Young Economist 2018 winner: Gus Smith - best essay on topic
01 Oct 2018
“Some internet companies have become too big for the good of society and should be broken up”. Do you agree?
The key to answering the question comes in clearly defining its parts – we must consider what constitutes the 'good of society' and what exactly the statement means by 'some internet companies'. From an economic perspective we can consider the 'good of society' to be a situation where economic welfare/utility is maximised for as many people as possible; our scarce resources are being allocated as efficiently as possible. The ideal also comes with a moral element as well, one that is far more subjective. Although it is impossible, and unhelpful given the theoretical nature of the question, to clearly define which internet companies are 'too big' we can clearly draw examples from some prominent firms, e.g. Apple, Google, in some ways Amazon, while also drawing inspiration from the 'superstar' firms proposed by Autor.1 There are two distinct sides to the argument: one that the heightened monopoly power results in a worse deal for both workers and consumers; the other that such companies have a beneficial impact and are unavoidable.
I will go on to consider both sides in detail but we must also reflect on the importance of the issue at hand. The dominance of some internet companies is complete – 94% of students use Facebook according to one study in the USA2 - and the subsequent effect on competition and the markets that appears with all monopolies: higher prices, lack of innovation, accelerating profits and in some cases lower levels of customer service, have a huge effect on society. The size, and growth, of these giants in recent years has been unprecedented even on an international scale. The graph below shows not only the rate of growth but also the raw size of the market caps. For comparison, the largest non-internet tech company by market value in May 2018 was Berkshire Hathaway at $499bn, just over half of Apple's $926bn.3
There is a general risk to increasing monopoly power found in basic economic theory; monopolies have a clear ability to determine prices and manipulate them to obtain higher profits, promoting producer sovereignty. This worsens the economic position of consumers as they are forced to pay more – acting opposite to the 'good of society'. This is most apparent with companies such as Amazon, a company that has in many cases a vertical monopoly: it controls sections of retail, supply chains, and sales channels in an advantage that makes its position impenetrable. Amazon has also been home to a spate of bad news stories highlighting the enormous levels of inequality in the company. The CEO makes the median employee's salary every 10 seconds5 while working conditions for many employees are not only morally repugnant but also sure to have a negative impact on productivity and self-worth.6 Amazon's ability to get away with this behaviour is due to their sheer size – were they a smaller company, more reliant on public goodwill, they would be more wary of bad news and less able of suppressing unionisation.
We can also draw a correlation between recent trends in increasing market concentration and another recent trend in the share of GDP going to labour falling. The study, published by Barkai, has found that the profits companies are making has grown exponentially in recent years while the share of GDP that labour receives has decreased dramatically from 64.6% in 2001 to 60.4% in 2014. Although based on figures from the US, it speaks to a growing trend of global inequality where increasing amounts of profit accrue to large concentrations – an effect of concentrated markets where the lack of competition enables them to avoid price competition.7 This has a direct effect on reducing the disposable income available to normal households, making the macroeconomic situation worse and acting opposite to the 'good of society' along with having a negative impact on labourer's mental wellbeing and self-worth. The correlation between the two facts is confirmed by Autor et al as a key finding when they write "industries with larger increases in concentration exhibit a larger decline in labour's share."8
Another consequence of the growth of internet companies has been the enormous amount they save internationally; saving that has a visible effect on the global economy by contributing to the "global savings glut". In 2013 it was found that the rate of saving was increasing for large internet companies, namely Apple, Microsoft, Google, Pfizer and Cisco, having increased by 21% in the two years preceding it.9 This rise in savings has been identified by Bernanke as a factor behind falling real interest rates globally even during short-term nominal interest rates rising.10 This has a worrying macroeconomic implication as the disconnect between nominal interest rates, as set by central banks, and global real interest rates, as cannot be influenced in the long-term if we follow the classical dichotomy but evidentially can in the short-term due to the power interest rates can have to expand the economy, means a key tool of the government to avoid recession is being removed. Interest rates are at their lowest for decades, sitting at 0.5% in the U.K, and even if they are increased lower global interest rates will mean that nominal interest rates falling will not have an expansionary effect on the economy, meaning the only solution to a recession would be expansionary fiscal policy – politically unsustainable and difficult to deliver given increasing levels of debt. The diagram below demonstrates this long-term change.
It is not a clear-cut issue, however, as there are clear arguments against breaking up internet companies – not least the seemingly inevitable nature of corporate consolidation. The study by Autor that was cited earlier makes clear that the growth of "online services" and "the Internet" are key drivers behind monopoly growth. Internet companies can also have a beneficial impact on the lives of many and society as a whole, encouraging communication and cooperation along with vastly increasing the speed of instant communication between individuals and firms. Although it is unable to accurately predict the effect of this on key economic variables such as productivity and cost savings it has had a visible impact on ordinary lives, as is observed simply by looking around. There has been attempts to determine economic growth arising from the advent of the Internet however, with one study finding that there "is considerable scope" for increase in "efficiencies" and "consumer convenience".12 The ease of consumption gained from sites such as Amazon and eBay makes shopping more practical and easy for many consumers.
There is also an issue with judging how we define the 'good of society' - an argument can be made that by the very growth of these societies consumers have indicated their preferences. The consumer is, according to the saying, king and the fact that internet firms have exploded in popularity shows that consumers enjoy shopping there – they choose those firms over competitors, and they are therefore deserving of their success. There is also the chance that regulation in the market might stifle, rather than promote, competition should the process result in either over-heavy regulations that suppress innovation and make any growth impossible or if regulatory capture occurs and the regulator serves the interests of the firms, resulting in anti-trust legislation being poorly executed.
Overall it seems obvious that the consequences of greater market consolidation amongst tech companies far outweigh the positives, with the arguments against action being taken mostly raised out of a fear of the consequences of such action rather than a genuine belief that the situation as it occurs now is a positive one. Large internet companies contribute to growing inequality and worse conditions for labourers – a section that makes up far more of society than corporate executives – along with having a negative impact on global interest rates and the macroeconomy through their saving. Therefore in two key metrics to judge the 'good of society' that we first outlined, moral and economic impact, internet companies contribute negatively. Monopolies offer a worse deal for consumers through their ability to evade price competition and therefore benefit a select few at the cost of many more. The main argument against action that consumers clearly benefit most from the companies because they shop their and not at alternatives does not stand up to scrutiny when we consider the enormous barriers to entry emerging in these markets due to the nature of the Internet and their marketing, dispelling that myth.
We must make a few final, other, considerations however – that of implementation. To 'break up' large internet companies could involve such an arduous process that it would ultiamtely be for the 'good of society' to simply leave them be. Ultimately our fear of the unknown cannot be allowed to stifle decision-making however. Difficult choices would have to be made over the exact sizes of companies, but nothing beyond the reach of a national government.
Autor, David, Dorn, David, Katz, Lawrence, Patterson, Christina, van Reenen, John, 'Concentrating on the Fall of the Labor Share', January 2001
Arthur, C. (2012). Digital wars: Apple, Google, Microsoft and the battle for the internet. London/Philadelphia: Kogan Page
Barkai, Simcha, 'Declining Labor and Capital Shares', Stigler Center, November 2016
Dolata U. (2018) Internet Companies: Market Concentration, Competition and Power. In: Collectivity and Power on the Internet.
Hsu, Shi-Ling, 'Antitrust and Inequality: The Problem of Super-Firms', The Antitrust Bulletin Volume: 63, 2018.
Khan, Lina, Vaheesan, Sandeep, 'Market Power and Inequality: The Antitrust Counterrevolution and Its Discontents', Harvard Law & Policy Reviews 2017 Vol 11, p235-294
King, Mervyn, Low, David, 'Measuring the "World" Real Interest Rate', February 2014
Litan, Robert & Rivlin, Alice. (2001). Projecting the Economic Impact of the Internet. American Economic Review. 91. 313-317. 10.1257/aer.91.2.313
Mansell, Robin & Javary, Michele, 'Emerging internet oligopolies: a political economy analysis', November 1999Noam, Eli, 'The Internet: Still Wide Open and Competitive?', August 2003 Open Markets Institute, https://openmarketsinstitute.org/explainer/monopoly-inequality/, 'Income Inequality & Monopoly'
1 http://scholar.harvard.edu/files/lkatz/files/aer-pnp-concentrating-pp-aea-jan-13-2017-final.pdf 'Concentrating on the Fall of the Labor Share' by Autor et al
2 "Pew: 94% Of Teenagers Use Facebook, Have 425 Facebook Friends, But Twitter & Instagram Adoption Way Up," Marketing Land, July 22, 2014, https://marketingland.com/pew-the-average-teenager-has-425-4- facebook-friends-44847
3 https://www.statista.com/statistics/263264/top-companies-in-the-world-by-market-value/ 'Top Companies in the World by Market Value' May 11, 2018,
4 https://www.statista.com/chart/9021/market-cap-of-us-tech-and-internet-companies/, 'Most U.S. tech giants still growing' Figures taken from Yahoo! Finance, April 2017
5 http://time.com/money/5262923/amazon-employee-median-salary-jeff-bezos/ 'The Median Amazon Employee's Salary Is $28,000. Jeff Bezos Makes More Than That in 10 Seconds' Julia Glum, May 2018
6 https://www.mirror.co.uk/news/uk-news/timed-toilet-breaks-impossible-targets-11587888 'Timed toilet breaks, impossible targets and workers falling asleep on feet: Brutal life working in Amazon warehouse' Alan Selby, Nov 2017
7https://research.chicagobooth.edu/~/media/5872FBEB104245909B8F0AE8A84486C9.pdf ‘Declining Labor and Capital Share’ Simcha Barkai, 2016.
8 http://www.nber.org/papers/w23108 'Concentrating on the Fall of the Labor Share', Autor, summary.
9 https://www.moodys.com/research/Moodys-US-companies-cash-pile-grows-10-in-2012-to--PR_268757 'US companis' cash pile grows 10% in 2012, to $1.45 trillion' Richard Lane, March 2013
10 https://www.federalreserve.gov/boarddocs/speeches/2005/200503102/ 'The Global Savings Glut and the
U.S. Current Account Deficit' Ben Bernanke, March 2005
11 Sources: https://www.nber.org/papers/w19887.pdf King and Low (2014); Consensus Economics; IMF; DataStream; 'Towards a global narrative on long-term real interest rates' https://voxeu.org/article/towards- global-narrative-long-term-real-interest-rates Rachel and Smith, January 2016
12 'Predicting the Economic Impact of the Internet', Litan and Rivlin, pg 317