The tech giants are getting stronger in the market. The barriers that they have raised have allowed them to increase their profitability from 1% to 8% in the last 40 years, in addition to limiting their number of competitors as much as possible. The consequences of this new power are directly affecting workers’ wages, which have stagnated despite productivity growth and have significantly lost weight with respect to the profitability of these companies. Jan Eeckhout (Aalst, Belgium, 50 years old), a research economist from the ICREA program at Pompeu Fabra University, recounts these abuses and the consequences in The profit paradox (The Profit Paradox, Princeton University Press). It breaks down topics, such as that of an increase in innovative companies, and reaches a conclusion: the solution is not fiscal or control over employment, but rather to emulate the work of central banks in independent competition bodies.
Question. Why The Profit Paradox?
Answer. Between 300 and 400 companies make big profits simply because they have the power of the market. The fact that so few companies generate so many benefits has effects on the rest of the companies, on innovations and start-ups. We always say that we are in a moment of innovation, but start-ups they have fallen by half. The percentage of startups today is 8% and it was 14% in the 1990s. We do not have innovation because there are so many dominant companies that the small ones cannot reach. This means that most companies are suffering greatly at the expense of a minority. And that makes the demand for employment lower and, if there is less demand, wages fall.
P. How did we get here?
R. It is clear that Amazon is not the same as Inditex, or Bertelsmann. Each sector has its history, but there are common aspects. One is innovation, which is the keyword and which is both hero and villain. It is good because these companies continue to do R + D + i, but it is bad because they use their own technology to avoid competition and establish it as a barrier to entry. The example is Amazon: a company that is so innovative in its network of centers that there is no other that can compete with it. With Facebook or eBay things are different, the economy of scale comes from the effects of your network: everyone is there and that is precisely why everyone wants to be. It is difficult to create a new competitor. Economies of scale create markets where there are only one or two companies. Visa or Mastercard are two other examples. This is happening because of the new technology, something that we already saw in 1900, when the innovations were the telephone, rail transport or oil and many economic powers were concentrated.
P. Is there an alternative?
R. Things can be done, but the solution will not come from the hand of taxation or raising the minimum interprofessional wage. The only thing possible is to directly attack the cause, the lack of competition, through a specialized agency. There is a very nice example, the difference between the telephony markets in the United States and in Europe. There I pay two or three times what I do here for the same and that is because there are three companies competing there and in Europe there are 150. The difference is that the EU forces the interoperability of the networks, so there is no reason to invest in new network. Economies of scale are not lost, there are more companies competing, prices are lowered, the consumer wins. There is the case of the dispute between Apple and Epic Games, in which it accuses it of forcing it to pay a 30% commission for being on its sales platform solely because there is no competition. It must be regulated because that is a monopoly and there is only one way: antitrust. Competence.
P. And raise awareness to combat this perhaps illegitimate situation?
R. It is not illegitimate, because everything is legal. I am the first to say that if Bezos has thought of making that investment, that is very positive, but, once he has made it, he has also managed to be so productive that he has no competition and that is why we have to intervene as a regulator to that does not impose barriers to entry. My proposal is more competition. If there is competition there is nothing better than maximizing profits because you are competing, but if you are maximizing profits without competition … that is not good for the economy, nor for the consumer, nor for the worker, nor for small companies, nor for innovation. … Thats the big problem.
P. It proposes breaking relations between political and economic power. How?
R. It is clear that Facebook or Telefónica do not want competition. And they will do everything possible to avoid it, and therein lies the problem: the connection between what we want to do and what the political system allows. I propose to have an independent competition authority, comparable to central banks. The ECB has targeted inflation and it is a success story. The case of antitrust is very similar. Companies want to maintain their power and do everything to buy from politicians. I believe that with an independent authority we can do it. The cost of inflation to the economy is estimated at 0.5% of GDP and the cost of market power is 9% of GDP. The Federal Reserve works with 25,000 people and the Antitrust is 2,000. We have few people to control such an important regulation that has more effect than inflation. It would be very cheap.
P. Does the Big Tech Tax Solve Anything?
R. Taxes can redistribute, but they don’t solve the problem. If you want to solve the problem, fiscally you can’t.
P. Talk about the false sense of competition when ordering a beer in an American bar. Does the citizen have an idea of the lack of competition?
R. He does not know and he does everything so that he does not know it, but he does care. The consumer is concerned above all who does not buy simply because he cannot access it due to a price issue.
P. Is the lack of social conscience behind this accumulation of power?
R. There is a part in which the consumer is the problem of this market dominance and, obviously, the brands know it. The one who wants Coca-Cola and not Pepsi despite being shown that we cannot distinguish the difference. That is why they advertise to generate that value. There are other situations in which addictions are generated, as is the case of 16 or 17-year-old social media consumers. A role should be reserved for a consumer protection authority, because social networks will be tobacco in 10 years, when we discover its collateral effects.
P. He says that job promotion in Spain goes from funeral to funeral. Why?
R. People believe that their employment is owned and that generates friction. It may seem like it is good for people, but it has an effect on the macroeconomy and that is that if you are young it is impossible to get a job, and if at 55 you lose your job you will not work again. Having a secure job has more negative than positive effects.