Will We Have a Consolidated Economy?

Economics

Adam Smith, the famous eighteenth century author of The Wealth of Nations, feared that “the wretched spirit of monopoly” would destroy a free and competitive market. Some merchants, he wrote, were “an order of men . . . who have generally an interest to deceive and even to oppress the public.” He was weary of these people’s efforts to lobby for self-beneficial laws while placing “an absurd tax upon the rest of their fellow citizens” (pp. 358, 220).

As with Smith, America’s Founders also worried about the plague of monopolies. James Madison, in an October 1788 letter to Thomas Jefferson, said that business concentration would lead to the loss of individual freedom. “Monopolies are sacrifices of the many to the few,” he wrote (National Archives).

Adam Smith and America’s Founders agreed with Thomas Hobbes—and the Scriptures—that humans were prone to be self-centered and greedy, so they argued that governments would need to put checks on power—economic or otherwise—to maintain a nation’s economic and civic health.

Despite these warnings, the US underwent dramatic economic consolidation after the Civil War, leading to the so-called Gilded Age of the 1870s. Concerned that monopolization was damaging individual freedoms and small businesses, Congress passed the Sherman Antitrust Act of 1890. The bill’s author stated the motivation behind the law this way: “If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessaries of life” (Binyamin Appelbaum, The Economists’ Hour, 2019, p. 133).

The fear in those days was that economic consolidation would enable a small group of people to heavily influence lawmakers for their own benefit, thereby fueling corruption and reducing freedoms for average Americans.

More recently, efforts to prevent monopolies have sought to protect not just citizens, but also heathy business and financial market. Nobel Prize-winner Kenneth Arrow recognized that monopolization hurts the free market itself, in part by reducing innovation. Arrow “pointed out that the existing profits that firms earn in imperfectly competitive markets can dull innovation incentives,” writes economist Richard Gilbert in his classic book Innovation Matters (MIT Press, 2020).

Arrow’s point was that if a small group of corporations dominate the market, thereby eliminating most competition and therefore eliminating market freedom, those corporations will have no need to bring forward new products and services. Instead of innovating, they will shift money from research and development to shareholders and CEOs. If Arrow was right, then well-designed antitrust laws can make the market freer and more innovative.

What is the condition of the US economy today? There are signs that the US has been gradually moving toward economic consolidation. Consider the banking industry. According to a 2021 research paper by two economists at the Federal Reserve Bank of Cleveland, “the number of banking institutions has declined since 2000 . . . by more than 2,300 during the past twenty years, with most of this decline happening in the past ten years” (Kyle D. Fee and Erik Tiersten-Nyman).

These numbers are supported by the National Community Reinvestment Coalition, which reports that “two-thirds of banking institutions have disappeared since the early 1980s—declining from nearly 18,000 in 1984 to fewer than 5,000 in 2021.” Most of this consolidation has occurred by mergers and acquisitions, not because of competition.

Jeremy Kress, an assistant professor of business law at the University of Michigan, conducted research on how consolidation in the banking industry has impacted Americans. He argues that the overall economy is less resilient to severe economic shocks because, as of 2021, “the top four banks—JPMorgan, Bank of America, Wells Fargo, and Citibank—hold the same amount of assets as the next three hundred combined, about $9 trillion.” These banks become “too big to fail” during a financial crisis, such as occurred in 2007, and therefore might require taxpayers to bail them out.

“Numerous empirical studies have demonstrated that large bank mergers threaten financial stability,” writes Kress. “When banks grow through mergers—as many did in the runup to the 2008 crisis—the consequences of their failure become more dire.”

The food and grocery sectors have also undergone significant consolidation since the 1980s. In an Axios 2020 article, Alex Fitzpatrick and Erin Davis show that Americans buy more than 30 percent of all food at Walmart. Citizens in most rural towns have only one grocery option: Walmart. The Federal Trade Commission found that shoppers had to pay higher prices as a result. Grocery consolidation is often invisible to most Americans because massive companies like Kroger and Albertsons own numerous brands, creating an “illusion of options.”

Supplying grocery stores with food are massive corporations like Cargill. This company provides some element of nearly everything we eat. We rarely think about Cargill when we buy food and beverages, but it dominates the global food industry. According to Statista in 2021, Cargill’s annual revenue is the same as the combined revenue of twenty US states.

As artificial intelligence rapidly permeates digital information realms, we could see further consolidation of information. AI companies and major search engines (e.g., Google, Microsoft, etc.) have already consolidated troves of copyrighted information in their data centers (without paying the publishers). Beyond that, these companies now impose short “AI summaries” at the top of our search results. This subtle tactic encourages users to trust the AI summary generated by Google or Microsoft rather than click on a website in the list. The goal, therefore, is to monopolize information searches. Google and Microsoft want people to rely on the AI summaries, which undermines independent website publishers.

That’s a classic example of monopolization. Why? Companies like Google confiscated the world’s data, it has the most advanced search engine, and now it can prioritize its own AI system over other search results. Moreover, only a handful of trillion-dollar companies have the capital to enter the new AI information environment, which is already highly concentrated and non-competitive, as demonstrated by a recent antitrust case against Google (New York Times, May 2, 2024).

All these monopolistic trends are concerning, but perhaps we should not be too pessimistic. No doubt massive corporations have brought benefits to society. Who doesn’t appreciate Goole Maps? And we should not overlook examples of small, competitive businesses who are doing well in the US economy. According to data from the Bureau of Labor Statistics, small businesses (those with fewer than 250 employees) have steadily employed about 50 percent of American workers since 2013. So, to whatever degree consolidation is occurring, small businesses—at least in terms of a national average—seem to be holding up.

Nevertheless, researchers have found that consolidation trends have led to increased prices, lower wages, the erosion of local communities, and the loss of local tax revenues that fund police, fire departments, and schools. (See for example: Charles Tolbert, “Civic Community in Small-Town America,” 2002; Josh Bivens et al, “How Market Power Has Affected American Wages,” American Policy Institute, 2018). We should be concerned and watchful.

What would Adam Smith and James Madison say if they were around? Their eighteenth-century concerns are still relevant today.

Quote to Ponder

“A society is more resilient if the pace of change does not outstrip the capacity to change. . . . If a cyclist rides too fast, his or her vulnerability will increase. Riding at high speeds will diminish the cyclist’s ability to avoid a pothole, potentially leading to a crash. Once a biker falls and incurs an injury, it will be more difficult to ride again. And so, change and technological progress must avoid leaving people behind.” — Princeton University Economist Markus Brunnermeier, The Resilient Society, 2021