In orthodox theory, oligopolies are big, lean and efficient. Their size and efficiency should produce price cuts. Instead, in the real world, oligopolies undermine economic democracy. They price gouge. They outflank regulatory laws while regulatory cops sit on their hands. Can Andrew Leigh and Jim Chalmers limit the damage economic concentration imposes?
As Jim Chalmers stepped up to the lectern to give his speech on the intergenerational report at the National Press Club there was a buzz in the air. An intriguing peek at the future was an unmissable prospect.
As important as the occasion was (and not taking anything away from Chalmers’ importance), there was a sense he was second violin in the narrative he would spell out. For as Adam Smith noted, capital has governing power over labour and its output. On the economy circuit, Chalmers can assist in smoothing out bumps as the bus turns corners, but it is corporate boardrooms that are in the driving seat.
The fate of the projection laid out by Chalmers rests with business. But business is an unruly horse. It presents a united front to organised labour, but businesses within their own ranks are hostile brethren. Their individual drive to maximise profits is not conducive to economy-wide projections. National ideals are outside their ambit. Business needs the help of figures like Chalmers who are independent from the daily grind of business to project the future overall shape of the economy.
Chalmers fully understands that any projection regarding the next forty years is a complex undertaking, fraught with difficulties. His speech noted that unforeseen local and international shocks may arise, which will knock projections sideways. However, there is a present and clear danger to any economic forecast being fulfilled. Chalmers knows the anti-competitive practices of business weigh on the prospect of achieving desired economic growth levels. In short, oligopolies are distorting the economy. They drive weak growth, low productivity and sluggish private capital investment. They are risk averse, and reluctant to introduce new technology―when they have at their disposal pools of low wage labour to draw on and can keep prices high even when selling less. Their high-price strategy deflates consumer demand, which in turn fetters investment and shackles technology. That can be contrasted with how the industrial application of technology thrived during the heyday of fierce competition between small businesses.
In orthodox theory, oligopolies are big, lean and efficient. It is termed economies of scale. Their size and efficiency should produce price cuts. Instead, in the real world, they price gouge. They outflank regulatory laws A price-leader moves and others follow. Regulatory cops sit on their hands.
Oligopolies undermine economic democracy. Even those with deep pockets find the barrier-to-entry too high. Kaufland, a German supermarket, considered setting up in Australia, but got cold feet when the reality of the grocery concentration level sank in. Economic concentration burns off interlopers and weakens the link with the price mechanism that theoretically aligns supply and demand, and whilst this reaps fat profits for oligopolies it creates a gulf between cost of production and prices. A further blow to democracy is inflicted by oligopolies flouting the headline corporation tax figure. To compound this blot on corporate social responsibility, they put out their hand for credits which further reduce their tax bills. All this while social services languish.
Chalmers is alert to the pitfalls of oligopolies. He realises they are running an anti-competitive racket. On the eve of his National Press Club speech, he announced that in his words a ‘crack team’ was to be appointed to examine competition policy and report back on how to stimulate the animal spirits of competition. The taskforce is to be headed by Andrew Leigh.
Chalmers took this step at a turning point. He was able to ride a populist bandwagon. In the past few months whilst the general population has carried the burden of interest rate hikes to cool inflation and borne the weight of a cost-of-living crisis, public disquiet about corporate profiteering has been gathering steam. Airlines, banks and retail shopping giants have been recording soaring profit margins whilst real wages lag.
Leigh is a good man fallen among ALP factions. He is a junior minister blessed with one of the sharpest intellects in parliament. He refused to join an ALP faction, and this killed his chance of high office. He was a Professor of Economics at ANU before entering parliament. He is a substantial figure. Chalmers made an excellent appointment. The best.
The tragedy is that Leigh and his crack team will in good faith deliberate for a lengthy period and then fight to produce changes. It is possible merger laws will be tightened to put a check on economic concentration. However, legislation since the early twentieth century has failed everywhere to halt the march of oligopolies.
The horse has bolted. Thus, Leigh will find it difficult to shift the dial of oligopolies and their price fixing and restriction of competition very far. The structural forces that have brought oligopolies to the forefront of the Australian economy go deep.
Even in the late nineteenth century, the rich minerals sector was highly concentrated. The Anglo-Australian combine that dominated Broken Hill and elsewhere had a grip on the market. They were important members of an international cartel that set global output and prices. They were headquartered in Collins Street in Melbourne, but the share register was dominated by British capital. One of the members of the combine is today called Rio Tinto. Another member morphed into BHP. Today they bestride the Australian minerals sector and British shareholders still predominate.
Oligopolies are not a matter of choice. They are a product of free competition. It is no accident of history that they dilute competition and stifle the price mechanism and retard innovation. They emerged out of the bonfire of free competition, as the strong prevailed and the weak succumbed. They fight against excess capacity in the form of overproduction pushing prices down. They quickly halt price wars when those price wars slash profits. They are the bane of modern life. They rake money into investors’ pockets, driving up wealth inequality, and they fetter risk-taking.
Chalmers and Leigh have their work cut out trying to limit the damage economic concentration imposes, but failure will have a blowback for every sphere of society including the imperative of state expenditure to cut emissions and to deal with the costs imposed by the ageing of Australia. Oligopolies are addicted to tax avoidance and shifting taxes onto the backs of ordinary Australians.
The conceptual structure of the intergenerational report is based on reconciling public benefit and private gain and maximising utility across the population. But the conundrum is how do you achieve that―when the efficacy of Adam Smith’s invisible hand posited on free competition unconsciously coordinating the economy through prices and markets has passed into history. The visible hand of oligopolies stalks the land.
Companies make profits or die, and those that make bigger profits grow larger while those that fall behind are absorbed by rivals or end up in the bankruptcy court. When an oligopoly falters it falls into the hands of a stronger peer.
At every stage in modern economic history oligopolies have flourished on an international scale. In the inter-war years, the process accelerated, as depressed market conditions drove economic concentration. By the 1960s and 1970s, a new burst of economic concentration spearheaded by multinationals, the new conquistadors, reconfigured the Australian business landscape.
The Leigh team will be met by chief executive officers and their legion of flaks who will intone that the market must decide the allocation of resources. They will engage in piffle about being utility maximisers, ensuring maximum benefit for consumers, while dodging any claim they abuse market power. Coles, NAB, Qantas and Woolworths chief executives gave a taste of their bunkum when going into overdrive to misrepresent the record profits they recently reported. The size of the task that awaits Leigh and his colleagues is daunting. Leigh is guaranteed sleepless nights, and Chalmers’ desire to leave a light on the hill legacy will be challenged.