Wednesday, 8 June 2011

Big Corporations vs. Big Private Equity groups: which is the greatest threat to market capitalism?

Among the three major sectors (state, shadow and big business) encroaching on the market capitalism territory, big business represents an important threat. However, big business comes in two forms – big corporations and big private equity funds. Two representative household names in the US for the two types of organizations are Citigroup and KKR, both listed in the stock market.

Of the two, private equity has the worst reputation. This is due to fact that their key business is in the field of leveraged buy-outs. They also use aggressive tax optimization practices through offshore domiciles. And, although they are the most generous contributors to political campaigns they do not have many job opportunities for politicians.

Leveraged buy-outs often wipe out value, destroy jobs and fail to improve the performance of the companies acquired. However, whether they fail or succeed they never create oligopolies. On the contrary they often lead to company break-ups. Therefore, unconsciously and involuntarily, they contribute to increase the share of competitive markets.

On the contrary, big corporations as the personification of managerial capitalism are often seen in a benign mode. They employ armies of bureaucrats, politicians, public relations and other professionals that promote their interests and image in terms of public opinion. However, to pay for all these courtiers and their management they need to increase their oligopolistic profits. These can only be obtained by curtailing supply or by the elimination of their competitors. In either case they will reduce the share of transactions carried out in competitive markets.

So, one must conclude that not all big business is equal and that big corporations are the greatest threat to market capitalism. Yet, public opinion is unaware that the “polite and urbane” big corporation is worse than the “rough and dodgy” private equity firms.

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