4 August 2018

Land of the giants?


Over the last 20 years, has the world’s extreme poverty rate a) almost doubled b) stayed the same or c) almost halved? CapX readers will, of course, know that the right answer is c. But when asked that question recently, just 9 per cent of Brits answered correctly.

Yet defending the market is not just about pointing out the many, under-appreciated ways in which capitalism has made the world a better place. It also forces us to take a dispassionate look at how things could be better. How capitalism as it exists in the real world in 2018 – not on the pages of a textbook – might be improved.

Some of the thorniest and most intriguing questions surround the power of big firms – and whether their economic clout is stopping competition from working its magic. This is not a new issue, but the latest wave of technological innovation and the rapid rise of the tech giants have brought it into fresh focus.

In the last few days, we had the news that Apple had become the world’s first trillion-dollar company; front-page tabloid denunciations of Amazon for its meagre corporation tax bill; and, perhaps most intriguingly, the fact that the British government has appointed Jason Furman, a Harvard economist and former head of Barack Obama’s Council of Economic Advisers, to lead a review into ‘the emergence of powerful new companies’ in the tech sector.

Furman, who has published extensively on the causes and consequences of market concentration in America, will consider how to ensure new firms can adequately compete, the impact on competition of ‘having data held within a few big companies’, and the pros and cons of digital markets becoming concentrated.

Part of the problem here is that debates about the role of big firms in Britain are frustratingly data-light. Not least because, for now, so much competition policy is run by Brussels.

Last week, however, The Economist published the results of a study of 250-odd sub-industries in the UK. They found that 55 per cent of those sectors have become more concentrated over the past decade, with the largest four firms in each area accounting for a larger share of the revenue. The trend appears to be less pronounced than in America, but its existence is undeniable.

The challenge for policymakers and regulators is knowing when and how to intervene. As technology has made distinctions between different markets harder to identify, deciphering who is competing with whom, and therefore the fairness of the fight, is far from straightforward.

A further difficulty is that, as in the case of the European Commission’s run-ins with the tech giants, headline-grabbing punitive fines do very little to help consumers. In fact, as Sam Dumitriu has argued on CapX, some of Brussels’s decisions are likely to have the opposite of their intended effect.

Another trap to avoid is letting a healthy suspicion of market concentration slip into a presumption that big is bad. On so many of the indicators that matter, big business outperforms small. Large firms are more productive, more likely to invest in their employees and spend more on R&D. They also, in the cases of Tesco, Amazon and many more, deliver massively lower prices for consumers.

The stance Britain takes against big firms – both in tech and elsewhere – needs to strike a fine balance between promoting competition and punishing success – which is a sure way to deter entrepreneurship.

It must also find a way to make a distinction between profits earned from innovations that drive the economy forwards and living standards up, and those enjoyed thanks to a position of economic privilege that is unearned and damaging to others. Unfortunately, that can be a hard line to draw.

Oliver Wiseman is Editor of CapX.