by Naim, Moises
What does all this have to do with power? Everything. It is not enough to control large, power-endowing resources like money, weapons, or followers. Such resources are a necessary precondition of power; but without an effective way of managing them, the power they create is less effective, more transient, or both. Weber’s central message was that without a reliable, well-functioning organization, or, to use his term, without a bureaucracy, power could not be effectively wielded.
If Weber helped us understand the rationale and workings of bureaucracy in the exercise of power, the British economist Ronald Coase helped us understand the economic advantages that they conferred on companies. In 1937, Coase produced a conceptual breakthrough that explained why large organizations were not just rational according to a certain theory of profit-maximizing behavior but, indeed, often proved more efficient than the alternatives. It was no coincidence that, while still an undergraduate, in 1931–1932, Coase carried out the research for his seminal paper, “The Nature of the Firm,” in the United States. Earlier he had flirted with socialism, and he became intrigued by the similarities in organization between American and Soviet firms and, in particular, by the question of why large industry, where power was highly centralized, had emerged on both sides of the ideological divide.20
Coase’s explanation—which would help earn him the Nobel Prize in economics decades later—was both simple and revolutionary. He observed that modern firms faced numerous costs that were lower when the firm brought the functions in-house than they would have been when dealing at arms’ length with another enterprise. Included among such costs are those for drafting and enforcing sales contracts—expenses that Coase initially called “marketing costs” and later redubbed “transaction costs.” Specifically, transaction costs helped explain why some firms grew by vertically integrating—that is, by buying their suppliers or distributors—while others didn’t. Large oil producers, for example, prefer to own the refineries where their oil is processed, as this tends to be less risky and more efficient than relying on a commercial relationship with independent refiners whose actions the oil companies can’t control. In contrast, a large garment retailer like Zara and computer companies like Apple or Dell are less compelled to own the manufacturing facilities that make their products. They subcontract (“outsource”) the manufacturing to another firm and concentrate on the technology, design, and marketing and retailing of their products. The propensity to operate through a vertically integrated firm is driven by the structure of the market of buyers and sellers active in the different stages of the industry and by the kinds of investments needed to enter the business. In short, transaction costs determine the contours, growth patterns, and, ultimately, the very nature of firms.21 Although Coase’s insight became an important underpinning of economics in general, its main initial impact was in the field of industrial organization, which focuses on factors that stimulate or hinder competition among firms.
The idea that transaction costs determine the size and even the nature of an organization can be applied to many other fields beyond industry to explain why not just modern corporations but also government agencies, armies, and churches became large and centralized. In all such cases, it has been rational and efficient to do so. High transaction costs create strong incentives to bring critical activities controlled by others inside the organization, thereby growing it. And by the same token, the more the pattern of transaction costs made it rational for organizations to grow large by integrating vertically, the more daunting an obstacle this growth represented for new rivals trying to gain a foothold. It is harder for a new rival to challenge an existing company that also controls the main source of raw materials, for example, or has internalized the main distribution channels or retail chain. The same applies to situations in which one army has exclusive control over the procurement of its weapons and technology and a second army is forced to depend on another nation’s arms industry. Thus, the transaction costs that some organizations are able to minimize by “internalizing” or controlling the provider or the distributors constitute one more barrier to potential new rivals and a barrier to gaining power more generally—and scale boosted by vertical integration provides a high protective barrier for incumbents inasmuch as newer, smaller players have a lesser chance to compete and succeed. It is worth noting that until the 1980s many governments were tempted to “integrate” vertically and own and operate airlines, smelters, cement factories, and banks. Indeed, governments’ quest for efficiency and autonomy often masked other motivations such as public sector employment creation and opportunities for patronage, corruption, regional development, and so on.
Though not commonly thought of as such, transaction costs are indeed determinants of an organization’s size and, often, of its power. And as discussed below, since the nature of transaction costs is changing and their impact is dwindling, the barriers that used to shield the powerful from their challengers are falling. And this is not happening only in the realm of business competition.
THE MYTH OF THE POWER ELITE?
In process and outcome, World War II reinforced the equation of size with power. The US “arsenal of democracy” that fueled the Allied victory nearly doubled the size of the US economy over the course of the war and nurtured corporate giants that were paragons of mass production. And who were the ultimate winners of this conflict but the United States and the USSR—countries that spanned whole continents, not island-nations like Japan or even Great Britain, beggared by the costs of the fighting into second-class status. At war’s end, pent-up American consumer demand, supported by wartime savings and new, generous government programs, allowed big companies to grow even bigger. More broadly and more ominously, as the Good War segued into what John F. Kennedy would call the “long, twilight struggle,” the contest for mastery between the capitalist West and the communist East fed huge security establishments on both sides of the Cold War divide, each guided by its own ideology, with bureaucratic imperatives stretching far beyond the purely military into science, education, and culture. As the historian Derek Leebaert put it in The Fifty-Year Wound, his wide-ranging tally of the costs of the Cold War, “Emergency played into the penchant for bigness that was a child of earlier industrialization, of the radical insecurity that the Depression inflicted on small organizations, and of the cooperative giantism of World War II: big unions, big corporations, and big government, with little concern for the market.”22
In short order, the symbolism of size and scale—the idea that the ventures most likely to succeed and endure were in some way the most monumental—passed into popular imagery virtually everywhere. As the world’s largest office building (as measured by floor area), the Pentagon, built during World War II, from 1941 to 1943, was a perfect symbol of this principle during the 1950s and ’60s. So, too, was the famed buttoned-down culture of IBM, whose attributes of hierarchy and convention were placed in support of the goal of advanced engineering. In 1955, General Motors, one of the early adopters and paradigmatic examples of the M-form management structure, became the first US corporation to net more than $1 billion in a year as well as the largest corporation in the United States, in terms of its revenues as a proportion of gross domestic product (roughly 3 percent); it employed more than five hundred thousand workers in the United States alone, offered consumers eighty-five different models to choose from, and sold about 5 million cars and trucks.23 Mass-production principles were also being expanded to industries such as homebuilding by businessmen like Bill Levitt, a former Navy construction worker who pioneered suburban development by building affordable middle-class homes by the thousands.
But the apparent triumph of the behemoth organizations that produced this Cold War cornucopia of goods and services also stirred worries. Architecture critics like Lewis Mumford complained that the new Levittowns were monotonous and the houses too spread out to create a real community. Irving Howe, the literary and social commentator, decried the postwar years as the “Age of Conformity,” and in 19
50 the sociologist David Riesman bemoaned the loss of individualism under institutional pressure in his influential book The Lonely Crowd.24
And these were not the only concerns raised. As large organizations took hold in every area, apparently cementing their grip on various facets of human life, social critics worried that the hierarchies they established would become permanent, separating an elite that controlled politics and business from everyone else, and concentrating power in a ruling group or class at the same time that the implacable logic of size caused organizations to grow larger and larger, swallowing each other up if need be through mergers or sharing the wealth in cartels and combines. For some, the expansion of government programs from military to social spending, and the growth of the bureaucracies tasked with administering them—again, not just in left or socialist societies—was a similarly worrying trend. Others viewed the concentration of power as chiefly a product of the capitalist economy.
In one way or another, these fears echoed the beliefs of Karl Marx and Friedrich Engels, who argued in The Communist Manifesto (1848) that governments in capitalist society were political extensions of the interests of business owners. “The executive of the state,” they wrote, was “nothing more than a committee for managing the affairs of the whole bourgeoisie.”25 Over the following decades, scores of influential followers would advance various arguments that had in common a core theme. Marxists argued that the expansion of capitalism brought with it the reinforcement of class divisions and, through imperialism and the spread of finance capital around the world, the replication of these divisions both within countries and between them.
But the rise of large hierarchical organizations focused a very particular critique that owed a debt to Weber, for its focus, and to Marx, for its argument. In 1951, the Columbia University sociologist C. Wright Mills published a study titled White Collar: The American Middle Classes.26 Like Ronald Coase, Mills was fascinated by the rise of large managerial corporations. He argued that these firms, in their pursuit of scale and efficiency, had created a vast tier of workers who carried out repetitive, mechanistic tasks that stifled their imagination and, ultimately, their ability to fully participate in society. In short, Mills argued, the typical corporate worker was alienated. For many, that alienation was captured in the warning printed on the Hollerith punch cards that, thanks to IBM and other data processing firms, became ubiquitous symbols and agents of bureaucratized life during the 1950s and 1960s: “Do Not Fold, Spindle, or Mutilate.”
In 1956 Mills further developed this argument in his most famous work, The Power Elite. Here, he identified the ways in which, according to him, power in the United States clustered in the hands of a ruling “caste” that dominated economic, industrial, and political affairs. Yes, Mills argued, American political life was democratic and pluralistic; yet despite this, the concentration of political and economic power put the elite in a stronger position than ever before to retain its supremacy.27 These ideas made Mills a social critic, but his views were by no means radical for their time. President Dwight Eisenhower would make a similar point only five years later in his farewell speech to the nation, in which he warned against unchecked power and the “undue influence” of the “military-industrial complex.”28
During the 1960s, the suspicion that modern economic organizations inherently produced inequalities and a permanent elite spread further among sociologists and psychologists. In 1967, a scholar at the University of California at Santa Cruz, G. William Domhoff, published a book titled Who Rules America? In it, Domhoff used what he called the “Four Networks” theory to show that American life was controlled by the owners and top managers of large corporations. Domhoff has continued to update the book in new editions, weaving in everything from the Vietnam War to the election of Barack Obama to make his case.29
The trope of an entrenched elite or establishment has itself become a foil for those who want to join its ranks, whether politicians who run against Washington or upstart firms seeking to dethrone a larger, more powerful rival. An example of the latter traces back to 1984, when Apple made advertising history with its iconic commercial introducing the Macintosh personal computer: in a tableaux inspired by George Orwell’s dystopic novel, a woman pursued by a phalanx of jackbooted police hurls a sledgehammer at a huge screen broadcasting a Big Brotheresque message to row upon row of benumbed automatons, setting them free. The ad was not-so-subtly aimed at IBM, Apple’s then-dominant competitor in the personal computer market. Of course, today IBM is out of the PC market, and its market capitalization value is dwarfed by that of Apple, which, in turn, is being criticized for maintaining its own Big Brotheresque grip on its operating system, hardware, stores, and consumer experience. Google, incorporated in 1998 with the informal hacker ethos and corporate motto of “Don’t Be Evil,” is now one of the world’s biggest corporations (as measured by market capitalization) and is seen in some quarters as akin to the Antichrist, single-handedly destroying newspapers, crushing rivals, and violating consumer privacy.
Increasing wealth and income inequality in the United States in the last twenty years, along with the global trend toward massive CEO pay packages and banker bonuses, have fed the perception that those who get to the top stay there, remote and above the cares that afflict lesser mortals. The theorist Christopher Lasch, who died in 1994, called the policies and behaviors in the West that made these trends possible—deregulation and such social choices as private schooling, private security, and so on—the “revolt of the elites.” He described this phenomenon as a kind of opting-out of the social system by those wealthy enough to be able to do so. “Have they canceled their allegiance to America?” Lasch asked in a cover essay in Harper’s.30
The idea of a “revolt of the elites” has resonated. Despite fuzziness as to what exactly defines the elite (Wealth? Status measured some other way? Particular professions?), the notion of a resurgent elite further strengthening its hold on government is very much alive. In 2008, days after the massive US bank bailout was announced and a few short weeks after the collapse of Lehman Brothers and the rescue of the insurance giant American International Group (AIG), the critic Naomi Klein described the era as “a revolt of the elites . . . and an incredibly successful one.” She argued that both the long neglect of financial regulation and the sudden bailout reflected elite control over policy. And she suggested that a common trend in the concentration of power linked together major countries with seemingly opposed political and economic systems. “I see a drift toward authoritarian capitalism that is shared in [the United States], Russia and China,” Klein told an audience in New York. “Not to say that we’re all at the same stage—but I see a trend toward a very disturbing mix of big corporate power and big state power cooperating in the interests of the elites.”31 A concomitant belief is that globalization has merely increased the concentration of power in individual industries and economic sectors, with market leaders cementing their hold on the top spots.
Events of recent years have revived the concern that power in many or most countries is ultimately held by an oligarchy—a small number of top players that enjoy disproportionate control over wealth and resources and whose interests are intimately woven, whether in blunt or subtle ways, into government policy. Simon Johnson, an MIT professor and former chief economist of the International Monetary Fund, drew on his experience to argue that everywhere the fund was called on to intervene, it found oligarchies seeking to shelter themselves and off-load the burdens of reform onto other constituencies (or foreign lenders). Oligarchies are a standard feature in emerging markets, Johnson asserted in a 2009 article in The Atlantic, but not just there. In fact, he argued, the United States set the lead here, too: “Just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.” He pointed to lobbying, financial deregulation, and the revolving door between Wall Street and Washington and argued in favor of a “breaking of the old elite.”32
Such analyses info
rm a more general belief that is so pervasive as to have become almost a collective instinct: “Power and wealth tend to concentrate. The rich will become richer and the poor will stay poor.” This rendering of the idea is something of a caricature, yet it is the default assumption underpinning conversations in parliaments, at millions of household dinner tables, in university halls and at after-work gatherings of friends, in erudite books, and in popular TV series. Even among freemarket devotees, it is common to find echoes of the Marxist idea that power and wealth tend to concentrate. In the last decade or two, media coverage of the extravagant wealth of Russian oligarchs, oil sheiks, Chinese billionaires, and American hedge-fund managers and Internet entrepreneurs has been enthusiastically provided and consumed. And whenever these tycoons intervene in politics—as with Silvio Berlusconi in Italy, Thaksin Shinawatra in Thailand, or Rupert Murdoch and George Soros globally—or Bill Gates and others try to shape public policies in the United States and around the world, the public is again reminded that money and power reinforce each other, creating an almost impenetrable barrier for rivals.