The Bear’s Lair: Oligarchy beats oligopoly

There is a central contradiction in modern capitalism. Markets have become concentrated in a few ultra-large companies, which then attempt to broaden their spectrum of employees through “diversity” initiatives. Yet the oligopoly of large companies diminishes competition and harms consumers, while “diversity” weakens trust within the corporations and increases communication costs. How much better was the traditional capitalist model, in which firms were small and oligarchic, with senior employees from a narrow social and geographic background! In such a system, trust is high and communication efficient, while the plethora of competitors ensures consumers of all types and backgrounds are optimally served.

Naturally, the optimal balance between oligarchy and oligopoly differs between business sectors. In some areas, for example selling simple, high-volume consumer products such as soap powder, the economies of manufacturing and/or marketing scale are such that an oligopoly is almost inevitable, while the production, marketing and distribution process is so straightforward that communication-sapping “diversity” does not affect it much. You would not want to work for one of these simplistic behemoths, and their management processes will inevitably be pure bureaucracy, but overall the structure probably fits the market and provides the consumer with an attractively-priced product of a type that he does not really care about. The main problem is that these companies’ oligopolistic pricing power will allow them to waste infinite amounts of money overpaying their top management and engaging in DEI initiatives, preventing consumers from getting the best deal.

At the other end of the scale are specialist services such as investment banking/private equity, top-end legal services, management consulting, forensic accounting and increasingly the kind of business-to-business IT services that involve a high degree of artificial intelligence. Carrying out these services in a large organization often produces a hugely inferior product, like the Fujitsu software supplied to the UK Post Office that caused hundreds of innocent postmasters to be wrongly convicted of fraud. Equally, because the nuances of each service provision are so different, a large number of competitors are needed in these businesses and those competitors need to inspire trust, both within their operations and from their customers. Oligopolistic behemoths are provably bad at providing these services, as shown by Barclays Bank’s or Citigroup’s repeated failures in investment banking.

To take (as is my current wont) an example from the distant past, I would bid you look at the history of the Rothschild banking consortium, which because of its five brothers, each of whom ran a branch in a different center (London, Frankfurt, Paris, Vienna and Naples) was collectively the biggest and most powerful banking house in the world for most of the 19th century, say from 1812 to 1880. (It was relatively weak in the United States, because neither the brothers nor any of their more senior offspring could bring themselves to live there!) Yet beyond some railroad financing, it played very little role in financing the Industrial Revolution itself.

We can see why this was the case when we examine one core financing, that was to lead to a leading French industrial empire, the leveraged buyout from bankruptcy in 1836 of the large iron works Le Creusot by the brothers Adolphe (1802-45) and Eugene (1805-75) Schneider.

Le Creusot, located near coal and iron ore supplies in Burgundy, had been set up in 1770 and enlarged in 1782, on both occasions with funding and ownership by the French monarchy. Its founder was one of the most distinguished ironmasters of the 18th century, François Ignace de Wendel (1741-95), a member of a Lorraine ironmaster family that had been ennobled by the Duke of Lorraine (then part of the Holy Roman Empire) in 1727 and had transitioned to France when Lorraine was peacefully annexed in 1766. De Wendel was dispossessed at the Revolution, although his son was able to buy back into other ironworks under the Empire with financing from a bank Banque Seillière, set up by another Lorrainer Florentin Seillière (1746-1825) who had made a fortune supplying army uniforms to France’s interminable military campaigns, diversifying thereafter into ironworks and banking.

Le Creusot was never very profitable, even under British ownership after 1823, partly because it was very remote from major industrial centers, so shipping iron goods across France’s then-abominable road system was impossibly slow and expensive. However, by the 1830s technological change was about to solve that; the railways would bring both an inexhaustible demand for wrought iron goods (Le Creusot’s specialty) and a vast reduction in shipping costs and times once the railway system reached the Le Creusot works.

Enter the Schneider brothers, also both Lorrainers from a gentry background. Adolphe began to work at the Seillière bank in 1821 and had achieved a coup for both the bank and his own finances by becoming chief equipment supplier to the French expedition to Algiers from 1830 – Charles X’s last great triumph – during which he got to know Le Creusot and its management. Eugene also worked at the bank in the 1820s and was then employed by a Wendel relative as manager of an ironworks. Thus, when Le Creusot went bankrupt in 1835, the Schneiders, with financing from the Seillière bank were able to buy it from the winner of the bankruptcy auction for 2.85 million francs (about $50 million in today’s money). Two years later Le Creusot produced the first French-built railway engine, and the foundation was laid for one of France’s great industrial empires.

This transaction indicates why the Rothschilds were not especially active in financing the Industrial Revolution. An LBO of this kind into a difficult situation required a very patient and understanding banker, who would not call loans at difficult times and might provide additional facilities. With both Schneiders having worked for the Seillière bank, Adolphe for more than a decade, and all principals coming from Lorraine and from roughly the same social stratum, mutual confidence and understanding was strong and communication was naturally excellent.

For the Rothschilds communication between the five banks was exceptional, but with all the cross-cultural antagonisms and “black legend” memories that still remained, that trust and communication could not have been achieved between the Rothschilds and gentile industrial entrepreneurs. Hence, even under the very able James de Rothschild (1792-1868) who ran the French bank, the vast majority of Rothschild business involved short-term trading and arbitrage operations, or share issues for large publicly backed companies, where close communications and deep bank-client relationships were less necessary.

The call for small, ethnically homogenous companies to maximize communication and serve the consumer better does not of course prevent diversity in the economy as a whole. Companies whose management cadre is entirely Bangladeshi, for example, generally have excellent internal communication, and can be highly competitive in a field in which they have expertise. Provided there are enough competitors, there are opportunities for all groups in the workforce, working with similar people in a company where communication quality is high, and producing a product or service that, because of the excellent internal communication, is highly competitive in the marketplace.

Likewise, in the complex service businesses in which communication between service providers and clients is critical, small homogenous providers will best serve customer groups with which they communicate optimally. We only need to hear tales of the consulting disasters provided by the big groups, staffed by a “diverse” workforce that fails to communicate with their customers, generally because they despise the customers intellectually and socially, to realize that the 1980s Harvard MBA-staffed behemoth “one size fits all” consulting model is obsolete.

The most important step we can take to achieve this goal is not to enforce “diversity” in large companies, which will merely produce a Tower of Babel effect within them, hampering their effectiveness. Instead, we must break up the large companies into smaller ones, encouraging diversity between competitors rather than within each behemoth. That will produce a market full of competitors that communicate well both internally and with customers.

In this respect, Lina Khan of the Biden administration FTC, with her hostility to mergers, is on the side of the angels. The government should not however break up individual companies directly, but merely institute policies, tax and otherwise, disfavoring size and sharpening competition. So great are the advantages of good communication both within companies and between companies and customers that the market will over time do the rest.


(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)