Interest Rates, Antitrust and Innovation
We exist in a strange world where it seems powerful technology monopolists are criticized for delivering too much value to consumers. Google, Amazon, and Facebook provide “free” delivery of goods, information, and social interactions, and provide more of it every year for lower prices. What’s not to like?
The Sherman Antitrust Act and “trust-busting” originated over a century ago in reaction to the power of robber barons and energy monopolists like Standard Oil. Then, as now, the owners of powerful private corporations became, in practice, a separate species of economic person: personally controlling resources akin to a nation-state. The rich were different than you and me. And though Standard Oil was itself delivering oil at lower prices than its competitors, much like Amazon and the others do today, concentration of power itself was viewed, rightfully, as a threat to democracy and social order.
Deflation and interest rates make the story even stranger today. At least in the case of Amazon, essentially free money from investors allowed the company to grow for almost 20 years at a loss. Over that time Amazon built a massive distribution platform allowing it to deliver goods at scale and for lower costs than its competitors. So the American public essentially funded its cheaper consumption with what should have been “loss making” investment over a very extended period of time. Such an investment approach would normally either be called “far-sighted national strategic planning,” or else a “Ponzi scheme”. In any case, the result appears to be an unassailable moat built with deflation shovels.
The consumer wins. But who loses as Amazon relentlessly drives prices lower? The answer is: every competing legacy business with a fixed cost structure. In the days of Standard Oil, the company would enter a new geography and undercut its competitors at a loss, driving them out of business. After the local competitor capitulated, the deeper-pocketed Standard Oil would be able to raise prices again to sustainable levels.
Is that what Amazon did for two decades? Is the result that every mom and pop store is at risk of going under? Will the shoe eventually drop and the American public find itself at the mercy of just one sole source supplier?
The situation is confusing from the framework of traditional capitalism and traditional capitalists. Large corporations today complain that innovation is difficult for them because they must meet “grown up” assessments of cost-of-capital and likely return. Spending two decades running at an operating loss is not the kind of plan that gets approved by division heads at Fortune 500 companies, except in pure R&D.
To which startup CEOs reply: “Yes, that is the point! We take chances that others will not, and perhaps that others should not. That is why you buy us later.”
But when money is so cheap, for so long, and certain players can engage in predatory pricing for entire business cycles, and “sustainable” businesses have their margins carved out, and when eventually even startups cannot compete with the moat that Amazon and Google have built, what is really happening? Is that healthy Schumpeterian creative destruction, or is that a disemboweling cancer to the economy?
Should trust-busters act? Should interest rates go up? Is there the “right” amount of innovation in the economy – not too much and not too little? These questions are not easily answered, but they are related.
