US politics has a large roster of villains these days, but few break partisan barriers as consistently as big business.
The Biden government is already considering using antitrust to dismantle the big tech companies and may take it a step further with an executive order to restrict market power in other sectors. The details remain unclear, but the order, still under consideration, would apparently give the government more power to regulate big business.
Before we agree to government restructuring of the economy, we must first understand why big business is dominating the market and whether they really hurt the economy and workers as much as critics claim. It is not enough to simply assume that big is bad.
An executive order intended to limit a private company purely because of its size would represent a major policy shift, but it would also be one that, for some critics, was long in coming. Large companies dominate most industries.
Economists call this the superstar effect, in which one or a few large companies are more productive than the others, growing more and more and capturing the most of the revenue and talent.
The existence of superstars worries some politicians, activists and economists, leading some to argue that increased market power has led to wage suppression and the price increases. A valid argument can also be made that the existence of large companies suppresses competition. A little newbie has a harder time getting a foothold in the market; in addition to being unfair, it can mean less innovation and overall growth.
Traditionally, market power went hand in hand with less competition, lower wages and higher prices. But markets change. Economist Jay Ritter argue that in a more global, technology-driven economy, the biggest companies are the only ones able to compete.
They need to scale quickly as the market is now global for customers and competitors, demanding more resources. Technology and e-commerce have made consumers more price and quality conscious.
Size has advantages: larger companies can be more productive. In a market where goods and services are less sensitive to space and borders, the company that offers the best and cheapest product first – like, say, Facebook – take everything.
This dynamic applies to all countries. Cracking down on big business in the US won’t change a global economy that rewards superstars and won’t help small businesses. This can only result in putting large American companies at a disadvantage in the global marketplace.
Nor is it clear that big companies harm workers and consumers. Wages may be stagnant, but those who work in superstar companies receive more because these companies generate more profits that they can pass on to workers.
It is possible, though unlikely, that regulations aimed at reducing productivity will raise workers’ wages in less productive firms.
The evidence also suggests that even though the US economy has fewer employers, competition for workers at the local level is greater. How can be?
A quarter of a century ago, you could only work at the local hardware store; today, a large company in the field is usually in the area. Therefore, even though the market is more concentrated at the national level, individuals have more options for goods and jobs than before – especially in rural areas.
Evidence to support the claim that companies are charging large increases in consumers are equally inconclusive. After accounting for quality, the price of many consumer goods and services has fallen over time.
Even as companies’ market power increased, prices continued to fall and some highly valuable services – Google Maps and social media, for example – are free.
Maybe some companies are keeping more profits and giving them back to shareholders, but that doesn’t mean consumers are worse off than before. They are generally better off.
It may be good policy to hit big companies, but economies change and so do market structures. Today’s big companies may not be so big tomorrow. The top five companies in the S&P 500 index – Apple, Amazon, Microsoft, Facebook and Alphabet – did not exist 50 years ago.
Compare the American situation with Europe, which is geared towards antitrust and regulatory legislation, where the top five companies have existed for more than 45 years and have dominated their markets for decades. Is this a model the United States should emulate?
Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor to the City Journal.