
How America became uncompetitive and unequal - orlandob
http://m.washingtonpost.com/opinions/how-america-became-uncompetitive-and-unequal/2014/06/13/a690ad94-ec00-11e3-b98c-72cef4a00499_story.html?hpid=z3
======
leaveyou
Consolidation is also favored by cheap money (yes, back to money monopoly
thingy). Above some threshold and especially if you are in good relations with
a bank, it is far easier to buy your competitors and dismantle them by selling
their assets than to compete with them. It's ironic how in the failed
communist centralized economies, the economic policy was dictated by "elected"
nomenklatura and it was BAD, while in the "free/democratic" market economies
the control is held by unaccountable private banks and nobody worries much.

~~~
spindritf
_It 's ironic how in the failed communist centralized economies, the economic
policy was dictated by "elected" nomenklatura and it was BAD_

It wasn't judged as bad because of nomenklatura, or rigged elections. Few
people care about these. It was bad because you couldn't get basic goods.
There were shortages of sugar and toiler paper. Not war-time shortages,
decades after the war.

Which is why the current system will continue as long as it can carry out its
basic obligations. American banks are a little behind the times but mostly
because of all the backwards compatibility they carry, not scale-related
dysfunction. Regular consumers don't feel that. They can still can get their
credit cards, chargebacks work, fraud is policed, Amazon gets paid, etc, etc.

~~~
leaveyou
"It was bad because you couldn't get basic goods". True. But the current
system is (even more?) problematic because you can't get basic JOBS. And not
only that but a fundamental part of the current system is the accelerating
race of getting rid of jobs. And not only that but now, unlike ever before,
the system uses the best tools against jobs: software & automation.

~~~
brc
Well, that is just not true. Technological innovation has been automating jobs
since, well, the Romans built aqueducts and hydro-power and stopped people
having to haul water in buckets up hills and bashing grain with a rock.

There are more people employed now than at any time in history. That's only
possible with automation. Even since the time of the Luddites, people have
been freed from drudgery and poor jobs and have higher quality of life,
despite industry after industry being dissolved.

For each product that is produced at lower cost and higher quality through
automation, extra spending is released by the consumers who get to purchase
those products at lower cost relative to their income. The extra spending
either goes into savings (good) or spending (still good) which in turn creates
new industries which create new jobs.

Essentially, you can't have a gaming and micro-brewing industry without the
more menial tasks being replaced by automation. I want no part of a future
where new innovations can't happen because we insist on slowing technical
progress to keep people in menial jobs.

The process has been repeating for a millenia - you have to have a very
compelling reason to suggest that it will somehow stop because of more
technology.

~~~
leaveyou
I agree with you on many points. Trying to keep my messages short, I made them
too ambiguous. I'm not a Luddite. My only worry is that Thomas Piketty may be
right. I don't know where you live, but where I come from, there is a very
small percent of shareholders/capital owners/producers and a very large number
of consumers/labor owners. The consumers have less and less money and the
producers need less and less labor. Are you sure a system like this is stable
? Technology and innovation is great if it works for you and useless if it's
someone else's and he has no incentives to share it with you.

------
ivan_ah
This opinion piece articulates something I've felt for a long time...
consolidation is the biggest problem in America right now, scratch that, in
the World.

One thing that I can't comprehend is how right-wing free-market ideologues can
get behind all the consolidation. Cant they see that consolidation is just
like communism?

Only a competitive market with many players can ensure progress continues.

~~~
brc
Except that it is nothing like communism.

Communism is defined by a complete lack of freedom to change the status quo.
In turn, the lack of freedom to change the status quo means that development
and progress is dramatically slowed, slowing down improvements in quality of
life - as people themselves would prefer.

Consolidation only persists where it is either an effective way to deliver
value (Walmart) or regulatory capture has occured (eg taxi licences, car
dealerships). Todays consolidated behemoth is tomorrows has-been company - as
long as the laws allow them to fall apart when they can no longer innovate and
compete.

Inequality of income to me seems as though an economy is functioning well at
the creating-value part. A lack of inequality (too much equality) is a danger
sign that the creation of wealth and progress has been halted, most likely due
to lack of freedom for individuals to pursue their own interests.

It's a misunderstanding to think that competition requires many players to be
effective. In many cases, you only need two players and threat of entry to any
others for competition to be successful at optimal use of resources. You only
need two fighters and some contenders for a world champ boxing match to make
them the best available at the time. And a fair referree.

I'll be the first to admit that the last part is the most difficult to
achieve, but it's no reason to abandon the concept of the game.

~~~
nmrm
> Consolidation only persists where it is either an effective way to deliver
> value (Walmart) or regulatory capture has occured (eg taxi licences, car
> dealerships).

Value for whom?

The problem is that "effective way to deliver value" is measured in terms of
corporate profit (value to shareholders), not in terms of the actual thing
being produced. So firms can produce less value to the economy at-large (fewer
flights, worse beer, etc.), at greater cost to the consumer/supply chain, and
still increase value.

The entire article is indicting this setup, where companies screw over their
customers and suppliers in order to produce value for a few already very
wealthy individuals who hold large stakes in the corporation.

This is how low-competitive environments work. Period. And it's not commie
nonsense (unless Goldman Sachs are part of a massive commie conspiracy). From
the article:

Goldman Sachs in February published a research memo advising investors to seek
out “oligopolistic market structure[s]” in which “a smaller set of relevant
peers faces lower competitive intensity, greater stickiness and pricing power
with customers due to reduced choice, scale cost benefits including stronger
leverage over suppliers, and higher barriers to new entrants all at once.”

> In many cases, you only need two players and threat of entry to any others
> for competition to be successful at optimal use of resources.

First of all, there's not much of a threat to entry when one or two companies
own the entire market and there's a huge cost to entry. Have you seen many
airline start-ups in the past half century or so?

Furthermore, it's possible to price like a monopoly when you only have one or
two major competitors and everyone is part of a gentleman's agreement.
Implicit, of course, but these aren't pricing cartels in the same sense that
PACs don't coordinate with political campaigns.

The boxing match analogy is inherently flawed because these companies can
still win big without wiping out all their competition. There is no gold medal
when everyone's happy splitting the enormous pot of gold.

In fact, most seem to desire a situation where they have one "friendly"
competitor so that they get all the perks of monopolistic position via an
implicit gentleman's agreement on pricing, while still having the luxury of
pointing across the street whenever regulators come around.

~~~
fennecfoxen
Value for who? PLEASE! Get real! Wal-Mart delivers value for shareholders
because they attract customers because they're cheaper and more efficient.

But I suppose some people rather vilify its customers, under the delusion that
tens of millions of America's poorest could magically lift themselves out of
poverty by spending more money on manufacturing and transportation costs and
on people working at cash registers. Bah.

(And the grocery market in general is anything but low-competition.)

~~~
nmrm
> Value for who?

Well they sure as hell aren't passing it on to their employees; meanwhile,
their stock is doing quite well...

> Wal-Mart delivers value for shareholders because they attract customers
> because they're cheaper and more efficient.

> (And the grocery market in general is anything but low-competition.)

Okay, so you've double turned yourself. Walmart faces lots of competition from
local chains, which prevents it from screwing consumers on prices. Competition
is good.

I'd argue they compensate by leveraging their market position to place
pressure on their increasingly de facto vertical supply chain and by poorly
compensating their employees.

> by spending more money on manufacturing and transportation costs and on
> people working at cash registers.

Of course, this ignores that many of those poor are the ones in the factories,
warehouses, trucks and behind the cash registers.

~~~
fennecfoxen
> Okay, so you've double turned yourself... Competition is good.

What? This isn't a double-turn at all. I'm not defending uncompetitive
environments and monopolistic exploitation, I'm asserting Wal-Mart as example
uncompetitive environment is, in the general case, nuts.

> Of course, this ignores that many of those poor are the ones in the
> factories, warehouses, trucks and behind the cash registers.

Not ignoring that fact, NOTWITHSTANDING THAT FACT. No one is better off if one
person working minimum wage pay extra money to have another person working
minimum wage drive a truck further (and burn more fuel for that matter).
Recognize a simple truism: no group gets better off by engaging in waste.
_(You could make a case that someone-else making substantially more than
minimum wage paying extra for that would increase overall well being by paying
more for these services, because of diminishing marginal utility of that
richer person 's wealth, but making groceries cost more is a freakishly
regressive sort of way to attempt to redistribute wealth... and wealthy people
aren't shopping at Wal-Mart anyway, they're all at Target or Whole Foods...)_

~~~
nmrm
> I'm not defending uncompetitive environments and monopolistic exploitation

Okay. Well that's what the article is attacking. So I guess I don't understand
your point w.r.t. the thesis of the original article. Do you agree with the
article but disagree that Wal-Mart is an example? Or what? Could you clarify?

> I'm asserting Wal-Mart as example uncompetitive environment is, in the
> general case, nuts.

To repeat myself, there's more than one way for companies to behave anti-
competitively.

Wal-mart cannot afford to screw consumers, so they find other ways to leverage
their status as a mega-corp -- squeezing local government via tifs (this corn
field/park/10 year old walmart is "blighted", so give us 15 year tax break to
build a new one), paying poorly compared to other players in the market,
abusing or undercutting supply chain partners, etc..

> but making groceries cost more is a freakishly regressive sort of way to
> attempt to redistribute wealth

Well, we could one-up Wal-Mart and make all the groceries completely free by
enslaving all those involved in food production. So this is clearly an over-
simplification.

It's also a false choice. Wal-Mart could instead decrease its profits and play
nicer with everyone (like many of its local chain competitors do, arguably
because they don't have the huge legal/PR/marketing team and cash reserves
which can buy F-U leverage against local governments and labor groups -- this
coercive power that comes with being so big is at the heart of the article's
thesis).

Also, the price difference vs. wage difference between Walmart and its
competitors also puts the lie to this claim -- even an extra 1.00+ an hour way
more than offsets an extra .10 cents on the dollar for groceries.

------
ergoproxy
I have a different take on this article than most. I'm a proponent of
Classical economics, and I reject all modern schools of economics--
neoclassical, Austrian, Keynesian, etc.

Classical thinkers like Adam Smith expounded how rational self-interest _and_
competition together lead to economic prosperity. There's a balancing act
going on between self-interest and competition--competition is the economic
faculty that _restrains_ self-interest.

Only in perfect competition do we get _Pareto efficiency_ \--the state in
which it is impossible to make any one individual better off without making at
least one individual worse off.

Unfortunately, modern schools of economics have diminished the role of
competition. Keynesianism lauds government monopoly power; while neoclassicism
and Austrianism foster private monopoly power. Both are _evil_. The result has
been a state of affairs wherein the vast majority of people are getting worse
off.

WRT government intervention in the markets, Adam Smith would not oppose
intervention that fosters competition and stifles monopoly. The goal of the
1890 Sherman Anti-Trust Act was to foster competition, not to diminish
"economic freedom."

"Economic freedom" is a mostly meaningless buzzword that's thrown around by
both libertarians and socialists. Indices of "economic freedom" as compiled by
the Heritage Foundation and the Wall Street Journal serve no other purpose
than propaganda.

It's impossible to divorce politics from economics in the real world. Adam
Smith understood this. The subject used to be called "politico-economics."

Today, the Left favors reforms to give government more monopoly power. While
the Right favors reforms that give firms more monopoly power. Until people
start to wake up and realize all monopoly power is evil and what we need
instead is more competition, things will continue to decline.

~~~
nhaehnle
_Keynesianism lauds government monopoly power; while neoclassicism and
Austrianism foster private monopoly power. Both are evil._

At least in the case of government, you may feel that it is evil, but it is
necessary [0]. So the more pragmatic and productive approach would be to think
about how this monopoly power could be used to further prosperity and equity
of the people.

 _Today, the Left favors reforms to give government more monopoly power. While
the Right favors reforms that give firms more monopoly power._

I think both those characterizations are a bit simplistic. Look at the
discussion surrounding surveillance, secret courts and the police state, for
example.

[0] This is true even within the economy: having a common measure of value is
important for doing business, so you need currencies to have large scopes.
Whoever ultimately controls a currency necessarily has a lot of monopoly
power. So the question is not whether such powers exist, but how they should
be structured subject to goals that we need to set for ourselves as a society.

~~~
ergoproxy
I was speaking specifically of monopoly power, i.e., the power to raise or
lower prices in the market. And no, neither government nor private firms
should have this power. Monopoly power is an example of market failure. In a
competitive market, all participants are _price takers_ , i.e., passive agents
incapable of changing the market price. In perfect competition, in every
transaction, at least one party is better off, and nobody is worse off. That
all changes when somebody gets the power to set prices; then transactions
leave some people worse off.

There are kinds of power besides monopoly power, such as coercive power. WRT
coercive power, that's best monopolized by a democratic government accountable
to its people. And government can and should use it's monopoly on coercive
power to promote competitive markets. Instead, its been empowering monopolies.

But people today aren't well informed enough to make demands on government to
promote competition or hold politicians accountable. They're given bogus
ideologies (neoclassicism, Keynesianism, etc.). And they're given the false
choice between Left and Right.

The terms "Left" and "Right" are not merely overly simplistic. They're total
falsehoods, fabricated by self-interested parties to delude people into
thinking they either need to give government more monopoly power or else give
private firms more monopoly power. There is a third choice that's left
unmentioned: Government can promote competition.

~~~
nhaehnle
I appreciate your engagement in this discussion. I think the notion of a
competitive market _as you define it_ [0] is inherently flawed. To quote:

> all participants are price takers, i.e., passive agents incapable of
> changing the market price

That makes no sense. If all participants cannot influence the price, then
where does the price come from?

Logically speaking, once you abstract away from all sorts of fluff, everything
that happens in a market is ultimately the result of the action of one or more
of its participants. That is, if participants were unable to change the market
price, then why would the market price ever change? Why would there be a price
in the first place? The fact is that participants are _necessarily_ able to
change the market price, whether you want that or not. The only question is
how this power is distributed and what the consequences are.

Having competitive markets in the sense of low barriers to entry etc. is
clearly a good thing. But in the sense you've defined them, they are either
useless or self-contradictory.

Interestingly, for every market, somebody has the (or at least some) power to
set prices. Despite of what you write, most transactions are mutually
beneficial anyway. Why is that?

I believe this is actually because the vast majority of markets _aren 't_
efficient in the efficient market hypothesis sense, and transactions aren't
happening at the margin. For obvious transaction overhead and opportunity cost
reasons, most transactions are only ever realized if they increase the total
welfare not just by some epsilon, but by a significant percentage.

The really interesting question is how this large benefit is distributed
between the transacting parties, and I would wager that the power to set
prices does actually have a big influence there. That is, whoever actually
gets to set the sticker price (for example) is bound to capture a larger
fraction of the benefits than the other party, even if the transaction is
overall still beneficial to both.

For this reason, I think the problem isn't even so much that transactions
leave people worse off. That only happens comparatively rarely. The much more
significant problem is when unequal power relations are exploited to give
somebody a benefit that is deemed to be unjustified. [1]

The prototypical example would be the millionaire in the desert who is near
death by thirst. If she signs over her entire wealth in exchange for a bottle
of water and a ride out of the desert, then clearly, this is a transaction
that is beneficial to both parties. Yet only the most psychopathic internet-
libertarians would ever think that such a transaction was okay in any sense.
The problem was not a lack of mutual benefit, but an exploitation of unequal
power relations.

[0] And I suppose others define it in the same way, perhaps even a large group
of economists.

[1] By the way, this is the root of the classical criticism of capitalism:
that the surplus value of labor is siphoned off by capitalists, leaving
workers with only a small amount. Even though employment contracts are
typically mutually beneficial in the narrow, technical sense, there is the
fact that the employer often exploits the reality of unequal power
relationships.

~~~
ergoproxy
> That makes no sense. If all participants cannot influence the price, then
> where does the price come from?

You are assuming that the dynamics of an economic system is nothing but a
summation of the individual dynamics. This assumption excludes the possibility
of the emergence of complex structures from simple individual behaviors.

I _strongly_ suggest you take a look at the subjects of Complex Systems[1]
theory, Nonlinear dynamics[2], Catastrophe theory[3], and Chaos
theory[4]---all consistent, mathematically well grounded theories which allow
for the _emergence_ [5] of aggregate behavior that cannot be explained simply
in terms of individual behaviors. There is also the emerging field of Complex
economics[6]. Donald Saari wrote an introductory paper called the
_Mathematical Complexity of Simple Economics_ [7].

[1]
[http://en.wikipedia.org/wiki/Complex_systems](http://en.wikipedia.org/wiki/Complex_systems)
[2]
[http://en.wikipedia.org/wiki/Dynamical_system](http://en.wikipedia.org/wiki/Dynamical_system)
[3]
[http://en.wikipedia.org/wiki/Catastrophe_theory](http://en.wikipedia.org/wiki/Catastrophe_theory)
[4]
[http://en.wikipedia.org/wiki/Chaos_theory](http://en.wikipedia.org/wiki/Chaos_theory)
[5]
[http://en.wikipedia.org/wiki/Emergence](http://en.wikipedia.org/wiki/Emergence)
[6]
[http://en.wikipedia.org/wiki/Complexity_economics](http://en.wikipedia.org/wiki/Complexity_economics)
[7]
[http://www.ams.org/notices/199502/saari.pdf](http://www.ams.org/notices/199502/saari.pdf)

~~~
nhaehnle
What you write is not an argument against what I wrote, and you make incorrect
assumptions about what I'm assuming.

You yourself talk about the possibility of the emergence of complex structures
_from simple individual behaviors_.

In other words, you acknowledge that it is the _individual behaviors_ that are
necessary for the complex structures to exist. There may not be a simple
linear relationship between the individual action and the ultimate outcome,
but that doesn't change the fact that individual actions have an influence on
the market price.

It also doesn't change the fact that without individual actions, a market
price would never change (and would never exist in the first place), and that
therefore, individuals have some power over the market price.

That does not mean that an individual can just dictate what the price should
be without any constraints, but it does mean that your definition of a
competitive market is a meaningless phantasy that cannot possibly exist.

The whole field of optimal control theory is about how to control complex
structures that emerge from individual controls.

Edit to add: By the way, outside of the theoretical argument, I think it's a
good idea to take a brief look at what kind of markets exist empirically. In
all markets that actually exist, it is obvious that there are actors who are
capable of changing the market price.

This holds for exchanges, where actors change the price by buying or selling.
It also holds for more everyday markets where it's typically the seller who
puts up a sticker price. For example, the people running a supermarket set the
price for the items in the supermarket.

One last thought: My argument is basically that for every market, there is
some function f whose outputs are the prices in the market, and that the only
inputs of this function is the history of actions of market participants (the
shape of the function depends on the structure of the market).

My argument then continues to say that since the market price is a function of
only the actions of the market participants, there must be at least one market
participant whose actions influence the price, otherwise the price could never
change. This is a simple mathematical statement.

Your attempted counter-argument is that the function f could be very
complicated, which is completely irrelevant to my argument.

~~~
ergoproxy
> you acknowledge that it is the individual behaviors that are necessary for
> the complex structures to exist.

 _Monopoly pricing_ and _price fixing_ are not any of the individual behaviors
necessary to get a market price, and that's all I was arguing.

In the absence of monopolies and cartels, market prices will emerge from
individual behaviors, without any one individual having the power to set the
price.

> a competitive market is a meaningless phantasy that cannot possibly exist.

If competitive markets don't exist empirically, that's not a flaw in the
theory of Classical economics, it is merely a symptom of corrupt culture and
politics. It means we don't really have a free-market system---

What we have today is more akin to Mercantilism. And with income inequality
increasing at an accelerating rate, our society will soon devolve back into
Feudalism.

> Your attempted counter-argument...

My argument isn't with you. My argument is strictly anti-monopoly and pro-
competition.

------
dmitri1981
Hospitals by their very nature are anti-competitive. There is no way that you
as a patient can shop around. You do not have the necessary knowledge to
compare the treatments, evaluate the options and decide on what represents the
best value.

~~~
dnautics
that's generally not true. For most procedures done in hospitals there is
nearly no reason why patients can't shop around. With basically the only
exception being the ER, for true emergencies.

Moreover, even if NOT ALL patients shop around, say, even just 10%, there
would be enough momentum going to put pressure on doctors to improve quality
of care and decrease costs.

~~~
watwut
It is hard to shop around because prices are not transparent. It is very hard
to find out in advance how much exactly will everything cost you. You can get
some partial information (how much they charge for room), but they will not
tell you in advance about all the tests you will have to pay. Then there are
small item hospitals charge a lot for: band-aids for example. Unless you know
a lot about healthcare system, you will not be able to guess all of them.

Plus, hospitals are not in habit of committing to agreed upon price in
advance. So, even if you shop around the amount they will charge you still can
be much different then the one you calculated.

------
warmfuzzykitten
I am pleased to see that all of the comments up to now deal with the
"uncompetitive" aspect of the article and none with the "unequal" aspect.
Indeed, it seems to me that "inequality" (the word appears 9 times in the
article) was thrown in after the fact to decorate a piece about the adverse
effects of monopoly, because post-Piketti it's stylish to talk about
inequality. These aren't the same subject; the discussion of inequality is
focused on person fortunes, not industrial domination. The former doesn't
require the latter.

~~~
esbranson
No more than dying requires getting shot in the face. But nonetheless getting
shot in the face adds considerably to the likelihood of dying.

------
gremlinsinc
Author has great points but too optimistic we're screwed, there's no fixing it
as long as politicians are our only hope for change.

