We aren’t the first to see that the world has changed and free market competition no longer produces benefits as if by an invisible hand. Historian Alfred Chandler described the change convincingly in his book The Visible Hand. Writing in the 1970s, Chandler described the growth of large industrial organizations in the early 20th century. Their emergence, he observed, marked a major new era in capitalism, dividing its history into two phases. Before 1850 there was the market economy, in which many players, engaged in something plausibly resembling perfect competition, collectively met demand without any grand plan to do so. After 1850, the markedly different system that he called managerial capitalism emerged.

One way to understand the difference is to reflect on the most basic definition of an economy: it allocates resources to fulfill desires. Beyond that, the rest is up for grabs. The difference between Chandler’s two eras was in the mechanism by which that allocation happened. Under managerial capitalism, overall production was no longer driven by market mechanisms; it was decided on by skilled managers in large companies. The invisible hand was replaced by a visible one, belonging to a John D. Rockefeller or Andrew Carnegie, operating deliberately and with sufficient power and intent to change the shape of markets.

The change Chandler describes actually began as far back as the industrial revolution, because that basically invented market power. Before mass production, no organization had achieved or could achieve the kind of scale the industrial revolution enabled. In the beer industry, for example, it created the capabilities to brew huge batches and ship beer over long distances — creating the so-called “shipping” breweries that ultimately dominated an industry that was once nothing but microbrew.

Today it is almost wholly the visible hand that rocks the economy. Massive firms do not respond to consumption dynamics so much as they shape them. They have the means to manufacture demand as well as to serve it.

So here’s the question: if competition is no longer atomized, but is now titanic, does that mean that markets are no longer truly competitive?

We would say so. We think when power is concentrated in the hands of the few, the game gets friendlier on some level. Consider that when there are 500 of us in some setting all pursuing our own agendas, it’s very difficult to get a consensus on anything. But when there are just a few of us, we can come to some kind of agreement.

Let’s say that happens, however implicitly (and we do not claim that it is more than implicit … except sometimes). What would the agreement be? It seems clear that not one of those few bloated players would be pounding the table for the establishment of a more competitive marketplace. Individually, they are committed to thwarting that.

That might sound like an outrageous statement, but it isn’t at all. If you are a reader of management literature, as evidently you are, you cannot have failed to encounter the phrase “sustainable competitive advantage.” This is what all managers in all firms aspire to — it is the holy grail that lies at the end of the search for excellence, and the promise of Michael Porter’s teachings. Its point is simple: that a firm does best when it finds some way not only to prevail in the current market with its current offering, but also to ensure that its advantage is not purely temporary.

Sustainable competitive advantage, in other words, is the tying of the Invisible Hand. In Adam Smith’s world, whenever a producer responded to a market opportunity with a uniquely valuable proposition to buyers, it had the ability to enjoy excess profits. But immediately, those excess profits would be spotted and coveted by other producers, who would rush in with rival offerings. Faced with multiple options, buyers would look for value differentials through lower pricing, and the profits would rapidly be competed away. This, to a firm, is a horror to be avoided: a buyer’s market. The entire enterprise of management has been to find a way around it.

To underscore the point: The invisible hand is the enemy of sustainable competitive advantage — and any firm trying to gain a sustainable competitive advantage is an enemy of the invisible hand.

When oligopolistic conditions exist, therefore, where it is possible for a few major players to implicitly agree on how business will be done, the agreement that is arrived at looks nothing like constant, fierce competition. Rather, it’s in all the leaders’ interests to maintain a stable market and profitable prices. Oligopoly permits mutual understanding to develop, and then, because that understanding supports premium profits, the players have an incentive to maintain the oligopoly. Fat cats just don’t fight like alley cats.

Okay, perhaps we should retract that last sentence, because we can already feel the cats’ backs getting up. That very phrase “fat cats” was after all a lightning rod for the business community when Barack Obama used it. “I did not run for office to be helping out a bunch of, you know, fat-cat bankers on Wall Street,” he told CBS’s 60 Minutes in mid December 2009. In the year following, his administration was broadly accused of being hostile to business, not only by its political rivals but by thoughtful executives like GE’s Jeff Immelt.

But we’re leaving it in, because it’s important to recognize when a knee-jerk response is happening, and when that reflex needs to be called out, challenged, and changed. Please think about this with a mind unclouded by what you think your politics are: it is not a necessity to be on board with business interests to be a defender of free markets. In fact, as we’ve been describing, the two are deeply at odds.

There is undeniably a common attitude in America that to be pro-free market is to be pro-business, and vice versa. Routinely we see defenders of American values reflexively taking the side of corporations in policy disputes. But it’s important to understand that, while in the abstract corporate leaders are defenders of free markets, when it comes to their own competitive settings, they would much rather sit well above the fray.

Sometimes it’s hard to understand what self-described advocates of the free market do believe in since they so often defend the rights of the company that already has market power to do whatever it can to strengthen its position further. This is a point we really feel strongly about: we give huge market power to large corporations under the banner of free competition, when in fact what they are engaging in is not competition. It is pseudo competition.