Market Structure and Political Law
Zephyr Teachout and Lina Khan
Table of Contents
1. Overt Political Investments .................................................................1
2. Structural Dependencies and TBTF....................................................1
3. Regulation.............................................................................................1
4. Feudal Politics ......................................................................................1
5. Taxing....................................................................................................1
Infinite Guises ..........................................................................................1
Dynamic Interactions Between Factors .................................................1
Incidental Political Impacts .....................................................................1
Structural Intervention ............................................................... 1
Introduction
Market structure is deeply political. One reason is that all markets are governed
by law.1 In other words, the structure of a market at any given time is the product of
political decisions – made and not-made – about how players in that market will be
allowed to user their power. Another reason is that market structure affects us as citizens.
It inscribes what we can and cannot do, and hence acts as a form of governance. Our lives
are governed by the dominant economic players to whom we are subject. Corporate size
and concentration undercut democratic self-governance by imposing on citizens a form of
1
Karl Polanyi, The Great Transformation, Beacon Press; 2 edition (March
28, 2001).
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Market Structure and Political Law
private governance unaccountable to the public. In competitive markets, the freedom to
choose among buyers or sellers limits the power of any one actor. In highly concentrated
markets, meanwhile, a few dominant companies can assume enough power to restrain
and even control the actions of others.
One of the most powerful American democratic ideas is that legal rules--like
those found in antitrust, or the public purpose doctrine in the FCC--can divest
concentrated economic power when it threatens to overpower the political system. This
premise, shared by Thomas Jefferson, Woodrow Wilson, and Louis Brandeis, is based on
the understanding that decentralized economic power and democratic self-government
are deeply intertwined. Monopolization or oligarchy in one realm (political or economic)
leads to monopolization and oligarchy in the other (political or economic). Unfortunately,
the idea has fallen into desuetude in law as legal scholarship has built up a division
between the study of economic and political power. The separation constitutes an
unnecessary--and arguably ideological--division that has undermined the capacity of both
economic and political laws to be as effective as they can be. Therefore, the regulation of
one must be understood in terms of its impacts on the other. Decentralization economic
power in most areas of commerce is an essential underpinning of political freedom: a
society with strong voting rights, speech protections, and fair elections is not
incompatible with an oligarchic economy. For law this means taht antitrust and other deconcentration rules should be understood not solely as part of corporate law, but also as
part of political law. In this light, a revival of antitrust policy be one of the most effective
forms of improving democratic self-government in ways that are typically associated
with campaign finance reform.
The goal of this paper is not to prove that we live in an increasingly oligarchic and
monopolist economy, but to explain why market structure is innately political. It provides
a taxonomy of the ways in which concentrated market structure enacts a form of private
governance that threatens democratic self-government. Not all monopolists engage in all
of these levers of power--that is not the point. The purpose is to create an integrated
vantage point through which to see the political effects of monopolization. Our goal is to
expand our understanding of how corporate power perverts the political process, beyond
money-in-politics, and to argue that those concerned with preserving authentic
democratic self-governance also focus their efforts on restoring antitrust policy.
We also hope to be part of opening up a new frontier in the debate about the scope
of antitrust, joining a growing body of scholarship in this area. We join and build on
scholars like Maurice Stucke, Rudy Peritz, Tom Horton, working on expanding a field
which has for decades essentially addressed itself to consumer welfare. We also,
however, build on scholars in fields that aren’t traditionally thought of as “competition
policy,” like Simon Johnson and Susan Crawford. Several other scholars have thoroughly
explored the history of political antitrust, and explained why the modern “efficiency and
consumer welfare” model of antitrust is “bad history, bad policy, and bad law.”2
We open by documenting the connections between size and political power, and
explaining why more concentrated companies will be more likely to purchase political
power, more likely to spend greater percentages of their assets on the purchase of
political power, and are likely to be able to get more political power for each dollar spent.
2
Robert Pitofsky, The Political Content of Antitrust, 127 U. PENN. L. REV. 4 (1979).
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Market Structure and Political Law
First, the amount of corporate money spent on influencing political outputs would
likely be less in a less concentrated economy, because of the size-related incentives to
spend money on political power. Second, the money spent by corporate teams would be
more likely to be horizontal—money spent on attempting to oust a rival—because of the
intensified competition that exists in more broken up regimes. Third, the range of
political visions expressed in political expenditures will likely be greater with more and
less concentrated companies. More parts of the country will be represented, and more
executives’ political ideas will be represented. Moreover, more competition would likely
mean lower profits and lower CEO pay; which is less cash available to the executives.
Equally importantly, larger companies in uncompetitive industries will be more
able and likely to impose private forms of governance over citizens in ways that enclose
them. The political implications of monopoly threaten democratic self-government in
ways that also go unaddressed by campaign finance rules. The ability of citizens to
govern their own lives is endangered in an economy dominated by a handful of big
companies. Absent competition, companies exert power over citizens in explicit and
implicit ways, all of which constrain their freedom of action and undercut their political
agency. This power manifests in a variety of ways, and its character and form vary
depending on the particular market structure and specific economic arrangements. In each
case, though, the power is born of size and dominance, and threatens the practice of
democratic self-government
Throughout, we discuss size and concentration. In our minds, they are connected.
Our concern with size is not absolute, but size relative to the total economy, so even size
discussions are discussions about the market role of a company in the market structure of
the larger economy. Moreover, the political power is at its apex when companies are both
large in terms of the economy and play a dominant role in their own markets.
Because of this history, and these forms of power, we argue that corporate market
structure rules should be understood as political rules. The mutual segregation of
corporate law and political theory has undermined each field’s capacity to explain,
understand, and propose solutions. Therefore, scholars and lawmakers ought treat a
certain category of corporations (as defined by structure and size) as political
organizations, and treat the rules governing those corporations as “political rules.”
Our goal is not to sketch out solutions, but create a way of thinking about the
problem. A political economy dominated by large companies, along with economies of
scale in the purchase of political power, is a problem for representative democracy. For
political purposes, an economy dominated by many small businesses is preferable to an
economy populated by large and concentrated industries. This is because excessive
corporate size tends to hurt democratic self-government enables a handful of actors both
to purchase disproportionate political power and to subject citizens to systems of private
governance that become less accountable the bigger and fewer the corporations.
Historical Roots
The idea that companies can act as a form of private government is not new.
“Monopoly” was originally used to describe an exclusive grant of power from the
government to work a particular trade or sell a specific good. In Britain monarchs would
sometimes abuse this power. Dissatisfied with the funds Parliament allocated her, Queen
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Market Structure and Political Law
Elizabeth routinely issued royal monopolies as a revenue-generating scheme. Citizens
protested that these exclusive trade privileges imposed an undue burden on them, in
addition to the burden they already bore paying taxes to Parliament. When paying higher
prices to the royal monopoly they were paying, in essence, a private tax that accrued to
the Queen.3
Thomas Jefferson was openly anti-monopoly because of his fear of the role that
patents played in distorting power in the political marketplace. While the whigs and the
democrat-republicans disagreed on how important monopolies were, even the most
whiggish centralizer assumed that for most industries, a widely distributed array of
producers was necessary. A widely spread economic text book from the 1860s said that
“A general Distribution of Capital is a matter of prime importance. By this is meant such
a condition of things that the capital of a country shall be in many hands rather than few. .
. The great aggregation of capital in the possession of individuals is disadvantageous
because it leads inevitably to despotic assumption.”4 Articles in the Harvard Law Review
and the North American Review condemned the growth of concentrated economic power
as “feudalism” and a “great, unscrupulous, powerful plutocracy.”5 One contemporary
wrote about the “political menace that was resident in these stupendous aggregations of
wealth.”6 The belief that decentralized economic power was essential for (and
inextricable from) political liberty were mainstays view of the day.
The first federal antitrust law, The Sherman Act, was understood at the time in
terms that we now relate to campaign finance laws. When the Sherman Act passed the
U.S. Congress in 1890, Senator John Sherman called it “A bill of rights, a charter of
liberty,” and crowed about its importance in both economic and political terms.7 Senator
Sherman viewed the monopolist as just another form of monarch. On the floor of the
Senate in 1890, he declared, “If we will not endure a king as a political power, we should
not endure a king over the production, transportation, and sale of any of the necessities of
life. If we would not submit to an emperor, we should not submit to an autocrat of trade,
with power to prevent competition and to fix the price of any commodity.”
Law Professor James May’s exploration of the Bill’s intellectual antecedents
shows that for Sherman and the Congressional supporters, economic and political
freedoms were seen as part of a piece. May summarizes the debates around the enactment
of the Sherman Act as indicating a “widespread congressional commitment to the longestablished ideals of economic opportunity, security of property, freedom of exchange,
and political liberty, and considerable hope that antitrust law might prove to be an
effective vehicle for their substantial, simultaneous realization.”8 Or as earlier historians
claimed, the “primary motivation of Congress in enacting the Sherman Act and every
significant amendment was concern about the abusive behavior of economic giants, real
Steven G. Calabresi & Larissa Price, “Monopolies and the Constitution: A History of
Crony Capitalism,” Northwestern University School of Law (2012).
3
4
F. Wayland, THE ELEMENTS OF POLITICAL ECONOMY 177 (1860).
Hudson, Modern Feudalism, 144 NO. AM. REV. 277, 290 (1887); Mickey, Trusts, 22 AM. L.
REV. 538, 549 (1888). We are indebted to John Millon for these quotes. See generally John
Millon, The Sherman Act and the Balance of Power, 61 S. Cal. L. Rev. 1219, 1220 (1988).
6
Andrews, Trusts According to Official Investigations, 3 Q.J. ECON. 117, 150 (1889)
7
21 CONG. REC. 2461 (1890).
8
James May, Antitrust in the Formative Era, 50 OHIO ST. L.J. 257, 288 (1989)
5
4
Market Structure and Political Law
or imagined, and sympathy for their victims, consumers and businessmen deprived of
alternatives and opportunities.” 9 The Act grew out of a long “tradition that aimed to
control political power through decentralization of economic power.”10 This view of the
Sherman Act persisted for several decades. In 1906, President Taft argued that the
Sherman Act had saved the nation from a potential “plutocracy” and described the bill as
a protection of economic and political freedoms.11
This ideology persisted in related legislation of the early 20th century. In 1914,
during the passage of the Federal Trade Commission Act, one Senator explained that “we
must do something to preserve the independence of the man as distinguished from the
power of the corporation; that we must do something to perpetuate the individual
initiative.” Senator Cummins argued against simply adopting the idea that cheaper
commodities were worth a great deal—conceding the point that aggregations of capital
might lead to cheaper goods he argued that “we can purchase cheapness at altogether too
high a price, if it involves the surrender of the individual, the subjugation of a great mass
of people to a single master mind.”
Passed in 1914, the Clayton Act prohibited a corporation from acquiring another
when the acquisition would result in a substantial lessening of competition between the
acquiring and the acquired companies, or tend to create a monopoly in any line of
commerce. The debates around the Clayton Act—again, explored nicely by Professor
May—show the same political cast. The House committee report on the bill argued that
“the concentration of wealth, money, and property in the United States under the control
and in the hands of a few individuals or great corporations has grown to such an
enormous extent” and it must be stopped lest it “threaten the perpetuity of our
institutions.”12 One Congressman explained that “Enterprises with great capital have
deliberately sought not only industrial domination but political supremacy as well.. . .
Great combinations of capital for many years have flaunted their power in the face of the
citizenship, they have forced their corrupt way into politics and government, they have
dictated the making of laws or scorned the laws they did not like, they have prevented the
free and just administration of law.”13 Senator Taft’s 1914 book about the Sherman Act
echoed these themes, arguing that antitrust was essential in fighting the “plutocracy” of
the “great and powerful corporations which had, many of them, intervened in politics and
through use of corrupt machines and bosses threatened us.”14
Ironically, the greatest burst of antitrust enforcement—as distinguished from the
antitrust laws themselves--was accompanied by an effort to tone down the political
content. Thurman Arnold, who brought antitrust and competition policy to the center of
the Roosevelt Administrations’ economic policy, himself downplayed the political
Harlan Blake & William Jones, In Defense of Antitrust, 65 COLUM. L. REV. 377, 385 (1965)
John Millon, The Sherman Act and the Balance of Power, 61 S. CAL. L. REV. 1219,
1220 (1988)
11
The first laws limiting corporate spending on elections appeared in 1907, after a 1904
scandal—Congress said that Corporations could not spend any money in association with a
campaign for Presidency or Congress. In 1910 and 1911, Congress passed bills limiting the
amount that could be contributed to campaigns.
12
H. R. REP. NO. 627, 63d Cong., 2d Sess. 19 (1914).
13
51 CONG. REC. 9086 (1914).
14
Robert Taft, THE ANTI-TRUST ACT AND THE SUPREME COURT (1914).
9
10
5
Market Structure and Political Law
problems of scale and concentration, and focused on the economic harms. Arnold is
widely recognized for giving antitrust laws power and the staffing and commitment
necessary for enforcing the general principle. It is unclear what we should make of
Arnold’s agnosticism about the political impacts of antitrust. On the one hand, one could
see Arnold as redefining antitrust for the country and giving him an authorship role
(including the capacity to re-author antitrust laws in an economic light). On the other
hand, one could see him as finally enforcing a policy that the public had long clamored
for—the fact his own emphasis was on economy instead of politics and power is of little
import. Regardless of Arnold himself, the law maintained a political cast after World
War II.
Courts, while looking at market share, did not limit themselves to economic
analysis, but saw the role of antitrust in terms of limiting concentrated power which could
be used in both the economic and political spheres. Cartels and dominant business
interests were associated with the political economies of Japan and Germany. Anti-big
business suspicion may have come from experience with business cartels associated with
harsh World War I governments in Germany and Japan. In 1941, the Supreme Court in
United States v. Hutcheson openly read the antitrust statutes in light of, and to be
harmonized with, earlier labor acts which had declared the public policy of the United
States to
In the major antitrust tract of the late 50s, Karl Kaysen and Donald Turner wrote
about the goals of antitrust. Kaysen and Turner were both Harvard Law Professors;
Turner later became the chief antitrust lawyer for President Johnson’s Antitrust. They
argued that that the goal of antitrust was a “proper distribution of power” in the economic
sphere. 15 This goal, they said, derived from Jefferson and principles of autonomy that
were central to American political ideology. Moreover, concentrated power posed threats.
They argued that “business units are politically irresponsible, and therefore large
powerful business units are dangerous.” 16They saw the goal of the Sherman act to
“protect equal access and equal opportunity for small business for noneconomic reasons:
concentration of resources in the hands of a few was viewed as a social and political
catastrophe.”17
Turner and Kaysen’s view was reflected in the court cases, although of course the
courts were more constrained by the text. In 1945, Judge Learned Hand in United States
v. Aluminum Company of America first discussed the economic arguments against
monopoly but endorsed the “belief that great industrial consolidations are inherently
undesirable, regardless of their economic results.” 18 He referred to Sherman’s stated
concerns about limiting aggregated capital because of the “helplessness of the individual
before them.” Moreover, he noted that later statutes including the Surplus Property Act
and the Small Business Mobilization Act had been right interpreted in Hutcheson to
shape the meaning of the antitrust acts. “Throughout the history of these statutes it has
been constantly assumed that one of their purposes was to perpetuate and preserve, for its
own sake and in spite of possible cost, an organization of industry in small units which
See Carl Kaysen and Donald F. Turner, ANTITRUST POLICY: AN ECONOMIC AND
LEGAL ANALYSIS (1959).
16
Id.
17
Id.
18
Alcoa, 148 F.2d at 428-29
15
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Market Structure and Political Law
can effectively compete with each other.”19 Antitrust as a force for decentralization was
important “for its own sake and in spite of possible cost.”20
In 1948 in U.S. v. Columbia Steel Co, Justice Douglas explained that:
“We have here the problem of bigness …The philosophy of the Sherman Act is
that … all power tends to develop into a government in itself. Power that controls
the economy … should be scattered into many hands so that the fortunes of the
people will not be dependent on the whim or caprice, the political prejudices, the
emotional stability of a few self-appointed men. The fact that they are not vicious
men but respectable and social minded is irrelevant. That is the philosophy and
command of the Sherman Act.”21
In 1950, Congress amended the antitrust laws by passing the Clayton Antitrust
Act, in response to a burst of merger activity. Like Sherman, the precise definitions were
lacking, but the goals blended political and economic aims. In this era, the Antitrust
division tended to be very successfully in blocking mergers—and the political vision
persisted. In 1959, Carl Kaysen and Donald Turner proposed “no fault” concentration
legislation.
In Brown Shoe in 1962, the Supreme Court said that Congress’ vision in the
Sherman act was to “promote competition through the protection of viable, small, locally
owned business.”22 Congress understood that this vision might lead to higher costs and
prices,” because of costs associated with “fragmented industries and markets.” However,
Congress “resolved these competing considerations in favor of decentralization.”23
Likewise, in United States v. Philadelphia National Bank, the Supreme Court
upheld a block of a bank merger between the second and third largest regional banks,
which would have led to one bank controlling 30% of commercial banking. Despite the
lack of evidence that this 30% interest would have negative effects on competition, the
Court held that they need not have “elaborate proof of market structure, market behavior,
or probable anticompetitive effects.” Instead, the high market share alone showed
“inherently anticompetitive tendency.” Clayton barred “anticompetitive mergers, benign
and malignant alike,” and in interpreting the statute, the court recognized that there were
concerns about concentration that were not directly measurable.
From the mid-60s to the early 1980s, there was a sea change in the understanding
of antitrust, and a hard-fought intellectual battle over its purposes. Richard Posner and
Robert Bork argued that current doctrine was based on flawed economic ideological
premises and that efficiency and consumer welfare—not the goal of aiding small
19
When the Norris-LaGuardia act of 1932 was passed, not an antitrust act itself but a labor right
act, the law is important because it explained that it was the “public policy of the United States”,
to protect individual unorganized workers in the face of corporate power. Norris-Laguardia
explained corporate power in terms of “prevailing economic conditions, developed with the aid of
governmental authority for owners of property to organize in the corporate and other forms of
ownership association.”
20
U.S. v. Aluminum Co. of America, 148 F.2d 416, 429 (2nd Cir. 1945).
21
U.S. v. Columbia Steel Co., 334 U.S. 495, 535 (1948)
22
Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962)
23
Id.
7
Market Structure and Political Law
businesses or having a decentralized economy—were the only legitimate goals of the
antitrust statutes. Posner argued that there was no justification for “using using the
antitrust laws to attain goals unrelated or antithetical to efficiency, such as promoting a
society of small tradespeople.” Bork, similarly, argued that any political or social
concerns were necessarily indeterminate and created unmanageable standards, and were
normatively unjustifiable.24
In every important way, they won the war. However, the political vision of
antitrust, and of an economy with few massive companies, was still an essential part of
the antitrust lawyer’s self-understanding at least through the early 1980s. While the
courts turned away from anything but bad behavior, politicians with a different economic
vision, and concern about concentration qua concentration, continued to fight for
decentralizing economic laws. In 1968, a White House Antitrust Task Force
recommended limiting mergers for companies with more than $500 million in assets. In
1972, Senator Hart proposed no fault de-concentration that would have set an absolute
cap on how concentrated industries could become. In 1979, Ted Kennedy introduced a
bill that would have limited mergers of companies with over $2 billion assets (close to $6
billion in today’s dollars). There was a fierce intellectual debate over the bill, coming as
it did when the law and economics models were gaining strength, and when the
traditional, political antitrust people still had significant political power.
Donald Turner, among others, argued that antitrust had always had a quasiconstitutional dimension, and that it would and did always reflect the economic views of
the country. As such, he argued, the Kennedy Bill was an important reflection of a
cultural commitment to decentralized political and economic power. But by this late date,
Turner was increasingly isolated, as the dominant figures in the field adopted variations
of the Posner and Bork model, and rejected any limitations on corporate size, or
arguments for decentralized corporate competition.
Unfortunately, when the Posner/Bork model came to dominate antitrust, it did not
just infect the particular field of antitrust law, but the larger understanding of the
relationship of corporate and political law. We have lost, therefore, the intellectual habit
of seeing that the earlier political antitrust provided. We see political problems in
isolation from economic ones, diminishing our capacity to analyze either arena
accurately.
The ideological radicalism of these public choice theorists may not have been
their commitment to “efficiency” and modeling, but the core commitment to the idea that
politics and economics are severable. While their sub-theories were debated and
discussed at the time, and the empirical evidence for their claims successfully challenged,
the great success of the “law and economics” movement (along with other related trends)
was in shaping the taxonomies of study. Economics and business are one area of study;
constitutional law and election law are another.
This separation of economic and political thinking goes very deep, and has shaped
newspapers, political rhetoric, and activists. Since the 1970s, reformers from left and
right have turned their energies towards laws governing the shape of the governing
institutions (like Congress), instead of laws governing the creation and shape of the
influencing institutions (like Bank of America). While they have different sets of beliefs
about corporate law and liabilities, it is rare that either left or right democracy reformers
24
Robert Bork, THE ANTITRUST PARADOX (1978).
8
Market Structure and Political Law
focus on antitrust or corporate size and structure. This is not merely intellectually
troubling, it is historically strange; prior to the 1970s, reformers would talk about money
and politics in terms of market structure as something government could do something
about.
It is no accident that the law and economics movement started in antitrust, which
seemed a bit of a backwater—and spread from antitrust out into other parts of business
law. If the law and economics scholars could convince others that antitrust—the most
political of economic laws—had nothing to do with political culture or elections, with
representative democracy and power—then it was far easier to convince them that other
factors of corporate law and structure were also fundamentally non-political.
When politics was taken out of economics, economics was taken out of politics.
frameworks for thinking about capture, rent, and campaign finance have limited our sense
of possibility—the same players return with different sets of tools (or the same set,
repackaged) back to the same sandboxes, over and over again, without looking out over
the playground. But this is not the only sandbox. The tendency to “study markets in
splendid isolation from such political acts,”25 can limit the imagination of the person
involved in questions of democratic design, and lead to problematically wrong
descriptions of the way the market, and government, actually works. Instead of seeing
political organizations—like Congress or political parties—as the only place in which we
might make political rules, we ought also see corporations as the place to make political
rules. In order to open up corporate structure rules to political conversations, we must
first recognize that corporations are sometimes political organizations.
Five Forms of Political Power
It is beyond the scope of one paper to explore all the political-economic
repercussions of an economy dominated by large companies. Instead, we will focus on
five ways in which companies might exercise political power. We aim to separate out
those companies who are deeply, constitutionally, political, from those who are
incidentally engaged in the exercise of power. When a company is heavily invested in, or
capable of exercising these forms of power, they may qualify as a political organization.
The categories we identify are:
1.
2.
3.
4.
5.
Direct Political Investments
TBTF
Regulation
Political Punishment
Taxing
We discuss each in turn. In business law, these five forms of power might be called a
subset of “nonmarket” strategies. As David Bach and David Bruce Allen wrote recently
in the MIT Sloan Management review, in an article entitled, “What every CEO needs to
know about nonmarket strategy”:
25 Rudolph Peritz, Competition Policy in America (1996) Page 241.
9
Market Structure and Political Law
Nonmarket strategy recognizes that businesses are social and political beings, not just
economic agents. Because companies create and distribute value, a plethora of actors
seek to influence them — formally, through laws and regulation, and informally, through
social pressure, activism and efforts to shape the public perception of business.
Companies can’t escape this. Smart executives, therefore, engage with their social and
political environment, helping shape the rules of the game and reducing the risk of being
hemmed in by external actors. Yet, few companies are prepared to do the hard work and
commit long term to developing an effective nonmarket strategy. Fewer still understand
how to integrate market and nonmarket strategies to sustain competitive advantage.26
Nonmarket strategy includes public relations, lobbying, legal change, and market
structure. Or, as Bach and Allen write, “Nonmarket issues can play out in multiple
settings, from courtrooms and regulatory proceedings to parliamentary committee
hearings and industry forums all the way to the news media, the public domain or the
blogosphere.”
While we do not discuss every nonmarket strategy here (most importantly, we do
not engage in the complicated political role of direct to consumer advertising), the word
“nonmarket” is helpful, because it signals that regulatory interference--in the form of
antitrust laws or other rules--would not interfere with “the market,” even according to the
terms of the market participants. However, our investigation necessarily differs from that
of strategy in a few ways. First, we are examining the political role of companies, not
simply the political choices facing an individual company. Second, we are less interested
in the actual strategic choices made, and more interested in the exercise of power. When
it comes to democracy, the accidental feudal lords are every bit as important as those who
set out to gain political power. Therefore, our portrait assumes the unity of the
‘company,’ instead of treating shareholders and insiders differently. We are persuaded by
the work of John Coates and others that as a strategic matter, many of these nonmarket
decisions--including the decision to invest in politics, or to merge--are driven by desires
of the managers where they diverge from those of insiders. However, again, for our
purposes, we are interested in the exercise of power itself, not the reasons for it.
When describing the source of power, we use terms like “dominant,”
“monopolistic,” and “oligopolistic.” Our use of these terms is deliberately imprecise.
Because we are interested in categorizing the forms of power born of size and
concentration, debates about the technical contours of these terms is secondary, and
possibly irrelevant, to our work.
1. Overt Political Investments
The first way in which companies exercise political power is the most obvious. These
are include all the overt use of financial resources to shape public policy in a way
favorable to the company. The open goal of these efforts is to influence the traditional
political process.
Companies spend a lot of money in politics, in a variety of ways. During the financial
reform bill fight of 2010, the financial industry officially employed 2,565 lobbyists, used
26
MIT Sloan Management, Spring 2010.
10
Market Structure and Political Law
media campaigns--JP Morgan’s was “The Way Forward” to explain how the crisis
happened--and donated generously to candidates. Companies may lobby elected officials
directly, they lobby regulators, they either create PACs which spend money on
campaigns, making access to decision-makers easier, or use SuperPACs or LLCs to
spend independently. They may play a large role in a trade association that lobbies. The
range extends to charities. While some socially responsible spending is done for nonpolitical reasons, some is done to enable political power. David Cohen oversees
government affairs at Comcast, but also runs its charitable foundation, which gave
$320,000 to the Hispanic Chamber of Commerce over a five year period. When the
Comcast merger was announced, the New York Times reported on the connection, noting
that one of the first supporters of the merger was the Hispanic Chamber.27 Bach and
Allen encourage this kind of political involvement, pointing to Toyota’s successful
lobbying to get California to give low-emissions vehicles preferred HOV lane access.
“With minimum financial investment, Toyota managed to give its product a decisive
competitive advantage.28
Some part of this strategy may include influencing voters through media. Some could
include efforts to get unmediated access to decision-makers, and then using that access in
order to push a particular policy or general ideology. (You can see examples of this in
Google’s corporate leadership creating close ties to the Obama administration.)
2. Structural Dependencies and TBTF
Corporate sizes relative to the economy, or a limited number of provider of essential
services, will create political dependencies not based on lobbying resources, but based on
economic dependencies. Bank of America's assets are around 1/7th of the United States
GDP. Exxon Mobil made $45 billion dollars in profits in 2008. Bank of America,
Goldman Sachs, JP Morgan Chase and Citigroup each have debts—not including the
money they owe depositors—that are over 2% of U.S. GDP. Lockheed has $35 billion in
assets.
When the relative size is significant—like 2%—democratic choices become
constrained by the self-interest of the individual corporation. Even in the absence of
resources devoted to purchasing political influence, the company with a large relative
size will have power. The relative size makes it incumbent upon legislators to design
laws that will at a minimum ensure the stability of the company. If Lockheed goes under
and lays off all its employees, that has an impact on the entire economy. Therefore,
Lockheed, even without lobbying, can make demands of government based on the threat
of its own failure. (At the state level, the disparity is more striking. In some states,
companies have assets are as much as 10% of the GDP. The non-lobbying power of those
companies is enormous. Regardless of the politics of a state, and the desires of its
citizens, individual, company-specific favors and earmarks will flow to those companies.)
Lipton, Comcast’s Web of Lobbying and Philanthropy, New York Times,
February 10, 2014.
27
Eric
28
See Bach and Allen, supra note __/
11
Market Structure and Political Law
Companies that are large relative to the size of American GDP can control politics
by threatening to collapse or leave if their demands aren’t met. After the recent financial
crisis, because of the size (relative to the economy) of the biggest firms, and because of
their absolute size, politicians made the decision that they should not be allowed to fail
and bring the country down with them. Putting aside the banks causal role in the crisis
(which is itself arguably a function of relative size), imagine that there were 10,000
banks, instead of 5, facing restructuring. The government could have allowed some to fail
while others were restructured. While the government might still have chosen to provide
a bailout, it could have had more bargaining power with the banks in determining the size
of the bailout. (This leads to a market distortion, as well, as large enough companies can
borrow capital more cheaply than merely big companies, because lenders see them as
backed up by the U.S. government—whether or not they are efficient or skillful. This
hurts smaller companies who have to compete. The structure rewards scale for scale's
sake instead of skill and creativity.)
Dominant firms breed uncertainty and instability in key resources—and that
uncertainty leads to political power.29 You can think of this kind of size as the “too big to
fail” rent, a promised subsidy that enables cheap capital and cheapens the cost of seeking
political power.
3. Regulation
As we describe above, large companies routinely win favorable regulations by
influencing the political process through lobbying and revolving door tactics. A more
direct and less visible way to set regulations is to be a monopolist. The standards a
dominant company sets can determine the course of an industry much like a government
agency does. If Pfizer, whose Advil holds over 50 percent of the market for ibuprofen,
chose to stop using propionic acid, a key ingredient, the effects of its decision would
resemble a regulatory prohibition by the Food and Drug Association. And the more
concentrated the market, the greater the governing power. For example, if we have a
competitive shampoo market, whether there are toxins in our shampoo will be determined
by hundreds of executive teams at hundreds of firms with competing interests. But if our
shampoo market is monopolized by one company, that same decision will be made by a
few executives sharing one common interest. In this second case, the shampoo company
enjoys power akin to a government, without being accountable to the public.
A recent example of how dominant companies become de facto regulators centers
around Zilmax, the feed hormone used to bulk up cattle in the final weeks of their lives.
Though the additive hit commercial markets in 2007, research showing it harmed the
quality of beef kept feedlot owners from buying it. Enter Tyson, JBS, Cargill, and the
National Beef Packing Company. Once the four meatpackers, which control 85 percent of
the market, began accepting Zilmax-fed animals, its adoption rapidly spread across the
29
As Simon Johnson and James Kwak argued in their book and blogs and articles, this structure
reeks of oligarchy. Gigantic firms are a real threat to self-government. If big corporations can
demand bailouts and dictate policy it takes away the ability of people to choose the policies they
most want. The policy is “chosen” by the people in the same way that someone with a gun to their
head “chooses” to do what the holder of the gun tells them to. Simon Johnson and James Kwak,
Thirteen Bankers (2010).
12
Market Structure and Political Law
whole industry. By late 2012, even feedlots leery of its side effects realized they’d have
to start using it if they wanted to stay in business.30 But when reports surfaced that cattle
fed with Zilmax were struggling to walk and displaying strange side effects, its
abandonment was equally swift. On August 9, 2013 Tyson, the biggest meat company in
the world, announced it would no longer buy Zilmax-fed livestock. On August 16,
Zilmax-producer Merck said it was suspending sales.31 No government agency
intervened at any point; it was a handful of executives that governed the contents of our
beef supply.
Meanwhile, policies set by Facebook regulate the online privacy of over 1.2
billion users worldwide. Three airline companies govern which cities in America receive
affordable and regular air service and which are cut from the grid. Rules decided by the
Chicago Mercantile Exchange – which has swallowed up the Chicago Board of Trade,
the Kansas City Board of Trade, and the New York Mercantile Exchange – now
determine how our corn, wheat, and oil are priced.
This observation about de facto regulatory power is different from a critique of
deregulation. We are not arguing that companies are presently making decisions that
ought to be made by government. We are saying that when you have one or very few
dominant companies making decisions that effectively set standards for the rest of the
industry, those outcomes take on the character of governance. The crucial difference
being, of course, that corporations, unlike government, are not accountable to the public.
4. Feudal
Politics
Dominance and lack of competition also empowers companies to direct the political choices made
by employees and suppliers. This exercise of power is more common in monopsony situations than
monopoly. Our livelihoods are more vulnerable than the goods we buy.
Take chicken farming. Four poultry processors control around 53 percent of the
US market. Regionally, concentration is even higher. Practically this means that chicken
farmers are often beholden to a single company, with scant bargaining power to negotiate
terms of their contract. The industry is vertically integrated, which means processors
hatch the chicks, mix their feed, slaughter the birds, and package the meat for market.
They leave farmers to actually raise the birds, the riskiest and most capital-intensive part
of the business. Farmers usually take on hundreds of thousands of dollars in loans to
build poultry houses and purchase heaters to warm the birds and ventilation systems to
cool them, all to the company’s specifications. Meanwhile, their pay is unpredictable and
occasionally arbitrary. That’s because chicken processors like Tyson pay farmers through
the “tournament system,” which pits farmers against one another by pegging their pay to
their ranking, with no accountability or transparency. Farmers know that if they protest or
challenge the company, it can cut them off – and sink their livelihood.
In 2009, the Obama administration announced it would convene a series of
workshops to assess the state of consolidation in agricultural markets. Attorney General
Eric Holder and Agriculture Secretary Tom Vilasck toured the country to hear directly
Christopher Leonard, “Why Beef Is Becoming More Like Chicken” Slate, Feb. 14,
2013
31
Theopolis Waters and Tom Polansek, “Amid cattle health concerns, Merck halts
Zilmax sales” Reuters, Aug. 16, 2013.
30
13
Market Structure and Political Law
from farmers about the conditions they faced. For many farmers, the opportunity was a
lifeline. But in the days before the poultry hearing in Alabama, representatives from
Tyson and Pilgrim’s Pride visited farmers to warn them that if they spoke out at the
hearing they would face retaliation.32 As farmers at the hearing recounted, scores others
had not shown up or were afraid to speak up because of the companies’ threats.33 Their
economic dependence lost them their right to free speech and assembly.
In other instances, companies like Tyson don’t need to exert their power; its sheer
existence quells dissent. As Christopher Leonard describes in The Meat Racket:
"[Perry] Edwards did not see any evidence that Tyson Foods delivered sick birds
to Jerry and Kanita Yandell to retaliate against them for any perceived bad
behavior. But what he observed was that the company had the ability to do so if it
wanted to. Farmers around Waldron did not have the front-seat view of this power
that Edwards was afforded. But they knew it existed. They felt it. They
perpetually feared it. And for that reason, they often stifled their complaints and
took what Tyson gave them."34
Political suppression is also common in union fights. For example, in 2012 a
federal judge found that Target managers had threatened to discipline employees who
talked about the union and threated to shut the store if workers voted in favor of
unionization.35
Political power is also expressed through direct communication to employees
about the political preferences of CEOs (an expression enabled by Citizens United).
While the letters may not, according to law, intimidate the employees, they can strongly
communicate a preference and give reasons. During the 2012 election, asked business
owners to use their power in this way: "I hope you make it very clear to your employees
what you believe is in the best interest of ... their job ... in the upcoming elections." Real
estate developer David Siegel sent a long letter to his employees, telling them that if
Obama won, he’d probably end up on a beach “without employees.” Steve Wynn sent a
long voter guide to his employees. It is not clear that the crude tactic works: One Wynn
resorts employee said, "Now that I'm being told who to vote for by my overlord, maybe
I'll just vote for Obama." However, if employees either feel pressure, or are shaped in
their choices, these communications act as a form of employer-employee political power.
5. Taxing
It is widely established – both in antitrust theory and the world around us – that
size and concentration correspond with market power. Market power enables a company
to raise what it charges consumers and lower what it pays suppliers. The higher margins
Lina Khan, “Obama’s Game of Chicken” Washington Monthly (November 2012).
DOJ/USDA “Public Workshops Exploring Competition in Agriculture”
http://www.justice.gov/atr/public/workshops/ag2010/alabama-agworkshop-transcript.txt
34
Christopher Leonard, The Meat Racket (2014), p. xx.
35
Steven Greenhouse, “Union Gets New Election at Target” New York Times, May 21,
2012.
32
33
14
Market Structure and Political Law
that it pockets as a result transfer wealth from its business partners to its own account. It
imposes a tax on those subject to its power.
This wealth transfer empowers the company at the expense of its customers and
suppliers, both politically and economically. Often times these transfers will accrue in
fractions of pennies, almost imperceptibly. Barry C. Lynn recounts how Henry Osborne
Havemeyer, after rolling up seventeen sugar refineries, astutely asked, “Who cares for a
quarter cent of a pound?”:
Havemeyer meant that he did not intend to use the power he had amassed over
our supply of sugar to gouge us suddenly and violently. Rather, he intended to
collect his quarter of a penny tax from us quietly and steadily, the same way our
local governments collect a few pennies from us quietly and steadily every time
we buy a Slurpee at 7-Eleven … For many decades, every time an American
sprinkled some sugarcane crystals into his or her tea, Havemeyer and his family
became just a bit richer and hence a bit more politically powerful than you and
me.36
These wealth transfers are all the more subtle in dull and quotidian industries like,
for example, container board, the corrugated material we use to box over 95 percent of all
delivered packages in the US. As noted in a recent Goldman Sachs memo, steady
consolidation since the 1990s has handed the top four companies control over 70 percent
of the market, with the largest player alone holding 33 percent. In subsequent years the
firms restricted supplies and raised prices. Margins spiked from 10 percent in 2003 to 18
percent last year – while the containerboard prices we all pay jumped 90 percent. Or take
the seed industry, in which Monsanto controls upwards of 85 percent of genetic traits
embedded in corn and soybeans, and together with DuPont sells 70 percent of all corn
seed. Since its roll-up of independent seed companies, its net profits have grown from
$2.67 million in 2003 to $2.5 billion last year – a staggering tenfold increase over ten
years.37 The price farmers pay for corn seed, meanwhile, has shot up 166 percent since
2005.38
The wealth transfers in concentrated markets are political because they make big
companies bigger, and hence more politically powerful. A robust antitrust regime that
kept companies from ballooning into giants that extract monopoly rents would check
their political power.
Infinite Guises
Our taxonomy illustrates how size absent competition can impose on the public a
form of private governance. The power a dominant company exerts is unaccountable to
citizens, yet determines and even constrains their actions. The first category – direct
Barry Lynn, Cornered: The Rise of Monopoly Capitalism and the Economics of
Destruction (2010), p. 48.
37
Emiko Terazono & Neil Munshi, “Monsanto at centre of intensifying debate on food”
Financial Times, Feb. 26, 2014.
38
Jacob Bunge, “Big Data Comes to the Farm, Sowing Mistrust” Wall Street Journal,
Feb. 25, 2014.
36
15
Market Structure and Political Law
political intervention, and lobbying and media – capture how companies strive to
influence the political process. This power is most discrete and discernible; projects like
opensecrets.org devote significant resources tracking it. The last four categories – TBTF,
regulation, and political punishment and tax – illustrate forms of political power
exercised outside the traditional political process. This influence is won not just through
size and capital but also – crucially – market structure. These forms of corporate power
can undercut democratic self-governance in ways untouched by campaign finance
reform. The political process isn’t the only highway to undue political control.
In addition to operating outside of the traditional political process, this type of
power is notable because its application doesn’t always require its active exercise. Power
can arise purely out of dominance. As Justice Louis Brandeis expressed it:
Restraint of trade may be exerted upon rivals; upon buyers or upon sellers; upon
employers or upon employed. Restraint may be exerted through force or fraud or
agreement. It may be exerted through moral or through legal obligations; through
fear or through hope. It may exist, although it is not manifested in any overt act,
and even though there is no intent to restrain. Words of advice, seemingly
innocent and perhaps benevolent, may restrain, when uttered under circumstances
that make advice equivalent to command. For the essence of restraint is power;
and power may arise merely out of position. Wherever a dominant position has
been attained, restraint necessarily arises.”
In other words, power can be experienced without being exercised. Our taxonomy is not
exhaustive, and could never be, precisely because power exerts itself in infinite and
subtle guises. That this power still threatens democratic self-government – even when it
doesn’t manifest as a concrete schemes or donation – suggests that reformers should look
beyond simply policing activity. They should also target structural advantages that derive
from concentration and size.
Dynamic Interactions Between Factors
In our view, these five sources of power are likely to interact dynamically with each
other. There are several factors that should influence the decision of whether to invest
explicitly in politics, including: the potential value of the political decision, the presence
of powerful allies, the ease of organizing competitors within industry, the degree to
which opponents are organized, the size of perceived threat to decision-makers, the
absolute cost of political spending, the relative cost of political spending as compared to
opponents, the economies of scale of political spending, the creation of political
connections that can be re-used, the degree to which subsidy-enabled growth will
decrease future political spending, and the society-wide economic dependency upon the
company.
Many of these factors are a function of, or correlated with, company size or market
concentration. Likewise, control over suppliers, influence over employers, the capacity to
tax, and structural dependencies are correlated with each other and arguably functions of
each other. In The Logic of Collective Action, Olson explained why a small, wellorganized group, is more likely than a large, dispersed group, to invest in political
16
Market Structure and Political Law
activity.39 It is simpler and cheaper to organize a group when the potential members are
few--in other words, when the market is monopolistic or oligopolistic.40 Because of fewer
actors the industries can more easily solve collective action problems. They can more
easily make joint strategic decisions about what to demand, and create a shared,
consistent message when lobbying and in meetings. They can more cheaply share the
costs of identifying shared needs, the costs of coordinated timing, the cost of identifying
and punishing free-riders (though free riding seems to operate in lobbying in a different
way), and it makes it easier to share fixed costs, like writing legislation, identifying
targeted politicians, and producing effective messaging. With these shared political goals,
transaction and coordination costs would be less in a concentrated industry than in a
highly distributed industry. The concentrated industry therefore can more cheaply seek
out shared goals, including increasing barriers to entry to the industry, decreasing taxes
for the industry, increasing subsidies for the industry, and creating public insurance for
the industry.
Furthermore, there are several aspects of overt political investment that require
intensive start up costs, and bear fruit only after several years of investment. Lobbying
can be an extraordinarily lucrative investment. A recent study last year found the rate of
return on lobbying expenditures (on a corporate tax break) at about 220:1.41 However, in
other areas there is relatively little payoff, and changing political climates make it risky.
The same can be said for all political ventures--external factors, and the essential
uncertainty, can make political engagement dangerous for companies that cannot ride out
major political upheavals. Therefore, economies of scale, capital cushions, and external
sources of stability could be important in both explaining who lobbies, and predicting
who will lobby in the future.
The relationship between size, scale and concentration has been the subject of
empirical research for years. While the results are equivocal, some evidence suggests that
concentration and lobbying activity are related.42 Another study showed that companies
in more concentrated industries make greater campaign contributions.43
However, the weight of the evidence suggests that size and political activity are
related. In a 2003 study, sample firms with PACs had assets significantly higher than
sample firms without PACs (slightly under twice as large), though the largest firms did
not have PACs.44
39
Several years later he described the pathologies of the rent-seeking political culture in The Rise
and Decline of Nations. Taking Olson seriously, then, Wesee our task as solving collective action
problems for those who most need it, and creating collective action problems to make rentseeking more difficult.
40
Mancur Olson, Logic of Collection Action, 9-16, 22-65 (1971)
41
Raquel Alexander, Stephen W. Mazza, Susan Scholz, Measuring Rates of Return on Lobbying:
Empirical Case Study of Tax Breaks for Multinational Corporations, 25 J. L. & POLITICS 401
(2009).
42
See Jeffrey Drope and Wendy Hansen, New Evidence for the Theory of Groups: Trade
Association Lobbying in Washington, D.C., 62 POLITICAL RESEARCH QUARTERLY 2 303-316
(2009). Wewill augment this in future drafts.
43
Pittman (1976); Hill (2011).
44
Sanjay Gupta and Charles W. Swenson, Rent-Seeking by Agents of the Firm, 46 J.L. & ECON.
253, 260 (.2003)
17
Market Structure and Political Law
The number of corporations that regularly engage in federal lobbying is under
500, and almost all of them are extremely large. A recent survey of lobbying in the
United States found that about one in 10 firms engage in lobbying, but that the strongest
determinant of the likelihood of lobbying was firm size. There are about 300 persistent
repeat players in lobbying in Washington, and they are all large, and they tend to lobby
year after year. The likelihood that a firm will lobby, in short, is defined by size and
whether it lobbied the prior year.45 It appears that there is an initial decision, largely
driven by the high fixed costs associated with lobbying, to become a political
organization; once a corporation has made that commitment, it does in effect become a
political organization, as opposed to an ad-hoc purchaser of political goods.
An in-depth study of over 6,000 publicly traded companies’ reported lobbying
activity from 1999 to 2006 showed that corporate lobbying is directly related to firm
size.46 Much of the research is in “transitional economies.” One recent study of 3,954
firms in 25 transition economies found that size was the most significant factor predicting
whether or not a firm would be part of a lobby group. They coded large firms as firms
with greater than 200 employees, and medium firms as firms with between 50 and 199
employees. They found that the firm being a large size increased the likelihood of joining
a lobby by between 15 and 17%.47 Larger firms are also likely to have more politically
connected directors.48 Economies of scale in rent-seeking have been noticed in the
oligarchical efforts of the Argentinian patria and the transition-era oligarchs in Russia.49
Unfortunately these studies represent the best research on industry size, structure, and
rent-seeking50 More research could be done around concentration and rent-seeking
(although still spare), using a variety of tools to measure market structure, and more
research could be done around mixed strategies, instead of looking at merely isolated
forms of political involvement (lobbying or campaign contributions). Companies treat
these strategies as tools, not the strategy themselves, so studies comparing “tool use” are
less valuable than studies that look at overall political investment.
45
William R. Kerr, William F. Lincoln, PrachweMishra, The Dynamics of Firm Lobbying,
NBER Working Paper Series (Nov. 11) http://www.nber.org/papers/w17577.
46
Matthew D. Hill, G. Wayne Kelly, G. Brandon Lockhart, and Robert A. Van Ness,
Determinants and Effects of Corporate Lobbying (published on SSRN). Wehave included a copy
of Hill et al’s table on the last page so that the numbers can be examined critically. They measure
size in terms of assets.
47
Nauro F. Campos, Franceso Giovannoni, Lobbying, Corruption, and Political Influence, 13
PUBLIC CHOICE 1-21 (2007).
48
Agrawal and Knoeber (2001).
49
http://mpra.ub.unimuenchen.de/22561/1/THE_ECONOMIC_TRANSITION_OF_CHINA_AND_USSR.pdf
(discussing economies of scale in rent-seeking in transitional Russia); COLUMBIA JOURNAL OF
EUROPEAN LAW SPRING, 2010 Article REEVALUATING THE EVIDENCE FOR
ANTICOMMONS IN TRANSITION RUSSIA Brian Sawers (2010).
http://nd.edu/~kellogg/publications/workingpapers/WPS/250.pdf (discussing efforts to maximize
economies of scale in rent-seeking in 90s Argentina)
50
This is much lamented, but little corrected. See, e.g., DanweRodrik Political Economy of Trade
Policy, (1995) (“On industry structure it is perhaps disappointing that the empirical literature is
not more clear cut on the political advantages of high concentration…”)
18
Market Structure and Political Law
When Are Corporations Political Organizations?
There is no consensus on what constitutes “political,” 51yet there is relatively little
debate about what constitutes political organization. There are different ways to come at
the question, “What is political?” We might, for instance, reject the idea of the nonpolitical altogether, in which case every corporation, regardless of its features is political,
along with every other societal institution. One version of this thesis – which appears
glibly as “the personal is political” – is grounded in the fact that all human interactions
involve some degree of (by virtue of inter-action) of influence. Another version is more
contextual, and notes that all private power in a modern democracy is backed by police
power.
We might, alternately, name that as political only those institutions which are
either cloaked in authority, or are designed to overtly influenced those in authority. Ayn
Rand, exhibiting the second view, argued that: "The difference between political power
and any other kind of social “power,” between a government and any private
organization, is the fact that a government holds a legal monopoly on the use of physical
force.”
We find both of these characterizations unsatisfactory. The first may be true, but
collapses the social role of the word “political” and makes it unintelligible and not useful.
We disagree with Rand in this way: When a corporation starts establishing a monopoly, it
starts to become political. For instance, if there is only one seller of all books, that seller
starts to become like the government. It is capable of exercising arbitrary power over the
content of our books.
It is less troubling than governmental power, because it is not backed by physical
force (no one gets shot who sells alternative books) but it is more troubling than
government because it is unaccountable. If it is the only bookseller with capacity to
distribute, it could choose to distribute only Ayn Rand, or no Ayn Rand at all. The fact
that a theoretical market entrant might exist, when as a practical matter none does, means
that we are subject to arbitrary power.
Instead, we turn to the dictionary. The political encompasses: “the activities
associated with the governance of a country or other area, especially the debate or
conflict among individuals or parties having or hoping to achieve power.” Using this
definition, we are interested in corporations that either seek to control government, or
seek to govern themselves.
We also turn--with no little irony--to the Supreme Court’s explicitly conclusion
that corporations are political entities. In Citizens United, the Court held that a law
limiting uncoordinated speech that was designed to elect or defeat candidates violated the
First Amendment. The Court rested its opinion on a few concerns. First, the court was
concerned about the engagement of government in deciding who can and cannot speak.
Second, the Court was concerned about limiting the associational rights of corporations.
Third, the Court was troubled that limitations by the state would undermine. In
expressing these concerns, the Court did not deny that corporate spending might have an
51
Amitai Etzioni, What is Political?
19
Market Structure and Political Law
impact on legislators. However, because that impact would not be explicitly corrupting,
the impact did not weigh against the speech interest. But for the purposes of this paper,
what is most important is that the court adopted a view that corporations should be
political organizations in order to question, and check, the power of government. The
court called corporate independent spending “indispensable to decision-making” in a
democracy.52
The Supreme Court legitimated and elevated political activity by
corporations. In this passage, for instance, the Court gives moral meaning to political
engagement: “By suppressing the speech of manifold corporations, both for-profit and
nonprofit, the Government prevents their voices and viewpoints from reaching the public
and advising voters on which persons or entities are hostile to their interests.”53 After
Citizens United v. FEC, the official political theory of the United States is that
corporations are much like—if not exactly like—political parties or labor unions or other
entities that are an essential part of the political architecture of the country.
The irony, of course, is that in validating and elevating corporate political life, the
opinion greatly enhanced the instances of corporate political life. It made it much easier
to use money for political influence, and makes political engagement (that was previously
barely legal) much less risky, because it lessens the risk of litigation. It had an indirect
impact on the political culture of corporations. It turned corporate involvement in
elections from a loophole-seeking practice to a practice endorsed by the Supreme Court.
Inasmuch as corporate management avoids political engagement, the Court’s
endorsement sends a signal to corporate leaders that political engagement is not a barelylegal activity, but a fully endorsed aspect of corporate structure, and might be mandatory.
However, under any theory, not all corporations are political. Colgate, Apple,
Microsoft, Lockheed Martin—all are corporations that have committed to political
activity and have made political activity and the effort to influence governmental
decision-makers an essential part of their institutional structure. They do not claim a
general authority to legislate over the society, but they are structured in part to influence
those bodies who do claim a general authority, and exercise real, meaningful political
power. They sometimes exert this influence in sophisticated and indirect ways, through
funding nonprofit groups who then lobby in favor of their position.54 In function,
therefore, it makes sense to describe them as political organizations.
The archetypal political organization is the political party, but close to that core
are labor unions, PACs, and policy groups with a legislative agenda. Political philosopher
Joseph Raz has defined political organizations55 in contrast to political institutions.
Political institutions make claims to authority and legitimacy, whereas political
organizations do not.56 “By political institution,” he writes, “We refer to the state and its
organs, but also, more broadly, to all public authorities.” Therefore, “not all political
organizations are political institutions.”57 In his definition, a political organization
52
53
Id.(citing Bellotti, 435 U. S., at 777)
Id.
Eric Lipton, “Comcast’s Web of Lobbying and Philanthropy” New York Times,
February 20, 2014 http://www.nytimes.com/2014/02/21/business/media/comcasts-webof-lobbying-and-philanthropy.html
54
55 Josef Raz, The Morality of Freedom p. 5 (1988)
56 Id.
57 Raz, supra p. 3.
20
Market Structure and Political Law
attempts to pressure political institutions through elections, lobbying and media
engagements. Raz provides a negative starting point, but he was defining political
organization in order to cordon it off from political institution, not so much to investigate
the shape of what constitutes a political organization. 58
Instead, for the term “political organization” to have meaning, there should be
some measure of non-incidental political entanglement. One could, for instance, measure
purpose as evidenced by institutional structure. In other words, a medium sized company
with no lobbying arm, no public affairs department, no PAC, and no policy pushed
through media would not be a “political organization.”59 By this defintion, most
American companies are not political organizations. However, a tiny arms sales company
that is set up in order to lobby for specialized contracts from the government, but fails in
such efforts, would be a political organization. So is a company like Comcast, that
exercises monopoly power in many markets, or a company like Tyson, that uses its
relationship to its producers for political ends.
Substantial direct political expenditures are a sign that something is a political
organization. For our definition, a political organization is an institution that:
(a) does not claim a general authority to legislate over the society and
(b) is structured in part to influence those bodies who do claim a general authority
or (c) despite not being so structured, is routinely protected by authority-wielding
figures.60
or (d) by the nature of control it exerts over society, partially governs it.
In short, a political organization is one with a power-seeking structure, or actual
power, but that lacks public authority. The “structure” test, (b), is suited to current
understanding of the term political. The “political impacts” test, (c) allows for
considering a large company whose presence was constantly on the mind of, and
influencing the decisions of, lawmakers. (Otherwise that would not be a “political
organization”, and the small, impotent, political party would not be a “political
organization.”)
Some economic research suggests that indirect and direct forms of political
control are connected. Mara Faccio showed how politically connected firms have higher
58 He was interested in the relative lack of accountability of political organizations as compared
to political institutions, but, interestingly, assumed a level of internal political accountability in
passing when discussing political organizations (see, Morality of Freedom, “The power of these
organizations means that their actions impact many. They must therefore give adequate weight to
the interest of those individuals when deciding on their actions.”)
59 Weleave aside for now the question of whether search engines and other content-rich
companies with strong first amendment roles might be “political organizations” in another sense.
E.g., whether Facebook was a political organization prior to setting up a public affairs office in
DC.
60 (This is not to be confused with the statutory definition of political organization, which are
“organized and operated primarily to accept contributions and make expenditures for the purpose
of influencing the “selection, nomination, election, or appointment of any individual to Federal,
State, or local public office or office in a political organization, or the election of Presidential
electors.”) See 527
21
Market Structure and Political Law
market shares.61 One would anticipate that, in part as a matter of personality--those
insiders who are involved in business as a form of power, instead of as a form of
entrepeneurship, are more likely to be drawn to direct political investment and capturing
a controlling market share out of the same impulse. Alternatively, the correlation could
be merely a function of Mancur Olson’s thesis: large market share makes the purchase of
power easier. Regardless of the mechanism, the overlap between different forms of
power makes it easier to classify those corporations which are fundamentally, structurally
political, and separate them from those who are fundamentally, structurally non-political.
Incidental Political Impacts
So far we have talked about when individual corporations are political. However,
there are other incidental political impacts of market structure on political society as a
whole, that are not captured by the five ways in which power is directly impacted. The
non-strategic use of the revolving door leads to ideological change within regulatory
agencies exercising power. In a concentrated market, regulators pull from a small set of
companies to staff their work. Those companies--such as Goldman Sachs--tend to
inculcate their employees with a set of beliefs about the way the world works.
Furthermore, for democratic self-government to work, society must be populated
by people who are educated enough to know the relationship between policies and their
impacts, and be somewhat capable of imagining other policies or other impacts. There is
something harder to capture than information alone that is critical for successful selfgovernment—it is a sense among the governed that they are fundamentally competent to
challenge the decisions of the representatives, and that they experience actual power in
the political process. Without this experience of power citizens will engage in the most
trivial of ways—voting—and their ability to govern themselves will be limited by the
choices presented by those in power. The experience of power cannot be taught by a textbook—it is a habit of power, and judgment, and decision-making. Of course the most
extreme Jeffersonian view is that self-government requires a country of yeoman farmers,
who are trained and accustomed to power.62 John Stuart Mill and William Greider have
also argued that the experience people have 364 days a year necessarily impacts how they
conduct themselves on the one day a year when they vote; if someone is constantly told
what to do, not allowed to question authority, punished for raising complaints and
rewarded for docility in all other aspects of their lives—how should we expect them,
when they encounter a Congress member on the street, to ask about why the new health
care law does not provide for dental policy, even if the daily obsession with their private
life is the inability to pay for dental care, and rants to her husband about the inanity of the
policy?63
This experience of power is directly related to corporate structure. When there are
bigger businesses, there are fewer people in management positions, and more people who
have no daily relationship to power. There are fewer people who work with and witness
Mara Faccio, Differences between Politically Connected and Non-Connected
Firms: A Cross-Country Analysis, 39 Fin. Mgt. 905-927
61
Benjamin F. Wright, "The Philosopher of Jeffersonian Democracy," American Political Science
Review Vol. 22, No. 4 (Nov., 1928), pp. 870-892.
63
See, e.g. William Greider, WHO WILL TELL THE PEOPLE (Simon & Schuster, 1993).
62
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Market Structure and Political Law
executive decision-making. Imagine 5 major tire companies in this country, instead of
1,000, and 5 executives instead of 1,000. If evenly distributed over the 50 states there
would be 20 executives in each state willing to challenge political power, instead of 5
states with executives, and 45 with none. Setting aside their expertise in tires, those 20
executives can be political presences in every major city in the country, both exhibiting
and modeling the vibrant sense of self that is required for true self-government.
If one out of every 20 people in a society is in a decision-making role, that mode
of thought—of responsibility taking—has a chance of being part of the civic culture. The
culture of responsibility taking infuses itself in deep ways into our lives, and changes our
internal grammar from “x is happening to me” to “I am part of changing x.” That habit of
grammar then translates from one sphere of power to another. Hannah Arendt equates
politics is freedom, and what happens when people come together and ask, “what should
we do?” expressing their own freedom to ask that question and then follow that question
with action.64 The habit of that freedom in economic life is not easily separated from that
habit of freedom in public life. The internal grammar of the private decision-maker
bleeds into the internal grammar of the citizen—when it is fluent with power in one
sphere, it bleeds to the other.
Structural Intervention
To reiterate the argument of the introduction, our goal is to understand market
structure as part of democratic design. Once we see institutions as political, instead of
non-political, different forms of structural intervention might seem legitimate that might
be cast as illegitimate if they were mere market intervention. Elections are political
institutions, and the particular design choices about them have deep political impacts. For
example, the date of elections, the form of the ballot, the form of registering to vote, and
questions about who can appear on the ballot are deeply important questions of
democratic design. Congressional districts are political institutions, and over the last 200
years, their size, shape, and type (single member/multimember) have been changing.
Congress is a political institution, and each state house is a political institution, and
municipal governments are political institutions. In designing their size, qualifications,
and rules regarding government are fundamental questions of democratic design.
In shaping political institutions, questions of size and scale are recurrent themes.
Since the days of Aristotle, who believed that a polity should never be so large that all its
citizens couldn’t hear the same morning bugle, these highly technical questions of size
have been front and center in institutional design. Should a state legislature have a
representative for every 5,000 people, or 50,000? How should campaigns be funded, and
what should be the maximum amount of contributions allowed by individuals? How
frequently should elections be held? How should district size be determined? All of these
are basic questions of democratic design surrounding political institutions. Similar kinds
of questions should be addressed to corporate size.
Given this proposed definition, there are actually relatively few corporations that
are political organizations in the United States, and most of them are very large and most
64
Hannah Arendt, THE PROMISE OF POLITICS (Random House Digital, Inc., Jun 19, 2007).
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Market Structure and Political Law
of them have hints of monopolization. Corporations’ role as potential political
organizations was endorsed by the political theory of the majority of the United States
Supreme Court in Citizens United v. FEC. “Corporations and other associations, like
individuals, contribute to the ‘discussion, debate, and the dissemination of information
and ideas’ that the First Amendment seeks to foster.”65
A great deal of thought has gone into how political parties are structured, how
they are funded, and their relationships to candidates. Their status as political
organizations has been enshrined by the Supreme Court, which recognizes a special role
for political parties, considering them essential in modern American democracy. Once we
understand corporations as political organizations, the same kind of attention to their
structure is merited.
However, up to now, in the public debate about money, power, influence politics,
most structural reforms have focused on Congress, and on the laws governing elections.
Publicly funded elections, filibuster reform, and transparency tend to be congress-centric.
Alternatively, laws designed to increase ballot box access, reform gerrymandering, or
include mail-in ballots are election-process centric. Election law scholars debate how
campaigns should work to minimize corruption, what role parties should have, and the
role of the media. But in all these areas the attention is focused on one or two discrete
kinds of levers.
Moreover, scholars who might otherwise be interested in the problems caused by
asymmetrical lobbying, instead throw up their hands because when it comes to lobbying,
it is hard to imagine anything but transparency doing any good, and it is unclear that
transparency has any meaningful effect. In fact, outside of campaign finance, scholars
might be willing see a problem, but throw up their hands and return to questions of
campaign finance restrictions, because it is inconceivable that there would be restrictions
on lobbying.66
Consider the two dominant trends within democracy reformers: public choice
deregulators and progressive campaign finance reformers. To date, the classic public
choice response has tended to be recommending a diminution of regulatory power—the
idea being that the less power there is to be exercised, the less that companies will spend
energy rent-seeking.67 This solution has so dominated the discourse that the two are seen
as intertwined. The more left wing campaign finance reformer has tended to focus on
laws limiting spending and donations and certain kinds of coordinated activity. Enormous
creativity has gone into exploring rules which might discourage certain kinds of flows of
money into the political system.68 These efforts have undoubtedly had some impact, but
the ability of the campaign finance reformer to enact limits on money flowing into
politics has been hobbled since Buckley v. Valeo, and the recent Citizens United Supreme
Court decision gave the Supreme Court’s imprimatur to unlimited corporate spending
Citizens United v. FEC, 130 S.Ct. 876, 900 (U.S.,2010)(quoting Bellotti, 435 U.S., at 783, 98
S.Ct. 1407)).
66
Kathleen Sullivan, Political Money and Freedom of Speech, 30 U.C. Davis L. Rev. 663, 673
(1997). See also Briffault, supra.
67
See, e.g. George J. Stigler, ed, Chicago Studies in Political Economy (U Chicago, 1988);
Dennis Meuller Public Choice IIWe(2003).
68
The ones Wefind most compelling are those that provide matching funds for low dollar
contributions, as they incentivize the most responsive politicking.
65
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Market Structure and Political Law
around elections. The Super PACS that are dominating the 2012 Presidential campaign
are evidence that existing limits on corporate spending in politics are likely not that
effective over time. “Like water seeking its own level, private money will inexorably
flow around reformist barriers to overwhelm the political process.”69
The public choice theorist has tended to reject campaign finance laws, and the
campaign finance reformer has tended to ignore lobbying—despite the evidence that
companies spend more on lobbying than they do on funding campaigns.70 Arguably, the
avoidance of each of these areas derives from a sense of hopelessness in the face of First
Amendment protections, which in turn leads to intellectual avoidance.71 Joseph Stiglitz
defended the avoidance in a way that might speak to both groups:
Redistributions are the consequences of special interest groups using the powers
of the state to reap private gains at the expense of the general public. These
redistributions are not only inequitable, they are also inefficient. They are not
only inefficient because of the rent-seeking expenditures that the special interest
groups make in the quest for special treatment; they are also inefficient because
the equity constraint results in government programs that are ill-suited to any
“rational” objective. There is, alas, no way in a democratic society to proscribe
such activities. There is no obvious way to distinguish these activities from more
“legitimate” activities.72
Faced with this sense that there is “no obvious way to distinguish” between
“good” and “bad” lobbying, there is a limit to what government-facing government
reform can do. Reformers from the left tend to propose contribution limits, transparency,
and matching funds’ systems. Reformers from the right tend to propose limiting the size
of government. Both have been stymied in recent years as the regulatory state grows, and
limits on campaign cash have proven weak. Instead of government facing rules, then, we
should start looking at structural corporate rules that dis-incentivize rent-seeking and
encourage entrepreneurialism.
Both groups have focused far less on corporate law itself, and it is the argument of
this paper that perhaps corporate structure might help the left and right both achieve
theirs stated goals. An explicit recognition that many corporations are political
organizations opens up a new category of structural changes that might improve
representative government and engagement. It enables one to think about incentives and
disincentives for investment in lobbying, for example, not by focusing on lobbying, but
69
Voting with Dollars, A New Paradigm for Campaign Finance, Ian Ayres and Bruce Ackerman,
The dominant casebook on the law of the political process, does not include a discussion of
lobbying in the section on money and politics. Isacharoff, Karlan, and Pildes, The Law of
Democracy (3rd Edition, 2007).
71
Since the early 20th century, lobbying laws have been largely off-limits, except inasmuch as
they require transparency. This was not always true—many states outlawed lobbying in the 19th
century, and the Supreme Court once refused to enforce a contract to lobby as deeply repugnant
to civic decency and threatening to our political institutions. See Trist v. Child, 88 U. S. 441
(1974).
72
Stiglitz (1989). This is a version of what Justice Kennedy argued in Citizens United—there is
no way to distinguish between the corporate-owned New York Times spending money around
elections and the corporate-owned Bank of America spending money around elections.
70
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Market Structure and Political Law
by looking at how corporate size, scope, and industry concentration interacts with
lobbying to either encourage more or less of it. The corporate form is a tool that
encourages a particular set of structures. It provides subsidies for certain business
activities in exchange for public goods that would not be created by the government.
Corporate charters can be as expansive or restrictive as we want them to be – they can
have charters that expire after 5 years – the liability can be as limited as we want it to be.
If we want, groups can only get corporate charters for carbon-neutral businesses. Instead
of focusing solely on Congress, the recognition of the corporation as a potential political
organization allows for a more imaginative approach to the puzzles of representation.
In teaching the law of politics, it is difficult to paint a fair picture of the ecosystem
of forces that interplay around an election without a deeper understanding of the political
organizations of corporations, yet the classic portrait painted in election law course-books
spends most of its energy on the internal structure and decision-making of one set of
important political actors—those with the political organizations known as political
parties—and only a passing glance at the internal structure and decision-making of other
sets of important political actors, like media companies and corporations. This leads to
extensive examination of the rules governing one set of political actors, and almost no
examination of the rules governing another.
Conclusion
The foregoing suggests that democracies with a small number of large corporate
enterprises will be less representative than democracies with a large number of
companies, none of which are too big to fail, but which compete against each other.
Larger companies in non-competitive industries are less likely to spend their energies on
product development than on political capture—therefore leading to individuals and noncorporate associations having a greater relative voice. One would expect that a
concentrated economic structure would have a much smaller percentage of the total
money spent on getting political favors coming from citizens, instead of companies.
There are different ways to get to a political economy dominated by small businesses
through limits. One could, for example, institute a tax policy that put a tax on bigness—it
could be a sliding scale, to disincentive size. Or one could act merely in regard to
companies of the future, and have a strong anti-merger policy. Or one could criminalize
large size.
In addition to targeting size, one could also try to limit political economic
dominance. The political power that companies exercised in the examples above derived
from their dominance – or the degree to which other actors depended on them –not just
their size. To address dominance regulators could learn from network dependence theory,
for example, which assesses the level of power any one player has over another by
viewing their structural dependency. An approach that included this wider frame would
be equipped to tackle monopsony, a major blindspot in current antitrust practice.
Most of this paper has been theoretical, but the issues it addresses are very current.
Six banks largely control the financial industry. In agriculture, retail and manufacturing
there are relatively few companies, each of which has enormous political and economic
26
Market Structure and Political Law
power. Mammoth companies are not creating enough social value to merit the costs of
their size, increasingly spending their money on rent-seeking. Existing antitrust is far too
feeble for the task. The public choice theorists who effectively killed it didn’t realize that
true antitrust, was actually their own intellectual father—the tool that could lead to
market competitiveness and reduce the amount of concentrated money spent influencing
government at the same time.
And yet the ghost of antitrust has never quite fully realized haunts the landscape.
Brandeis was skeptical of size, in part because he thought gigantism was a kind of mark
of Cain—a company couldn’t get large but through sinning of some kind. After the
Supreme Court’s decision in Citizens United there are no meaningful limits on how much
money a company can spend influencing elections, and all forms of electioneering are
considered virtuous according to the Court. But now we are dealing with virtuous
monsters like Google, or Apple, along with the less virtuous ones who may or may not
have committed securities fraud.
You can see the American impulse to antitrust appearing in Jonathan Macey’s recent
article about limiting bank size, in Tim Wu’s concerns in the Master Switch, in the
financial journalist Barry Lynn’s book Cornered, in Robert Reich’s support for breaking
up banks, even in Alan Greenspan suggesting that companies too big to fail are too big to
exist. And this impulse is gradually creeping out and finding its way into legislation.
During the financial reform fight, Senator Sherrod Brown of Ohio and Senator Ted
Kaufman of Rhode Island proposed a simple new law that the New York Times
endorsed. They wanted to put a cap on bank size. Brown/Kaufman would have made it
illegal for any financial institution to have non-deposit liabilities (basically debts and
obligations) bigger than 2-3% of GDP. This is a good start but far too small.
The largest limited liability companies are too complex to manage, too difficult to
regulate, and are often effectively immune from criminal prosecutions. Their size allows
them to operate outside of normal democratic constraints, and their use of their economic
power for political rents undermines our democracy. We should turn to a true, new
antitrust to break them up.
27