How America became uncompetitive and unequal

http://m.washingtonpost.com/opinions/how-america-became-uncompetitive-and-unequal/2014/06/13/a690ad94-ec00-11e3-b98c-72cef4a00499_story.html?hpid=z3

by orlandob • 12 years ago

52 68 12 years ago

m.washingtonpost.com

ivan_ah2• 12 years ago

This opinion piece articulates something I've felt for a long time... consolidation is the biggest problem in America right now, scratch that, in the World.

One thing that I can't comprehend is how right-wing free-market ideologues can get behind all the consolidation. Cant they see that consolidation is just like communism?

Only a competitive market with many players can ensure progress continues.

grondilu4• 12 years ago

The answer is simple : economic freedom. If companies have the right to merge, it's not because "right-wing free-market ideologues" think it is best for the economy, it's because it is their business and they are free to organize it as they will.

Saying that only "many players can ensure progress continues" and thus prohibiting companies to merge is interfering with economic freedom in the name of "I know better", and that is planned economy. And that, is "just like communism", as you put it.

brazzy5• 12 years ago

You could not possibly be more wrong.

Monpolies are the exact opposite of economic freedom and amount to a planned economy, except the plan is not even nominally for the good of everyone.

dougabug3• 12 years ago

Corporations are legal fictions. They exist through the power and authority of the State, their contracts are enacted and enforced through agents of the Courts. Corporations are manifestly not free to organize as they will.

Is it economic freedom to have one choice for Internet broadband? For healthcare? Unregulated monopolies should supply us with food, water, power, and all other essential utilities/needs? Welcome to the age of thousand dollar a pill medicine. Every communication, location, every purchase, every mouse click or swipe duly tracked, recorded, and data mined. To imagine that as freedom merges the Dickensian with the Orwellian.

ivan_ah2• 12 years ago

The answer is simple : economic freedom.

I'm all for freedom, and that is precisely why I'm opposed to consolidation. There are a couple of components required to make the free market work: (1) freedom for companies to grow [--> efficiency], (2) freedom for new companies to enter the market [--> competition], and (3) freedom for customers to choose from different offerings [--> competition].

Consolidation is all about (1) at the expense of (2) and (3).

To clarify, when I said "communism" I meant "central planning" (not totalitarianism), which is what happens when a single corporation controls most of a market. Apologies for using this emotionally-charged term loosely.

prohibiting companies to merge

I'm not sure what wing that puts me in, but I think we should prohibit large companies from merging and also dismantle existing large companies as well. The way I see it, a world with many small and medium-sized companies will run much smoother than one with a single large company. Specifically, keeping the chain of command short (height of the corporate pyramid < 7) will ensure informed decisions are made (instead of decisions based on office politics, and personal vision---the corporate version of "I know better"). Except for some exceptions (e.g. you need a pretty big company to manufacture planes) this would be possible.

nl• 12 years ago

I think it would be more reasonable to complain about consolidation combined with regulatory capture being a big problem.

In some parts of the world regulation of corporate behaviour is an adversarial process. In the US it is often designed to improve the market for large companies.

(I also find it difficult to view a statement like "consolidation is the biggest problem in the world" as anything but lacking some perspective. I suspect you may like to revisit that idea)

brc6• 12 years ago

Except that it is nothing like communism.

Communism is defined by a complete lack of freedom to change the status quo. In turn, the lack of freedom to change the status quo means that development and progress is dramatically slowed, slowing down improvements in quality of life - as people themselves would prefer.

Consolidation only persists where it is either an effective way to deliver value (Walmart) or regulatory capture has occured (eg taxi licences, car dealerships). Todays consolidated behemoth is tomorrows has-been company - as long as the laws allow them to fall apart when they can no longer innovate and compete.

Inequality of income to me seems as though an economy is functioning well at the creating-value part. A lack of inequality (too much equality) is a danger sign that the creation of wealth and progress has been halted, most likely due to lack of freedom for individuals to pursue their own interests.

It's a misunderstanding to think that competition requires many players to be effective. In many cases, you only need two players and threat of entry to any others for competition to be successful at optimal use of resources. You only need two fighters and some contenders for a world champ boxing match to make them the best available at the time. And a fair referree.

I'll be the first to admit that the last part is the most difficult to achieve, but it's no reason to abandon the concept of the game.

brazzy5• 12 years ago

Communism is defined by a complete lack of freedom to change the status quo.

Um, no. No, it's not. At all.

nhaehnle4• 12 years ago

Communism is defined by a complete lack of freedom to change the status quo.

I agree that the comparison to communism is silly, but not for this reason. Ultimately, communism is about how the economy is structured, one important feature being that there is no private ownership of capital (though other forms of private property are okay). In other words, a world of capitalist consolidation/monopolies is indeed nothing like communism.

There could (and should) still be freedom to change the status quo in a communist economic system though.

Edit to add:

Consolidation only persists where it is either an effective way to deliver value (Walmart)

Putting Walmart in parenthesis here is a bit dishonest. Almost every kind of business benefits from consolidation, because of economies of scale. You might just as well have put Burger King, KFC, or any other chain of anything into parenthesis.

Same is true in the high-tech industry, by the way. Just look at the big players in the web, but also count the number of remaining chip foundries on the planet.

In all those cases, power is concentrated into few hands, which we know to be problematic from history.

rtpg• 12 years ago

Consolidation only persists where it is either an effective way to deliver value (Walmart) or regulatory capture has occured (eg taxi licences, car dealerships). Todays consolidated behemoth is tomorrows has-been company - as long as the laws allow them to fall apart when they can no longer innovate and compete.

That doesn't hold up to reality, as proven by what has happen ed with banks, hospitals, and health insurance over the past 30 years (regulations make entry a bit more capital-intense, but if you have enough willpower and minimum capital you can start a bank).

It's a misunderstanding to think that competition requires many players to be effective.

It's part of a definition of a free market : atomicity of actors. In a free market, no single actor can influence price.

I'll be the first to admit that the last part is the most difficult to achieve, but it's no reason to abandon the concept of the game.

The concept of the game involves an infinite amount of really tiny boxers, not two world champions. All the math around free markets bringing prosperity is based around this fact (among a couple other prerequisites). You can't just abandon it.

Anti-trust and anti-monopoly laws are basically the most pro-free-market laws we can make.

nmrm3• 12 years ago

Consolidation only persists where it is either an effective way to deliver value (Walmart) or regulatory capture has occured (eg taxi licences, car dealerships).

Value for whom?

The problem is that "effective way to deliver value" is measured in terms of corporate profit (value to shareholders), not in terms of the actual thing being produced. So firms can produce less value to the economy at-large (fewer flights, worse beer, etc.), at greater cost to the consumer/supply chain, and still increase value.

The entire article is indicting this setup, where companies screw over their customers and suppliers in order to produce value for a few already very wealthy individuals who hold large stakes in the corporation.

This is how low-competitive environments work. Period. And it's not commie nonsense (unless Goldman Sachs are part of a massive commie conspiracy). From the article:

Goldman Sachs in February published a research memo advising investors to seek out “oligopolistic market structure[s]” in which “a smaller set of relevant peers faces lower competitive intensity, greater stickiness and pricing power with customers due to reduced choice, scale cost benefits including stronger leverage over suppliers, and higher barriers to new entrants all at once.”

In many cases, you only need two players and threat of entry to any others for competition to be successful at optimal use of resources.

First of all, there's not much of a threat to entry when one or two companies own the entire market and there's a huge cost to entry. Have you seen many airline start-ups in the past half century or so?

Furthermore, it's possible to price like a monopoly when you only have one or two major competitors and everyone is part of a gentleman's agreement. Implicit, of course, but these aren't pricing cartels in the same sense that PACs don't coordinate with political campaigns.

The boxing match analogy is inherently flawed because these companies can still win big without wiping out all their competition. There is no gold medal when everyone's happy splitting the enormous pot of gold.

In fact, most seem to desire a situation where they have one "friendly" competitor so that they get all the perks of monopolistic position via an implicit gentleman's agreement on pricing, while still having the luxury of pointing across the street whenever regulators come around.

audunw2• 12 years ago

"Communism is defined by a complete lack of freedom to change the status quo."

Communism is as diverse as capitalism, and this is neither the text-book definition, nor the real-world definition.

Is the definition of capitalism a complete lack of freedom to change the status quo because that was the case under Pinochet?

The text-book definition is the common ownership of the means of production. Is China still communist? The definition still applies somewhat in that they still have a lot of state owned businesses, and the banks which borrows capital to private business are state-owned. It can be argued. Does China have a complete lack of freedom to change the status quo? Only from a naive western perspective. There is only one party, but China's way is, if you want to change the state you join the party or work for the government (membership is not necessary to hold a government position). In other words, they consider it democracy through participation. A single person certainly has the ability to change the status quo, basically in the same way as in the west. Who really thinks voting actually matters much any more?

I don't condone China's way. I think the lack of acceptance for political dissent is disgusting. But that's besides the point. Point is, we can't fool ourselves into thinking China is like a dictatorship. They have other processes, but still achieves a decent meritocracy.

I'm beginning to think that democracy is a failure at the federal/union level. Look at the US and the EU. How functional is the democracy at that level these days? Maybe having so many people vote for a single/a few position makes democracy ineffective? I think these observations is why China is not jumping on the democracy bandwagon at the top level (they have implemented local elections).

danmaz74• 12 years ago

The absolute belief that the free-market will always correct itself for the benefit of everybody is very much like the absolute belief of communists that in a communist world everybody will work at his/her best for the benefit of everybody. In many markets, the only way to avoid monopolies or tight oligopolies is with anti-trust legislation, but recognizing this is impossible for those who believe that all regulation is evil.

collyw2• 12 years ago

Exactly. Too little in politics is based on evidence.

(I think) I would vote for the first politician to admit that they are not sure what the outcome will be. Unfortunately in politics, and honest attitude is not well received.

gremlinsinc• 12 years ago

Author has great points but too optimistic we're screwed, there's no fixing it as long as politicians are our only hope for change.

ergoproxy4• 12 years ago

I have a different take on this article than most. I'm a proponent of Classical economics, and I reject all modern schools of economics--neoclassical, Austrian, Keynesian, etc.

Classical thinkers like Adam Smith expounded how rational self-interest and competition together lead to economic prosperity. There's a balancing act going on between self-interest and competition--competition is the economic faculty that restrains self-interest.

Only in perfect competition do we get Pareto efficiency--the state in which it is impossible to make any one individual better off without making at least one individual worse off.

Unfortunately, modern schools of economics have diminished the role of competition. Keynesianism lauds government monopoly power; while neoclassicism and Austrianism foster private monopoly power. Both are evil. The result has been a state of affairs wherein the vast majority of people are getting worse off.

WRT government intervention in the markets, Adam Smith would not oppose intervention that fosters competition and stifles monopoly. The goal of the 1890 Sherman Anti-Trust Act was to foster competition, not to diminish "economic freedom."

"Economic freedom" is a mostly meaningless buzzword that's thrown around by both libertarians and socialists. Indices of "economic freedom" as compiled by the Heritage Foundation and the Wall Street Journal serve no other purpose than propaganda.

It's impossible to divorce politics from economics in the real world. Adam Smith understood this. The subject used to be called "politico-economics."

Today, the Left favors reforms to give government more monopoly power. While the Right favors reforms that give firms more monopoly power. Until people start to wake up and realize all monopoly power is evil and what we need instead is more competition, things will continue to decline.

nhaehnle4• 12 years ago

Keynesianism lauds government monopoly power; while neoclassicism and Austrianism foster private monopoly power. Both are evil.

At least in the case of government, you may feel that it is evil, but it is necessary [0]. So the more pragmatic and productive approach would be to think about how this monopoly power could be used to further prosperity and equity of the people.

Today, the Left favors reforms to give government more monopoly power. While the Right favors reforms that give firms more monopoly power.

I think both those characterizations are a bit simplistic. Look at the discussion surrounding surveillance, secret courts and the police state, for example.

[0] This is true even within the economy: having a common measure of value is important for doing business, so you need currencies to have large scopes. Whoever ultimately controls a currency necessarily has a lot of monopoly power. So the question is not whether such powers exist, but how they should be structured subject to goals that we need to set for ourselves as a society.

ergoproxy4• 12 years ago

I was speaking specifically of monopoly power, i.e., the power to raise or lower prices in the market. And no, neither government nor private firms should have this power. Monopoly power is an example of market failure. In a competitive market, all participants are price takers, i.e., passive agents incapable of changing the market price. In perfect competition, in every transaction, at least one party is better off, and nobody is worse off. That all changes when somebody gets the power to set prices; then transactions leave some people worse off.

There are kinds of power besides monopoly power, such as coercive power. WRT coercive power, that's best monopolized by a democratic government accountable to its people. And government can and should use it's monopoly on coercive power to promote competitive markets. Instead, its been empowering monopolies.

But people today aren't well informed enough to make demands on government to promote competition or hold politicians accountable. They're given bogus ideologies (neoclassicism, Keynesianism, etc.). And they're given the false choice between Left and Right.

The terms "Left" and "Right" are not merely overly simplistic. They're total falsehoods, fabricated by self-interested parties to delude people into thinking they either need to give government more monopoly power or else give private firms more monopoly power. There is a third choice that's left unmentioned: Government can promote competition.

audunw2• 12 years ago

Excellent points! I like your thinking.

Although I agree to classical economics as the ideal, I'd argue that there are some moral arguments to limited government ownership and even monopoly in certain areas. That is, to guarantee a certain level of service, to handle natural monopolies, and to ensure that profits from large natural resources are distributed to the people rather than the few who has the capital, the luck and the political influence to acquire the mines/oil fields/etc.

leaveyou8• 12 years ago

Consolidation is also favored by cheap money (yes, back to money monopoly thingy). Above some threshold and especially if you are in good relations with a bank, it is far easier to buy your competitors and dismantle them by selling their assets than to compete with them. It's ironic how in the failed communist centralized economies, the economic policy was dictated by "elected" nomenklatura and it was BAD, while in the "free/democratic" market economies the control is held by unaccountable private banks and nobody worries much.

leaveyou8• 12 years ago

As Arthur Clarke would say: Any sufficiently advanced "bread and circuses" is indistinguishable from freedom and democracy.

spindritf3• 12 years ago

It's ironic how in the failed communist centralized economies, the economic policy was dictated by "elected" nomenklatura and it was BAD

It wasn't judged as bad because of nomenklatura, or rigged elections. Few people care about these. It was bad because you couldn't get basic goods. There were shortages of sugar and toiler paper. Not war-time shortages, decades after the war.

Which is why the current system will continue as long as it can carry out its basic obligations. American banks are a little behind the times but mostly because of all the backwards compatibility they carry, not scale-related dysfunction. Regular consumers don't feel that. They can still can get their credit cards, chargebacks work, fraud is policed, Amazon gets paid, etc, etc.

crdoconnor3• 12 years ago

There are currently shortages of another basic good: housing.

It's a mistake to think that our economies are any the less planned. Fraud may be policed at the low end, but at the high end (servicer fraud; pension rip offs) it is rife and largely unpoliced.

leaveyou8• 12 years ago

"It was bad because you couldn't get basic goods". True. But the current system is (even more?) problematic because you can't get basic JOBS. And not only that but a fundamental part of the current system is the accelerating race of getting rid of jobs. And not only that but now, unlike ever before, the system uses the best tools against jobs: software & automation.

brc6• 12 years ago

It's ironic how in the failed communist centralized economies, the economic policy was dictated by "elected" nomenklatura and it was BAD

It was bad because the only effective way of determining which goods should be produced and which should not is via the price system. It's a fatal conceit of planners that they can predict and determine what people want - even right down to how many loaves of bread they want.

It's the whole reason why some startups fail and others succeed, but nobody really knows why at the outset. Replace the dynamism of Silicon Valley with a government planning board and the whole thing would be dead in 2 years.

The actual idealogy behind it doesn't matter - if you think you can plan an economy, you're already creating trouble.

Control of the economy is most definitely not in the hands of 'unaccountable private banks'. Banks rarely even feature in most startup stories - the market innovated around them by forming venture funds and employing individuals who were skilled at allocating the capital in them. It's simply not true that banks control the economy, and anyone is free to start their own bank or perform their own lending if they like.

leaveyou8• 12 years ago

Again, I agree with you with one exception: banks have an unfair advantage and a monopoly over money creation. With the fractional reserve banking, banks take interest on money they don't have and in partnership with large corporations (in which banks may have vested interests and which are dependent on banks), banks can "determine which products should be produced and which should not" before the market has any word about it (by buying competitors, buying critical suppliers of competitors, patents..). Banks do control and steer the economy more than any other actor.

dmitri1981• 12 years ago

Hospitals by their very nature are anti-competitive. There is no way that you as a patient can shop around. You do not have the necessary knowledge to compare the treatments, evaluate the options and decide on what represents the best value.

antimagic• 12 years ago

Yup. I had to get some surgery done a few years back, and I went surgeon shopping. The surgeons did not like that one little bit. They got quite upset with me when they realised I was talking to several different surgeons and checking out my options.

Of course, as you point out, it is very difficult to evaluate medical professionals from a layman's perspective. I ended up talking to surgical nurses in the hospitals the surgeons worked out of. It was not easy finding the nurses, it took persistence and physically going to the hospitals in question and asking real nurses which nurses I need to talk to. Then I had to track those nurses down, and convince them to talk openly. It helped that I have a cousin that is a nurse, and she gave me some contacts / introductions.

I was glad I did it though. One of the surgeons on my shortlist had a very poor reputation amongst nurses as to his skills in the operating theatre, so I managed to avoid him.

As an aside, considering just how critical the nursing staff where about this guy's skills, it is incredible to me that he is still allowed to practice...

dnautics• 12 years ago

that's generally not true. For most procedures done in hospitals there is nearly no reason why patients can't shop around. With basically the only exception being the ER, for true emergencies.

Moreover, even if NOT ALL patients shop around, say, even just 10%, there would be enough momentum going to put pressure on doctors to improve quality of care and decrease costs.

watwut2• 12 years ago

It is hard to shop around because prices are not transparent. It is very hard to find out in advance how much exactly will everything cost you. You can get some partial information (how much they charge for room), but they will not tell you in advance about all the tests you will have to pay. Then there are small item hospitals charge a lot for: band-aids for example. Unless you know a lot about healthcare system, you will not be able to guess all of them.

Plus, hospitals are not in habit of committing to agreed upon price in advance. So, even if you shop around the amount they will charge you still can be much different then the one you calculated.

warmfuzzykitten• 12 years ago

I am pleased to see that all of the comments up to now deal with the "uncompetitive" aspect of the article and none with the "unequal" aspect. Indeed, it seems to me that "inequality" (the word appears 9 times in the article) was thrown in after the fact to decorate a piece about the adverse effects of monopoly, because post-Piketti it's stylish to talk about inequality. These aren't the same subject; the discussion of inequality is focused on person fortunes, not industrial domination. The former doesn't require the latter.

esbranson• 12 years ago

No more than dying requires getting shot in the face. But nonetheless getting shot in the face adds considerably to the likelihood of dying.

How America became uncompetitive and unequal

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