Increasingly, our financial world is an oligarchy of big established firms: big banks, big cable companies, big hospital systems, big advertising agencies, big airlines – you name it. It has frequently been argued that economies of scale will result in lower prices. Bigger, in other words, is better. But it isn’t always turning out that way.
Recently Eduardo Porter, the business reporter for The New York Times, has been exploring the implications of this development, and he has been finding that conventional wisdom here is not always correct.
Consider health care, a sector that accounts for nearly one-fifth of the American economy. “Hospital systems have been growing at breakneck speed, gobbling up independents and taking over physician practices . . . In 1992, the average metropolitan area was served by the equivalent of four rival hospital systems of equal size, according to estimates by [the] chief economist at the Federal Trade Commission. By 2006, the number was down to three.” But the cost of health care is not declining, nor is service improving.
“Four airlines — United, Delta, American and Southwest — serve 71 percent of domestic air traffic in the United States. From 1980 to 2009 the share of the top four fluctuated around 55 percent.” As their market share rose, so did their fares.
Cable companies are combining and thriving, and “yet, the United States has some of the highest broadband prices among industrial nations, according to data compiled by the Organization for Economic Cooperation and Development in the fall of 2012, and comparatively slow speeds.” (See, “Concentrated Markets Take Big Toll on Economy.”)
A parallel development is that “The rate of new businesses entering the economy declined sharply from the late 1970s through 2011, [according to research] reported by Robert E. Litan of the Brookings Institution and Ian Hathaway of Ennsyte Economics.”
“I wasn’t expecting this result,” Mr. Litan said. “I’m still struggling with this puzzling fact.” He thought it might be due to “tougher regulation and increasing economies of scale” created by existing businesses, weighing against small new entrants. But the pattern also fits a picture of entrenched incumbents erecting walls against new competitors, buying them up, for example, before they can become established.
Joseph Stiglitz has argued that the “excess profits companies can extract from their customers when they face little or no competition — known to economists as ‘rents’ — may be deepening income inequality.”
“In a competitive economy, the real return to capital would be much smaller,” Professor Stiglitz said. Concentration in the financial sector might have something to do with the fact that finance and insurance amass 15 percent of corporate America’s pretax profits, employing 5 percent of its private sector workers.
So there is real reason to worry about this growing corporate oligarchy. Yes, there are agencies designed to monitor these developments and intervene to prevent the stifling of competition. But increasingly the big and bigger businesses are able to muster political clout to hamper regulation and defeat attempts to rein them in.
Squads of lobbyists, descending on congress, many of who are former congressmen, are restraining attempts to impose limits on these bigger and bigger corporations.