The Corporate Society: Why Do Small Firms Not Oppose Austerity?

The British political economist, Colin Crouch, convincingly argues in his latest book ‘the strange non-death of neoliberalism’ (2010), that we need to move beyond a simplistic and outdated ‘market versus state’ dichotomy, which has afflicted public discourse on the economy since the 20th century, particularly in the USA. Neoliberalism, he argues, and it’s various manifestations in diverse political economies, is not about market competition or consumer choice but increasing the dominance of powerful corporate firms over the market. The economic theories that underpin this policy paradigm are not, as is commonly assumed, about the defence of liberal markets but a defence of powerful corporate interests as a mechanism to increase wealth in society. The following article builds upon this notion by relating business interests to the current policy response to the crisis.

Most social scientists would accept that ‘actually existing capitalist economies’ do not conform to the market theories taught in economic, business and public policy departments across Western universities. In fact, most of these economic-legal theories, particularly those who follow the Chicago school tradition in economics, or the Virginia public choice tradition in political science, would admit that the policies they prescribe to governments are less about increasing market competition or consumer sovereignty but policies to maximise collective economic welfare through substituting the state for the private contractual corporation. They argue that maximising economic welfare is best achieved through corporate takeovers, amalgamations, and competition laws that favour private shareholders not individual consumers. The argument, and most strongly reflected in US anti-trust laws, is that as long as economic wealth is created by private firms, and steadily increases over time, it will enhance consumer welfare. How this economic wealth is distributed is of no concern to these economic-legal theories. The objective is to keep democracy and government out, or at least reduce it to a regulatory agency defending market principles.

We can observe the dominance of corporate firms in a whole variety of business sectors. In food there has been a tendency in most countries toward what I call ‘super-marketization’, (reflected in the dominance of Tesco’s in Ireland, or Albert Hein in the Netherlands,). This leads to price competition among local producers with the final outcome that small producers have to sell their goods in expensive farmers markets. The dominance and danger of ‘too big to fail’ banks such as AIB, Dexia, Deutsche Bank and ING, in the European finance market, have destroyed many small businesses, not to mention sovereign states, throughout the Eurozone economy. The educational sector is not immune either. In academic publishing, which is the primary mechanism for academic professionals to share knowledge, almost 80 percent of publications are controlled by one company. The same processes exist in book markets, leading to super-bookstores at the expense of independent ones. In manufacturing, whether it is steel, pharmaceuticals, engineering, energy or clothes production, the tendency toward fewer but more centralised and hierarchical firms is clearly evident (think about the industrial factory belts along the Chinese coast.). In IT, Microsoft has successfully defended anti-trust laws, arguing that their predatory practices eat out inefficiencies (i.e. smaller firms) and improves overall economic efficiency in the market. Private healthcare firms have done likewise (the industrial-health insurance complex successfully changed Obamacare in the USA to one based on private insurance rather than national public provision).

The general point is that markets are about the dominance of large private corporations yet most economic theories still work from the assumption of isolated private transactions in a competitive market. Prices cannot be manipulated in an assumed private competitive market because firms are isolated contractual agents. They are diffuse networks rather than political or organisational actors. Firms, when they are taken seriously, are assumed to be incapable of influencing political outcomes because they are too small and lacking collective capacity. This is the Irish American fairy-tale of hard working entrepreneurs producing local products in a free-market, earning enough to remain middle class, but never too rich to be perceived as out of touch with the average Joe. One cannot criticise business interests because the romanticised entrepreneur is equated with absolute virtue. In actually existing neoliberalism, the opposite occurs. Markets tend toward oligarchies. Large corporate firms, particularly in the USA, fund cash-hungry political parties and spend colossal sums of money lobbying parliamentarians to advance their interests. Pepper Culpepper (2010), for example, has shown when policy problems are assumed to have low political salience, and require technical or regulatory solutions; it increases the space for financial and corporate interests to prevail. Fiscal policy, primarily taxation, is a clear example of this. In most industrial economies, taxes have been reformed to enhance corporate profit, increase executive remuneration, which concides with a general trends to enhance managerial control over internal markets (even within the public service).

This increased autonomy provides the space for the giant firm to weaken competition, shape and manipulate markets, particularly when the legal objective is the maximisation of shareholder value. The analogy of the vampire squid, often used to describe the behaviour of Goldman Sachs, in spreading its corporate tentacles in the process of influencing public policy making, is particularly salient here. The conflict between the principle of increasing profit for shareholders and maximising consumer interests (free market advocates would have us believe that private firms operate in the interest of consumers by enhancing the incentives for shareholders to increase profit) was brutally exposed after the global financial crisis. Maximising shareholder profit in private banking increased consumer happiness in the short-run through the provision of cheap credit but the costs entailed by taxpayers to pay for this risk has crippled western economies.

The corporate society, which narrowly focuses on maximising what are perceived to be rational choices in the short-run, has emerged unscathed from the financial crisis. This is something that is baffling political scientists and documentary-makers alike. The response has not been to democratise the market but to enhance it through structural reforms of the welfare state. Public investments aimed at the collective interest of society such as education, healthcare, social security, pensions, childcare, and research infrastructure are being decimated to reduce the debt-GDP ratio incurred by the state after it saved the private financial market from its own follies. Corporate firms re-grouped and established a narrative, with support from many academics and policy think-tanks, that it is the bloated public sector and the democratic welfare state that requires de-centralisation, cuts in pay and downsizing. Governments, it is argued, must implement austerity to reduce nominal fiscal deficits, preferably to 3 percent of GDP, regardless of the impact this is having on employment and inequality. Some economists, such as Paul Krugman, would have us believe that if governments just took different technical advice, and implemented Keynesian oriented policies, the solution would be resolved. This downplays the importance of the material interests of corporate firms in implementing these policies.

The corporate takeover of the private market across Europe is ironically defended on the basis of competition policy. It is assumed that large private firms who take over smaller ones optimise consumer welfare, and push the price protectionist oriented companies out of the market. The shift toward an Anglophone shareholder model of capitalist development has changed the incentive structure of private companies in every European economy. The traditional Mittlestand model of German enterprise certainly still exists, and provides an interesting test case to illustrate the importance of long term investment in skills, training, and education for small firms who want to increase their exports. But the general process of institutional change in the German political economy is toward increased ‘super-marketization’. Large companies in the automobile, engineering and chemical sectors have easy access to the big banks for credit, and increasingly opt out of the collectivist industrial relations regime. As shown by Wolfgang Streeck (2009) large companies can opt out of the social market economy, and are increasingly liberalising and manipulating it in their interest.

The collapse of local indigenous companies is particularly obvious in cities such as Dublin, where local co-operatives and businesses have effectively disappeared. This is not to deny the importance of a thriving music and creative industry clustered in certain districts of the city. But, in general, it is not unusual to hear Irish people in Toulouse, Paris, Rome, Amsterdam and Firenze romanticising ‘the small local shops’, with their ‘home grown’ products, and asking why has Ireland not been able to maintain this tradition? The answer is that Ireland has opened itself to the corporate takeover of society with open arms. It did not happen by chance, it was the outcome of political and economic choices. The biggest losers are citizens and consumers, the biggest winners are large private companies. In the aftermath of the crisis, there was an opportunity to re-think the patchwork neoliberal approach to market managerialism in Ireland. It has not happened because the underlying business coalition supporting the Irish policy paradigm remains intact. There is no alternative political coalition.

But this begs a further question, and one that I am particularly interested in at the moment, which is why small and medium-sized enterprises (and employer groups) are not openly protesting against the European policy of coordinated austerity, and the dominance of corporate finance over economic policy? The IMF and EU commission have openly admitted that they under-estimated the multiplier effect of austerity on economic growth. It is beyond empirical dispute that the aggressive fiscal consolidation strategies in Ireland, Greece, Spain, Italy and Portugal are not leading to Ricardian equivalence in output but depressing domestic demand, not to mention the distributional implications this entails and the long term fiscal consequences for the democratic state. These international agencies, with domestic support from Irish business interests, continue to prescribe the harsh medicine because they believe the nation-state must become a debt collection agency on behalf of financial markets, in order to re-gain access to those same markets. It is understandable why large finance firms support this; it is designed in their interest. But why would a small enterprise support this strategy? The massive reduction in public expenditure, in addition to decreased incomes and increased taxes, depresses domestic growth with inevitable consequences for small businesses and local co-operatives. Over 90 percent of employment in Ireland occurs in what the Eurostat describe as the ‘small business’ sector. Small businesses are much more reliant on bank credit to maintain overhead costs (such as monthly wages). When this credit line dries up, they go bust. According to a recent EU report, Ireland is now second only to the ravaged Greek economy when it comes to access to funding for small and medium-sized firms.

This is where it gets interesting. In Greece, Italy, Spain and Portugal, small and medium sized enterprises are actively rejecting the policy of austerity in their countries. In Spain, the employer association representing small and medium sized enterprises is actively supporting the European Trade Union Confederation (ETUC’s) call for a general strike on November 14th. In Greece, small businesses tend to align with the newly emergent leftist protest groups, against the corrupt collusion practices between large firms and the mainstream political parties. In Italy, many of the small firms associations oppose the competition policies of Mario Monti and the EU, not because they are protectionist, but because they don’t want to enter global markets that incentivises a maximum and immediate rate of profit. Many of these local co-operatives, particularly in olive, cheese and wine production are content with making a 10 percent profit margin. There is an olive oil festival in Firenze at the moment, and the producers openly celebrate their traditional handcraft practices, low profits, cooperative production and contribution to environmental sustainability. Similar preferences, can, of course, be found in all European countries. But the collective impact in Italy is that small businesses do not align with government policies or parties that are perceived to represent the interest of big corporations or implement policies that damage the domestic market. All of this leads me to the hypotheses that small and medium sized enterprises, and their collective representatives, should favour a macro-economic paradigm that is highly critical of austerity. This appears to hold for most countries. But not Ireland.

Why are the Chamber of Commerce, the Small Firms Association (SFA), and the Irish Small and Medium Enterprise association (ISME) actively supporting an economic strategy which drives their members out of business? It is not at all in their interest to support a coordinated strategy that leads to a contraction of domestic demand and a decrease in credit provision. The strategy of all these lobby groups since the onset of the crisis has been twofold: push for the de-regulation of labour market institutions and structural downsizing of the public sector. This is despite the fact that Ireland has the most flexible labour market in the EU15 after the UK, the second easiest place to do business in the EU, and has one of the mallest public sector’s in the EU. There has been no focus on the macro-economic implication of the government and EU’s strategy for the domestic economy but an argument that the government is not cutting expenditure fast enough.

This begs the question whether these groups really serve the interest of small businesses, co-operatives and consumers in Irish society. If the policies they advocate go against the self-interest of their members, then there are only two other possible explanations for their strategy: interests and ideas. It can be argued that they have uncritically internalized (much like a lot of Irish academia and policy-makers) the interests and ideas of the neoliberal paradigm (i.e the assumption of market driven, but in reality, corporate driven politics). In the policy response to the crisis, particularly in relation to generating resources, US multinationals are conspicuous by their absence. This is despite the fact that everyone knows they have significant influence and veto power over the economic and employment policies of the state. The perceived threat of exit (and therefore capital flight) is sufficient to embed a consensus among all the main political parties, state departments and policy think-tanks that Irelands low corporate tax regime is untouchable. Neoliberalism, and low taxes, it is quietly agreed, is a comparative advantage.

The pluralist nature of the lobbying process, and the close-knit boardroom networks between state agencies, regulatory bodies and the media, provides easy opportunities for business interests to prevail in government departments. When it emerged that the Prime Ministers Department chairs a permanent committee representing the interests of the Irish Financial Services Centre (IFSC) in government buildings, and that this committee were central to the Irish governments policy of opposing the European Financial Transaction Tax, external observers were aghast. In Ireland, the attitude was one of indifference. This, I think, reflects a general acceptance in Ireland that politics is about market managerialism not democratic representation. The Department of Jobs, Enterprise and Innovation, a central administrative agency in the state, tasked with implementing competition law and industrial development has an open door policy to employer representatives. It is no surprise that since the onset of the crisis, it is employment regulation that has been the locus of reform. Challenging the dominance of powerful corporations in manipulating the market has not received much political importance. The focus is on downsizing the public sector and implementing structural reforms. The ‘state does not create jobs’, we are constantly told, it supplies the market with the necessary conditions for employment growth. But the contradiction between strategies that depresses economic growth in the domestic economy whilst promoting employment in small and medium sized firms is largely ignored.

The dominance of corporate finance and the contradictory strategy of those who promote it can be traced to the power of ideas and the interests of those who defend them. This consensus, in Ireland, can only last as long as the political coalition that supports it. For this to change would require recognition by small businesses, employers and co-operatives that maybe they are not being served by those who claim to represent them: IBEC, the SFA, ISME and the FG-Lab government.

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