There is nothing new in monopoly capital gaining power and threatening free market capitalism. Government-favored and protected bankers, firms, and financiers have been around for centuries. But this time, monetary inflation and the nature of contemporary technological change have combined to raise the threat posed by these monopolists to an existential level. The ultimate barrier against this is the institution of sound money, at present virtually extinct in the world of politics.
Adam Smith and Karl Marx both in their own ways were keenly aware of monopoly’s threat. Smith thought social and political institutions were up to the task of thwarting it. Marx, by contrast, saw the force of monopoly inevitably bringing chaos and destruction in accordance with his philosophy of dialectic materialism.
J.S. Mill warned us that money out of control becomes the monkey wrench in all the other machinery of the economy. He could not foretell, however, our modern incarnation of this problem. Namely, the vast asset inflation alongside camouflaged goods inflation and the contemporary technological revolution. This has a proclivity to generate monetary monopoly which could be so severe as to mean simultaneously shaky invisible hands would be unable to mend the machinery.
It is not commensurate with that threat to simply contemplate a gradual roll back of present radical monetary policies. Just calling off further quantitative easing or phasing out negative interest rates — as some conservative ex-central bankers now advocate — would be too feeble even if accompanied by beefed up “structural reform” policies, including the aggressive pursuit of anti-trust laws.
Understandably, some advocates of sound money are reluctant to press the case for any great discontinuity in present monetary policies when accumulated asset inflation and related financial risks are so large. Better to wait until the present bubbles burst under the influence of endogenous forces before starting the monetary revolution.
The problem with such caution is that several years more of a super long cyclical expansion repeatedly extended by the administering of monetary elixirs (such as Chief Powell’s rate cuts this year), albeit no longer including non-conventional medicines, could mean a deadly further advance of monopoly “capitalism.”
Cautious monetary reformers (in the direction of soundness) could retort that the latest elixir will not be effective and asset inflation is already about to ease. But then another dose of elixir would come soon afterwards unless there has been a fundamental change in the monetary regime. Or some maintain that an almighty final blow-up and crash is on its way, even if after one more fling, and that this will smother the threat from monopoly. The defenders of free market capitalism should not count on that natural death. however. The monopoly capital could be so strong by the time of an ultimate blow up that it can survive the shock.
The present danger from monopoly capital is so great, that it justifies abandoning the course of slow adaptation of the present monetary regime in favor of revolutionary change.
How could that be?
Let’s start by identifying three ways in which monopoly power has been increasing in the US economy.
First, there is the winner-take-all aspect of digital technology within the tech industry itself. That aspect extends to the near-technology sector, especially online retailing.
Second, outside the technology sector, there is accumulating evidence that the lead firm (in each sector) has been gaining market share. In the “star firm” literature much is made of the particular nature of contemporary technological advance to explain this. The firm which first exploits the new technology reaps big productivity gains via investment in highly specific forms (much intangible capital) which cannot seep out to competitors. Highly specialized and talented labor is discouraged from exiting the firm by various forms of golden handcuff contracts including equity options.
Competitor firms, in order to sustain their sales, find themselves under pressure to cut prices even though they do not have any matching productivity gains and they drive down their pay bill by a combination of wage cuts and changes in the structure of employment (for example towards temporary contracts). Monopoly profits in the lead firm reflect prices which have not come down fully in line with efficiency gains and wage rates (other than for highly specialized input) which have not kept up with productivity gains.
Third, crony capitalism has been digging broader and deeper moats around established lead players in many sectors. We can think here of credit card companies, more broadly Big Finance, and the other huge spaces in the economy where the regulatory state or public procurement play decisive roles. A key further element in the growth of crony capitalism has been the bubble in private equity directly stimulated by present inflationary monetary conditions.
How does monetary inflation exacerbate this growth of monopoly power?
And how does growth of monopoly power intensify monetary inflation which in turn feeds the monopoly power?
Monetary inflation in its present form has generated a “hunt for yield” and fertile conditions for the flourishing of speculative narratives (investors desperate for yield drop their normal cynicism towards hypotheses about the future). Present or future monopoly power has become a fantastic narrative to tell by equity sales promoters. Monetary inflation-dosed markets put sky-high valuations on equities which enjoy present high monopoly profits (dropping cynicism regarding their long-run survival) or future monopoly profits. Investors are promised a certain road to Eldorado — never mind the big risks along the way — but the destination is never reached).
The cost of equity advantage bestowed by such speculation on monopoly profits in some cases entrenches present monopoly power and in others gives those promising Eldorado scope to rapidly expand due to the ability to give great bargains to customers and win market share from competitors. Meanwhile the huge boom of passive investment in ETFs made up of large capitalization US stocks (principally S&P 500), driven by asset inflation, lowers the costs of capital for many firms enjoying various degrees of monopoly power.
The phenomenon of star firms retaining technological leads and putting downward pressure on wages goes along with measured price inflation undershooting the two-percent inflation target despite rampant monetary manipulations. Hence there is no political pressure to rein back monetary inflation whose virulence is evident in asset markets and welcome to a President in pursuit of re-election victory.
The infernal triangle joining asset inflation, monopoly capitalism and cronyism has historical ancestry — notably the bubble in Dutch East India stock during the great Dutch monetary inflation of the 1630s which features also the notorious tulipmania. But that was well before the miraculous emergence of free market capitalism and classical economics. The Dutch monopolist was not able to pre-empt that future miracle; today’s monopolists, by contrast, could bury that miracle once and for all.
