Larry Summers brings up an interesting point:
…it could be that higher profits do not reflect increased productivity of capital but instead reflect an increase in monopoly power. If monopoly power increased one would expect to see higher profits, lower investment as firms restricted output, and lower interest rates as the demand for capital was reduced. This is exactly what we have seen in recent years!
Is the increased monopoly power theory plausible? The Economist makes the best case I have seen for it noting that (i) many industries have become more concentrated (ii) we are coming off a major merger wave (iii) there is some evidence of greater profit persistence among major companies (iv) new business formation has declined (v) overlapping ownership of companies that compete has become more common with the rise of institutional investors, (vi) leading technology companies like Google and Apple may be benefiting from increasing returns to scale and network effects.
The combination of the fact that only the monopoly power story can convincingly account for the divergence between the profit rate and the behavior of real interest rates and investment, along with the suggestive evidence of increases in monopoly power makes me think that the issue of growing market power deserves increased attention from economists and especially from macroeconomists.
which conforms pretty darned well with the complaints I’ve been making for years about big companies.
One of the problems we face is something else I’ve pointed out from time to time: Big Government and Big Labor prefer dealing with Big Business. You don’t need as big a Rolodex. As I learned in the theory of negotiations class I took many years ago, a lack of options is a position of strength.
Hat tip: Noah Smith at BloombergView
“One of the problems we face is something else I’ve pointed out from time to time: Big Government and Big Labor prefer dealing with Big Business.”
Unfortunately, the converse is not true, as Big Business has spent much of the last 40 years trying to rid itself of both Big Labor and Big Government.
I didn’t mean to imply that it did. The question I was trying to address was why are obvious illegal monopolies being tolerated? I think the answer is that our politicians and government like monopolies.
It’s a seductive theory, but I’m not so sure. The gap in GAAP (heh) vs adjusted earnings has widened for quite some time. The endless stream of “one time” events. And at the end of assembling this monopoly power profits are declining rapidly.
Do corporations seek monopoly power? Yes. How broad and effective has it been? I suspect less than Summers would have us think.
The most effective check? Probably imports.
Uh-oh.
“The most effective check? Probably imports.”
You can’t import health care, education, many financial services, insurance, construction, and probably many others (Marvel IP, etc.).
It seems to me that one of the challenges that globalization presents is that it’s not easy to identify monopolies in a global environment, particularly when they’re vertically integrated. Additionally, patents, copyrights, and occupational licensing produce monopolies or, at least, oligopolies. That’s their purpose.