How Oligopolies Undermined Competitiveness and Produced Inequality

Economists, commentators, and policymakers have spilled boatloads of ink on what caused the financial crisis and why the US and most advanced economies remain mired in a weak recovery. A substantial school of thought sees stagnant wage rates, financialization, and rising inequality as linked causes. Starting in the 1970s, the old bargain between large corporations, which tended to anchor wages, and labor began to break down. Before, workers shared in the benefits of productivity gains, which enabled them to enjoy a rising standard of living. Economic policy also focused on the health of labor, measured in wage and employment levels.

While the shift in emphasis started in the 1970s, the new “free market” economic paradigm really took hold in the 1980s. Markets were touted as the neutral arbiters of economic problem, regulations were depicted as a drag on this virtuous device. That belief served to justify widespread deregulation. Stagnant worker wages were papered over by rising levels of consumer debt and asset prices, which allowed ordinary citizens for decades to use borrowing to augment flagging incomes and thus provide for rising living standards (another prop was much greater participation by women in the economy, so more and more two-earner households also masked the flat trend in real wages). Increased financialization, as well as lower tax rates on top earners (and the failure to close critical loopholes), helped promote widening inequality. And that now much greater disparity between the 1%, and particularly the 0.1%, and everyone else, has dampened the recovery, since the wealthiest don’t consume as much of their income as low and middle income people do, so the high degree of wealth concentration perpetuates post-crisis weak aggregate demand.

Now notice what is missing from this account: the role of anti-trust policy. One thing that even conservative economists will concede is that monopolies and oligopolies undermine the tidy “markets are virtuous” account. Monopolies and oligopolies have the power to set prices unnaturally high, assuring more profits for themselves. Yet the highly efficient markets of economic fairy tales, where no producer or buyer has pricing power, is a highly unattractive setting for businessmen. Efficient markets produce minimal profits. Indeed, rampant competition is destructive to businesses, as railroad speculation and bankruptcies in America in the 1800s demonstrated.

The job of an entrepreneur is to find or create market inefficiencies. That might be the virtuous way, by creating a distinctive product that is hard to replicate (think the iPhone). It might be by exploiting a niche market (think the convenience store that charges high prices but can get away with it by being open 24 hours or by being in an underserved location). Or it might be by trying to become a dominant player in a market that has some barriers to entry (say scale economies or network effects).

More at http://www.nakedcapitalism.com/2014/06/oligopolies-undermined-competitiveness-produced-inequality.html .

Cross-posted in General Discussion.