THE GIST of Editorial for UPSC Exams : 02 JANUARY 2019 (Disruption, concentration, and the new economy)

Disruption, concentration, and the new economy

Mains Paper 4: Economy
Prelims level: FAANGs
Mains level: RBI’s functions to maintain global economic stability

Context

•  The growing dominance of leading technology firms has occasioned an intense debate about the trade-offs between efficiency and market power, while raising questions about what the changing structure of markets will mean for innovation and the distribution of wealth in the future.
•  These findings suggest that young firms are increasingly agreeing to be acquired, rather than trying to grow into large public firms.
•  At the same time, exit rates within many industries have remained relatively flat despite an increase in productivity dispersion.
•  In other words, weaker producers aren’t being knocked out of the market, implying a lack of dynamism in many sectors of the economy.

Situation in U.S. industries

•  The corporate profitability seems to be higher in the US than in Europe; but, again, it is not clear what that means.
•  Some see it as a sign of increased monopolization in US industries. Others see it as a sign that dominant.
•  US superstar firms are innovating more, and reaping the benefits of higher productivity.
•  But if that is the case, one must still confront the reality of low overall productivity growth worldwide.
•  If innovation is so high, why is productivity growth still so low?

Concentrated disruption

•  Current research suggests that rising concentration is a reflection not of market power, but of a shift in market share toward better-managed, more innovative firms the firms that attract the best employees.
•  Having congregated in a few superstar firms, the capable have become super capable.
•  This would seem to be a good thing, insofar as it suggests that firms are gaining market share by becoming more efficient, and not simply by snatching up other firms while antitrust authorities stand aside.
•  One would expect market concentration/monopolization to lead to higher prices, but there isn’t much evidence of that happening.
•  The firms could be improving efficiency without passing on the savings, in which case even flat prices would be a source for concern.

FAANGs out

•  The next important question is whether the structure of key industries is slowing down investment, research and development, or the diffusion of innovation from superstar firms.
•  Most economists would say that innovation is driven largely by competition, both within an industry and further afield, as well as by the threat of future competition. So, even if one is not too worried about the effects of concentration on innovation today, one still must consider whether that could pose a threat to future dynamism.
•  There is plenty of evidence of this happening in the pharmaceutical industry; but we also know that the FAANGs (Facebook, Amazon, Apple, Netflix, and Google) will resort to such measures as needed.
•  Perhaps the biggest worry of all is the deceleration of technological diffusion.
•  Current data suggest that new ideas are not spreading from superstar firms to the rest of the economy.
•  While some firms show strong productivity growth, and the dispersion of productivity within industries is increasing, we are also seeing lower productivity growth overall.
•  There are a number of possible reasons for low diffusion, from intellectual property (IP) protections to constraints on labour mobility between firms.
•  But whatever the cause, it is clear that we should be worrying even more about the future of productivity than its present.

The lumpen majority

•  At the risk of oversimplifying, we have reached a point where the highest earners are concentrated in a few firms, with the rest largely lacking such earning opportunities.
•  In other words, it is not the few at the top in every firm who are earning outsize wages, but instead the many in a few superstar firms.
•  The question is whether that should make us feel better.
•  The more the top-skilled people congregate in a select few superstar firms, the more those left behind will wonder why the “elites” keep getting away with everything.
•  It hardly seems fair that those reaping the lion’s share of the rewards also happen to be so concentrated in a few companies on the coasts, rather than distributed more broadly across firms, sectors, and regions.

What is to be done?

•  Having surveyed the data on market concentration, innovation, and the distribution of incomes, we should now turn to the policy implications of these trends.
•  The policymakers should be particularly worried about how the behaviour of superstar firms today could affect competition in their industries tomorrow.
•  Politicians and regulators should take a hard look at whether IP and proprietary agglomerations of data are being used to stifle competition or prevent the diffusion of new knowledge and technologies across sectors.
•  They should consider policy instruments that go beyond the scope of traditional antitrust.

Central bankers’ unenviable task

•  One of the most important effects of the economy’s ongoing structural changes has been on the political economy of central banking.
•  Fear of technological change, the declining quality of jobs, and the disruptions caused by superstar firms have given people plenty of reasons to be unhappy.
•  Despite low unemployment, many workers are unhappy.
•  They are stuck in non-superstar firms, where they harbour a general post-Great Recession resentment against elites and their policy agenda.

Way forward

•  No wonder there has been such a decline in public trust. It is bad enough when average citizens can scarcely understand the complicated trade-off between inflation and unemployment.
•  It is worse when one adds in public grievances over Wall Street bailouts and the perception that central bankers are focused on global conditions instead of domestic concerns.
•  Yes, it is every central banker’s job to think about such things; but that job is increasingly being met with suspicion by those who aren’t in the room.
•  Central banking is hard enough as it is.
•  It is harder still when there are politicians trying to score political points by attacking you.
•  One should not envy central bankers as they navigate today’s environment of distrust and derision, which itself is a product of the larger structural changes occurring in the economy.

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General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) Which of the following indicators are included to rank a country in Human Development Index (HDI)?
1. Health
2. Education
3. Sex ratio
4. Living Standard

Select the correct code from below:
a) 1,2 and 3
b) 2,3 and 4
c) 1,2 and 4
d) All of the above

Answer: C

Mains Questions:
Q.1) Can central bankers win back the public’s confidence, maintain global economic stability, and find ways to accommodate widespread technological disruptions all at the same time?