The Profit Paradox: How Thriving Firms Threaten the Future of Work

"The paradox in the title of the book is that profits have risen because there’s a lack of competition and that actually makes everyone worse off in general. Although it makes firms better off, it makes the economy worse off. This book is written by an economist who, along with other co-authors, wrote one of the most influential papers in recent years, which has tried to measure market power in the economy—the ability to raise prices above costs. Eeckhout shows that this is not just about the big tech firms. He’s looked at accounting data for firms across almost all sectors over 50 or 60 years. It’s a remarkably comprehensive piece of research and what he’s found is that market power has risen in almost all sectors and in almost all continents. It’s a very, very widespread phenomenon. This is an extremely important piece of research and very influential. It’s made everyone sit up and think about what’s going on. It’s really shaken the economics profession because we had never before realized how widespread the rise of market power has been. “Market power has risen in almost all sectors and in almost all continents” The other thing that’s very interesting about the book is that it links this rising market power and profitability to implications for the labour market and another very interesting phenomenon of recent decades, the fall in the share of national income that goes to labour. This has fallen for many years. It used to be that two-thirds of value-added went to workers. That was actually the case for centuries. It was one of the most stable facts in economics, that two-thirds of value-added went to workers. But, in recent decades, this has fallen to less than 60%, which is quite a dramatic change. It’s never, ever moved so much before. Eeckhout says that this is due to the rise in market power. It’s an example of the profit paradox that profits have gone up, but workers haven’t seen the benefits. In recent decades, the median worker hasn’t had any improvement in their standard of living. There have been some workers who have been made a lot better off in recent years, but the median worker hasn’t seen any increase in their pay. There’s been a great widening in inequality. He puts this down to rising market power. Yes, he does. He believes in tougher competition policy. He thinks that competition policy has been too soft. He’s got a chapter “Putting the Trust Back into Antitrust” by which I think he means we should try to restrict mergers and acquisitions—all the usual things that people say when we talk about tougher antitrust policy. That means being much stricter about laws allowing firms to merge together and possibly going back to the idea of breaking up big firms, which we used to do, but we haven’t done in recent years."

"Yes, he’s showing the impact of all this and how it leads to inequality. It used to be that the biggest inequality was within companies, the CEO versus workers. That’s no longer the case, it’s now between companies. There are high-wage, very effective companies who are outsourcing all their lower-wage jobs. So now you have low-wage companies, and you have high-wage companies; there is job polarization, and the middle class has disappeared. Eeckhout says it’s all about market power, but there’s also globalization, which is a different force. It’s amplifying the impact of market power and big concentration and it’s hard to disentangle. Is it globalization that pushed all the middle-class jobs to China? Or is it the massive corporate power of Apple that says, ‘OK, let’s get all these jobs out of here’? It’s both. He talks about the difference between big cities. It used to be that compensation across cities wasn’t really that different. Now, where the big concentrations are in New York and San Francisco you have massive increases in wages versus other cities where this is not the case. He’s talking about the increase in non-compete contracts, of licensing as a way of keeping other companies or potential entrants out. He really thinks that the patent system is no longer working, that it’s being used to keep other companies out. He talks about the fall in job mobility. These big monopolies don’t necessarily all want to grow, they just want to keep their profits where they are. People used to switch jobs a lot more than they do today. He sees that as part of the lower dynamic business mobility because companies don’t go come and go anymore. They don’t die as much. He is talking about how the brunt of all this change falls on the elderly. Technology changes, market power, he sees it all as one thing. He then links it up with the Deaths of Despair that we talked about by Anne Case and Angus Deaton. The low wage growth, the worsening of health. “The economy and the equity market ain’t the same thing” As to the solution, that’s where it gets a little bit weaker. He wants a third way. He recognizes that these big corporates like Amazon and Google have created millions of jobs. So they are helping the economy overall. The question is, can you keep the good stuff without having the bad stuff, which is that market power ultimately corrupts? He’s a bit waffling there on exactly how you do it. He says he’s neither with the Chicago school nor the Harvard school, which is the Tim Wu, Louis Brandeis approach. He says bigness by itself should not be a sin. Big companies are there because they provide good stuff. But ultimately, excessive power has a negative impact on society, and we need to control that. In technology, he talks about ‘interoperability’, which is a hot topic at the moment. A typical example is Apple. It has its app store. You need to pay Apple for that and Apple will decide who’s on and who’s not. So opening that up a bit as we did many years ago when Microsoft said, ‘you can only use our browser.’ Then the antitrust authority said, ‘No, you have to allow everybody’s browser to be on there.’ That massively reduced the monopoly power of Microsoft. So we need to do the same thing with Apple. I heard him speak at a conference a few months ago. He said, ‘We have an inflation problem in America and we have a monetary policy to deal with that, with 3000 or 4000 economists working at the Federal Reserve. We have a much bigger problem with corporate concentration, but how many people work at the antitrust division? A fraction of that. We need more proper resources for antitrust, and FTC.’ Amy Klobuchar also has several proposals at the moment in the Senate. One of the big provisions is to provide more resources for the antitrust division. Biden is trying to do that also. My main criticism of the book is that he has one little tool, market power, and he uses it to explain everything in the world. There is not always a correlation there. I’m not optimistic. Corporate power is too strong, and the power of money is there. The judges are also going be preventing a lot of this because we have not applied antitrust for 30 years. The US uses a precedent system similar to the UK and there is now a broad legal precedent of allowing these things to happen. The US equity market has been the strongest equity market in the world for the last 15 years because of a doubling of profit margins. The moment antitrust comes back, if it comes back, we will see our equity market do what China’s did, which is crash because then the profits will go away. So antitrust is a big threat to our equity market but it’s good for the economy and the country in the long term. The economy and the equity market ain’t the same thing. China is not managing its economy for the benefit of shareholders, it’s managing it for the benefit of everyone in China. That’s why China is doing better than we are at the moment."