Competition and Inequalities
European Straits #44
Dear all,
The inequality gap keeps on widening, for reasons that I once reviewed in an issue of The Family Papers. But political and business leaders are still coming up short when it comes to narrowing that gap.
For some, universal basic income would be the only way to make our economy more sustainable and inclusive (I don’t think so). For others, especially in Europe, economic inequalities are more of a pretext that they can use to demonstrate that technology is the work of the devil.
It has led to a situation in which voters voice their anger in the face of inequalities and politicians respond with promises that they'll impose tougher regulations on tech companies. This has taken form lately with Margrethe Vestager, the European commissioner in charge of antitrust, becoming a superstar in anti-tech European circles—all while rising inequalities are being used in those same circles as an argument to rally support and attack the tech companies bringing about radical innovation.
Some people may see this as a strange response. After all, what does antitrust have to do with inequalities? Aren’t rendering the tax system more progressive, broadening the safety net, and improving our schools the most effective policies when it comes to narrowing the inequality gap?
Except there actually is a relationship between competition and inequalities. Here are a few ideas related to that—if only to remind us that tech companies are far from being the sole culprits:
More vigorous antitrust measures contribute to maintaining a high level of competition on markets for goods and services. To focus on competing, firms then have an incentive to try and level the playing field on the other sides of the business. It’s not fair competition if one firm can simply decide to pay its workers less: hence the importance of the minimum wage and collective bargaining at the industry level. With those safeguards in place, firms can react to a higher competitive pressure with operational effectiveness and strategic positioning, not by mistreating their employees. In that context, antitrust eventually contributes to reducing inequalities.
Conversely, less competition on markets for goods and services leads to a stronger market power for dominant firms and ultimately a higher concentration of that power. The result is a monopsony, in which market concentration offers employers undue leverage over workers. This is why US Senator Cory Booker has recently regretted that federal antitrust authorities “have not prioritized the responsibility to ensure that workers have meaningful choices that allow them to fairly bargain among potential employers”. Here’s an interesting lead toward using antitrust policy as a lever to improve the workers’ bargaining power and thus reduce inequalities!
Likewise, less competition puts most firms off their efforts to implement radical innovation. As many companies cease taking the risks required for maintaining their competitive edge, they convert to rent-seeking strategies that maximize shareholder value and increase the pressure on the weakest link in the supply chain—the workforce. This echoes Clayton Christensen’s argument as to how corporate executives focus on efficiency rather than innovation. The main consequences are the freeing of invested capital (hence the record dividends) and the destruction of jobs—which then weakens the workers’ power at the bargaining table.
Too often the idea of “regulating tech companies” is a code for simply preventing them from competing on the market. Most regulations designed to contain the growth of tech giants don’t benefit their direct competitors (other tech companies) as much as they consolidate the positions of lazy, rent-seeking incumbents in legacy industries. And as recently explained by Jonathan Rothwell in a masterful article in the New York Times, “almost all of the growth in top American earners has come from just three economic sectors: professional services, finance and insurance, and health care, groups that tend to benefit from regulatory barriers that shelter them from competition”.
So I’m not saying that antitrust shouldn’t apply to the tech industry. But the new techno-economic paradigm calls for a new antitrust policy—not one that enriches rent-seeking incumbents and eventually widens the inequality gap, but one that submits competition to higher goals: rewarding innovation and risk-taking by the few while increasing economic security and maximizing opportunities for the many. Making progress on those fronts requires that policymakers escape the incumbents’ grip. It implies reflecting on increasing returns to scale and their consequences on competition. And it probably involves measures related to data portability, startup M&A...and worker empowerment.
I like these words by John Doerr, of Kleiner Perkins Caufield & Byers: “Google, Facebook, Amazon, Apple—the four horsemen of the Internet are really setting the pace. They’re not limited by market. They’re limited by their ability to execute—to get great, smart people.”
What if that was the case not only with workers of the creative class, but with all workers—whatever their know-how, status, and level of education? This is the key challenge we have to tackle to counter rising inequalities. It’s not about defending rent-seeking incumbents against tech companies. Rather it’s about providing all workers in every industry, either legacy or tech, with enough power to bargain with employers without slowing down the pace of innovation.
In addition to all the linked articles, I recommend reading this essay by Paul Graham: The Refragmentation.
Warm regards (from Paris, France),
Nicolas