices, but their near-monopoly positions create tremendous barriers to entry and… more

America's Fate in the Coming Era of Chinese Hegemony

Communications — Wed, 12 Mar 2008 06:00:00 -0400

A New America Event
03/12/2008 - 3:00pm

With the United States and China, who will rule whom? That's the central question of In the Jaws of the Dragon by Tokyo-based journalist and writer Eamonn Fingleton. His own answer is sobering. As American leaders fixate on the Middle East, China quietly consolidates both its geostrategic vision and its economic and military power. What is at stake is far more important than manufacturing jobs or the transparency of Sovereign Wealth Funds. It is a matter of which nation will… more

Barry Lynn on Marketplace Applauds Europe's Antitrust Stand

Communications — Tue, 16 Oct 2007 08:12:00 -0400

KAI RYSSDAL: As Congress weighs electronic surveillance, the Europeans have been taking aim at another slice of the American high-tech pie: Last month, the European Commission won a landmark case against Microsoft. The commission charged the company with maintaining a monopoly on computer operating systems and media players. Commentator Barry Lynn says Washington ought to think like the Europeans if it's serious about technological innovation.

Trade Imbalance

Communications — Fri, 05 Oct 2007 07:15:00 -0400

A New America Event
10/05/2007 - 12:15pm

In the coming months, the U.S. Congress will vote up or down on trade agreements with Colombia, Panama, Peru, and Korea. These elected officials will not examine these agreements solely on their commercial or foreign policy benefits to the American people. They will also weigh whether or not each agreement advances particular human rights abroad. However, these Representatives proceed with little information about how trade agreements, and even trade per se, affect human rights at home or abroad. Although… more

The Next Catastrophe

Communications — Wed, 06 Jun 2007 07:15:00 -0400

A New America Event
06/06/2007 - 12:15pm

Is America ready for the next September 11 or Hurricane Katrina? Is our nation really safer now than it was when Al Qaeda attacked the World Trade Center towers? Have the billions of dollars we spent on Homeland Security prepared our industrial and financial systems for real shocks? Have we even managed to identify what the real threats to our society actually are?

Charles Perrow is one of America’s preeminent experts on disasters and disaster preparedness, and… more

New Statesman Cites Barry Lynn on Free Market, Grocery Sector

Communications — Mon, 23 Apr 2007 18:21:00 -0400

Groceries were always the best illustration of the merits of free markets. How ridiculous it would be if we decided collectively - by annual ballot, say, or by entrusting the decision to some Whitehall bureaucrat - which fruits and vegetables the shops should stock and in what quantities. A system whereby competing retailers offer individual consumers a daily choice is obviously better. Yet we are close to driving the free market out of the grocery sector...For example, as the all-party parliamentary group for small shops pointed out in a report last year (High Street Britain: 2015), retail is usually a good sector in which to start up your own business because the entry barriers are very low. Many budding entrepreneurs have used retail as a stepping stone to other sectors. An important form of self-help and enterprise is therefore disappearing. So is a source of innovation. Supermarkets now sell some organic food but I doubt they would have done so without the example of independent retailers.

Most notoriously, the supermarkets screw their suppliers. We sometimes forget that choice matters (or ought to matter) as much to us when we are selling as when we are buying. In the US,… more

Rules That Wilt the Free Market in British Groceries

Cecille Isidro — Thu, 05 Apr 2007 18:27:00 -0400

Perhaps it is time to erect a new stone next to Adam Smith’s grave in Canongate Kirk, Edinburgh. Not to commemorate Smith, whose greatest monument is his masterwork, The Wealth of Nations. Rather, to mark the demise of the insitution Smith did so much to promote - the free market.

If you did not notice the free market’s passing, you were not alone. No television newscasts bemoaned the fact. The notice was hidden deep in a Competition Commission report on monopolisation of the grocery market by companies such as Tesco and Wal-Mart subsidiary Asda. The inquiry does not wrap up until November, but the recent interim report set the tone.

According to the section on the buying power of the mega-retailers, old-fashioned supply and demand has been supplanted by something new. Prices today are "negotiated bilaterally" by the giants. Instead of viewing activities that put food on shelves as taking place in a "market framework," we should view them as taking place in something called a "bargaining framework."

So an idea that has shaped human society for more than two centuries, an idea we must credit not merely with much of our economic wealth but our political well-being, is interred under a mound of bureaucratic euphemism.

It has become fashionable on both right and left to shrug off the consolidation of power by immense corporations over formerly free, open markets. To many, the process seems inevitable, decreed by technology, the price of progress. The Keynesian economist John Kenneth Galbraith expressed such thinking in his book, American Capitalism, more than 50 years ago.

To accept the inevitability of corporate control over the British groceries market is, however, to accept an old error -- to lose sight of the fact that humans manage different markets in different ways to different ends.

Provision of clean water, gas and electricity was once organised in open markets, with many companies. In most industrial nations, citizens at the end of the 19th century -- for reasons ranging from safety to efficiency and social equity -- began to enclose such markets within monopolised systems regulated in part by government.

Production of chemicals, metals and cars also once took place in wide-open marketplaces. Then, early in the 20th century, in part for reasons of national security, citizens in industrial nations accepted that greater scale might make these activities more productive. The result, at least in Britain and the US, was a sort of hybrid market, with oligopolies regulated by government and, thanks to enforcement of anti-monopoly law, to some degree by the market.

Grocery markets, by contrast, until recently were kept largely open and free, a place where many small companies sold to a robust number of retailers, where a citizen could set up a new business with ease. This openness remained true of retailing and trading generally. Beginning in the early 1980s, however, the radical retreat from enforcement of anti-monopoly law cleared the way for a phenomenal concentration of power. This monopolisation has benefited society in one respect -- the lower prices achieved through top-down enforcement of monocultural systemisation. But the achievement shines less bright when we look at what we sacrificed for these lower prices (which, if past serves as guide, will prove evanescent at best).

The list includes such basic social goods as the independence of the small entrepreneur, in such forms as the self-supporting family farm or family-owned retailer. It includes innovation, measured by the individual citizen’s ability to bring a new idea to fellow citizens’ eyes. Then there is freedom of the worker, measured by the number of potential bidders for an individual’s labour. And the political life of the local community, measured by the variety of actors who have a voice.

The greatest loss is measured by the ability of open marketplaces to deliver vital information to society. After all, one of the market’s main functions is to help us adjust our consumption, thinking and way of living to the world’s ever-changing realities.

Let us not blame these failures on the Competition Commission. It is merely fulfilling its mission to prevent harm to the "consumer." Let us blame the politicians. First, for their craven attempt to pass off a deeply political decision as a technical issue to be determined by "experts." Second, for participating in the political putsch signified by whittling the citizen down to a mere "consumer." A panel of bureaucrats is not the proper venue for deciding whether to allow the enclosure of any public commons, let alone one of the most important. What role the marketplace plays in a society cuts to the heart of how a people organises itself.

Perhaps the British people will elect to live in "Tesco towns" and work for Tesco wages and shop at Tesco for products that, even if packaged ever more "creatively," are in truth ever more monochromatically Tesco. Or perhaps they will opt for the far richer, woollier, vibrant, free and politically and economically secure life delivered by a market system that is truly open.

The final decision to erect a tombstone for the free market has not been made, yet. It is up to the British people to make their feelings known now.

Why Economists Can't See the Economy

Cecille Isidro — Sun, 01 Apr 2007 22:16:00 -0400

"The purpose of studying economics is not to acquire a set of of ready-made answers to economic questions, but to avoid being deceived by economists."
-- Joan Robinson, Cambridge University

On page one of The Wealth of Nations, Adam Smith illustrates the central principle of his economics with an example taken from, in his words, a "very trifling manufacture": the making of pins. Smith goes to some effort to describe the process. "One man draws out the wire," he writes, "another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head." In all, Smith counts 18 different "operations," then estimates that such specialization boosts productivity at least 240 times over what the same number of men, each working alone, could accomplish.

Smith’s pin factory has served economists ever since as an organizing vision of what economics should work toward. "Specialization is wealth" is the idea that, to greater or lesser degree, orders the thinking of all economists. And due to the immense influence of economics within our society, this vision has come to shape how we view our world and organize the industries on which we all rely. America’s promotion of free trade, at the most simple level, is just the vision of the pin factory supersized into national policy. If specialization across the factory floor is good, and across the nation’s breadth is better, then across the face of the globe is best.

But what does it mean when such a dream comes true, and the dreamer does not realize it?

Look closely at today’s global production system and you will see shockingly high degrees of specialization, in terms of both geography and ownership. More and more activities take place in only one or a few places on earth, and within one or a few companies. This is especially true in electronics: Taiwan produces more than half of the world’s vital customized chips. But it is also ever more true of heavy industries, like automobile manufacturing, even of agriculture and food processing. One of the crowning conceptions of the Enlightenment has been achieved, yet economists appear entirely unwilling to recognize the fact, let alone begin the task of examining how this revolutionary event might alter the purposes and pathways of their work.

For America, this is a big problem. As Adam Smith understood 230 years ago, decisions on how to divide the tasks necessary to produce pins are based not merely on questions of efficiency but also of engineering. If anything, the engineer’s work naturally precedes that of the economist. Americans would never ask an economist to design a suspension bridge or a new jetliner, though we wisely insist that engineers give the economists a seat at their table. Yet when it came time to design the most amazingly complex system ever devised by human beings -- the global production machine -- we relied only on principles that spring from the mind of the economist. We did not insist that economists offer the engineers a single stool at the table; we did not insist they even invite the engineers into the room.

Our brand-new global factory does look awfully efficient. But it is an efficiency purchased through the destruction of all flexibility, and hence sustainability. What we should be fretting about now is what happens when, one day soon, we awake to find that war, revolution, disease, or natural disaster has cut us off from some one of the increasingly scattered pockets of workers we rely on to produce keystone industrial components or to process vital back-office information; what happens when, for want of access to one or a few of the links that make up the global assembly line as a whole, our entire industrial system breaks -- pins, electronics, pharmaceuticals, food, and all.

****

One of the more fascinating academic exercises in America these days is to sit down with an industrialist to discuss the growing brittleness of our production systems, then raise the exact same points with an economist.

The industrialist grasps the idea of fragility immediately, and often offers up fresh tales of production shutdowns and close calls. Indeed, industrial fragility has quietly emerged as perhaps the single biggest operational concern of business today, reflected in a boom in programs to study supply chain risk at places like MIT’s Sloan School of Management and Penn’s Wharton School.

The economist, by contrast, just as swiftly rejects the idea of such fragility outright. Why? Because no industrialist, the economist will declare, would ever take such a risk. Industrialists who say that market pressures force them to take too much risk are simply seeking protection. They are selfish, or lazy.

To understand why economists will so audaciously dismiss the words of industrialists like Intel’s former Chairman Andrew Grove -- who a few years back warned that any break in trade between Taiwan and China would precipitate the "computing equivalent of Mutually Assured Destruction" -- it helps to look at how the engineering of today’s global production system differs from the engineering of the previous production system. Because to the extent that economists’ thinking is based on the real world, it is the world that existed in mid-20th-century America.

Through most of our nation’s history, the industries on which America depended were organized and managed in a radically different manner than they are now. The biggest difference was that industrial activity was doubly "compartmentalized." Production took place within discrete, vertically integrated firms, located within a largely self-reliant nation. This isolation of production -- inside a box inside another box -- made it relatively easy to identify risk and contain disaster.

A second big difference was that self-conscious actors with clear goals managed both the nation-state and the vertically integrated firm. The U.S. government wanted to maintain a robust industrial base for use in war; it therefore ensured that certain industrial capacity be located in America, and that American industry have access to the necessary supplies of materiel, technology, and skilled labor. Top managers at individual firms, meanwhile, had an interest in ensuring that no one ever shut down their firm. This meant structuring production systems in ways that guaranteed the assembly lines would always function, no matter what happened in the United States or abroad.

Over the last generation, however, Americans busted open both these boxes. We merged our national industrial system with the industrial systems of many other nations, in the process we know as globalization. At the same time, we encouraged our vertically integrated firms to blend their operations together, through outright merger and through the process of disintegration we call "outsourcing." Add these two processes together, and the result is a single, global, networked system of production marked by extreme and growing specialization of activity. More and more, certain things are made, and certain services located, only in certain places.

In theory, there is absolutely nothing wrong with a networked system of production. On the contrary, we can easily imagine industrial networks -- even ones global in scale -- that are not merely more efficient but actually more safe, both economically and politically, than the compartmentalized systems of the past. The catch is to understand that networks are not safe by nature, but by design. A network will organize into dispersed compartments that isolate risk only if humans program it to do so.

This is what we did with the Internet, the basic architecture of which was designed by the U.S. government during the Cold War to ensure a deeply resilient system of communication. This is true also of the global monetary system, which is compartmentalized by currency and regulated by central banks. Indeed, this is true of all complex systems built by humans. Sometimes by initial design, sometimes after a period of trial and error, human beings act to make a system resilient and flexible by building in some redundancy and compartmentalization. Human beings come to realize that a system can become too specialized, too efficient, to be really safe.

This is not, however, the path we have taken with our global production system. Over the past two decades, we have destroyed the old compartments and kept the engineers from building new ones.

****

In January, Britain’s competition commission released several reports on consolidation within the country’s grocery industry. Four firms control at least 75 percent of the total U.K. market for groceries; one, Tesco, controls a phenomenal 30 percent. Looking at the ability of a market owner like Tesco to dictate terms to suppliers, the researchers concluded that the industry had witnessed a qualitative shift from what they called a "market framework" of organization, characterized by numerous buyers and sellers, to what they called a "bargaining framework," in which "prices and other terms are negotiated bilaterally by a few giant powers." Their data also showed a huge shift of revenue away from such small suppliers as independent dairies, and a sharp reduction in the number of these suppliers.

Consider also the ongoing battle between Delphi and its hourly workers, or more accurately the three-way struggle among Delphi, the United Auto Workers (UAW), and General Motors, which for decades owned Delphi but which cut loose the parts unit in 1999. The fight is one of the best illustrations of how American capital has reorganized ownership and production to better concentrate its power. Two decades ago, the fight would have been largely an internal GM affair, worked out in negotiations between company managers and UAW leaders. Since then, however, GM succeeded in placing two barriers across that relationship.

It created one barrier when it spun off the parts unit, thereby turning an intra-firm relationship into one governed by semi-adversarial contracting procedures. This barrier, bolstered by the fact that GM is by far Delphi’s No. 1 customer, has allowed GM since 1999 to reduce what it pays Delphi for a particular component by an average of 2.1 percent every year.

The other barrier is really a couple of barriers: the border with Mexico and the de facto border with China. These barriers enabled first GM and then Delphi to pit workers in distant lands against workers in the United States, in order to drive down wages in a relatively orderly fashion. As recently as 1999, 60,000 of Delphi’s 180,000 workers labored at unionized assembly-line jobs in the United States. Today, the number of these U.S.-based workers is below 22,000 and falling fast, as Delphi shifts work abroad at the exact pace that best serves its needs.

What we see here are two variations on the business model refined over the last two decades by Wal-Mart. In the case of the U.K. grocery system, we see the replacement of a relatively free and open market system by one characterized by hierarchy and the top-down exercise of authority. In the U.S. automobile industry, we see the creation of wage-lowering arbitrage inside what was already a hierarchical and authoritarian system. In both cases, the result has been a massive increase in the top-down exercise of power over suppliers and workers who have nowhere else to go.

Now let’s consider how the most basic theory of economics compares with what exists in today’s real world.

The most fundamental assumption of mainstream economics today is that the natural state of an economy is perfect competition among many small actors. The average marketplace is viewed as free, open, and politically neutral. For our purposes, this theory is especially important because it allows economists to assume away the exercise of power within the economy, and hence any need to understand the effects of how power is exercised down -- on to, for instance, the English dairy farmer or the American assembly-line worker.

The idea that the economy is characterized by perfect competition has been questioned, and sometimes ridiculed, both inside and outside the academy for ages. Until recently though, there were still many real-world examples of open markets comprising small actors such as farmers, storekeepers, and garage owners. Economists could continue to claim that their theory was valid in the real world, and hence of value to anyone seeking to understand the workings of the real world, because of the relative openness of these markets.

Such competition, though, is less and less the case in any major American marketplace. The radical changes in antitrust law imposed in the early 1980s by the Reagan administration unleashed forces that played out in the enclosure of many previously open markets. By limiting antitrust’s scope to policing against concentrations intended to raise consumer prices, and by ignoring the effect of concentrated power on suppliers and employees, the Reagan Justice Department gave the rich individuals who control corporations carte blanche to control entire American marketplaces and to exercise near-absolute power within those systems. In market after market, private monopoly has returned -- or, as in retail and agriculture (with the rise, for instance, of Perdue and Tyson, in the 1980s and 1990s, or Smithfield Foods’ recent takeover of Premium Standard), consolidated power for the first time.

Over the last 25 years, this concentration of the economy has resulted in the emergence of an entirely new hierarchy of power. We see this most clearly in the displacement of the old producer oligopolies that dominated the American economy during the 20th century by newer firms like Wal-Mart and Dell, built from the ground up to retail other companies’ products, and ultimately to dominate and manage entire systems. We see the emergence of this new hierarchy even more dramatically in the transformation of erstwhile manufacturers like GM and Boeing into firms that derive their profit increasingly from their ability to trade in goods and services produced by others. GM’s spinoff of Delphi is just one small case. More dramatically, Boeing plans to turn to outside contractors for some 90 percent of its new 787 jetliner.

The emergence of this new hierarchy affects almost every aspect of American life. It amounts to the spread of private governance to a far wider swath of the U.S. political economy than was the case in the recent past, as exemplified by Wal-Mart’s ability to set wage standards not only in its stores but, by dictating to its suppliers, on the roads and in the factories as well. The most important economic aspect of this new hierarchy is how it changes the nature of competition. Competition still exists, of course, but it takes place less and less within the open marketplace and more and more inside closed, authoritarian, corporate-controlled networks. In consequence, competition tends to become ever less creative in nature and ever more destructive.

Not all hierarchical systems are self-destructive. The vertically integrated firms of the past were extremely hierarchical in nature. But the structure of the old industrial system tended to prod managers to take care of their machines, workers, and technologies. In part, this was a function of loyalty: Everyone was part of a single enterprise. In part it was a function of law: Workers had the right to organize. In part it was a function of self-interest: The 20th-century enterprise had to compete in the marketplace with other vertically integrated firms, and hence its managers placed some value on skills, knowledge, and capacity.

Today’s hierarchies, by contrast, are the result of consolidation and outsourcing working in tandem. Consolidation means that top-tier firms fear competition from business rivals less than they did in the past; outsourcing, as we saw with Delphi, means firms feel less loyalty to the people and suppliers who actually do the work. In combination, consolidation and outsourcing result in top-tier firms assuming ever more freedom to exercise their power down onto the system itself (and, unlike the old producers, ever more freedom not to concern themselves with the total amount of revenue within a system -- as measured not merely in profits but in wages and benefits and R&D investment -- but rather only with the amount that the leading managers and shareholders can take away).

Nor, as we have seen, are all networked systems self-destructive. What makes our present networked system of production so dangerous is that, due to consolidation, more and more of its component operations are unique in nature. As we saw in the Soviet Union, systems defined by a high degree of monopoly tend over time to erode any sense of ownership or responsibility. Even those managers and engineers who want to care for the system, perhaps improve it, increasingly can’t. Any system in which gain is personalized and pain collectivized makes it more and more tempting for an individual to take risks that result in personal profit even if they imperil the system as a whole.

If anything, in an unregulated network, competition will tend increasingly to play out as a race to sack the system. A network is, after all, a sort of commons, like a fishery. As we see in poorly regulated commons, the lack of enforceable rules encourages even people who know better to grab what they can when they can, because they know that if they don’t, someone else will. What the most powerful people strip from the system are pockets of accumulated wealth. From the point of view of the workers, these pockets of wealth are called pensions and good wages. From the point of view of society, these pockets of wealth are what make up a sound industrial structure marked by variety, new technology, redundancy, and flexibility.

And so, every day, the divide between economist and engineer grows wider. The economist -- reclining upon the ancient verities -- remains supremely confident that the system is structured to identify and isolate risk, and to punish those people and firms who take too much risk. The engineer -- who acts in the real world, within a framework of "markets" reconstructed over the last generation to reward power, encourage destruction, undermine community, and limit the scope of individual action and responsibility -- grows ever more fearful.

****

Economists did not always live in the clouds. Adam Smith based The Wealth of Nations on a close study of the processes and history of industrial activity and its relation to state policy. David Ricardo, who introduced the concept of comparative advantage, worked on the London Stock Exchange, where he made a fortune as a financier and speculator. The French economist Leon Walras studied to be a mining engineer, then worked as a journalist. Vilfredo Pareto spent more than 20 years as a civil engineer for two Italian railway companies.

Even after the academy began to emphasize the use of mathematics, it was by no means clear that economists would one day find themselves so completely divorced from the world. On the contrary, many in the profession seemed, in the early 1930s, to be developing the tools necessary to muck around in the real world, where economics collides with politics and power. To understand what economics is now, take a moment to look at one of the more important pathways economics did not take.

In 1932, Adolf Berle, a professor of corporate law at Columbia and one of Franklin Roosevelt’s original three brain trusters, teamed up with Gardiner Means, a young economist at Harvard, to write The Modern Corporation and Private Property. This book showed that just a few firms dominated the U.S. economy, and that they were controlled not by old-fashioned owner-entrepreneurs but by professional managers. A year later, another Harvard economist, Edward Chamberlin, published The Theory of Monopolistic Competition, and the Cambridge economist Joan Robinson published The Economics of Imperfect Competition. Together, these works showed how such large firms hugely distorted basic market functions. At a time when the Depression had shattered the old certainties of laissez-faire economics, the effect of the near-simultaneous appearance of these three volumes was sensational, both within economics and among the general public.

For many economists, the works promised a future in which they would study and model the power of large firms and trace the effects of these concentrations of power on such factors as pricing and employment. This approach implied that markets are, at least indirectly, the products of law acting on or through the corporation and other institutions. It also implied that the concentration of economic power, especially through a public institution like the corporation, transformed the affected marketplace into a largely if not entirely political realm.

For mainstream economics, these works added up to nothing less than a direct challenge, from some of the most gifted economists and legal scholars of the era, to the core theory of economic dynamics: that all markets are perfectly competitive and perfectly neutral. For the citizen, they added up to nothing less than an argument in favor of bringing economic interactions more fully under the rule of law.

There are many reasons why this movement, often called "Institutionalism," did not become the branch along which the mainstream of economic thinking flowed. One was simple politics. Conservatives inside and outside economics rose in opposition to the new ideas, which, after all, did savor more than a little of Marxist analyses of "monopoly capitalism." (Even three decades later, in the book that launched him on his political career, Milton Friedman labeled the Berle and Means approach to the corporation one that threatened to "thoroughly undermine the very foundations of our free society.")

A second reason was war. As the United States prepared to fight Germany and Japan, even many left-wing economists felt compelled to work more harmoniously with the nation’s industrialists.

A third reason, and what proved perhaps the most damaging one over the long run, was the emergence of Keynesian economics, which swiftly attracted many of the economists most enamored of Institutionalism, including the young John Kenneth Galbraith. Compared with the task of remaking the economy at the level of the firm, reform through broad fiscal policy seemed politically simpler and -- because it allowed reformers to operate at the "wholesale" level -- far more efficient.

Yet even without a platform within the academy, Institutionalism remained very much alive. It survived in law, especially in the philosophy and practice of antitrust. And thanks largely to another Harvard economist, Edward S. Mason, dean of Harvard’s Graduate School of Public Administration, it survived in the public mind, flourishing again in the late 1950s and early ‘60s.

What ultimately killed off Institutionalism was the rise of the Chicago School of economics, organized loosely around Friedman’s political writings, in the 1960s and ‘70s. Like the Institutionalists a generation earlier, the members of the Chicago School understood viscerally that economics and law -- and hence economics and politics -- were one and the same. Their goal could not have been more different from the Institutionalists’, however. Rather than illuminate the political nature of market relationships, their aim was to push the politician entirely out of the realms of business and finance, and to push "market concepts" into the realm of politics.

Unlike the Institutionalists, moreover, the Chicago School was highly organized and very well funded. In public, members repeated ad nauseam their mantra that markets are perfect, and for that matter perfectly wise -- which meant that politicians should never interfere in any market whatsoever, and that the state itself was, to at least a certain degree, an immoral entity. From behind this rhetorical cloud, in both Democratic and Republican administrations since the mid-1970s, members of the school oversaw the radical rewriting of the three main pillars of American economic regulation -- the laws governing trade, competition, and the corporation -- in ways that steered power and profit upward rather than down.

The Chicago School did not, of course, seek to chase the engineer from the factory floor. Its goal was merely to chase the American people -- whether organized into unions or organized through Congress -- from the realms of business and finance. But it does not much matter whether the death of industrial engineering was premeditated or merely an unintended accident. What matters is that, going forward, we can apply fresh engineering principles to our radically new global industrial network only by altering, in fundamental ways, the laws that govern trade, competition, and the corporation.

****

To the degree that we trace economics to Adam Smith, we trace it to a man who sought through his writing to encourage the exercise of reason by human beings condemned to live in a complex, dangerous, ever-changing world in which the interest of the nation and of the community sometimes trumped that of the individual. Mainstream economics today, by contrast, has degenerated into a purely materialistic and atomistic philosophy, fixed monomaniacally on the pursuit of efficiency as measured by the manufacture of objects and, increasingly, raw cash. Mainstream economics today strives not merely to restrict the realm made subject to reason but to replace the responsibility of the individual citizen to pursue ethical outcomes through politics with abject worship of an automatic mechanistic "market," which is really just a sham for private directorship of the political economy by the immensely rich.

Just how dangerous such a materialistic and deterministic way of thinking can be when applied to the real world is clear if we consider what Tom Friedman and other radical globalists conclude from the fact that we have scattered our pin factories and all of our other factories across the face of the earth. Their line of reasoning is beautifully simple.

Once human beings understand that our production system is so specialized geographically that it will stop working in the absence of any one of a number of major industrial regions, all rational people and right-thinking nations will naturally avoid any actions that might disturb the functioning of the system. The inescapable, predetermined result of making our industrial system fantastically fragile, they conclude, is a world of peace and harmony forever more. If anything, the more precarious the system, the more secure the peace.

To accept this global-market utopianism ultimately amounts to accepting the economist not merely as the engineer of our global industrial system but also as the engineer of an entirely new human nature. Isn’t that what is implied by the idea that fear of disrupting our global materials and food-processing systems guarantees that people will soon cease entirely to even threaten the use of force against one another? What moral arguments have failed for millennia to achieve, what the still-living memory of the Holocaust and Hiroshima has not yet effected, the fear of crashing our high-definition-television supply chain will now make manifest. War, revolution, politics itself -- all reduced to vague and unpleasant memories by the global division of labor.

For those who harbor even a slight doubt that our global production system will automatically build for us all a world-spanning Zion (if only we keep our hands out of the gears), there is a wiser course, one that requires no radical shift in our politics. On the contrary, it requires merely a return to our nation’s traditional approach to organizing government among human beings, which is to assume that human nature is deeply and irretrievably flawed, and that the best way to control such flaws is through the construction of carefully calibrated, interlocking, counterbalancing, and ever-evolving political institutions. It requires, as James Madison wrote in "Federalist No. 51," pursuing a "policy of supplying, by opposite and rival interests, the defects of better motives," and the will to trace this approach "through the whole system of human affairs, private as well as public."

Most immediately, it requires recognizing that the average American economist is not fit to understand, let alone design, the complex networks of our 21st-century economy in ways that result in the most minimal amounts of redundancy, resiliency, flexibility, and survivability, and that we’d better act fast to put someone on the job who can. It requires doing just what Adam Smith would surely do: Turn the task back over to the engineer.

End of the Line

Communications — Thu, 30 Nov 2006 06:00:00 -0500

A New America Event
11/29/2006 - 12:00pm

At this California event, Barry Lynn, a New America Foundation senior fellow, discussed his ground-breaking book, End of the Line: The Rise and Coming Fall of the Global Corporation.

We are used to thinking about the effects of globalization and outsourcing in terms of winners and losers: how these trends harm certain classes of American workers or benefit consumers. Lynn goes beyond the stereotypical debate about whether this economic revolution is good or bad to expose the dangerous underside… more

Breaking the Chain

adminn — Sat, 01 Jul 2006 23:26:00 -0400

There is an undeniable beauty to laissez-faire theory, with its promise that by struggling against one another, by grasping and elbowing and shouting and shoving, we create efficiency and satisfaction and progress for all. This concept has shaped, at the most fundamental levels, how we understand and engineer our basic freedoms -- economic, political, and moral. Until recently, however, most politicians and economists accepted that freedom within the marketplace had to be limited, at least to some degree, by rules designed to ensure general economic and social outcomes. From Adam Smith onward, almost all the great preachers of laissez-faire were tempered by a strain of deep realism. Most accepted that a national economy ultimately served a nation that had to survive in an often brutal world. So, too, did most accept that all economies are characterized by struggles for power and precedence among men and institutions run by men; in other words, that all economies are fundamentally political in nature. And so most accepted the need to use the power of the state -- most dramatically in the form of antitrust law -- to prevent any one man or firm from consolidating so much power as to throw off basic balances. The invisible hand of the marketplace, and all that derives from it, had to be protected by the visible hand of government.

It is now twenty-five years since the Reagan Administration eviscerated America's century-long tradition of antitrust enforcement. For a generation, big firms have enjoyed almost complete license to use brute economic force to grow only bigger. And so today we find ourselves in a world dominated by immense global oligopolies that every day further limit the flexibility of our economy and our personal freedom within it. There are still many instances of intense competition -- just ask General Motors. But since the great opening of global markets in the early 1990s, the tendency within most of the systems we rely on for manufactured goods, processed commodities, and basic services has been toward ever more extreme consolidation. Consider raw materials: three firms control almost 75 percent of the global market in iron ore. Consider manufacturing services: Owens Illinois has roiled up roughly half the global capacity to supply glass containers. We see extreme consolidation in heavy equipment; General Electric builds 60 percent of large gas turbines as well as 60 percent of large wind turbines. In processed materials; Corning produces 60 percent of the glass for flat-screen televisions. Even in sneakers; Nike and Adidas split a 60-percent share of the global market. Consolidation reigns in banking, meatpacking, oil refining, and grains. It holds even in eyeglasses, a field in which the Italian firm Luxottica has captured control over five of the six national outlets in the U.S. market.

The stakes could not be higher. In systems where oligopolies rule unchecked by the state, competition itself is transformed from a free-for-all into a kind of private-property right, a license to the powerful to fence off entire marketplaces, there to pit supplier against supplier, community against community, and worker against worker, for their own private gain. When oligopolies rule unchecked by the state, what is perverted is the free market itself, and our freedom as individuals within the economy and ultimately within our political system as well.

Popular notions of oligopoly and monopoly tend to focus on the danger that firms, having gained control over a marketplace, will then be able to dictate an unfairly high price, extracting a sort of tax from society as a whole. But what should concern us today even more is a mirror image of monopoly called "monopsony." Monopsony arises when a firm captures the ability to dictate price to its suppliers, because the suppliers have no real choice other than to deal with that buyer. Not all oligopolists rely on the exercise of monopsony, but a large and growing contingent of today's largest firms are built to do just that. The ultimate danger of monopsony is that it deprives the firms that actually manufacture products from obtaining an adequate return on their investment. In other words, the ultimate danger of monopsony is that, over time, it tends to destroy the machines and skills on which we all rely.

Examples of monopsony can be difficult to pin down, but we are in luck in that today we have one of the best illustrations of monopsony pricing power in economic history: Wal-Mart. There is little need to recount at any length the retailer's power over America's marketplace. For our purposes, a few facts will suffice -- that one in every five retail sales in America is recorded at Wal-Mart's cash registers; that the firm's revenue nearly equals that of the next six retailers combined; that for many goods, Wal-Mart accounts for upward of 30 percent of U.S. sales, and plans to more than double its sales within the next five years.

The effects of monopsony also can be difficult to pin down. But again we have easy illustrations ready to hand, in the surprising recent tribulations of two iconic American firms -- Coca-Cola and Kraft. Coca-Cola is the quintessential seller of a product based on a "secret formula." Recently, though, Wal-Mart decided that it did not approve of the artificial sweetener Coca-Cola planned to use in a new line of diet colas. In a response that would have been unthinkable just a few years ago, Coca-Cola yielded to the will of an outside firm and designed a second product to meet Wal-Mart's decree. Kraft, meanwhile, is a producer that only four years ago was celebrated by Forbes for "leading the charge" in a "brutal industry." Yet since 2004, Kraft has announced plans to shut thirty-nine plants, to let go 13,500 workers, and to eliminate a quarter of its products. Most reports blame soaring prices of energy and raw materials, but in a truly free market Kraft could have pushed at least some of these higher costs on to the consumer. This, however, is no longer possible. Even as costs rise, Wal-Mart and other discounters continue to demand that Kraft lower its prices further. Kraft has found itself with no other choice than to swallow the costs, and hence to tear itself to pieces.

The idea that Wal-Mart's power actually subverts the functioning of the free market will seem shocking to some. After all, the firm rose to dominance in the same way that many thousands of other companies before it did -- through smart innovation, a unique culture, and a focus on serving the customer. Even a decade ago, Americans could fairly conclude that, in most respects, Wal-Mart's rise had been good for the nation. But the issue before us is not how Wal-Mart grew to scale but how Wal-Mart uses its power today and will use it tomorrow. The problem is that Wal-Mart, like other monopsonists, does not participate in the market so much as use its power to micromanage the market, carefully coordinating the actions of thousands of firms from a position above the market.

One of the basic premises of the free-market system is that actors are free to buy from or sell to a variety of other actors. In the case of Wal-Mart, no one can deny that every single firm that supplies the retailer is, technically, free not to do so. But is this true in the real world? After all, once a firm comes to depend on selling through Wal-Mart's system, just how conceivable is the idea of walking away? Producers own and maintain machines, employ skilled workers, lease land and buildings. Even with careful planning, most would find the sudden surrender of 20 percent or more of their revenue to be extremely disruptive, if not suicidal.

Another basic premise of the free-market system is that the price of a commodity or good carries vital information from actor to actor within an economy -- say, that cherries are scarce, or vinyl floor tiles abundant, or the latest iPod includes a new technology. Again, no one can deny that, technically, every firm that supplies Wal-Mart is free to ask whatever price it wants. But again, we must ask whether this holds true in the real world. Every producer knows that Wal-Mart is, as one of its executives told The New York Times, a "no-nonsense negotiator," which means the firm sets take-it-or-leave-it prices, which as we know from the previous paragraph are far harder to leave than to take. Every so often Wal-Mart will accept a higher price, but then the retailer's managers may opt to punish the offending supplier, perhaps by ratcheting up competition with its own in-house brands. Price, within the consumer economy, increasingly carries but one bit of information -- that Wal-Mart is powerful enough to bend everyone else to its will.

Those who would use the word "free" to describe the market over which Wal-Mart presides should first consult with Coca-Cola's product-design department; or with Kraft managers, or Kraft shareholders, or the Kraft employees who lost their jobs. These results were decided not within the scrum of the marketplace but by a single firm. Free-market utopians have long decried government industrial policy because it puts into the hands of bureaucrats and politicians the power to determine which firms "win" and which "lose." Wal-Mart picks winners and losers every day, and the losers have no recourse to any court or any political representative anywhere.

Antimonopoly sentiment in America dates to the nation's founding. We see it in the acceptance by the thirteen newly independent states of English common law, with its rich antimonopoly tradition. We see it in the most vital statement on industry in American history, Alexander Hamilton's Report on Manufactures, itself deeply influenced by Adam Smith's antimonopoly writings in The Wealth of Nations. We see its citizen-centered nature in a 1792 essay by James Madison, in which he condemns monopolies for denying Americans "that free use of their faculties, and free choice of their occupations, which not only constitute their property in the general sense of the word; but are the means of acquiring property strictly so called." We see it dominating many of the great political battles of the nineteenth century, from Andrew Jackson's war on the Second Bank of the United States to William Jennings Bryan's populist campaign of 1896.

It would be wrong, however, to regard America's powerful antitrust law of the twentieth century as especially populist in nature. By the time Congress passed the Sherman Antitrust Act in 1890, the industrial explosion that began during the Civil War had resulted in the rise of hundreds of big firms, which often proved far more efficient than their older, smaller competitors. The phenomenal productivity of these newcomers tempered support for more radical antimonopoly proposals. The result was a sort of compromise, engineered mainly by the progressive wing of the Republican Party. The Sherman Act came to be seen not as a license to destroy all big firms simply because they were big but as a very big stick with which to convince the average firm not to overreach, and on rare occasions to break companies like Standard Oil, which had developed reputations for grossly abusing power. Most big firms were allowed to remain big as long as they avoided outright collusion with competitors, or extreme abuse of their consumers, or overly rapid predation against smaller property holders.

Thus did antitrust power come to serve as a sort of constitutional law within America's political economy. The goal was to enforce a balance of power among economic actors of all sizes, to maintain some degree of liberty at all levels within the economy. In recent years it has become a truism that antitrust law is designed to protect only the consumer. But the fact that Congress intended these laws also to preserve both competition per se and to shelter entire classes of entrepreneurs (among whom is the individual worker) was clear at the beginning and has been made clearer many times since. The text of the Sherman Act itself is famously vague, but the Supreme Court's decision in the 1911 Standard Oil case was based flatly on the assumption that the need to ensure robust competition sometimes outweighs the benefits of near-term efficiency. Standard's roll-up of the oil industry cut the cost of kerosene by nearly 70 percent, and yet the justices shattered the firm into thirty-four pieces. For many legislators, this was not nearly enough. Three years later, Congress greatly strengthened the rules against inter-firm price discrimination, in the Clayton Antitrust Act. Then in 1936, Congress did so again, even more resoundingly, by passing the Robinson-Patman Act. Wright Patman, the Texas Democrat who was the main force behind the bill, made sure everyone understood Congress's intent. "The expressed purpose of the Act is to protect the independent merchant," he wrote on the first page of a book he published to explain the law, "and the manufacturer from whom he buys."

During the twentieth century, antitrust law shaped the American economy more than did any other government power. Over the years, many thousands of antitrust cases were filed, by federal and state governments against particular firms and by one firm against another. Antitrust law determined not merely how big a firm could grow but where it could do business, how it was managed, how it could compete, even what lines of business it could enter. As the industrial scholar Alfred D. Chandler has noted, the vertically integrated firm -- which dominated the American economy for most of the last century -- was to a great degree the product of antitrust enforcement. When Theodore Roosevelt began to limit the ability of large companies to grow horizontally, many responded by buying outside suppliers and integrating their operations into vertical lines of production. Many also set up internal research labs to improve existing products and develop new ones. Antitrust law later played a huge role in launching the information revolution. During the Cold War, the Justice Department routinely used antitrust suits to force high-tech firms to share the technologies they had developed. Targeted firms like IBM, RCA, AT&T, and Xerox spilled many thousands of patents onto the market, where they were available to any American competitor for free.

When Ronald Reagan took power in 1981, one of his first targets was antitrust law. The new administration put forth a variety of arguments -- not least that international competition, especially with Japan, had rendered moot the old fears of monopoly. Yet the driving motive clearly was the philosophical antipathy of the Reaganites to the idea that the American people, acting through their representatives, had any business whatsoever telling business what to do. And the practical effect was to harness the institution of the corporation to that administration's larger project of shifting power and profit from the working, middle, and entrepreneurial classes to the powerful and rich. The radical nature of Reagan's attack on antitrust law is, in retrospect, astounding. Early in the administration, Attorney General William French Smith declared that "bigness is not necessarily badness." Antitrust enforcer William Baxter held that big firms were more efficient than smaller and said he had the "science" to prove it. When the Reagan team published its new Merger Guidelines in 1982, the document formalized two revolutionary changes: it redefined the American marketplace as global in nature, and it severely restricted who could be regarded as a victim of monopoly. From this point on, only one action could be regarded as truly unacceptable -- to gouge the consumer. Any firm that avoided such a clumsy act was, for all intents, free to gouge any other class of citizen, not least through predatory pricing and the blatant exercise of power over suppliers and workers.

If a single business deal illuminates the degree to which Wal-Mart has centralized control over America's consumer economy, it was last year's takeover of Gillette by Procter & Gamble. Gillette would seem one of the last firms likely to find itself unable to protect its pricing power; its 70 percent share of global razor sales gives it some weight at the negotiating table. Yet the Boston-based firm discovered that it could no longer keep its profit margins safely out of the grasp of the Arkansas retailer. And so was conceived the largest in a long list of buyouts due at least in part to Wal-Mart's power, including Newell's takeover of Rubbermaid, Kellogg's purchase of Keebler, and Kraft's buyout of Nabisco. And of course there is the long list of firms that have ended up dead or in Chapter 11 reorganization at least partly because of their dealings with Wal-Mart. Some are small fry, like Vlasic Foods. Others were once powers, like Pillowtex. Some were beloved brands, like Schwinn. Others were family enterprises, like Lovable Garments.

Even with Gillette in hand, Procter & Gamble itself is anything but safe. For decades, P&G was regarded by retailers as the "800-pound gorilla" among suppliers of home products. It was one of two firms that most spurred Sam Walton as he built Wal-Mart -- the competitor to beat was K-Mart; the supplier to tame, P&G. By the time Walton died in the early 1990s, he was able to brag of how he had forced P&G to accept a "win-win partnership" based on the sharing of information. Had he lived a few years longer, though, Walton would have witnessed what amounts to the outright capture of his foe. And for a man who spent much of his life scrounging for deals on lingerie and hawking hula-hoop knockoffs, he would surely have relished how this struggle for the heights of the consumer economy was decided by the power to price toilet paper and detergent. In recent years, Wal-Mart beat P&G into submission by mercilessly pitting its in-house brands against top P&G brands; the retailer, for instance, introduced not one but two detergents to compete with Tide and, in a particularly audacious move, grabbed outright the copyright for the White Cloud line of toilet paper, after P&G unwisely forgot to protect its own brand's name.

With the purchase of Gillette, P&G has achieved a new scope and scale, vaulting past Unilever to become the world's biggest maker of consumer goods. Yet the new balance of power is unlikely to last. Wal-Mart has become so strong, so sure of the invulnerability of its position, that not only does it not fear consolidation among its suppliers; it actually forces many of them to form fully self-conscious, collusive oligopolies with their rivals. Not that these relationships are advertised as such. The key here is the innocuous-sounding term "category management," and it describes a practice that is now common to all large retailers. But it is a practice that grew out of Wal-Mart's original "partnership" with P&G, and it is a practice that has been pushed especially hard by Wal-Mart.

Until recently, every retailer would draw up its own merchandising plan, detailing which brands to promote, how much shelf space to grant each, which products to place at eye level. These days, Wal-Mart and a growing number of other retailers ask a single supplier to serve as its "Category Captain" and to manage the shelving and marketing decisions for an entire family of products, say, dental care. Wal-Mart then requires all other producers of this class of products to cooperate with the new "Captain." One obvious result is that a producer like Colgate-Palmolive will end up working intensely with firms it formerly competed with, such as Crest manufacturer P&G, to find the mix of products that will allow Wal-Mart to earn the most it can from its shelf space. If Wal-Mart discovers that a supplier promotes its own product at the expense of Wal-Mart's revenue, the retailer may name a new captain in its stead. * Not surprisingly, one common result is that many producers simply stop competing head to head. In many instances, a single firm ends up controlling 70 percent or more of U.S. sales in an entire product line, such as canned soups or chips. In exchange, its competitor will expect that firm to yield 70 percent or more of some other product line, say, snacks or spices. Such sharing out of markets by oligopolies is taking place throughout the non-branded economy -- in grains, meats, medical devices, chemicals, electronic components. But nowhere is it more visible than in the aisles of Wal-Mart.

In essence, Wal-Mart has grown so powerful that it can turn even its largest suppliers, and entire oligopolized industries, into extensions of itself. The effects of this practice are most obvious in Wal-Mart's horizontal competition against other retailers. Retail experts sometimes talk of a "waterbed effect," which takes place when a supplier insists on collecting from weaker retailers at least some of the rent a more powerful firm refuses to pay. One recent study of how such power plays out within an entire system shows that a small retailer can expect to pay upward of 10 percent more than a powerful firm for the same basket of items. The effect also explains what takes place economically between communities served by Wal-Mart and those served by less powerful firms -- the more power Wal-Mart accrues, the more it is able to shift costs from, say, suburb to city. And so every day the competitive landscape tilts just that much more in Wal-Mart's favor. And so, every year, the landscape is littered with that many more dead or half-dead retailers -- including such once-big names as Winn Dixie, Albertsons, K-Mart, Toys R Us, and Sears.

This advantage is simply what can be quantified in price. Many of the benefits Wal-Mart extracts from its suppliers lie in a realm far beyond the market economy. If Wal-Mart's aim were simply to dictate the price it will pay for a product, then leave up to its suppliers all decisions as to how to get to that price, it would cause far less economic damage than it does now. But that is not Wal-Mart's way. Instead, the firm is also one of the world's most intrusive, jealous, fastidious micromanagers, and its aim is nothing less than to remake entirely how its suppliers do business, not least so that it can shift many of its own costs of doing business onto them. In addition to dictating what price its suppliers must accept, Wal-Mart also dictates how they package their products, how they ship those products, and how they gather and process information on the movement of those products. Take, for instance, Levi Strauss & Co. Wal-Mart dictates that its suppliers tell it what price they charge Wal-Mart's competitors, that they accept payment entirely on Wal-Mart's terms, and that they share information all the way back to the purchase of raw materials. Take, for instance, Newell Rubbermaid. Wal-Mart controls with whom its suppliers speak, how and where they can sell their goods, and even encourages them to support Wal-Mart in its political fights. Take, for instance, Disney. Wal-Mart all but dictates to suppliers where to manufacture their products, as well as how to design those products and what materials and ingredients to use in those products. Take, for instance, Coca-Cola.

We should be most disturbed by the fact that Wal-Mart has gathered the power to dictate content, even to the most powerful of its suppliers. Because no longer is the retailer's attention focused only on firms that produce T-shirts, electrical cords, and breakfast cereal. Every day Wal-Mart expands its share of the U.S. markets for magazines, recorded music, films on DVD, and books. This means that every day its tastes, interests, and peculiarities weigh that much more on decisions made in Hollywood studios, in Manhattan publishing houses, and in the editorial offices of newspapers and network news shows. Americans who favor abortion have much to worry about these days, between South Dakota's recent ban and the appointment to the Supreme Court of Justice Joseph Alito. But at least these battles are taking place entirely in the public eye, and the decisions are being made by democratically elected representatives. Such was not the case when Wal-Mart recently decided to allow each individual pharmacist in the company to choose whether or not to stock the "morning after" pill. Given the degree to which Wal-Mart has rolled up the pharmaceutical business in many towns and regions across the country, this act amounted, for all intents, to a de facto ban on these pills in many communities. This political decision was made and enforced by a private monopoly.

To appreciate just how blatantly Wal-Mart defies America's antitrust tradition, consider how our grandparents handled the last retailer to gather extreme power: the Great Atlantic & Pacific Tea Company. Better known as the A&P, the grocer at its height operated more than 4,000 supermarkets in nearly forty states and wielded immense influence over the entire food economy. The A&P was famous for its innovations in discount retailing, in distribution, in advertising. And it was infamous for its use of monopsony power, not least its perfection of the art of setting in-house brands against producers who resisted its will. Relative to Wal-Mart today, the A&P a half century ago was a far less awesome force. The firm sold only groceries; it was only double the size of its nearest competitor; and its total workforce was, as a percentage of the U.S. population, only a fifth as large as Wal-Mart's is now. Even so, the A&P was widely and vociferously denounced by local communities, state governments, newspapers, and labor unions as a threat to the American way of life.

Over the years, the federal government repeatedly hauled the A&P into court for abusing its market power. The government first began to scrutinize the firm in 1915, when Cream of Wheat refused to sell to the A&P because of its pricing policy. Then in 1936 came the Robinson-Patman law, which was popularly known as the "Anti-A&P Act." A year later, the Federal Trade Commission filed suit against the A&P, charging that the company had forced a Maryland vegetable packer to grant it a special 4 percent discount. In November 1942, the Antitrust Division filed a Sherman Act case against the retailer, one section of which detailed how the A&P had used "several turns of the screw" to coerce Ralston Purina into granting it a discount three and a half times what the cereal packer offered any other firm. Three years after winning that case, the Justice Department was back in court in September 1949 with another Sherman Act suit, this time asking for the dismemberment of the A&P. Filed at a time when the grocer was already clearly in decline -- not least because of antitrust enforcement -- the 1949 case was dropped five years later. But this was only after the A&P admitted guilt, agreed to dissolve an internal company that traded in agricultural products, and signed an outright prohibition against "dictating systematically" to suppliers. The final antitrust case against the A&P was not resolved until February 1979, a month after a West German grocery mogul bought control over the remnants of the once-huge firm.

Antitrust enforcement against the A&P and other big firms like Sears prevented any twentieth-century American retailer from ever growing nearly as powerful as Wal-Mart is today. But since the Reagan Administration, the only effective constraints on Wal-Mart have been set by investors and revenue flow. Even during the 1990s, when the Clinton Administration targeted a few companies for abusing their pricing power, the Arkansas-based retailer somehow managed to avoid any action. It is unclear whether this was in any way due to the close relationship between the Clinton family and Wal-Mart, on whose board Hillary Clinton served for many years. But even as Staples and McCormick & Co. were sued, a firm with vastly more power over the American economy was left entirely free to extend its domain in whatever direction and to whatever extent it wished. In fact, in one of the highest-profile antitrust cases of the 1990s, an FTC suit against Toys R Us for colluding with toy manufacturers, Wal-Mart emerged as one of the biggest winners.

The Reagan Administration's assault on antitrust enforcement had an even more dramatic effect on manufacturers. Complete license to expand horizontally resulted, in many industries, in the virtual collapse of the vertically integrated firm. Once they consolidated control over their marketplaces, scores of big manufacturers shut down or spun off most or even all of such naturally expensive and risky activities as production and research. These firms opted instead to purchase components and other manufacturing "services" from smaller companies whose main or only path to the final marketplace passed through their offices. This is true of corporations as diverse as Nike, Boeing, 3M, and Merck. Although it has become commonplace to trace the phenomenon of "outsourcing" to the emergence of new technologies and changes in the global "marketplace," it is much more accurate to trace it back to the disappearance of antitrust enforcement. The change in law that gave Wal-Mart license to grow to such a huge size also gave to many manufacturers the license to recast themselves in Wal-Mart's image and become retailers themselves. The result? More and more production systems are run by companies designed not to manufacture but to trade-in components manufactured by other, smaller firms, over which they can exercise at least some degree of monopsony power.

Some of Wal-Mart's more sophisticated boosters will defend the company by defending the exercise of monopsony power itself. Wal-Mart, in their view, should be seen as a firm that aggregates our will and buying power as consumers in much the same way that unions once aggregated the interests of workers. One of the better known versions of the argument was put forth by Jason Furman, a former campaign adviser to Senator John Kerry, who last year published a strong defense of Wal-Mart. The huge retailer, Furman wrote, is "a progressive success story" that has brought "huge benefits" to the "American middle class." Sure, this argument goes, Wal-Mart may employ its power with a certain Stalinist flair; but it does so in our name, and the result is to make the production system on which we all rely more efficient. This efficiency is good for all society, and it is especially good for those poor folks who cling to the lower rungs of the economic ladder.

There are two great flaws in such thinking. The first and most obvious is that it ignores the effects of monopoly on our political system -- the consolidation of vision and voice, the de facto merger of private and public spheres, the gathering of power unchecked and unaccountable. It is to view American society through an entirely materialistic prism, to measure "human progress" only in terms of how many calories or blouses can be stuffed into an individual's shopping cart. It is to view the American citizen not as someone who yearns to decide for himself or herself what to buy and where to work in a free market but to say, instead, "Let them eat Tastykake."

The second flaw is economic, and is of even more immediate concern. Even if the American people did choose to bear the extreme political costs of monopoly, the particular type of power wielded by Wal-Mart and its emulators makes no economic sense in the long run. On the surface, it may seem to matter little who wins the great battles between such goliaths as Wal-Mart and Kraft, or between Wal-Mart and P&G. Yet which firm prevails can have a huge effect on the welfare of our society over time. The difference between a system dominated by firms built to produce and a system dominated by firms built to exercise monopsony power over producers is extreme. The producers that dominated the American economy for most of the twentieth century were geared to build more and to introduce new, to protect their capital investments against overly predatory investors, to raise price faster than cost, to show some degree of loyalty to workers and outside suppliers and communities. Wal-Mart and a growing number of today's dominant firms, by contrast, are programmed to cut cost faster than price, to slow the introduction of new technologies and techniques, to dictate downward the wages and profits of the millions of people and smaller firms who make and grow what they sell, to break down entire lines of production in the name of efficiency. The effects of this change are clear: We see them in the collapsing profit margins of the firms caught in Wal-Mart's system. We see them in the fact that of Wal-Mart's top ten suppliers in 1994, four have sought bankruptcy protection.

In a world of rising tensions within and among nations, of accelerating climate and environmental change, we would be wise to design the production systems on which we rely to be able to evolve as rapidly as the human and natural worlds around us evolve. Instead, we have programmed the dominant institutions within our economy to eliminate all the wonderful chaos of a free-market system. Rather than speed up the random motion and serendipitous collisions that have for so long propelled the American economy, Wal-Mart and other monopsonists are slowly freezing our economy into an ever more rigid crystal that holds each of us ever more tightly in place, and that every day is more liable to collapse from some sudden shock. To defend Wal-Mart for its low prices is to claim that the most perfect form of economic organization more closely resembles the Soviet Union in 1950 than twentieth-century America. It is to celebrate rationalization to the point of complete irrationality.

There are many ways to counterbalance the power of Wal-Mart and the other new goliaths. In the case of Wal-Mart, we could encourage yet more mergers among its suppliers and its competitors. Or we could make it easier for its workers to unionize. Or we could micromanage the firm through our state and municipal governments (e.g., requiring it, as Maryland recently did, to devote 8 percent of its payroll to health insurance). Yet every one of these approaches runs the risk of only further warping our economy and perhaps even reinforcing Wal-Mart's power by creating new allies for it. After all, super-consolidated suppliers already share many of Wal-Mart's political interests; labor unions now committed to Wal-Mart's destruction could overnight become equally as committed to the further extension of Wal-Mart's power; and new bureaucracies will generally tend to sympathize with the firms they regulate. We can also, of course, choose to do nothing, and surrender to the immense retailer all the decisions that in the past were made within the marketplace itself or by democratically elected legislators. In other words, we can cede to Wal-Mart the role it so relentlessly seeks for itself -- to be dictator over the central functions of the U.S. consumer economy.

If, however, we choose the path of the free market, and of individual freedom within the market; if we choose to ensure the health and flexibility of our economy and our industrial systems and our society; if we choose to protect our republican way of government, which depends on the separation of powers within our economy just as in our political system -- then we have only one choice. We must restore antitrust law to its central role in protecting the economic rights, properties, and liberties of the American citizen, and first of all use that power to break Wal-Mart into pieces. We can devise no magic formula or scientific plan for doing so -- all antitrust decisions are inherently subjective in nature. But when we do so, we should be confident that we act squarely in the American tradition, as illuminated by the cases against Standard Oil and the A&P. We should act knowing that the ultimate fault lies not with Wal-Mart but with our last generation of representatives, who have abjectly failed to enforce laws refined over the course of two centuries. We should act knowing that much similar work lies ahead, against many other giant oligopolies, in many other sectors. We should act knowing that to falter is to guarantee political and perhaps economic disaster.

As we make our case, we should be sure to call one expert witness in particular. Last year, Wal-Mart CEO Lee Scott called on the British government to take antitrust action against the U.K. grocery chain Tesco. Whenever a firm nears a 30 percent share of any market, Scott said, "there is a point where government is compelled to intervene." Now, Wal-Mart has never been shy about using antitrust for its own purposes. In addition to the Toys R Us case, the firm was also the instigator of a Sherman Act suit against Visa and MasterCard. And so such a statement, by the CEO of a firm that already controls upward of 30 percent of many markets and has announced plans to more than double its sales, sets a new standard for hubris. It also sets a simple goal for us -- elect representatives who will take Citizen Scott at his word.

*Such blatantly enforced collusion has not gone entirely unnoticed in Washington. Toward the end of its time in office, even the merger-happy Clinton Administration allowed the Federal Trade Commission to launch an investigation of these practices, and an FTC report in early 2001 identified four ways that Category Management may violate even the remarkably loose antitrust guidelines of the last generation. All four of these violations cut right to the core of the free-market system. As the FTC put it, a category captain might "(1) learn confidential information about rivals' plans; (2) hinder the expansion of rivals; (3) promote collusion among retailers; or (4) facilitate collusion among manufacturers." In Wal-Mart's world, all four violations are present to at least some extent.

Risk, Ahoy!

Cecille Isidro — Thu, 01 Jun 2006 16:20:02 -0400

It's so easy to forget the close calls. I was reminded of this while reading an article in a recent issue of The New Yorker, which looked back at one of the more terrifying international crises of recent years -- the near war between India and Pakistan in 2002. That event marked the first time since the Cold War that two nations threatened to launch nuclear weapons at one another, and to this day it's not clear either country has developed a realistic plan about how to manage their weapons responsibly. Even so, this danger is almost entirely ignored by the ever-growing number of companies that rely on work done in India.

Some readers will wonder why a war in India, even if nuclear, should concern the average CIO. But others will see the point immediately, which is that the detonation of even a single nuclear weapon in a modern capital would all but paralyze the flow of information, money, goods and people into and from that country. This of course means that any company that has, say, located key back-office capacity within that nation's borders better have an airtight contingency plan that can be implemented immediately, using resources far from the affected lands. Yet as we all know, in a business environment shaped by intense global competition and shareholder pressure, such plans are increasingly rare.

Today's interconnected world is full of risks with the potential to trigger catastrophic business shutdowns. Flu epidemics, natural disasters, terrorist attacks, political uprisings, war -- the dangers are so varied that it's only natural to feel a sort of paralysis when confronted with what might happen. Sometimes it seems the only option is simply to go about business as usual and pray that when the next disaster strikes, it won't prove so devastating as to make recovery impossible.

Yet there are in fact many actions we can take to limit the risk, once we set our minds to the task. The catch? Well, actually there are two. First, any general fix will raise one's cost of doing business, at least temporarily. Second, and far more important, the only way to guarantee a level playing field, to ensure that all companies will be willing to accept the higher costs, is for the government to regulate the process by demanding that all companies respond to the new landscape of risk. This is true not only in India but in any country that serves as a major link in the new global economy.

THE FALLACY OF RATIONALITY

During the 2002 crisis, many companies doing business in India woke up fast to the risk of relying on key business operations and personnel located there. Yet as is so often the case, the fear faded almost as soon as the threat of war did, and it was not long before most companies were acting as if nothing had ever happened. We all know why it can be so hard to focus on political risk. For one thing, everyday competition is replete with near-term dangers that can seem far more pressing. More disturbing is the utopian thinking on the part of those who are supposed to manage political risk. An increasing number of executives seem to assume that the very fragility of their operations will discourage political conflict. Politicians, these executives believe, will always rationally conclude that their own self-interest and the interest of their people will be served best by avoiding any conflict that might throw a monkey wrench into smoothly operating cross-border business processes. One example of such thinking was a Thomas Friedman column in The New York Times about the Indian nuclear scare. More than the soothing voice of the U.S. Secretary of State Colin Powell, Friedman wrote, it was pressure from multinationals like GE that convinced the Indian government to "cool it."

It doesn't take much effort to spot the deep flaws in this thinking. The idea that national leaders, caught in a crisis that might cost millions of lives, would be influenced by the fear that foreign investment could suffer would be laughable were it not so naive. Not that such hubris is new to the world of business. Longtime IBM CEO Thomas Watson remained convinced until after the outbreak of World War II that international businesses could lead Adolf Hitler onto the road to peace.

Many executives scoff at the idea that government can really do anything to reduce the risks posed by a globally networked system of production. After all, for a generation now we have been told that the market controls us, not the other way around. We must keep in mind, however, that the corporation, and indeed the marketplace itself, are ultimately tools that can be shaped in different ways by different policies to yield different outcomes. We can adjust everything from trade rules to risk management systems, and do so in a way that boosts security while preserving true freedom for managers.

Change is already on the way. Policy-makers are fast waking up to the new nature of business risk, and they are beginning to alter long-standing policies. The problem is that their responses can prove to be counterproductive, if not downright dangerous. A perfect example is the U.S. port controversy, a case in which protectionists managed to chase away an important foreign investor without improving the security of the United States one iota. The real question for CIOs is whether they will help shape the new policies or simply allow their practices to be shaped by them.

There is much CIOs can do right now. Insist that all outside service providers prove they have detailed plans to deal with any contingency. Apprise other members of the management team and the board of directors of the global risks. Seek out counterparts at other organizations to share best practices and develop ideas about what sort of government regulations would result in true redundancy at the lowest cost. Simply requiring companies that do business in the United States to divide their information processing work equally among two providers, located in two nations, would dramatically lower the level of risk. Yes there will be some cost. But it will surely seem worthwhile to any CIO who wakes up one day to read of an outbreak of avian flu in, say, Bangalore.

Being the bearer of bad news won't make you the most popular executive at headquarters. But an honest assessment, supported by a well-thought-out plan to solve the problem, will gain you the respect of your peers. If anything, CIOs who provide their executive team with a more realistic appraisal of the risks posed by global networks will reap greater responsibility and bigger budgets. In some cases work that has been outsourced may need to be brought back inside. In many cases, outsourced work will have to be managed much more closely.

We must adjust our thinking to make sure this new world of outsourced activities upon which we now rely is flexible and redundant enough to absorb any political, economic or natural disaster that we can imagine. CIOs are in a position to help lead the way.

Globalisation Must be Saved from the Radical Global Utopians

Cecille Isidro — Tue, 30 May 2006 16:20:01 -0400

Now may hardly seem the time to imagine a more global future, let alone do so with optimism. Most of us are hard pressed just to maintain the illusion that the present system is not breaking down, to deny with conviction what everyone knows -- that the grand trade liberalisation project is, at best, on life support.

It is only natural to think conservatively, even defensively, when witnessing the collapse of an empire. Few outside the US doubt that America's free-trade system, constructed with such care in the decades after the war, is crumbling fast. The proximate cause is America's looming bankruptcy. As the ongoing Doha round of world trade negotiations has already proved, the US simply lacks the currency -- in the form of believable promises of sustainable access to the US marketplace -- to "buy" the next round of trade liberalisation, as Washington has "bought" every round since the 1960s. Clearly no other nation is willing or able to take America's place.

Yet we will find no better moment to begin, once again, to imagine a world in which expanding trade helps to promote a more just, secure, free and peaceful world. This is because there is no better time than today to face up to the two fatal flaws of the radical globalisation project that in the early 1990s came to supplant the more careful trade liberalisation of the postwar era: first, America's utopian belief that an unregulated "market" would somehow do the work of government; and second, the rise of global companies -- especially in the retail and electronics sectors -- to fill the power vacuum created by the retreat of the American state from its traditional role managing US trading relationships.

Similarly, there is no better time than now to grasp that the real question is not, as Americans like to frame it, free trade versus protectionism. It is whether the world trading system will be regulated by private companies that are answerable only to the rich and powerful, and are profoundly unequipped for the task of processing complex information for the sake of society, or by states built to assess risk and to be answerable to all citizens.

It would be Pollyannaish to deny that grave dangers abound. The last time a free-trade system unwound, when Britain's "invisible empire" vanished almost overnight in the 1880s, one result was a scramble for territory. Europe's powers carved up Africa, then began to hack away at China, in a process that helped set the stage for the first world war.

Already today, two scrambles are under way. One aims to grab keystone parts of the global industrial system, as nations ranging from Japan to South Korea and China to France resurrect a variety of mercantilist tactics to seize and hold industrial operations. The other scramble is for greater control over natural resources, especially oil. Although neither scramble poses an immediate threat to peace, both only exacerbate the biggest danger the world now faces: the extreme fragility of our highly specialised, cross-border industrial systems.

By far the greatest obstacle to understanding the failings of post-cold-war globalisation is the US's own utopian ideology. For most of the nation's history, America was guided by deeply realistic thinking, and idealistic rhetoric was trotted out mainly to clothe cold strategic aims. But after the fall of the Berlin Wall, in that moment of self-congratulatory euphoria, much of the US's ruling elite came to believe the rhetoric itself. The result was a uniquely American, fin-de-siecle paganism -- absolute faith in the ability of an all-determining market mechanism to deliver universal prosperity and peace, in perpetuity -- which was then hawked abroad with evangelical zeal.

This is not the first time an imperial power has imagined a link between the workings of empire and the benevolent actions of some higher force. It is, however, the first time a power that strove so relentlessly to sit in the driver's seat of a world system then chose to close its eyes to the road.

It is the first time that the central director of a hyper-complex industrial system has had so little ability to process basic information about the workings of that system, which is also, by design, the central framework of its empire. The depth and intensity of America's trade utopianism becomes more astonishing as time wears on. Look at how the US treats oil politics and you will see the realistic America of old. The nation's leaders shape an energy policy, they intervene in markets, they invade oil-rich nations. But when it comes to the global trading system, America today operates on an entirely different set of principles. No one dares whisper the words "industrial policy." No one dares admit the degree to which the trade system is actually manipulated, not by any state but by companies built to straddle many states. No one dares admit the degree to which these companies tend to destroy not merely soft social infrastructure, such as pensions and wages, but basic production infrastructure.

The dangers of this perverse duality in the US mind are extreme. Yet even in America, the fantastic delusion of trade utopianism cannot last -- it is neither logically nor physically sustainable. Indeed, as can be seen in the growing willingness of politicians in both parties to engage in xenophobic demagoguery, America's utopian fever seems to be breaking. This brings us back to the question of whether the nations of the world will, together, take proactive steps to expand an open global system, or will stumble into blind and destructive protectionism.

The biggest reason for hope is the prospect of a reformed, sober US. Once the American mind is exorcised of today's mechanistic utopianism, the most probable result will be a return to a far more realistic, practical, ethical internationalism. Rather than attempt to retreat into an equally impossible autarky, it is far more likely that America will re-embrace the responsibility of using state power to engineer markets and systems to serve its own people, while ceding to other states far more space to serve their citizens in ways of their own choosing. The next global system will be far more heterogeneous, cosmopolitan, liberal and flexible than today's.

Utopian universalism is dead. The sooner nations gather to bury its corpse -- and harness, hobble or break up the immense companies that have grown so powerful in the shadow of that myth -- the more likely we will be to save globalisation. This, of course, can happen only if we define globalisation, once again, as a political process that must be managed by nation states. The result may not be perfect, and it certainly will be no utopia. But it is the best we can expect on this earth. And that may be enough.

What Should USTech's Sourcing Strategy Be?

Cecille Isidro — Wed, 01 Mar 2006 00:00:00 -0500

Greg should consider himself lucky. The cozy relationship between USTech and TaiSource was speeding toward a crisis even before he hired Morris. But thanks to what he learned from that questionable decision, Greg now has an opportunity to fix USTech's sourcing strategy before disaster strikes.

USTech and TaiSource have become so interdependent that USTech must establish either a more formal alliance with the supplier or a more strictly defined arm's-length relationship. Given the distrust on both sides, the only real option is the latter. Greg can now choose to diversify USTech's ODM relationships; source directly in China and Taiwan, which would require quickly mastering certain management and assembly tasks; or combine these approaches, thereby enabling USTech to expand in China at a safe pace. Greg can afford no illusions: Whatever the choice, USTech's costs will increase. The era of free-rider collaboration for a firm this size is over, and the sooner USTech recognizes that fact, the better.

Greg's next step should be to gather the USTech team for an honest postmortem. In retrospect, the degree to which USTech trusted TaiSource will seem shockingly naive. All interdependent relationships are competitive. Absent a clear ownership structure, or the social constraints that exist within certain Asian societies, such competition will eventually destroy even mutually beneficial relationships.

Although the relationship with TaiSource looked great on the bottom line, the result was to empower a new competitor. TaiSource has deep knowledge of USTech's products and the ability to manufacture in both Taiwan and China, and it plans to open a U.S. R&D office -- another name for a sales office.

A review of USTech's sourcing system, if truly complete, will reveal that the company is still hugely vulnerable in at least one area: political conflict. In the event of political turmoil within China, or between China and another industrial nation, the flow of components on which USTech depends would be cut off. Direct entry into China by USTech would do nothing to lessen this risk. And no matter which ODMs Greg links up with in Taiwan, all rely on work done in China.

Sure, Thomas Friedman and other trade utopians insist that industrial interdependence prevents conflict among nations. But this is rank foolishness. The entirely unregulated industrial relationship between the United States and China is analogous to the fuzzy "collaborative" relationship between USTech and TaiSource. Eventually, there will come a struggle for a greater share of the profits, or for control of the system itself.

Unfortunately, Greg's options are few. Suppliers in the United States, Japan, Korea, Malaysia, and Singapore would all cost more. Given that the biggest immediate threat to USTech is posed by direct competitors, all of whom source extensively in China, the executive team has no alternative but to depend on China and hope for the best.

Which means that Greg's next call should be to Washington. When any company discovers a political risk that no firm on its own can afford to address, it is time to sit down with the people who shape the market. After all, if no one company can mitigate the dangers, then the political risk has shifted from the level of the firm to the level of the societies that depend on those firms. At this point, Greg must cease to act as an executive and act instead as a citizen.

When Greg makes his call, he may be tempted to speak in anger. After all, it will seem to him that the politicians have screwed up once again, this time by pretending that incredibly complex global markets could somehow be self-regulating. Greg should use his own mistakes to help politicians understand what must be done. After all, just as USTech realized it could not rely safely on one supplier, so too must the United States.

Wake Up to the Old-Fashioned Power of the New Oligopolies

Cecille Isidro — Tue, 14 Feb 2006 00:00:00 -0500

What will it take to wake us up to the ever-tightening grip of oligopolies over ever more of our global marketplaces? Even though their power increasingly warps our production systems, and our free market system, alarms are rare and fleeting.

The collapse of an overly consolidated US flu vaccine system two years ago did not set off any bells. Nor did the revelation, by experts studying the potential impact of an avian flu pandemic on commerce, of deep fragilities in our hyper-rationalised medical and food supply systems. The mega-merger of Procter & Gamble and Gillette last year did not do it. Nor did the general consolidation of food processors; in the US, 10 groups account for half of all retail sales, with single companies often capturing more than 75 per cent of particular product markets. Neither the fact that Wal-Mart controls 30 per cent of sales for many goods in the US economy, nor that four companies account for 94 per cent of UK supermarket sales, seem to concern policymakers.

What about Samsung's effort to capture world markets for liquid crystal display screens and D-Ram computer chips? Or Tokyo's rewriting of antitrust laws to allow companies to consolidate 100 per cent monopolies over key technologies? Or the capture of 60 per cent of the global trainer market by Nike and Adidas? In every case, there has been almost no reaction. Mittal Steel's play for Arcelor may not be a global-scale problem, as the two companies combined account for only 10 per cent of the world steel market. But what of the fact that three companies account for 75 per cent of global iron ore production?

There is no shortage of competition in many markets. Just ask Volkswagen or Delta Airlines. But the further down we look below the level of branded companies, the more consolidation we tend to find. This is true in commodities, services, industrial components and shipping. Many executives and investors do understand what is happening, and recognise the stakes. In a recent article for McKinsey & Co, one consultant wrote of the rise of "global mega-institutions". Although the writer did not refer to these as oligopolies, he described their character well. Not only, he wrote, have these companies developed "extraordinary scale and scope", but they capture "disproportionately high profits". It seems that only the citizen and politician remain in the dark. The global corporate endgame is well under way, and none of our societies is prepared for it, intellectually or institutionally.

It is not as if we need to search long for evidence of the problems traditionally associated with monopoly. Capture of political power? Consider Boeing's hold over the Bush administration. Extreme pricing distortions? We see them throughout Wal-Mart's supply system. Artificial control over what technologies are brought to market and when? One blatant example is the power over renewable energy systems of British Petroleum and Royal Dutch Shell. Extreme profiteering? America's big energy companies have not only resurrected the art of gouging the consumer, they have raised it to a new state of perfection.

As bad as these old-fashioned problems may be, many of our 21st century global oligopolies appear to pose entirely new dangers. This is due largely to how power is exercised in systems characterised by extreme outsourcing. Alfred D. Chandler, an industrial scholar, has written that one of the main factors behind theories of the huge, vertically integrated corporation early in the 20th century was enforcement of US antitrust law, which limited the horizontal growth of these companies. Unable to exert power over the market, many scrambled instead to internalise key functions, for competitive advantage.

This means we cannot ignore the effect on global industrial organisation of the radical relaxation of antitrust enforcement by the Reagan administration in 1981. One result of giving big companies a licence to grow horizontally was that many producers, once they captured control over their markets, opted to sell off or shut down expensive and risky manufacturing and research and development operations and buy these "services" from outside suppliers with few or no other pathways to the marketplace. Over time, many of these top-tier companies relied ever more on their power to dictate prices to their suppliers (including workers) to capture profits.

The increasing power of a few leading trade-oriented companies over entire production and supply systems results in a variety of economic and political ills. One is the degradation of many production systems themselves. That is what happens when the actual producers of goods or components are unable to capture a sufficient share of revenue to support innovation, or sometimes even to maintain existing machinery and workforces. Another is the heightening of competition within society as opposed to between leading companies. In a production system marked by extreme outsourcing, oligopoly does not result in the end of competition so much as the redirection of competition downwards, as lead companies capture more power to set supplier against supplier, community against community and worker against worker.

It is here we find at least a partial explanation for one of the more confusing paradoxes of today's global system -- the simultaneous rise in consolidation and competition. So far, especially in America, the tendency has been to blame extreme competition on "globalisation", not least because faulting foreigners for domestic ills can be a good way to sell books and win votes. The real explanation, however, is not only globalisation, or even mainly globalisation, as much as radical changes in the structure of industry. In other words, it is not the Chinese who destroy US and European jobs, but roll up by the world's largest traders and retailers of the power to pit producer against producer, and to capture most or all of the gain from the arbitrage.

Outright monopoly is absolutely defensible -- when granted temporarily to reward companies for bringing truly new ideas to market. But most of today's powerful companies are not the result of new ideas, only the strategic reordering of markets. If anything, their goal is the oldest one in commerce -- to fence in the place where deals are done, and to tax producers and consumers for the right to meet there. It will not be long until we realise that to save our free market system will require, among other actions, far more aggressive enforcement of antitrust. Simply stopping any further consolidation of power will not be enough. True believers in the free market will admit there is no other choice than to roll the power back.

The Fragility that Threatens the World's Industrial Systems

Cecille Isidro — Tue, 18 Oct 2005 00:00:00 -0400

Time and again, human beings have learned to build buffers into complex systems. We design compartments into our ships, circuit breakers into our electrical networks and minimum reserve requirements for our banks. Yet since the cold war era, we have done the exact opposite with our industrial system. Rather than conceive market-friendly methods to distribute risk and dampen shocks, we devoted ourselves to eliminating the bulkheads that have traditionally existed between nations and between companies. To evoke a more raw analogy, in our production system, we bulldozed all the levees flat.

As a result, we now live in a world where an isolated political or natural disaster on the far side of the globe can disrupt basic systems on which we all depend. Consider what would happen in the event of war on the Korean peninsula, or an uprising in south India, or an avian flu pandemic in industrial Asia.

In the first case, we would immediately lose half the global production of D-ram chips, 65 per cent of Nand flash chips and much more. At a minimum, the result would be massive disruptions in the electronics industry and in all industries that depend on electronics components. In the second case, numerous global companies, including banks, would lose their ability to process information because they have relocated key back-office operations to that region. The third case, meanwhile, presents chilling proof that the production system has evolved in directions no one expected. As a recent article in Foreign Affairs noted, one cross-border system that would collapse in the event of a pandemic is the one the US relies on for medical respiratory masks.

In each instance, an everyday disaster far away would set off potentially massive disruptions of the industrial systems on which all nations depend. This could mean the loss of jobs, both in production and in retail. It could mean store shelves empty, even of staples. It could mean the destruction of wealth if the disruptions triggered financial crashes. And it could mean the loss of lives if systems designed to manufacture drugs or process food were to break down. These are just a few among many potential disasters.

How did we end up in such a fragile world? After all, this was not the way our industrial system worked 20 years ago. More to the point, globalisation was not supposed to work this way. If anything, most of us expected globalisation to deliver the exact opposite--more companies, offering a greater variety of goods, in a system marked by greater flexibility. And so it proved, for a while, in the early and mid-1990s.

But in the past decade, three factors have changed the way companies organise their operations and hence the nature of the production system itself: First, consolidation. A steady, at times dramatic, series of mergers, acquisitions, strategic retreats and bankruptcies have enabled lead companies to reshape entirely many global marketplaces. Rarely challenged by government, the deals have led to instances of consolidated power we have not witnessed in nearly a century. Consider that Owens-Illinois now produces more than half the world's food containers. Or that Intel supplies 90 per cent of the world's demand for certain key semiconductors.

Second is the end of vertical integration. The huge, vertically-integrated companies that dominated production during most of the 20th century have been literally taken apart and the pieces merged in brand new ways. This process alters completely how responsibility and risk are apportioned among companies, and between the private sector and society.

Third is the rise of just-in-time production. Beginning in the late 1980s, many US companies began to adopt the Toyota system of production, and to apply it on a scale far grander than Toyota ever tried. The result has been efficiencies but also an unprecedented systematisation of single sourcing and the elimination of inventory.

This revolution in the organisation of the production system would have posed a problem even in a purely domestic environment, if only because of its evident fragility. The fact that the system now stretches across multiple borders--that it is "global"--simply raises the degree of risk.

After Hurricane Katrina many US systems failed. But the storm also illustrated how a well-designed system should work--energy. Despite destruction of both pumping stations and refineries, even at the worst moment Americans were forced to do without only about 10 per cent of the petrol they normally use. It was much the same three years ago after opposition forces shut the pumps in Venezuela.

Now consider the many small-scale industrial crashes of recent years due to issues including the spread of the Sars virus, the closing of borders after September 11, the US west coast port lock-out and the Taiwan earthquake of 1999. The contrast is shocking. The system built to deliver resources literally stuck in the ground is redundant, resilient, and able to deliver always roughly 90 per cent of what is normally used.

The system that humans can literally shape in any way they wish is marked by extreme concentration and specialisation, to a point where we can imagine a country losing as much as 90 per cent of its normal supply of key industrial products.

It is time to admit that our grand experiment with radical laisser faire management of industry has failed. The original deal was simple enough--companies would do as they wish and in exchange they would watch out for threats that might endanger the safety of the countries that depend on them. Unfortunately, it is ever more evident that today's companies are entirely different from those of 20 years ago. The radical new organisation of industry has changed completely how and where these companies perceive system-wide risk and, in some cases, has left them all but blind.

The corollary is that it is time for governments to adjust the rules that shape how the private sector runs the production infrastructures on which all countries depend, to ensure that compartments are built back into these systems. Much can be accomplished using modified versions of policies tried and proven safe years ago. These include a more aggressive use of antitrust power; a requirement that companies dual source all components in real time; and limits on how much of any one product, component or service importers can source from any one nation. The prospect of more state involvement need not be regarded with horror; after all, rich nations did not do badly at developing their industrial systems in the half-century before radical laisser faire. By contrast, simply waiting to see how bad the next industrial crash will be really is a scary prospect.