Big monopolies stifle innovation through their total control of market power and patents. We need to break this vicious cycle if we want our productivity back, writes Paul Ormerod
The mystery of the dramatic slowdown in productivity growth across the West since the late 2000s remains unsolved. It is the key question in political economy. If productivity doesn’t rise, national income per head of population remains flat. As a result, government receipts from taxation remain static.
In the UK, where the limits to taxation have been more or less reached, there is no spare money around to finance the myriad demands on the state which are made by a wide range of interest groups. More money for train drivers, subsidies for people who have bought houses which they can no longer afford, extra benefits for families who have more than two children. The list is endless.
Stanford professor Mordecai Kurz argues in the fascinating new book ‘The Market Power of Technology’ that much of the problem stems from rapid advances in technology enabling companies to increase their market power. The degree of monopoly in the economy has increased.
Innovation, which by itself improves productivity, allows large firms to consolidate their market dominance. But once they have achieved it, the incentive to innovate is reduced.
But an increase in market power doesn’t simply lead to less innovation by dominant firms. More importantly, it reduces the diffusion of innovation amongst other companies, as the giants use both market power and patents to consolidate their dominance.
Kurz takes a very long historical view. He goes back to the decades around 1900, which he calls the first “gilded age”, when firms operating on a global scale first emerged. In the United States there was a massive wave of mergers and acquisitions, which created companies of completely unprecedented size.
The share of profit in national income was boosted and stock prices rose sharply as a result. Between the mid-1890s and mid-1900s, the Dow Jones index increased more than 200 per cent.
Kurz defines the second gilded age as beginning in the 1980s. Since then stock markets have boomed in a way which is simply not justified by the performance of the economy as a whole.
Between the mid-1950s and mid-1980s, for example, the Dow Jones was effectively flat adjusting for inflation, and American GDP grew by an average of 3.5 per cent a year. Since then growth has slowed to some 2.5 per cent, but share prices have risen by over 6 per cent a year in real terms.
This is attributed to a gradual rise in the degree of monopoly in the economy, which eventually reduces innovation and hence productivity.
Before the First World War, the US federal government initiated and won a series of Supreme Court cases using anti-trust legislation to break up unwarranted market power. The most notable were those against the gigantic Standard Oil of New Jersey and General Electric.
Kurz argues that a similar active anti-trust strategy is needed now. He proposes a breakup of vertically integrated technological conglomerates, and standardisation of digital platforms. He also suggests reforms to patent law, such as increasing novelty requirements, the return of unused patents, and reducing the duration of patents by half upon renewal or acquisition.
The key argument, that large firms now have too much market power, seems relevant to the current debate in the UK about “greedflation”. If Kurz is correct, the proposition that big companies are in a position to keep prices artificially high becomes true.