Milton Friedman: "The Social Responsibility of Business is to Increase its Profits," is Wrong

Milton Friedman, "The Social Responsibility of Business is to Increase its Profits," is wrong.

In his famous article, “The Social Responsibility of Business is to Increase its Profits,” (originally published in the New York Times Magazine September 13, 1970, see eg:http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html) Milton Friedman quotes himself from his book Capitalism and Freedom:

"there is one and only one social responsibility of business–to use it(s) resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

This is his concluding line in an article dedicated to denigrating the idea of “social responsibility” in businesses, and in particular by corporate executives. For a corporate executive to act in a “socially responsible” manner, Dr. Friedman posits that “it must mean that he (the corporate executive) is to act in some way that is not in the interest of his employers.”  That is, any act, (not geared to maximizing profits,) in excess of the minimum required by law and custom is not in the interests of his employers. 

His conclusion is at least naïve.  Clearly, a business can increase its profits if  “it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."  How much easier, though, to maximize its profit by externalizing all costs, by capturing and corrupting government, and altering the rules of the game to its convenience?  How much easier to profit by eliminating free and open competition, and legalizing deception and fraud? 

Dr. Friedman criticizes the 'socially responsible' postures taken by executives in and prior to 1970.  He further condemns socially responsible behavior by smearing it with the ‘socialist’ paint brush:   ”This is the basic reason why the doctrine of "social responsibility" involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce re­sources to alternative uses.”  Here Dr. Friedman makes no compromise. He essentially claims that market mechanisms are the only way to determine the allocation of scarce resources, denying any limitation to or failure of markets, or any use for political mechanisms of allocation.  But pollution control, and work place safety, are political allocations of resources, and ones which would be opposed by market mechanisms.  The failure of the market in the US to provide universal health care is another case in point, assuming universal healthcare is desired by a majority of the people.  

Milton Friedman's claim that the sole social responsibility of business is to increase its profits, places businesses into an adversarial relation to society.  That is, businesses become the enemies, the exploiters, of the society of which they are a part.  The logical conclusion of Dr. Friedman’s statement is that it is not a part of the social responsibility of business to behave in a socially responsible manner.  His implication, although I don’t think he realized this, is indeed quite the opposite, that a business should behave in a socially irresponsible, and even socially destructive, manner, if this increases its profit. This position is schizophrenic.  It is as if the hand was encouraged to act against the interests of the body of which it was a part.

There are ways of increasing a business’ profits which are damaging to the society of which it is a part. Indeed, it is a tendency of business to seek to externalize all costs. Thus, to pollute, to ignore worker safety regulations, to engage in mis-representation if not fraud, etc. If the business is in competition, and these things are permitted, it must do them, since its competitors, similarly situated, will also do these things.  Its competitors, if allowed to externalize costs by polluting, will do so, and so it must also.  Its competitors, if allowed to externalize costs by skimping on worker safety, will do so, and so it must do so also.  Further, business will seek subsidies by the government, and taxes by the government on its competition.

The conclusion of Dr. Friedman’s position implies the necessity that the corporate executive act without conscience.  This is necessary, since any operation of conscience within the confines of the executive’s office would be contrary to the profit maximization principle under which the executive, as an employee of the owners, is obliged to operate.  Indeed, profit maximization obligates the corporate executive to pollute and otherwise externalize all costs, so far as practically permitted, and to undertake the corruption of the regulating bodies, that is the corruption of government. 

But where is the root of his error?  Consider this quote from the article: “Society is a collection of individuals and of the various groups they voluntarily form.”  Society is hardly a mere collection.  It is dynamic, and its dynamic is non-linear. Society is not merely the collection of individuals, or even the mere collection of their actions.   The effect of everybody doing a thing, is quite different from the effect of just one or a few persons doing that thing.  Society is more than the sum of its parts. A business is more than the sum of its parts.  And the actions of businesses, and the other parts of society, combine in non-linear, and synergistic ways. There are returns of scale, and greater returns on the scale of integration of an entire society.  A business unconcerned with these interactions does society, and itself, disservice.  Dr. Friedman’s conception serves to atomize and divide, and reduce those social returns to scale, impoverishing society.  This is what we have seen, in the triumph of his error, and the rise of those who subscribe to it.

Consider instead a purely operational, and self-interested, definition of conscience: seeking to do that which is ultimately best for one’s self:  Seeking the larger good, with the expectation that one’s own welfare will be improved if that larger good is enhanced.  We do assume that the executive is interested indeed in maximizing the profits of his company. Then a goal of the business executive is the optimization of his society, (and by optimizing we can here mean purely maximizing the economy's growth rate,) since in an optimum society, his corporation itself is optimized, and in the long run, its profits maximized.  Thus, the executive with conscience will seek to participate in, and encourage the development of, a well regulated market, one which will enhance the value of his business to society, since in such a market growth is optimized for all businesses.  Therefore, rather than corrupting the regulators, he will seek regulation which maximizes the efficiency of resource allocation. Rather than competing in a race to the bottom, he will seek effective regulation that will encourage all businesses to good behavior. The business man of conscience, therefore, will speak out against corruption, and the capture of government by other businesses. As this will be in his own long term best interest.

The corporate executive’s duty to his employers is not uncritical obedience to the principle of short term profit maximization. Long term maximization requires the long term survivability of the society of which it is a part. 

Neither do the owners enjoy all incidents of property.  Ownership of property in any society is not an absolute.  It entails duties.  Society, and its government, retain the most important incidents of property, and this implies the obligation of the owners to ”socially responsible” behavior.   All individuals in society, by voluntary agreement, undertake this. 

While it is beneficial for each business to pursue its narrow interests, even to act in an unethical manner, (which Dr. Friedman in the larger sense implies is OK as long as it is within ‘the ‘rules of the game,’) it is bad for each business if all businesses act so.  Where all businesses sacrifice the larger good, sacrifice their ‘responsibility to society,’ for their narrower interests, all are poorer, and all lose. Where all businesses sacrifice the larger good, the larger good contracts.   

Even the winners lose. Therefore, it is in the interests of each business, to see that other businesses act in an ethical manner.  Thus, that the business exists in a well regulated market, and not a corrupt, environment.

We take Dr. Friedman to his logical conclusion, and that business indeed exists in an adversarial relationship to society, that its ultimate interests are contrary to the interests of society.  Then there is no intrinsic restriction to its activities in that society:  There is no limit on the things it can, or should, do, to gain profit. So business should seek to capture government,  and seek to ‘free’ itself from the constraints of regulation, and mitigate or corrupt that regulation.  Then when business captures government, and corrupts regulation, it must be that the government also acts contrary to the interests of society.  Therefore, it is in the interests of society, that the separation of business and state remain inviolate.  The Supreme Court’s decision Citizens United, therefore, must be considered inimical to society, at the least a terrible mistake, and those who support it, and profit by it, society’s enemies.

Clearly, it is in the interests of failing executives, and failing businesses, to corrupt government, and to legitimize deception and fraud.  Failing at production, they seek success through corruption.  Instead it is in the interests of successful executives and businesses to seek a well-regulated environment, and good government.

Society is captured by men who do not believe that the larger good is to their benefit, and therefore seek their own narrower self-interests, to the destruction of the larger good, and ultimately their own.

That our government is captured by executives and businesses, many of which would otherwise fail, that is to say, are not producers in any real economic sense, and so could not compete in a free and open market, bodes ill.   

Executives and corporations have taken Dr. Friedman's statement to heart.  His prescriptions have, so far as they have been carried out, done untold damage to the economy.

Progressive Taxation Encourages Investment

Progressive taxation can be an important tool in conserving natural resources, since it increases the relative present value of future returns, by reducing the returns to immediate exploitation of the resource.  Consider an example:  A capital good, a wood lot, say, provides an income stream of $100,000 in perpetuity.  Now, if the tax is flat, and the resource can be cashed out, for $2,000,000, and invested at interest for 5%, then the owner would be indifferent to exploiting or conserving the resource.  On the other hand suppose, with a progressive tax, the $100,000 was taxed at a miniscule rate, and the $2,000,000 at 50%.  Then the owner would have to be able to invest the $1,000,000 that remained after taxes at a 10% rate in order to be indifferent to preserving or exploiting the resource.  If this rate were unavailable, he would be more interested in conserving, rather than exploiting, this resource.

Indeed, progressive taxation increases the relative present value of any future income stream, and so encourages investment in the future.

The Extraction of Money from Communities in the New Economy

     The sound you don’t hear is the sound of money being sucked out of your community.  But you can see it.   Walmart is merely the biggest.  Target, Home Depot and Lowes.  Best Buy.  Staples.  McDonald’s and Wendy’s, Burger King.  The old standards like  Penny’s and  Sears. Even  PetCo,  Starbucks and ToysRUs. CVS and Walgreen’s.  The grocery chains.  Shell and Mobil and Sunoco.  And then of course  the big banks, Bank of America ,Wells Fargo, the rest.  They are pervasive.    Everywhere. 

      And what are they?  They are all extractive industries. 

      And that is what they extract?  Money.  Money from your community.

      And this is a new thing, this reorganization of the American economy.  It used to be, in the days of mom and pop stores, of locally owned factories and family farming, of small banking, that more of the money remained in the community, helping to maintain the flow of resources within and through the local economy. Factories and farms brought in the money.  Returns of production costs of the product went to the community.  Merely the cost of the materials which it used in manufacturing went outside the community, and this it recouped through the price of selling. The community also retained the profit, when the owner of the factory was local. See Diag 1, the factory in the Old Economy. (The sizes of the arrows within each diagram are merely indicative.  The important thing is the difference in sizes of the arrows between the diagrams.  Remember also the flow of money is opposite to the flow of goods and services.  When goods go out of the factory, and are sold in the Rest of the World, money flows in.)  The factory is a part of the community.  The factory brings money into the community by selling its product to the Rest of the World outside the community.  The only money it exports is for the material and energy which goes into making that product.  The rest of the money goes either to the workers, or to the owner.

      The workers, and the owner, who was a part of the community, spend some of their money in the Rest of the World, but spend most of their money in the community.  It is thus more likely that the amount of money retained by the community is greater than the money which leaves the community.  So the community prospers and grows.   

(Note, however, it grows by extracting money from other communities.  With a constant money supply, this is a zero sum game.   One community’s gain is another community’s loss.  Indeed, for a community to grow without deflation, it must have an influx of money.   And it is difficult for a community to grow with deflation, because under deflation, on average, businesses are nominally losing money.)

      The ‘Old Economy’ is no longer.  Now the profit goes to the headquarters of the giant corporations.  And to their owners, who take the money extracted from your community and spend it in theirs.   This makes their communities prosperous, while yours declines. See Diag 2, the factory in the New Economy.  The diagram is really no more complicated. All the flows of money are in the same directions. The extra solid arrows indicate increases in money being spent.  The clear arrows indicate money which is no longer being spent.  Thus in Diag 2.  the extra arrow going from the factory to the Rest of the World is the increase in costs due to the fact that the factory must buy its factors from oligopolies, while the clear arrow indicates money lost due to increased competition and the fact that it must sell to oligopsonies in the Rest of the World.  The money going to the owner does not necessarily change, but now, since the corporate owner is no longer in the community, the profits from the factory also leave the community.  Facing oligopsony, the Factory’s return is minimized, reducing profits and forcing the reduction of overhead.  This means replacing workers with machines.  So the capital costs leave the community, and the lost jobs reduce income to the community.  The clear arrow from the Factory to the workers in the community represents the reduction in income to the community due to decreased payrolls, a result of increases in productivity and mechanization.  Since the workers, as well as the factory, are now buying from oligopolies, more money leaves the community through them, and the clear arrow to the community indicates that less is retained by the community.  Thus the direction of the flows are the same, but the quantities are different, with more of the money from the operation of the factory leaving the community, and less staying in the community.  

      

      While it is possible for this community to also be prosperous, it is more likely, than in the old economy, that it is not, but rather that more money is being taken out of the community than is coming in.  It is still possible for the factory to be operating at a profit, that is the money coming into the factory is greater than the money going into the rest of the world and the workers. The owner is then making a profit.  However, it is more likely, than in the old economy, that the money going to the workers is also less than that leaving the community.  Thus, the community would be in decline.

      We can make a similar comparison of diagrams between old and new economies by studying the flow of money through their respective stores.  In the old economy, the store is locally owned, in the new, corporately owned. 

      Consider Diag 3, the store in the Old Economy.  The store is locally owned.    Money comes into the community from outside, say through a factory.  It could be farm production, or just the returns from the labor of members of the community in other communities.  Some is spent at the store, some circulates through the community, some leaves the community through other channels.  Of the money spent in the store, some goes to the Rest of the World, that money the store spends on products there.  But much, even most, is retained by the community, as wages, as profit to the local owner, as money paid to local producers.  Of the profits paid to the owner, some are spent in the Rest of the World, some spent in the community.  In any case, a relatively high percentage of the money spent in the store remains in the community. 

      Compare this to Diag 4, the store in the New Economy, in a ‘typical’ modern community.   This is the chain store, owned by a distant corporate owner. (Some of these are franchises, locally owned, but all sending a cut to the distant corporation.)  Again, the diagram is really no more complicated than the first one, the store in the old economy.     The flows of money are all in the same direction.   The added solid arrows indicate an increase in the flow of money, the clear arrows a decrease.  Money comes into the community from outside, through what the community produces.   This may be farm production, the production of a factory, or the labor of members of the community in other communities.  This is reduced from before (clear arrow from Rest of World to Community,) because the Community faces oligopsonies.  With a chain store, there is an increase in flow into the Rest of the World.  First, of course, the profits of the store go to the corporate owner, and leave the community.   This is also indicated by the clear arrow from the Corporation to the Community.   Second, there is little or nothing bought from local producers, so that arrow now points into the Rest of the World. Finally, there is the increase in money due to the fact that the goods the store buys are now bought from oligopolies, and thus at a higher cost. 

      

       This last needs to be discussed, because it is not so clear cut. While the chain store faces oligopolies, it is often an element of an oligopsony, and thus can command lower prices for the goods it buys.  Further, there is the natural savings due to trade.  (But this tends to drive out the local producers.) What is certain that it can, with its volume purchases, command prices from its suppliers lower than a locally owned store, and thus put the locally owned store at a competitive disadvantage.  This reduction is indicated by the clear arrow from the community to the store.  Indeed, because of this, the chain, so far as it presents substitutable goods, tends to drive the locally owned store out of business, and replace it.

      But to continue, the chain store, where it is larger than its competitors, can reduce labor costs two ways.  First, through more efficient labor practices, that is selling a greater volume of goods per unit of labor, and second through oligopsony in the labor market, driving down the costs of labor to a minimum.  It tends to drive wages down to the minimum, actually.    This is indicated by the clear arrow from the store to the workers.   Since the workers also face oligopoly in the rest of the world, the flow of money from the workers to the Rest of the World increases.  Together these factors reduce the amount of money the workers circulate in the community.  This needs to be discussed.

      The cost of labor to the store is really a zero sum for the community.  The greater the labor costs, the more the community must pay.  The less the labor costs, the less the community must pay. But in either case, the money comes back to the community as wages paid to the workers.   So it is really only a factor in the chain store competing against local businesses, lower labor costs allowing lower pricing and thus greater competition against the local business.  This forces down the price of labor in the local businesses, so long as they remain competitive.  It does change the distribution of money in the local community, reducing the share available to low wage earners, but this is another matter. 

      Aside from the differences due to oligopoly and oligopsony, the two major differences are the profits  leaving the community to the corporate owners,  and the money that leaves the community instead of going to local producers.  As in the new factory economy, the bottom line is the increase in money flowing out of the community, and the decrease in money flowing into the community, making it more likely, than in the old economy, that the community may be losing money rather than gaining it, and so be in decline.  If we realize that a prosperous community is only a few percentage points to the good, that is, the community typically makes only a small ‘profit,’ this is a significant difference, and may mean the difference between success and failure.

      And a successful community may be an extractive community, that is, one that relies on the extraction of resources from other communities.  We have indicated how successful factory communities extract money from other communities.  But we look now at Diag 5, the Store in Owner Communities.  

      The arrows have been simplified and reduced, but otherwise it is the same as Diag 4, except the corporate owner is a part of this community, and is responsible for a great influx of money into the community.  Indeed, the owner may be the major, or even the only source of money to the community. (By owner here, corporate owner, we don’t necessarily mean just the owner per se.  For instance, in a community with a corporate headquarters located in it, all the staff of the headquarters would be included under the term ‘owner.’  Even a corporate engineering office would qualify, (although that could also be analyzed as a factory, as could the headquarters itself.)  Not that they are necessarily actually owners, but rather that their employment is dependent on the flow of money from distant stores and factories.)   

      In any case, the inflow the sum of profits extracted from many communities, is more likely greater than the outflow.  For oligops living in communities distant from the ones they exploit, the fate of these other communities is secondary to their profits. 

      

      And what are the symptoms of excessive extraction? 

      Well, you can tell the poor communities, because few of the extractors mine there.  The money is gone. The ore has been played out.   Oh, perhaps the inferior extractors, like Dollar Tree, or Family Dollar, or the Payday Loan check stops, still plough the poor soil.  But the better ones, even many of the not so good ones, have left.   Those that require the rich ore, the high end extractors, the Bergdorf’s, the Saks, the fashion boutiques, the Abercrombie & Fitchs, the Aeropostales,  who require higher margins from their smaller volume;  the Apple stores, have long gone, if they ever came.        

   

      A community  may benefit from trade, where it is a net producer of goods, but this is increasingly difficult.    Free trade exposes a community to oligopsony and oligopoly.  Oligopsony minimizes the benefits the community receives from its own production, whether it be factory, or farming, or mining.   Oligopoly maximizes the extractions from the community, of goods sold in the community.   So a community may suffer from trade, even when it remains a producer.  It will likely benefit, where it is an extractor/owner community, but theses are comparatively few.  A community either benefits from the advantages of trade, or instead suffers extraction, of which a deficit in the public budget, is one aspect.  As money is sucked out of the community, unemployment rises, and locally owned businesses decline.    The tax base erodes. The schools decline, and maintenance of roads and infrastructure deteriorates.     The public commonweal is destroyed.

      Corporations are not interested in the typical communities of America, except as a source for the extraction of money.  Indeed, according to Milton Friedman, their only social responsibility is to increase their profits.  That is, their interest is in the destruction of the community.  Look at Apple.  They send their jobs to China and their profits to Lichtenstein.  They do not love America.  America to them  exists only to be exploited.   Their store is here.  They are interested in investing in stores here, but not so much in factories.  This is because in a community which is still a source of extraction, which still has money, everything costs more.  And this means the cost of labor, and thus the cost of production, is higher. 

      That is why corporations are not investing in America, except in extractive industries.  They are not investing in producing in America, because it means investing in the communities of America, and they have yet to be depleted by the extractive actions of these same corporations.  The costs are high, because of oligopoly, and the returns are low, because of oligopsony, oligopoly and oligopsony these corporations themselves inflict.  

      As for the extractors, they cannot spend their money fast enough.  And, because they cannot spend it fast enough, they put it in banks, often overseas.   From there, it makes its way back to the front banks in the US, where it is loaned to members of your community, and the interest is extracted.  Or they invest it in other extractive industries, other retail chains, or factories overseas.  The products of these factories are used to extract money from the communities in which they are sold. And the money from the production of these products, no longer made by factories in the community, is extracted by these overseas factories.   And the cost of shipping from overseas is also extracted.

      We come to an interesting conclusion.  As long as there is money to be extracted, extractors will come, with their stores, and seek to extract that money from the community.  (But worse is Amazon, which you do not see.   Amazon spends nothing in your community.  The entire monetary value of the imported product is extracted from the community.  Because those brick and mortar stores you do see spend most of their overhead in their respective communities, at least the community retains that, and the damage is less.  But Amazon and the rest of the mail order companies spend nothing, and are engaged in pure extraction.)

       And the members of the community become a party to the destruction of their community, and their own destruction.  Because the extractors do not bear the cost of supporting the community, they can sell at lower prices.  And the members of the community, in perceived self interest, benefit from these lower prices.   But their community does not, because the money saved is merely spent at other stores, and still exported from the community.  Not enough money is retained by the community to maintain the money supply in the community, and that supply declines, along with the community welfare. It could be said that the community consumes itself to death, as increasingly each act of consumption, in the New Economy, costs the community money.  

Links to NPR: Money in US Politics

Here's a link to an NPR episode on money in US politics.  You probably don't know how bad it really is:

http://www.thisamericanlife.org/radio-archives/episode/461/take-the-money-and-run-for-office

Here's the teaser.  Just 10 minutes:

http://www.npr.org/blogs/money/2012/03/30/149712857/the-friday-podcast-im-calling-to-ask-for-your-contribution

 Should make you want to listen to the main episode.

This American Life is doing a series, which we will try and keep you up on.

Links: Bank of America: Too Crooked to Fail

This should make you angry.  You're paying for it, and will pay perhaps thousands of dollars for it.
You.  Personally. And that may be if you're just lucky, since this sort of things screws up civilizations.

http://www.rollingstone.com/politics/news/bank-of-america-too-crooked-to-fail-20120314


Higher taxes. Higher prices.  Fewer services. Degraded quality of life.

The bank(s) is(are) half the problem.  The essential complicity of our government is the other half.

And more of the same with the so called JOBS bill  (Jump-start Our Business Startups) now going through Congress.   Investors will have another reason to beware, since it essentially reduces or does away with a lot of pesky disclosure formerly required of companies raising money from the public. Not that that will be a real problem, except to the suckers, er, investors, any company unwilling to disclose is looking for. 

Further, there is no reason to invest in an economy that is essentially frozen by excessive rent seeking, and as Matt Taibbi documents, is increasingly run as a Kleptocracy.

And this is the real reason for the decline in IPOs. (IPO is initial public offerings, the stock companies offer when they go public.) After all, disclosure wasn't a problem before  Certainly not in the 1990's, when there were hundreds each year, despite the disclosure laws they are now getting rid of.
 
As far as I can tell, the only difference between Democrats and Republicans is that the Democrats seem to use a little more grease. 

On the Need for Regulation of Oligopoly and Oligopsony

 A modern economy relies on a robust distribution of assets. This distribution of assets is necessary for its distribution of income.  It has a certain ‘shape,’ and the distributed income from these assets is necessary for it to maintain that shape.  Where ownership and control of these assets is narrow, the income from these assets goes to a small portion of the economy, depleting the rest of the economy of the income it needs to maintain itself  Even where there is redistribution, there is loss of efficiency.  While this is recognized with government redistribution, which is why large private interests often oppose it, it also happens with private redistribution, which tends to shortchange vital services which are not easy to extract profit from.   The privately powerful also have other interests in opposing or co-opting government authority, since government is, besides other private interests, the only counter-weight to their own unbridled power.  And this power will not always act in the public interest. Indeed, there is no reason, once it attains a certain magnitude, to imagine that it would act in the public interest, and instead that it would see the public as a source of rent extraction and exploitation.   

Our point is that while regulation may be a matter of justice, it is as importantly a matter of economic stability and efficiency.

There is clearly a need for regulation in monopoly. It is in the interests of the monopolist to produce less and charge more for what is produced, reaping an extra normal profit.  Extra normal profit translates into extra normal growth.  This results in an increase in the share of the economy going to the monopolist.  When the monopoly is small, this is incidental to the economy.  Where large, in proportion to the economy, however, it is insupportable in the long term.   

Just as in monopoly and monopsony, we see a need for regulation in oligopoly and oligopsony, and their combination oligonomy.  (When referring to all or any of them, we’ll use term oligopy, and similarly oligopist.)   The point is that rational behavior for the oligopist is not the best outcome for society. The oligopolist will produce less, and charge higher prices, than at competitive equilibrium.  The oligopsonist will pay less, and buy less, than at competitive equilibrium. Both will reap extra normal profits. The continuing transfer of wealth to the oligopist leads to accumulation and concentration of wealth and power, and a depletion of the wealth from the rest of society, while at the same time shorting the economy of goods and services it otherwise desires and even needs.

But this is not even in the long range interest of the oligopist.  For the oligopist, his market must grow at a rate equal to his own.  But by collecting extra normal profits from his market, his market cannot grow at that rate. His market grows, if at all, at a slower rate, and this rate limits the rate at which the oligopist himself can grow.

An oligopsony reduces the revenue available to producers facing that oligopsony.  Producers cannot sell as much, nor can they get the best prices for what they do sell.  They are thus discouraged from production.  Fewer enter the market.  Production is less reinvested in, becomes undercapitalized, and tends towards obsolete methods. 

When the oligopsony is in labor markets, (and the destruction of labor union power has essentially resulted in such an oligopsony,) it has these effects on the investment in human capital.  There is greater unemployment, greater underemployment, and less investment in education, as the labor force becomes undercapitalized, and tends towards obsolescence.

An oligopoly, where it is a supplier of factors for other producers, (and even finished goods may be regarded as factors for labor,) has the same effect. Because the producer forced to buy his factors from an oligopolist must pay more for those factors than he would if he could buy his goods in a more competitive market.  His product must either be more expensive, sell for more and at reduced quantity, or, if priced the same, sell at reduced profit.  His revenue is reduced.  His ability to capitalize his business is reduced.  Production is less reinvested in, becomes undercapitalized, and tends towards obsolete methods.   

The oligopist, because of his power, finds himself in a situation where he must sacrifice the long range good of society, and thus his own long term interests, for the short run interests of his oligopy.   Putting it the other way, if he were to seek to better serve his society, he must put his firm at disadvantage. The only other option is to cooperate with his fellow oligopists in producing, or buying. to competitive equilibrium,  in price and quantity. But this would entail sacrificing their extra normal profits, and worse, losing market share in the event any of the other oligopists defected, and ceased to cooperate.  (Of course, they could always cooperate to enhance their extra normal profits, to society’s detriment.) The preservation of his society is simply not seen in his best interests. This is a situation he would not be in with more perfect competition, when his interests would be more closely aligned with that of the economy at large.  

And it is a situation of composition.  Where oligopy is a relatively small portion of the economy, the economy can endure the distortions brought about by the abnormal profits of the oligopy.  The rent collected is not so exorbitant that it cannot be compensated for, at least to some degree, by the other operations of the economy.

 It is worse when oligopy is pervasive. Suppose the economy consists, somewhat evenly divided, of oligopy and its market. Then the oligopist is in a quandary.   What can he do with his extra normal profits?  It is pointless to invest in the oligopy’s market, which, limited in profit from facing the oligopy, is restricted in growth.   And it is pointless to invest further in the oligopy, which, because its market is restricted in growth, itself is restricted in growth.   Since there is no profitable investment in the real economy, he seeks to invest in the financial economy.  But the financial economy is also limited by the real economy.  Financial assets must eventually be redeemed for real assets, but since the growth in real assets is arrested by the extra normal profits of oligopy, there is no growth in the real assets for any growth in the financial assets to be redeemed for.  The result is a surplus of money for investment, with no real profitable opportunity.

This is the important point.  Unregulated oligopy, with its extra normal profits, when it becomes extensive, arrests the growth of the entire economy.  Indeed, the situation is actually worse, because by continuing to purge the rest of the economy of its normal income, it can cause the rest of the economy’s revenue to be less than its expenses.  Thus, the remainder of the economy, the oligopist’s market, may actually be forced into contraction.  But this is bad for the oligopist as well. For an oligopolist, it will shift the demand curve left and/or down, thus reducing the optimum quantity, or the price, or both, depending.  In any case, the revenue will be reduced.

With a straight demand curve, shifting it left, down, or left and down, are all equivalent.  With a kinked, or curved, demand curve, these each result in different diagrams, so we have to figure what factors will reduce the price, but not the quantity demanded, and which will reduce the quantity demanded, but not the price, and which both.  We must follow the kink, since that is where the price and quantity will become fixed at. 

If money were taken out of the market for food, say, a good with a relatively inelastic demand, the quantity demanded would probably not change, but the price would decline. The demand curve would shift downward, and p_a would decline.   In the food market it would be price deflationary.  In the more elastic market for luxury goods, the quantity demanded would probably change, but maybe not so much the price. q_a would shift to the left, but p_a would not change so much.  For goods or services in intermediate elasticity, the demand curve would probably shift down and to the left, and both p_a and q_a would change.   

(And similarly for increases in the demand curve.  The demand curve would shift up for inelastic, right for elastic, or both, depending on the price elasticity of the good or service demanded.)

In analyzing the situation, reducing the economy to just an oligopy and the rest of the economy, the situation then reduces to the producer-consumer problem, with the oligopist in the position of the producer. But of course, the oligopist attains his advantage, and his extra normal profits, not by doing more, but by doing less, and charging more, and paying less.  Rather than contributing his ‘fair share’ for the economy, of ‘pulling his weight,’ he slacks off, and uses oligopistic power to demand more money for what he does contribute, and to pay less for what others contribute.  That is, compared to the rest of the economy, he becomes a net consumer, the consumer of the purchases of his extra normal profits.   So really, it is more accurately described as the strong sector vs. weak sector economy, with the strong sector extracting its rents from the weak sector. See:  http://anamecon.blogspot.com/2011/11/morality-and-debt.html

We see here, with oligopy, Adam Smith's invisible hand, rather than acting to the benefit of society, acts to its detriment.

So now that we have established the need, the issue becomes what techniques can most efficiently counter the redistributionist tendencies of oligopy.

Link to Michael Hudson on How Banks Plan

Another gem from Michael Hudson:

 http://michael-hudson.com/2012/02/wall-streets-capital-gain-planning/

“…Everything over subsistence, they’ll want as a loan…”

“…Once the entire surplus is paid to the banks, there’s nothing  (left) over for rising living standards, there’s nothing over for new capital investment, there’s nothing over for long term research and development…”

Further, once growth is arrested, so is growth of the bank's investments.  It becomes a fixed income stream on a fixed asset.  Optimum is for the banks to aim for optimum real growth rate.  But banks can’t do this.