It is a truth universally acknowledged that as a society we want successful, profitable companies because, as Jan Eeckhout says in The Profit Paradox: How Thriving Firms Threaten the Future of Work (Princeton UP, 2021), “we tend to accept that when firms do well, the economy does well”, even when that's not true.
The rising tide, in some cases, does not lift all boats. Even when a few strong players have outsized gains, the rest of the market can suffer. These trends have a ripple effect over time that effectively separate economic winners, who keep an increasingly large share of benefits, from economic losers who struggle to compete, let alone maintain the standard of living achieved by their parents.
In this book, Jan Eeckhout documents how a small number of large firms have been able to gain tremendous market power through a variety of mechanisms such as price manipulation, outsourcing, and leveraging new technical innovations. None of these are inherently wrong, but when used by powerful companies to reduce or eliminate potential competition, they lead to inefficient markets that weaken society.
It is a case of excessive success, as companies narrowly focus on defending and increasing their profits without significant consideration for the externalities or unintended consequences of these market failures.
Eeckhout presents an optimistic outlook of how we can retain the extensive advantages of economic growth while reversing some of these more dangerous trends. His recommendations for the future include leveraging what we've learned from prior generations who faced similar challenges, and building on the incredible technical innovations that have characterized the last few decades, including recent breakthroughs in artificial intelligence.
Recommended reading: The Wisdom of Crowds by James Surowiecki.
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Jan Eeckhout, "The Profit Paradox: How Thriving Firms Threaten the Future of Work" (Princeton UP, 2021) | New Books in Finance podcast - Listen or read transcript on Metacast
