Posts Tagged ‘Monopoly’

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Back in 2010, Charles Ferguson, the director of Inside Job, exposed the failure of prominent mainstream economists who wrote about and spoke on matters of economic policy to disclose their conflicts of interest in the lead-up to the crash of 2007-08. Reuters followed up by publishing a special report on the lack of a clear standard of disclosure for economists and other academics who testified before the Senate Banking Committee and the House Financial Services Committee between late 2008 and early 2010, as lawmakers debated the biggest overhaul of financial regulation since the 1930s.

Well, economists are still at it, leveraging their academic prestige with secret reports justifying corporate concentration.

That’s according to a new report from ProPublica:

If the government ends up approving the $85 billion AT&T-Time Warner merger, credit won’t necessarily belong to the executives, bankers, lawyers, and lobbyists pushing for the deal. More likely, it will be due to the professors.

A serial acquirer, AT&T must persuade the government to allow every major deal. Again and again, the company has relied on economists from America’s top universities to make its case before the Justice Department or the Federal Trade Commission. Moonlighting for a consulting firm named Compass Lexecon, they represented AT&T when it bought Centennial, DirecTV, and Leap Wireless; and when it tried unsuccessfully to absorb T-Mobile. And now AT&T and Time Warner have hired three top Compass Lexecon economists to counter criticism that the giant deal would harm consumers and concentrate too much media power in one company.

Today, “in front of the government, in many cases the most important advocate is the economist and lawyers come second,” said James Denvir, an antitrust lawyer at Boies, Schiller.

Economists who specialize in antitrust — affiliated with Chicago, Harvard, Princeton, the University of California, Berkeley, and other prestigious universities — reshaped their field through scholarly work showing that mergers create efficiencies of scale that benefit consumers. But they reap their most lucrative paydays by lending their academic authority to mergers their corporate clients propose. Corporate lawyers hire them from Compass Lexecon and half a dozen other firms to sway the government by documenting that a merger won’t be “anti-competitive”: in other words, that it won’t raise retail prices, stifle innovation, or restrict product offerings. Their optimistic forecasts, though, often turn out to be wrong, and the mergers they champion may be hurting the economy.

Right now, the United States is experiencing a wave of corporate mergers and acquisitions, leading to increasing levels of concentration, reminiscent of the first Gilded Age. And, according to ProPublica, a small number of hired guns from economics—who routinely move through the revolving door between government and corporate consulting—have written reports for and testified in favor of dozens of takeovers involving AT&T and many of the country’s other major corporations.

Looking forward, the appointment of Republican former U.S. Federal Trade Commission member Joshua Wright to lead Donald Trump’s transition team that is focused on the Federal Trade Commission may signal even more mergers in the years ahead. Earlier this month Wright expressed his view that

Economists have long rejected the “antitrust by the numbers” approach. Indeed, the quiet consensus among antitrust economists in academia and within the two antitrust agencies is that mergers between competitors do not often lead to market power but do often generate significant benefits for consumers — lower prices and higher quality. Sometimes mergers harm consumers, but those instances are relatively rare.

Because the economic case for a drastic change in merger policy is so weak, the new critics argue more antitrust enforcement is good for political reasons. Big companies have more political power, they say, so more antitrust can reduce this power disparity. Big companies can pay lower wages, so we should allow fewer big firms to merge to protect the working man. And big firms make more money, so using antitrust to prevent firms from becoming big will reduce income inequality too. Whatever the merits of these various policy goals, antitrust is an exceptionally poor tool to use to achieve them. Instead of allowing consumers to decide companies’ fates, courts and regulators decided them based on squishy assessments of impossible things to measure, like accumulated political power. The result was that antitrust became a tool to prevent firms from engaging in behavior that benefited consumers in the marketplace.

And, no doubt, there will be plenty of mainstream economists who will be willing, for large payouts, to present the models that justify a new wave of corporate mergers and acquisitions in the years ahead.

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I understand readers’ attention is mostly focused on today’s election. However, it is not too soon to look beyond the results themselves, to consider the economic policies of the new administration. If Hillary Clinton is elected (as seems likely), reducing “labor market monopsony” appears to be one of the directions economic policy will be going.

 

For decades now, the labor share of U.S. national income (the blue line measured on the left-hand vertical axis in the chart above) has steadily declined, while the shares of income and wealth captured by the top 1 percent (the red and green lines on the right-hand axis) has increased. And in recent years, even as employment has mostly recovered from the Second Great Depression, the wages paid to the majority of workers have continued to stagnate (even while incomes of workers at the very top, especially CEOs and other corporate executives, have risen).

Might it be the case that employers are conspiring to keep workers’ wages down?

The idea that employers often try and ultimately succeed in keeping workers’ wages lower than they otherwise would be has been recognized seen at least the end of the eighteenth century—an observation made by none other than Adam Smith:

What are the common wages of labour, depends every where upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorises, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. . .

We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate. To violate this combination is every where a most unpopular action, and a sort of reproach to a master among his neighbours and equals. We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things which nobody ever hears of. Masters too sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy, till the moment of execution, and when the workmen yield, as they sometimes do, without resistance, though severely felt by them, they are never heard of by other people.

However, it wasn’t until 1932 that we got the modern term for exercising market power on the purchasing or demand side of a market: monopsony. It should come as no surprise that it was invented by Joan Robinson (with help from classicist B. L. Hallward) and first utilized in her Economics of Imperfect Competition.

It is necessary to find a name for the individual buyer which will correspond to the name monopolist for the individual seller. In the following pages an individual buyer is referred to as a monopsonist.

Still, within mainstream economics, the idea that employers would operate as monopsonists—and therefore exercise power in setting workers’ wages—was mostly considered irrelevant, either overlooked or considered to be a minor exception (as, e.g., in the stereotypical “company town”) to the rule of perfectly competitive markets.

Now, however, that seems to have changed. The combination of slow wage growth, obscene and still-increasing inequality, and growing concentration among corporations in the production and selling of commodities (the classical case of monopoly) has put monopsony back on the agenda—at least for the President’s Council of Economic Advisers (pdf).

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Monopsony in the labor market serves an important explanatory role for Jason Furman and the other members of the Council because it creates a situation in which both wages (W2) and employment (Q2) are lower than they would be in perfect competition (W1 and Q1, respectively). In consequence, as a result of the shifting of the balance of bargaining toward employers, the wage share declines and both employers’ profits and the incomes of high-level corporate employees increase.*

What this means, in terms of policy, is a series of reforms designed to move markets closer to mainstream economists’ ideal of perfect competition: anti-trust enforcement as well reforms to labor markets (such as modernizing non-compete clauses, pay transparency, and affordable health care) that enhance the ability of workers to move between employers and move closer to “normal” wages.

The problem, of course, is that the theory of labor market monopsony, which pertains to individual employers, also serves to obscure the power wielded by employers as a class. When, as the result of a complex historical process, the labor market itself is created, a large group of people is forced to have the freedom to sell their ability to work to a small group of employers, who own or have access to the financial resources to hire those workers. Under such conditions (as they are first created and then reproduced over time), even if individual employers exercise no market power at all (and take the wage as given by the market), workers’ wages are still only equal to the value of their labor power, which is less than the value workers create. Workers are, in other words, exploited—even in the absence of individual monopsony.

What monopsony does, initially, is lower the wage to a level below the value of labor power (thus making it difficult for workers to continue to sell their ability to work under customary conditions). Then, if such a condition persists, the value of labor power itself falls (as the value of the basket of goods that make up the workers’ customary standard of living declines), thus increasing the level of exploitation. That, of course, is exactly what has happened in the United States since the mid-1970s.

Enforcing anti-trust laws and reforming the labor market might lower the amount of individual employers’ power in the labor market, thus raising the price (and, perhaps eventually, the value) of labor power. But it would not eliminate the monopsony of the group of employers as a whole in relation to the working-class.

The only way to abolish that class monopsony and build a more equitable economy is to eliminate the central role and regulating principle of the labor market—by creating the conditions whereby workers are not excluded from participating in the appropriation of their surplus labor.

 

*It is also the case that, if there is significant monopsony in the labor market, an increase in the minimum wage (at least up to W1) will actually lead to an increase in employment (toward Q1).

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P&B 13.5 Monopoly Smaller Output & Higher Price

It’s the most obvious criticism of mainstream, especially neoclassical, economics.

All of the major models and policy proposals of neoclassical economics—from the theory of the firm through the gains from trade to the welfare theorems—are based on the assumption of perfect competition.

But, as is clear in the diagram above, if there’s imperfect competition (such as a single seller or monopoly), the price is higher (PM is greater than PC), the quantity supplied is lower (QM is less than QC)—and, in consequence, excess profits are not competed away and the amount of employment is lower. (Of course, the monopolist can increase demand, and therefore output, through advertising, which for mainstream economists makes no sense for perfectly competitive firms since they are presumed to be able to “sell all they want to at the going price.”)

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The existence of imperfect competition by itself undoes many of the major propositions of neoclassical economics—including (as I explained back in April) the idea that there’s no such thing as a free lunch (since, as in the Production Possibilities Frontier depicted above, point A inside the frontier represents an inefficient allocation of resources, and no new resources or technology would be required, just the elimination of monopolies and oligopolies, to move to any point—B, C, or D—on the frontier).

Readers may not believe it but imperfect competition is mostly an after-thought in mainstream economics. It’s there (and extensively modeled) but only after all the heavy lifting is done based on the presumption of perfect competition—and then none of the major theoretical and policy-related propositions is revised based on the existence of imperfect competition. (The usual mainstream argument is either imperfect competition isn’t extensive or, even if prevalent, imperfectly competitive firms act much like perfectly competitive firms, not restricting output or raising prices by very much. Therefore, perfect competition remains a valid approximation to real-world economies.)

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Now, however, imperfect competition seems to have returned as an area of concern—in the White House Council of Economic Advisers and in the Federal Reserve Bank of Minneapolis. The irony, of course, is that the market power of a few giant firms in many industries has been growing after decades of neoliberalism and the celebration of free markets.

As James A. Schmitz, Jr. explains for the Minneapolis Fed, new research

shows that monopolies are not well-run businesses, but instead are deeply inefficient. Monopolies do drive up prices, as conventional theory suggests, but because they also reduce productivity, they often ultimately destroy most of an industry’s profits. These productivity losses are a dead-weight loss for the economy, and far from trivial.

The new research also shows that monopolists typically increase prices by using political machinery to limit the output of competing products—usually by blocking low-cost substitutes. By limiting supply of these competing products, the monopolist drives up demand for its own. Thus, in contrast to conventional theory, the monopolist actually produces more of its own product than it would in a competitive market, not less. But because production of the substitutes is restricted, total output falls.

The reduction in productivity exacts a toll on all of society. But the blocking of low-cost substitutes particularly harms the poor, who might not be able to afford the monopolist’s product. Thus, monopolies drive the poor out of many markets.

The last time monopolies came to the fore in the United States was during the first Great Depression, when Thurman Arnold (from 1938 to 1943) ran the Antitrust Division at the Department of Justice, “taking aim at a broad range of targets, from automakers to Hollywood movie producers to the American Medical Association” in order to protect society from monopoly.

Is it any surprise that now, in the midst of the second Great Depression, attention is being directed once again to the idea that gigantic national and multinational corporations with growing market power are responsible for reducing productivity and crushing low-cost substitutes, thus hurting workers and the poor?

One possibility is to get tough again with antitrust legislations and rulings, and try to restore some semblance of competitive markets. The other is to resist the temptation to turn the clock back to some mythical time of small firms and perfect competition and, instead, through nationalization and worker control, transform the existing firms and allow them to operate in the interest of society as a whole.

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Joseph Stiglitz usefully explains that there’s more than one theory of the distribution of income. One theory, he writes, focuses on competitive markets (according to which “factors of production” receive their marginal contributions to production, the “just deserts” of capitalism); the other, on power (“including the ability to exercise monopoly control or, in labor markets, to assert authority over workers”).

In the West in the post-World War II era, the liberal school of thought has dominated. Yet, as inequality has widened and concerns about it have grown, the competitive school, viewing individual returns in terms of marginal product, has become increasingly unable to explain how the economy works. So, today, the second school of thought is ascendant.

I think Stiglitz is right: with the obscene levels of inequality we’ve seen emerge over the course of the past four decades, the notion of “just deserts” is being called into question, thereby creating space for other theories of the distribution of income to be recognized.

The only major problem with Stiglitz’s account is he leaves out a third possibility, an approach that combines a focus on markets with power, that is, a class analysis of the distribution of income (which the late Stephen Resnick begins to explain in the lecture above).

According to this class or Marxian theory of the distribution of income, markets are absolutely central to capitalism—on both the input side (e.g., when workers sell their labor power to capitalists) and the output side (when capitalists sell the finished goods to realize their value and capture profits). But so is power: workers are forced to have the freedom to sell their labor to capitalists because it has no use-value for them; and capitalists, who have access to the money to purchase the labor power, do so because they can productively consume it in order to appropriate the surplus-value the workers create.

That’s the first stage of the analysis, when markets and power combine to generate the surplus-value capitalists are able to realize in the form of profits. And that’s under the assumption that markets are competitive, that is, there is no monopoly power. It is literally a different reading of commodity values and profits, and therefore a critique of the idea that capitalist factors of production “get what they deserve.” They don’t, because of the existence of class exploitation.

But what if markets aren’t competitive? What if, for example, there is some kind of monopoly power? Well, it depends on what industry or sector we’re referring to. Let’s take one of the industries mentioned by Stiglitz: health insurance. In the case where employers are purchasing health insurance for their employees (the dominant model in the United States, at least for those with health insurance), those employers are forced to transfer some of the surplus-value they appropriate from their own employees to the insurance oligopolies. As a result, the rate of profit for the insurance companies rises (as their monopoly power increases) and the rate of profit for other employers falls (unless, of course, they can cut some other distribution of their surplus-value).*

The analysis could go on.** My only point is to point out there’s a third possibility in the debate over the distribution of income—a theory that combines markets and power and is focused on the role of class in making sense of the grotesque levels of inequality we’re seeing in the United States today.

And, of course, that third approach has policy implications very different from the others—not to force workers to increase their productivity in order to receive higher wages through the labor market or to hope that decreasing market concentration will make the distribution of income more equal, but instead to attack the problem at its source. That would mean changing both markets and power with the goal of eliminating class exploitation.

 

*This is one of the reasons capitalist employers might support “affordable” healthcare, to raise their rates of profit.

**The analysis of wage or consumer goods would be a bit different. But I don’t have the space to develop that here.

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We used to make sense of market concentration in terms of the notion of “monopoly capital,” which for all its theoretical problems was a serious attempt to analyze the consequences of the (absolute and relative) growth of the size of firms stemming from the concentration and centralization of capital.*

The late Paul Sweezy was one of the pioneers (along with other members of the “Monthly Review School”) of the theory of monopoly capitalism. As he explains,

The reasoning here follows a line of thought which recurs in Marx’s writings, especially in the unfinished later volumes of Capital (including Theories of Surplus Value); individual capitalists always strive to increase their accumulation to the maximum extent possible and without regard for the ultimate overall effect on the demand for the increasing output of the economy’s expanding capacity to produce. Marx summed this up in the well-known formula that “the real barrier to capitalist production is capital itself.” The upshot of the new theories is that the widespread introduction of monopoly raises this barrier still higher. It does this in three ways.

(1) Monopolistic organization gives capital an advantage in its struggle with labor, hence tends to raise the rate of surplus value and to make possible a higher rate of accumulation.

(2) With monopoly (or oligopoly) prices replacing competitive prices, a uniform rate of profit gives way to a hierarchy of profit rates—highest in the most concentrated industries, lowest in the most competitive. This means that the distribution of surplus value is skewed in favor of the larger units of capital which characteristically accumulate a greater proportion of their profits than smaller units of capital, once again making possible a higher rate of accumulation.

(3) On the demand side of the accumulation equation, monopolistic industries adopt a policy of slowing down and carefully regulating the expansion of productive capacity in order to maintain their higher rates of profit.

The fact is, monopoly capitalists don’t strive to increase their accumulation to the maximum extent possible. Instead, large portions of the surplus they are able to appropriate from their workers and otherwise capture with their monopoly pricing power is used to acquire other portions of capital (through mergers and acquisitions), to engage in lobbying and funding its desired political candidates, to pay dividends to stockholders, and to pay enormous incomes to corporate executives and other members of the “professional-managerial” class who produce some of the conditions of existence of monopoly capital.

It should be no surprise, then, that increased concentration in a wide variety of industries has been accompanied by slower rates of economic growth, the rise of more fraudulent and speculative economic activities, and to growing inequality in the distribution of income and wealth.

*Bruce Norton has identified some of the key problems in the theory of monopoly capitalism, especially the presumption that “capitalists always strive to increase their accumulation to the maximum extent possible.” See, e.g., his “Epochs and Essences: A Review of Marxist Long-Wave and Stagnation Theories,” published in 1988 in the Cambridge Journal of Economics.