This weekend’s Willy Rant was about how America is becoming ever more concentrated in its economy. Monopoly not just thrives but expands and the economic rents from that explain all that ails the colonial cousins.
The problem with this being that there’s not an ounce of truth to it:
Except the latest research demonstrates the reverse is true. Britain is about to make a vast mistake. In the recently published The Great Reversal, leading economist Thomas Philippon of New York University and member of the advisory panel of the New York Federal Reserve, mounts a devastating attack on the conventional wisdom, so perfectly embodied by the witless Boris Johnson. The news is that over the last 20 years per capita EU incomes have grown by 25% while the US’s have grown 21%, with the US growth rate decelerating while Europe’s has held steady – indeed accelerating in parts of Europe. What is going on?
Philippon’s answer is simple. The US economy is becoming increasingly harmed by ever less competition, with fewer and fewer companies dominating sector after sector – from airlines to mobile phones. Market power is the most important concept in economics, he says. When firms dominate a sector, they invest and innovate less, they peg or raise prices, and they make super-normal profits by just existing (what economists call “economic rent”). So it is that mobile phone bills in the US are on average $100 a month, twice that of France and Germany, with the same story in broadband. Profits per passenger airline mile in the US are twice those in Europe. US healthcare is impossibly expensive, with drug companies fixing prices twice as high or even higher than those in Europe; health spending is 18% of GDP. Google, Amazon and Facebook have been allowed to become supermonopolies, buying up smaller challengers with no obstruction.
This analysis is looking a the number of competitors across the national economy. Yet that’s not where competition is, nor is it where it counts. Competition matters only in the face of the consumer. Recall all that stuff about how the UK supermarkets were an oligopoly? How did we try to measure that? By looking not at national shares of the market because that’s an irrelevance. Instead we looked at how many supermarkets did any one – or set of – households have to choose from. Geography matters that is.
So, when we look at competition of monopoly in an economy we want to be looking at the choices – or the monopolies – that apply to groups of people, not the nation as a whole. And what has recent decades done? Vastly increased the competition to service any one household.
Think of Amazon, just for a moment. OK, so it has some vast percentage of the national ecommerce market. Is that the important thing? Or that every household now can choose from the local mall, the one a bit further away and also however many squillion sellers there are on the Amazon Marketplace. Oh, and, also, e-Bay, Target, Walmart and everyone else trying to sell online?
Competition for the business of any particular household has risen, not fallen. Thus a claim about increased monopolisation of the American economy fails, doesn’t it?
But then if Willy Hutton knew any economics he’d not be Willy Hutton, would he?