Larry Summers gives a great answer on competition, concentration, and market power

His podcast with Tyler Cowen is worth a listen for many reasons, but this was particularly in line with my own thinking:

COWEN: Regular economics: one hears increasingly these days that the higher concentration ratios in the American economy are an economically relevant fact. We all know those ratios are up somewhat.

But at the same time, consumers don’t, in an obvious way, seem to feel the burden of monopoly. If you look just at product choice and variety, productivity may be slow, the growth of manufacturing output appears to be quite steady. There’s not obviously a break in that series where all the monopolies restrict output.

We have all these different pieces of data: high-share values, high measured profits, very steady output behavior, a lot of product variety. How do you think about the issue of monopoly in the American economy right now? Is it significant or not?

SUMMERS: Most things I might be right or wrong, but I’m confident.


SUMMERS: This is one where I’m not certain. On the one hand, Tyler, higher concentration ratios, higher profit — with lower investment — manifest in lower interest rates. More monopoly power fits the story. On the other hand, take a thing like Apple Pay. Apple Pay means that Apple, which is already the largest company in America, is even larger.

So you could say that’s more monopoly and more market power. Or you could say there’s a whole financial industry it’s now getting competed with from outside the financial industry, and so it’s making things more competitive.

Both those views have merit. I think the second may have more merit than the first. Some of the rhetoric one hears recently, which leaves you with the impression that we’re seeing an era of a lot of new Standard Oils, seems to me to be quite overdone, with respect to the facts as I understand them.

On the other hand, are there combinations of healthcare systems in cities where we go from having some real competition to there being one dominant provider and networks to consumers’ benefits.

COWEN: Clearly, there’s problems there.

SUMMERS: There’s almost certainly some problems there. Are there difficult issues when information is central, as it would be with a Facebook or a Google? Yes, there are difficult issues: privacy, reliance on information, networks.

But are those best thought of through the prism of antitrust and monopoly? I’m not at all sure that that is the best way to think about them. After all, in some sense, the products in those two examples are given away to consumers for free. One of the most important issues for economists to figure out over the next couple of years is how to think about these trends.

I think there are some selective grounds for concern. It’s much more likely that antitrust has been insufficiently tough than it is that it’s been too tough over the last decade. But I also think one needs to be careful about the fact that being a successful business will tend to cause you to have more profits. We usually think of that as a good thing, not a bad thing.

A few things I think Summers gets right: 1) lack of certainty; 2) attention to ways in which business may be getting more competitive; 3) separating the tech platforms out from the broader story.

My best attempt to grapple with these trends is here; my reading list on the subject is here.

Blue Bottle, brands, and market power

Nestle has bought a majority stake in Blue Bottle, the fancy coffee chain. Why? As The New York Times reports:

The rapidly expanding niche accounts for 15 to 20 percent of coffee consumed in the United States, according to the Specialty Coffee Association. Perhaps more important than the sector’s rapid growth is that it commands higher prices and generates bigger profit margins.

So much of the talk of marker power, markups, and concentration has focused on technology and in particular the big tech giants. But what if Blue Bottle is the more representative example?

I don’t mean to knock the product when I say that Blue Bottle’s success is to a large degree about branding:

Although Blue Bottle is one of the most important players in the third-wave coffee sector, it has distinguished itself from its rivals in significant ways. It has spurned many of the hallmarks of high-end shops — barista competitions, lengthy travelogues about journeys to find the perfect small coffee farm — while emphasizing the aesthetics and experience of a well-prepared cup.

The strategy is a reflection of the company’s founder, a soft-spoken, classically trained musician who began roasting coffee as a hobby while on the road with traveling orchestras. Mr. Freeman’s approach has less of the rebellious rock ‘n’ roll attitude displayed by competitors like Stumptown, and more of the quiet calm that one might associate with a slowly but well-brewed cup of coffee.

You can argue over whether some of these differentiators are about product or brand, but the news reminded me of a paper I read recently: a 2016 review paper on branding by Bart J. Bronnenberg and Jean-Pierre Dubé. Some relevant bits:

In the latter part of the twentieth century, the degree of concentration in consumers goods industries grew at a much faster pace than other industries in the US (Caves and Porter, 1980). By the end of the twentieth century, most consumer goods industries were dominated by a small number of brands commanding most of the share of sales (Bronnenberg, Dhar, and Dubé, 2007). Most striking, many of the dominant consumer brands in 1923 were still the dominant brands in their respective categories in 1983 more than half a century later1 , although the findings are predominantly in food categories.2


In general, the sales in these CPG product categories are very concentrated, as summarized in Table 2. On average across categories and Scantrack markets, the top brand commands 46% of equivalent unit sales, which is consistent with the analysis of food categories in Bronnenberg, Dhar, and Dubé (2011). The average four-firm concentration ratio is 79%


The key consistent finding is the persistence in market shares and the advantages to early movers (even if not for the first entrant) that “survive” long-term.


The body of literature and the collection of empirical evidence supports the long-standing notion that established brands constitute important barriers to entry

To recap, branding appears linked to rising industry concentration. Branding should increase markups by the definition used in this recent and widely discussed paper if good branding requires higher up front costs relative to marginal ones. And it represents market power to the extent it deters new entrants. You could imagine digital technology amplifying the importance of branding, but also perhaps creating opportunities for new entrants like Blue Bottle as the ways that companies brand themselves change.

Needless to say, this is all speculative, and not, I think, in tension with other common explanations of market power, like lobbying, network effects, etc. But concentration + market power is a big, complicated trend, likely with many partial explanations. Perhaps the rise of branding is one.

Digital economics in one paragraph

Search costs are lower in digital environments, enlarging the potential scope and quality of search. Digital goods can be replicated at zero cost, meaning they are often non-rival. The role of geographic distance changes as the cost of transportation for digital goods and information is approximately zero. Digital technologies make it easy to track any one individual’s behavior. Last, digital verification can make it easier to verify the reputation and trustworthiness of any one individual, firm, or organization in the digital economy. Each of these cost changes draws on a different set of well-established economic models: Primarily search models, non-rival goods models, transportation cost models, price discrimination models, and reputation models.

From a review paper by Avi Goldfarb and Catherine Tucker, which discusses the empirical findings for each of the points above.

3 very different views of economic models

The first is a famous one, from Milton Friedman, via Justin Fox’s The Myth of the Rational Market:

[T]he relevant question to ask about the “assumptions of a theory is not whether they are descriptively “realistic,” for they never are, but whether they are sufficiently good approximations for the purpose at hand. And this question can be answered only be seeing whether the theory works, which means whether it yields sufficiently accurate predictions.

As Fox writes:

To head off the obvious objection that it was ridiculous to think regular folks reason according to complex statistical rules, Friedman and Savage argued that billiards players couldn’t write down the physics formulas that underlay their shot selections but nonetheless acted as if they did.

Here’s quite a different take that I just came up on recently, from J.W. Mason of the Roosevelt Institute:

It seems to me that Deirdre McCloskey was right: Economics is not the study of the economy. Economics is just what economists do. Economic theory is essentially a closed formal system; it’s a historical accident that there is some overlap between its technical vocabulary and the language used to describe concrete economic phenomena. Economics the discipline is to the economy, the sphere of social reality, as chess theory is to medieval history: The statement, say, that “queens are most effective when supported by strong bishops” might be reasonable in both domains, but studying its application in the one case will not help at all in applying it in in the other.

Finally, a third view, from Dani Rodrik’s excellent book Economics Rules:

I wrote this book to try to explain why economics sometimes gets it right and sometimes doesn’t. “Models” — the abstract, typically mathematical frameworks that economists use to make sense of the world — form the heart of the book. Models are both economics’ strength and its Achilles’ heel; they are also what makes economics a science — not a science like quantum physics or molecular biology, but a science nonetheless.

Rather than a single, specific model, economics encompasses a collection of models. The discipline advances by expanding its library of models and by improving the mapping between these models and the real world. The diversity of models in economics is the necessary counterpart to the flexibility of the social world. Different social settings require different models. Economists are unlikely ever to uncover universal, general-purpose models.

But, in part because economists take the natural sciences as their example, they have a tendency to misuse their models. They are prone to mistake a model for the model, relevant and applicable under all conditions. Economists must overcome this temptation. They have to select their models carefully as circumstances change, or as they turn their gaze from one setting to another. They need to learn how to shift among different models more fluidly.

Would better antitrust rein in the 1%?

The American economy has grown more concentrated in recent years — in most industries, the top few firms account for more revenue than they did 10 or 15 years ago. This phenomenon appears linked to the decline in the share of national income going to labor, as opposed to capital.

Would better antitrust help reverse that trend, resulting in higher wages and less inequality? That seems plausible, and my inclination is toward stronger antitrust. But the answer may depend on the sort of inequality we’re talking about.

It’s helpful, I think, to consider two types of inequality: the gap between the 1% and the rest, and the gap between educated professionals/the top 20% and the rest. Both gaps have grown, albeit for different reasons. The terrific rise of the 1% is largely an American phenomenon, whereas the other is more global.

Generally speaking, the international nature of the latter inequality has led economists to look beyond policy for explanations, to things like technology or globalization. The localized nature of the 1% inequality has led to an emphasis on U.S. policy decisions.

But the theme of a small number of top firms pulling away from the rest in terms of productivity and wages — not exactly the same as industry concentration necessarily, but related — appears to be international.

That suggests to me that the sort of inequality that would be addressed by tackling industry concentration is the widespread gap between educated professionals and the average worker, not the gap between the 1% and the rest.

This is all speculative, of course. It could be that concentration is a necessary but not a sufficient condition for the rise of the 1%, such that we don’t observe the same inequality around the world but that antitrust would address it. But it’s worth remembering what Alvaredo, Atkinson, Piketty and Saez concluded in their paper on the 1%:

The most obvious policy difference—between countries and over time—regards taxation.

That’s not the only cause they highlight. But the spectacular rise of the 1% is a mostly American phenomenon and so likely the result of something specifically American. The rise of incredibly powerful, productive superstar firms doesn’t fit the bill.

A reading list on market power, superstar firms, and inequality

My best attempt at an overview of the corporate concentration issue, from a recent piece:

The basic facts are these: Most industries in the U.S. have grown more concentrated, meaning the largest firms account for a larger share of revenue. At the same time, corporate profits have reached all-time highs, despite lackluster rates of business investment. And the number of new businesses being founded has declined; the number of new growth startups being founded has risen, yet these firms struggle to scale. The cause of these trends is not clear. Theories include the rise of IT and the network effects it creates, less-rigorous antitrust enforcement, and lobbying and excess regulation.

And a reading list (I’ll try and update it, and let me know what I’ve missed):

The Pro Market blog at the Stigler Center has been excellent on this. Here are a few examples:

Economists: “Totality of Evidence” Underscores Concentration Problem in the U.S.

The Rise of Market Power and the Decline of Labor’s Share

Is the Digital Economy Much Less Competitive Than We Think It Is?

So has the Washington Center for Equitable Growth. 

Market power in the U.S. economy today

Is declining competition causing slow U.S. business investment growth?

U.S. antitrust and competition policy amid the new merger wave

A communications oligopoly on steroids: Why antitrust enforcement and regulatory oversight in digital communications matter

New federal antitrust legislation recognizes U.S. workers are not only consumers

Unlocking the promise of antitrust enforcement (conference recap, with videos)

The New America Foundation’s Open Markets program is focused on this:

(update: New America and the Open Markets program have parted ways)

Amazon’s Antitrust Paradox

The Economist has done several great pieces:

The problem with profits

Too much of a good thing

A giant problem

The rise of the superstars

So has The Atlantic:

America’s Monopoly Problem

America’s Monopolies Are Holding Back the Economy

So has ProPublica:

The American Way

These Professors Make More Than a Thousand Bucks an Hour Peddling Mega-Mergers

This is a great piece from Fivethirtyeight on the state of startups:

The Next Amazon (Or Apple, Or GE) Is Probably Failing Right Now

Neil Irwin on winner-take-all at The Upshot:

The Amazon-Walmart Showdown That Explains the Modern Economy

Noah Smith at Bloomberg and on his blog:

Monopolies Are Worse Than We Thought

The Market Power Story

America’s Superstar Companies Are a Drag on Growth

Tyler Cowen on rising markups: “the whole story just doesn’t add up”:

The Rise of Market Power

Productivity and market power in general equilibrium

Intangible investment and monopoly profits

More on the rising markups paper (linked below):

Karl Smith

Robin Hanson

Arnold Kling

Larry Summers comments:

“I’m not certain”

Joe Stiglitz has a big piece in The Nation:

America Has a Monopoly Problem

Litan and Hathaway on decline of new business formation:

Declining Business Dynamism in the United States: A Look at States and Metros

Jason Furman was involved in two papers on this topic:

A Firm-Level Perspective on the Role of Rents in the Rise in Inequality


Vox’s Matt Yglesias and Ezra Klein did a podcast on this:

The Weeds

Justin Fox on winner-take-all industries and firm lifespans:

America’s Most Winner-Take-All Industry, Visualized

The Fall, Rise and Fall of Creative Destruction

Greg Ip at WSJ:

A Provocative Look at the Harm From Corporate Heft

McKinsey on winner-take-all dynamics in manufacturing:

Making it in America

Washington Monthly

The Democrats Confront Monopoly

Academic papers:

Are U.S. Industries Becoming More Concentrated?

The Fall of the Labor Share and the Rise of Superstar Firms

Declining Competition and Investment in the U.S.

The Rise of Market Power and the Macroeconomic Implications

(have not read yet, but…) Oligopolies, Prices, and Quantities

(have not yet watched) Rise of Monopoly Power in the U.S.

An interesting anonymous contribution, via Tyler Cowen

Large U.S. firms have always commanded monopolistic rents–think Dupont, Bethlehem Steel, IBM, GM/Ford/Chrysler in their respective heydays. However, several developments have worked to dramatically change how those rents are shared. Before the 1980s shareholder revolution, monopolistic rents of dominant firms were more broadly shared–not just with rank and file employees but with the local community. (link)

We’ve done tons at HBR on this…

…are firms failing faster?

The Biology of Corporate Survival

The Scary Truth About Corporate Survival

(not HBR but see also the last quote)

…on startups being started but not scaling:

The U.S. Startup Economy Is in Both Better and Worse Shape than We Thought

…on superstar firms, and the pay inequality that comes with them:

Productivity Is Soaring at Top Firms and Sluggish Everywhere Else

A Study of 16 Countries Shows That the Most Productive Firms (and Their Employees) Are Pulling Away from Everyone Else

Research: The Rise of Superstar Firms Has Been Better for Investors than for Employees

Corporate Inequality is the Defining Fact of Business Today

Corporations in the Age of Inequality

Investing in the IT That Makes a Competitive Difference

…on digital firms pulling ahead:

The Real Reason Superstar Firms Are Pulling Ahead

The Most Digital Companies Are Leaving All the Rest Behind

What the Companies on the Right Side of the Digital Business Divide Have in Common

Managing Our Hub Economy

(see also several of the items in the superstar section above)

…an interview with Jason Furman:

Competition Is on the Decline, and That’s Fueling Inequality

…on mergers:

Mergers May Be Profitable, but Are They Good for the Economy?

…on antitrust:

As More People Worry About Monopolies, an Economist Explains What Antitrust Can and Can’t Do

…on antitrust, data, and AI:

How Pricing Bots Could Form Cartels and Make Things More Expensive

Should Antitrust Regulators Stop Companies from Collecting So Much Data?

…on lobbying and rent-seeking:

Lobbyists Are Behind the Rise in Corporate Profits

…on common ownership:

One Big Reason There’s So Little Competition Among U.S. Banks

Warren Buffett Is Betting the Airline Oligopoly Is Here to Stay

…on big companies paying more than small ones, but less so than they used to:

Big Companies Don’t Pay As Well As They Used To

…and trying to sum it all up:

Making Sense of Our Very Competitive, Super Monopolistic Economy


Loosely related stuff, on productivity, inequality, etc.

Cloud computing and young firm survival

Productivity and IT in Italy

NBER on innovation and inequality: here, here.

AI and productivity, here and here. And robots.

A new paper on the decline of entrepreneurship.

Good overview on antitrust and how competition relates to innovation.

Will Wilkinson on dynamism and the welfare state

When I started writing about the link between entrepreneurship and the welfare state a couple of years ago, the research I was reporting on seemed to me to contradict a common belief: that economic dynamism was at odds with more expansive government.

But there are more and more signs that the prevailing wisdom is changing. Will Wilkinson had an excellent op-ed in The New York Times, notable in part because of his libertarian leanings. He writes:

Republicans need to recognize finally that secure property rights, openness to global trade and a relatively low regulatory burden are much more important than fiscal policy for innovation, job creation and rising standards of living…

Republicans make a critical mistake, both factual and strategic, when they cast the welfare state as the enemy of prosperity and freedom. Far and away the biggest items in the budgets of advanced countries are “welfare state” social programs, like Social Security, Medicare and Medicaid, which account for nearly half the federal budget…

dynamic, competitive markets drive growth and opportunity through “disruptive innovation,” which necessarily destabilizes industries and displaces workers. The lack of a robust safety net capable of keeping people from becoming collateral damage of routine creative destruction, such as the automation and offshoring of jobs or the closing of local plants, generates anxiety and hostility to the sort of economic policy that produces growth and employment. So not only are sound safety nets popular, but they also increase the public’s tolerance for the dislocations of a dynamic free-market economy.

Other signs of this shift include the Kauffman Foundation, which last year produced a policy digest arguing that expanding social insurance would boost entrepreneurship, and more recently Mark Zuckerberg’s commencement speech, which made this point without explicitly mentioning government.

More broadly, books like Concrete Economics and American Amnesia have argued that strong and aggressive U.S. government deserves credit for the nation’s history of dynamism. (Mariana Mazzucato was well ahead of this curve, as her book The Entrepreneurial State came out in 2013.)

Part of Wilkinson’s point, though, is to distinguish between the redistributive state and the regulatory state. It’s the latter, he argues, that more frequently impedes innovation.

My view is somewhat less pessimistic, and my bottom line in 2015 was:

Even the assumption that bureaucratic “red tape” holds back startups is less obvious than it sounds… What evidence we do have squarely challenges the intuition that it’s government that holds back startups.

But if Wilkinson is going to acknowledge the entrepreneurial benefits of the welfare state, liberals ought to at least consider the possibility that regulations do hamper innovation.

Putting entrepreneurship and innovation aside for a second, it seems clear that the net benefits of regulation vary considerably depending on which ones you’re talking about. The Clean Air Act seems to have had large positive effects. On the other hand, overzealous land use regulations that prohibit building have had large negative effects.

The same is likely true of regulation and entrepreneurship. Plenty of regulations probably aren’t a big impediment; some even help. But plenty of others probably do hold back innovation.

If we can agree about the merits of the welfare state — or at least agree that it’s not a major barrier to innovation and entrepreneurship — perhaps we can start talking about which regulations are worth keeping, and which are in need of reform.

What’s good on the internet?

“I thought once everybody could speak freely and exchange information and ideas, the world is automatically going to be a better place,” Mr. Williams says. “I was wrong about that.”

That’s Ev Williams, founder of Medium, Twitter, and Blogger, in The New York Times. The headline begins “The Internet is Broken”. So it is. But perhaps, as Nick Denton recently suggested, the “good internet will rise up again.”

What might it look like? And what signs of it can we see today?

For me personally, the less time I spend on social media and the more I spend in Pocket or Coursera, the better an internet day I have. Here are a few things on the internet I’m excited about right now:

MOOCs. I use them constantly, and whether or not they ever transform formal education they’ve already changed my life and helped my career.

Pocket. There is no other app that better represents the good internet. The new recommendations are great, which is saying something given the quality of most content recommendations. I hope their recent acquisition by Mozilla helps them sustain themselves.

Prediction tournaments. A bit niche, but they’re fun, useful, and a way to put the wisdom back into “wisdom of the crowd.” Publishers should be doing more with them.

Machine intelligence. This one is unoriginal, I know. But that doesn’t mean it’s not a big deal.

May the good internet return soon.

Zuckerberg on entrepreneurs and safety nets (plus supply-side economics)

I was pleased to see this bit in Mark Zuckerberg’s Harvard commencement speech:

Let’s face it. There is something wrong with our system when I can leave here and make billions of dollars in 10 years while millions of students can’t afford to pay off their loans, let alone start a business.

Look, I know a lot of entrepreneurs, and I don’t know a single person who gave up on starting a business because they might not make enough money. But I know lots of people who haven’t pursued dreams because they didn’t have a cushion to fall back on if they failed.

We all know we don’t succeed just by having a good idea or working hard. We succeed by being lucky too. If I had to support my family growing up instead of having time to code, if I didn’t know I’d be fine if Facebook didn’t work out, I wouldn’t be standing here today. If we’re honest, we all know how much luck we’ve had.

Let me pause here to insert my favorite inequality chart, from Raj Chetty’s data, which underscores that last point:


Zuckerberg’s argument that businesses aren’t started because founders have nothing to fall back on underscores a critical aspect of the link between the welfare state and entrepreneurship. A more generous welfare state leads to more new businesses, but as I explained in my review of the research on food stamps and entrepreneurship:

Interestingly, most of these new entrepreneurs didn’t actually enroll in the food stamp program. It seems that expanding the availability of food stamps increased business formation by making it less risky for entrepreneurs to strike out on their own. Simply knowing that they could fall back on food stamps if their venture failed was enough to make them more likely to take risks.

The impact of the safety net on entrepreneurs isn’t just about who receives assistance. It’s about the possibility of that assistance if things don’t work out.

Relatedly, New York Magazine had a great piece on the Trump budget, which cited my writing on entrepreneurship and the welfare state. One thing I particularly liked about it was its discussion of “supply-side” economic policy. “Supply-side economics” is typically used to mean the belief that tax cuts will have a large and sustained effect on economic growth, potentially so much so that the tax cuts pay for themselves. The last bit is clearly wrong, and tax cuts are, at the very least, overrated as a driver of growth.

But that doesn’t mean that policies to improve the “supply-side” of the economy — our ability to produce more with less — aren’t important. Just think about R&D or education.

So I was pleased that the New York piece linked to my work in a section with the heading “Anti-poverty spending increases productivity and entrepreneurship, and grows the supply side of the economy.” The New York Times’ Neil Irwin had a whole column on this point in April:

Certain social welfare policies, according to an emerging body of research, may actually encourage more people to work and enable them to do so more productively.

That is the conclusion of work that aims to understand in granular detail how different government interventions affect people’s behavior. It amounts to a liberal version of “supply-side economics,” an approach to economics often associated with the conservatives of the Reagan era…

The United States and other advanced nations are struggling to emerge from a pattern of persistently low growth, an era when many prime-age people aren’t in the labor force at all and productivity gains have been weak for years. Supplementing low-end wages through the tax code and ensuring that children have the food and education to become productive adults just may help, and that means “supply-side economics” isn’t just for low-tax conservatives any more.

This is just the economics of what Zuckerberg was arguing. The best way to increase the supply of entrepreneurs isn’t to cut their taxes. A better approach is to provide enough financial security that people feel empowered to start something in the first place.

Was ‘Shareholder Value’ ever a good idea?

Joe Nocera had a great column recently on shareholder value, based in part on a recent feature we published in HBR. In it, he pauses to consider why the idea of putting shareholders first might ever have made sense to anyone other than investors:

It seemed like such a good idea at the time, back in the late 1970s and 1980s. For too long, the compensation of top executives was disconnected from any performance criteria, including whether they made money for shareholders. CEOs did pretty much whatever they wanted, with no fear of consequences. Thus, companies that needed to slim down, wouldn’t. Companies that needed to deploy capital more intelligently, didn’t. Executives who should have been fired, weren’t.

But, as Nocera writes, be careful what you wish for.

In “The Error at the Heart of Corporate Leadership” in HBR, Joseph Bower and Lynne Paine take issue with shareholders’ primacy, writing that:

We are concerned that the agency-based model of governance and management is being practiced in ways that are weakening companies and—if applied even more widely, as experts predict—could be damaging to the broader economy. In particular we are concerned about the effects on corporate strategy and resource allocation. Over the past few decades the agency model has provided the rationale for a variety of changes in governance and management practices that, taken together, have increased the power and influence of certain types of shareholders over other types and further elevated the claims of shareholders over those of other important constituencies—without establishing any corresponding responsibility or accountability on the part of shareholders who exercise that power. As a result, managers are under increasing pressure to deliver ever faster and more predictable returns and to curtail riskier investments aimed at meeting future needs and finding creative solutions to the problems facing people around the world.

Instead, they put forward a “company-centered” model:

A better model, we submit, would have at its core the health of the enterprise rather than near-term returns to its shareholders. Such a model would start by recognizing that corporations are independent entities endowed by law with the potential for indefinite life. With the right leadership, they can be managed to serve markets and society over long periods of time.

It is helpful to remember, as Nocera does, why shareholder primacy might have ever been appealing. But I’m squarely with Bower and Paine that it’s gone much too far. (Whether agency theory has been a productive academic framework for studying firms is a separate question.) I’m a bit less convinced that activist investors are the primary culprit (see here, here, here, here) and the question of whether firms are too short-term focused remains a matter of debate (see here, here, here) but these are quibbles. Shareholders are taking home a larger and larger share of the economic pie, and that’s a deeply troubling phenomenon.

My favorite formulation in the Bower/Paine piece is this one:

It is important to note that much of what activists call value creation is more accurately described as value transfer. When cash is paid out to shareholders rather than used to fund research, launch new ventures, or grow existing businesses, value has not been created. Nothing has been created. Rather, cash that would have been invested to generate future returns is simply being paid out to current shareholders.

This is the right way to think about companies’ job in the economy: to create real economic value, not just paper value, and not just to transfer value from one group to another. The main way to create value is through innovation. But would a move away from shareholder primacy help or hurt?

In one view, a move away from shareholder primacy helps innovation, as companies feel free to reinvest profits into R&D, and to spend more on training workers. In another view, absent pressure from shareholders incumbents get too cozy, and a “company-centered” model prioritizes the needs of existing organizations over the creation of new ones. That latter situation would be a problem, since we have good evidence linking firm entry and exit with economic growth and job creation.

I see no reason why a move away from shareholder primacy should lead to a less dynamic economy; the opposite seems more likely. You can imagine a 2×2 matrix, with Dynamic/Complacent on one axis and Shareholders-First/Balanced on the other. Over the past 50 years, the U.S. economy moved from the Balanced side of the grid toward Shareholders-First. There’s at least some evidence that the economy became less dynamic over that very same period of time.

Dynamic+Balanced clearly seems like the best part of the grid to be in. Putting the interests of shareholders on a more equal footing with the interests of employees, customers, and broader society seems like a step in the right direction.