People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary. A regulation which obliges all those of the same trade in a particular town to enter their names and places of abode in a public register, facilitates such assemblies. . . . A regulation which enables those of the same trade to tax themselves in order to provide for their poor, their sick, their widows, and orphans, by giving them a common interest to manage, renders such assemblies necessary. An incorporation not only renders them necessary, but makes the act of the majority binding upon the whole.
– The Wealth of Nations, Book I, Chapter X.
I think this post misses the largest downside of the proposal, which is the undermining of competition.
At the moment, companies generally attempt to maximize their own profits. This means trying to operate as efficiently as they can, attract talented workers, and sell products that people want to buy. Competition between firms helps ensure that we minimize the use of costly inputs, pay workers concordant with their marginal product, and design new products that match what consumers want. It is, in general, a naturally regulating system that produces largely good outcomes without the need for external micro-management.
The Universal Ownership proposal is that firms should try to maximize the profitability, not just of themselves, but of the entire portfolio that their investors own.
I am skeptical of many of your proposed benefits. For example, you suggest that “investors … owning the coal companies [would get] them to implement a policy of no new plants.” But coal companies, which are responsive (at least in theory) to investors typically do not run power plants, and they sell a commodity. Power plants are run by electric utility companies, who are highly regulated. It does not matter if 100% of the investors in a utility demand it close down a coal plant: if their regulator likes the coal plant, they must keep it running. Worse, almost half the new coal plants being built are in China, a country where western investors have few rights and almost no influence.
But more importantly, I think you miss that the most obvious action if companies were to try to boost their collective, not individual, profitability: collusion. The largest externality companies have is their pecuniary externality on competitors. In an industry with 10% margins, if all the competitors decided to work together to raise prices by ‘just’ 10%, profits would double. Similarly, they could agree to not bid up wages, or to all ease up on R&D. Normally, they wouldn’t be able to do this, because they’re each incentivised to ‘defect’, cut prices, and gain market share—but that protection is gone if they are effectively all working together. This seems like a much more significant benefit to the investor that the somewhat nebulous and second-order impact of reduced CO2 emissions, where they capture only a small fraction of the benefit.
Of course, if this were to happen, I would expect governments to impose new regulations. Governments tolerate free markets largely not because of an ideological belief in liberty but because they think that companies competing produces good outcomes. If we replace this with a cartel system, where companies work together to promote the interests of their owners as a class, this will change. (I also think more founders would refuse to allow public investors control over their firms).
Overall, I think this proposal is basically trying to abuse a possible flaw in our system of economic governance, and only appears attractive by focusing the less likely but more desirable outcomes that motivated it, rather than the outcomes which have the strongest economic link to the proposal. But if people start to abuse this flaw en masse I would expect regulations to close it anyway.
Thank you for this—I have discussed this with many people and not heard this competition critique before, and I’m always glad to encounter a novel critique.
I’m not sure I understand it though.
Are you saying that if Universal Ownership took hold, companies would collude to raise prices (or otherwise damage customers for their own benefit)?
I’m not clear on why Universal Ownership makes a difference here—it’s already in companies’ interests to form cartels, and there’s already regulation to stop it.
I have discussed this with many people and not heard this competition critique before
I’m surprised to hear that. This is an economics 101 level critique. You are proposing moving from a competitive situation to something equivalent to a monopoly, and it is basic microeconomics that monopolies charge higher than other market structures. Their redeeming feature is economies of scale, but that is not present when it is just rival firms colluding to act as if they are a monopoly without actually combining their supply chains.
I’m not clear on why Universal Ownership makes a difference here—it’s already in companies’ interests to form cartels,
If each company is maximising its own profit, when raising prices they have to balance an increase in profit-per-unit against a reduction in total units sold from competitors taking share. This is a natural check against the tendency to raise prices.
However, if they are instead maximizing profit for the industry (or the universe of public companies) as a whole, this is not the case: they still get the benefit of higher profit-per-unit, but the loss of market share is instead neutral, because competitors will benefit. As such, companies will raise profits until consumers stop buying units from anyone at all, a much higher price level. As such the incentive to increase prices like a cartel is increased.
If you want you can show this using standard supply-and-demand diagrams.
and there’s already regulation to stop it.
Many existing regulators will generally not work against the sort of advanced collusion you are recommending. Your proposed system does not, for example, require any mergers, or agreements between competitors, or exclusive dealing, or many other standard techniques that antitrust goes after. This is why competition regulators have been concerned about the dangers of this approach.
As I’ve alluded to in another comment, I think you’re missing part of the model. If you incorporate UO considerations, you would have two further perspectives to incorporate:
Your model now includes the company’s competitors, who also benefit from collusion
Your model also includes the rest of the economy, which is damaged by the collusion
It is not immediately clear to me which of these would win. To a first-order approximation, it may appear that the two effects are roughly offsetting, since the cartel likely moves money from the rest of the economy to the cartel members in what might simplistically be treated as a zero sum game. To add more detail to the model, it would be worth considering that the cartel essentially constitutes a form of rent-seeking, which is generally considered by economists to be bad for the economy, which suggests that item 2 likely outweighs item 1 (i.e. maybe makes the Universal Owner less keen to take part in a cartel). I won’t keep on adding more and more details to the putative model.
I think the bottom line here is that companies currently have incentives to collude, and those incentives may still survive under a Universal Ownership system.
Your point about the mechanism of that collusion is a good one. Regulations currently anticipate ways to forbid anti-competitive behaviour, and likely don’t already anticipate a UO-driven mechanism, so the regulations would have to evolve. It’s worth bearing in mind that if this concept does reach the companies themselves (not just investors) then it will take many years, and so there will be plenty of time for this regulatory adaptation to occur.
– The Wealth of Nations, Book I, Chapter X.
I think this post misses the largest downside of the proposal, which is the undermining of competition.
At the moment, companies generally attempt to maximize their own profits. This means trying to operate as efficiently as they can, attract talented workers, and sell products that people want to buy. Competition between firms helps ensure that we minimize the use of costly inputs, pay workers concordant with their marginal product, and design new products that match what consumers want. It is, in general, a naturally regulating system that produces largely good outcomes without the need for external micro-management.
The Universal Ownership proposal is that firms should try to maximize the profitability, not just of themselves, but of the entire portfolio that their investors own.
I am skeptical of many of your proposed benefits. For example, you suggest that “investors … owning the coal companies [would get] them to implement a policy of no new plants.” But coal companies, which are responsive (at least in theory) to investors typically do not run power plants, and they sell a commodity. Power plants are run by electric utility companies, who are highly regulated. It does not matter if 100% of the investors in a utility demand it close down a coal plant: if their regulator likes the coal plant, they must keep it running. Worse, almost half the new coal plants being built are in China, a country where western investors have few rights and almost no influence.
But more importantly, I think you miss that the most obvious action if companies were to try to boost their collective, not individual, profitability: collusion. The largest externality companies have is their pecuniary externality on competitors. In an industry with 10% margins, if all the competitors decided to work together to raise prices by ‘just’ 10%, profits would double. Similarly, they could agree to not bid up wages, or to all ease up on R&D. Normally, they wouldn’t be able to do this, because they’re each incentivised to ‘defect’, cut prices, and gain market share—but that protection is gone if they are effectively all working together. This seems like a much more significant benefit to the investor that the somewhat nebulous and second-order impact of reduced CO2 emissions, where they capture only a small fraction of the benefit.
Of course, if this were to happen, I would expect governments to impose new regulations. Governments tolerate free markets largely not because of an ideological belief in liberty but because they think that companies competing produces good outcomes. If we replace this with a cartel system, where companies work together to promote the interests of their owners as a class, this will change. (I also think more founders would refuse to allow public investors control over their firms).
Overall, I think this proposal is basically trying to abuse a possible flaw in our system of economic governance, and only appears attractive by focusing the less likely but more desirable outcomes that motivated it, rather than the outcomes which have the strongest economic link to the proposal. But if people start to abuse this flaw en masse I would expect regulations to close it anyway.
Thank you for this—I have discussed this with many people and not heard this competition critique before, and I’m always glad to encounter a novel critique.
I’m not sure I understand it though.
Are you saying that if Universal Ownership took hold, companies would collude to raise prices (or otherwise damage customers for their own benefit)?
I’m not clear on why Universal Ownership makes a difference here—it’s already in companies’ interests to form cartels, and there’s already regulation to stop it.
I’m surprised to hear that. This is an economics 101 level critique. You are proposing moving from a competitive situation to something equivalent to a monopoly, and it is basic microeconomics that monopolies charge higher than other market structures. Their redeeming feature is economies of scale, but that is not present when it is just rival firms colluding to act as if they are a monopoly without actually combining their supply chains.
If each company is maximising its own profit, when raising prices they have to balance an increase in profit-per-unit against a reduction in total units sold from competitors taking share. This is a natural check against the tendency to raise prices.
However, if they are instead maximizing profit for the industry (or the universe of public companies) as a whole, this is not the case: they still get the benefit of higher profit-per-unit, but the loss of market share is instead neutral, because competitors will benefit. As such, companies will raise profits until consumers stop buying units from anyone at all, a much higher price level. As such the incentive to increase prices like a cartel is increased.
If you want you can show this using standard supply-and-demand diagrams.
Many existing regulators will generally not work against the sort of advanced collusion you are recommending. Your proposed system does not, for example, require any mergers, or agreements between competitors, or exclusive dealing, or many other standard techniques that antitrust goes after. This is why competition regulators have been concerned about the dangers of this approach.
As I’ve alluded to in another comment, I think you’re missing part of the model. If you incorporate UO considerations, you would have two further perspectives to incorporate:
Your model now includes the company’s competitors, who also benefit from collusion
Your model also includes the rest of the economy, which is damaged by the collusion
It is not immediately clear to me which of these would win. To a first-order approximation, it may appear that the two effects are roughly offsetting, since the cartel likely moves money from the rest of the economy to the cartel members in what might simplistically be treated as a zero sum game. To add more detail to the model, it would be worth considering that the cartel essentially constitutes a form of rent-seeking, which is generally considered by economists to be bad for the economy, which suggests that item 2 likely outweighs item 1 (i.e. maybe makes the Universal Owner less keen to take part in a cartel). I won’t keep on adding more and more details to the putative model.
I think the bottom line here is that companies currently have incentives to collude, and those incentives may still survive under a Universal Ownership system.
Your point about the mechanism of that collusion is a good one. Regulations currently anticipate ways to forbid anti-competitive behaviour, and likely don’t already anticipate a UO-driven mechanism, so the regulations would have to evolve. It’s worth bearing in mind that if this concept does reach the companies themselves (not just investors) then it will take many years, and so there will be plenty of time for this regulatory adaptation to occur.