Competitive Markets and Rewards

Both Steve Sailer and Half Sigma have posts up today about the competitive landscape in business.

Steve notes that antitrust law used to be a big deal in the US, but its popularity is waning. Does anyone actually care that AT&T and Standard Oil are slowing reassembling themselves? The Senate still takes such things seriously, but public outcry is lacking. So much for the unwashed masses, but what about the commentariat?

Among conservative/libertarian economists, the current thought is that competition should eliminate monopolies absent government interference. I am sure that proponents of this position can marshall impressive arguments about such large companies could easily be outmaneuvered by smaller, hungrier competitors in the marketplace. I don't think I disagree entirely, but I do think there are compelling psychological reasons why we don't like competitive markets, defined by Half Sigma as:

Here is an incomplete list of some of the characteristics of a competitive market:

• Many buyers
• Many sellers
• Market participants are approximately the same size
• No cooperation (or less politely, no collusion) between the market participants.
• Equality of bargaining power between buyers and sellers
• Transparency and equality of information
• Buyers and sellers act rationally and with the intent of maximizing their own value
• No product differentiation
• No barriers to entry

This kind of thing is pretty wearying, both for the consumer and for the businessman. It is hard work to make money in this environment, and it is also hard work to find a unique product for the consumer. Steve Sailer has a good anecdote about what it feels like to work in a competitive market:

The funny thing was that when I got a job with a young company, however, it turned out that competition, from the perspective of owners and employees holding stock options, was awful. It's like Adam Smith said, in a genuinely competitive market, it's hard for a business to make more than the risk-adjusted cost of capital, which is not much fun at all. Why go through the immense amount of hard work to invent a new, better way of doing business if that's all you'll end up with? To make good money, the kind of money the stock market demands you make, you need some kind of quasi-monopolistic edge.

What it comes down to is a truly competitive market sustained indefinitely is just not worth it. Periods of fierce competition seem to be naturally followed by cartelization or monopolization while the victors enjoy their spoils. Depending on how you present it, this can seem pretty bad. Half Sigma repeatedly mentions the idea that in a competitive market, everyone receives the value they create, while in a monopolistic market the winner transfers value from everyone else. This seems unfair, and it probably often is, but I think there is another side to this cycle of competition and consolidation. The old AT&T funded Bell Labs out of its monopolistic profits, producing seven Nobel prizes and many more technological innovations. All that dried up once AT&T was broken up.

There is some value to society in the activity of business over and above the compensation of the workers. It is valuable to a given worker to be paid for a a fair day's work, but it is also valuable to everyone that worker has a job. A continual tension exists between the necessity of the ordinary people who work in all the jobs that keep the world of business moving along, and the outsize rewards that accrue to the creators and managers of that activity. In a perfectly competitive market, the rewards for being an innovator are much smaller than in a monopolistic market.

The problem is, when fairly apportioned, those rewards aren't worth the effort. I suspect that the slope of perceived effort versus economic output is not flat. Roughly speaking, creating twice as much economic value is more than twice as hard. Unless the reward matches up with the perceived effort, people won't bother, and will turn their efforts to something else. There is an equity concern here; we cannot allow too much value to accrue to the businessman or the innovator, because that will be perceived by the public as unfair. That happened to the robber barons. But if we have strictly fair apportionment of economic rewards, then the economy as a whole will probably do less well. How much less well is probably exaggerated by libertarian types, but it seems clear that there would be less creation and innovation if it paid less well.