Sometimes, lots of little stories boil down into one big one. And behind all of the political turmoil in recent years, all of the fretting about globalisation and automation and rising inequality, lies a simple fact: workers are being screwed.
Put more elegantly, what is happening in the economy is that the balance of reward between capital and labour, which remained roughly the same for most of the 20th century, has tilted swiftly and jarringly in favour of capital. Our economies are still growing. But a smaller and smaller share of the proceeds are going to the ordinary workers – about which they are understandably cheesed off.
There are various explanations for this change. Thomas Piketty has argued that it is part of an ineluctable law, by which returns on inherited wealth tend to exceed those on earned income. Others have argued that it is a result of offshoring, as work shifts to cheaper labourers in China and elsewhere, driving down wages (although this has recently been challenged). Others talked about automation, or digital technologies. Still others argued that the surge had been driven, in America at least, by an increase in housing costs.
Now a new contender has entered the lists. As Bloomberg reports, two new papers argue that the reason labour is getting less and less of the pie is that monopolies are back.
As sector after sector becomes dominated by a few large firms, salaries are squeezed – for the simple reason that workers have fewer alternative options, and so have a weaker bargaining position.
The first paper, from Simcha Barkai of the University of Chicago, points out that the decline in labour’s share of the economy has not in fact been matched by a rise in the share taken by capital – in fact, that too has declined. What has filled the gap has been profit.
The economy, in other words, is not working with perfect efficiency. What is happening is that as industries become more concentrated, firms are able to raise their prices – “markup”, to use Barkai’s term. This is the only thing, she argues, that explains what we’re seeing in the economy.
This is backed up by the second paper, by a variety of authors, which argues that most markets have transitioned from being properly competitive to a state of “winner takes most”, in which they are dominated by a few “superstar” firms. Between 1982 and 2012, they show, the top four firms in a wide variety of industries increased their market share significantly.
It’s worth pointing out that this paper is slightly kinder to these big firms than Barchai’s. She depicts their profits as a tax deriving from their monopoly position. They argue that these companies grew into superstars because they were more productive and profitable than their rivals, rather than more rapacious. But this by definition meant that they gave less of their revenues to their workers – meaning that as they grew, so labour’s share of the proceeds across the industry shrank.
It’s long been clear that technology, in particular, is a winner-take all business: the effects of networks mean that once a firm like Google, Facebook or Amazon becomes the market leader, they have a self-reinforcing advantage that ends up handing them the lion’s share of the market. (We use them because everyone else is, they leverage that customer volume to lower their prices or make their products more attractive, increasing their advantage over their rivals.)
But this phenomenon also seems to be happening elsewhere. And you don’t need to study economic papers to see it in action.
I pointed out in my recent book that industrial concentration has reached the point where a company like Glencore can control, at the time of its IPO, more than half of the global market for zinc and copper.
The food industry is another great example: 81 per cent of the US beef market is in the hands of four giant processing companies; the global tea trade is controlled by just three firms; while a single company, Fresh Express, produces more than 40 per cent of America’s pre-packaged salads. America has only a tenth as many hog farms as 30 years ago – but they are, on average, 10 times larger.
Only this month, a giant firm called Luxottica announced its merger with a giant firm called Essilor. Luxottica makes pretty much every high-end brand of eyewear you’ve ever heard of: Rayban, Oakley, Sunglass Hut. Essilor does the same, but with contact lenses.
Then there’s the merger of AT&T and Time Warner, or Charter and Verizon, or Reynolds and British American Tobacco. In each case, one vast corporation is swallowing another, further concentrating the number of players within a particular industry. As I pointed out in a recent CapX article, the result is an economy increasingly dominated by gigantism.
There are many factors driving this concentration, but one of the big ones is the pressure of what might be called quarterly capitalism. This is the need for firms to keep investors happy by meeting revenue and profit targets, quarter after quarter.
A new book, The Innovation Illusion, argues that this has actually been damaging to innovation: the need to kowtow to the markets means that firms are reluctant to do crazy, risky, world-changing things and more focused on squeezing out every last drop of efficiency.
And no less a figure than Clayton Christensen, the guru of disruption, says much the same thing. Christensen’s point, as I mention in my book, is that managers have got very good at making their firms look good on spreadsheets, but much less good at actually coming up with new stuff.
“The way we calculate success,” he says, “makes it impossible for innovators to invest in the kind of things that create jobs, and so it makes it impossible for recoveries to create jobs . . . the finance mechanism hijacks capital and recycles it into itself.” The result is pristine balance sheets – and, in the long term, economic stagnation.
This also helps to explain the wave of mergers. The larger these firms get, the harder they find it to grow organically, especially in sectors that are already mature. So they resort to buying it, by acquiring or merging with other companies – even though the larger size of the combined firm makes it even harder to grow at the desired pace.
What these two new papers suggest is that the resulting hyper-firms have got too large for their own good – and for ours. Their sheer muscle is stifling competition, and giving them the ability to jack up prices. In other words, rather than innovating for the customer’s benefit, they are too often profiteering for their own.
Back in 2014, Maurice Saatchi – chairman of the Centre for Policy Studies, which founded CapX – made the point that big corporations have become just as much of a danger to the public as big government. He argued that tough action was needed to break up these new cartels – and that the tax system should be tweaked to give small and medium-sized firms the change to compete (via the policy outlined in the video above).
This latest evidence shows quite why that idea was right. Capitalism at its heart is about competition. But for the game to work properly, you need more than just a few giant players.