Part of The Economist’s Open Future initiative looks at what has gone wrong with modern capitalism, and what can be done to put it right. One of the big themes we will examine is competition. There are fears that in recent years, capitalism in the rich world has become less vigorous. As part of our week-long debate on whether capitalism is rigged in favour of elites we spoke to Barry Lynn, the head of the Open Markets Institute, to discuss the basics of competition and why it is important. A conversation between Mr Lynn and The Economist has been transcribed and lightly edited for clarity.
The Economist: Why is competition important? Why should we care about it?
Barry Lynn: There are two ways to think about competition: good competition and bad competition. Under good competition, we get businesses and powerful people to compete for everyone else’s sake. Imagine that there are ten car companies, all competing to put out better cars. That is good. Competition helps promote better safety, innovation and technology—and lower prices. Workers benefit too. With ten companies, even if you don’t have good labour laws, there is an impulse to work cooperatively. Firms need to treat workers well in order to get them to work well. You want happy workers; you want the best workers.
But then there is bad competition, where powerful people get others to compete for their sake. Imagine now that the ten car companies have been swallowed up in to one big company. If you have a single monopolist, then at the level of the customer, there is only one place to buy your cars. The company can put out trash and still make money. And there is also no need to treat workers well. Once consolidation has taken place, businesses don’t need to serve the customer so well, so they don’t need to hire so many people or pay them very much.
The Economist: Is it possible to measure the degree of competition in an economy? How has it changed over time?
Barry Lynn: Yes, it is possible. There are many measures, because it is a complex topic. One is the level of corporate profits, which are at record levels. The rate of startups has fallen as well. Some research I did looked at the period 1979-2009, and focused on the rate of creation of new firms that had at least one employee. We found that over the period, the rate of new-company formation declined by 50%. And it has continued to go down since then. That suggests that breaking into markets is more difficult than ever before.
And we have got prices for all kinds of goods that are much higher than they would otherwise be. Most dramatically, health care, which in America is incredibly expensive. That is because of consolidation of hospitals. People get all upset about insurance companies. Yes, they can be bad actors but most of the surge in prices is to do with consolidation in the hospitals sector.
The Economist: Work that we have done also looks at the amount of an industry’s total revenue that is accounted for by the four biggest firms in that industry. Of America’s roughly 900 sectors, two-thirds became more concentrated between 1997 and 2012.
Barry Lynn: Right. I think to show evidence of declining competition, you can also just show people their paycheck.
The Economist: What do you mean by that?
Barry Lynn: Well, everyone is saying that robots or free trade are driving down wages. But maybe it’s actually declining competition. Economists have tended to ignore the effects of consolidation until recently. Now, we are finally getting some articles about this, which look at what happens when a big, monopolistic company buys labour. Wages go down. This is extremely significant.
The Economist: Yes, a paper published recently by the National Bureau of Economic Research looks at Amazon Mechanical Turk, an online crowdworking platform. There are few buyers of labour on that platform but loads of sellers. That may allow buyers of labour to push down the wages of those completing tasks, to way below what they might be paid in a more competitive arrangement.
Barry Lynn: Right.
The Economist: So if competition in modern capitalism has become less vigorous, why is that?
Barry Lynn: Really, it is to do with the replacement of liberalism with libertarianism as the guiding ideology of the state in the late 1970s and early 1980s. People changed the philosophy with which they viewed anti-monopoly laws. It was a revolution of Margaret Thatcher and Ronald Reagan. In America, there was a radical change in competition policy in the early 1980s. The idea was to reduce state intervention in the economy more generally—to give people liberty. That meant that it gradually became easier for big companies to acquire smaller rivals, and build themselves up into a position of monopoly.