October 30, 2018 • 22 mins
A smaller number of companies are coming to dominate the U.S. and other advanced economies, gobbling up market share and making record profits. What's causing it, and how's that affecting you as a consumer, as a worker or as an entrepreneur? Chris Condon examines how market concentration may be eroding competition and the very dynamism of our economy. Plus, Stephanie sits down with Bloomberg Opinion writer Noah Smith to dissect just how worried we should be about this phenomenon, the threat of idea hoarding, and the underrated benefits of exports.
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Speaker 1 (00:02):
Hello, and welcome to the New Economy. I'm Stephanie Flanders,
head of Bloomberg Economics. If you listen to any business
leader talk about the world today, you'll hear them talk
about the pressure of global competition, the relentless focus on
the bottom line, the rivals snapping at their heels, the
struggle to stay ahead of the pack. But you can't
(00:24):
help noticing that those same businesses have been making an
awful lot of money. Net profit margins for top SMP
five hundred companies have been rising more or less continuously
since and jump to a new high this summer. It
makes you wonder whether the market can really be so
competitive after all. A bunch of economists have been asking
(00:44):
the same question lately, and it turns out the answer
matters a lot, because if companies, not just big companies,
but across the economy are getting more market power, that
could explain why economic growth has been slower in this
recovery and why the average worker feels like they've been
getting a raw deal. I call it the bad capitalism debate.
Others talk about the rise of superstar firms. Whatever you
(01:08):
call it, it's starting to attract a lot of attention
In a little while, I'm going to talk to Bloomberg
columnist Noah Smith about what it means for capitalism and
the future of the world. But first, US economy reporter
Chris Condon has been doing some digging by the way
(01:34):
things look, as well as the way they perform. Our
homes acquire new grace, new glamor new accommodations, expressing not
only the American love of beauty, but also the basic
freedom of the American people, which is the freedom of
individual choice and all who manufacture what is sold. You
(02:01):
know that American women often have the deciding voice in
whatever we come to buy. They offer her the romance Ah,
the mighty US consumer. With technology your fingertips and the
free market your playground, your options are greater than ever. Right, Well,
(02:22):
what about that magical device you're shopping on. Of all
the smartphones sold in the US this year, three manufacturers
made about eight of them. The cell phone service you're
using four providers tied up more than of that market.
When you search the Internet, there's a greater than sixty
chance you're using Google. And what do you think people
(02:44):
said when I asked them where they made their last
online purchase? I was on Amazon, Amazon, Amazon. I'm gonna
go with Amazon, Amazon dot com, Amazon, Amazon. Actually, last
time was Amazon. Last time maybe an online purchases on Nords,
Drum dot com Amazon. Probably it was probably Amazon. So
(03:12):
if the world is at our fingertips, why do our
options seem to be getting narrower? And it's not just
in the g wiz tech world drug store chains, airlines,
cable TV, toilet paper makers, the list goes on and on.
Over the past twenty years, the market share held by
the top handful of players has increased in more than
(03:35):
sev of u S industries. That's worrying, not just from
the perspective of choice. It may be both a symptom
of and contributor to weaker competition across our economy. And
if that's the case, then it could have severe consequences
for consumers and workers, affecting prices, wages, investments, and possibly
(03:58):
overall economic growth. Adding intense competition is the machaneese that
transform the pursuit of private interest into a public good.
That's Luigis and Galles, a professor at the University of Chicago,
channeling the great eighteenth century economist Adam Smith. Zingali Is
regularly addresses this topic in his research and on his podcast.
(04:22):
Capital Isn't So. When you reduce the number of firms
that actually compete, the risk that this mechanize will not
hold is quite large. Now. To be fair, concentration doesn't
automatically equal less competition. Economist Jan Acount says that if
(04:42):
the only two fuel stations in town are right next
to each other, they might still compete fiercely on price.
The key to gauging competition, he says, is to look
at the firm's mark up, the gap between what it
costs to produce a good and the price the company
charges to consumers. That's what Acount and a colleague did.
(05:02):
They examined markups at US firms over the past seventy years.
They found that from nineteen fifty to nineteen eighty, markups
were pretty much flat at around seventeen percent of costs,
but since nineteen eighty there risen to a whopping sixty
seven percent. And during the same period they found profits
relative to g DP have quadrupled. But hold on, why
(05:26):
are rising profits so bad? Here? Acount, who's a professor
at Pompeo Fabra University in Barcelona, even market is really competitive.
The firm cannot afford to charge our high markup and
cannot afford to make these huge profits. I mean, this
is the whole tenets of competitive markets that you know,
if you made huge profits, then there's room for someone
(05:49):
else to commit and say, but I want to share that. Unfortunately,
that doesn't seem to be happening, or at least not
as much as it used to. Not only are profits
moving high here and higher, but measures of what economists
called business dynamism, or the rates at which companies are
born and die, have declined. Firm entries are especially down,
(06:10):
plunging from nineteen seventy seven to two fourteen according to
US Census Bureau data. But that raises another question. If
these markups are rising, why isn't inflation. Well, for many companies,
they've increased markups not by raising prices but by lowering costs.
But either way, if those markups persist, it means companies
(06:34):
aren't being forced to pass them on to consumers or
workers or both. Here's m I T Professor David Ottter.
You could argue that there's been a lot of protivity
growth that's not translating into lower consumer prices. Or higher
work or wages that's just translating into profits. So in
a more robust competitive environment, you might expect more of
(06:56):
those protivity games to either feed into directly reducing prices
or into uh competing more vigorously for workers. Now that
we're really getting worried about concentration, it's worth asking what's
causing it in the first place. Many economists have argued
that concentration is the result of a more relaxed approach
taken by antitrust regulators in the US since the nineteen eighties,
(07:20):
allowing big mergers and acquisitions to slowly erode the competitive landscape.
That may be partly true, but it's unlikely to tell
the whole story. It's not quite as pronounced. But concentration
is happening and developed economies outside the US as well
in countries with a wide range of antitrust environments, so
(07:40):
there's probably something else going on. Indeed, many economists have
lined up behind something called the superstar firm thesis that
was first developed by M. I. T. S Autour. In
a nutshell, it proposes that globalization and technology have combined
to make big winners out of a small number of
corporate players. I think of a company, maybe a regional
(08:03):
or national seller, that once had some small advantage over
competitors because of say scale, or maybe product quality. Imagine
that same firm got to jump on expanding internationally as
markets became more globalized, and imagine it invested ahead of
rivals in a global online sales and marketing platform. Here's
(08:23):
to these kinds of changes in competition, uh stemming from
from improved search technology, from globalization, even from changes and
then the type of products that people are buying has
tending to magnify these small competitive advantages and give outsized
rewards to the kind of leaders within given industries. And
so is born the superstar firm, gobbling up a much
(08:46):
greater share of the market than was ever previously possible. Now,
the free market is still supposed to take care of this.
In theory, every superstar firm will get its come up
ince from a new challenger as it grows complacent or
falls victim to some newer technology. But many of today's
superstars are so big that economists worry they may be
(09:09):
blocking the next generation of challengers, sometimes by buying them up,
sometimes by influencing rules and regulations to their favor. And
sometimes with predatory pricing. Even if the growth of the
superstar firms is not a reflection of a regulatory failure
or a lack of competition, it could still be the
case that once firms gain dominance, they have an incentive
(09:34):
at temptation to abuse that dominant position. So there's definitely
reason to keep a close eye on this. Some economists
and anti trust advocates have called for the government to
get much more aggressive in preventing predatory behavior, blocking mergers
and even breaking up existing companies like Google and Amazon,
(09:55):
and even those who don't go that far stress that
there's more at stake than just consumer choice or fighting
isolated instances of competitive unfairness. It's really about protecting our
economy from a broader breakdown in the competition that makes
it so vibrant. Here's Ragu Rajan, a professor of finance
(10:16):
at the University of Chicago Booth School. We have to
be vigilant that this kind of domination doesn't lead to
a loss of economic dynamism. We have to be vigilant
that the you know there is the heart of capitalism
is dynamism, constant innovation, constant church. And it is possible
(10:40):
that domination could reduce that. So that was Chris Condon.
I'm joined now by Neah Smith, Bloomberg opinion columnist on
lots of interesting things in economics. Um No, I should
ask you, actually, falling on from that last quote from
ragu Rajan at the end, do you think fundamentally the
(11:02):
kind of developments that we're talking about here, with market concentration,
maybe a reduction in in competition in key parts of
the economy, do you think that is a threat to capitalism?
Is it sapping market forces of the powers of the
force innovation and growth. I do worry that it is,
and I don't think it's it's, you know, a slam
(11:23):
dunk case yet that it is. But I think that
a lot of people are very rapidly becoming worried about this,
And of course you've already covered a lot of the
reasons why. But there's other problems with this massive concentration.
To one is something that almost never gets talked about,
which is idea hoarding. So if you have a few
companies that are really at the top of their field
(11:44):
and generating a lot of good ideas internally for how
to improve their business practices and how to get better technology,
they're probably not going to share. If you have a
large ecosystem of competitors that are on a kind of
even footing, they can hire each other's workers away from
each other, and the ideas will therefore flow between the companies. However,
if you have Google as the internet services company, or
(12:06):
Amazon is the online retailer, Facebook is the social network provider,
then all the best people just get trapped in these
companies and ideas don't flow out of these companies. And
one one interesting thing is that we've seen that top
company productivity growth has not slowed down in recent years.
It's actually accelerated slightly. However, overall productivity growth has slowed
(12:26):
because so many companies aren't sharing in the productivity growth.
You have. Google is becoming incredibly more productive, Amazon's becoming
incredibly more productive. But then you have this long tail
of companies that aren't becoming more productive and whose productivity
is basically stagnating, And we don't know how much of
that is caused and how much of that is affect Like,
there could be some companies that just have some secret
(12:48):
management sauce that makes them really good at doing what
they do, and so naturally tend to get all the
best people and to take over the markets and you know,
make those markets more concentrated. That's one possibility. Another possibility
is this idea trap thing. And of course the third
potential problem is that these large companies kill startups, and
so there's more research now about kill zones. People are
(13:10):
investigating the question of whether or not vcs and startups
essentially avoid anywhere where they might have to go up
against Facebook or Google or Amazon and um there's also
the question of eating of ecosystems, where basically, at some
point these large tech companies start eating all their third
party suppliers and buying all the third party supplies or
(13:31):
replacing them in house. You see this with of course
Amazon replacing third party merchants with its own in house products.
You see this with Google buying all the websites where
their ads run, and that could slow productivity growth by
basically slowing the number of new entrants that comes into
the market. So that's why technology concentration is kind of scary.
(13:53):
But but of course it's important remember that most of
the industries in America are not what we call the
tech industry, and those are becoming more concentrated to you know,
there's a lot of worry, parallel worries. So we talked
about companies, tech companies eating their ecosystems. A parallel worry
for you know, Tyson Chicken or whatever, is the idea
that they'll squeeze their suppliers and you'll have all these
(14:15):
little like independent suppliers whose profit margins basically squeeze to
nothing by this giant buyer. You have monopsinny power. Um.
Of course, workers are a different kind of supplier and
they can get squeeze too, as we've talked about. So
you have a lot of these these different bad things
that can happen. And we haven't even talked about the
political effects where large companies can can have huge political
(14:36):
power as well, and no one wants to no one
wants to go against you know, in the old days
with general motors in the in the future of course,
you know, we recently saw a successful sort of joint
effort between Bernie Sanders on the left and Trump and
Tucker Carlson on the right to to force Amazon to
raise their their minimum wage. So you know, maybe maybe
(14:59):
this is not something worth worrying about, and maybe companies
that get really big will actually be the targets of
increased political pressure and disapprobation. But I would say there's
still the worry that overall no one in some small
town Kentucky is going to want to go against Tyson Chicken.
Although even your example, if you've got into a world
where basically they're so big that they can then sort
of do do the world of favor by giving everyone
(15:21):
a wage rise, it doesn't feel like quite the right
dynamic between right, between government and companies. Oh I don't.
I agree completely, And I think this idea of job
owning companies into doing the right thing and actually not
a very good way of making pulse. The point about
the longer tail, I mean, it's interesting Andy Holden in
(15:42):
the Deputy Government the Bank of England, he's looked at
this from in the UK and it's very striking that
that there's always been a long tail in the UK
of companies who are kind of not very productive. But
as you say, there's this top one percent of companies
that since two thousand and eight had had you know,
double digit growth in productive ty They've been there just
(16:03):
in fact that we actually have more of them in
the UK than Germany and other places these top top performers,
but then companies had had little or no productivity growth
since two thousand and eight. And when you look at
the characteristics of that top one percent, it's as you
it's a little bit you're what you were saying about
the idea hoarding. They tend to be run by hyper
(16:24):
connected boards who were all part of a kind of
small community of superboards and hyper and have hyper connected
sort of workers working for them who don't really go
out into the broader community, if you like. So there
is this lack of absorption, lack of the knowledge, the
kind of best practice of these companies has just not
(16:44):
spread in the way that you're used to. And I'm
sure that it's a lot of the same dynamics that
you talked about. The question is how does technology flow
between companies? This is a question that needs a lot
more work research wise, because we don't have an amazing
idea of this it. I think that the best way
we know that technology flows between companies is for workers
(17:05):
to flow between companies. The question is how do we
get more really top workers to go out and use
their talents, turning a second rate company into the first
rate one then making a first rate company a little
bit better. And that's very difficult because that there is
a natural tendency to cluster, because smart people build off
(17:25):
with the ideas of other smart people. You don't want
to be the one smart person working in a company
full of not so smart people. UM. You want to
be the smart person working with all the best other people. UM.
One interesting idea is to use the university system. In America,
We've had great success getting universities and university labs and
(17:47):
professors to give a boost to the private sector by
basically commercializing their ideas by working with people from the
private sector, etcetera. There's so many good ideas and smart
people in university is of course a lot of times
that will go to the deep pocketed big companies. You know,
Google will be working with a million university research labs.
So the question is, could we tweak the law for
(18:10):
who universities work with to incentivize them to work with
lagging smaller companies to help them catch up, nudge them
away from working with the Googles of the world. Um.
There is one thing I wanted to say about ideas
to raise companies productivity. So the idea is exporting and
(18:31):
competing in world markets. There is copious evidence that competing
in world markets is correlated with higher productivity. Of course,
that correlation could be because more competitive companies have just
are able to go out into world markets. But actually
there's now starting to be more research saying that when
(18:52):
companies go and compete in world markets, they become more
competitive because it you know, some of the company, these
the less productive companies die and the more productive companies
sort of rise to the challenge, rise to the task
and become even more productive. And you know, while this
of course can increase concentration at home, it decreases concentration globally. That's,
(19:15):
by the way, the result of Paul Krugman's new trade
theory that he did back in the day. But the
idea is to get more companies competing in export markets,
to get a lot of the long tail of of
not so productive companies to get out there and sell
stuff overseas. Is is a is a big idea that
um I think hasn't been tried enough, and it's often
(19:36):
it's often a thing that people think about developing countries doing.
You know, these poor companies trying to find their comparative advantage,
trying to develop some tent pole industries industrial policy blah
blah blah. We think of this in terms of that,
but in fact, I think that there are so many
sort of lagging companies enrich countries, especially rich countries with large,
you know, um trade deficits, that that probably discourage a
(19:59):
lot of companies from thinking about export. You can export
a ton and still run a huge trade deficit. But
I'm not talking about like increasing net exports because boost GDP,
you know, the stuff Trump talks about. I'm not talking
about that. I'm talking at gross exports, even if you
end up importing more too. I'm talking about simply competing
in world markets. Is this underrated idea that competition forces
(20:21):
the improvement of productivity and allows the improvement of productivity,
And I think that's an underrated strategy and idea that
needs to be tried more, and something that is technologically
now much more open to small businesses. And we see
it everywhere. I mean, I've talked to I've talked to
tiny companies that, you know, people who are just literally
in their back room making a cool presence to send
(20:43):
to people or cards or whatever, and they will find
you know that their biggest one of them was telling
me this woman in the depths of Scotland was telling
me that her biggest export market was Argentina because one
Argentine film star had tweeted something about something they'd found
on her website on Amazon, and then you know everybody
(21:04):
had had started by everyone in Argentina has started buying this,
buying her products. And that's the kind of thing I've noticed.
I think the Canadian trade deal they did with China
had one of the things in it was to require
China to make and Chinese companies to open their sort
of online vending platforms to small businesses in Canada and
(21:26):
that could potentially open access to that market for the
for the whole swathe of businesses. And you think of
trade deals is often benefiting the big multinationals, but this
was specifically talking about small businesses. So I completely agree.
And it's all of the evidence shows that you get
faster productivity growth from being more open to the rest
of the world than exporting Lawich is why by Brexit
is such an interesting choice for the U. For the UK,
(21:51):
it was bad. It's an interesting it's an interesting thing
to do in the economy that is innovatively going to
make it slightly less open to the rest of the world.
We are definitely going to be talking about all of
these issues. As you say, it is the big new thing,
although probably not so new, but certainly the new thing
as far as economics is concerned and policymakers is concerned.
This question of of of market concentration there will be
(22:12):
a big topic of debate in Singapore. Thank you very much,
Nervah Smith. Thank you it has been a pleasure. Thanks
for listening to the New Economy. Today's episode was reported
by Chris Condom with editor Scott Landman, and produced by
Magnus Hendrickson, with special thanks to Noah Smith. Francesco Levy
(22:33):
is the head of Bloomberg Podcast.
Hello, and welcome to the New Economy. I'm Stephanie Flanders,
head of Bloomberg Economics. If you listen to any business
leader talk about the world today, you'll hear them talk
about the pressure of global competition, the relentless focus on
the bottom line, the rivals snapping at their heels, the
struggle to stay ahead of the pack. But you can't
(00:24):
help noticing that those same businesses have been making an
awful lot of money. Net profit margins for top SMP
five hundred companies have been rising more or less continuously
since and jump to a new high this summer. It
makes you wonder whether the market can really be so
competitive after all. A bunch of economists have been asking
(00:44):
the same question lately, and it turns out the answer
matters a lot, because if companies, not just big companies,
but across the economy are getting more market power, that
could explain why economic growth has been slower in this
recovery and why the average worker feels like they've been
getting a raw deal. I call it the bad capitalism debate.
Others talk about the rise of superstar firms. Whatever you
(01:08):
call it, it's starting to attract a lot of attention
In a little while, I'm going to talk to Bloomberg
columnist Noah Smith about what it means for capitalism and
the future of the world. But first, US economy reporter
Chris Condon has been doing some digging by the way
(01:34):
things look, as well as the way they perform. Our
homes acquire new grace, new glamor new accommodations, expressing not
only the American love of beauty, but also the basic
freedom of the American people, which is the freedom of
individual choice and all who manufacture what is sold. You
(02:01):
know that American women often have the deciding voice in
whatever we come to buy. They offer her the romance Ah,
the mighty US consumer. With technology your fingertips and the
free market your playground, your options are greater than ever. Right, Well,
(02:22):
what about that magical device you're shopping on. Of all
the smartphones sold in the US this year, three manufacturers
made about eight of them. The cell phone service you're
using four providers tied up more than of that market.
When you search the Internet, there's a greater than sixty
chance you're using Google. And what do you think people
(02:44):
said when I asked them where they made their last
online purchase? I was on Amazon, Amazon, Amazon. I'm gonna
go with Amazon, Amazon dot com, Amazon, Amazon. Actually, last
time was Amazon. Last time maybe an online purchases on Nords,
Drum dot com Amazon. Probably it was probably Amazon. So
(03:12):
if the world is at our fingertips, why do our
options seem to be getting narrower? And it's not just
in the g wiz tech world drug store chains, airlines,
cable TV, toilet paper makers, the list goes on and on.
Over the past twenty years, the market share held by
the top handful of players has increased in more than
(03:35):
sev of u S industries. That's worrying, not just from
the perspective of choice. It may be both a symptom
of and contributor to weaker competition across our economy. And
if that's the case, then it could have severe consequences
for consumers and workers, affecting prices, wages, investments, and possibly
(03:58):
overall economic growth. Adding intense competition is the machaneese that
transform the pursuit of private interest into a public good.
That's Luigis and Galles, a professor at the University of Chicago,
channeling the great eighteenth century economist Adam Smith. Zingali Is
regularly addresses this topic in his research and on his podcast.
(04:22):
Capital Isn't So. When you reduce the number of firms
that actually compete, the risk that this mechanize will not
hold is quite large. Now. To be fair, concentration doesn't
automatically equal less competition. Economist Jan Acount says that if
(04:42):
the only two fuel stations in town are right next
to each other, they might still compete fiercely on price.
The key to gauging competition, he says, is to look
at the firm's mark up, the gap between what it
costs to produce a good and the price the company
charges to consumers. That's what Acount and a colleague did.
(05:02):
They examined markups at US firms over the past seventy years.
They found that from nineteen fifty to nineteen eighty, markups
were pretty much flat at around seventeen percent of costs,
but since nineteen eighty there risen to a whopping sixty
seven percent. And during the same period they found profits
relative to g DP have quadrupled. But hold on, why
(05:26):
are rising profits so bad? Here? Acount, who's a professor
at Pompeo Fabra University in Barcelona, even market is really competitive.
The firm cannot afford to charge our high markup and
cannot afford to make these huge profits. I mean, this
is the whole tenets of competitive markets that you know,
if you made huge profits, then there's room for someone
(05:49):
else to commit and say, but I want to share that. Unfortunately,
that doesn't seem to be happening, or at least not
as much as it used to. Not only are profits
moving high here and higher, but measures of what economists
called business dynamism, or the rates at which companies are
born and die, have declined. Firm entries are especially down,
(06:10):
plunging from nineteen seventy seven to two fourteen according to
US Census Bureau data. But that raises another question. If
these markups are rising, why isn't inflation. Well, for many companies,
they've increased markups not by raising prices but by lowering costs.
But either way, if those markups persist, it means companies
(06:34):
aren't being forced to pass them on to consumers or
workers or both. Here's m I T Professor David Ottter.
You could argue that there's been a lot of protivity
growth that's not translating into lower consumer prices. Or higher
work or wages that's just translating into profits. So in
a more robust competitive environment, you might expect more of
(06:56):
those protivity games to either feed into directly reducing prices
or into uh competing more vigorously for workers. Now that
we're really getting worried about concentration, it's worth asking what's
causing it in the first place. Many economists have argued
that concentration is the result of a more relaxed approach
taken by antitrust regulators in the US since the nineteen eighties,
(07:20):
allowing big mergers and acquisitions to slowly erode the competitive landscape.
That may be partly true, but it's unlikely to tell
the whole story. It's not quite as pronounced. But concentration
is happening and developed economies outside the US as well
in countries with a wide range of antitrust environments, so
(07:40):
there's probably something else going on. Indeed, many economists have
lined up behind something called the superstar firm thesis that
was first developed by M. I. T. S Autour. In
a nutshell, it proposes that globalization and technology have combined
to make big winners out of a small number of
corporate players. I think of a company, maybe a regional
(08:03):
or national seller, that once had some small advantage over
competitors because of say scale, or maybe product quality. Imagine
that same firm got to jump on expanding internationally as
markets became more globalized, and imagine it invested ahead of
rivals in a global online sales and marketing platform. Here's
(08:23):
to these kinds of changes in competition, uh stemming from
from improved search technology, from globalization, even from changes and
then the type of products that people are buying has
tending to magnify these small competitive advantages and give outsized
rewards to the kind of leaders within given industries. And
so is born the superstar firm, gobbling up a much
(08:46):
greater share of the market than was ever previously possible. Now,
the free market is still supposed to take care of this.
In theory, every superstar firm will get its come up
ince from a new challenger as it grows complacent or
falls victim to some newer technology. But many of today's
superstars are so big that economists worry they may be
(09:09):
blocking the next generation of challengers, sometimes by buying them up,
sometimes by influencing rules and regulations to their favor. And
sometimes with predatory pricing. Even if the growth of the
superstar firms is not a reflection of a regulatory failure
or a lack of competition, it could still be the
case that once firms gain dominance, they have an incentive
(09:34):
at temptation to abuse that dominant position. So there's definitely
reason to keep a close eye on this. Some economists
and anti trust advocates have called for the government to
get much more aggressive in preventing predatory behavior, blocking mergers
and even breaking up existing companies like Google and Amazon,
(09:55):
and even those who don't go that far stress that
there's more at stake than just consumer choice or fighting
isolated instances of competitive unfairness. It's really about protecting our
economy from a broader breakdown in the competition that makes
it so vibrant. Here's Ragu Rajan, a professor of finance
(10:16):
at the University of Chicago Booth School. We have to
be vigilant that this kind of domination doesn't lead to
a loss of economic dynamism. We have to be vigilant
that the you know there is the heart of capitalism
is dynamism, constant innovation, constant church. And it is possible
(10:40):
that domination could reduce that. So that was Chris Condon.
I'm joined now by Neah Smith, Bloomberg opinion columnist on
lots of interesting things in economics. Um No, I should
ask you, actually, falling on from that last quote from
ragu Rajan at the end, do you think fundamentally the
(11:02):
kind of developments that we're talking about here, with market concentration,
maybe a reduction in in competition in key parts of
the economy, do you think that is a threat to capitalism?
Is it sapping market forces of the powers of the
force innovation and growth. I do worry that it is,
and I don't think it's it's, you know, a slam
(11:23):
dunk case yet that it is. But I think that
a lot of people are very rapidly becoming worried about this,
And of course you've already covered a lot of the
reasons why. But there's other problems with this massive concentration.
To one is something that almost never gets talked about,
which is idea hoarding. So if you have a few
companies that are really at the top of their field
(11:44):
and generating a lot of good ideas internally for how
to improve their business practices and how to get better technology,
they're probably not going to share. If you have a
large ecosystem of competitors that are on a kind of
even footing, they can hire each other's workers away from
each other, and the ideas will therefore flow between the companies. However,
if you have Google as the internet services company, or
(12:06):
Amazon is the online retailer, Facebook is the social network provider,
then all the best people just get trapped in these
companies and ideas don't flow out of these companies. And
one one interesting thing is that we've seen that top
company productivity growth has not slowed down in recent years.
It's actually accelerated slightly. However, overall productivity growth has slowed
(12:26):
because so many companies aren't sharing in the productivity growth.
You have. Google is becoming incredibly more productive, Amazon's becoming
incredibly more productive. But then you have this long tail
of companies that aren't becoming more productive and whose productivity
is basically stagnating, And we don't know how much of
that is caused and how much of that is affect Like,
there could be some companies that just have some secret
(12:48):
management sauce that makes them really good at doing what
they do, and so naturally tend to get all the
best people and to take over the markets and you know,
make those markets more concentrated. That's one possibility. Another possibility
is this idea trap thing. And of course the third
potential problem is that these large companies kill startups, and
so there's more research now about kill zones. People are
(13:10):
investigating the question of whether or not vcs and startups
essentially avoid anywhere where they might have to go up
against Facebook or Google or Amazon and um there's also
the question of eating of ecosystems, where basically, at some
point these large tech companies start eating all their third
party suppliers and buying all the third party supplies or
(13:31):
replacing them in house. You see this with of course
Amazon replacing third party merchants with its own in house products.
You see this with Google buying all the websites where
their ads run, and that could slow productivity growth by
basically slowing the number of new entrants that comes into
the market. So that's why technology concentration is kind of scary.
(13:53):
But but of course it's important remember that most of
the industries in America are not what we call the
tech industry, and those are becoming more concentrated to you know,
there's a lot of worry, parallel worries. So we talked
about companies, tech companies eating their ecosystems. A parallel worry
for you know, Tyson Chicken or whatever, is the idea
that they'll squeeze their suppliers and you'll have all these
(14:15):
little like independent suppliers whose profit margins basically squeeze to
nothing by this giant buyer. You have monopsinny power. Um.
Of course, workers are a different kind of supplier and
they can get squeeze too, as we've talked about. So
you have a lot of these these different bad things
that can happen. And we haven't even talked about the
political effects where large companies can can have huge political
(14:36):
power as well, and no one wants to no one
wants to go against you know, in the old days
with general motors in the in the future of course,
you know, we recently saw a successful sort of joint
effort between Bernie Sanders on the left and Trump and
Tucker Carlson on the right to to force Amazon to
raise their their minimum wage. So you know, maybe maybe
(14:59):
this is not something worth worrying about, and maybe companies
that get really big will actually be the targets of
increased political pressure and disapprobation. But I would say there's
still the worry that overall no one in some small
town Kentucky is going to want to go against Tyson Chicken.
Although even your example, if you've got into a world
where basically they're so big that they can then sort
of do do the world of favor by giving everyone
(15:21):
a wage rise, it doesn't feel like quite the right
dynamic between right, between government and companies. Oh I don't.
I agree completely, And I think this idea of job
owning companies into doing the right thing and actually not
a very good way of making pulse. The point about
the longer tail, I mean, it's interesting Andy Holden in
(15:42):
the Deputy Government the Bank of England, he's looked at
this from in the UK and it's very striking that
that there's always been a long tail in the UK
of companies who are kind of not very productive. But
as you say, there's this top one percent of companies
that since two thousand and eight had had you know,
double digit growth in productive ty They've been there just
(16:03):
in fact that we actually have more of them in
the UK than Germany and other places these top top performers,
but then companies had had little or no productivity growth
since two thousand and eight. And when you look at
the characteristics of that top one percent, it's as you
it's a little bit you're what you were saying about
the idea hoarding. They tend to be run by hyper
(16:24):
connected boards who were all part of a kind of
small community of superboards and hyper and have hyper connected
sort of workers working for them who don't really go
out into the broader community, if you like. So there
is this lack of absorption, lack of the knowledge, the
kind of best practice of these companies has just not
(16:44):
spread in the way that you're used to. And I'm
sure that it's a lot of the same dynamics that
you talked about. The question is how does technology flow
between companies? This is a question that needs a lot
more work research wise, because we don't have an amazing
idea of this it. I think that the best way
we know that technology flows between companies is for workers
(17:05):
to flow between companies. The question is how do we
get more really top workers to go out and use
their talents, turning a second rate company into the first
rate one then making a first rate company a little
bit better. And that's very difficult because that there is
a natural tendency to cluster, because smart people build off
(17:25):
with the ideas of other smart people. You don't want
to be the one smart person working in a company
full of not so smart people. UM. You want to
be the smart person working with all the best other people. UM.
One interesting idea is to use the university system. In America,
We've had great success getting universities and university labs and
(17:47):
professors to give a boost to the private sector by
basically commercializing their ideas by working with people from the
private sector, etcetera. There's so many good ideas and smart
people in university is of course a lot of times
that will go to the deep pocketed big companies. You know,
Google will be working with a million university research labs.
So the question is, could we tweak the law for
(18:10):
who universities work with to incentivize them to work with
lagging smaller companies to help them catch up, nudge them
away from working with the Googles of the world. Um.
There is one thing I wanted to say about ideas
to raise companies productivity. So the idea is exporting and
(18:31):
competing in world markets. There is copious evidence that competing
in world markets is correlated with higher productivity. Of course,
that correlation could be because more competitive companies have just
are able to go out into world markets. But actually
there's now starting to be more research saying that when
(18:52):
companies go and compete in world markets, they become more
competitive because it you know, some of the company, these
the less productive companies die and the more productive companies
sort of rise to the challenge, rise to the task
and become even more productive. And you know, while this
of course can increase concentration at home, it decreases concentration globally. That's,
(19:15):
by the way, the result of Paul Krugman's new trade
theory that he did back in the day. But the
idea is to get more companies competing in export markets,
to get a lot of the long tail of of
not so productive companies to get out there and sell
stuff overseas. Is is a is a big idea that
um I think hasn't been tried enough, and it's often
(19:36):
it's often a thing that people think about developing countries doing.
You know, these poor companies trying to find their comparative advantage,
trying to develop some tent pole industries industrial policy blah
blah blah. We think of this in terms of that,
but in fact, I think that there are so many
sort of lagging companies enrich countries, especially rich countries with large,
you know, um trade deficits, that that probably discourage a
(19:59):
lot of companies from thinking about export. You can export
a ton and still run a huge trade deficit. But
I'm not talking about like increasing net exports because boost GDP,
you know, the stuff Trump talks about. I'm not talking
about that. I'm talking at gross exports, even if you
end up importing more too. I'm talking about simply competing
in world markets. Is this underrated idea that competition forces
(20:21):
the improvement of productivity and allows the improvement of productivity,
And I think that's an underrated strategy and idea that
needs to be tried more, and something that is technologically
now much more open to small businesses. And we see
it everywhere. I mean, I've talked to I've talked to
tiny companies that, you know, people who are just literally
in their back room making a cool presence to send
(20:43):
to people or cards or whatever, and they will find
you know that their biggest one of them was telling
me this woman in the depths of Scotland was telling
me that her biggest export market was Argentina because one
Argentine film star had tweeted something about something they'd found
on her website on Amazon, and then you know everybody
(21:04):
had had started by everyone in Argentina has started buying this,
buying her products. And that's the kind of thing I've noticed.
I think the Canadian trade deal they did with China
had one of the things in it was to require
China to make and Chinese companies to open their sort
of online vending platforms to small businesses in Canada and
(21:26):
that could potentially open access to that market for the
for the whole swathe of businesses. And you think of
trade deals is often benefiting the big multinationals, but this
was specifically talking about small businesses. So I completely agree.
And it's all of the evidence shows that you get
faster productivity growth from being more open to the rest
of the world than exporting Lawich is why by Brexit
is such an interesting choice for the U. For the UK,
(21:51):
it was bad. It's an interesting it's an interesting thing
to do in the economy that is innovatively going to
make it slightly less open to the rest of the world.
We are definitely going to be talking about all of
these issues. As you say, it is the big new thing,
although probably not so new, but certainly the new thing
as far as economics is concerned and policymakers is concerned.
This question of of of market concentration there will be
(22:12):
a big topic of debate in Singapore. Thank you very much,
Nervah Smith. Thank you it has been a pleasure. Thanks
for listening to the New Economy. Today's episode was reported
by Chris Condom with editor Scott Landman, and produced by
Magnus Hendrickson, with special thanks to Noah Smith. Francesco Levy
(22:33):
is the head of Bloomberg Podcast.
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