EXCLUSIVE: Jan Eeckhout's 'The Profit Paradox' Details How Lack Of Competition Warps Economies


Boss Tweed, the notorious 19th-century New York City political chieftain, once remarked, “The way to have power is to take it.”

Tweed’s philosophy appears to have survived well into the 21st century, at least according to Jan Eeckhout, author of the new book “The Profit Paradox: How Thriving Firms Threaten the Future of Work.”

In his book, Eeckhout details how a relatively small number of companies have created an off-kilter environment over the past four decades in which they have consolidated economic controls to a point where they can exist without fear of either competition or government regulation. As a result of this situation, workforce wages have mostly stagnated and prices on consumer and industrial goods are in constant ascension.

Eeckhout, who is the ICREA Research Professor at Pompeu Fabra University in Barcelona and previously taught at the University of Pennsylvania, University College London, Princeton University and New York University, spoke with Benzinga about “The Profit Paradox” and the state of global macroeconomy.

Benzinga: How did you come about with the thesis for your work?

JE: The thesis is based on facts, and we see two things. First of all, with the new fast technological change that's going on, we see that those highly productive firms — these very big innovators — have become very profitable, which is a good thing because innovation is a good thing. That's the driver of the economy, that's how we get progress and growth.

At the same time, this past ecological change has also led to a lopsidedness within the industries, because an Amazon AMZN or a Facebook FB is so productive and is so much better than anyone else that they actually grab the entire market.

Still, couldn’t an argument be made that these companies are giving the public what it wants?


JE: I'm the first one who loves Amazon, because I get a lot of stuff at a low price and it's very convenient. But the reason why they can do it is because our central tenets of competition don't work.

What happens is that the first innovator in a market is the winner — it has competed heavily to get there. But once they're there, there's a huge barrier for other firms to come in to compete in that market.

Let me give you an example. In the '90s, Yahoo tried to get into the online auction market but never got a hold because eBay EBAY had 90% to 95% of the auction market.

But if you look at what happened in Japan, Yahoo Auctions was first and eBay has less than 5% of the market share — they can't get it. So, it's not that eBay is superior to Yahoo, it was that eBay was first.

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But doesn’t each generation bring a new wave of innovators creating different ways to change the economy?

JE: While the innovation was very valuable in the '90s, 30 years on this innovation has stopped happening and the only thing that we see now is basically barriers to entry. The start-up rate is half what it was in the '90s.

When people try to start up a new company, they face these huge giants and two things can happen with the giants: either they buy you, either at a price that's very low or in a killer acquisition where they buy and they just kill you off immediately, or they let you do what you do and they just copy your technology.

The COVID-19 pandemic created chaos on all economies around the world. Did this period of tumult change the landscape in any way for the better?

JE: From looking at the Dow Jones, the profitability of the largest firms has gone up even more — we know the Dow Jones is close to 35,000 and the growth since the pandemic has been enormous. This seems to indicate that what the pandemic has is to create innovation, and a lot of firms had to just be doing business in a different way. For example, you and I are talking over Zoom ZM, and many of our meetings would have been very different a year and a half ago.

But a lot of the smaller companies had to close down, either declaring bankruptcy or just simply leaving the market.

Overall, we see that large firms’ profitability had gone up even further than it was before the pandemic, and I think that's a sign that these firms have been beneficiaries of the pandemic.

What is the role of the government in addressing this situation?

JE: What I suggest in terms of government intervention — and it might sound like an oxymoron — but the government should ensure more competition. If a market has barriers to entry, anti-trust regulations should ensure more competition rather than less competition.

There's an important distinction to be made. There is a role for anti-trust legislation, but my view is they don't have to split up firms. There's no kind of gain in splitting up Amazon. The reason why Amazon is so efficient and cost-effective is because they're so large, so let's keep the size. But the government can do other things to induce competition.

Speaking of competition, how can the economy that you describe in your book compete against China?

JE: China is going through a transition from a planned economy to a market economy, and we see in the data that China is the one country where the degree of concentration is actually going down.

They still have a lot of state-owned enterprises which are massive, but these government companies are not very efficient and are now facing competition from many of the private companies in China.

As a result of that, there is a degree of competitiveness that's increasing because they're weeding out these massive state-owned enterprises. So, China is somewhat different from the rest of the world.

How does that work in terms of the competition? Ultimately, for the customer, it doesn't matter whether your company is Apple AAPL or Alibaba BABA. I have an American phone in my pocket, and you probably drink a Belgian beer in the United States. If you read a book by Penguin, it's owned by a German company, and if you buy through Alibaba, it's a Chinese company.

But ultimately, it's the customer's location that matters because that is where the market power is, especially with the top 100 global firms, because that is exactly the kind of the issue of what's going on. It's a global phenomenon.

“The Profit Paradox: How Thriving Firms Threaten the Future of Work,” published by Princeton University Press.

(Photo of Jan Eekhout courtesy of ICREA.)

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Posted In: EconomicsExclusivesInterviewbooksChinacompetitionJan EeckhoutMonopoliesregulationThe Profit Paradox
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