Can Your Wealth Escape the Blackhole?
This NPR article, “The hidden power keeping wages low,” documents the long history of economists arguing that monopolies are bad for the economy. In particular, economists document how monopolies hinder competition and concentrate wealth. For Adam Smith competition was the key to a free market and a general prosperity.
When Adam Smith studied markets in the Eighteenth Century, governments altered the flow of money from the agricultural sector to the foreign market sector. Free markets allowed for the free flow of goods and services. For example, English peasants struggled to get by while the East India Company made millions importing tea from China.
Smith argued that Crown monopolies diverted wealth from domestic agriculture to foreign trade. He argued that this mercantilist system enriched the few at the expense of the many. He theorized that removing government monopolies would naturally rebalance the market and allow domestic agriculture to flourish.
During the 19th century Smith’s theories were gospel among bankers and industrialists. Why wouldn’t they support this theory? Without government interference bankers and industrialists naturally grew their businesses and created monopolies. They argued these monopolies should exist because they grew organically without the help of government intervention.
Not only do we now know that this narrative is completely false. Both bankers and industrialists constantly received a helping hand, but we also know that natural monopolies also distort wealth distribution.
The NPR story does a good job of explaining the details of why this happens. Large companies lack effective competition. Company towns like Detroit had few employers. In these large single corporation towns, big businesses made decisions independent of local market conditions. For example, we know how Walmart destroys small town shopping by lowering prices and driving out the competition.
For me, this process has been difficult to explain quickly and briefly. The best way to imagine what happens is by imagining a trampoline. If a trampoline only has marbles on it, then the marbles will generally be scattered and move with little friction. This is how money acts when all of the actors are similar to the small businesses or artisans during the time of Adam Smith.
Smith simply couldn’t imagine the new corporations of the industrial era. These economic leviathans would be like placing a bowling ball on the trampoline. Almost as soon as the bowling ball is introduced, all of the marbles get sucked into the bowling ball. No marbles can resist its pull.
This is the difference between the imagined economy of Adam Smith and the real economy of the modern world. Bankers and industrialists want us to believe that all the money flows like marbles. In reality large corporations and even individual investors act like bowling balls. for most of our lives, we struggle to hold on to our money and keep it from being sucked towards the bowling ball. What is good for the bowling ball is not good for the marbles.
Teddy Roosevelt and Franklin Delano Roosevelt, however, knew that governments could break up the bowling balls and help workers keep more of their hard-earned money. Antitrust laws are essential for shared prosperity. We need to stop listening to the charlatans and start listening to the experts.
Comments
You must be logged in to post a comment.