It has been argued that Adam Smith articulated two essential attributes in the economic system that was not yet fully born in his time:
1. A society of competitive profit-seeking individuals can assure its orderly material provisioning through the self-regulating market system.
2. Such a society tends to accumulate capital, and in doing so enhances its productivity and wealth.
The market, according to Smith, was its own guardian. If anyone’s prices, wages, or profits strayed from levels that are set for everyone, the force of competition would drive them back. Each firm in seeking to expand is naturally led to introduce more machinery as a way of improving the productivity of its workers. Thereby the market system becomes an immense force for the accumulation of capital, mainly in the form of machinery and equipment.
One must therefore raise the issue whether the constant accumulation of capital that emerges from competition does not inevitably lead to the emergence of monopolies.
In all fairness to Adam Smith, the conditions in Britain did approach the model of natural equilibrium he had in mind.
- Business was competitive
- Prices rose and fell as demand ebbed and rose
- Prices invoked changes in occupation and output
This form of historical referencing should not deter us from making a trenchant critique of his fundamental categories and concepts. Smith’s system of thought contained within it elements that contradicted his own premises
Self- Interest- competition- profit maximization- saving and investment into existing capital to and growing concentration of assets to gain an advantage over competitors (in order to gain economies of scale in production) to increase profit –leading to a system of accumulation for accumulation’s sake- and large businesses.
In 1900 there were about 8 million independent enterprises, including 5.7 million farms. By the early 1990s, the number of proprietorships had grown to over 14 million including 2.1 million farms. Meanwhile, the labour force itself has more than tripled. Thus as a percentage of
all persons working, the proportion of self-employed has fallen from about 30% in 1900 to around 10% today.
With the decline of the worker has come the rise of the giant firm. In 1901 financier J.P. Morgan created the first billion dollar company when he formed the United States Steel Corporation out of a dozen smaller enterprises. In that year the total capitalization of all corporations valued at more than $1 million was $5 billion. By 1904 it was $20 billion. In 1985 it was about $10 trillion.
Largest Manufacturers’ Share of Assets (%)
1948 1960 1970 1983 1991 (est.)
100 largest corporations 40.2 46.4 48.5 48.3 69.5
200 largest corporations 48.2 56.3 60.4 60.8 88.7
Three mains reasons are associated with the rise of large corporations:
- Economies of scale using technological innovations
- Business concentration as a result of corporate mergers
Mergers have accounted for about 2/5ths of the increase in concentration between 1950 and 1970.
- Concentration is accelerated by the business cycles or crises. Depressions and Recessions plunge many smaller firms into bankruptcy and make it possible for larger, more financially secure firms to buy them up cheaply.