The author believes that the two economic masters who have opposed the concentration of power and social inequality all their lives will agree with the current global "anti-monopoly", of course, on the premise of taking a good approach.
Anti-monopoly regulation has re-heated up after nearly 20 years of lows, and Europe and the United States have taken the lead in investigating and fining the monopolistic behavior of large enterprises, which are time-consuming and labor-intensive, but such enterprises are basically unscathed. China came to the fore, and the market value of related companies fell sharply in a short period of time, which naturally attracted some scholars and investors.
Economists are accustomed to expressing their dissatisfaction with antitrust regulation by citing Hayek's (or his mentor Mises's) advocacy of free competition, opposition to regulation, and Schumpeter's advocacy of corporate "creative destruction" (similar to the now popular "disruptive innovation") in favor of growth; investors such as Soros, as always, embraced the liberal philosophy of his mentor Pope, harshly attacked antitrust regulation as an enemy of an open society.
Hayek, Schumpeter and Pope, all austrians, experienced the drastic changes in European countries in the early 20th century, witnessed the outbreak of war, social disorder and the rise of totalitarianism, and experienced exile far from their homeland. Naturally, they all argue strongly for the protection of individual rights and freedoms so that society and economy will not repeat the same mistakes.
Why did Hayek not believe that monopolies would exist?
Hayek economics is an upgraded version of smith's depiction of a perfectly competitive market economy. On the one hand, since neither the government nor a single enterprise can grasp the "invisible knowledge and information" scattered throughout the economy, the "invisible hand", that is, the market price mechanism, becomes the best tool for summarizing "knowledge and information" and can achieve the efficient allocation of resources (to use economic terms, public prices are sufficient statistics of private information, and the result of free competition in the market economy is "Pareto optimal").
On the other hand, a government-led, centrally planned and regulated economy can only create price distortions and resource misallocations. In Hayek's view, perfect competition between firms would prevent monopolies from arising, and economic profits would quickly disappear with the entry of new firms. The only monopoly power in the economy is the government, for example, the monopoly and improper use of currency issuance power by central banks can lead to a cyclical cycle of prosperity and depression.
Even if the government wants to exert a visible "hand of aid" through industrial policy, it may become a "predatory hand" under the distortion of incentives. In the end, good intentions pave the way to slavery.
Hayek himself, academic economists who advocate "market omnipotence and regulation is not beneficial," and their fans have not thought that if prices can aggregate all private information under perfect competition, who would want to spend money to collect information? Enterprises naturally do this for the monopoly profits brought by information superiority, and they will also try their best to prevent competitors from entering and prolong the effective time of monopoly profits. And such a company is exactly what Buffett dreamed of, they have a wide moat.
The motivation of enterprises to pursue long-term profits is contradictory to the rapid reduction of profits to zero under perfect competition, and the problem is naturally that perfect competition is originally an extremely idealized and extremely difficult to appear in reality. The prerequisites for perfect competition to produce "Pareto optimal" include complete information, no difference in products, no difference in technology and efficiency between enterprises, and in order to ensure the free entry and exit of enterprises, there can be no friction, externalities and scale effects in economic operation. In standard economics textbooks, only agricultural markets are used as examples of perfect competition. Yet a man as clever as Hayek believed that the preconditions needed for perfect competition were basically satisfied in reality, and that government remedies for market failures were futile.
Interestingly, Orwell, who wrote Animal Farm and 1984, was as opposed to totalitarianism as Hayek, and in his evaluation of The Road to Slavery, he pointed out to the point: "The trouble with competition is that someone will be the winner, and although Hayek denies that liberal capitalism must produce monopolies, in reality it is." Faced with depression and unemployment, most people prefer to be run by the government. ”
What did Schumpeter's theory of "innovation" ignore?
Unlike Hayek's belief in Smith, Schumpeter's main scholarly ideas came from Marx. Discussing the common cycle of prosperity and depression in capitalism, Schumpeter, like Marx, believes that this is the result of the continuous pursuit of profit by entrepreneurs, which will eventually lead to the disintegration of capitalist society. In this sense, Schumpeter's concepts of "entrepreneurship" and "creative destruction", which are popular today, were originally pejorative, but later free-market economists repackaged the terms positively.
Under this new interpretation, "creative destruction" is regarded as the advantage of the market economy, and entrepreneurs' innovation in products, technology, management or sales becomes the driving force of economic growth, because innovation constantly destroys the old and backward order and structure from within, and constantly creates new and advanced orders and structures. As for the "disruptive innovation" that has become popular in recent years, it is more about describing the process of replacing old products with new products from a technical point of view, it does not try to explain the economic cycle, so it can be seen as a subset of "creative destruction".
It is worth emphasizing that Schumpeter believes that entrepreneurs who innovate in pursuit of monopoly profits are worth encouraging, but he, like Hayek, believes that such monopoly profits can only be "temporary" because competitors will produce better products through innovation or produce original products at a lower cost.
Their beliefs in life are deeply disgusted by the long-term maintenance of monopoly power, but this shows that their understanding of entrepreneurs is far less profound than Buffett's. As clever as Schumpeter, he did not consider that entrepreneurs could also build a wide moat in the form of "innovation" to prevent opponents from entering the castle to compete with them, so as to maintain the monopoly profits that were originally only "temporary" for as long as possible.
Traditionally, "temporarily" methods of preventing opponents from entering have been patent protection, low-price dumping, rent-seeking lobbying, and better and longer-term "innovation" methods include burn-in subsidies, dimensionality reduction strikes (high-end products sell at a lower price than low-end products), mergers and acquisitions of counterparties, exclusive agreements, etc. In terms of creativity, the first is to exchange free services for users' private data, and then use algorithms to tap out users' demand preferences, indirectly profit from manufacturers through advertising, or directly profit from upgrading production and supply efficiency. The more data you have, the greater the monopoly advantage.
Not to say that these "innovations" exceeded Schumpeter's expectations, Hayek could not imagine that the information that he considered "invisible" was not only clearly seen by companies that used algorithms, but also became a source of huge profits. What is even more tragic is that under the manipulation of algorithms, people's thoughts and values have become more extreme, and data and algorithms have become tools for enslaving people.
By the way, scholars such as Philippe Aghion, who mathematically modeled the idea of "creative destruction leads to economic growth," published a paper in 2019 pointing out that one possible reason for the low growth of the U.S. economy is the destruction of some industries (concentrated in hotels and restaurants, not manufacturing) and disappearing. They concluded that "creative destruction" reduced the U.S. economy by an average of 0.5 percentage points per year between 1983 and 2015. If this conclusion stands the test, Aghion et al. not only negate their own early years of research, but also the free-market repackaging of Schumpeter's ideas.
The re-emergence of the monopoly economy
Hayek and Schumpeter were fortunate that their most prestigious era coincided with the global antitrust movement, the decline in corporate monopoly profits, and the narrowing of the gap between rich and poor in society. The chart below is the degree of "market power/monopoly" measured by the average pricing markup for U.S. businesses (unit selling price divided by direct production costs). Obviously, around 1974, when Hayek won the Nobel Prize, American companies did experience a process of declining monopoly.
However, under the influence of Hayek and Friedman, the Reagan and Thatcher administrations launched "neoliberal" reforms in 1980, and the world entered the process of marketization and privatization, and antitrust gradually abdicated. Correspondingly, the average markup for global companies has increased significantly. According to a study of pricing bonuses by Belgian economists Jan De Loecker and Jan Eeckhout on nearly 70,000 companies (the vast majority of them listed) in 134 countries around the world, the average bonus rose from 1.17 in 1980 to 1.61 in 2016.
Similar to the change in the markup of U.S. companies above, the average global corporate fee mark remained unchanged or declined slightly in the first decade of the 21st century (which is likely related to China's accession to the WTO as the world's factory), but accelerated after 2010.
In terms of the added value of enterprises in 2016 relative to 1980, Europe, North America and Oceania are higher than the global average, followed by South America, Asia and Africa. In terms of the average corporate markup in 2016, the top five are Denmark (2.84), Switzerland (2.72), Italy (2.54), Belgium (2.06) and the United States (1.84). Such a finding completely exceeded expectations. A popular view is that monopolies are concentrated in the United States, and this has to do with the relaxation of regulation in the United States. Due to the relative strength of Europe in anti-monopoly, the company's development lags behind that of the United States, and there are no European companies in the world's top ten companies. Another popular view is that differences in antitrust efforts result in European firms being significantly less innovative than the United States, but it is not surprising that European firms are more monopolistic, then less innovative.
When measured in terms of profit margins (a percentage of sales prices higher than direct production and marketing and management costs), the degree of "market power/monopoly" has been measured, and the average profit margin of U.S. firms has continued to rise from 1% in 1980 to 7% in mid-2000, and then fluctuated around 6-8% (similar in Europe). Such figures may seem prosaic, but a closer look reveals that since 1980, the average share of profits in wage expenditures (or sales) has risen from a low of 5% (or 1%) to a high of 43% (or 30%), respectively. For companies like Google or Facebook, that's 300 percent in 2019.
The surprise has only just begun
If European companies have led the way in monopoly power beyond expectations, the surprising discovery has only just begun.
First, monopolies are not just familiar technology platform companies, they are almost ubiquitous. In the field of food, clothing, housing and transportation, many brands seem to be fiercely competitive, but in fact, they belong to a few large enterprises, and their pricing power is highly concentrated. The most prominent example is the Belgian-based beer manufacturer AB InBev with 650 beer brands in 150 countries.
Most people do perceive price increases in the consumer sector, but they often doubt the monopoly characterization of technology platform companies. It seems that these companies through free, low prices, discounts and convenient logistics to bring everyone the benefits of competition, rather than the consequences of monopoly.
Such an idea apparently sees only one side of the coin, on the other side, in addition to the profits generated by personal privacy data, the pricing of the producer is depressed, and the other identity of each person as a consumer is a worker who serves a certain producer. Even back to the original side of the coin, the rising corporate price bonus means that the "low price" we enjoy is still too high.
Second, although the market monopoly power of enterprises in various countries around the world has risen in the past 40 years, the pricing power of enterprises below the median has barely increased, and the price increase is mainly from large enterprises in the top 1/4 quantile. Especially those "superstars" in the top 10%, their price markup rose from 1.5 in 1980 to 2.5 in 2016.
What is even more surprising is that the market share has gradually shifted from low-commission companies to high-commission companies. Before analyzing the specific reasons, we have seen that if the market is relaxed and the market is allowed to determine the competitive strength of the enterprise, then only a few star companies become big winners, and most companies are struggling to survive. Those who believe in Hayek's ideas probably did not expect that the forces of the market were so cruel. Well-designed antitrust measures limit the power of a few businesses and help most businesses grow.
Thomas Philippon, who studies the phenomenon of corporate monopolies in the United States, found that from the mid-1970s to the mid-1990s, the phenomenon of "changing the king flag at the head of the city" was obvious, that is, the possibility of companies at the top of various industries being replaced by competitors was increasing, but since then, this possibility has been declining. Schumpeter, who believes that monopoly profits are only "temporary", should not want to see the ranking of companies so rigid.
Third, although the changes in the surcharges in most countries are in line with the overall global trend, China is a clear exception: the average bonus of enterprises starts from 1.89 in 1980, experiences a W trend, and comes to 1.49 in 2016 (Hong Kong, China is another exception), which is naturally related to the rise of private enterprises after the reform and opening up, and the constant change in market competition intensity. The more granular data of Chinese companies is worth digging into. This is also what the author emphasized in the article "Cold Thinking under the Great Discussion on Antitrust, Strict Supervision and Common Prosperity: Discussion with Professor Zhang Weiying".
More surprises arose beyond changes in corporate price bonuses. If the pursuit of profits and monopolies by enterprises brings about the result of "rising tides", it is naturally "Xida Puben". Contrary to expectations, however, from 1980 onwards, the pricing power and profit rate of enterprises rose, but the cost was borne by labor and (productive) capital.
The chart below shows that from 1950 to 1980, the wage income of ordinary workers was highly consistent with the labor productivity of enterprises (which means that labor was fairly distributed under market competition), but from 1980 onwards, a clear K-shaped differentiation was formed: although labor productivity still maintained the same rate of gdp growth, the wage income of ordinary workers as a proportion of GDP continued to decline from a stable 65% to 59% in 2017.
In other words, traditional economics uses the Cobb-Douglas production function to describe the share of labor income as a stable 2/3 of GDP, which is very much in line with empirical data before 1980, but after 1980, theory deviates from reality.
Similarly deviated from (productive) capital for machines and plants, which before 1980 stabilized at 32% of GDP, which is close to 1/3 of capital in the Cobb-Douglas function, while profit as a non-productive capital has a theoretical value of 0 and a real value of 3%. But by 2017, (productive) capital accounted for 29 percent and profits accounted for 12 percent.
After 1980, the price of rising corporate monopolies and pricing power was that the profit owners, that is, the shareholders of the enterprise, became the sole winners, and labor and (productive) capital were left behind. The aforementioned figures come from the United States, but an IMF study of 74 countries around the world reveals that the above conclusions are prevalent in other countries with strong monopoly economies (the IMF also found that the stronger the monopoly economy, the weaker investment and innovation).
A series of social upheavals brought about by the decline in labor incomes and the widening gap between the rich and the poor are well known. In the past, American scholars blamed it on the "China shock wave" caused by the substitution of US imports after China's accession to the WTO. In "Did the "China Shockwave" Hurt the United States? The long article points out the flaws in this view, and the real troublemakers are the rise of the monopoly economy and the thick "capital" and thin "labor" of the US tax system.
epilogue
Times have changed, but unfortunately, most of today's economics classrooms are still repeating hayek and Schumpeter economics (the mathematical modeling of economics was done by Schumpeter's student Samuelson): the profits of firms equal to zero, and the distribution of labor and capital gains is fair because they are equal to their respective productivity.
I often lament that the disconnect between economics textbooks and society makes it difficult for students who perform well in the classroom to adapt to today's society.
It was inspired by Eeckhout's new book, The Profit Paradox: How Thriving Business Threatens Future Work, and Philippon's book The Great Reversal: How America Abandoned the Free Market. I suggest that Hayek and Schumpeter fans, rather than admiring interpreters who stay in the old era, should learn directly from a new generation of academic leaders.
The author will next explain where the monopoly power of enterprises comes from, why enterprises with high commissions will also gain greater market share; why since 1980, academic and political circles have changed the antitrust movement's assertion of cracking down on monopolistic behavior of enterprises and allowed the monopoly economy to rise; and how to design strict regulatory measures to achieve a better balance between efficiency and fairness.