Monopolies hire too many pointless managers and kill off productivity growth

The need to increase productivity is of fundamental importance to the political economy of the Western democracies. As I’ve written, the causes for this slowdown in productivity eludes a consensus.

The big tech companies are often seen as hives of innovation. But they might be responsible for at least part of the productivity problem.

In the Western economies, small and medium sized companies (SMEs) contribute around 50 per cent – the number varies somewhat across countries – of total output.  For the most part, they really are small. Most of them are sole traders who set up their businesses as a company. They literally have zero employees. The next most frequent number of employees in a company is one.

These very small SMEs exist in vast numbers. But they almost invariably have low productivity levels. The key word here is “almost”. A tiny percentage of them grow rapidly and become large. Google famously started with just two people in a garage.

During the growth phase of such companies, productivity is high. But over the past decade or so, a small number of tech firms have grown so stupendously large that they effectively dominate their markets. Their rise has led to an increase in what economists call the degree of monopoly in the economy.

This is part of a general trend for output to become more concentrated in large firms in the 21st century. The American Office for Advocacy, for example, estimates that over a 15 year period the output of SMEs grew at an annual average of 1.4 per cent, while large firms grew at 2.5 per cent.

The market power which size confers often breeds complacency, especially with monopolies. Readers of a certain age will recall the old British Rail, which almost makes the current set of train operators look like models of efficiency. If you wanted a telephone installed, there were only landlines available. The state-run outfit which morphed into British Telecom might deign to carry out the task after a wait of at least six months.

But near-monopoly positions in the private sector also lead to inefficiencies and waste. A very good example is provided by the current wave of redundancies in the tech giants.

The first bloodbath came after Elon Musk purchased Twitter. The company’s headcount is down by some 75 per cent. Others have followed suit. Mark Zuckerberg has laid off tens of thousands at Meta.

Astonishingly, when Zuckerberg commented on a recent wave of sackings, he said: “Since we reduced our workforce last year, one surprising result is that many things have gone faster.” In other words, the company had taken on unnecessary layers of management which actually reduced productivity.  

The anthropologist David Graeber wrote convincingly about purposeless jobs in his best seller Bullshit Jobs. His contention that over half of jobs were useless was probably overblown. As the tech giants are discovering, there is something in his description of“managerial feudalism”, where managers need underlings in order to feel important and maintain competitive status.

At last, the tech giants are themselves facing serious disruption from newcomers such as OpenAI, the developers of ChatGPT.  They are being forced to look at their business models and, in doing so, realise they have lots of scope to increase productivity.

Competition is beneficial in so many ways. The emergence of serious new competition in the tech sector should help to start increasing productivity again.

As published in City AM Wednesday 19th April 2023
Paul Ormerod
Image: Wallpaper Flare

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