In Many Ways, the Major Enemy of Markets Are Businesses

The types of private interest that worked against the public good that Adam Smith noted in The Wealth of Nations are almost quaint when put against the size and nature of the concentrated power structures that are modern corporations. The world has changed drastically since the late 18th century liberals were observing it.

Our understanding of how large private corporations strive to gain a competitive edge and further their influence and control of the market needs to go beyond the occasional casual admittance that they’ll, every now and then, take government support and lobby for special advantages against competition. We need to get comfortable with the institutional analysis and acknowledgement that allows us to see them as power centers.

Power centers don’t want to be seriously challenged and will proactively ensure that they aren’t. This seems obvious to most people when we talk about other sources of concentrated power, like the government. It is less obvious when we talk in a serious way about a corporation’s logical aversion to market change and disruption — challenges to their position.

Entrepreneurship and innovation are among the main driving forces in a market economy that we can count on to disrupt current order. New entrants, ideas, processes, and means of production destabilize current players; make new and better ideas and solutions available; boost economic growth and efficiency; and, ultimately, benefit the market overall.

What about the large companies that exist now that represent the slow-moving, non-innovative establishment? Content with the status quo, these companies often find it costly to change any of their methods or approaches to market, even if it meant a broader and healthier market and ultimately better results for the consumer. Where they do pursue their own version of change or innovation, it is necessarily limited by institutional reality — no company will creatively destroy itself, even if benefits for many will outweigh the costs of a few.

“No problem,” the free marketeer says. “We can count on entrepreneurs to bring us the paradigm shifts that shake everything up and force Goliath to move with David, or Goliath’s defeat.”

In many cases, this is actually the way it works. There are great examples of entrepreneurs and new players radically changing entire industries, with the added benefit of kicking open the door for even more new market plays and players.

Uber comes to mind. By going up against traditional taxis and what were, in many cases, ridiculously restrictive government licensing structures, the company has become an instant classic for those who love to talk entrepreneurship, innovation, creative destruction, and how all that ultimately benefits the consumer.

The ride-sharing company stuck it to established players in many cities, causing municipal governments headaches by forcing them to reconsider their licensing restrictions, and sometimes even incentivizing a re-write of the entire legislative playbook that dealt with for-hire transportation. This also paved the way for others to enter the market and create competition for taxis. Even if massive amounts of regulation remain in some cities, with Uber in operation, the public is ultimately the winner in this story.

Uber has entered capitalist folklore: The entrepreneur and smaller private interest as the protagonist, eventually rising to multi-billion-dollar glory, with the government and their protections for established players as our antagonists.

Stories like this deserve the attention they get from proponents of capitalism. However, perpetual focus on scenarios of this breed sometimes encourage a conflation of the benefits of markets with anti-market private interests and incentives.

The disincentives and hostility entrepreneurs and the forces of innovation directly face from established players are not discussed nearly as much as they should be. Here I am referring to the motives and actions of established corporate power that hinder entrepreneurs and innovation — preserving the established order at the consumer’s expense. In other words, it’s important to recognize that Uber’s primary incentive has been, and always will be, the preservation and success of Uber. In the past, that may have meant opening up markets. In the future, that may mean closing and weakening markets to prevent competition and maintain dominance.

Now, those in favor of free markets should know all too well the standard playbook response for addressing the claim that private interests can inflict damage on entrepreneurship, economic progress, and the health of the market overall: “Of course, when established players try to capture the power of government to protect their own interests against competition and market changes, this has negative consequences and shouldn’t be allowed to happen. Besides, that’s not really ideal capitalism anyway — we should object to state power in all of these cases.”

This is true, but that’s only one aspect of the story, and it again sidesteps a head-on discussion of the nature of the anti-market tendencies of business. Furthermore, many in favor of free markets tend to overlook that the government isn’t always a necessary partner in structuring arrangements that hold the forces of entrepreneurism at bay.

Let’s get back to David and Goliath. Looking at the established corporate players in a market as lumbering Goliaths that can’t react quickly enough to a sneaky rebel attack that exploits major weaknesses or opportunities is one great way to start describing the inherent advantages entrepreneurs have over them. Sure, the premise goes, multi-billion-dollar firms have billions, but alas, they are like a large ship with a small rudder. They can’t react as easily to market changes or innovate as quickly as some smaller firms can, and this is where the entrepreneur seizes their opportunity, even if they don’t have the same level of resources.

In some ways, this can be true. For a variety of reasons, it can take a large corporation a year to accomplish a feat in, say, software development that four people in someone’s basement would take only two months to do.

In many other ways, the lumbering Goliath characterization isn’t true at all. People who run large corporate entities are not stupid. They are often extremely conscious of the inherent lack of agility that comes with such a large ship, and because of this they are also hyper-aware of the tricks of the trade and tactics that can be exploited to keep others from eating any of their lunch — they have a strong incentive to execute those tactics.

Large corporations can and do consciously pursue courses of action designed solely to hinder direct and indirect competition, many of which have nothing to do with competing on a product, service, or solution level. Corporate interests are always on the lookout for what could or would be paradigm shift in the industry — a threat to them and probably a benefit to consumers — and how to prevent the source of that shift from ever generating it. Or, they can absorb the source of the threat into their own sphere of ownership and influence, and leverage it the way they want — usually in a way that will not disrupt the current order and render as many benefits as it might have.

This is sometimes demonstrated with a corporation’s rush to acquire a company or innovation that appears to be a game-changer. On the one hand, that’s a standard business story everyone is told to be comfortable to celebrate — yay for the entrepreneur and their multi-million-dollar cash out, and yay for the acquisition that press releases tell us will be a boon to a stock price and so on.

However, on the other hand, why a company or innovation was purchased and what happens to it afterward are more interesting questions. It isn’t exactly unheard of in the business world for large corporate players to purchase companies or ideas they see as potential threats — read economically as an eventual benefit to the consumer — to simply take them off the market. Nor is it unheard of for companies to bring certain innovations into their fold and leverage them in a way that benefits their current trajectory, rendering them a little less disruptive than they otherwise could or would have been.

Again, the idea that a large corporate entity would absorb innovation and neuter it (intentionally or not, for one reason or another) isn’t top-secret conspiracy boardroom talk, nor is it a foreign idea to people in the business world. It isn’t uncommon for founders of certain companies or innovations, after the sale of their companies or innovations, to express their frustration with how their work was managed after letting go of it. Dag Kittlaus (carefully) expresses this sentiment in some of his interviews: The co-founder of Siri Inc. (the company acquired by Apple who turned the technology into a same-name feature for iPhones) felt this Goliath didn’t leverage the tech in a way that would see it become the “paradigm” unto itself that it could have been. Rather, the technology became a mere “utility.”

Is this because Apple is purely evil and tried to prevent some great tech from hitting the world stage due to some Illuminati plot? Is it because they didn’t have the talent to get as much as they could out of it? Of course, not in the first instance, and probably not in the second. It all comes down to incentives and the nature of a large, established corporation. The reality is that, for starters, getting Siri under their control was as much about getting some great technology into iPhones as it was about ensuring competitors couldn’t get their hands on it. With the tech under their control, it meant that they could use it at their own pace in a way that most benefited them — in a way that would not disrupt industry paradigms to the point where it would cannibalize or jeopardize business-as-usual. That’s something that innovation is inherently supposed to accomplish and a smaller team or company would have necessarily worked toward.

In other cases, the hindrance of entrepreneurs goes back to the classic employer-employee paperwork shtick. Multi-page contracts that bind even the thoughts and aspirations of intelligent people to corporate structures go beyond non-disclosure agreements and the protection of certain intellectual property secrets and straight into the premise that says if you even think of an idea while you work at a certain company (and it comes into reality in some form), the company you’re working for owns a large portion, if not all, of that idea automatically. And, of course, if you leave the company, you couldn’t even begin to dream of setting off on your own in the same or related industry as you’re more than likely saddled with a hefty non-compete agreement.

Whether that’s justified or not, the point is that corporations aren’t structuring these types of agreements because of the cosmic justice related to the ownership of ideas and the rightful shares of intellectual glory. It’s to establish a safeguard against anyone attempting to leave an arrangement with them that could pose a competitive or disruptive threat to their business. The benefits to the market are not the chief concern.

The aftermath of large corporate mergers and acquisitions and the entanglements of 100-page contracts aren’t the extent of private efforts to prevent competition and thwart disruption — they are select illustrations. People often talk about the “private sector” in a broad sense as if to describe an area of the economy where the values are exclusively a “may the best company win” mentality, in the same way free marketeers do: An arena where players of all sizes see new ideas and innovations as brilliant and exciting opportunities in a strict product, service, or solution sense. However, make no mistake, large, established corporate players view competition, the market, and innovation as destructive, chaotic, and something to be reined in — just like governments and politicians often do.

Some companies position the spirit of innovation as part of their branding (e.g., Apple and Google) and work hard to build up the perception that their primary focus is working towards that next paradigm shift and a better world for everyone. Although this may be true at some level, we can’t lose sight of what corporate systems that use these great buzzwords are — established players in the market that want to remain established. The last thing they are looking to do is truly overhaul or destroy the spectrum or range of currently accepted ideas and expectations that are working perfectly fine for them — that’s something the market and innovation is great at doing.

Again, it’s about incentives. Even if a new idea or opportunity would ultimately be better than existing alternatives, if a company can’t either absorb it or make it work within the confines of their trajectory, they will do their best to see to it that no one benefits from it. They would rather the industry, the market, and the world be 10 times worse off with them as major established players than 10 times better off without them or their influence on the market.

Some demonstrations of this attitude reach comedic heights, like a few years ago when it was reported that in one fiscal year Apple and Google had more money tied up in legal fees than research and development. It’s no secret why this kind of thing happens. As a private corporate interest, would you rather let other players innovate and compete as they please — something everyone in the market would benefit from in terms of progress and eventual price points — or would you rather tie up other people with intellectual property claims to hinder their innovation in favor of your own interest? It’s important to not let the marketing and branding of a certain company’s “attitude” and “culture” of innovation distract from this fact.

In many ways, businesses are enemies of the free market. Their goal is to maximize revenue and minimize costs. The smaller they are, the more free-market principles work toward that aim. The bigger they are, the less they do. The reality is at some point companies lose more than they gain by operating in a free market system, and will naturally come to oppose it.

Yes, it’s important to talk about the government, red tape, taxes, the basics of crony-capitalism and privilege, and the state’s share of the blame for burdening entrepreneurs, great ideas, and the market. However, we’re doing a disservice to ourselves as liberals and to anyone else that’s listening to us if we don’t also bring forward deserved criticisms against concentrated power in all of its forms, and outline the costs to the public, as seriously as we do when talking about the government. This includes what large corporate entities do to ensure that their place in the grand scheme of things remains secure and the incentives at play that prod companies to see to it that extremely limited disruption in the market happens unless it directly benefits them — and they don’t always need to use the government for that either.

When it comes to self-interest and incentives, we must be logically consistent. It’s not correct to shoulder the blame for all the market’s woes on the state if the reality is that there are other structures of power at play that willingly contribute to those woes. Trying to frame the state as the sole corrupting force in a world of well-meaning, innovative corporations is naïve at best/delusional at worst. If we can’t count on benevolent, economics-savvy, market-disruption-loving politicians, we also can’t count on large corporate systems stocked with business people of that breed either.

Free marketeers need to stop themselves from the temptation to think and speak too highly of private power and business and remind themselves that it’s really a healthy framework of market incentives that encourages the results they like, and the integrity of that framework is what should be defended — especially since it’s under attack from more than one side.

Be pro-market, not pro-business.

In many ways, the major enemy of markets are the business communities. In many ways, the real function of government ought to be to keep down the power of anybody from becoming excessive — including the business community.

Milton Friedman

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About the Author: Alex Aragona

Alex is a business and marketing professional residing in Canada. He also hosts The Curious Task podcast. He is the founder of Speaking Liberally and a contributor.

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