Monopolisation as anti-innovation, and some alternative approaches

Today, America’s five largest banks control a stunning 48 percent of bank assets, double their share in 2000 (and that’s actually one of the less consolidated sectors of our economy). Similarly, the debate over health insurance reform awakened many of us to the fact that, in many communities across America, insurance companies enjoy what amounts to monopoly power. Some of us are aware, too, through documentaries like Food, Inc., of how concentrated agribusiness and food processing have become, and of the problems with food quality and safety that can result.

In a recent conversations with a Silicon Valley enthusiast, I mentioned monopolization as a big problem of neoliberal capitalism, in terms of hampering innovation and keeping small businesses out of the equation, which my conversation partner saw as a non-issue. It’s indeed to see America as the land of the Silicon Valley entrepreneurs and to lose sight of the larger issue of the deep structure of the economy.

So here is the argument of why monopolization is one of the big issues, playing a big role in the current crisis and in particular, the lack of creation of new jobs. It is also a powerful force against innovation.

The argument is made in the Washington Montlhly by Barry C. Lynn, author of the new book Cornered: The New Monopoly Capitalism and the Economics of Destruction and Phillip Longman of the Montlhly Review:

“While the mystery of what killed the great American jobs machine has yielded no shortage of debatable answers, one of the more compelling potential explanations has been conspicuously absent from the national conversation: monopolization. The word itself feels anachronistic, a relic from the age of the Rockefellers and Carnegies. But the fact that the term has faded from our daily discourse doesn’t mean the thing itself has vanished—in fact, the opposite is true. In nearly every sector of our economy, far fewer firms control far greater shares of their markets than they did a generation ago.
Indeed, in the years after officials in the Reagan administration radically altered how our government enforces our antimonopoly laws, the American economy underwent a truly revolutionary restructuring. Four great waves of mergers and acquisitions—in the mid-1980s, early ’90s, late ’90s, and between 2003 and 2007—transformed America’s industrial landscape at least as much as globalization. Over the same two decades, meanwhile, the spread of mega-retailers like Wal-Mart and Home Depot and agricultural behemoths like Smithfield and Tyson’s resulted in a more piecemeal approach to consolidation, through the destruction or displacement of countless independent family-owned businesses.

It is now widely accepted among scholars that small businesses are responsible for most of the net job creation in the United States. It is also widely agreed that small businesses tend to be more inventive, producing more patents per employee, for example, than do larger firms. Less well established is what role concentration plays in suppressing new business formation and the expansion of existing businesses, along with the jobs and innovation that go with such growth. Evidence is growing, however, that the radical, wide-ranging consolidation of recent years has reduced job creation at both big and small firms simultaneously.”

The article continues with an in-depth explanation of how monopolization destroys jobs and innovation in practice.

The same argument can be made in a more positive way. On what was the great electronic revolution that is the PC and the internet predicated? According to Alfred Chandler, cited by Susan Crawford, it was the vigorous anti-trust policies that preceded it as a necessary condition:

“In “Inventing the Electronic Century,” Alfred Chandler lists antitrust actions that opened up the data processing, consumer electronics, and telecommunications fields to U.S. and other competitors. Chandler’s text is dry and factual (and he is inordinately fond of the word “epic”), but he gets his points across:

1. Consent decree with IBM in 1956 mandates the licensing of “existing and future patents” to any “person making written application.” As a result, all the peripherals and other hardware created during the development of the System 360 become available to all manufacturers. Epic. Clones produced in huge numbers.

2. Threat of another antitrust suit against IBM in 1969 prompts the company to unbundle its packaged software for the System 360 and 370. Epic. Huge revenues for software companies between 1968 and 1980.

3. Consent decree with AT&T in 1956 mandates that the company stay out of the computing business.”

Is there an alternative to the kind of monopolistic privatization decried by Barry Lynn and Phillip Longman?

One answer is smart public ownership, and a new report on municipal broadband highlights the advantages of this approach.

The Institute for Local Self-Reliance has just released a comprehensive report on the practices and philosophy of publicly owned networks. Breaking the Broadband Monopoly which explains “how public ownership of networks differs from private, evaluates existing publicly owned networks, details the obstacles to public ownership, offers lesson learned, and wrestles with the appeal and difficulty of the open access approach.”

The report authors offer the conclusion that:

“Communities that have invested in these networks have seen tremendous benefits. Even small communities have generated millions of dollars in cumulative savings from reduced rates – caused by competition. Major employers have cited broadband networks as a deciding factor in choosing a new site and existing businesses have prospered in a more competitive environment.
Residents who subscribe to the network see the benefits of a network that puts service first; they talk to a neighbor when something goes wrong, not an offshore call center. At the municipal fiber network in Wilson, North Carolina, they talk of the “strangle effect.” If you have problems with their network, you can find someone locally to strangle. Because public entities are directly accountable to citizens, they have a stronger interest in providing good services, upgrading infrastructure, etc., than private companies who are structured to maximize profits, not community benefits. Residents who remain with private providers still get the benefits of competition, including reduced rates and increased incumbent investment.

Some publicly owned networks have decided to greatly increase competition by adopting an “open access” approach where independent service providers can use the network on equal terms. Public ownership and open access give residents and businesses the option of choosing among many providers, forcing providers to compete on the basis of service quality and price rather than simply on a historic monopoly boundary.

Perhaps the greatest benefit communities have gained from owning their telecommunications networks is self-determination. Recent court rulings enable private network owners to set their own rules, including increased charges for accessing some sites – much like a cable bill charges more for some programming. The rules are made far from where the customer resides and the criteria used to design such rules maximizes benefit to the private firm, not the community.”

An additional alternative is user-led innovation, following the models of peer production, co-creation and co-design, in particular, student-led innovation, as outlined and proposed
by Tom Kalil and Aneesh Chopra (respectively Deputy Director and Associate Director for Technology in the White House Office of Science and Technology Policy):

“Students have contributed some of the most important advances in information and communications technologies—including data compression, interactive computer graphics, Ethernet, Berkeley Unix, the spreadsheet, public key cryptography, speech recognition, Mosaic, and Google.”

Focusing on broadband development, they propose the following strategy:

“The initiative could have a number of elements, including:

• Campus-based incubators for the development of broadband applications, with access to high-speed networks, cutting-edge peripherals, software development kits, and cloud computing services.
• Relevant courses that encourage multidisciplinary teams of students to design and develop broadband applications.
• Competitions that recognize compelling applications developed by students. Some existing competitions that could serve as models include Google’s Android Developer Challenge, Microsoft’s Imagine Cup, and the FCC-Knight Foundation’s “Apps for Inclusion” competition.”

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