Although the basic Marxian model assumes perfectly competitive markets with a large number of small firms in each industry, Marx was aware of the growing size of firms, the consequent weakening of competition, and the growth of monopoly power. He concluded that this phenomenon derives from the increasing concentration and centralization of capital. Increasing concentration of capital occurs as individual capitalists accumulate more and more capital, thereby increasing the absolute amount of capital under their control. The size of the firm or economic unit of production is increased correspondingly, and the degree of competition in the market tends to be diminished.
A more important reason for the reduction of competition is the centralization of capital. Centralization occurs through a redistribution of already existing capital in a manner that places its ownership and control in fewer and fewer hands. Marx maintained that larger firms would be able to achieve economies of scale and thus produce at lower average costs than would smaller firms.
Competition between the larger, lower-cost firms and the smaller firms would result in the elimination of the smaller firms and the growth of monopoly.
The battle of competition is fought by cheapening of commodities. The cheapness of commodities depends, ceteris paribus, on the productiveness of labor, and this again on the scale of production. Therefore, the larger capitals beat the smaller.5
The increasing centralization of capital is furthered by the development of a credit system and of the corporate form of business organization. Although the corporation was just beginning to assume importance during Marx's time, he demonstrated a remarkable insight into some of the long-run consequences of the growth of the corporate economy. Corporate capitalism is characterized by the fact that its enterprises assume the form of social enterprises as distinguished from individual enterprises. It is the abolition of capital as private property within the boundaries of capitalist production itself. Transformation of the actually functioning capitalist into a mere manager, an administrator of other people's capital, and of the owners of capital into mere owners, mere money capitalists.
Marx's view was that capital accumulation, economies of scale, the growth of credit markets, and the dominance of the corporation in business organization would lead to the concentration and centralization of capital into fewer and fewer hands. Competition would end by destroying itself, and the large corporation would assume monopoly power. With the large corporation would come a separation of ownership and control, along with a number of undesirable social consequences:
a new aristocracy of finance, a new sort of parasites in the shape of promoters, speculators, and merely nominal directors; a whole system of swindling and cheating by means of corporation juggling, stock jobbing, and stock speculation. It is private production without the control of private property.7 Possibly no other vision of the future of capitalism advanced by Marx has been more prophetic than his law of the concentration and centralization of capital. Yet this prediction was not backed up by any substantial reasoning, for Marx did not fully develop an explanation of the forces that would bring about the growth of the corporation and monopoly power. According to Marx, the growth of the large firm with its monopoly power is merely another example of the contradictions within capitalism between the forces and relations of production that will lead to the ultimate destruction of capitalism.