To worry about technological change, network effects, increased market and pricing power, monopoly and oligopoly, fair enough. To then use UK supermarkets as your exemplar would be equally reasonable. But to use the UK supermarket sector as the example of increasing concentration and thus market power is to be alarmingly ignorant. But that’s what Ed Conway does here which leads to a question – is Conway always this mindgarglingly stupid about the subject under discussion?
If you could boil capitalism down to a single principle it would have to be creative destruction.
Well, no, that’s markets, not capitalism, but let that slide.
The idea, popularised by the Austrian economist Joseph Schumpeter in the 1940s, is that the economy is continually being renewed as old, inefficient companies give way to new start-ups. The “perennial gale of creative destruction”, as Schumpeter called it, drives each economic cycle: the rise and fall of the steam age, the industrial revolution, and so on. We all benefit from the prosperity and dynamism these forces of destruction bring the economy.
Except that in the past few decades, they seem to have petered out. Across a range of indicators including job creation and destruction, and the length of time companies stay at the top of stock markets, business dynamism has been in decline. This matters for all of us because the more dynamic businesses are, the greater their productivity, which in turn should make us all better off. Is it any coincidence that productivity, the rate at which we generate income for every hour worked, is also sputtering? We can see it throughout the developed world: in the US and in Europe; in small, open economies and big, closed ones; in high-regulation countries and thinly regulated ones. Diminishing dynamism; piddling productivity. Something seems to have gone wrong with the central mechanism of capitalism.
Well, maybe. Certainly, we can find examples. Now, it’s which examples which is the point here.
So the decision of the Competition and Markets Authority yesterday to block the merger between Sainsbury’s and Asda is rather significant. One can argue the toss over whether it is right or wrong. The CMA reckons the takeover would push up prices; the companies say it would cut them.
Set against the Silicon Valley behemoths, Sainsbury’s and Asda hardly look like giants. In theory blocking the merger should protect consumers but there is a risk that after the CMA decision a giant like Amazon may swoop into the UK grocery market and take advantage. In the long run that could be even worse for competition.
It’s entirely the wrong example. Even, the example runs the other way. We’re bemoaning the fact that we’re not gaining productivity increases as a result of competition. Then saying that it’s a bad idea – potentially – that Amazon comes in and provides the competition that leads to productivity increases?
It’s about time too. As the giants attempt to cling on to their size and influence at the cost of productivity and competition throughout the economy, this battle is about to get bloody.
Obviously, we all know what’s happened here. There’s been a piece stewing, distilled out of the conventional wisdom. And then along comes some particular decision upon which the musing can be hung. Without actually realising that the hook argues entirely the opposite case.
What is the defining feature of the UK supermarket business this past couple of decades?
But the key point is not just that they imported an innovative way of doing business, it’s the impact their presence has had on the rest of the British groceries sector. While economists and commentators often talk about new arrivals putting their competitors out of business, perhaps less remarked on is the way that new arrivals can spur the rest of the market to up their game. Nowhere is this truer than with Britain’s supermarkets. Before the Teutonic interlopers arrived with their spartan stores and unfamiliar product lines, the likes of Sainsbury’s and Tesco enjoyed profit margins of around 7 per cent. Fast-forward a few decades and that is down to just 2 per cent. The German firms are the archetypal disrupters, bringing in a new way of doing things that forces competitors to sit up, take notice and improve. That competitive pressure is the bedrock of a successful capitalist economy, and one of the many reasons it ends up providing living standards far beyond anything achieved in a planned economy. Conversely, when capitalist economies drift away from competition, either through nationalisation of industries or monopolisation in the hands of a few big players, it’s always the consumer who loses out.
The arrival of Amazon, Ocado, is just the next turn of this technological cycle increasing competition. Think on it a moment. We used to have Competition Commission reports musing over how many people lived within x miles of 1, 2, maybe 4, supermarkets. That was the measure of the competitiveness of the sector. Looking to local monopolies and pricing power. Amazon and Ocado – and however many other firms – now deliver to the doorstep. Meaning that there’s no one at all who lives more than the distance to the front door from at least two supermarkets. Whatever this is it is not an increase in market concentration and thus pricing and economic power, is it?
And brought on by exactly that creative destruction driven by technological change that we’re supposed to be noting the lack of.
Jeebus, what actually is the necessary qualification to be an economics correspondent these days?