21 September 2016

Industry concentration discredits market forces

The 'Economist' writes about the direction in which our economies appear to be heading: briefly, the concentration of business into fewer big companies:
The share of GDP generated by America’s 100 biggest companies rose from about 33% in 1994 to 46% in 2013. The five largest banks account for 45% of banking assets, up from 25% in 2000. In the home of the entrepreneur, the number of startups is lower than it has been at any time since the 1970s. More firms are dying than being born. A giant problem, the 'Economist', 17 September
The dangers of such concentration extend beyond the 'too big to fail' paradigm that in the past few years has brought about a massive transfer of wealth from the poor and middle class to banks and wealthy investors. It's the usual scenario: government and big business on the one side, ordinary people and small enterprises on the other. I have two objections to increasing industry concentration: first, that it widens the gap between governments and the people they are supposed to represent. This results in a public disengaged from policymaking, which can lead to flawed policymaking or, just as bad, the creation of otherwise good policies that have no buy-in.

My other objection is simply that industry concentration discredits our economic systems in general and markets in particular. The 'Economist' identifies technology and globalisation as two of its causes. But, as the journal points out, some of the consolidation of business represents the triumph of the anti-market approach. Big business is adept at taking advantage of and manipulating trade rules and other important parts of the regulatory environment to stifle competition:
Regulation inevitably imposes a disproportionate burden on smaller companies because compliance has a high fixed cost. ... The complexity of the American system also serves to penalise small firms. The country’s tax code runs to more than 3.4m words. The Dodd-Frank bill was 2,319 pages long. Big organisations can afford to employ experts who can work their way through these mountains of legislation; indeed, Dodd-Frank was quickly dubbed the “Lawyers’ and Consultants’ Full-Employment act”. General Electric has 900 people working in its tax division. Why giants thrive, the 'Economist', 17 September
Society needs some guidance. Not, heaven forbid, central planning, but some sense of direction over where both market and anti-market forces are taking us. We're now on a path that is taking western countries into a world of entrenched wealth and class differences and widespread, growing alienation. It's not a healthy outlook.

Which is where Social Policy Bonds could enter the picture. A bond regime wouldn't randomly allow influential players to throw their weight around with the government (if we're lucky) coming in to deal with the adverse consequences or (if we're unlucky) being co-opted to join with big business in stifling competition and extracting funds from taxpayers. In contrast, Social Policy Bonds would reward people who achieve universally wished for social and environmental outcomes. They would do so in ways that inject the market's incentives and efficiencies into the achievement of social goals. The skills and energies of, for instance, those 900 tax experts working for General Electric, would be channelled into socially useful projects. Incentives matter and we need to give big business and its pals in government incentives to work for all citizens, and not just for their own narrow short-term interests. 

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