Sunday, 5 June 2016

Corporate power? (updated)

In the past I have written,
Many commentators, even today, argue that the economy and the nation are controlled by powerful, large, very long lived corporations. John Kenneth Galbraith is perhaps the most (in)famous economist who argued along these lines. He argued that in the industrial sectors of the economy, which are composed of the largest corporations - think S&P 500 companies, the principal function of market relations is, not to constrain the power of the corporate behemoths, but to serve as an instrument for the implementation of their power. Moreover, the power of these corporations extends into commercial culture and politics, allowing them to exercise considerable influence upon popular social attitudes and value judgements. That this power is exercised in the shortsighted interest of expanding commodity production and the status of the few - the 1% - is, in Galbraith's view, both inconsistent with democracy and a barrier to achieving the quality of life that the "new industrial state" with its affluence could provide to the many. Galbraith argued that we find ourselves living in a structured state controlled by these large and all powerful corporations. Control over demand and consumers is exercised via the use of advertising which creates a never ending consumer "need" for products, where no such "need" had existed before. In addition, as Princeton University Press said in its advertising for a new edition of Galbraith's "The New Industrial State",
The goal of these companies is not the betterment of society, but immortality through an uninterrupted stream of earnings.
I have always thought that an implication of these ideas is that large firms, e.g. those in the S&P 500, would be very long lived. After all given the amount of control that these firms apparently have over their markets and the economy at large its hard to see how they could ever go bankrupt or be taken over. They are, after all, able to ensure "immortality through an uninterrupted stream of earnings." Thus these firms would have a long life.
Part of the idea here is that large corporations have power over markets and their consumers. When "corporate power" get mentioned I sure people think of companies like Microsoft, Google, Coca-Cola, Pepsi, and McDonald’s etc and the control these firms are said to have over their sectors of the economy. One aspect of this power is the control these corporations are claimed to have over their consumers, but if these "powerful" firms produce spectacular failures, then perhaps consumers are not as docile as some would suggest and we overestimate the extent of said corporate "power".

At this blog Ordinary Business Art Carden looks at the power of corporations by asking, Do they produce spectacular failures?

Carden writes,
I suspect you’re not reading this on your Zune.

Why not? Because the Zune failed. That the Zune failed in spite of backing by one of the world’s most powerful companies should give us pause when we think about “corporate power.” Products succeed and fail, ultimately, because consumers vote for them or against them with their hard-earned dollars. The Zune is just one of many products consumers have voted out of the marketplace over the objections of corporate boards of directors.

Consider what happened with soft drinks in the 1980s and 1990s. In the 1980s, Coca-Cola introduced New Coke, which they had reformulated based on extensive market research. It was one of the greatest marketing disasters in American business history, and the company corrected its mistake by reintroducing the old formula as Coca-Cola Classic.

In the 1980s, Pepsi introduced Crystal Pepsi. I was sort of captivated by it: a clear cola that totally wasn’t like Slice or Sprite or now Sierra Mist? Mind-blowing. Now all that remains of Crystal Pepsi is a suite of memories set to the tune of Van Halen’s “Right Now.”

There’s a McDonald’s song that starts “Big Mac, McDLT, a Quarter Pounder with some Cheese…” McDLT? Come again? If you remember getting one of these, they came in a two-sided container with the lettuce and tomato—the “LT”—on their own side, presumably for freshness. Now again all that remains of the McDLT is a memory and jingle—and probably some vintage containers and toys you can get on eBay.
Also the older of you may remember the infamous Ford Edsel. Not a glowing recommendation for corporate power.

If we really do live in the Galbraithian world of the all-powerful corporation how can failures such as these occur. The corporation with power overs its markets and consumers surely can get consumers to buy their products no matter what. Isn't this the very definition and purpose of market power?

And yet we see many examples of product failures, situations where consumers determined the markets outcome rather than the corporation. Perhaps, therefore, we need to be more skeptical of those who tell us that corporations have overwhelming corporate "power".

Update: Tim Worstall adds Microsoft's dismal record with Nokia to the list of failure for supposedly all powerful companies.

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