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Economic Power

(EPE, pp. 245-249)

One of the most fundamental concepts in the social sciences, "power" may be understood here as an agent's capacity to affect other individuals or groups by "altering the constraints upon their action-environments" [Wartenburg 1990, 85] that condition their behaviors and/or decisions and values. In general, of course, social agents affect each other mutually, but relationships in which this mutual influence is significantly asymmetric or unequal, where one agent dominates the other, are critically important, particularly from the viewpoint of concerns with ethics and democracy.

All forms of power are to some extent 'economic' in nature. Exercising power entails either (1) 'sanctioning' people, i.e., threatening them with a loss or offering them a promise of a gain in well-being contingent upon their making certain choices; or else (2) influencing their knowledge of, or their values and preferences about, the choices available to them [Bartlett 1989, chs. 2-3; Schutz 1995]. Thus the individual exercising power must wield 'scarce resources' -- at the least, his/her own time and energy. And the benefits attained by exercising power are 'goods or services' of one form or another that are provided, in effect, by means of the time, energy and attention of subordinates in the power relationship.

"Economic power" is often singled out, however, from among other forms of power, as that which is involved in society's economic structures per se, those institutions whose primary function is allocation and distribution. Thus in modern industrial societies, economic power is most manifest in government and private bureaucracies, especially, in capitalist market economies, in CORPORATIONS and the MARKET STRUCTURES that knit them together.

Mainstream economics by and large has been loathe to consider either corporations or markets as entities involving or manifesting power (Bardhan [1991], an excellent overview, is less disparaging). Traditionally neoclassical economics treated the firm as a "black-box," the social relationships inside of which were of no interest. More recently mainstream economists have begun to scrutinize these social relationships, but they continue to eschew any description of them as power relationships (see TRANSACTION COSTS, and WILLIAMSON'S THEORY OF THE COPORATION; also Perrow [1991] for critique). As for the corporation's external relationships with individuals and groups in markets and other spheres of social life, neoclassical economists accept that certain circumstances may give a firm power over its customers or suppliers. Yet they consider such circumstances exceptional, and argue that the power the firm then derives is of little consequence. Transactions in markets are voluntary, and because markets are more or less competitive, and developed market systems allow people broad choices about their labor, leisure, and consumption, neoclassicals argue that agents can neither subject, nor be subject to, others in any significant way in such systems. RADICAL and other HETERODOX economists strongly dissent from this view.

Power relationships within the firm. To begin with, as a social structure, the corporation is a stratified hierarchy of command, with owners or their representatives at the top (see OWNERSHIP/CONTROL OF CORPORATION), then layers of upper, middle and lower managers, and finally production and other workers at the bottom. Some neoclassicals view this structure as the product of a mutually agreeable relationship among individuals contracting with each other as equals in a kind of cooperative association in which they 'agree' to organize themselves hierarchically in order to maximize net income [Alchian & Demsetz 1972]. Yet voluntary contractuality in a relationship does not necessarily preclude it from involving power -- for example, historically contracts of indentured servitude represented voluntary submissions to power. And the private corporation, in which owners and managers make decisions without democratic accountability to their employees, does not resemble the sort of organization that would be expected in a free association of equals. Instead, the structure of the corporation is most clearly an embodiment of employer power, that which is exercised by firm-owners over all employees, and by superior employees (managers) at every level in the hierarchy over their inferiors.

Employer power derives from the threat of job termination that employers hold over employees, a threat manifest to the latter by the perennial existence of a RESERVE ARMY of potential employee replacements. The threat rests upon the material deprivation the employee expects to suffer with any major loss of income (see EFFICIENCY WAGE THEORY; also Bowles and Gintis [1990]). Since the overwhelming majority of employees lack significant liquid or income-earning assets; since the costs of finding another job may be considerable (and re-training costs can be overwhelming); and since unemployment insurance and re-training and relocation subsidies are only grudgingly provided by the state in capitalist economies, the cost of job loss is great and the threat is substantial. Because these are systemic features in all labor markets, it follows that profit income, even in "competitive equilibrium," contrary to the neoclassical analysis, derives at least partly from an asymmetric power relationship in such markets, i.e., from the EXPLOITATION of labor.

Of course, with solidarity workers may confront their employers with COUNTERVAILING POWER -- primarily by threatening to withdraw their labor services from employers (i.e., striking) -- thus altering both their relations with employers in the firm and the larger social and political environment that conditions those relations (see UNIONS). Yet owners and managers generally may bring substantial resources to bear to prevent such a scenario.

First, employers can and do structure the corporation itself such that it DIVIDES AND CONQUERS employees, including managers [Edwards 1979]: the complex layering of command and privilege, and the minute definition of conpensation according to experience, position, occupation, merit (and also according to race, sex, 'attitude', and so forth -- see DISCRIMINATION) all militate against employee solidarity. Second, as will be explained below, owners and managers generally have greater influence upon the cultural and political environment that undergirds employer power -- for example, in the politics of welfare, unemployment insurance and labor law as major determinants of the cost of job loss -- than do those most subject to that power.

The power of the corporation in markets and society. It is their position on the short-side of a perenially glutted labor market that enables firms' owners and managers to assure employees' compliance with their commands [Bowles and Gintis 1990]. Similar short-side positions in other markets may privilege firms with power vis-a-vis other groups of transactors. Often, for example, a firm may assume short-side power over independent suppliers of parts or materials and effectively integrate them into its managerial command hierarchy.

One crucially important instance of short-side power is that of lenders in financial markets. Lenders usually give regular borrowers premium terms on credit (low interest-rates, easier repayment schedules, etc.) as part of a strategy aimed at ensuring credit-worthy behavior. An excess demand for loans is thereby created, providing a basis for lenders' invidious DISCRIMINATION among borrowers, as occurs in residential mortgage lending. Regular business customers are thereby threatened with non-renewal of their credit lines and loss of the important advantages deriving from continuing access to business credit: just as unemployment manifests a threat to workers, perennial credit shortage threatens borrowers with a loss of continued credit on relatively easy terms. Lenders thereby gain access to a significant non-reciprocal influence in non-financial businesses' decision-making.

Another important form of threat-based power that firms may have in their market relations derives from positions of monopoly (see MARKET STRUCTURES): with only one seller in the market, customers are threatened with complete lack of access to the product if they do not do business with the monopoly on its terms (monopsony, of course, conversely implies a similar threat to sellers). The "economic profits" firms may thus extract from customers or suppliers have been extensively studied by mainstream economists; and both empirical and game-theoretic analyses support the intuition that strict monopoly or monopsony per se is not necessary for firms to have such power: significant concentration on one side or the other in the market will suffice.

In mainstream economics, concentrated markets are recognized as arising from contingent factors such as a maldistribution of resource ownership, government largesse, or scale economies. Heterodox economists argue that instead monopoly/monopsony power is a primary goal of firms in dynamic market competition. One strategy firms use in pursuit of that goal, particularly important in the present context, is ADVERTISING AND SALES EFFORT: when it is effective, advertising constitutes an exercise of value power [Bartlett 1989, ch. 9], i.e., that which alters people's preferences or values, in this case concerning consumer goods.

The extent of horizontal concentration, as well as vertical and conglomerate integration among ostensibly independent firms, is considerable in both the non-financial and financial sectors of modern market economies. Given the subordinacy of non-financial firms to lending institutions, a framework of coordination is therefore evident, a 'business hierarchy' that is subject to financial hegemony [Mintz and Schwartz 1985], within which the capital allocation process occurs not by means of an 'invisible hand' but instead by what amounts to CENTRALIZED PRIVATE SECTOR PLANNING.

Corporations also wield considerable power outside of the market sector for purposes of securing their goals in markets. For example, as noted earlier, they may effectively press for favorable treatment in labor laws affecting their power over employees; or they may press for favorable workplace safety or environmental regulations, taxes, or antitrust laws (see CORPORATE STATE). Their influence in this regard is importantly a function of the purchasing power they can bring to bear in political and cultural affairs affecting them. Since firms are the property of their owners and top managers, this influence is effectively on behalf of those groups, and constitutes an important dimension of the power of the RULING CLASS in CAPITALISM.

In fact, the extra-market influence wielded by corporations and their owners and managers is crucial as an underpinning of the entire capitalist market system as a whole. Capitalism rests upon a degree of INEQUALITY in the distribution of private property that would not be sustainable were its political and social systems truly democratic. For great inequality in the property distribution is equivalent to great inequality in people's rights and opportunities, hence cannot be understood as the outcome of a truly democratic public decision on the matter: it can only be sustained by power exercised on behalf of those most benefitted, at the expense of the rest [Schutz 1994].

Property-owners and corporate-managers do indeed exercise ruling class power in capitalist society: They have more time and personal resources, along with their corporate resources, to spend in such political activities as lobbying and campaign financing than do working people's or other groups. They are better able to carry out major threats of withdrawal of their 'economic services', i.e., their personal and corporate investments, in 'capital strikes'. They own and manage the media of public discourse and dominate other important cultural institutions such as schools, churches and opinion-making organizations.

Consequently the values promoted in all the institutions of capitalist society are 'contaminated' by, and 'subordinated' to those of the owning and managing classes (see CORPORATE HEGEMONY). In the mythologies they promote, e.g., of the intrinsically greater worth of managers and owners relative to workers, these institutions thus tend to 'mystify' rather than clarify for people the nature of their society. Their social status thus elevated, owners' and managers' behaviors and values come to be widely 'emulated' by those who can never hope to attain such positions. Even in many of its smallest details then, the structure of capitalist society serves as an apparatus of "value power" functioning primarily on behalf of the property-owning and corporate-managerial classes.

REFERENCES.

Alchian, Armen A. and Harold Demsetz. "Production, Information Cost, and Economic Organization" in American Economic Review 62 (1972): 777-795.

Bardhan, Pranab. "On the Concept of Power in Economics" in Economics and Politics 3 no. 3 (1991): 265 - 277.

Bartlett, Randall. Economics and Power: An Inquiry into Human Relations and Markets. Cambridge: Cambridge U. Press, 1989.

Bowles, Samuel and Gintis, Herbert. "Contested Exchange: New Microfoundations for the Political Economy of Capitalism" in Politics and Society 18 no. 2 (1990): 165-222.

Edwards, Richard. Contested Terrain. N.Y.: Basic Books, 1979.

Mintz, Beth and Michael Schwartz. The Power Structure of American Business. Chicago: U. of Chicago Press, 1985.

Perrow, Charles. "Economic Theories of Organization" in Zukin, Sharon and Paul DiMaggio editors. Structures of Capital: The Social Organization of the Economy. Cambridge: Cambridge U. Press, 1990.

Schutz, Eric. "Social Power in Neo-Marxist Analyses" in Review of Radical Political Economics 26 no. 3 (1994): 95-102.

________. "Markets & Power" in Journal of Economic Issues, December (1995): forthcoming.

Wartenberg, Thomas E. The Forms of Power: From Domination to Transformation. Philadelphia: Temple U. Press, 1990.

Economic Power

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