An audience who had read either of Smith’s blockbusters, The Theory of Moral Sentiments (published in 1759) or The Wealth of Nations (1776), would have caught several references. But the most obvious similarities came in Varoufakis’s irritation with the rise of corporate power, oligopoly and monopoly – something Smith was constantly concerned about.
One of Smith’s best known quotes is on this very matter: “People of the same trade seldom meet together, even for merriment and diversion,” he wrote, “but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” The fewer players in an industry, the more powerful those players are and the more they hang around together, the easier it is for the “conspiracy” to kick off and for the ordinary person to be disadvantaged.
Big companies are getting more powerful
It would be nice to think that in the 228 years since Smith’s death, capitalism might have been refined so that we no longer had to worry about such a thing. But it is not so. A recent report from the International Monetary Fund (IMF) lamented the sharp rise in the “economic wealth and power” of big companies in sectors from technology to airlines, pharmaceuticals and auditing.
The evidence rested on tracking average mark-ups on goods and services provided by listed companies in 74 countries (this is the extent to which a company can bump up its prices relative to its costs, and is an obvious and simple measure of its power in the market).
The results, says the IMF, show a few worrying things. First, that mark-ups in advanced economies have significantly increased since the 1980s (by 43% on average); that this trend has accelerated in the past ten years; and that the increase is mostly driven by the “superstar” companies in each sector.
This matters partly because overly concentrated market power is connected with falling investment and innovation, and partly because it is possible that market concentration is one of the things holding down wages in the West. The IMF says that “the labour share of income declines in industries where market power rises”.
However, it mostly matters because it appears to represent an obvious failure of capitalism. In a perfect environment with no barriers to entry – in the form of regulation, access to capital and industry associations – superstar companies would not be around for long: many start-ups would compete their advantage away, wealth would again be spread about a bit and that would be that.
This is not happening – perhaps because of regulation or the endless and expensive lobbying habits of big business. According to lobbyfacts.eu, Google, for example, had 120 lobby meetings with a commissioner, cabinet member or director-general of the EU between 2014 and 2016. The networking effect of new technology plays its part.
In the US, the rate of new company formation is well below where it was before the financial crisis. At the same time, the big are getting bigger. The result is a depressing perception that capitalism is doing exactly what Karl Marx said it would: it is pushing wealth towards the few, something that is surely one of the main drivers of the sentiment shift towards socialism in the UK and in the US. Polls show that about half of US millennials think they would prefer to live in a socialist society than a capitalist one.
Politicians are waking up to the threat
The good news is that this apparent “change in market structure” is causing the correct amount of anguish among those with the power to change it. It was, for example, on the agenda at the Jackson Hole central bankers’ symposium at the weekend. The solution, however, is unclear.
Smith would not have wanted corporate merriment tackled in any way not consistent with “liberty or justice”. But given that most people at the moment – whether they identify as capitalist or socialist – appear to agree that they are anti-oligopoly and pro a fair share for labour, it must be time to reimagine industrial policy. The aim should be not to “pick winners” but to root out the wrong kind of winner.
There may be no particular need to worry about dominant technology companies in the immediate future, for example, given that, data concerns and tax arguments aside, their products do great things for consumers. But a dedicated “crony capitalism” tsar might find that there is an argument for legislation to break up accounting firms by banning them from doing both audit and corporate finance work and perhaps one for limiting corporate lobbying.
Either way, the fact that both the friends and the foes of capitalism are looking at the same entirely solvable problems is surely progress.
• This article was first published in the Financial Times.