The Next Capitalist Revolution

A while back, I ran across several academic papers pointing to a causal connection between increased concentration of market power and stagnation in wage gains. The correlation was that rents obtained through market power were disproportionally shared with managers and owners and not with employees.

I also ran across several charts showing increased concentration of market power in American business sectors. Here are a few:

The special report in the November 17th, 2018 issue of The Economist pointed to the need for de-concentration of market power as the next revolution in capitalism. Anti-trust limitations on company market power would, said the editors, reduce rent extraction (a technical term economists use to point out returns to market power and not quality of product or service or fair pricing in open markets).

Take Google, for example. It has bought up some 200 small companies – potential competitors.

Amazon has just bought a software firm which manipulates data on individual health conditions and a company which sells drugs over the internet. Put the two together and fund them with Amazon cash and you re-structure the health care market to Amazon’s advantage in giving its platform greater market share.

Rent extraction – the result of successful rent-seeking – is the antithesis of moral capitalism and even of Adam Smith’s invisible hand capitalism. Smith excoriated monopolies and mercantilism for the unfairness of its rent extraction propensities. Rent extraction is an economic system using political power of some kind to obtain cash income. It is the basis of aristocracies and landlord regimes, of warlord societies and political hegemony and most of the crony capitalism and self-serving autocracies in the world today.

If profits in America were at historically normal levels, says The Economist and private sector workers got the benefits, real wages would rise by 6%.

The Economist pointed out that in America, the free cash flow of companies is 76% above its 50 year average, while real incomes for workers and the middle class have been largely stagnant for several decades. Is it, therefore, any wonder that so many non-elite Americans voted for Donald Trump in 2016?

The Economist also calculated that the global pool of “excess” profits is $660 billion, of which more than two-thirds were extracted in America.

The Economist recommends: 1) let individual users of tech services take their information anywhere they want; 2) outlaw many barriers to entry such as non-compete clauses in employment contracts; and 3) modernize anti-trust jurisprudence to take into account more than short-term consumer benefits, including consideration of competitive health of markets and excessive returns on capital.

In several commentaries and articles last year, I suggested new examination of the big internet firms for buying excessive market power. It’s nice to have The Economist supporting our recommendation.