People, Power, and Profits

Highlights

• Markets play an invaluable role in any well-functioning economy and yet they often fail to produce fair and efficient outcomes, producing too much of some things (pollution) and too little of others (basic research).
• If there are large discrepancies between the social returns of an activity—the benefit to society—and the private returns to the same activity—the benefit to an individual or company—markets alone will not do the job.
• Nor do markets work well when information is imperfect and some key markets are absent (for instance, for insuring important risks, like that of unemployment); or when competition is limited.
• And so too, markets won’t produce enough of what are called “public goods,” like fire protection or national defense—goods whose use is easily shared by the entire population and hard to charge for in any way other than taxes.
• Nations grow wealthier—achieving higher standards of living—by becoming more productive, and the most important source of increases in productivity is the result of increases in knowledge.
• Third, one must not confuse the wealth of a nation with the wealth of particular individuals in that country. Some people and companies succeed with new products that consumers want. That is the good way to become wealthy. Others succeed by using their market power to exploit consumers or their workers.
• Fifth, government programs to achieve shared prosperity need to focus both on the distribution of market income—what is sometimes called pre-distribution—and redistribution, incomes that individuals enjoy after taxes and transfers.
• The true wealth of a nation is measured by its capacity to deliver, in a sustainable way, high standards of living for all of its citizens.
• One of the insights of modern economics is that countries with greater inequality (especially when inequality becomes as large as in the US, and engendered in the way that it is in the US) perform more poorly.37 The economy is not zero sum; growth is affected by economic policy—and actions that increase inequality slow growth, especially over the long run.
• Science and reasoned argument has been replaced by ideology. Ideology has become a new instrument in the pursuit of capitalist greed. In some segments of the country, a culture has been created that is by and large antithetical to scientific reason.
• Modern economic research—both theory and experience—has enhanced our understanding of government’s fundamental role in a market economy. It is needed both to do what markets won’t and can’t do as well as make sure that markets act as they are supposed to.
• For markets to work well on their own, a host of conditions have to be satisfied—there has to be robust competition, information has to be perfect, and actions of one individual or firm can’t impose harm on others (there cannot, for example, be pollution).
• Most importantly for a dynamic, innovation economy, the private sector, on its own, will spend too little on basic research. The same is true for other areas of investments with wide public benefit (infrastructure and education, for instance).
• Many of these public expenditures complement private expenditures. Advances in technology financed by government can help support private investment. Investors find their efforts to be more profitable when there is a highly educated labor force and good infrastructure. Central to rapid growth is an increase in knowledge, and the underlying basic research has to be supported by government.
• As we think about fixing our economic system, we need to dismiss the view that because the US won the Cold War, America’s economic system had triumphed. But it was not so much that free-market capitalism had demonstrated its superiority49 but that Communism had failed.
• All individuals combine self-interest and other-regarding (altruistic) behavior (as Smith himself noted52), and the nature of our economic and social system changes the balance between the two.
• The power to sustain prices above costs reflects market power.
• In the standard economic model, creating a better product does not ensure sustained profits. Others may enter, and compete away those profits. When the dust settles, firms should only get the normal return on their capital, just the return required to compensate them for the use of their money and the risk they bear. There should be no excess returns.
• Just as market power in the product market (the market for goods and services) allows firms to raise prices from what they otherwise would be, and well over the cost of production, in labor markets, market power enables firms to push wages below what they would otherwise be.
• Anticompetitive practices—actions that reduce competition in the market—should be presumed to be illegal, unless there is strong evidence that (a) there are significant efficiency gains and that a significant proportion of the benefits of these efficiency gains accrue to others than the firm and (b) these efficiency gains could not be achieved in a less anticompetitive manner.
• More often than not, firms’ incentives are to create market power, not just better products—and we’ve seen that American firms have excelled in doing so.
• We as a country didn’t do what we should have to help workers whom globalization was hurting. We could have ensured that globalization benefited all, but corporate greed was just too great.
• Even if the country as a whole is better off, it just means that everyone could be better off; the winners could share their gains with the losers so all would benefit; but it doesn’t mean they will share their gains—and in selfish capitalism American-style, they don’t.
• If trade is roughly balanced, and if imports are more labor-intensive than exports, then overall, trade destroys jobs.
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• When capital comes into a country, the exchange rate is driven up as investors convert their currencies to the local
• No modern economy can perform well without a well-functioning financial market that serves society, and that’s why it’s essential to reform the financial sector so that it serves society, rather than the other way around.
• is ironic that in a country that supposedly holds capitalism dear, the private sector says the simple task of creating mortgages and bearing the associated risk is beyond them.
• Finance is crucial, but there is nothing inherent about its functioning that requires the financial sector to be as gargantuan as it has become.
• Of course, in principle, technological advances should be able to make all of us better off, as is also true for globalization. The size of the national pie has increased; there’s more to go around; and so everyone can get a bigger slice. But with machines replacing labor, it won’t happen on its own: the decreased demand for labor, and especially unskilled labor, will lower wages, so that workers’ income will decrease even as national income increases. Trickle-down economics won’t work, just as it didn’t work for globalization.
• The social media platforms are effectively like publishers; they both distribute news and carry ads. Newspapers are liable for what they publish, but the tech giants have used their political influence to escape a corresponding liability.
• Tighter public oversight (or even ownership) might enable us to redirect innovation in a more constructive way. Figuring out a better way to target consumers with advertising or to extract more consumer surplus can be important for firms—it can be an important source of profits. But this is another instance where social and private returns are not aligned.
• I fear Big Brother. It is better that we join Europe in having strong privacy protections and, if necessary, figure out ways to offset any advantage that others have from unbridled access to Big Data. 41
• Advances in technology should be a blessing. They should better enable us to ensure that everyone has access to the basic requisites of a decent life. But these advances can, and likely will, lead to the immiseration of large fractions of the population unless we take strong collective action.
• Societal well-being was advanced not just by farmers and merchants pursuing their own interests in a libertarian dream, but also through a strong government, with clearly specified but limited powers.
• Steve Jobs could not have created the iPhone if there had not been the multitude of inventions that went into it, much based on publicly funded research over the preceding half century.
• Markets on their own produce too much pollution, inequality, and unemployment, but too little basic research.
• If we rely on private provision of a public good, there will be an undersupply. People or companies think only of their own gain, not of the broader societal benefits.4
• fundamental role of government is ensuring opportunity and social justice for all. Deficiencies in capital markets mean that those unfortunate enough to be born in poor families won’t, on the basis of their own or their parents’ resources, ever be able to live up to their potential. It’s unfair, and it’s inefficient.
• The near-religious belief that private firms are always and everywhere better than government is wrong and dangerous.9
• In an interdependent society, there has to be regulation.10 The reason is simple: what one person does affects others, and without regulations those effects won’t be taken into account.
• Every society has learned the painful way that there are those who seek to get rich not by inventing a better product or making some other contribution to society, but by exploitation—exploitation of market power, exploitation of imperfections of information, exploitation especially of those who are vulnerable, poor, or less educated.
• More generally, there is and should be concern when there is too great an asymmetry in bargaining power.
• Even if in the long run there would be entrants offering more reliable internet service, as John Maynard Keynes said in another context, in the long run, we’re all dead:
• We have to have government action. The question is how best to ensure that what the government does serves the interests of all of society.
• The production of knowledge is different from the production of steel or other ordinary commodities. Markets on their own will not invest sufficiently in basic research, the wellspring from which all other advances come—which is why government has taken on the central role at least in financing it.
• A more complex system, with more interrelationships, with each market participant trying to squeeze out the last dollar of profit, turns out to be a more fragile economic system.27
• As I’ve noted, markets don’t manage transitions well on their own: That’s partly because those in sectors or places that are in decline don’t have the resources to make the investments needed to move into the sectors of the future.
• We’ve become more interdependent, more exposed to risks, often beyond the ability of most individuals to cope. There is greater need for global collective action, to manage this interdependence, this risk; but economic globalization has outpaced political globalization, the development of institutions to manage economic globalization.
• Of course, what matters is not just growth in national output, but in living standards of ordinary Americans,2 and that requires not just increases in productivity, but that ordinary citizens get a fair share of that increase.
• Monopolies have less incentives to innovate, and the barriers to entry that they set up actually stifle innovation. Curbing market power is thus part of a growth and jobs agenda, not just part of a power and inequality agenda.
• The essential insight of economists concerning public goods is that on its own the market undersupplies them. In the case of knowledge, moreover, when private firms produce knowledge, they try to keep it secret.
• Facilitating transition after the fact is extraordinarily costly and problematic. We should have done more to help those who were losing their jobs to globalization and advances in technology, but Republican ideology said no, let them fend for themselves.
• Recent and earlier episodes of such changes have generated one important lesson: the market on its own is not up to the task. There is a simple reason already explained: those most affected, for instance, those who are losing their jobs, are least able to fend for themselves.
• Thus, there is an essential role for government to facilitate the transition, through what have been called active labor market policies. Such policies help retrain individuals for the new jobs and help them find new employment. Another tool for government is referred to as industrial policies, which help restructure the economy into the directions of the future and assist the creation and expansion of firms, especially small and medium-sized enterprises in these new sectors.
• Too often economists ignore the social and other capital that is built into a particular place. When jobs leave a place and move elsewhere, economists sometimes suggest that people should move too. But for many Americans, with ties to families and friends, this is not so easy; and especially so since with the high costs of child care, many people depend on their parents so they can go to work. Research in recent years has highlighted the importance of social bonds, of community, in individuals’ well-being.
• In short, we need policies focusing on particular places (cities or regions going through stress), in what are called place-based policies, to help restore and revitalize communities.
• A UBI could increase equality and provide a backstop for those who fail to get jobs. It could eliminate the bureaucratic processes entailed in getting access to each of the multiple safety net and social protection programs, like food stamps and Medicaid.
• Some taxes prove beneficial to the economy—some can even stimulate the economy. Imposing a tax on carbon emissions would encourage firms to make investments in emission-reducing technologies; firms would have to retrofit themselves to reflect the end of the massive carbon subsidy that they have, in effect, been receiving.
• Improvements in infrastructure can increase private investment, as businesses benefit from better access to markets. Thus, public spending will encourage private spending. Another benefit is resource savings. Huge amounts of private resources are wasted as a result of congested airports and roads.
• In twenty-first-century America, we should recognize a new right—the right of every person able and willing to work to have a job. And if the market fails, and if our fiscal and monetary policies fail, the government needs to step into the breach.
• We first need to make the distribution of market income more equal (this is sometimes called pre-distribution). But try as we may, inequality in market income will almost surely be too high. We have to then use more progressive taxation, transfer, and public expenditure programs to equalize standards of living further.
• Racial justice and economic justice are inextricably linked. If we reduce inequalities overall, if we ensure that families at the bottom can give their children the same opportunities as families at the top, then we will be able to make strides in enhancing racial, economic, and social justice, and in creating a more dynamic economy.
• There is a general principle: whenever there is an economic activity for which the private return exceeds the social return, a tax will enhance welfare.
• many ways, the stock market is just a rich person’s casino. And while gambling may afford some short-term pleasure, money simply moves from one person’s pocket to another. The gambling—and short-term trading—doesn’t make the country richer or more productive, and often it ends in bitter tears on the part of one party or the other.
• In short, markets alone won’t solve our problems. Only government can protect the environment, ensure social and economic justice, and promote a dynamic learning society through investments in basic research and technology that are the foundation of continued progress.
• The reality is that markets have to be structured, and over the last four decades we’ve restructured them in ways that have led to slower growth and more inequality. There are many forms of market economies, but we have “chosen” one that ill-serves large portions of our population. We now have to once again rewrite the rules, so that our economy serves our society better.