Extreme Faith In The All-Knowing Government Bureaucrats
/One of the great parlor games of economists is to identify what are claimed to be "market imperfections" and "market failures," and to propose solutions to them. Among liberal academic economists, somehow the solutions are always the same, namely that the all-knowing government bureaucrats must intervene in the market to impose the preferable result. Might any problems arise from giving the bureaucrats such powers to transform large markets? Somehow that never gets discussed. After all, the bureaucrats are all-knowing and perfect!
An extreme example of this genre appears in a column by Official Manhattan Contrarian Worst Economics Writer Paul Krugman that appeared on October 19, titled "Amazon's Monopsony Is Not O.K." Krugman's topic of the day is amazon.com, which according to this article has accreted way too much power to itself in the marketplace for books, and needs to be taken back down by the government. They are just like the robber barons of old!
Does Amazon really have robber-baron-type market power? When it comes to books, definitely. Amazon overwhelmingly dominates online book sales, with a market share comparable to Standard Oil’s share of the refined oil market when it was broken up in 1911. Even if you look at total book sales, Amazon is by far the largest player. . . . So can we trust Amazon not to abuse that power? The Hachette dispute has settled that question: no, we can’t.
And obviously, the government must intervene to impose a better result:
Standard Oil . . . had too much power, and public action to curb that power was essential.. . . The robber baron era ended when we as a nation decided that some business tactics were out of line. And the question is whether we want to go back on that decision.
Remarkably, Krugman never says exactly what he proposes the government should do here. Should it bring a court case to break up the monopsonist -- which is what the government did in the oil, steel and tobacco industries in the early 1900s? The whole idea that government action in a situation like this may have adverse or unintended consequences just is not part of Krugman's world view.
And by the way, that line that "public action to curb [Standard Oil's] power was essential" is just one of those endlessly-repeated pieces of official conventional wisdom that cannot be proved or falsified, but there is every reason to think it is wrong. Why wouldn't the competitors of Standard Oil have quickly caught up with it, as have other competitors of plenty of other corporate giants that the government has not dismantled?
To consider a couple of examples, IBM was the bugaboo of the 1960s and 70s, with its tremendous dominance of the market for what were called "main frame" computers. The government sued to break up IBM in 1969, and began a court trial seeking that remedy in 1975. The case was still on trial in 1982 when the new Reagan administration concluded that it was "without merit," and they then gave up and walked away from the case. Meanwhile, the whole market for "main frames" had already begun to decline, and today it has completely disappeared. Computers have gone from main frames to personal computers, to laptops, to smartphones, and IBM has more or less stayed away from the whole thing and become a consulting business. IBM was number 9 on the Fortune 500 when the antitrust trial started in 1975, and has gradually slipped to number 56 by revenue in this list from 2014. Just this week IBM backed away from an ambitious profit forecast for next year, and its stock took a big hit. Again, what was the reason that IBM needed to be dismantled by the government? Today, nobody even remembers.
The other corporate giant severely criticized in recent years for allegedly too much power is Wal-Mart. It's actually still holding on to the official number 1 position in the 2014 Fortune 500, but there are many reasons to think that its glory days are behind it. According to data collected by Credit Suisse and reported by CNBC here, Wal-Mart's market share in U.S. retailing, after rising rapidly for decades, hit a peak of 13.9% in 2009, and then began to decline. By 2013 it was down to 11.4%. Same store sales have been very flat for years, and there aren't a lot of new towns in the U.S. to invade.
Don Boudreaux of Cafe Hayek wrote a letter about Krugman's column to the New York Times, and posted it on his web site. He includes a long quote from D.T. Armentano's "Antitrust Policy" (Cato Institute, 1986) addressing Krugman's contention that Standard Oil needed to be dismantled:
Here’s the noted antitrust historian D.T. Armentano: “Standard Oil’s efficiency made the company extremely successful: it kept its costs low and was able to sell more and more of its refined product, usually at a lower and lower price, in the open marketplace. Prices for kerosene [Standard’s principal output] fell from 30 cents a gallon in 1869 to 9 cents in 1880, 7.4 cents in 1890, and 5.9 cents in 1897. Most important, this feat was accomplished in a market open to competitors, the number and organizational size of which increased greatly after 1890. Indeed, competitors grew so quickly in the years preceding the federal antitrust case that Standard’s market share in petroleum refining declined from roughly 85 percent in 1890 to 64 percent in 1911. In 1911, at least 147 refining companies were competing with Standard, including such large firms as Gulf, Texaco, Union, Pure, Associated Oil and Gas, and Shell.”
Meanwhile, the government today maintains two separate antitrust bureaucracies, the FTC and another in the Justice Department, that constantly scrutinize the business organization structure of the U.S. economy for no good reason that anyone can articulate. They know nothing about the markets they periodically disrupt, and they care nothing about the costs they impose. Their ranks could easily be shrunk by 80% with great positive effect on the U.S. economy.
My take: sure Amazon has a little more power than I would like. The antitrust regulators have way, way more power than I would like, and than is healthy for the economy.