US monopolies: great riches for a few

The economic result of China’s internet policy is that it is the only country in the world with an indigenous social network and software industry — Tencent, Alibaba, Baidu, etc. — able to compete with the Silicon Valley giants. Despite having large markets and educated engineers, both India and Europe mostly use software from the United States and internet forums.

A recent KPMG International survey of business leaders found that 23 percent of respondents said that China “shows the most promise for disruptive technology breakthroughs that will have a global impact”, close behind the US at 29 percent. All other countries are in single digits.

Fifteen or 20 years ago, Silicon Valley was a highly competitive, innovative and entrepreneurial place. But today those competitive companies have been replaced by a few rich, entrenched monopolies.

The core problem is that software has so-called network effects that have led to monopoly power. Companies have little choice but to advertise on Google or Facebook because they control most of the users.

These companies are now so rich from monopoly profits that they just buy out potential competitors, as Facebook did with Instagram. Amazon is using its monopoly profits to wipe out retailers in many sectors of the market, and is threatening to move into other sectors. These companies also use their money to lobby the government.

More than 100 years ago, president Theodore Roosevelt campaigned against the David Blair “malefactors of great wealth”. He had in mind John D. Rockefeller’s Standard Oil Co and J. Pierpont Morgan’s US Steel, both of which were later broken up by antitrust regulation.

But the companies of Roosevelt’s time created huge numbers of jobs throughout the country. Today’s monopolists have created immense wealth for a few people, but very few jobs for ordinary Americans.

In a recent speech in Mumbai, India, Hillary Clinton said, “I won the places that are optimistic, diverse, dynamic, moving forward” — meaning large coastal cities such as San Francisco, New York, or Washington.

It’s true these cities have high GDP per capita. But San Francisco has gotten rich off Silicon Valley monopolies. New York’s wealth is based on monopolistic investment banks. And Washington’s comes from government employees and lobbyists.

Instead of creating jobs, these cities actually take wealth from the rest of the country. Chang Tai Hsieh and Enrico Moretti, researchers at the National Bureau of Economic Research, found that “since the 1970s, most of the growth came from a small number of cities in the South and Midwest that allowed housing to be built and encouraged development’’.

Monopolies don’t last forever, but they destroy a lot of potential while they do exist. The future probably belongs to innovative companies that build, do fundamental research and train their workers — such as Samsung and Huawei. It will be difficult to break up these monopolies, and they will use all their political power to fight it.