Healthy competition

“The greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults” (Alexis de Tocqueville)

Impeachments, inequality, and the American dream

The world’s most important capitalist democracy can sometimes seem a poor advert for both. Right now, the political context remains messy,[1] even if appearances can be deceptive.[2] Meanwhile some measures of inequality, social mobility and other metrics describing the ‘American dream’, remain dispiriting.[3]

For sure, the direct links between populism and the economy are not as obvious as often suggested.[4] Thresholds of wealth or income inequality do not automatically predict extreme politics, even if the intuition is appealing. Nonetheless, a look at the map shows significant overlap between where manufacturing jobs were lost to China[5] and the tragic opioid epidemic identified by economists Angus Deaton and Anne Case.[6] They famously won the Nobel prize for highlighting the plight of many white, less educated Americans – the emergence of a new range of highly addictive pain relief shown as central to surging mortality and morbidity relative to the rest of society.[7] The effects on overall US life expectancy relative to developed world peers is startling.

The prioritisation of global economic efficiency over many other considerations has brought enormous rewards to the world. Poverty reduction of a hitherto undreamed-of scale in many emerging markets is part of it. However, segments of developed world society have suffered as a result. That this suffering has not shown up in widespread unemployment should not permit us to underestimate such hardship.

The ongoing response from developed world policy makers

This helps explain the marked change in direction from policy makers (not just in the US) over the last few years in particular – namely, some economic efficiency willingly sacrificed to promote domestic jobs in certain industries. The creation of ‘small yards with high fences’ in the words of one of the architects of the US shift[8]- attempts to nurture some domestic manufacturing efforts in key strategic areas, from computer chips to batteries.

Competition is a powerful and mostly positive force for the world economy. It has helped keep many states, companies and indeed individuals honest over many centuries. However, the rules of the game are not only central to minimising the inevitable negatives but also require constant evolution as technology and other inputs change over time.

Alphabet anti-trust and China

Alphabet’s ongoing anti-trust case, and the spiralling fears about the damage that China is inflicting on the European car manufacturing industry (in large part a function of Chinese domestic production swamping declining domestic demand)[9], perhaps have more in common than one might think at first glance.

The analysis of falling consumer prices is just one way to judge the effects of highly successful companies (and countries) on the rest of us. In terms of competition between companies, the threat of monopolists (companies dominating a particular marketplace) has long been thought to be found in the prices we pay for their wares. Without the disciplining effect of competition, theory (and some experience) shows that monopolists can raise prices to their hearts’ content. To that extent, competition authorities have focused on consumer prices as shorthand for whether an industry is sufficiently competitive, or not.

However, the last few decades have seen the rise of several corporate giants which have monopolised industries (and indices), with little-to-no negative effect on consumer prices. In fact, the reverse has often been true. Many of the services which these modern titans provide have been free. Can we therefore relax and assume that their immense scale and clout are a net positive for global society?

A more complicated story

Just as with the effect on frictionless trade amongst nations, we need to carefully weigh the benefits with some of the more difficult effects. There is a growing body of work showing the link between the growth of these increasingly unassailable businesses and declining productivity in the wider economy.[10] Cause and effect is fiendishly difficult to untangle. However, there seems to be a self-reinforcing effect at play between the rising market concentration described above, the long-term declines in real interest rates and productivity growth.?

As real interest rates have fallen over the decades running up to the pandemic, the rewards to scale (particularly related to corporate balance sheets) have risen. The growing gap between winners and the rest, means there is ever less incentive for ‘the rest’ to innovate, or to spend precious resources on research & development and other necessities. Catching up becomes too unrealistic given so large a gap. Economy-wide productivity suffers as a result. As productivity growth flatlines, so do living standards with all that entails.

Obviously, there is much more going on in all of this than this paragraph implies. I have reduced entire fields of academic study to short causal statements. However, the point is that there is more to all this than meets the eye.

As investors, we should be wary of where all this heads next. Inflation-adjusted interest rates have soared since the beginning 2022, for a range of reasons. We are already back at levels not seen since the 2008 financial crisis. Just as low real interest rates reinforced themselves in the prior decade, perhaps we begin to see the reverse as these rates head higher? The return of what is called the ‘cleansing effect’[11], as well as higher competition for various projects, could enforce greater discipline (and therefore returns).

The incoming technological leaps embodied in large language models could ultimately play a supporting (and levelling hand) for workers at least. Various studies of GPT-4 on worker productivity are demonstrating the most pronounced effects on less skilled workers. Perhaps the dearth of coders, and associated premium wages, will be solved as before by technology handing out superpowers to those more in need.[12]

Investment conclusion

Competition is of course mostly a good thing. Certainly, the lack of it has had visibly deleterious effects in many economies and sectors down the ages. However, there is a sense that many of the developed world's current struggles can be chalked up to the difficulties in measuring what ‘healthy competition’ looks like, and how to enforce it.

Technology may be part of the answer, but there is also work for policy makers here as the ongoing Federal case against Alphabet may suggest. For investors, the message is simple and oft repeated. Diversify beyond the recent winners, we may be in a period where much of what went right for them could conceivably go in the other direction.

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[1] https://thehill.com/homenews/house/4199641-mccarthy-directs-house-committees-to-open-biden-impeachment-inquiry/

[2] https://en.wikipedia.org/wiki/Electoral_Count_Reform_and_Presidential_Transition_Improvement_Act_of_2022

[3] https://www.brookings.edu/articles/stuck-on-the-ladder-wealth-mobility-is-low-and-decreases-with-age/

[4] https://www.hks.harvard.edu/publications/trump-brexit-and-rise-populism-economic-have-nots-and-cultural-backlash

[5] https://news.mit.edu/2021/david-autor-china-shock-persists-1206

[6] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7725949/

[7] https://blogs.lse.ac.uk/lsereviewofbooks/2021/08/12/book-review-deaths-of-despair-and-the-future-of-capitalism-by-anne-case-and-angus-deaton/

[8] https://www.lowyinstitute.org/the-interpreter/debate/new-washington-consensus?

[9] https://www.politico.eu/article/von-der-leyen-hits-china-with-electric-vehicle-subsidy-probe/

[10] Various (2023) – The Economics of Creative Destruction – new research on themes from Aghion and Howitt, edited by Ukuk Akcigit & John Van Reenan – Harvard University Press. Particularly chapters 3 – 5 on ‘competition and international trade’ and chapter 11 – ‘Productivity growth and real interest rates: a circular relationship’.

[11] https://blogs.lse.ac.uk/businessreview/2017/09/05/the-cleansing-effect-of-recessions-inefficient-firms-fail-average-productivity-goes-up/

[12] https://www.podpage.com/econ102/e10-dm-debates-ai-and-tech-downturns-with-adam-nash-ceo-of-daffy/

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