MONOPOLISTIC COMPANIES HARM THE ECONOMY AND DEMOCRACY

Forty years of plutocratic economics has resulted in monopolies and near monopolies in many business sectors due to the failure to enforce antitrust laws. This concentration of economic power, and, along with it, political power, has undermined our democracy both economically and politically. It has also contributed to rapidly growing income and wealth inequality. (For information on plutocratic economics in general, see this previous post. For more on the effects of its deregulation of business, see this post.)

The Sherman Antitrust Act of 1890 laid the groundwork for antitrust regulation. Its purpose was to reduce the size and economic power of large, monopolistic companies. It was based on the federal government’s responsibility to regulate interstate commerce. At the time, the conglomeration of companies under trusts had come to dominate several major business sectors, such as the oil industry under the Standard Oil Trust. These trusts were monopolistic and destroyed competition.

The Sherman Act banned business activity that was “in restraint of trade or commerce among the several states, or with foreign nations”. The Sherman Act sought to balance the power of commercial, for-profit enterprises and the public interest. [1] The Clayton Antitrust Act of 1914 built on the Sherman Act and states that any merger is illegal if “in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly”. The reference to “any section of the country” is significant because when a few companies dominate an industry, they often have effectively divided the country up geographically so each one has a monopolistic position in some areas. Therefore, to effectively enforce antitrust laws, industry concentration should be analyzed in markets properly defined by product or service AND geography. Such an analysis often finds that market concentration is much higher than a nationwide analysis would suggest. [2]

In the 1960s, a concerted effort to undermine the historically broad economic and public interest goals of antitrust enforcement began. It was spearheaded by a group from the Chicago Law School with Robert Bork playing a leading role. (He was nominated for the Supreme Court by President Reagan in 1987 but was rejected by the Senate.) Bork and others argued that the only legitimate use of antitrust laws was to maximize consumer welfare, narrowly defined as low prices (often presumed to be the inevitable result of the economies of scale possible for large companies). This theory was adopted by pro-business economists, judges, and policy makers, including President Reagan.

Under President Reagan, antitrust enforcement was significantly scaled back and the Federal Trade Commission actually stopped collecting data on industry concentration. In eight years, President George W. Bush’s administration did not initiate a single antitrust case. [3] [4] The number of mergers grew from 2,308 in 1985 to 15,361 in 2017. [5]

Since 2000, three-quarters of U.S. industries have become more concentrated, including the technology, health care, communications, defense, and agriculture industries. This is perhaps most noticeable in the high-tech industry where Google and Facebook now control over 60% of all digital advertising and Amazon controls over half of all e-commerce. [6] From 1997 to 2012, the top four firms in any given industry saw their share of industry-wide revenue grow from 24% to 33%. [7]

There’s clear evidence that entrepreneurship and the number of start-up companies is down in the U.S. This is mostly due to dominant companies suppressing competition in multiple ways. They can block the entry of new firms simply by dominating the consumer and supplier markets. They can simply acquire competitors, especially given the lack of antitrust enforcement. Or these large companies can overwhelm start-ups in the market through fair and unfair competition using their vast resources. Among the evidence of reduced entrepreneurship and start-ups is that from 1987 to 2015 employment by companies under 10 years old has declined from 33% of the workforce to just 19%. [8]

Fewer, bigger employers have negative effects on workers and their compensation. Industry concentration means employees have fewer options, reducing their bargaining power. One reflection of this is the reduction in employment by newer companies. Furthermore, increasing numbers of companies, including low-wage, franchise businesses like McDonald’s, are forcing workers to sign non-compete agreements and franchisees to sign non-poaching agreements (banning solicitation or hiring of employees from other franchisees), further limiting workers’ options for employment, advancement, and wage growth. [9]

The growing size and reduced number of companies have exacerbated the economic divide between urban and rural areas. The large, highly profitable companies tend to be in urban areas, and people and economic vitality are drained from rural areas. Furthermore, the relatively small number of highly profitable, very large companies has made a handful of big cities the big economic winners, leaving many other cities behind.

The growing number of large, dominant companies also gives them power over suppliers. The condition of having a dominant buyer in a marketplace is called monopsony. It allows buyers like Wal Mart or Amazon to drive down suppliers’ prices, often forcing them to reduce the compensation of their workers, or in some cases, to drive the supplier out of business and take over the business for themselves. [10]

The result of industry concentration in the U.S. economy has been soaring profits, stagnant wages, and falling investment in companies’ equipment, research, and product development. In addition, service quality has fallen, along with entrepreneurship and innovation. This combination of rising profits with falling investment and stagnant worker pay violates the basic economic theory of competitive markets.

There is only one explanation: monopoly or near-monopoly conditions that allow companies to give their increased profits to owners while under-investing in human and physical capital, as well as service quality and innovation, because they can squelch competition, for example by buying up or crushing competitors and innovators. [11]

My next post will present solutions to the problem of large, monopolistic companies dominating our economy and democracy.

[1]      Paul, S., 6/24/19, “The double standard of antitrust law,” The American Prospect (https://prospect.org/article/double-standard-antitrust-law)

[2]      Abdela, A., & Steinbaum, M., Sept. 2018, “The United States has a market concentration problem,” The Roosevelt Institute (https://rooseveltinstitute.org/wp-content/uploads/2018/09/The-United-States-has-a-market-concentration-problem-brief-final.pdf)

[3]      MacGillis, A., Jan./Feb./March 2019, “Taking the monopoly threat seriously,” Washington Monthly (https://washingtonmonthly.com/magazine/january-february-march-2019/taking-the-monopoly-threat-seriously/)

[4]      Dayen, D., 6/24/19, “In the land of the giants,” The American Prospect (https://prospect.org/article/land-giants)

[5]      Abdela, A., & Steinbaum, M., Sept. 2018, see above

[6]      MacGillis, A., Jan./Feb./March 2019, see above

[7]      Shambaugh, J., Nunn, R., Breitwieser, A., & Liu, P., 6/16/18, “The state of competition and dynamism: Facts about concentration , start-ups, and related policies,” Brookings (https://www.brookings.edu/research/the-state-of-competition-and-dynamism-facts-about-concentration-start-ups-and-related-policies/)

[8]      Shambaugh, J., Nunn, R., Breitwieser, A., & Liu, P., 6/16/18, see above

[9]      Covert, B., 2/15/18, “Does monopoly power explain workers’ stagnant wages?” The Nation (https://www.thenation.com/article/does-monopoly-power-explain-workers-stagnant-wages/)

[10]     Abdela, A., & Steinbaum, M., Sept. 2018, see above

[11]     Covert, B., 2/15/18, see above

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