A fascinating bit from Max Ehrenfreund in WaPo concerning economic activity in free markets:
It’s one of the most important yet least understood sources of ordinary Americans’ economic frustration: U.S. companies aren’t investing as much as they used to.
When corporations don’t invest or invest less, they put fewer people to work building factories, making equipment and conducting research. But investment has slumped in recent years, and researchers say there isn’t any obvious or consensus reason for the investment slowdown.
Now, two economists at New York University, Germán Gutiérrez and Thomas Philippon, think they might have at least a partial explanation. In a paper published this week by the National Bureau of Economic Research, they argue that increasing concentration of economic power in the hands of relatively few behemoth corporations — in some cases to the point where companies enjoy a near monopoly — could explain the pattern: The big firms, unconcerned about their competitors, simply have no need to invest in staying ahead.
“It explains a big chunk of why investment is low in the U.S. today,” Philippon said.
In separate research, the two economists found that market power has not become more concentrated in Europe. As a result, European markets are now more competitive than those in the United States — a remarkable shift in a country where free markets have long been not just a point of pride, but also a priority for national economic policy. “It’s a complete reversal,” Philippon said. “The U.S. has always been the more pro-competition place, but it’s not true any more.”
Now, the libertarians will tell you that in this situation, new competitors will appraise the market and its suppliers, discover inefficiencies, innovate, and attempt to overturn the dinosaurs dominating the niche. However, the “moat”, the barriers to new competition, can stifle those new competitors. Often, behemoths are difficult to even breathe against; the end of the dinosaurs may come about only because it’s the end of that particular market. Think buggy whips.
Kevin Drum remarks:
I don’t have the chops to evaluate this, but I’m sure others will chime in. However, it reinforces my belief that competiton [sic] is good for its own sake, and antitrust law needs to recognize this. We should move away from “consumer benefit” fables that corporations use to justify mergers, and instead insist on keeping sectors as competitive as possible.
And, implicitly, completely free markets are not naturally great economic generators; the quality & quantity of the economic activity will depend on the context. Given a large enough moat, a company dominating its niche can simply become a cash machine for its owners.
And, philosophically speaking, and assuming this research is replicated and generally accepted, it’s a blow to the concept that free markets are naturally self-regulating and well-organized systems requiring little to no governmental supervision. This concept is greatly appealing to programmers, as they find analogs in the problems they solve. Human supervision of computer programs is often a clumsy, discouraging business, as it introduces possible error and even malice. When it can be avoided, there’s a certain satisfaction to completing the coding. Perhaps it’s distantly akin to the physicists’ love of beautiful math to describe reality.
But free marketeers often ignore the human element, and companies often reflect the personalities and desires of their management and shareholders. I recall a story about my first post-college employer, CPT Corp., whose CEO was characterized as the Ayatollah Khomeni[1] of Minnesota business. The story went that his VP of Development, a gentleman by the name of Stearns, was developing the very first clone of the IBM PC without notifying the CEO. When he revealed that he had nearly completed what would have been a huge cash cow for CPT, the CEO didn’t thank him – he fired him in a rage.
CPT later went bankrupt, and not much later.
That said, until now competition implied labor – the labor to develop and manufacture new products. But the advent of AI-driven robots may alter this equation, depending on how the long term cost structure for such machinery works out. If so, the greater competition anticipated from successful anti-trust efforts may not appear as anticipated.
1The Ayatollah, the spiritual leader of the revolutionaries who overthrew the Shah of Iran, was demonized by American politicians, since the Shah was friendly to American commercial interests, while Ayatollah Khomeni’s forces tended to label the United States as the Great Satan.
[EDIT add forgotten word “how the longer term…” 11/15/2017]
