Since economic evolution is right up my alley, I thought I would continue the theme of Karl’s recent post on the subject explaining while a plethora of old, small businesses is a sign of market failure, and specifically respond to a comment left by Jazzbumpa, which includes a common sentiment among the left, that is not at all a feature of a market economy:
So the natural evolution of capitalism is for each business segment to ultimately become a near-monopoly. This is economic growth, and it is a good thing.
And Private Equity funds accelerate this process, making it an even better thing.
http://www.asymptosis.com/ows-how-wall-street-capital-destroys-capitalism.html
I’m starting to get it. Who do think will eventually own the whole world – General Electric or Cerberus?
Cheers!
JzB
Let me ask you; are you afraid of dominance and market power of British-East India Company? If the above were an actual concern, you would be. B-EIC had the mother of all market positions, and not even just in the 17th and 18th centuries — but a position that would make any company today envious. It was largely horizontally integrated in trade goods, and fully vertically integrated (even featuring its own army and navy). B-EIC had a captive market of nearly 1/5th of the entire population on earth, and had was specifically handy at brutal oppression.
However, despite all of the advantages one could hope for, B-EIC went out of business in 1873. Which highlights what should be a fundamental law of economics (but is not):
All competitive advantage is temporary.
Billions of gallons of ink has been spilled chronicling the rise of giant firms, and detailing how their businesses were run to be “in it for the long haul”. However — and ironically — billions of gallons of ink has also been spilled chronicling the same companies’ fall from grace as quickly as a decade later. In fact, of the original Forbes 100 list of largest US companies, only eighteen sustained their performance to the 50 year mark…and if my memory serves me correctly only two are still there (one being Exxon).
In fact, with an increase in the level of competition, economists Robert Wiggins and Timothy Ruefli find that the ability of a single firm to remain in a position of competitive advantage shortens precipitously. This is just another way of saying that he “S-curve” of deductive tinkering/technological innovation has been compressed.
To sum it up: a healthy market is characterized by relatively easy entry to new participants, a healthy level of competition between firms, and the ability for firms to die gracefully. Large firms will come and go, and some may be quite intimidating (like IBM, Microsoft, or Google, for example)…
…their time, too, shall pass.

13 comments
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Tuesday ~ October 25th, 2011 at 7:49 pm
Johnny Disaster
How many generations lived between 1612 and 1757? If I (and my parents, and my children as well) can be born. live and die under the thumb of an anti-competitive monopoly, it makes no difference to me that it might eventually pass, someday in the next century.
50-70 years is functionally permanent from an actual human being’s standpoint.
Tuesday ~ October 25th, 2011 at 8:31 pm
Brett
Then you should be grateful for the current period, where that’s no longer the case. IBM was on top of the computer market for decades before Microsoft pushed it off the top – but Microsoft was only dominant for two decades at best before Google, Apple, and Facebook shoved it off. The time that a dominant company can enjoy near-total dominance in a market is shrinking rapidly.
That ties into what I consider to be the main point, one that my fellow left-leaning friends tend to miss: without regulatory and official support to constrict the market, private sector monopolies or near-monopolies don’t last. They lay the seeds of their own destruction because of the economic incentives for competition.
Wednesday ~ October 26th, 2011 at 5:18 am
reason
eply to Brett,
so that is why we should none-the-less have an active anti-monopoly policy. Because if we are passive about it, the powerful monopoly will try and co-opt the government.
Wednesday ~ October 26th, 2011 at 6:34 am
Tel
How do you propose to have an anti-monopoly policy that is not itself a branch of government (therefore open to being co-opted) ?
Friday ~ November 4th, 2011 at 8:35 am
Hermenauta
Brett,
IBM, Google, Apple, Microsoft and Facebook are hardly in the same relevant market, speaking in antitrust terms. Monopolies are defined in terms of relevant markets. So your argument can still be valid, but isn´t compelling prima facie, and must be taken cum grano salis.
Tuesday ~ October 25th, 2011 at 10:15 pm
Leigh Caldwell (@leighblue)
I haven’t time to read the whole paper, but if it is suggesting that industries are more competitive now, and that this destroys dominant market positions faster, could this explain the apparent decline in business investment over the last decade? If companies know that they won’t be able to reliably build market share and earn a return on their capital, why invest?
Wednesday ~ October 26th, 2011 at 3:23 am
FT Alphaville » Further reading
[...] – Mythbusters: competitive advantage? [...]
Wednesday ~ October 26th, 2011 at 5:17 am
reason
Reply to Brett,
so that is why we should none-the-less have an active anti-policy. Because if we are passive about it, the powerful monopoly will try and co-opt the government.
Wednesday ~ October 26th, 2011 at 5:14 am
reason
Johnny Disaster is right, we shouldn’t be complacent about monopoly power.
Wednesday ~ October 26th, 2011 at 5:20 am
Rob Parenteau
How would you choose to reconcile the view that competition is higher now with the secular rise in profit margins across many of the developed economies since the early ’80s? In a world where Schumpeterian creative destruction is more prevalent and/or accelerating, pricing power should be increasingly temporary, and product prices should migrate closer to unit costs, not further away. Instead, markups over labor and interest costs are higher, for example, in the US than they have ever been in the post WWII period. Your narrative does not seem to square with that economic fact – wondering how you grapple with that one?
Wednesday ~ October 26th, 2011 at 6:30 am
Tel
If we abandoned the concept of limited liability and demanded that shareholders were fully responsible for the actions of their agents, it would tend to curb the massive corporations somewhat (shareholders would have a tendency to invest in something small enough that they can personally comprehend what goes on).
We now have corporations so large that not only is the CEO unable to keep track of what is going on, but when there’s some sort of bribery scandal or similar wrongdoing, the CEO and the board can just shrug and say, “Oh well it happened in down some department, we don’t keep track of that level of detail.”
This culture has reached the level of acceptability within the companies themselves, and within the legal system, and the government regulators do nothing, and even the public at large just shrugs… ho hum, another report of corruption.
Wednesday ~ October 26th, 2011 at 8:51 am
nemi
AFAIK, it was not any forces of evolutionary capitalism that broke the B-EIC – but instead the forces of military combatant/insurgents all over the world (America, the Boston tea party and the American revolution being one of them)
Saturday ~ February 2nd, 2013 at 4:14 pm
Even Under Free Immigration Natives Have a Competitive Advantage « It Don't Mean Much, These Seats are Cheap.
[...] course, there is no such thing as sustained competitive advantage, and this is no different. Descendants of first-generation [...]