Is Techno-Monopoly Inevitable?

William H. Janeway at Project Syndicate: The detective in a typical British crime procedural would say that Mordecai Kurz “has got form.” An emeritus professor at Stanford University, Kurz received his doctorate in economics from Yale University more than 60 years ago. In 1970, he co-authored a book with Kenneth J. Arrow, a soon-to-be Nobel laureate in economics and among the greatest cross-over mathematician-social scientists ever.

Given the need to reward those who risk time and money on unproven ventures and ideas, there is often a tension between encouraging innovation and preventing monopolization in capitalist economies. The question is how to strike a proper balance in the face of immensely powerful technological and market dynamics.

Kurz would go on to establish a distinctive platform for criticizing John Muth and Robert Lucas’s rational expectations hypothesis, demonstrating with rigor that any number of models could be mapped to the historical statistical record to reveal a spectrum of alternative “rational beliefs.” And now, in his book The Market Power of Technology: Understanding the Second Gilded Age, he brings the same rigor to bear on the question of what shapes income growth and the distribution of wealth in an economy driven by privately owned technological innovations.

Kurz’s theory of “technological market power” distinguishes legally sanctioned monopolies based on innovation from illegal conspiracies that restrain trade. He offers the example of General Electric, which exemplified the persistence of technological market power for a century, starting in the 1890s. An initial innovation that improves the innovator’s competitive position creates market power which, in turn, generates monopoly profits that are invested in entrenching and extending the scope of market power. Moreover, those monopoly profits can and observably have been applied to influence the extent to which the political process can counter the accumulated market power.

Kurz challenges the view that any monopoly based on technology will be necessarily transient, subject to the Schumpeterian process of “creative destruction.” Once market power becomes entrenched, he argues, targeted state interventions become the only means of restoring meaningful competition. Accordingly, Kurz proposes a radical program of reforms to disestablish market power where it exists and minimize the risk of its recurrence.

Yet the feasibility of such responses would appear to be limited by the monopolists’ immense political power in the United States. Their reach extends even beyond electoral and legislative politics to encompass the judiciary: consider the success of the Federalist Society in establishing an ideological basis for pro-business, anti-regulatory jurisprudence. As Kurz himself is aware, tackling technological market power will require a sea change in American politics.

Kurz’s book is a profoundly significant contribution to a growing body of political-economy literature (including some of my own work) that seeks to make sense of the complex, potentially contradictory dynamics of democratic capitalism or capitalist democracy (you choose the order). His work is distinctive in several ways.

First, he offers formal mathematical models to express the logic of his argument and to interrogate historical data. Second, his analysis allows him to furnish deterministic conclusions, such as his main argument that the historically observable “permanence” of market power results from how technology and capitalism intersect. And third, he arrives at quite radical conclusions about what is needed to counter market power.

There is no need to recount in detail how Kurz develops his thesis. He himself has translated the arguments for a nontechnical audience in a series of Project Syndicate commentaries. He is ultimately addressing observable facts of economic, technological, and political life. That said, four areas of his analysis warrant closer attention.

First, his quantified profile of the trajectory of monopoly profits occasionally fails to map precisely with the political history that he invokes. Second, he pays scant attention to the financial dimensions of monopolizing incumbents’ behavior. Third, in his analysis and in his proposed reforms, he paints a simplistic picture of the tension between the expected profits that incentivize investment in innovation and the power that realized profits confer on successful innovators, while treating research and development, and the innovations it generates, as a homogeneous amalgam. And fourth, his attack on Schumpeterian growth theory targets a straw man that both Joseph Schumpeter and later scholars abandoned long ago.

The Long View

Kurz gives us a history of technologically derived market power from the end of the nineteenth century onward, deploying formal models to distinguish monopoly profits – the returns to market power – from the returns to physical capital and labor. In this calculation, all the output of R&D – patents, software, intangible assets – is deemed to be both the source and a consequence of market power. Capitalized in the stock market, monopoly profits (extended to include stock-based executive compensation) become quantifiable monopoly wealth…

More here.