Monopoly: A Manifesto and Fact Post

Epistemic Sta­tus: ex­plo­ra­tory. I am REALLY not an economist, I don’t even play one on TV.

[Edit: After some dis­cus­sion in the com­ments I’ve up­dated that that GDP-to-gold, or GDP-to-oil, are bad proxy mea­sures for eco­nomic growth. Fur­ther thoughts on this in Oops on Com­mod­ity Prices]

You can call it by a lot of names. You can call it crony cap­i­tal­ism, the mixed econ­omy, or cor­po­ratism. Cost dis­ease is an as­pect of the prob­lem, as are rent-seek­ing, reg­u­la­tory cap­ture, and oli­gopoly.

If Scrooge McDuck’s down­town Duck­burg apart­ment rises in price, and Scrooge’s net worth rises equally, but noth­ing else changes, the dis­tri­bu­tion of pur­chas­ing power is now more un­equal — fewer peo­ple can af­ford that apart­ment. But no­body is richer in terms of ac­tual ma­te­rial wealth, not even Scrooge. Scrooge is only “richer” on pa­per. The to­tal ma­te­rial wealth of Duck­burg hasn’t gone up at all.

I’m con­cerned that some­thing very like this is hap­pen­ing to de­vel­oped coun­tries in real life. When many goods be­come more ex­pen­sive with­out ma­te­ri­ally im­prov­ing, the re­sult is in­creased wealth in­equal­ity with­out in­creased ma­te­rial abun­dance.

The origi­nal rob­ber barons (Raubrit­ter) were me­dieval Ger­man landown­ers who charged ille­gal pri­vate tolls to any­one who crossed their stretch of the Rhine. Essen­tially, they prof­ited by re­strict­ing ac­cess to goods, hold­ing trade hostage, rather than pro­duc­ing any­thing. The claim is that peo­ple in de­vel­oped coun­tries to­day are get­ting sucked dry by this kind of ar­tifi­cial ac­cess-re­stric­tion be­hav­ior. A clear-cut ex­am­ple is closed-ac­cess aca­demic jour­nals, which many sci­en­tists have be­gun to boy­cott; the value in a jour­nal is pro­duced by the schol­ars who au­thor, edit, and referee pa­pers, while the on­line jour­nal’s only con­tri­bu­tion is its abil­ity to re­strict ac­cess to those pa­pers.

Scott Alexan­der said it right:


Ex­cept that it’s pretty easy to see why. We have a lot of trolls sit­ting un­der bridges charg­ing tolls to peo­ple who want to cross. Modern Raubrit­ter can eas­ily main­tain a hard-to-re­fute image that they’re pro­vid­ing value, and so make it hard for any­one to co­or­di­nate to avoid them. It’s gen­uinely risky to unilat­er­ally skip col­lege, re­fuse to pub­lish in closed-ac­cess jour­nals, or leave an ex­pen­sive city with a boom­ing econ­omy. You know you’re be­ing charged a ton for some stuff you don’t want or need, but it’s hard to tell where ex­actly the waste is; it’s dis­si­pated and con­cealed and difficult to dis­en­tan­gle. As 19th cen­tury busi­ness­man John Wana­maker said, “Half the money I spend on ad­ver­tis­ing is wasted; the prob­lem is, I don’t know which half.”

But, for now, let’s try to get a fac­tual pic­ture of what’s ac­tu­ally go­ing on.

Stag­nant Com­mod­ity-Denom­i­nated Growth

GDP is sup­posed to be ad­justed for in­fla­tion, but the calcu­la­tion of the in­fla­tion rate is pretty poli­ti­cal and might be mis­lead­ing. What hap­pens if you in­stead de­nom­i­nate in com­modi­ties?

This is the Dow-to-gold ra­tio for the past 100 years; as you can see, there are three ma­jor con­trac­tions in the places you’d ex­pect: one in the Great De­pres­sion, an even deeper one that be­gan around 1972, and the most re­cent in the Great Re­ces­sion that be­gan in 2008.

You get a similar pic­ture look­ing at the US GDP-to-gold ra­tio:

and the global GDP-to-gold ra­tio:

In 100 years we’re look­ing at some­thing like an av­er­age of 1.4% growth in gold-de­nom­i­nated stocks or GDP; and gold-de­nom­i­nated GDP is com­pa­rable to where it was in the 1980’s.

But maybe that’s just gold. What about GDP de­nom­i­nated in other com­mod­ity prices? Here’s US GDP in terms of crude oil prices:

Once again, this shows US GDP never re­ally re­cov­er­ing from the 2001 tech bust, and not be­ing much higher than where it was in the 80’s.

Com­pared to the global price of corn, again, US GDP barely seems to have an up­ward trend since 1980; some­thing like 1.5% growth.

Com­pared to a global com­modi­ties in­dex, once again, GDP seems no higher than it was in the 90’s.

This should make us some­what sus­pi­cious that “real” GDP growth is over­es­ti­mat­ing growth in ma­te­rial wealth.

Of course, since me­dian in­come has grown slower than GDP, this means that me­dian in­come rel­a­tive to com­modi­ties has ac­tu­ally dropped in re­cent decades.

Stag­nant Productivity

La­bor pro­duc­tivity, in dol­lars per hour, has risen pretty steadily in ad­vanced economies over the past half-cen­tury.

On the other hand, to­tal fac­tor pro­duc­tivity, the re­turn on dol­lars of la­bor and cap­i­tal, seems to have stag­nated:

To­tal fac­tor pro­duc­tivity is thought to in­clude phe­nom­ena such as tech­nolog­i­cal im­prove­ment, good in­sti­tu­tions and gov­er­nance, and cul­ture. It’s been stag­nat­ing in other de­vel­oped coun­tries, not just the US:

A Brook­ings In­sti­tute re­port broke down US to­tal fac­tor pro­duc­tivity by sec­tor, and con­cluded that the de­clin­ing growth from 1987 to to­day was in ser­vices and con­struc­tion, while man­u­fac­tur­ing and other sec­tors con­tinued to im­prove:

Ser­vices and con­struc­tion, please note, pretty much match the “cost dis­ease” sec­tors whose prices are ris­ing faster than the rest of the econ­omy can grow: ed­u­ca­tion, hous­ing, trans­porta­tion, and es­pe­cially health­care. As ser­vices be­come more ex­pen­sive, they’re also be­com­ing less effi­cient.

De­clin­ing pro­duc­tivity means that we’re do­ing less with more. This is par­tic­u­larly true for in­no­va­tion, where, for in­stance, we’re not get­ting much in­crease in crop yields de­spite huge in­creases in the num­ber of agri­cul­tural re­searchers, and not get­ting much in­crease in lives saved de­spite in­creas­ing vol­ume of med­i­cal re­search.

Monopoly and De­clin­ing Dynamism

The Herfin­dahl In­dex is a mea­sure of mar­ket con­cen­tra­tion, defined by the sum of the squares of the mar­ket shares of firms in an in­dus­try. (If a sin­gle firm held a monopoly it would be 1; if N firms each had equal shares, it would be 1/​N.)

US in­dus­tries have be­come more con­cen­trated since the mid-1990s, with the num­ber of firms drop­ping and the Herfin­dahl in­dex ris­ing:

Firms have also got­ten larger:

You can also look at con­cen­tra­tion in terms of em­ploy­ment. Ed­u­ca­tion and health­care are the most con­cen­trated in­dus­tries by oc­cu­pa­tion, while com­put­ers are the least:

There has been a steady in­crease in mar­ket power since 1980, with markups ris­ing from 18% above cost in 1980 to 67% above cost in 2014.

More con­cen­trated in­dus­tries can charge higher prices rel­a­tive to costs.

As in­dus­tries are be­com­ing more con­cen­trated, they’re also be­com­ing more static. Fewer new firms are be­ing cre­ated:

Amer­i­cans are mov­ing less be­tween states:

And self-em­ploy­ment is drop­ping:

As mar­ket power in­creases (i.e. as in­dus­tries be­come more mo­nop­o­lis­tic), you can get a sce­nario where the fi­nan­cial value of firms out­paces their in­vest­ment in cap­i­tal or their spend­ing on la­bor.

With an in­crease in mar­ket power, the share of in­come con­sist­ing of pure rents in­creases, while the la­bor and cap­i­tal shares both de­crease. Fi­nally, the greater monopoly power of firms leads them to re­strict out­put. In re­strict­ing their out­put, firms de­crease their in­vest­ment in pro­duc­tive cap­i­tal, even in spite of low in­ter­est rates.

If you di­vide the econ­omy into “cap­i­tal” and “la­bor”, you find a long-term de­cline in the share of la­bor and in­crease in the share of cap­i­tal. But if you de­com­pose the cap­i­tal share, you find that the re­turns on struc­tures, land, and equip­ment are static or de­clin­ing, while pure prof­its are on an up­ward tra­jec­tory:

This story is con­sis­tent with other long-term trends, like the in­creas­ing share of the value of firms that con­sists of in­tan­gibles — that is, “the value of things you couldn’t eas­ily copy, like patents, cus­tomer good­will, em­ployee good­will, reg­u­la­tor fa­voritism, and hard to see fea­tures of com­pany meth­ods and cul­ture.

Those in­tan­gibles con­sti­tute bar­ri­ers to en­try, pre­cisely be­cause they can’t be eas­ily copied by new firms. The rise of in­tan­gibles is also a sign of a more mo­nop­o­lis­tic econ­omy.

It’s Not (Just) Regulation

Alex Tabar­rok, a liber­tar­ian economist, ar­gues that the de­cline in dy­namism is not due to reg­u­la­tion.

Since the 1970’s, the most stringently reg­u­lated in­dus­try by far has been man­u­fac­tur­ing:

(“FIRE” here refers to fi­nance, in­surance, and real es­tate.)

How­ever, more stringently reg­u­lated in­dus­tries are not less dy­namic:

Some of these re­sults are weird, since #622, marked as a lightly reg­u­lated in­dus­try, is “Hospi­tals”, which I don’t re­ally think of as free­wheel­ing. Maybe these num­bers don’t in­clude in­di­rect effects like oc­cu­pa­tional li­cens­ing for med­i­cal pro­fes­sion­als re­strict­ing the sup­ply of peo­ple to work in hos­pi­tals.

But at any rate, reg­u­la­tions are not the only way to en­force monopoly power, and it seems that they’re not the de­ci­sive fac­tor. Govern­ments have means other than reg­u­la­tion to pro­mote monopoly (for in­stance, grants, con­tracts, or sub­sidies to in­sider firms, or in­creases in the scope of what can be patented and for how long). And there are purely pri­vate mechanisms (like pres­tige/​sig­nal­ing in the sci­en­tific pub­lish­ing in­dus­try) that can pre­serve mo­nop­o­lies as well.

Prob­lems for the Mid­dle and Lower Classes

US in­come in­equal­ity is ris­ing; in real dol­lar terms, this looks like the rich get­ting richer while ev­ery­one else stays the same:

On the other hand, it’s worth mod­er­at­ing this pic­ture by aware­ness of cost dis­ease. High-in­come peo­ple as well as lower-in­come peo­ple are spend­ing a larger frac­tion of their bud­get on hous­ing and health­care, which aren’t re­ally im­prov­ing much in qual­ity.

In­come mo­bil­ity is also drop­ping:

Some Slogans

Why is monopoly bad?

Monopoly drives up prices while de­press­ing pro­duc­tion. That means we have fewer nice things. Yes, even for the “win­ners” of this nega­tive-sum game, though of course the prob­lem is worse for ev­ery­one else.

Monopoly and lack of in­no­va­tion go to­gether, since mo­nop­o­lists have less in­cen­tive to pro­duce or com­pete.

Monopoly and in­tan­gibles go to­gether. Brand­ing is a form of mar­ket power. As are patents.

Monopoly causes in­equal­ity; it also causes ab­solute eco­nomic in­se­cu­rity (if ne­ces­si­ties cost more, the poor are most harmed).

Monopoly is anti-mer­i­to­cratic. It’s a troll guard­ing a bridge, not a hard­work­ing ge­nius in­ven­tor.

None of this tells us what to do about monopoly. I’m not at all con­fi­dent that an­titrust law works or is a fair solu­tion to the prob­lem. There’s also rea­son to doubt that dereg­u­la­tion would fix ev­ery­thing, though fix­ing zon­ing and oc­cu­pa­tional li­cens­ing laws seems like it would at least help.