Capitalism has suffered a series of mighty blows to its reputation over the past decade. The sense of a system rigged to benefit the owners of capital at the expense of workers is profound. In 2016 a survey found that more than half of young Americans no longer support capitalism. This loss of faith is dangerous, but is also warranted. Today’s capitalism does have a real problem, just not the one that protectionists and populists like to talk about. Life has become far too comfortable for some firms in the old economy, while, in the new economy, tech firms have rapidly built market power. A revolution is indeed needed—one that unleashes competition, forcing down abnormally high profits today and ensuring that innovation can thrive tomorrow.
Countries have acted to fuel competition before. At the start of the 20th century America broke up monopolies in railways and energy. After the second world war West Germany put the creation of competitive markets at the centre of its nation-building project. The establishment of the European single market, a project championed by Margaret Thatcher, prised open stale domestic markets to dynamic foreign firms. Ronald Reagan fostered competition across much of the American economy.
A similar transformation is needed today. Since 1997 market concentration has risen in two-thirds of American industries. A tenth of the economy is made up of industries in which four firms control more than two-thirds of the market. In a healthy economy you would expect profits to be competed down, but the free cashflow of companies is 76% above its 50-year average, relative to gdp. In Europe the trend is similar, if less extreme. The average market share of the biggest four firms in each industry has risen by three percentage points since 2000. On both continents, dominant firms have become harder to dislodge.
Incumbents scoff at the idea that they have it easy. However consolidated markets become domestically, they argue, globalisation keeps heating the furnace of competition. But in industries that are less exposed to trade, firms are making huge returns. We calculate the global pool of abnormal profits to be $660bn, more than two-thirds of which is made in America, one-third of that in technology firms (see Special report).