Many economists suggest increased competition as a means of closing the growing gap between profitable firms and low-wage workers. For Sacha Dierckx from ABVV and Denktank Minerva, they assume a wrong diagnosis.
The profits of large companies are skyrocketing. Company after company announces in its financial results that it is handling the increased energy prices well for the time being, from AB Inbev to Unilever and RyanAir to Solvay. Well in Belgium the profits record after record.
The big problem according to economist Jan Eeckhout and his book The profit paradox: the market power of a number of large companies. These lead to lower wages for the worker and higher prices for the consumer and thus large profits for the companies. In addition, the big companies also influence politicians with their power. According to him and other economists who share his diagnosis, the solution is therefore more competition. ‘An economy with healthy competition is ultimately the best form of redistribution’, according to Eeckhout.
Eeckhout’s analysis seems attractive to both the right and the left: more markets and competition are popular for the right, lower prices, higher wages and less inequality for the left. Of course, the problem of high corporate profits and corporate lobbying power is relevant. But if we see high profits and lobbying power as symptoms of a disease, on closer inspection one can seriously question both the diagnosis (‘market power’) and the proposed remedy (‘more competition’).
Is ‘market power’ the cause of high profits and lobbying power?
Let’s start with the diagnosis: Is it the increased market concentration and market power of a small number of companies that is responsible for the high profits and strong lobbying power?
More competition is not good for you.
When it comes to high profits and low wages, it is striking that the word ‘union’ is hardly used in the entire story of Eeckhout and his supporters. However, there is much research showing that the reduced strength of unions in several countries has led to greater inequality and a lower share of labor, the share of the pie that goes to workers. In Belgium too, the restriction of freedom of association is the main reason for the high profits. De Tijd points out that the profit margin has grown since 1999 and has risen more strongly than in neighboring countries, especially in the period 2015-2020. What happened in that period is that the Standard Wage Act came into effect in 1996, wage subsidies increased sharply, and in 2015-2020 the Michel government introduced an index jump and tightened the Standard Wage Act, making it even more difficult for the unions to monitor. real wage increases.negotiate.
When it comes to lobbying power, too, one can ask oneself whether it is true that it is only the market power of a few large companies that ensures that business has so much power. In a capitalist economy, politicians tend to listen to the demands of business anyway, whether it is a sector with few large companies or a more competitive sector with more players. Consider, for example, how the auto sector managed to resist stricter emissions standards for years and was allowed to circumvent existing emissions standards. Or how the aviation sector has managed to maintain an exceptional position until today, with no VAT on air tickets and no petroleum tax. Or how the textile sector continues to treat workers in low-wage countries horribly and continues to have a strong negative impact on the environment without governments putting a stop to this.
More competition is not good for employees, consumers and the planet
So we can question the diagnosis. The result is that the remedy proposed by Eeckhout, more competition and market forces, is also problematic.
This is most obvious for employees. Take the package delivery now. It is a market with fierce competition between players such as BPost, PostNL and DPD. PostNL is trying by all means to win that battle. The consequences: subcontracting, false self-employment, atypical working hours, even child labor, etc. Social dumping is also widespread in the competitive construction sector, as has been shown several times recently. Fierce competition means that companies do everything they can to keep costs as low as possible, and this is very often passed on to employees.
In addition, wages are lower on average and working conditions are often worse in small companies, both in Europe and in the US. More competition, with more small and smaller companies, will therefore not only be positive for employees.
But more competition is certainly not always a good thing for consumers. The reasons are different: it is clear that the consumer is often not (or cannot be) a ‘homo economicus’ who makes rational economic decisions, that there is an information asymmetry where consumers have insufficient information to make a good decision, . Take the energy sector: you already have to be an absolute specialist to be able to handle complex energy contracts, and you already have to have a crystal ball to be able to predict whether a fixed or variable price will be more advantageous in the future. Or take the private insurance sector. Research in the US and other countries shows that a majority of people make wrong choices when choosing an insurance company. And how many people in Belgium get lost in the extensive but complex range of car, hospital, fire and other insurances?
The problem is not the size of the companies themselves, but the pursuit of profit in a capitalist economy and the lack of strong counterforce.
Furthermore, increased competition and fragmentation can lead to numerous inefficiencies and disadvantages for consumers. For example, competition in scientific research does not necessarily lead to better results than cooperation. Philosopher Jean-Paul Van Bendeghem condemned the competition in the search for a vaccine with the following comparison: ‘You can compare that race to the search for a key. Suppose you have a house with ten rooms, where one room contains the key that gives us access to the solution of a problem. In front of that house are ten people who want to solve the problem. One method could be: get everyone to search the entire house as quickly as possible. But you can also arrange for one person to search in the first room, another in the second, and so on. I think the second method is more effective.’
In addition to the many inefficiencies associated with competition, there are also sectors that actually constitute ‘natural monopolies’, where the competition is often very artificial and does not lead to positive results. A typical example is rail transport, where Eeckhout advocates more competition, while in the UK it led to very poor results in terms of service, prices and efficiency. More competition in this case only worsens the symptoms, rather than providing a cure for them.
Which solutions are better?
If Jan Eeckhout’s diagnosis and treatment are inadequate, what alternatives are there? For that we need a better diagnosis. The problem is not the size of corporations per se, but the pursuit of profit inherent in a capitalist economy and the lack of strong countervailing power against this pursuit of profit. This means that the remedy does not lie in more competition, but in slowing down the pursuit of profit and creating a stronger counterforce.
Concretely, firstly, where competition does not make sense and it concerns more or less natural monopolies, well-functioning public companies can be an alternative. Think initially of the railways, but also, for example, the energy suppliers or those package delivery. Numerous examples (including in Scandinavian countries) show that public companies can do a very good job if the political will is present. Furthermore, any profits flow back to taxpayers rather than to the small group of wealthy shareholders in private companies.
Second, strong and critical unions and less anti-union laws are indispensable to strengthen countervailing power. For example, we have already seen that the Wage Standard Act in Belgium is an important reason for the falling labor share and the increasing profit margins of companies. In countries such as the United States and the United Kingdom, there are many anti-union laws that make it very difficult to increase the degree of unionization, to organize strikes legally, and to conduct collective bargaining that affects the entire sector or applies to the economy. .
Third, the government can channel a greater proportion of private company profits back into general resources. This can be done by raising corporate tax, which has been increasingly lowered worldwide in recent decades, and by ensuring that multinationals actually pay a higher rate. Research also shows that lower corporate taxes do not lead to more economic growth at all, as is often claimed. This can also be done, for example, by setting up a public investment fund that takes shares in large companies, analogous to the Norwegian government fund or other examples.
In addition, many measures are possible that limit the pursuit of profit or strengthen countervailing power, such as stronger social and environmental regulation, limiting corporate lobbying, and democratizing corporate governance from stakeholders other than shareholders.
The fact that all these alternatives involve a less capitalist economy, and are therefore considered less ‘mainstream’, is also the main reason why they receive less attention than the recipes of Eeckhout and his supporters. But for workers and consumers who want a more equal and democratic economy, more competition is a deceptive solution.
Sacha Dierckx is an economic advisor at the federal ABVV and a core member of the Think Tank Minerva