One would assume that if the engines of innovation are working as the hype suggests, Schumpeter’s famous creative destruction would be happening at a rate seldom seen before. Research from Chicago Booth suggests that not only is this not happening but that a smaller number of companies are making up an ever larger share of the economy than ever before.
“Corporate concentration (e.g., shares of the top 1% or top 0.1% businesses) has been rising persistently for the past 100 years,” the researchers explain. “The rise was stronger in manufacturing and mining in earlier decades, and stronger in services, retail, and wholesale in later decades.”
The Matthew Effect
Indeed, far from technology being found to disrupt incumbent operators, the data suggests that investments in digital technology are largely ensuring that dominant incumbents can entrench their strong market position and fight off any upstarts.
The researchers explain that this is a process that has been emerging since the 1930s, as whereas the share of the American economy dominated by the biggest 1% of companies was around 70% then, it has now grown to approximately 90%. What’s more, the share occupied by the top 0.1% of companies has nearly doubled, from 47% to 88%.
The authors highlight that this was something Marx famously warned about in Das Kapital. Indeed, he worried that rising concentration was not so much a bug of industrial development but a key feature of it, as technological development increased the scale of both economies and the businesses within them.
Rising concentration
The researchers collected data from the last 100 years from the Internal Revenue Service’s Statistics of Income publications. These datasets cover all of the businesses operating in the economy. For instance, the IRS was recording company size by profits, size by sales, and size by assets consistently throughout this period.
The data revealed that before the 1970s, rising concentration was especially prominent in mining and manufacturing, with the researchers believing that this was primarily due to the rise of mass production in these sectors. After the 1970s, it spread to other sectors, with the rise in information technology a likely factor behind that.
Across each of the three measures, there has been a persistent rise in economic concentration over the course of the past hundred years. Alongside a growing concentration of assets, the top 1% also account for a scarcely believing 80% of revenue, which is a rise of 20% from their 1969 figure.
Whichever way the data is cut, the top 1% of companies are taking a greater share of the economic pie. The researchers believe that this growth is highly likely to be caused by investments in information technology.
“We find that the timing and the degree of rising concentration in an industry align closely with investment intensity in IT and R&D,” they explain. “Moreover, industries with higher increases in concentration also exhibit higher output growth.”
Enhancing economies of scale
These trends highlight the growing importance of economies of scale, as spending on both IT and R&D take up an ever greater share of overall investment by firms.
The authors explain that these areas are often directly involved in various technological changes that can enhance the impact economies of scale have. They can also often be required to achieve scale in production, especially when things like customer preferences increase the value of scale.
“Overall, to the extent that production processes with more scalability are associated with more R&D and IT, we can use the intensity of R&D and IT as a general indicator of firms exploiting economies of scale,” they continue.
Technology matters
Indeed, the study suggests that technology-driven economies of scale are better able to explain the trend of rising concentration than anything else, including changes in regulation or globalization.
The question is whether this concentration of economic power is good or bad. This is a question that the researchers don’t touch upon a great deal, but they do explain that it is not a trend without consequences.
“This trend depends a lot on the social infrastructure of the economy,” they explain. “How do we distribute surplus? How do we let employees bargain with companies? If we worry that large companies can influence politics, how do we improve democratic institutions?”
They also ponder whether it’s a trend that is likely to continue. To understand this, they believe we need to better understand how changes in technology and organization will affect both fixed costs and marginal costs of production, or whether they will facilitate decentralization. Or, in other words, whether Coarse’s theory of the firm will be more fully tested.
