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Why has the investor class been getting richer for decades as the working class’s share of the pie grows smaller? One prime reason is: our system, left unchecked, leads inevitably towards monopoly, which eats us all alive.

The fairy tale version of capitalism often espoused in internet comments and Republican Congressional primaries holds that the free market regulates itself by competition—if one firm raises its prices too high, for example, competition will bring those prices back down. Equality of opportunity plus perfect competition equals, at the very least, a meritocracy. In reality, America’s 40-year explosion of economic inequality fueled by rent-seeking and declining labor share of income point to the inescapable fact that competition ain’t getting the job done.

A new working paper from three Brown University economists zeroes in on corporate monopoly powers as the culprit behind several worrying trends in the US economy, including the facts that “Financial wealth has increased rapidly despite no real increase in the amount of investment in the economy” and “The share of income going to labor (in the form of wages, salaries, and other kinds of compensation for work) has declined as the share of income going to profits has increased.” These are the trends driving inequality, slowly undermining the public’s faith in our democracy, and fueling our insane political situation. Economic rents—the money captured by companies due to their entrenched market position, which the authors refer to as “pure profits”—have been growing steadily. Combined with the lack of ability for others to compete away these rents, the public loses and the companies and their investors win: “Because of the barriers to entry, the assets which hold the rights to the pure profits are non-reproducible: unlike productive capital, individuals cannot recreate these assets through investment, they must instead purchase them from others,” the authors write. “An increase in firms’ market power leads to an increase in pure profits, thus an increase in the market value of stocks (which hold the rights to these pure profits).”

As the paper notes, there is nothing radical about the idea that companies will work to build themselves a competitive “moat” that constitute barriers to entry to competition— “The assumption of pure profits in our model is in alignment with the field of business strategy and managerial economics, in which the existence of market power is emphasized, and indeed one of the main purposes of the firm to gain and secure this market power: the celebrated ‘sustainable competitive advantage,’” they write. Hell, the most successful investor in America has been talking about this very thing for decades. But it is generally thought of in terms of business strategy rather than in terms of social cost. The reality is that the social costs have been high. Riding the process of increasing monopoly power can attract easy, increasing rents for investors, but it also blocks out competition and ultimately sucks gains to capital that would otherwise accrue to labor. In other words, it tends to pull onto Wall Street money that once went to Main Street. And that is exactly the tendency that we have seen in America since the Reagan era.

Without government intervention, successful firms will continue to suck up ever greater portions of our economy for themselves, simultaneously fortifying their own positions against competition and leaving the rest of us more and more at their mercy. Less monopoly, more socialism, please.


[The full paper]