Too big, full stop

No sooner has summer ended than it’s almost Christmas – how has this happened? In between meetings and paper-writing, I have managed to read a few things. Two thrillers on journeys to and from a family visit last week, John Le Carre’s A Legacy of Spies and one of the outstanding Mick Herron Jackson Lamb series, Spook Street – highly recommended if new to you.

On more serious matters, I’m half way through the handsome new Stripe Press edition of Mitchell Waldrop’s The Dream Machine. And I’ve finally read Tim Wu’s The Curse of Bigness. This is a very interesting, and commendably concise, history of US anti-trust legislation and enforcement. The argument in a nutshell is that anti-trust was born out of a power relations confrontation between the original trusts – Rockerfeller, Carnegie etc – and the US government: Theodore Roosevelt determined on trust-busting to establish the primacy of government power. To some extent this tradition continued after the second world war with landmark cases against AT&T and IBM. But, Wu continues, the Chicago school and especially Robert Bork defanged US anti-trust enforcement by embedding so thoroughly an economic test based on a consumer welfare standard as measured only by consumer prices. Today, with digital giants so often charging zero or low prices, this is less appropriate than ever. The time has come to reaffirm that the government, not rent-extracting monopolies, runs the country.

This is an interesting and persuasive account. It is also a specifically American one. Although the underlying economic analysis concerned crosses the Atlantic, there has never been such a narrow interpretation either of consumer welfare or of how to measure it in Europe. The test in UK law is a ‘substantial lessening of competition’ with reasonably wide discretion for the competition authority, and the guidance sets out other dimensions of welfare such as quality, range, innovation – although of course price is the easiest to measure. We have had prominent cases looking at monopsony power, such as the inquiry into supermarkets. Nor has there ever been on this side a routine acceptance that the benefits of vertical integration or horizontal merger can be assumed to be passed on to consumers – in my cases we always asked about the incentive as well as the scope for efficiencies to be passed on. And, as Wu notes at the end of the book, the UK’s market inquiry tool can be very powerful.

Having said all this – and cautioning against translating Wu’s account and other influential authors such as Lina Khan – to non-US contexts, this does not mean the question of monopoly power is not a pressing one here too. The UK has an inquiry into digital competition under way (chaired by Professor Jason Furman – I’m a member). In other markets from insurance/banking to pharma there are very powerful and profitable firms sustaining their position over long periods and scant sign that new entry is possible. As I’ve written in a forthcoming paper, the competition authorities need tools to assess dynamic, Schumpeterian competition as well as their everyday static toolkit.

Behind the technicalities, there is also the issue of political power highlighted by Wu’s book. Most economists would be hesitant to re-politicise competition policy after the dire experiences of big companies using their lobbying power to protect themselves before the present regime came into force. Two former DGs of the UK’s Office of Fair Trading, John Fingleton (here) and John Vickers, have rightly pointed to the vast expansion of arbitrary ministerial say-so over mergers in proposed UK legislation. This is a route sure to make consumers worse off.

At the same time, there are valid political questions. Some companies in a number of sectors have become simply too powerful. Paul Tucker’s recent book Unelected Power highlights these, arguing for a tilt in the balance away from technical economic analysis toward political choice. I’m not persuaded that the problem stems from the use of economics in competition policy, such that dethroning economic analysis would fix the pwer imbalance. However, there do seem to be some unresolved tensions between the economic standards for assessing competition in a market, the legal interpretations, and the politics.

Much food for thought in a short book. The Curse of Bigness is a great stocking filler for the economists and lawyers in your life.

Share

The border between creation and cataclysm

Some books are too big to carry around so I’ve been reading three, one on each bedside table (London & Cambridge) and one in my bag.

The (portable) one I just finished is Colin Mayer’s excellent Prosperity: better business makes the greater good. It’s a book about corporations which have certainly not had a good press in recent times. This is a vitally important subject and it’s a really well-written book. Colin (a colleague of mine on the Natural Capital Committee) thinks that for the most part big companies deserve their dismal reputation: “The interests of the corporation have progressively diverged from those of the societies in which they operate.”

The book pins the blame squarely on the Milton Friedman doctrine that companies sole aim should be maximising shareholder value, a doctrine embedded in corporate law and governance in the UK above all (about the only country in the world that has fully swallowed and digested the Friedmanite Kool-Aid) but also to some extent in the US, and in other western economies. Mayer sees the doctrine as somewhat incoherent internally: “There is considerable irony in the conclusion that the market is needed in the form of the market for corporate control to ensure that the corporation fulfils Ronald Coase’s objective of being lower-cost and more efficient than the market.”

A historical section shows the extent to which this version of corporate rationale diverges from the past of the corporation. Corporations were created to fulfil public functions, binding people together over long periods of time to do so. The book argues passionately and convincingly that making a profit for its owners is an essential task of business, but certainly not the purpose of a company. A corporation is not a set of contracts, but of relationships: “Those relations are based on trust. That trust depends on commitment and that commitment is to the purpose of the corporation – a purpose that inspires and unites all to a common goal of producing profitable solutions to the problems of people and planet.”

Mayer points out that in the US and UK, public equity markets are shrinking as companies delist and private equity grows. He argues the merits of family owned businesses, including additional voting rights to protect their interests, & I’m not convinced by this. I think there is decent evidence that productivity is lower in family firms; the famous Mittelstand has been praised for bringing in professional managers rather than always handing on the business to the children; and companies like the tech giants are hardly a great advert for dual classes of shareholders. Another suggestion – industrial foundations run by trustees – is more appealing.

The book ends though with some pragmatic reforms, saying they are needed urgently – “we are on the border between creation and cataclysm.” These suggestions cover corporate law and governance – dethroning the shareholder value mantra in the law in favour of requiring a commitment to corporate purpose; accounting changes – proper accounting for natural capital use in particular; ending the favourable tax treatment of debt – a total no-brainer; and reshaping regulation around activities and principles rather than around specific types of institution.

These seem perfectly sane and practical. Will any government pick them up? Political will seems to crumble when faced with consistent and intense corporate lobbying, as the ultimately feeble response to the financial crisis illustrates. I think the climate of ideas will need to change too, and it’s up to us economists to debunk the ‘market’ for control of these important social institutions.

 

 

PS I also read (slowly) Robert Tombs’s much-praised The English and Their History. I quite enjoyed the early parts, not knowing much pre-15th century history, but the book sat less and less well with me as it went on. Its enormous length and ambition stake a claim to universalism but it turned out to be yet another southern English, Westminster focused account with little about how different the rest of the country is, just token sections on the Midlands and North in the Industrial Revolution and the era of municipal socialism.

Price: £12.48
Was: £14.99
Share

It’s all in Kuznets….

I just re-read, or read properly, Simon Kuznets’ 1966 book Modern Economic Growth. (A sliver of silver lining in libraries closing or getting rid of old books is that you can sometimes find them at low prices online, although also sometimes at algorithmically weird ones.) It turns out that all the new debates are actually old debates. A few points leapt out at me on this reading.

First, Kuznets’ insistence that: “[T]he definition of national product used for measuring economic growth embodies the accepted notions of the means and ends of economic activity, reflecting the main features of modern economic society.” When society changes, the relevant concept changes. “If we are to understand modern economic growth, we must measure its magnitudes in terms of the modern system of means, ends and values.” This certainly speaks to my view that GDP is fitting society decreasingly well.

A second point is the definition of a sector – I’m puzzling now over the relevance of lengthening supply chains and implications for thinking about both sectors and productivity in the process innovation sense. A sector is defined by the raw materials it uses, the production process and the finished product. “A marked change in one … is usually the basis for distinguishing and defining a new industry.” His example is the emergence of rayon although it served the same market as cotton textiles.

There are many more fascinating reflections – including the disparity between definitions of intermediate consumption and investment for the corporate and household sectors – why is household expenditure on commuting not an intermediate, or on education not part of investment? A book well worth revisiting. And an interesting counterfactual question – what society would we have now if Keynes’s GDP-style measure had not trumped Kuznets’ economic-welfare conception of aggregate output back in 1940?

 

Share

Humanity’s future…

I read On the Future: Prospects for Humanity on the train back from the Festival of Economics. (See the #EconomicsFest hashtag – recordings will go online soon.) This short and compelling book by Martin Rees, the Astronomer Royal (and a Cambridge colleague), was a bit of a dampener on my good cheer. Our prospects are not great. It turns out that the risk of a large asteroid causing mass extinction is one of the lesser worries about our future. Other existential risks have a higher probability with the same mass death/end of civilisation impact.

Take biotech terrorism: “Whatever can be done will be done by someone, somewhere,” the book calmly states in passing. Even more exotically, another: “Scary possibility is that the quarks [produced by high energy physics experiments] would reassemble themselves into compressed objects called strangelets. That in itself would be harmless. However, under some hypotheses, a strangelet could, by contagion, convert anythign else it encountered into a new form of matter, transforming the entire Earth into a hyperdense sphere about a hundred meters across.” I gather this is a remote prospect indeed, but it takes some of the gloss off the Large Hadron Collider. Strangelets, eh.

The early scientists (natural philosophers, as they called themselves) were considered ‘merchants of light’ yet science and technology have come to seem pretty scary. This book is a perfect antidote to worrying about Brexit or Donald Trump or neo-fascism, as it offers so many much bigger problems to worry about.

It tries to strike a positive note by saying science and tech offer potential solutions too. Martin Rees thus ends by calling for scientists to engage more with philosophy. I think they should be engaging more with social scientists. The barriers to taking action to safeguard humanity from any devastating effects of climate change or AI are not mainly about science and technology, but rather about what people believe and how they behave.

 

 

Share

Gods and Robots, myths and machines

In one of those lucky dip moments I picked Adreinne Mayor’s Gods and Robots: Myths, Machines and Acnient Dreams of Technology off the pile. What a good move. I know nothing about ancient Greek mythology but it turns out that not only are the myths rip- roaring tales of sex and violence, they are also stuffed with automata, robots and cyborgs. Pre-digital, clearly, but vividly imagined. And even in some cases (simple automata) possibly even real.

Mayor writes: “Homer’s myth reminds us that the impulse to ‘automate’ is extremely ancient. … The myths demonstrate that automata were thinkable, long before technology made them feasible.” And even in the time of Homer and Hesiod raised questions about free will and the difference between humans and not-humans, nature and artifice. Myths were sort of the sci-fi of their day.

Mayor concludes by suggesting the myths provide food for thought today as we grapple with the same questions as raised by AI. Indeed, all the more so as the day approaches when technology brings some of the things dreamt of by the ancient Greeks out of the realm of myth and into reality.

Brilliant book.

Share