Obviously the analysis of Big Business profitability presented in section C.5 is denied by supporters of capitalism. H. Demsetz of the pro-"free" market "Chicago School" of economists (which echoes the right-libertarian "Austrian" position that whatever happens on a free market is for the best) argues that efficiency (not degree of monopoly) is the cause of the super-profits for Big Business. His argument is that if oligopolistic profits are due to high levels of concentration, then the big firms in an industry will not be able to stop smaller ones reaping the benefits of this in the form of higher profits. So if concentration leads to high profits (due, mostly, to collusion between the dominant firms) then smaller firms in the same industry should benefit too.

However, his argument is flawed as it is not the case that oligopolies practice overt collusion. The barriers to entry/mobility are such that the dominant firms in a oligopolistic market do not have to compete by price and their market power allows a mark-up over costs which market forces cannot undermine. As their only possible competitors are similarly large firms, collusion is not required as these firms have no interest in reducing the mark-up they share and so they "compete" over market share by non-price methods such as advertising (advertising, as well as being a barrier to entry, reduces price competition and increases mark-up).

In his study, Demsetz notes that while there is a positive correlation between profit rate and market concentration, smaller firms in the oligarchic market are not more profitable than their counterparts in other markets [see M.A. Utton, The Political Economy of Big Business, p. 98]. From this Demsetz concludes that oligopoly is irrelevant and that the efficiency of increased size is the source of excess profits. But this misses the point — smaller firms in concentrated industries will have a similar profitability to firms of similar size in less concentrated markets, not higher profitability. The existence of super profits across all the firms in a given industry would attract firms to that market, so reducing profits. However, because profitability is associated with the large firms in the market the barriers of entry/movement associated with Big Business stops this process happening. If small firms were as profitable, then entry would be easier and so the "degree of monopoly" would be low and we would see an influx of smaller firms.

While it is true that bigger firms may gain advantages associated with economies of scale the question surely is, what stops the smaller firms investing and increasing the size of their companies in order to reap economies of scale within and between workplaces? What is stopping market forces eroding super-profits by capital moving into the industry and increasing the number of firms, and so increasing supply? If barriers exist to stop this process occurring, then concentration, market power and other barriers to entry/movement (not efficiency) is the issue. Competition is a process, not a state, and this indicates that "efficiency" is not the source of oligopolistic profits (indeed, what creates the apparent "efficiency" of big firms is likely to be the barriers to market forces which add to the mark-up!).

It seems likely that large firms gather "economies of scale" due to the size of the firm, not plant, as well as from the level of concentration within an industry. "Considerable evidence indicates that economies of scale [at plant level] . . . do not account for the high concentration levels in U.S. industry" [Richard B. Du Boff, Accumulation and Power, p. 174] and, further, "the explanation for the enormous growth in aggregate concentration must be found in factors other than economies of scale at plant level." [M.A. Utton, Op. Cit., p. 44] Co-ordination of individual plants by the visible hand of management seems to be the key to creating and maintaining dominant positions within a market. And, of course, these structures are costly to create and maintain as well as taking time to build up. Thus the size of the firm, with the economies of scale beyond the workplace associated with the administrative co-ordination by management hierarchies, also creates formidable barriers to entry/movement.

Another important factor influencing the profitability of Big Business is the clout that market power provides. This comes in two main forms - horizontal and vertical controls:

"Horizontal controls allow oligopolies to control necessary steps in an economic process from material supplies to processing, manufacturing, transportation and distribution. Oligopolies. . . [control] more of the highest quality and most accessible supplies than they intend to market immediately. . . competitors are left with lower quality or more expensive supplies. . . [It is also] based on exclusive possession of technologies, patents and franchises as well as on excess productive capacity [. . .]

"Vertical controls substitute administrative command for exchange between steps of economic processes. The largest oligopolies procure materials from their own subsidiaries, process and manufacture these in their own refineries, mills and factories, transport their own goods and then market these through their own distribution and sales network." [Allan Engler, Apostles of Greed, p. 51]

Moreover, large firms reduce their costs due to their privileged access to credit and resources. Both credit and advertising show economies of scale, meaning that as the size of loans and advertising increase, costs go down. In the case of finance, interest rates are usually cheaper for big firms than small ones and while "firms of all sizes find most [about 70% between 1970 and 1984] of their investments without having to resort to [financial] markets or banks" size does have an impact on the "importance of banks as a source of finance": "Firms with assets under $100 million relied on banks for around 70% of their long-term debt. . . those with assets from $250 million to $1 billion, 41%; and those with over $1 billion in assets, 15%." [Doug Henwood, Wall Street, p. 75] Also dominant firms can get better deals with independent suppliers and distributors due to their market clout and their large demand for goods/inputs, also reducing their costs.

This means that oligopolies are more "efficient" (i.e. have higher profits) than smaller firms due to the benefits associated with their market power rather than vice versa. Concentration (and firm size) leads to "economies of scale" which smaller firms in the same market cannot gain access to. Hence the claim that any positive association between concentration and profit rates is simply recording the fact that the largest firms tend to be most efficient, and hence more profitable, is wrong. In addition, "Demsetz's findings have been questioned by non-Chicago [school] critics" due to the inappropriateness of the evidence used as well as some of his analysis techniques. Overall, "the empirical work gives limited support" to this "free-market" explanation of oligopolistic profits and instead suggest market power plays the key role. [William L. Baldwin, Market Power, Competition and Anti-Trust Policy, p. 310, p. 315]

Unsurprisingly we find that the "bigger the corporation in size of assets or the larger its market share, the higher its rate of profit: these findings confirm the advantages of market power. . . Furthermore, 'large firms in concentrated industries earn systematically higher profits than do all other firms, about 30 percent more. . . on average,' and there is less variation in profit rates too." [Richard B. Du Boff, Accumulation and Power, p. 175]

Thus, concentration, not efficiency, is the key to profitability, with those factors what create "efficiency" themselves being very effective barriers to entry which helps maintain the "degree of monopoly" (and so mark-up and profits for the dominant firms) in a market. Oligopolies have varying degrees of administrative efficiency and market power, all of which consolidate its position — "[t]he barriers to entry posed by decreasing unit costs of production and distribution and by national organisations of managers, buyers, salesmen, and service personnel made oligopoly advantages cumulative - and were as global in their implications as they were national." [Ibid., p. 150]

This recent research confirms Kropotkin's analysis of capitalism found in his classic work Fields, Factories and Workshops (first published in 1899). Kropotkin, after extensive investigation of the actual situation within the economy, argued that "it is not the superiority of the technical organisation of the trade in a factory, nor the economies realised on the prime-mover, which militate against the small industry . . . but the more advantageous conditions for selling the produce and for buying the raw produce which are at the disposal of big concerns." Since the "manufacture being a strictly private enterprise, its owners find it advantageous to have all the branches of a given industry under their own management: they thus cumulate the profits of the successful transformations of the raw material. . . [and soon] the owner finds his advantage in being able to hold the command of the market. But from a technical point of view the advantages of such an accumulation are trifling and often doubtful." He sums up by stating that "[t]his is why the 'concentration' so much spoken of is often nothing but an amalgamation of capitalists for the purpose of dominating the market, not for cheapening the technical process." [Fields, Factories and Workshops Tomorrow, p. 147, p. 153 and p. 154]

All this means is that the "degree of monopoly" within an industry helps determine the distribution of profits within an economy, with some of the surplus value "created" by other companies being realised by Big Business. Hence, the oligopolies reduce the pool of profits available to other companies in more competitive markets by charging consumers higher prices than a more competitive market would. As high capital costs reduce mobility within and exclude most competitors from entering the oligopolistic market, it means that only if the oligopolies raise their prices too high can real competition become possible (i.e. profitable) again and so "it should not be concluded that oligopolies can set prices as high as they like. If prices are set too high, dominant firms from other industries would be tempted to move in and gain a share of the exceptional returns. Small producers — using more expensive materials or out-dated technologies — would be able to increase their share of the market and make the competitive rate of profit or better." [Allan Engler, Op. Cit., p. 53]

Big Business, therefore, receives a larger share of the available surplus value in the economy, due to its size advantage and market power, not due to "higher efficiency".