I posted this chart because my friend Arnold posted it on his Facebook. But, it’s a metaphor for everything in America these days. Massive companies dominate every industry. I’d urge everyone to read Professor John Cochrane’s essay on economic growth. If you want to listen to him talk about it, here is a link to a podcast. Here is one excerpt:
Higher productivity typically comes from new companies, which displace old companies —and displace the profits of their owners, and the healthy pay and settled lives of their managers and workers. Southwest enters and either displaces the legacy carriers—Pan Am and TWA—or forces wrenching changes for survivors such as American and United. A&P displaced mom and pop stores. Walmart displaced A&P. Amazon may displace Walmart. Nobody likes the process. Everyone needs the results.
Why aren’t we seeing new airlines, new insurance companies, new banks, new anything?
There are a few reasons. One is that as companies grow, there are internal economies of scale and scope they can take advantage of that smaller companies cannot. When I was in MBA school, one of the things I learned in microeconomics is that the bigger you can get, the more you can drive marginal costs down. The lower your marginal costs, the easier it is to fight off competition.
However, there is something else afoot in America that is a game changer. Government size, tax policy and regulation. Small companies cannot afford to compete. If the mega corporation has a cozy relationship with a government bureaucrat, the government bureaucrat can make life difficult for the upstart company. Just look at the problems Uber and Airbnb are encountering for evidence. Look at the problems raw milk farmers have.
Dodd-Frank and Sarbanes-Oxley have made the hurdles so high it’s practically impossible to innovate and go public. Obamacare has squelched innovation in insurance. Since the forced decision by the FCC on net neutrality, have we seen competition in broadband? No, we have seen consolidation and some companies exiting the business.
By the way, Warren Buffett owns a large controlling interest in two out of the ten companies. He is smart, knowing that they will just get bigger due to regulation. If you are really curious about how all this works, you need to read Professor George Stigler’s work. He outlines it here.
Government regulations wind up killing competition rather than encouraging it. You can look to our nation’s capitol, and state capitols for enemy number one as to why there are no new competitors bubbling up to make our lives better and easier-and the cost of goods and services cheaper.
Thanks for the link Insty. I changed the title when my PhD econ professor friend corrected me on Monopsony. So, Crony Employeeism worked better.