Monthly Archives: September 2022

Goliaths everywhere

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James Bessen’s The New Goliaths is one of my books of the year so far (with a fashionably chatty subtitle). Indeed, I’d been looking forward to it because I liked his previous one, Learning By Doing, so much. Based on his impressive research on technology over a number of years, and on his prior experience as the founder of a successful early digital startup, the core of the argument is that a small number of (generally) large companies have built IT systems that can manage immense complexity in their operations. Sophisticated software and massive flows of data enable them to co-ordinate in previously unimaginable ways, delegating decisions to where the information can go. The complexity – say of a new model of software-laden car or a major retailer’s logistics system – increases the cost of entry for potential competitors. The Goliaths are to be found not just in ‘Big Tech’, but in many sectors of the economy.

What’s more, “The investment in software is only part of the total investment in these systems. The entire technology investment that firms make in these proprietary systems goes well beyond software code to include data, workforce skills and investments in alternative organizational structures.” An example used throughout the book is Walmart – which McKinsey found accounted for a substantial proportion of the US 1990s productivity boost. Somewhat counter-intuitively, at least for those who see Big Tech as the main competition problem, Bessen sees Walmart as the unassailable incumbent in US retail, whereas Amazon is the one example of successful entry, and one offering a platform to other retailers.

This dynamic, of superstar firms in many industries from retail to autos to finance with a widening productivity advantage, has consequences for income inequality: the workers in those firms are paid more because they gain invaluable experience simple by working in the superstar companies, so wages are dispersing within sectors. The skills are scarce because you have to work for a big, sophisticated complex firm to get the skills, which are thus in short supply. It has led to less dynamism – fewer entries and exits in many markets. Small firms simply can’t match the spending on R&D of the big ones: one example given is voice recognition software, where pioneer Nuance was a massive commercial success, but still couldn’t match the spending of big firms: Amazon (again) has more than 10,000 engineers working on Alexa products, more than ten times the number Nuance had at its peak. “Proprietary information technology is exacerbating economic and social devisions. It is widening the gaps between the pay of workers at different firms. It is leading to greater segregation of skill groups across firms and cities.”

The complexity dynamic has implications too for competion policy – which becomes challenging, because after all the superstars generally offer great services – and regulation more broadly – because the information asymmetry between company and regulator grows ever wider.

So what to do? The book advocates for mandating open standards, morecompulsory licensing, and for reforming IP law to tilt the incentives for big companies to do more voluntary unbundling of their services, clamping down on worker non-compete agreements to spread skills. All excellent, and ultimately inevitable policies, as the inequalities are socially and politically unsustainable. But there’s much devil in the detail, and there will be massive lobbying against change. So this is a political struggle rather than a technocratic one.

But that’s to wander off into the future. I highly recommend The New Goliaths. It synthesizes a growing body of research into how firms use technology, how that interacts with organisational structures and markets,  and what the consequences are. It’s also really well-written, with lots of examples and a grounded understanding of the realities and limits of technology policy.

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Exporting US capitalism

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When I was in the early days of my previous journalism career, writing for the Investors Chronicle, and also pregnant with child number 1, I was taken by a stockbroker (I think it was Smith New Court, bought by Merrill Lynch in 1995) on an investors’ tour of Budapest and its environs. It was early 1990, and the ‘shock therapy’ privatisation of companies in the formerly communist countries was under way. One visit vivid in my memory was the day trip to Ganz Electric on the outskirts of Budapest, where it seemed like iron ore went in at one end and everything from tractors and trains to light bulbs emerged at the other. But the toilet paper for the office suite was locked up in a cupboard to which only the Director’s formidable secretary had a key.

Ethan Kapstein’s Exporting Capitalism: Private Enterprise and US Foreign Policy brought this all back to me because one of the chapters covers that post-perestroika era. (Indeed, my previous job had involved interpreting perestroika for western European clients of an economic forecasting company and I, like many others, was coming to realise that the figures for material output of the Soviet bloc had led us to greatly over-state the prior economic growth of those countries.) Kapstein, now a Prof at Arizona State and a Director of a conflict studies center at Princeton, had previously been a banker and worked for the US Government and the OECD. He therefore had a seat on various front lines in variously troubled economies. This experience illuminates the book’s analysis. I found it a very interesting read.

The book is a history of the ups and downs of the US’s consistent focus on relying on private investment, particularly FDI, as a vector for economic development and a handmaiden to US foreign policy goals – above all, limiting the spread of Communism to developing countries. Starting with postwar Taiwan, the US has insisted on the central role of private enterprise. One explanation is ideological, the deep-seated US reverence for business and the market. Another is simple pragmatism: official aid will never be sufficient to meet the scale of the investment need in low or middle income countries. A third is an implicit theory of change: that multinational FDI builds local supply chains and has multiplier effects, setting down long-term roots for sustained development, and inoculating local people against socialist ideas and undesirable (from the American perspective) other overseas influence.

Of course, the record has been mixed, to say the least, even among the post-Communist countries. The multinationals required to do the investing have their own aims, which are not obviously aligned with long-term national development needs. Some – such as ITT in overthrowing Allende in Chile – played deeply troubling roles. With hindsight, shock therapy was too much shock and not enough therapy – the idea being to create quickly enough people with enough of a stake in the market to prevent a reversal to communism. But heterogeneous local institutional and political conditions turned out to make a big difference to outcomes.

The historical chapters in this book are fascinating. I was stopped short in one of the final chapters by the reflection that times are changing (indeed) and the US is now converging on China’s state capitalism. This seems a bizarre over-interpretation of the shift – more complex than often painted – away from globalisation. And anyway, as this chapter observes, official aid is still absolutely dwarfed by investment need. The private sector will fill the gap, or the investment won’t happen. It would be good to get away from the old chestnut that state and market are opposites, when they succeed or fail together, and for the same reasons. The history of FDI underlines the need for contextual nuance. Still, a very interesting and enjoyable read, gaining much from the author’s personal practical experience.

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Interest rate mysteries

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The Price of Time: The Real Story of Interest by Edward Chancellor has generally been very well reviewed (see here and here for example) but sadly didn’t grip me. It has one message, hammered home in every chapter (which are organised more or less chronologically): that too low an interest rate (below the natural rate) is damaging. As a microeconomist, looking at the consequences of massive QE in recent times, this seems a persuasive argument. The case is handily set out in a section discussing John Locke’s view (p43 – I paraphrase a bit):

  • financiers benefit at the expense of ‘widows and orphans’
  • there is redistribution of wealth from savers to borrowers
  • There is inadequate reward for taking risk
  • bankers will hoard rather than lend
  • Too much debt will be incurred
  • money will seek higher returns elsewhere
  • asset price inflation will enrich the rich
  • low rates won’t revive the economy anyway

As someone who has been surprised by the macroeconomics argument that an unnaturally reduced price will make credit markets work better, these points make sense to me. The bulk of the book consists of illustrations of these various points using examples from past and present. It is a polemic: it asserts that low real rates have caused weak growth, asset price bubbles, high debt and financial fragility.

But I don’t think the book really grapples with how to reconcile the micro (interest rates as a market price) vs macro (interest rates for demand management) dilemma. Keynes is described as an unbeliever in a natural rate of interest and dismissed as somebody who never missed an opportunity to argue for lower rates. Nor does the book explain why real interest rates (and so presumably the natural rate) have trended lower for centuries, millennia even (see this Bank of England working paper).  Nor did it help me think about how to reconcile the short-term market clearing role of interest rates with the long term Ramsey formula that would give us now a low social rate of interest (if you take it seriously, zero rate of time preference to respect moral equivalence of future generations, plus an elasticity times a close to zero long-run growth rate).

So, while I largely agreed from the start with the point about monetary policy being too loose for too long post-2008, I ended this feeling like I’d been bludgeoned, and still with some unanswered questions about the interest rate. But it must be me, given the uniformly glowing reviews.

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