I’ve been grazing along the shelf of my old Penguin economics texts and stumbled on this quote from J.K.Galbraith’s (1952) American Capitalism: The Concept of Countervailing Power (in M.A.Utton’s Industrial Concentration): “The modern industry of a few large firms is an excellent instrument for inducing technical change. It is admirably equipped for financing technical development and for putting it into use. The competition of the competitive world, by contras, almost completely precludes technical development.”
American Capitalism Industrial Concentration (Modern Economic Texts)
Galbraith is talking complete nonsense, of course. As this little textbook points out in the next paragraph: “The supposed antithesis between price competition and innovation is false: they are different forms of the same competitive process. Innovation is competition.” Many is the oligopolistic industry that has failed to innovate. As Will Baumol pointed out in his book The Free Market Innovation Machine, big firms tend to do incremental innovation, while radical innovation tends to come from small entrants.
This is the heart of the competition debate about Google etc. Will some new entrant come along an torpedo it in the search market, or has it through its scale effectively foreclosed new entry? Critics of the EU competition authorities’ assault on Google (including this week Barack Obama – but listen here to Martha Lane-Fox demolish him) point to its continuing record of innovation; but from another perspective, that looks like it leveraging its scale advantages into new markets, something dominant firms always try to do. I’m with Tim Wu, whose fabulous book The Master Switch argues that the opportunity for new entrants to cause upheaval in technology and communication markets has always been created by a regulatory intervention.
The Master Switch: The Rise and Fall of Information Empires The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism
To be fair to Galbraith, this being one of his books I’ve not read, this summary suggests he was not relaxed about oligopoly power; however, he suggests the ‘countervailing power’ of organised labour is the way to control it. I’m all for workers having adequate bargaining power in the labour market but fail to see how that fixes a lack of competition in product markets. Google’s workers are very well treated. I wonder what Galbraith would make of these modern business titans?