For 200 years, there have been two schools of thought about what determines the distribution of income – and how the economy functions. One, emanating from Adam Smith and 19th-century liberal economists, focuses on competitive markets. The other, cognisant of how Smith’s brand of liberalism leads to rapid concentration of wealth and income, takes as its starting point unfettered markets’ tendency toward monopoly. It is important to understand both, because our views about government policies and existing inequalities are shaped by which of the two schools of thought one believes provides a better description of reality.
The second school of thought takes as its starting point “power”, including the ability to exercise monopoly control or, in labour markets, to assert authority over workers. Scholars in this area have focused on what gives rise to power, how it is maintained and strengthened, and other features that may prevent markets from being competitive. Work on exploitation arising from asymmetries of information is an important example.
In the west in the post-second world war era, the liberal school of thought has dominated. Yet, as inequality has widened and concerns about it have grown, the competitive school, viewing individual returns in terms of marginal product, has become increasingly unable to explain how the economy works. So, today, the second school of thought is ascendant.
In today’s economy, many sectors – telecoms, cable TV, digital branches from social media to internet search, health insurance, pharmaceuticals, agro-business, and many more – cannot be understood through the lens of competition. In these sectors, what competition exists is oligopolistic, not the “pure” competition depicted in textbooks. A few sectors can be defined as “price taking”; firms are so small that they have no effect on market price. Agriculture is the clearest example, but government intervention in the sector is massive, and prices are not set primarily by market forces.
Barack Obama’s council of economic advisers (CEA), led by Jason Furman, has attempted to tally the extent of the increase in market concentration and some of its implications. In most industries, according to the CEA, standard metrics show large – and in some cases, dramatic – increases in market concentration. The top 10 banks’ share of the deposit market, for example, increased from about 20% to 50% in just 30 years, from 1980 to 2010.
The implications of this are profound. Many of the assumptions about market economies are based on acceptance of the competitive model, with marginal returns commensurate with social contributions. This view has led to hesitancy about official intervention: If markets are fundamentally efficient and fair, there is little that even the best of governments could do to improve matters. But if markets are based on exploitation, the rationale for laissez-faire disappears. Indeed, in that case, the battle against entrenched power is not only a battle for democracy; it is also a battle for efficiency and shared prosperity.
In the west in the post-second world war era, the liberal school of thought has dominated. Yet, as inequality has widened and concerns about it have grown, the competitive school, viewing individual returns in terms of marginal product, has become increasingly unable to explain how the economy works.
In today’s economy, many sectors – telecoms, cable TV, digital branches from social media to internet search, health insurance, pharmaceuticals, agro-business, and many more – cannot be understood through the lens of competition. In these sectors, what competition exists is oligopolistic, not the “pure” competition depicted in textbooks.
The top 10 banks’ share of the deposit market, for example, increased from about 20% to 50% in just 30 years, from 1980 to 2010.
His world view is very narrow.. this is about the US as far as I can see. But it is also confusing...
Even in the US this is not even true. Yes the post-second world war era was dominated by the "liberal school" of thought, but it has not been anything like that since 1980 when Reagan took over and moved it to the school of "Me me me me and **** the rest" thought... aka trickle down economics. The reason that inequality has widened is this, not the "liberal school of thought". That school pushed down inequality massively after WW2.
Here I agree fully, but that has to do with the US political system and not so much a school of thought per say. If we look at Europe, the total opposite has been happening and that has been because of the EU forcing markets open. The reason that the US telecoms are in such a state, or whatever industry you want to name really.. is that these industries have been able to "sway" (the polite word for bribe) the politicians to create a legal system that promotes bigger and fewer companies.
And yet he blames a "liberal school of thought"? What happened in 1980 and onwards..... it aint rocket science.
You do know he's talking about neoliberalism...
An interesting article by Joe Stiglitz. Is this the new normal? I hope not.
https://www.theguardian.com/business/2016/may/13/-new-era-monopoly-joseph-stiglitz
Hey Joe? Look what has happened just since the beginning of the Great Recression? Massive government/central bank intervention. The Result? Food stamp usage is up roughly 40%, home ownership rates are falling hard overall and are at generation lows, the M2 money velocity is in near-free fall and at RECORD low (which means people are not spending) and the 25-54 age range employment to population ratio (the heart of the middle class) is still no where near where it was before the Great Recession. Yet the rich are thriving.
The great experiment is failing miserably. And the more money they throw at it...the worse it becomes for the masses and the better it becomes for the rich...DUH.
But if markets are based on exploitation, the rationale for laissez-faire disappears. Indeed, in that case, the battle against entrenched power is not only a battle for democracy; it is also a battle for efficiency and shared prosperity.
You keep insisting that our problems are THE RESULT of government action, but you have never made the case. Well, make your case. And that means more than pointing out that the economy isn't working well. MAKE A CONNECTION, AND EXPLAIN WHAT YOU THINK THE MECHANISM IS. So the government bailed out the banks, and food stamp usage is up - connect the dots for us. And then explain how it would have been better to let the banks fail.
its hard to imagine that free markets are based on exploitation when free people cant be exploited?But if markets are based on exploitation
who refused Stimulus Spending had got economic-policy all wrong?
actually, stealing $100 from someone so you can spend it and they cant is in fact not stimulative, obviously. Do you understand?
Please take a course in EC101.
This IS an economics forum, isn't it ... ?
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