The Rise of Large Corporations

Economic freedom enables large corporations to exert considerable influence over the nation. However, before exploring this influence, it might be useful to examine how large corporations emerged. More specifically, what factors led to the establishment of giant hierarchical corporations with in-house transactions and administrative coordination? Two alternative views are discussed. The efficiency hypothesis proposes that the establishment of corporations was a free market response to potential cost-saving and efficiency gains in production, distribution, organization, and management. The power hypothesis suggests that, to avoid the market and its uncertainties, and control supply, firms acquired market power. They also sought the power of large size to gain leverage in dealings with financiers, legislators, suppliers, rivals, customers, and employees. In terms of the current framework, the issue is whether large corporations came about as a genuine response to free market efficiency signals or as an attempt to destroy free markets and reduce other market participants’ economic freedom. The latter was accomplished primarily by taking advantage of unrestricted freedom to profit through the use of political influence.