Let's talk about monopoly rents

[Kimura]

I continued to be impressed by more and more references to rent-seeking as way to make sense of the massive and ridiculous distribution of income in the US. We see Stiglitz, Galbraith, Mishel and Krugman finally admitting that rent-seeking is how the 1% have managed to monopolize a huge percentage of the income in the United States economy.

Here’s my two cents: the obscene amount of income going to the top 1% and the reality that the majority of these activities are economically useless, such as returns on stocks or serving as a CEO in the finance sector, for example, has finally demonstrated that marginal productivity theory is utter nonsense. It’s become virtually impossible to rationalize this concentration of wealth among those at the very top of the pyramid with the absurd idea people ultimately get what they deserve mostly due to their marginal contributions to production.

 

[oldfart]

Those who do not want to believe monopoly is a problem are brain dead, or simply bought and paid for. They will argue that monopoly in any commercial form is of no concern.

Thanks. I had to do some reading before it dawned on me that monopoly generates rents rather than profits. A few quick notes because you are correct that most folks think of monopoly power as a perjorative term without having much grasp of it.

"Monopoly power" has two sides, classic monopoly in the product market and monopsony in the resource and labor market. They operate the same, but on reverse sides of the market. Walmart plays both and very aggressively. Monopoly is when Walmart drives small hardware stores and such out of business. Monopsony is when Walmart uses its size in the local market to drive down wages and extract concessions from local governments. Note that there probably is no such thing as perfect competition because each location is unique. So every business has a slight degree of monopoly power in the sense that no other business uses the location it occupies. So we have theories of imperfect competition (thanks to Joan Robinson!) and oligopoly as well as monopoly, but the limiting case for analytical purposes is monopoly.

Since Adam Smith in 1776 classical economists have treated monopoly as an unmitigated evil. Before that physiocrats and mercantilists promoted a government run controlled economy to wage economic war on the rest of the world. In that period, there were two main ways to gain a monopoly. The first was to collude with other firms (there were no anti-trust laws), which Adam Smith noted occurred whenever businessmen gathered even for the most benign social purposes. The second was to get a "patent" from the government, a legally protected monopoly. So "free markets" to Smith, Ricardo, and Malthus were simply markets without monopoly power, which they regarded as an unmitigated economic evil.

The same dynamic works today, monopoly power is based on collusion, legal or illegal, and government action or inaction ("regulatory capture"). The key is that economic theory over the centuries has always predicted that monopoly power will result in higher prices to the consumer, lower payments to other factors of production like labor and capital, and lower output of everything than would be seen in competitive markets. If median real family income for the lowest 99.8% of households had kept pace with real national income (i.e. income shares had remained constant) then that median would be $92,000 today rather than $50,000. Think about that a moment: without monopoly power, virtually all American households would have almost double the standard of living they have today. And make no mistake, monopoly power is almost the only explanation for the last 40 years disjoint between growth of national income and income shares.

At some point, we should discuss the monopoly issue as it relates to the drug industry and health care costs in general. Anyone game to try to define the issue??

Good topic. Do we get more exposure here or in the health care forum?

 

[oldfart]

I continued to be impressed by more and more references to rent-seeking as way to make sense of the massive and ridiculous distribution of income in the US. We see Stiglitz, Galbraith, Mishel and Krugman finally admitting that rent-seeking is how the 1% have managed to monopolize a huge percentage of the income in the United States economy.

Here’s my two cents: the obscene amount of income going to the top 1% and the reality that the majority of these activities are economically useless, such as returns on stocks or serving as a CEO in the finance sector, for example, has finally demonstrated that marginal productivity theory is utter nonsense. It’s become virtually impossible to rationalize this concentration of wealth among those at the very top of the pyramid with the absurd idea people ultimately get what they deserve mostly due to their marginal contributions to production.

What Kimura said!

 

[EdwardBaiamonte]

And make no mistake, monopoly power is almost the only explanation for the last 40 years disjoint between growth of national income and income shares.

of course you are being too stupid for words! When liberal programs destroyed the family and thus created millions and millions of poor single mothers you had a huge income loss. When liberal unions shipped 30 million jobs off shore you had a huge income loss. When liberals invited 20 million illegals in to take our jobs you had a huge income loss. When liberal schools began turning out the dumbest kids in the world you had a huge income loss. When liberal deficits meant the Chinese and Japanese could buy our debt rather than our products you had a huge income loss. And, when there was a huge huge explosion in welfare entitlements there was less incentive than ever to work and earn income.

70 million corporations all competing in a life and death capitalist environment to always get us better and cheaper stuff are not a monopoly. Sorry to burst your foolish liberal bubble wide open.

 

[william the wie]

The monopoly rents argument while valid has pretty tight limits on application. In 1959 when the St. Lawrence Seaway opened because of its greater throughput we almost saw NYC and Chicago go under and eventually we did see Detroit go under. The Illinois canal made Chicago the connector of the great lakes and Mississippi while the Erie canal was the Great Lakes and Atlantic connector. Prior to 1959 monopoly rents were seen from the Western Shore of Lake Superior to the Atlantic coast. now they are fading. The same is true about IP monopoly rents due to the product life cycle as newspaper chains worldwide can testify to and broadcast TV is likely to follow the same route. The value of IP is dropping all of the time as witness CDs and DVDs.

So while valid this argument has ever shorter shelf lives.

You make a really good point! I hadn't given much thought to the lifespan of the underlying property. It seems to me that there are three trends which work in the opposite direction, lengthening the period the assets can generate monopoly rents and creating new property to generate those rents.

First is the legal system. It's no accident that intellectual property law has developed from a stodgy old "patent law" specialty into the cutting edge of the legal profession. Now the trick is to be able to parse Supreme Court decisions from last week to determine what naturally occurring DNA is non-patentable and what unique laboratory created DNA is. This with one justice writing in his separate opinion that he agrees with the majority in result, but doesn't understand enough of the science to join in supporting the reasoning!

My younger son is a PhD research chemist for PPG. He "watches paint dry". His first project for them was to try to find an alternative to a Japanese company's process patent because PPG thought it was cheaper to develop the alternative than pay the licensing fee. Of course the Japanese patent is published through the USPTO so it's easy to check out and then tweak into something "different". But all this is expensive, very expensive. It's a game that multi-billion dollar multinationals can play, but little companies with mere hundreds of millions are effectively locked out. They can't afford the litigation. This is the norm in commercial law today; it doesn't matter how strong your case is, it matters if you have the resources and determination to spend the money required to "bury" the opposition in expensive litigation. So we now have monopoly rent to legal positions!

Second, and overlapping is branding. Take your patent law firm, make an appointment with the guy down the hall in trademarks and copyrights, tweak the game plan, rinse and repeat. Look at what McDonald's did; trademark everything! (I raise you a Hamburgler and six Fry Guys!) Throw a few million a month into advertising for brand recognition for a few decades and see how many new competitors are in a position to take a run at your market position.

Third is lobbying; not Congress but the staffers who actually write the legislation and the regulatory agencies that write the rules. Throw in a nice job offer when they retire from public service. Hell, Abramoff was promising them jobs a year or two BEFORE they left government. How sympathetic was the treatment his clients got? "The return on investment will always be higher on the dollar spent on lobbying."

The common denominator of these strategies is money. They take lots of money. Large organizations have more money and use it to get more money. The twist is that now the way to get more money is to create monopoly power and create a self-reinforcing feedback. Is it getting better or worse? Good question.

Again all true points but massive difference in our estimates of compounding increasing returns industries. Look at the monopoly rents from Microsoft, Intel and Oracle over the last three years since ARM took off. Look also at the M&A activity in additive manufacture, nano-tech, bio-tech, Optronics, Cost to orbit and the rest of the high-tech industries. The number of increasing returns that deflate monopoly rents are growing exponentially.

This is the major reason for increasing income disparity not increasingly deflationary monopoly rents from IP. The number of interactive industrial processes ran over 50 digits in 1975 (G. Harry Stine's "The Third Industrial Revolution") and no one knows the current number because we passed what Stine estimated was the maximum number of material sciences simulations possible before the death of the universe 1968-72. So no the money is not in getting monopoly rents but rather your third point buying the bureaucrats and politicians pays the highest rents of all.

 

[EdwardBaiamonte]

This is the major reason for increasing income disparity

there are many reasons:

1) liberal attack on family creating millions of poor single mothers

2) liberal unions driving 30 million jobs off shore

3) liberals inviting 20 million illegals in to work

4) liberals schools turning out dumbest kids in world

5) highest liberal corporate taxes in world driving companies off shore

6) liberal deficits making it possible for China to buy our debt, not our products

7) massive liberal entitlements that discourage work

8) globalization so that those at top can now sell to world rather than just this country

 

[oldfart]

In looking for another old thread, I stumbled on this one. I'm bumping it because I think it has a lot of relevance and there are a lot of posters who probably have not seen it before and might have some contributions to make. Enjoy.

 

[Toro]

It's usually a good idea to buy Boardwalk for $450, because even though rent is $50 if you land on it, you can charge $2000 if you build a hotel. And its strategically placed as players move towards Go.

 

[Toro]

I continued to be impressed by more and more references to rent-seeking as way to make sense of the massive and ridiculous distribution of income in the US. We see Stiglitz, Galbraith, Mishel and Krugman finally admitting that rent-seeking is how the 1% have managed to monopolize a huge percentage of the income in the United States economy.

Here’s my two cents: the obscene amount of income going to the top 1% and the reality that the majority of these activities are economically useless, such as returns on stocks or serving as a CEO in the finance sector, for example, has finally demonstrated that marginal productivity theory is utter nonsense. It’s become virtually impossible to rationalize this concentration of wealth among those at the very top of the pyramid with the absurd idea people ultimately get what they deserve mostly due to their marginal contributions to production.

OK, I'll play. How exactly is "returns on stocks" economically useless? Or, for that matter, "serving as a CEO in the finance sector?"

 

[SteadyMercury]

It's usually a good idea to buy Boardwalk for $450, because even though rent is $50 if you land on it, you can charge $2000 if you build a hotel. And its strategically placed as players move towards Go.

Go green. High rent like boardwalk/park but much better opportunity for others landing since 3 vs. 2, and like blue will generally cause people to sell their kids into prostitution if they land when you have hotels.

 

[oldfart]

It's usually a good idea to buy Boardwalk for $450, because even though rent is $50 if you land on it, you can charge $2000 if you build a hotel. And its strategically placed as players move towards Go.

Go green. High rent like boardwalk/park but much better opportunity for others landing since 3 vs. 2, and like blue will generally cause people to sell their kids into prostitution if they land when you have hotels.

I was drinking a Vernor's and you made me spew!

 

[william the wie]

Asking not reporting, how has the attempt to get Monopoly board style rents in the real world worked out over the last 6-8 years? The results for BRK over the past five years have been dismal and it was in that market. Atlantic City, the market that the board game was based on is not doing well, as usual. This is not what the theory in the OP proposes. Likewise the New World gold and silver mines destroyed Spain. The Alexandrine empire had a similar problem with the Persian treasure troves. I think Dutch disease is much more powerful than current theory suggests.

 

[EdwardBaiamonte]

So is this an adequate explanation of what is happening today? And if so, what can be done to reverse it? What say you?

no 100% inadequate. Picketty has been proven wrong over and over. Here's what do:

1) make liberal unions illegal and bring back 30 million jobs

2) eliminate corporate taxes that force corporations off shore and bring back 20 million jobs

3) eliminate 20 million illegals and create 20 million jobs and huge upward pressure on wages

4) make deficits illegal so China and Japan have to buy our products rather than our deficits

5) end the war on the America family that has rendered our kids unfit for work

6) end liberal unions in the schools so our kids are not the dumbest in the civilized world and are capable of learning and holding a job.