Power and its distribution matter in society, not least in economic processes and outcomes. Neo-classical theory, with its starting point of perfect competition in the theory of the firm, only really addresses power as departures from this point. Oligopoly and monopoly power are examples of this. In these two cases, firms have a greater degree of power to set market prices and sustain ‘excess’ profits than is desirable for the maximum social welfare.
In contrast to the theory of perfect competition and its ‘imperfection’ offshoots, Marx proposed that competition under capitalism would lead to larger and larger firms engaged in production. The prospect of increased profitability is a major incentive to firm expansion. Organic or internal growth, as well as mergers and acquisitions, would produce this result. Thus a degree of monopoly power and competition were part of the same dynamic economic process. Larger firms can take advantage of economies of scope and scale to produce at a lower average cost. They can also engage in expensive research and development on new products and production processes to attempt to stay a step ahead of their rivals.
Schumpeter also thought that firms would become larger and larger over time, and that technological development would become increasingly bureaucratised and routine as a result. He also thought that this would ultimately change society from capitalism into socialism, a prospect which he decried.
All this is not to say that there is sometimes a need for market power to be regulated by the state. While large firms can be a source of economic progress, there are often cases where excessive market power can produce a complacent inefficiency through a lack of competition. The neo-classical idea that excess profits can reduce social welfare remains important.
Less mainstream economists, such as the late John Kenneth Galbraith, writing in the 1960s, addressed the issue of the dominance of large firms in capitalist society, their capture of market power and their use of advertising, which tended to undermine the neo-classical notion of consumer sovereignty. The latter holds that firms in perfectly competitive markets are driven to produce in order to maximise consumer satisfaction. Galbraith could see that post-war American society was nothing like this. He also suggested that there was a need for a ‘countervailing power’ in the form of trade unions, which could play a part in sustaining wage levels in order to reduce the excessive profits of monopolistic firms.
The balance between public and private power under capitalism is also an important idea which is left out of mainstream economics, and which is more commonly analysed by some heterodox economists. The power exercised by government in its regulation of the economy is a well-established feature of industrialised nations. Part of this role must surely be to prevent excessive private power from undermining economic and social well-being. Sometimes this might take the form of preventing the abuse of monopoly power as already argued. But it must also take into account that private wealth appropriation can lead to the capture of elected representatives and the policies they are persuaded to support. The enormous influence of corporate lobbying in the US may sometimes be benign, but it can also lead to government policy which simply promotes and sustains particular private interests rather than that of the wider society. This is one of the dangers of rising inequality, which if unchecked can undermine the democratic process.
Lobbying of politicians is inevitable under capitalism. It is a form of rent-seeking, an activity which tries to create, capture or sustain rents or an economic surplus beyond that necessary to sustain the activity in question. In developing countries much rent-seeking, such as bribery or other forms of corruption, is illegal but perhaps inevitable. In more advanced countries, rent-seeking tends to take on forms which are legal. They can damage economic performance, although this need not be the case. Some rents can be growth-enhancing if for example they promote technological progress and learning by doing within firms and industries that would not otherwise have occurred due to market failure. This provides support for the potentially beneficial effects of certain forms of state intervention in the economy.
An unequal distribution of power under capitalism is innate to the system, but whether or not this proves harmful depends on a careful analysis of the particular situation. Monopoly power can reduce welfare, but it can also lead to the creation of new technologies. It can also be counterbalanced by the power of trade unions interested in the welfare of their members. Trade union power has been in decline in rich countries in recent decades, due to anti-union legislation and falling employment in manufacturing as opposed to service industries. But the stagnation of wages for ordinary workers that these developments have also contributed towards has led to a rising inequality of incomes. Consumption among middle and lower income workers has only been sustained in many countries by an unsustainable rise in private debt, which played a major role in the Great Recession which began in 2007. Shifts in political and economic power can therefore have diverse and contradictory effects.
State power can be excessive, and libertarians tend to focus on the damage this can do to society. However they seem to regard private power as essentially benign, which is a mistake. This too can be excessive, as in some cases of monopoly and in the rising lobbying power of the wealthy who may attempt to maintain and enhance their social position and wealth in ways which do not enhance the public good. In such cases, the power of the state is necessary to resist such processes, and enact policies which change the balance of power in society. As an example, for good or ill, Thatcher changed the balance of power in the UK during the 1980s, reducing the influence of trade unions and enhancing that of private capital.
The Great Recession and its long aftermath represent another potential turning-point, whose lasting effects are still difficult to foresee. In contrast to the 1970s, the excessive power and profitability of the financial sector, promoted by successive governments, is part of the problem. Many economies are burdened with huge levels of private debt, driven by international imbalances and the concomitant savings glut. Until these issues are confronted by radical governments free of the ideology of recent decades, global development will stall and huge numbers of ordinary people will continue to suffer. Within limits, reform will reflect and act upon the balance of political power and its effect on the economy.