The Rentiers Are Here
In the past few decades, the world's largest corporations have increasingly been extracting profits from the economy instead of generating them through innovation. Reversing this trend is essential for future growth and social cohesion; but it won't be easy.
GENEVA – Since the 2008 financial crisis, policymakers and international institutions have regularly expressed concerns about widening income inequality and its unwelcome political consequences. More often than not, they attribute the problem to “exogenous” factors such as global trade and new technologies.
While policymakers have intensified their focus on trade and new technologies, they have missed an even more potent driver of inequality: the endemic rent-seeking that stems from market concentration, heightened corporate power, and regulatory capture.
Rent, broadly defined, is income derived solely from the ownership and control of an asset, rather than from innovative, entrepreneurial deployments of economic resources. When the British economist John Maynard Keynes anticipated the “euthanasia of the rentier” in his 1936 book The General Theory of Employment, Interest and Money, he was referring to a financial class that served no purpose other than to exploit scarce capital for its own benefit. But over the last three decades, financial rentiers have taken their revenge. Through private credit creation and financial alchemy, they have amassed huge gains that are wildly disproportionate to the social return of their activities.
Moreover, in our age of hyper-globalization, large non-financial corporations have also emerged as a rentier class. Owing to their substantial market power and lobbying prowess, they now regularly engage in the kind of rent-seeking activities that were once the exclusive preserve of the financial industry. As a result, large non-financial firms have become a pervasive source of rising income inequality.
Non-financial corporations have entered the rent-seeking game through a number of channels. They have systematically abused intellectual-property laws to achieve market domination, rather than to protect genuine innovations. They have looted public-sector resources through large-scale privatization schemes, and by securing public subsidies that rarely require them to deliver benefits to taxpayers. And they have engaged in far-reaching market manipulation, by turning themselves into debt collectors, using share buy-backs to boost executive remuneration, and so forth.
In addition to the sheer range of rent-seeking schemes operating today, lax corporate reporting requirements around the world make it difficult to estimate the scale of the problem. Much of the existing research focuses on the US economy, where some studies have measured the growth of dominant firms’ market power through the steep upward trend in mark-up pricing; and others have examined the role of proliferating information technologies in the accumulation of “surplus wealth.”
At the United Nations Conference on Trade and Development (UNCTAD), our research looks beyond the US economy, relying on a newly constructed database for publicly traded companies in 56 developed and developing countries. We used these data to estimate the extent to which large non-financial corporations’ profits exceeded typical annual sectoral profit performance since 1995. Surplus profits, we found, rose markedly over the past two decades, from 4% of total profits in 1995-2000 to 23% in 2009-2015. For the top 100 firms, that share increased from 16% to 40%, on average.
The same multi-country database also confirms that market concentration has risen significantly over the past two decades, particularly among the top 100 firms. In fact, large inter-firm disparities have become a key feature of the corporate rent-seeking age. In 2015, the top 100 firms had a combined market capitalization (the total value of a company’s outstanding shares) that was 7,000 times that of the bottom 2,000 firms. Twenty years ago, that multiple was just 31.
Making matters worse, this trend has not extended to employment. Between 1995 and 2015, the top 100 firms increased their market capitalization fourfold, but did not even double their share of employment. This implies that market concentration and corporate rent-extraction are feeding off one another. The result is a “winner-takes-most” market environment that strongly disadvantages start-ups, entrepreneurial innovation, and sustained creation of high-quality jobs.
Consider, for example, the proliferation of wide-ranging patent-protection powers through bilateral and multilateral trade and investment agreements. These powers have been extended to new activities that were not previously considered areas of technological innovation, such as finance and business methods. As a result, the tech giants, in particular, have achieved a new level of regulatory capture, allowing them to limit free speech when it serves their interests, expand into non-high-tech markets, and shape emerging global policy agendas, such as financial inclusion and e-commerce.
It is not too late to check the trend toward rentier capitalism. The “endogenous” factors contributing to wide-scale regulatory capture and corporate rentierism can be addressed with stronger antitrust legislation, policies to empower organized labor, revisions to existing trade agreements, and better monitoring, at the international level, of transfer pricing and tax evasion. Some policymakers have already started to take action on these fronts. But success will require a more concerted effort. It is time to force big business back into the business of productive investment and job creation.