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All Prices Are Political

By James H. Nolt

One reason I call myself a political economist, rather than simply an economist, is that I know what economists deny: that all prices are political. That is, all prices are influenced not just by market conditions of supply and demand, but also by private power. As I discussed last week, economics was founded to elaborate the realm of the market as a locus of freedom, wherein power does not rule. I contend this is pure propaganda. It merely diverts attention from pervasive private power.

Political economy recognizes that most economic relations are non-market relations and that even within the realm of markets, power is ubiquitous. The notion of markets as a realm of freedom unsullied by power is a powerful myth and the cornerstone of modern conservatism, but it is untrue.

Whether governmental or private powers are more adequate for solving any particular problem is a valid question, as long as we understand that both involve the exercise of power over others. However, economics often presents itself as a “science” of voluntary choice. Agents are free to choose what they want in markets, according to economists, whereas governmental solutions involve authoritative imposition, backed ultimately by government’s monopoly of force. This distinction, however, is overdrawn.

Economics argues that prices are predominantly determined in free markets. Markets are free when all producers selling and all consumers buying a product or service are small relative to the total size of the market and are not organized so that none of them has any significant ability to influence the price by means of any decision they could make to increase or decrease their supply of product to the market. Furthermore, the product must be sufficiently homogenous so that they are all actually producing the equivalent thing.

Do such free markets actually exist anywhere? I think not. Textbooks sometimes use the example of agricultural products, such as wheat or rice. Certainly these commodities are pretty homogenous and there are millions of producers supplying the world market, but the buyers are far fewer. In fact, a handful of very large agricultural trading companies like Cargill and ADM, along with a few similar companies abroad, dominate markets. While these are not pure monopolies, the companies involved in the trade are certainly large enough to influence prices by their own strategic choices. Strategy implies power and politics, not just raw markets.

During the Industrial Revolution of the early 19th century, there were similarly thousands of producers of yarn, cloth and clothing. But these sold to a smaller number of mercantile firms, including some true giants. Furthermore, the financing of the trade depended on a handful of large mercantile banks, including the privately owned Bank of England.

Modes of transportation were also loci of private power, starting with huge mercantile shipping companies, then canal and railroad companies financed and often controlled by the biggest banks, and finally general trading companies, such as Jardine Matheson in England, A&P in the U.S., and Mitsui Bussan in Japan.

Shipping and railroad companies were not just giants of their industries, but these giants themselves soon organized even bigger cartels to fix prices. Cartels are often hidden behind euphemisms. For example, shipping cartels are called “shipping conferences,” and railroad cartels are often called pools. Textbooks argue that cartels cannot be durable because there is an incentive to cheat, but the textbooks ignore the fact that many cartels are effectively enforced by the mutual creditors of the big companies, i.e., the biggest banks. Buck the cartel and you could lose your financing.

Banks themselves have always been among the largest private corporations. They have for centuries organized the largest bond and stock operations, called initial public offerings or IPOs, in syndicates or consortia: more euphemisms for cartels. I have recently acquired detailed documentation of the railroad bond cartels organized by J.P. Morgan & Co. around the turn of the twentieth century from the bankers’ own records.

Such financial cartels were also organized to combine many large but formerly independent industrial companies into the world’s first billion-dollar corporations, including U.S. Steel and General Electric, both also organized by J.P. Morgan.

Enormous financial companies and even larger syndicates are not new to the twenty-first century. They existed already during the seventeenth century. Therefore there is no golden era of free market capitalism. During all periods, there are great concentrations of private power. Often, though not always, the pinnacles of private power are financial and mercantile. Even in ancient Rome, when the Roman Republic could not cope with the slave revolt led by the famous Spartacus, an enormously rich merchant, Marcus Licinius Crassus, raised an army with his own funds and defeated the uprising. This was the beginning of the end of the Roman Republic.

Since prices depend not only on the cost of production, but also on financing, transportation and marketing, powerful concentrations of mercantile and financial wealth obviously made prices subject to private power even during times when industrial and agricultural producers competed with each other. For example, John D. Rockefeller gained a dominant position in the American oil business not at first by controlling production, but by making deals with powerful railroad companies for preferential shipping rates that allowed him to undercut others’ prices.

Today’s equivalents of the last century’s railroad companies are the giant Internet and software companies that serve as the modern gateways to commerce. There cannot be any real free market in the way the textbooks describe as long as such enormous companies dominate the buying, selling and marketing of almost everything. Of course, giant companies do sometimes compete with each other in various ways. They also form alliances and cooperate when it suits their purposes. My point is that all such activity is not “free market” behavior, but strategic exercise of private power.

Industrial companies also exercise private power today. Companies that produce homogenous commodities, such as steel, minerals, chemicals and electricity, have long formed cartels and are mostly quite large anyway. On the other hand, most consumer products are highly differentiated, so the “law of one price” does not prevail. It is like every product is a monopoly in its own particular niche. In fact, this is the objective and purpose of marketing: to create unique demand and brand loyalty, which allows monopolistic pricing.

Furthermore, a great many products today include components protected by legal monopolies, which are based on patents or copyrights. Nearly all our electronic devices and appliances include such proprietary hardware and software. Likewise, entertainment and pharmaceutical products as mostly copyright or patent protected. Owners of such legal monopoly privileges of course have the power to set prices to maximize their profits as they see fit.

Where does the powerless anarchy of economic freedom exist? Only in the minds of economists and others under their sway. The real world of business is an arena of strategic contest among private powers, no different in character from the political competition occurring within government, except it is even less democratic.



James H. Nolt is a senior fellow at the World Policy Institute and an adjunct associate professor at New York University

[Photo courtesy of Forex Money]

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