What determines the price level is a theoretical topic that pops up in Mosler's White Paper on Modern Monetary Theory (MMT - link to my discussion). Mosler's argument is that only MMT provides a proper understanding of price level determination. That is a strong claim, and difficult to assess. However, the discussion of price level determination is a distinctive part of MMT, and should receive greater prominence in discussion....Bond Economics
Our study aims to help draw together two strands of literature. As the World Inequality Report recently showed, most advanced nations have seen an increase in inequality over the past generation. Meanwhile, a growing body of evidence points to an increase in market power, both in terms of rising market concentration and increasing markups. A burgeoning literature suggests that superstar firms are capturing increasingly high market shares, allowing them to use their market position to earn excess profits. Given the inequality in stock ownership, market power may continue to increase inequality in the future....ProMarket
Discussions today are pervasive among economists and policymakers about the increasing rise of firms’ market power and the potential negative effects of that power on the U.S. economy. Of particular concern is the rise of new technologies and the dominance of platform giants—such as Amazon.com Inc., Alphabet Inc.’s Google unit, Apple Inc., and Uber Technologies Inc., among others—which are not improving the U.S. socioeconomic landscape by reaping gains from potential economies of scale, but rather are throwing around their weight to suppress wages, raise prices on consumers, and enter the political arena to ensure the federal government allows the U.S. economy to continue on the path of market consolidation.
Many economists point to this disconcerting rise in market power as leading to a simultaneous rise in monopsony power—the ability of the firm to have an influence over the determination of workers’ wages—which may contribute to the persistence of stagnant wages despite relatively low headline unemployment numbers in recent times.
This is in stark contrast to decades of research and modeling in economics following the so-called marginalist revolution in the discipline, which resulted in most economists simply treating monopsony power as a special case only existing in the now long-gone company towns of Homestead, Pennsylvania, and Pullman, Illinois, of the 19th century or in highly concentrated island economies of introductory economics textbooks.4
Recent empirical investigations into U.S. labor markets no longer allow reasonable economists to bury their heads in the sand about market power and assume that workers’ wages are simply equal to the value of their marginal product or service. There’s now insurmountable evidence that monopsony power is prevalent throughout the U.S. economy, though the degree to which it may contribute to widening income inequality and underemployment remains an open question. These findings imply that employers can siphon off “rents”—economic parlance for excessive profits beyond the cost of production—from workers through the exercise of monopsony power. These findings are the complete opposite of the dynamic formulated in most current labor market models.
In our new Washington Center for Equitable Growth working paper, “Monopsony and Collective Action in an Institutional Context,” we seek to better understand the theoretical implications of this new and growing empirical literature on monopsony power and the resulting lower wages for workersWCEG — The Equitablog
In this post, which is based on my FTC testimony, I explain why growing market power provides a better explanation for higher price-cost margins and rising concentration in many industries, declining economic dynamism, and other contemporary US trends, than the most plausible benign alternative: increased scale economies and temporary returns to the first firms to adopt new information technologies (IT) in competitive markets.
The benign alternative has an initial plausibility because the efficient size of firms has likely grown over time in many industries. That is the natural consequence of the high fixed costs of investments in information technology, the growing importance of network effects, and an increased scope of geographic markets. Under such circumstances, firms could grow larger, concentration could rise, and price-cost margins could increase even if markets are competitive. In addition, the first firms to invest in new information technologies may earn substantial rents. The rents should be temporary if those investments don’t confer market power and rivals follow suit with investments of their own.
Yet six of the nine reasons I gave for thinking market power is substantial and widening in the US in my testimony cannot be reconciled with the benign alternative. I set forth evidence showing that anticompetitive coordination, mergers, and exclusion are underdeterred, that market power is durable, that increased equity ownership of rivals by financial investors softens competition, and that governmental restraints on competition have grown. As I explained in my testimony, none of the reasons is individually decisive: there are ways to question or push back against each. But their weaknesses are different, so, taken collectively, they paint a compelling picture of substantial and widening market power over the late 20th century and early 21st century....
The bottom line is that growing market power is a better explanation for declining dynamism, rising concentration and markups in many industries, and the other reasons for concern, taken as a whole, than the alternative of increasing scale economies and early-adopter rents in competitive markets. The benign alternative may be a partial explanation for some trends, but increasing market power is a key part of the story.
We need a revolution to cast off monopolies and restore entrepreneurial freedom. First of two excerpts from “The Myth of Capitalism.”Bloomberg Opinion
A lot of times, when you read reviews about books on the economy, you end up wondering what the reviewer’s ‘priors’ are as people like to say in economics. You read the review and wonder where the biases of the reviewer are, because that can tell you a lot about the review.
So I’m going to lay it out there.
The ‘Corporatist’ is a kleptocrat masquerading as a believer in liberty. He uses terminology based in liberty to construct an ideology solely as a means of furthering the gains of a specific strata of society allied with the corporatist and at the expense of other strata, by coercion if necessary.That’s me, seven years ago on this very website in a post I called Corporatism masquerading as Liberty. So, those are my priors coming into this; I’m someone who sees the ‘ideology’ of freedom and liberty being used as a cloak and shield for people who are almost entirely self-interested. And what I believe has happened is that ideology has been injected into our form of capitalism as a way of disarming naysayers and allowing the ‘Corporatist’ to benefit at everyone’s expense.
So when I read “The Myth of Capitalism" (henceforth The MOC) was subtitled “Monopolies and the Death of Competition", I was intrigued because the question for me was how self-interested people are able to reap all the gains of our system, while avoiding a lot of the downsides....
Huawei chief financial officer Wanzhou Meng is facing extradition to the United States after being arrested in Canada on suspicion of violating U.S. sanctions on Iran, the Globe and Mail reports.
Mere hours after Chinese officials finally affirmed President Trump's description of Saturday's trade 'truce' - this after fears that the true nature of the agreement might have been "lost in translation" helped trigger the worst one-day market selloff since October - the DOJ has gone ahead and kicked the hornet's nest, seriously jeopardizing the prospects for a prolonged trade detente between the world's two biggest economies....Zero Hedge
In an interview with ProMarket, Nobel Prize-winning economist Angus Deaton talks about the connection of rent-seeking and monopolization to rising inequality.ProMarket — The blog of the Stigler Center at the University of Chicago Booth School of Business
The logic behind the design of the Affordable Care Act does not hold up well when faced with the reality of how markets actually work outside cities. ACA exchanges were built on the fundamental idea that competition between regulated private insurance companies would improve quality and hold down prices, but competition is lacking in most rural counties. That’s very unlikely to ever change....The Intercept
The two standard explanations for why labor’s share of output has fallen by 10 percent over the past 30 years are globalization (American workers are losing out to their counterparts in places like China and India) and automation (American workers are losing out to robots). Last year, however, a highly-cited Stigler Center paper by Simcha Barkai offered another explanation: an increase in markups. The capital share of GDP, which includes what companies spend on equipment like robots, is also declining, he found. What has gone up, significantly, is the profit share, with profits rising more than sixfold: from 2.2 percent of GDP in 1984 to 15.7 percent in 2014. This, Barkai argued, is the result of higher markups, with the trend being more pronounced in industries that experienced large increases in concentration.ProMarket — The blog of the Stigler Center at the University of Chicago Booth School of Business
A new paper by Jan De Loecker (of KU Leuven and Princeton University) and Jan Eeckhout (of the Barcelona Graduate School of Economics UPF and University College London) echoes these results, arguing that the decline of both the labor and capital shares, as well as the decline in low-skilled wages and other economic trends, have been aided by a significant increase in markups and market power....
"The essence of the neo-classical theory is the constraint on choice imposed by given and widely shared technology and competitive markets for resources and vendors. Political engagement derives from and is focused on seeking monopolistic power. The various theories of monopolistic competition are instructive but fall far short of the standard sought by neoclassical theory."Campaign contributions, lobbying, and the revolving door are directed at least in part toward government capture, for the purpose of increasing market power artificially in the intent of extracting economic rent. Political influence lies outside the scope conditions of the neoclassical framework.
Most researchers assume that the share of total output lost by labor went to the owners of capital. However, a new working paper shows that the capital share has also declined, while the profit share has gone up. Could this be related to an increase in firms’ market power?Profit = surplus value = economic rent. Economic rent arises from market power.
My hypothesis is that markups have increased because firms became better at creating product differentiation and erecting barriers to entry. In 1980 Michael Porter wrote Competitive Strategy, the ninth most influential book of the 20th century according to the Academy of Management. In this book, Porter explained how firms can create barriers to entry and obstacles to competition to increase their pricing power. The book became the primary textbook of all of the strategy courses taught in business schools and the gospel of the leading consulting firms. It captured also Warren Buffet’s investment rule. As he famously stated: “In business, I look for economic castles protected by unbreachable ‘moats’.” Should we then be surprised if firms finally learned how to apply it?The standard (neoclassical) economic model is based on no asymmetry including perfect competition.
If this were the case, Barkai’s model clearly shows that the outcome is inefficient: economic output and welfare could be greater if there were more competition. But how to promote it? The traditional antitrust method, which looks predominantly at mergers and market shares, could be insufficient. If Barkai’s conclusions prove to be robust, we may need to start thinking about new policies to promote competition.
Phil Ebersole: The solution to this problem, [Elizabeth] Warren said, is simply to enforce the anti-trust laws as originally written.
The reason that they aren’t is a neoliberal philosophy of business regulation that took hold in the late 1970s, which held that the most important thing was not competition, but business efficiency. If Amazon can serve customers more efficiently that a local bookstore, then, according to this idea, there was no reason for the local bookstore to exist.
That could be true only if Amazon, Wal-Mart, Comcast and other big corporations were owned and operated by altruists, who passed along the gains in economic efficiency to customers, workers, suppliers and the local community.
But even when consolidation produces economic efficiency that benefits consumers, economic efficiency isn’t everything. Concentration of economic power means concentration of political power, which results in the kind of dysfunctional economic system we have now.…Monopoly power = monopoly rent
Beverly Mann: This movement, our movement, which began in the fall of 2011 with Occupy Wall Street, is on track to cause a political and economic earthquake.
For 200 years, there have been two schools of thought about what determines the distribution of income – and how the economy functions. One, emanating from Adam Smith and 19th-century liberal economists, focuses on competitive markets. The other, cognisant of how Smith’s brand of liberalism leads to rapid concentration of wealth and income, takes as its starting point unfettered markets’ tendency toward monopoly. It is important to understand both, because our views about government policies and existing inequalities are shaped by which of the two schools of thought one believes provides a better description of reality.…Joe goes "there" and mentions the "p" world. Apparently his Nobel is his sword and also his shield. The post is short and incisive.
The implications of this are profound. Many of the assumptions about market economies are based on acceptance of the competitive model, with marginal returns commensurate with social contributions. This view has led to hesitancy about official intervention: If markets are fundamentally efficient and fair, there is little that even the best of governments could do to improve matters. But if markets are based on exploitation [rent extraction], the rationale for laissez-faire [economic liberalism] disappears. Indeed, in that case, the battle against entrenched power is not only a battle for democracy; it is also a battle for efficiency and shared prosperity.
That’s precisely what is missing from mainstream economics, including its liberal wing: a theory of the contradictory class dynamics of capitalist firms and of capitalism as a whole.Occasional Links & Commentary
I greatly admired his previous book, Banking Across Boundaries, and this new one has the same compelling combination of analysis and historical detail. The theme this time is capitalism as a constant balance between competitive markets and market power, these two forces applied by laws and their enforcement. Anti-trust laws are enacted or enforced with greater rigour when monopoly power gets out of hand. Intellectual property laws are strengthened after periods of cut-throat competition. In contrast to those – often Marxist – writers who have seen a single direction of travel toward ever-greater monopoly power, Christophers argues here that there is a cycle. He cites Kalecki, but also Marx’s dialectics: “Monopoly produces competition, competition produces monopoly,” Christophers quotes Marx as writing in a letter of 1846.…
Christophers ends with Lenin’s prediction that the future is capitalist monopoly on the international stage, monopoly imperialism. I have more confidence in self-correcting mechanisms. We will see.
