There have been changes in market dynamics that result from technological developments and adoption since 1992. For example, national and international communications and transportation have increased the global nature of businesses. Another important example is the nearly infinite ratio of fixed to marginal costs in information businesses that leads to increasing pressure toward consolidation. This occurred concurrent with the value of public companies shifting from 40% intangible assets in 1996 to 75% in 2000. These trends are certain to persist as long as there is benefit from increasing efficiency and improvements to the communications and transportation infrastructures.

Unfortunately, when you combine the globalizing economy with massive consolidation pressures, the natural equilibrium is a monopoly. This monopoly will, in theory, act in its own best interest. And the best interest of a global monopolist is not necessarily the best interest of the global society (Assuming that price discrimination remains imperfect).

If we are to act as a society in the best interests of the society, then we should implement a structural incentive that acts to offset any negative changes in the economic dynamics. Specifically, we could limit the benefits of scale or, preferably, we could create a new incentive for competitive market pricing and competitive innovation. Ideally, we would finance this new incentive with part of the net benefits, such that everyone is still better off in net, more broadly distributing the net benefit.

This can be achieved with a progressive federal corporate income tax that finances an investment company that finances companies that can improve competitive pricing or innovate. The progressive tax could begin at a high profit level so that competition would be encouraged. Not a very popular suggestion among stockholders in the largest corporations, I would imagine, but the benefit to us in the long run would be very great.

Necessity is the mother of invention, and monopolists can sustain their position with far less innovation than occurs in competitive markets. We will see advancements in communications, transportation, environmental protections, health care, entertainment, safety, and even life span. These innovations will occur inevitably, but it is our decision as a society how we structure ourselves to best approach this evolution.

Note - The Government-financed investment company should probably be independent in a similar model to the federal reserve.

Note - The competitive application for the funds of the Government-financed investment company avoids the incentive problems associated with socialist policies.

Labels: Investment, Public Policy