Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Tag: Matt Stoller

How Biz Profs Destroyed Free Markets

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On April 28, 2025

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Economics is largely a worthless discipline. Its axioms, like humans being rational utility maximizers, are simply wrong and everything built on top of them is thus flawed. It reminds me of pre-Copernican astronomy, which was based on the idea that the sun and planets revolved around the Earth. The difference is that pre-Copernican astronomy more or less worked and economics mostly doesn’t.

But there are insights in economics, and there’s a cluster around free, or rather, competitive markets. In order for competitive markets to work:

  1. There must be lots of buyers and sellers, so no one has pricing or buying power.
  2. There must be no significant barriers to entry. If you can’t start a new business doing whatever it is, market incumbents can jack up prices. Barriers to entry are both legal and technical: if there’s no availability of whatever is needed to make the product, that’s a barrier to entry.
  3. Products must be roughly the same. If one producer is able to produce much better products, then people will buy that. This means, in effect, that intellectual property laws must be open, or people won’t be able to produce roughly equal goods.
  4. Collusion in setting prices cannot be allowed, nor can special deals like larger buyers getting better prices. (A large supermarket which pays lower prices will drive smaller ones out of business till there are only a few major supermarket firms left.)

Now the problem with competitive markets, from the point of view of capitalists, is that they keep profits low. If you start jacking up your prices, your competitors will get the business, since the products are about the same and since other firms can easily enter the business.

Competitive markets lead to fast innovation and low prices, with any high profit periods due to innovation lasting only as long as it takes for others to reproduce the new product. If you want high profits over a long time period you have to keep innovating, you can’t make essentially the same product forever and expect to make more than average (low) profits.

But business hate competitive markets, exactly because they do make it almost impossible to make high profits over the long term.

So business profs and consultants read the economic literature and said “if we want to make high profits we have to find or create businesses which are not competitive.

Reverse engineering, high profits come to companies which are oligopolies or monopolies so they have pricing power; to companies in industries where there are significant barriers to entry, whether thru intellectual property laws or vertical integration; to companies that have a better product because no one else is allowed to make that product (pharma is great at this); and to businesses which collude on prices. Right now, for example, a lot of landlords subscribe to a software service which sets prices and even keeps rental properties off the market in order to keep rents high.

There are other tricks, of course. Health providers, in general, have an advantage. When someone’s seriously sick they can’t really comparison shop and they’re desperate, they’ll pay whatever they have to save their life or get well.

Another one is network externalities. If everyone’s on one site or a few, then other sites have a hard time competing. Think of Facebook’s suite of sites, or think of Google’s monopoly on search.

When Private Equity and investors who provide seed capital roll up firms or invest in new firms, they’re either looking to liquidate those they buy (PE likes this) or they’re trying to destroy a competitive market so they can charge much more than a competitive market would normally allow.

One of the things which has made China so dynamic is that it has much more competitive markets than America or Europe. There are dozens of EV firms, for example. Tons of drone makers. Multiple space companies. Absolutely massive supply networks where you can buy anything you need to make whatever it is, or get them to make anything new you’ve thought up. IP laws are weaker, and often not enforced, and so on. Where there is market power, the government often steps in either to regulate what firms can charge (in natural monopolies like power distribution, for example) or to prevent the use of that market power to freeze out competitors.

As the US and the West have financialized, they’ve destroyed most of the laws which were in place to keep markets competitive. Eggs, for example, are not high priced primarily because of Avian bird flu, but because there are only a few oligopoly suppliers in the market, and they’re making more money with shortages than they would by providing as many eggs as people really want to buy at lower prices. Those prices would still be profitable, but they would be obscenely high.

Almost all Western industries are now entrenched behind various barriers designed to give them pricing power: to allow them to charge more than they could in a competitive market.

So China, with competitive markets, produces EVs which cost under 20K in many cases. Everything they produce is cheaper than in the West. This isn’t all about barriers and non-competitive markets, but a lot of it is and most of what seems to not be about competitive markets, like needing to pay American workers more, really is. American workers need more money because of high rent, high health care costs, high tuition, high real estate prices and just, in general, high prices. When Chinese show Americans their grocery bills, Americans are startled and some even cry, they are so much cheaper.

So driving up prices deliberately makes US goods in particular, and Western goods in general non-competitive because it jacks up the cost structure.

Matt Stoller, of course, is the premier thinker and activist around this and his BIG column is worth reading regularly.

But the simple takeaway is that your life sucks and the West can’t compete because of non-competitive markets and the regulations which are bad are those which make it non-competitive: horrific IP laws, non enforcement of anti-trust, allowing huge mergers and so on.

If America and the West are ever to be competitive again, we must make markets competitive and where they can’t be, in natural monopolies like energy and water and so on, we must have regulations that directly control prices, as we did in the 50s and 60s, where utilities were basically guaranteed a 5% profit, and forced to reinvest in infrastructure (no California fires because PG&E would rather pay dividends then replace century old power lines and poles).

This isn’t really a hard problem, conceptually. We know how to create competitive markets, and regulate non-competitive markets. We’ve done it before. It is entirely a political issue, because incumbents with tons of money also have tons of political power.

But don’t let anyone spew nonsense like “it’s complicated” or suggest it’s an unsolvable problem, it isn’t.

 

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How Monopolies and Oligopolies Cause Shortages

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On September 10, 2021

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I don’t usually write “just go read this” posts, but I’m going to make an exception for this piece by Matt Stoller on how a monopolized economy causes shortages. This is the best article I’ve ever read on how monopolies and oligopolies work (Stoller tends to just say monopoly), and how their incentives systematically induce them to reduce the welfare of almost everyone in society.

Matt starts by noting that now that Uber and Lyft have destroyed Washington DC’s cab companies, waits for rides are now ten to 20 minutes, as well as being more expensive.

It was obvious that this was the play; destroy the cab industry by underpricing, then reap monopoly profits, and it’s something I pointed out repeatedly for years.

But Matt has put together a systematic explanation of how the entire process works which is the best I’ve seen, and you should read it.

Go, read.

 

The nature of a corporation and how it changed in the 1980s

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On February 8, 2015

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By Matt Stoller

Let’s start with Pfizer, which announced the acquisition of generics maker Hospira for $17B this week. Pfizer isn’t a drug company.  Pfizer is a financial company that happens to own some labs and drug factories.  Pfizer’s business model is to acquire small companies who innovate, lay off their scientists, and ride the patent or other monopolies.  Former employees of acquired companies explain this clearly. So does Pfizer itself.

Pfizer is telling Wall Street that the acquisition will be ‘accretive to earnings’ and it will cut $800M in costs. Laying off scientists.  What this means, in reality, is that large pharma companies are actually innovation destroying machines. How did we get here?

Prior to the 1980s, Americans understood that corporations were private governments of resources and people.  Large corporation consolidations in the 1890s were done under the auspices of rationalizing the economy.  Then antitrust from the 1930s to the 1970s was done to force these private governments to act in the public interest. RCA, GE, Alcoa, Dupont, Xerox, etc – all were forced by antitrust actions to put their patents into the public domain.  The US gov’t structured markets as a way of ensuring that these political entities had checks and balances on their activities.

Antitrust was a Madisonian solution to the monopoly problem of the 1890s-1920s, which was understood as political NOT economic.  This had an incredible effect. Large companies, like Dupont, were forced to spend more on R&D instead of acquiring innovation.  Because they had to compete against smaller firms and they couldn’t acquire (due to merger scrutiny).  Pfizer’s business model, in other words, would have been illegal prior to the 1970s.

Most of the laws that forced this state of affairs are still on the books. The were just reinterpreted by Reagan.  Any President can simply go back to the pre-1981 model through executive action. Every merger is still reviewed by DOJ.

In the 1980s, an intellectual revolution took hold. Corporations were no longer private governments. They became property.  They weren’t political entities, but economic entities pursuing ‘efficiency’. Corporations exist only for shareholder benefit.  This idea was radical. Prior to this, few thought large shareholders were the only stakeholders, or even the most important ones.  Eliminating all other interests – workers, managers, customers, communities, national security, small shareholders – was truly radical.

It was a political fight, but the Reagan conservatives along with Wall Street Dems of the early 1980s won.  Liberal Democrats had focused their energies on important social questions, rather than the nature of the corporation.  The result was Wall Street primacy and a massive merger boom in the 1980s. Layoffs, offshoring, globalization, monopolies, etc.

This idea that these private governments – corporations – exist solely for shareholders has led to a dangerous unbalanced politics.  In which the industrial base, worker rights, small businesses, consumers, don’t matter. Even China’s strategic threat is irrelevant.

This is changing. Net neutrality is the first significant antitrust concept to emerge and take hold since the Reagan revolution.  Because tech companies and citizens intuitively understand but can’t articulate that telecoms are private governments, not just property.

Which brings us back to Pfizer. The ability to create/sell medicine is of deep public interest. Pfizer has a state charter to do this.  That Pfizer instead is full of financial engineers who generate cash by destroying access to medicine is increasingly understood.  Same with hospital monopolies. These should not be run to maximize cash generation over patient well-being. This is a consequence of the Reagan revolution in corporate governance. It is unsustainable. And the ideas behind it are stale and bad.

All it will take to reorganize our culture is relearning that corporations are part of our political system and need to be managed through a Madisonian checks and balances system of ensuring competition and the public interest as mattering.

Antitrust is popular, Zephyr Teachout got huge applause lines on it when she ran a shoestring campaign in NYC.  Net neutralit generated 4 million comments to the FCC. People get it. It’s simple stuff. The liberal lawyer elites aren’t there yet.  But we’re beginning to understand the importance of the government protecting private property from corporate predators.  And Citizens United is opening up a new (or rather old) way to understand how political corporations really are.

And that is why these ideas are coming back. And why our political system feels deadened, but is on the verge of renewal.

(And to make the point another way: In 2008, Pfizer/Wyeth spent $13B on R&D. 2009, Pfizer bought Wyeth. In 2013, the combined company spent $6.55B on R&D. Down 50%.)

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