This post is part of a series on the Methods of Political Economy.
For the past 35 years (and certainly before that), scholars across disciplines have offered critiques of neoclassical theory and its variants of political economy. As a result, there is a great deal of theoretical work done on issues of the linkages between states and markets, the comparative study of capitalism across countries, and on understanding how markets are the product of social interactions between market actors—an approach known as the sociology of markets. All of these perspectives share the view that the economy is embedded in political, social, and cultural processes. The upshot of these perspectives is to counter neoclassical political economy’s claim that there is one best or “efficient” way to arrange markets. Instead, markets reflect the relative power of governments, firms, and workers to structure the production of goods and services. The outcome of these interactions produces stability for incumbent firms, a stability that reflects a resolution of these political conflicts. This perspective exposes theoretical arguments that assume efficiency as both incomplete and misleading. Such arguments miss that because there are multiple ways in which these arrangements can be negotiated, there are multiple paths to create stable markets.
These perspectives have been used to understand many empirical contexts including the rise of shareholder value capitalism in the U.S., the rise of finance in the U.S. and around the globe, and the implications of all of this for increasing income and wealth inequality. This literature is well known in political science, sociology, and business studies but less well known in the rest of the academy, particularly in parts of legal studies. My goal here is to introduce the perspective I have contributed by explaining a few of the key ideas and a couple of insights based on using those ideas to make sense of important features of markets.
There are three main insights. First, markets require states and institutions to make them work. Second, the co-constitution of states and markets does not come about innocently or arbitrarily. It reflects the historical distribution of power in society amongst labor, capital, and the state. These conflicts have produced different kinds of market rules, and as a result, different market dynamics, in different times and places. Finally, markets are social structures subject to the dynamics of all forms of organized social life—for example, imitation, coercion, and normativity. This means that market actors orient themselves to one another and take cues from one another in order to decide what to produce and how to compete. The key features of these interactions are the relative power of market actors and the current understanding of how the market works. The creation of new markets, the ongoing competition in stable markets, and the transformation of existing markets can only be understood from focusing on these social processes.
In my work, I have proposed that markets are arenas where competitors watch one another, have positions defined by whether they are challenger or incumbents, and operate with a set of shared understandings about what is at stake and common conceptions of formal and informal market rules. They use this knowledge to work to reproduce or better their positions. For a market to emerge requires market actors to solve all of these problems. While neoclassical economics does not offer an account of market emergence, I observe that new markets tend to emerge from existing markets. Because of the fluidity of these situations, new markets often resemble social movements where market actors are using political opportunities to create stable order. In the case of new markets, actors must not only find customers but establish stable relations to competitors and the government.
Once markets have stabilized, incumbents will use whatever power they have to reproduce their positions. This means that market transformations require huge crises, crises that undermine an existing order. These can be caused by general economic or political disorder, invasion by firms from nearby markets, or disorder caused by resource dependencies. Even under dire circumstances, incumbent market actors will try to maintain their position by all means necessary including getting the government involved. As a result of the power of incumbents, it is often the case that markets get reconfigured rather than transformed under crisis. So, for example, the financial crisis of 2007-2009 ended by creating five large banks that now control almost 60% of all assets in the U.S.
I have used this model to make sense of the emergence and subsequent history of the large American corporation from after the Civil War until the 1980s. I show how large economic crises, often caused by too much competition, followed by the construction of antitrust laws around competition, have shifted the ways that corporations organize themselves over time.
The 1950-60s witnessed a merger movement that created the conglomerate firm. Here, managers of the largest corporations used the market for corporate control to build large and diversified enterprises. Managers used the justification that they were better able to manage these assets than were diffuse shareholders. But managerial power came under attack during the 1970s, when there was a slow growing economy, high inflation, and high interest rates. This depressed the stock prices of corporations as investors fled the stock market to buy bonds that paid high yields. Managers of large diversified corporations tried to control their destinies by holding onto cash and avoiding borrowing money at high interest rates. They also did not revalue the assets on their books to prevent their financial performance from looking even worse.
But these tactics failed to keep their firms financially valuable. In the late 1970s, these conditions meant that the largest corporations had lower market values than the value of their component parts. Institutional investors, led by so-called “corporate raiders”, saw the opportunity to buy these firms, break them up, and make immediate and large profits. This invasion by outsiders took control away from the incumbent managers of diversified firms. Institutional investors forced managers to either focus on “maximizing shareholder value” or face being taken over and losing their jobs. To please institutional investors, managers had to engage in successive waves of layoffs of blue collar workers, outsourcing of corporate functions, downsizing managerial ranks, selling of product divisions that did not produce enough profit, and when all else failed, they bought back their shares to raise the stock price.
Shareholder value capitalism is still with us. It has changed some of its focus as some strategies to increase the share price have stopped working and new ones need to be invented. Currently, corporations are using the low interest rates at which they can borrow money to buy back their own stock and thereby raise their stock prices. They have also engaged in mergers with their competitors to create oligopolies in many industries, thereby lowering the level of competition.
My approach does not assume that this particular path of corporate evolution was “efficient,” but instead that it serves certain interests and is structured towards those ends. Shareholder value capitalism has worked for those who own shares. This is reflected in the growth of income for the 1% who have captured the gains of the shareholder value revolution. They have also, of course, gained political power and helped create tax and other policies to enrich themselves. My analysis suggests that the current interest in reviving antitrust enforcement to counter this trend could usefully break up some of the oligopolies that have emerged, but will not necessarily have an impact on inequality.
Once we understand that shareholder value capitalism arose as a way to increase the income and wealth of those who owned stock, it follows that it can only be undermined through concerted political action to shift the balance of power between government, firms, and workers. Current political discussions share this analysis. Progressives have put forward proposals to make it easier to organize unions, put workers on boards of directors, and make workers “shareholders” by giving them a substantial ownership stake in firms. All of these could potentially undermine institutional investors and shareholder value capitalism, although incumbents in the political and economic arenas will surely fight to maintain the status quo.