The writer Mordecai Kurtz points out some dangers in following the US developmental model as we embark on our oil-fuelled transition. “In the US, the turn of the 20th century was a period of extraordinary technological and economic progress, delivering most of the major twentieth-century innovations. Between 1895 and 1904, however, more than 2,000 firms were merged into 157 large conglomerates, leaving virtually every sector of the US economy dominated by a powerful monopolist.
“Those who created these trusts believed they were doing God’s work of strengthening the economy by saving it from “ruinous” competition. Supported by the ideas of the eugenicist Francis Galton and Herbert Spencer’s theory of social Darwinism, business leaders saw themselves as superior, intelligent men who had prevailed in the process of natural selection.
“This selection process also applied to their firms, through which they were building a new society in which a few strong men would lead. It followed that small and weak firms must be eliminated or swallowed up within strong monopolies. The latter were seen as superior to all the unfit firms that were going bankrupt in frequent depressions. The big monopolies were also considered progressive organizations. As John D. Rockefeller put it, monopolization was unstoppable because it was “the law of God.”
“These ideas were rejected by progressive reformers and those pursuing antitrust enforcement under President Theodore Roosevelt after 1901, and under President Franklin Roosevelt in the New Deal era. Americans in these periods chose democracy and rejected the power-worshipping oligarchy, resulting in a long era of economic growth with shared prosperity.
But that story ended in 1981, when renewed laissez-faire economic policy led to the contemporary techno-winner-takes-all economy. In this Second Gilded Age, the worship of power and wealth has returned with a vengeance. Capitalism’s strong incentives for innovation and growth remain, but the survival of democracy hinges on whether the system’s most destructive effects can be contained.
In a techno-winner-takes-all economy, the market power conferred by innovation leads to one or a few firms monopolizing each industry. One firm might offer costly products of high quality, while a second may offer low-cost products of adequate quality. All these products are trademarked, and all monopoly profits are considered “innocent” by law, because they result from “spontaneous” innovations and are not subject to antitrust enforcement.
In this environment, small firms on the margin are vulnerable to either hostile acts or acquisition by larger firms. Dominant firms find it easy to snatch up competing innovative technologies because small firms are reluctant to risk losing an economic war against powerful incumbents.
When a firm increases its price and earns monopoly profits, that leads to inefficient use of its economic resources, ultimately resulting in significantly lower output and lower demand for labour and capital inputs. As an approximation, a monopoly firm’s output and inputs might be reduced by as much as half. When market power is widespread, this results in lower investment, lower wages, and a lower rate of wage growth. The aggregate outcome is lower levels of income, consumption, and capital stock.
Moreover, when prices are too high, too few consumers would benefit from innovations – as one often sees with costly drugs. There is substantial evidence that market power leads to extensive abuses of power more broadly. These might include the erection of high entry barriers to would-be competitors, suppression of competing innovations, efforts to compel the acquisition of competitors, and so forth. The result is a gross national product that grows more slowly than is technologically feasible.
The existence of monopoly profits changes business accounting. Under competitive conditions, the income created by a firm is divided into a labour share and a capital share. But with permanent market power, a firm’s income is divided into three shares: labour, capital, and monopoly profits.
This distinction between capital income and monopoly profits is central to techno-winner-takes-all capitalism. Net income paid to capital consists of interest payments at the prevailing market rates, whereas monopoly profits extracted by pricing higher than incremental costs are paid to the source of market power: mostly privately owned technology and other intellectual property rights.”
