Fat-Cat groans and Thin-Cat moans

Why are Health Care, Policing, Pensions etc all struggling to function adequately, yet Cars stockpile and there are no Arms shortages, Cosmetics droughts or Fast-Food famines.....

( with thanks to J.K.Galbraith and J.R.T.Hughes - look them up ! )

Two factors act strongly and persistently to distort the economist's view of modern industrial society.

[1] A tendency to think of the economy in static terms - like the sciences of chemistry or geology, rather than in evolutionary terms. Since the institutions dealt with, markets, companies, labour relations, consumer behaviour, government etc; are not stable but subject to continuous change, this approach is flawed.

[2] A tendency to adhere to a faulty image of the economics of modern industrial society because it is what was taught and what all economic wisdom is based on. In fact, if anything can be learnt from the knowledge gleaned by previous generations of economists, it is that the knowledge of the economy learned by one generation cannot be applied to the next. The self-denying nature of this situation is obvious.

The Present "Accepted" Image
There are numerous entrepreneurial firms distributed between consumer-goods industries and producer-goods industries, all market led and therefore controlled by the consumers. Their sheer number induces competitiveness as a direct result of free competition. This also applies to the purchase of both materials and of labour.
The entrepreneur (or his agent(s)) is considered to have authority in and over the firm, the fundamental motivation is profit.
Simultaneously, the consumer exercises control, through the market. Therefore the firm ultimately bends to the will of the consumer. This implies that the firm has little power in or over the market, and it is also assumed that the firm has minimal power within the state.
The only (and not numerous) exceptions to this are monopolies and oligopolies, and they are considered to be imperfections in the system, undesirable departures from the general rule of competition.

Adherence to this flawed image of the modern economy is a great comfort to large corporations. If their prices are too high, they are surely blameless because the market set the price. When profits are obscenely high, it is not their fault - the market determines them. Products that are unsafe, poorly designed or environmentally harmful are merely reflections of the will of the consumer, market forces dictate which products and services are provided and at what costs. Any criticisms of the influence of corporations on the state are dismissed as aberrations, since there is no relation between firm and state.

This flawed image also hides the true workings of the economic system, both success and failure, and prevents any remedial action from being seen as necessary. The businessman is shielded from that which he needs to understand best of all - how it all actually works.

The general public perceive that it is ridiculous to suggest that the giant corporations are just helpless servants of the public's own desires and needs, beholden unto every whim of the market and with no power within the state. Yet this is exactly what they are told is happening. Since this is at odds with what they see going on, common sense tells them that there must be something intrinsically deceptive about the modern corporation, the economists who describe it and the governments who exercise control and restraint over it, even about accepted economics itself.

The Present "Actual" Image
Not a single competitive and entrepreneurial system but a double system, each part very differently structured but producing roughly similar output.

One half - approximately 1 in every 1000 manufacturing firms producing about 50% of the products by market value. As time passes this concentration increases.

The other half - the remaining 999 - constitute the dispersed half; farms, small service providers, builders, small traders etc. They give rise to the other 50% of the product. This split is typical of most advanced industrial countries.

Put simplistically, the productivity is split between a small number of extremely large firms and an extremely large number of small firms.

That the large corporation is inherently different from the small entrepreneurial and competitive firm does not need to be argued or proved. Their co-existence however, and the resulting economic behaviour is critical.

The Corporation
The corporate differs from the small firm in two ways, both resulting from its sheer size.

[1] It wields considerable market and political power.
The modern large corporation has considerable influence over its prices and costs. It supplies much of its capital from its own earnings. It strongly influences the tastes and behaviour of its consumers. It exists in the closest relation with the state.
Government gives the corporation legal existence, establishes the parameters within which it functions, monitors the quality and safety of its products and the honesty of its advertising, supplies many of the services on which sale of its products depends (highways/automobiles, electricity/computers).
Governments also act as safety nets, if the corporation struggles or fails they are not allowed to go out of business because of the potential social damage. Modern Socialism is the adoption by reluctant governments (regardless of politics) of the abandoned offspring of modern capitalism.
The corporation's dependence on the state forces them to seek power in the state. Whilst this power is not absolute or perfect it is significant.

[2] It diffuses personal power.
The corporation removes power from the owners (in whatever form), long considered the locus of capitalist authority. Doing so, it also removes power from the stockholders and their representatives, the board of directors. Directors no longer make decisions, they merely ratify them.
This removal of power from the capitalists is part of a larger process, which diffuses power down through the corporation.
[a] Because decisions are numerous and complex they are delegated and re-delegated. This process is perceived as (and probably is) necessary.
[b] The technical and social complexity of the decisions necessitates their shared responsibility amongst the experts - lawyers, accountants, engineers, scientists. Power thus passes from individuals to groups.
[c] Where no direct participation in the decisions takes place, organisation takes form to influence the process - most significantly in the shape of trade unions etc.
Further - power is diffused outside the corporation itself into the innumerable supporting professions and services - law firms, accountants, the education system, dealerships, repair franchises etc.

Testing the Hypothesis
In the old accepted scheme, the competitive, entrepreneurial model, the combination of severe unemployment and severe inflation cannot exist. Two scenarios can exist.

[1] Inflation - which would be controlled by conventional macroeconomic monetary and fiscal policies, usually restricting bank lending and reducing public budget spending. These controlling influences reduce the aggregate demand for goods and services. Since firms do not control prices, the market drives prices down which in turn forces firms to alter production due to falling demand. Lowered price rises put a check on inflation and eventually a rise in unemployment - BUT ONLY AS INFLATION DROPS.

[2] Unemployment - controlled by raising public expenditure, lowering taxes, making borrowing easier and thus increasing spending in general and demand for products and services specifically. Increasing sales will produce an upsurge in jobs to balance the required increase in production, and unemployment will fall. At the same time, increased demand in the market place will push prices up and thus inflation, once again - ONLY AS UNEMPLOYMENT FALLS.

Since, in the Real World, we can observe high unemployment combined with high inflation in numerous economies, the accepted economic model cannot hold.

In the actual double system the combination of unemployment and inflation is to be expected, most especially when the sole tools used in attempts to control the economy are the very fiscal and monetary policies described above.

Trade unions exercise control over wages in the corporate economies. The corporations use their power in the market place to pass their concessions to the unions on to the consumer as raised prices. The old confrontational approach to collective bargaining has been superceeded by the realisation that unions and management can reach an agreement and pass the costs on to the consumer. It is rarely corporate employers who complain about the cost of wage increases, it is usually the government worrying about inflation or the public bitter at rising prices.

The traditional application of monetary and budget restraint in an attempt to reduce demand rarely actually causes prices to fall. Corporations have sufficient clout to maintain their prices. Rather, the first effects are on sales, output and employment. Further - sustained pressure from the unions for higher wages merely pushes prices higher.

The unions are only disinclined to demand higher wages and the corporations are only inclined to stop raising prices when unemployment is sufficiently severe. It is only at this time - severe unemployment and inflation combined, that the traditional monetary and fiscal restraints start to take effect.

Unfortunately, long before they have an effect on the corporate economies, monetary and fiscal restraints have swingeing effects on the multitude of competitive and entrepreneurial firms.

Their prices do fall in response to monetary and fiscal policies designed to reduce demand. Unfortunately, many of the industries that make up the multitude of small firms exist on borrowed capital, housing and construction being classic examples. This makes them extremely vulnerable to the policies imposed to reduce demand, especially the restrictions on bank lending.

As an aside, this does not apply to the corporates, they utilise retained earnings for capital or exercise their power in the banking community, where they are priority customers.

Thus, inflation continues in the corporate half of the economy whilst there is a severe recession in the entrepreneurial and competitive sector.

In the mid 1970's monitory restrictions were vigorously applied to the US economy in an attempt to reduce the severe inflation prevalent at the time. This resulted in a severe recession with falling farm prices, housing construction down by a third, unemployment raised to 1 in 10 of the labour force. Through all this industrial (corporate) prices continued to rise.

Inflation cannot be slowed by fiscal and monetary policies alone without the penalty of very high unemployment. The alternative, which seems to offer some hope of control without penalty is direct intervention to restrain incomes and prices combined with prudent fiscal and monetary policies.

Further proof of the (greater) accuracy of the two-system model can be found in the divergence occurring between the development of the modern economy and the measures taken by government to control it. The corporate half of the economy has the advanced organisations, high technical skills and high capital resources to persuade both consumer and state of the need for its products.

As a result, in all industrial countries, cars, weapons, appliances, drugs, alcohol, tobacco, cosmetics and luxuries are abundant. Shortages of these commodities would be seen as very strange.

In the competitive, entrepreneurial sector, limited in or lacking organisation, technology, capital and power to persuade, shortages and inadequacy are not seen as at all surprising.

Housing, health care, consumer services, even basic infrastructure commodities (road and rail for example) are invariably cause for complaint and anxiety in the developed countries.

Governments are continuously trying to find ways to compensate for these inadequacies in the private enterprise half of the economy.

The conventional model explains these problems away as reflections of consumer choice, the implication being that the consumers are not aware of their needs. This seems unlikely with regard to fundamentals like housing, health care, sanitation, policing etc.

Inequality of opportunity and inequality of reward
Conventional wisdom suggests that inequality arises from differences in ancestors, talent or luck, and that inequalities are constantly being remedied by movement into higher income jobs. For this to work, people must be able to move.

In the corporate half of the economy, as long as inflation is a problem with monetary and fiscal policies attempting to remedy it yet producing the inevitable unemployment, easy movement of the workforce into higher paid jobs is severely curtailed.

In the competitive half of the economy, the unemployed can find work either by going for lower paid self-employment, or lower paid work in non-union controlled small firms.

Thus the inequality between the two halves of the economy, corporate and competitive, still maintains because movement between them is difficult.

In removing power from the owners and capitalists, diffusing it through and even out of the corporation and accepting or even encouraging the organised workers response, the corporations do a great deal to blur the old lines of class and status. This has a significant effect on patterns of consumption in society.

No group in the corporate sector of the economy any longer accepts that it is meant, by the nature of its occupation, to consume less. This exerts pressure for goods, services and the wages to acquire them. This in turn fuels inflation. Raised expectations for public services, education, transport, health care, also increase the pressure.

Demand for more personal income to spend on more goods and services along with better public goods and services are associated with the diffusion of power by the corporations to make them effective. As a result, attempts to cut consumption of private goods by taxation or incomes policies or to inhibit consumption of public goods and services by reducing budgetary spending prove difficult.

I have no answers - only questions to pose and things for those better qualified than me to ponder.