Pros and cons of neo-liberal competition

The author discusses effects of market competition on inequality, innovation and suggests that opposition to crony oligarchy and advocacy of worker representation should be compatible with liberalism

One glaringly obvious downside of market competition is that in the usual absence of level playing fields and with unequal initial endowments, some will win, often unfairly, and others will lose. The way out is not to block competition, but to try to correct for initial handicaps, for information failures (which, for example, deny essential credit to small firms with low collaterals), and in the case of inequality of outcomes, help building safety nets and generous assistance schemes for those who lose out. The Scandinavian countries have been among the most successful in combining market competition (including openness to globalisation) with generous social insurance and labour market support (such as retraining). Again, the effectiveness of the Scandinavian state was an essential ingredient of success. Asking an ineffective and corrupt state to meddle with competition can make things much worse. 

There are, of course, numerous cases of socially costly failures of market competition where the state and the other social actors have to intervene. An obvious example is the case of environmental degradation; another is the case when one entrepreneur cannot profitably expand operations unless others do the same (what economists call ‘coordination failure’); and yet another is when unregulated financial markets result in excessive risk-taking and systemic failure. There are also cases of dire macro-economic crises in developing countries brought on by full exposure to footloose international capital flows — the case of what Dani Rodrik has called hyper-globalisation. To be fair, many so-called neo-liberals who support free trade are not opposed to some restrictions on capital flows — “sand in the wheels” of runaway financial capitalism (even the IMF now has provided some grudging support to such restrictions). 

Illustration by Binay Sinha

What about the large inequalities all over the world that the so-called neo-liberal policies are supposed to have fostered? If liberals believe in competition on level playing fields, they should be opposed to a great deal of inequality of opportunity. Besides, the empirical evidence on how much of increased inequality is due to market competition (such as, globalisation) and how much due to advances in labour-saving technology and automation is not always clear, though both are likely to have some role. To the extent increasing concentration of corporate market power is responsible for increasing inequality (particularly through its effect in depressing wages and labour share of income), the liberal advocate of economic competition should be opposed to this to be consistent with their article of faith (as in the case of the pro-market but not necessarily pro-business liberals we have referred to before). 

Similarly, liberals should be opposed to the regulatory capture in financial markets by the financial oligarchy or the rampant crony capitalism of many countries, just as in the political arena, they should be opposed to the formidable barriers to political competition in the form of corporate lobbying and large contributions to campaign finance. So the liberal position, if consistently followed, should not be subject to Left strictures on these points. There is also a bit of an ironical twist in the position of those critics who advocate state intervention to supplant neo-liberal policies on grounds of such inequality and oligarchic tendencies, as if the state is above being captured by the same vested interests. 

Liberals, as supporters of political democracy, should also in principle be generally supportive of proposals for economic democracy within the firm—-for example, for significant worker representation in company governing boards, which at the moment mostly are answerable only to managers and share-holders. The evidence from German works councils on the positive effects of worker representation on productivity, particularly when the firm has profit-sharing and collective bargaining arrangements, suggests that this may not be always against the interests of corporate profits.

In the arena of political economy, however, the so-called neo-liberals (inspired by ideas propagated by economists belonging to the Chicago and Virginia Schools in the US) often castigate trade unions as rent-seeking ‘special interests’. They suggest that trade unions by organising workers for collective bargaining (aimed at rent-sharing with the owners) in some sense interfere with the operation of untrammelled competition in the labour market. But in the real world of massive power of concentrated capital unorganised workers face such a grotesque asymmetry of power that organising them into unions is often a relatively small step toward achieving some kind of countervailing power, and hence toward a bit of levelling of the playing field which a sincere liberal should not much object to. In any case, in much of the world today, unions have their backs to the wall. While corporate concentration is increasing, the influence of labour organisations in work sites is shrinking fast — examples are many all around the world, from the successful strike-breaking “right-to-work” movement pushed by employers in the American Rust Belt, to large numbers of “contract laborers” without benefits working side by side with regular workers in factories in India. 

Another political-economy issue arises when liberals are criticised both by populists and by the Left for being too focused on procedural aspects of democracy and its imperfect representative institutions, and less on its direct participatory aspects. In particular, liberals are often found to be too comfortable with the dominance in policy-making of unelected technocrats insulated from the participatory processes. But on many complex issues of regulatory, monetary or financial policy, one needs evidence- or knowledge-based governance and some insulation from day-to-day political pressures. Otherwise we are likely to be at the mercy of ignorant but arrogant antics of demagogues (such as Trump’s mercantilist trade wars to get jobs for American workers or Modi’s demonetisation stunt in India to fight corruption). 

One other aspect of competition we should pay attention to is its dynamic aspect. Uncompetitive oligarchic economies are usually also less innovative. In the long run, innovations and productivity growth sustain high standards of living. But there is a trade-off between static and dynamic competition here, as a temporary suspension of competition — in the form of patents and copyrights which allow the innovator to get monopoly profits that are supposed to compensate for the initial research and development costs incurred in producing the innovation — is called for, which is supported by many liberal economists. The World Trade Organization (WTO), for example, enforces a 20-year patent monopoly. Others consider these costs too high (kept high in WTO negotiations by expensive corporate lawyers hired by multinationals), with an adverse effect particularly in discouraging future innovations, as the latter depend on access to earlier innovations in advancing the frontier. In the US, the patent system is now quite broken, with patent standards declining, and in some areas new products or processes (for example in software or business methods) are difficult to define precisely, giving rise to a minefield of litigations and a whole army of rapacious ‘patent trolls’ which particularly harm small innovating firms. One should keep in mind other, possibly less costly, ways of encouraging innovations, other than private patents (such as a pre-announced prize for a particular research direction, research grants, the state buying the patent and putting it in the public domain, helping development of open-source technology and open-access science journals etc).

The dynamic nature of competition in challenging incumbent firms is also being dampened, when today’s giant firms with deep pockets often buy up the new start-ups with an innovative product and thus pre-empt potential competition. In any case these firms often enjoy the inherent advantages from big data feedback loops and network effects that are increasingly important in the technological field. There are also certain steady incremental innovations which arise in the process of production itself in the large firms (the Japanese call this kaizen). Altogether, the relation between competition and innovations is getting more complex.

The article was first published in the international blog 3 Quarks Daily. 

(Tomorrow: Issues in privatisation & market principle in general)

The author is Professor of Graduate School at University of California, Berkeley. His most recent books are Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India, Globalisation, Democracy and Corruption: An Indian Perspective, and Smriti-kandyuan (a quasi-memoir in Bengali)

The first part of the series was published on Wednesday. This is the second part.