Monopoly’s new era

Financial Mirror (Cyprus) - - FRONT PAGE -

For 200 years, there have been two schools of thought about what de­ter­mines the dis­tri­bu­tion of in­come – and how the econ­omy func­tions. One, ema­nat­ing from Adam Smith and nine­teenth-cen­tury lib­eral econ­o­mists, fo­cuses on com­pet­i­tive mar­kets. The other, cog­nisant of how Smith’s brand of lib­er­al­ism leads to rapid con­cen­tra­tion of wealth and in­come, takes as its start­ing point un­fet­tered mar­kets’ ten­dency to­ward monopoly. It is im­por­tant to un­der­stand both, be­cause our views about gov­ern­ment poli­cies and ex­ist­ing in­equal­i­ties are shaped by which of the two schools of thought one be­lieves pro­vides a bet­ter de­scrip­tion of re­al­ity.

For the nine­teenth-cen­tury lib­er­als and their lat­ter-day acolytes, be­cause mar­kets are com­pet­i­tive, in­di­vid­u­als’ re­turns are re­lated to their so­cial con­tri­bu­tions – their “mar­ginal prod­uct,” in the lan­guage of econ­o­mists. Cap­i­tal­ists are re­warded for sav­ing rather than con­sum­ing – for their ab­sti­nence, in the words of Nas­sau Se­nior, one of my pre­de­ces­sors in the Drum­mond Pro­fes­sor­ship of Po­lit­i­cal Econ­omy at Ox­ford. Dif­fer­ences in in­come were then re­lated to their own­er­ship of “as­sets” – hu­man and fi­nan­cial cap­i­tal. Schol­ars of in­equal­ity thus fo­cused on the de­ter­mi­nants of the dis­tri­bu­tion of as­sets, in­clud­ing how they are passed on across gen­er­a­tions.

The sec­ond school of thought takes as its start­ing point “power,” in­clud­ing the abil­ity to ex­er­cise monopoly con­trol or, in labour mar­kets, to as­sert au­thor­ity over work­ers. Schol­ars in this area have fo­cused on what gives rise to power, how it is main­tained and strength­ened, and other fea­tures that may pre­vent mar­kets from be­ing com­pet­i­tive. Work on ex­ploita­tion aris­ing from asym­me­tries of in­for­ma­tion is an im­por­tant ex­am­ple.

In the West in the post-World War II era, the lib­eral school of thought has dom­i­nated. Yet, as in­equal­ity has widened and con­cerns about it have grown, the com­pet­i­tive school, view­ing in­di­vid­ual re­turns in terms of mar­ginal prod­uct, has be­come in­creas­ingly un­able to ex­plain how the econ­omy works. So, to­day, the sec­ond school of thought is as­cen­dant.

Af­ter all, the large bonuses paid to banks’ CEOs as they led their firms to ruin and the econ­omy to the brink of col­lapse are hard to rec­on­cile with the be­lief that in­di­vid­u­als’ pay has any­thing to do with their so­cial con­tri­bu­tions. Of course, his­tor­i­cally, the op­pres­sion of large groups – slaves, women, and mi­nori­ties of var­i­ous types – are ob­vi­ous in­stances where in­equal­i­ties are the re­sult of power re­la­tion­ships, not mar­ginal re­turns.

In to­day’s econ­omy, many sec­tors – tele­coms, ca­ble TV, dig­i­tal branches from so­cial me­dia to In­ter­net search, health in­sur­ance, phar­ma­ceu­ti­cals, agro-busi­ness, and many more – can­not be un­der­stood through the lens of com­pe­ti­tion. In th­ese sec­tors, what com­pe­ti­tion ex­ists is oligopolis­tic, not the “pure” com­pe­ti­tion de­picted in text­books. A few sec­tors can be de­fined as “price tak­ing”; firms are so small that they have no ef­fect on mar­ket price. Agri­cul­ture is the clear­est ex­am­ple, but gov­ern­ment in­ter­ven­tion in the sec­tor is mas­sive, and prices are not set pri­mar­ily by mar­ket forces.

US Pres­i­dent Barack Obama’s Coun­cil of Eco­nomic Ad­vis­ers, led by Ja­son Fur­man, has at­tempted to tally the ex­tent of the in­crease in mar­ket con­cen­tra­tion and some of its im­pli­ca­tions. In most in­dus­tries, ac­cord­ing to the CEA, stan­dard met­rics show large – and in some cases, dra­matic – in­creases in mar­ket con­cen­tra­tion. The top ten banks’ share of the de­posit mar­ket, for ex­am­ple, in­creased from about 20% to 50% in just 30 years, from 1980 to 2010.

Some of the in­crease in mar­ket power is the re­sult of changes in tech­nol­ogy and eco­nomic struc­ture: con­sider net­work economies and the growth of locally pro­vided ser­vice-sec­tor in­dus­tries. Some is be­cause firms – Mi­crosoft and drug com­pa­nies are good ex­am­ples – have learned bet­ter how to erect and main­tain en­try bar­ri­ers, of­ten as­sisted by con­ser­va­tive po­lit­i­cal forces that jus­tify lax anti-trust en­force­ment and the fail­ure to limit mar­ket power on the grounds that mar­kets are “nat­u­rally” com­pet­i­tive. And some of it re­flects the naked abuse and lever­ag­ing of mar­ket power through the po­lit­i­cal process: large banks, for ex­am­ple, lob­bied the US Congress to amend or re­peal leg­is­la­tion sep­a­rat­ing com­mer­cial bank­ing from other ar­eas of fi­nance.

The con­se­quences are ev­i­dent in the data, with in­equal­ity ris­ing at ev­ery level, not only across in­di­vid­u­als, but also across firms. The CEA re­port noted that the “90th per­centile firm sees re­turns on in­vest­ments in cap­i­tal that are more than five times the me­dian. This ra­tio was closer to two just a quar­ter of a cen­tury ago.”

Joseph Schum­peter, one of the great econ­o­mists of the twen­ti­eth cen­tury, ar­gued that one shouldn’t be wor­ried by monopoly power: mo­nop­o­lies would only be tem­po­rary. There would be fierce com­pe­ti­tion for the mar­ket and this would re­place com­pe­ti­tion in the mar­ket and en­sure that prices re­mained com­pet­i­tive.

My own the­o­ret­i­cal work long ago showed the flaws in Schum­peter’s anal­y­sis, and now em­pir­i­cal re­sults pro­vide strong con­fir­ma­tion. To­day’s mar­kets are char­ac­terised by the per­sis­tence of high monopoly prof­its.

The im­pli­ca­tions of this are pro­found. Many of the as­sump­tions about mar­ket economies are based on ac­cep­tance of the com­pet­i­tive model, with mar­ginal re­turns com­men­su­rate with so­cial con­tri­bu­tions. This view has led to hes­i­tancy about of­fi­cial in­ter­ven­tion: If mar­kets are fun­da­men­tally ef­fi­cient and fair, there is lit­tle that even the best of gov­ern­ments could do to im­prove mat­ters. But if mar­kets are based on ex­ploita­tion, the ra­tio­nale for lais­sez­faire dis­ap­pears. In­deed, in that case, the bat­tle against en­trenched power is not only a bat­tle for democ­racy; it is also a bat­tle for ef­fi­ciency and shared pros­per­ity.

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