Too Many Companies Drain Value From the Economy

Defenders of free markets have always portrayed them as rife with healthy competition. Striving to outdo each other in providing high-quality products to consumers at ever-lower prices, according to this narrative, companies only profit from the hard work they do and the risks they take. This means that corporate profits should grow roughly at the rate of the economy as a whole. As for stock prices, they can grow faster than profits if investors’ appetite for risk increases, or if interest rates go down.

But skeptics of modern capitalism have an alternative narrative. Too many businesses, they say, extract value from the economy rather than add it. Using monopoly power, or favorable treatment from conflicted or ideologically friendly regulators, big corporations raise prices, push down wages and squeeze their suppliers to the benefit of their shareholders. Economists call this sort of value extraction economic rent.