COVERSTORY
What’s worse: monopoly power or government intervention?
Politicians of all stripes increasingly agree with Karl Marx on one point – that monopolies are an inevitable consequence of free-market capitalism, and must be broken up. Are they right? Stuart Watkins isn’t so sure
Free markets left to themselves in a capitalist context are great at producing wealth, but will inevitably tend to concentrate that wealth in ever fewer hands, leading to increasing inequalities of income, power and wealth, and undermining the benefits that might be supposed to flow to consumers, such as cheaper prices. The logic inherent in market exchange must, in other words, progressively undermine the very qualities that the champions of the market promise they will deliver.
This, at least, was the view of Karl Marx. Perhaps surprisingly, it is also the mainstream view today. It is not all that easy to find a mainstream commentator, economist, think-tanker or policymaker who will raise a squeak of protest against the idea. All the main political parties – particularly in the US, where the problem is deemed to be particularly acute – agree that something must be done to curb the rise of the monopolies, namely that the state should step in and break them up, or at least restrain them.
Indeed, “Market Power, Inequality and Financial Instability” – a new paper by Federal Reserve Board economists Isabel Cairo and Jae Sim – argues that the concentration of market power in a handful of companies, and the resulting decline in competition, explains the deepening of inequality and financial instability in the US, as Craig Torres reports on Bloomberg. They blame the rising market power of big companies for the decline in the share of wealth that goes to workers, the rise in inequalities of wealth and income, and the growing debt burden. The authors call for policies that will redistribute wealth to the poor, perhaps by gradually raising the tax on dividend income from zero to 30%. They suggest that such policies might help to slow the rise of inequality and the growth in debt, and make financial crises less likely.
The paper is just the latest voice in a rising chorus. Towards the end of last year, The Great Reversal, a book by economist Thomas Philippon, presented a detailed empirical analysis of the question and argued that America can no longer be considered a free-market economy in any real sense. As well as confirming that the trends already sketched are indeed in play, he concludes that the main explanation is political – namely, that politicians have not enforced competition policy as they should, thanks in part to lobbying and campaign contributions. The result, to quote just one example, is that the price of broadband access in the US is roughly double that of comparable countries, leading to predictably higher profits.
The year before Philippon’s book, a similar one by Jonathan Tepper and Denise Hearn (The Myth of Capitalism) made the same point. “I realised that particularly in the US, which is probably the most advanced in this trend, you’re seeing more and more industrial concentration,” he said in an interview with MoneyWeek at the time of publication. That gives companies pricing power over consumers, more power over workers as they don’t have to bid against rivals for their labour, and power over suppliers. The result is that a small number of huge companies are capturing very high profit margins. Tepper, too, blames lax enforcement of competition laws for the problem.
The problem may be about to get worse. The response of governments to the coronavirus pandemic has led to a huge economic crisis, and their response to what they have caused is to throw money at it. The combined effect will be to push smaller firms out of business, quenching the fires of creative destruction, and for the well-connected, better organised larger companies to obtain all the government cash and bolster their already dominant position. Low interest rates may also contribute, as bigger companies are in a better position to get hold of cheap credit and invest it in expansion. If rising concentration and monopolies are a problem, it’s one that seems set to get worse.
THE CASE FOR THE DEFENCE
Are Marx and his mainstream followers correct? The answer, as ever, is – it’s complicated. A sounder tradition in economics would lead us to be cautious about the claims from first principles. As Edmond Bradley, a writer for the Mises Institute, put it back when Microsoft was the monopolistic bogeyman in the early 2000s, “the fear of industrial concentration is the last refuge of socialist theory” and the idea that governments must step in to save us from it is “wildly incorrect”. A company operating in a market economy might look like a monopoly “under myopically static analysis”, but a broader and historical view will reveal that even very large, dominant companies face intense competitive pressure – whether from the fear of potential competition from new entrants eyeing their high profits; or from competitors offering products and services of a different but nevertheless substitutable kind; or from losing customers altogether, should they decide they’d rather do without what is being offered.
“HISTORY SHOWS THAT LARGE FIRMS ARE ALWAYS IN DANGER OF HAVING THEIR PROFITS COMPETED AWAY AT ANY MOMENT”
And if that’s what first principles tell us, there are plenty of reasons to be sceptical about what the real-world data are showing, too. A roundtable discussion of the subject by experts, hosted by the OECD group of wealthy nations in 2018, concluded that although market power did indeed appear to be rising in many countries, the causes were unclear. It might reflect a reduction in competitive intensity, but it might equally be the outcome of intense competition. If the causes are unclear, then there’s no way to be confident about what the correct policy response should be.
In any case, the rise in industrial concentration may not be all it appears to be. As a 2019 paper by Alessandra Bonfiglioli, Rosario Crinò and Gino Gancia for the Centre for Economic Policy Research notes, all the existing evidence for the increase in industrial concentration and the fear that this will usher in a new era of monopolies has been based on national data. They find that when competition from foreign imports is included, the overall level of competition may in fact have intensified rather than fallen – even if the number of firms from the home country entering the market falls. So increased global competition and greater national concentration may be two sides of the same coin – “growing global competition may force unproductive firms to exit and top firms to consolidate on their best products”.
IS MONOPOLY SUCH A BAD THING ANYWAY?
Amazon is one of the companies charged with unfairly exploiting its dominant position to crush competition and hence harm customers. Indeed, its boss, Jeff Bezos, was recently dragged before the US Congress and had to defend his firm from hostile questioning. But if Amazon is a monopoly, then the first question that arises is, is that such a bad thing? Amazon started out as an idea in Bezos’s mind, which he put into action using money he raised himself from family and investors, working from his basement and carrying parcels to the post office. It was, from the beginning, a high-risk venture, deemed by most to be almost certain to fail. Yet by consistently offering consumers what they didn’t know they wanted, and winning their approval and then loyalty, Amazon rose above its competitors by sheer excellence. It’s not as if its customers have been forced into anything.
“WE NEED LESS GOVERNMENT INTERFERENCE, NOT MORE”
Moreover, even in its current dominant position, Amazon faces plenty of intense competition. As Bezos pointed out in his testimony to Congress, customer trust is hard to win and easy to lose. Amazon’s globe-spanning dominance would end very quickly should that trust disappear. There are plenty of competitors snapping at its heels. Amazon accounts for less than 1% of the $25trn global retail market, according to Bezos, and less than 4% of retail in the US. There are more than 80 retailers in the US alone that earn more than $1bn in annual revenue – that includes Walmart, which is more than twice Amazon’s size and whose online sales grew 74% in the first quarter. In the wake of the pandemic, plenty of other companies are competing with Amazon in the race for online orders for goods, including Shopify and Instacart.
The briefest review of relatively recent history should be enough to show that large companies of the kind that draw fire from those concerned about monopolies are in reality always in danger of having their profits competed away at any moment – witness Kodak and Myspace, to take just two commonly cited examples. As those economists who most consistently defend free markets insist, monopolies are only ever really a threat, not as a result of companies operating in free markets, but as a result of government interference – particularly, in our day, as a result of money printing and ultra-low interest rates. What is needed, then, is not more government interference to solve the problems they have created, but less. In this sense, the rising threat of monopoly as a result of the coronavirus pandemic is a clue to the real source of the problem.
THERE ARE BETTER SOLUTIONS THAN ENFORCED BREAK-UPS
Even if you’re not buying all that, and are convinced that rising concentration and market power is a problem that the government should try to tackle, is it really worth the bother? As Ryan Bourne of the Cato Institute has pointed out, over the past 100 years or so, major anti-trust cases have seen huge amounts of time and resources spent litigating against companies that seemed dominant. And yet in most cases, the firms in question were overtaken by competitors even as the investigation was going on (see the box on page 28). Companies would be better off focusing on improving their offering to consumers rather than resentfully pursuing their competitors in the courts. And the political energy spent pursuing monopolies would be better spent pursuing polices that make free-market economies more robust and dynamic, says Bourne.
And even if you agree that Facebook, say, deserves to be split up, just how would that work? You might say that it should sell off Instagram and WhatsApp, two subsidiaries that are now enormous platforms in their own right, as James O’Malley points out in The Spectator. Yet those three platforms are tightly integrated and share the same back-end infrastructure. Demanding a split would be like demanding that McDonald’s sell off some restaurants and then expecting those branches to operate without staff or supply chains, says O’Malley.
Even if the split worked, there would be nothing to stop Facebook launching its own alternatives, which would probably win out in the end thanks to network effects and Facebook’s existing dominance. So if governments are serious about dealing with the problem in a way that the cure won’t be worse than the disease, they’ll need to be at least as savvy as Silicon Valley in crafting regulation that is fit for purpose. Anyone looking at governments’ response to the coronavirus worldwide would be justified in suppressing a chuckle at that idea.
Trouble is, that doesn’t mean they won’t act. Panicky governments aren’t in much of a mood for listening, or for restraint, or for good judgement. The coronavirus panic is leading to ever-bigger government, and bigger government has to be seen to be doing something. Taking on the tech giants and breaking up monopolies is “something”. So it wouldn’t be wise to bet against it happening. That’s something to keep an eye on if you are invested in big tech, say – which, given their huge weighting in the main indices, probably means everyone with a pension or an index tracker. For more on what that might mean for your money, see box at the bottom of the page
A brief history of competition law
Laws governing monopolies (and who was allowed to hold them) have been around for almost as long as human beings have been trading with one another, writes John Stepek. One of the earliest surviving examples of competition law is from around 50BC, when Rome passed a law (the Lex Julia de Annona) imposing heavy fines on anyone who tried to drive up the price of corn artificially by disrupting supplies. Note that food price inflation would have been one of the biggest threats to social order at that time (as it still is today). Competition law has always been political and it’s almost certainly no coincidence that today’s increasing hostility by politicians to Big Tech in particular, go hand in hand with the general sense of voter anger.
So there has always been a recognition of the risks posed to consumers by overly dominant producers. However modern competition law as we know it has been most heavily shaped by the US. In 1890, the Sherman Anti-Trust Act was passed, banning trusts (hence the term “antitrust”) and other monopolistic entities. The move came in response to the power of groups such as John D Rockefeller’s Standard Oil Trust, which Rockefeller used to consolidate the oil industry. Again, note that the act passed at the height of America’s “gilded age”, another era of heightened inequality and political turbulence, which is often compared to today. Eventually, in 1911, Standard Oil was broken up by the US Supreme Court into 34 smaller companies (its surviving successor companies include ExxonMobil and Chevron). That said, by that point its share of American refining capacity had fallen from 90% in 1880 to below 65% – due to competition.
In 1961, none other than Alan Greenspan, during his early days as a disciple of Ayn Rand, declared that the Sherman Act had stifled innovation by “inducing less effective use of capital”. The former Federal Reserve chairman argued that while the free market itself “does not guarantee that a monopolist who enjoys high profits will necessarily and immediately find himself confronted by competition”, it does ensure that “a monopolist whose high profits are caused by high prices, rather than low costs, will soon meet competition originated by the capital market”. In other words, if someone else can do the job better than you, or more cheaply than you, or both, then it’s impossible to sustain profiteering prices in a genuinely free market.
Companies in the firing line – and those that are not
The most obvious targets of today’s competition concerns are the big technology companies, writes John Stepek. That matters, as Stuart notes above, because the big tech stocks – or FAANGs – also happen to be some of the most valuable companies in global markets right now.
It’s worth noting that not every member of that group is in the immediate firing line. Streaming service Netflix is important but it has plenty of competition. Microsoft – not in the acronym but often lumped in with these companies – has also largely escaped scrutiny (although it did have its own run-ins with the competition authorities in the late 1990s).
Currently in the spotlight, following the testimony of their chief executives in front of US politicians in July, are Facebook, Amazon, Apple and Alphabet (Google). As James Clayton reports on the BBC, both the Republicans and the Democrats have their quarrels with Big Tech, and both parties want to be seen to champion small businesses. “It’s hard to avoid the conclusion that whoever wins the next election, Big Tech is going to get whacked. The question is how and by whom.”
We may not even have to wait that long. In November last year, notes CNBC, analyst Paul Gallant of the Cowen Washington Research Group tried to forecast the odds of action being taken by the US government against any of the big four. In his view, Alphabet was deemed the most likely target regardless of the political party in charge, and as it turns out, there are reports that US attorney general William Barr wants to announce a case against Google – based primarily on its dominance of internet search – ahead of the election.
Also, competition cases don’t just have to be brought by the government. Both Apple and Google are increasingly being challenged by other companies over the commission fees they take on sales made through their apps with Epic, developer of the popular Fortnite video game, currently the most prominent.
With the big tech stocks looking expensive, any decisive setbacks could be bad news for their shareholders. But perhaps what investors really need to grasp is that – as was the case in the “gilded age” (see the box on page 28) – this focus on competition is just one symptom of increased concern about the perceived concentration of power and wealth in society, and a wider sense of voter dissatisfaction.
In essence, governments are reminding corporations that when push comes to shove, they’re the ones who have the power, not the companies. That might work in favour of “value” sectors that have already been humbled – banking and fossil fuels, say. You might also see it as an reason to own smaller stocks that won’t appear on government radars for a long time. And you might also see it as a reason to own a bit of gold as a defence against politically induced volatility.
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