The third and final part of ProMarket’s interview with Bernard Yeung, Dean of the National University of Singapore’s business school and one of the predominantly non-U.S.-born economists who laid the foundations for the scientific research of economic power concentration.
In the first part of our interview with Bernard Yeung, we talked about Yeung’s seminal papers on power concentration, on which he collaborated mainly with Randall Morck. The discussion there focused on dominant players and their ability to shape their own markets, the capital market, and even the economy.
In the second installment, we talked about how free trade may have backfired, how wealth and power are connected, how big corporations can control and distort the market for ideas, and why governments may actually prefer markets that are controlled by dominant players rather than many competitors.
In the final part, we talk about when and how the U.S.’s moral supremacy eroded and how technological changes are bringing about an economy that is global and local at the same time—even to the point of making foreign direct investment (FDI) obsolete.
GR: We previously mentioned Amazon and Alibaba. There’s another, less discussed common thread between them: Jeff Bezos bought The Washington Post and Jack Ma bought the South China Morning Post. Why is it that they are both interested in newspapers?
Bernard Yeung: Political power. But maybe there’s something else, too: I believe that Alibaba could be told to buy it so that China can influence Hong Kong’s media. China, by fiat and through its economic power, already has influence over Hong Kong, and it wants to have some leverage in the mass media. And, of course, we have to consider social media as well. By the way, honestly no value judgment here. This is, I believe, happening around the world, perhaps in varying degrees. There are concerns about what the U.S. can do with its powerful companies which control servers, social media, or mass media.
GR: The term “social media” is actually a euphemism for one company that controls most of the markets in the West and one company that controls China. Social media is consolidated into one company, Facebook. We don’t have any other significant social networks in most countries. Of course we have LinkedIn, which is a professional network, and it was bought by Microsoft. That’s it.
BY: If you were the U.S. government, you’d love Facebook because if you want to close down everything, close down Facebook and you’re done. In China, it’s Tencent, which has WeChat. If the Chinese want to, they can close them down. And they track these services. If I write something and it goes around more than a number of times, the Chinese government can immediately put a stop to it. They track everything, from divorces to scandals. The world is potentially becoming more and more controlled. It could be for worse: few like high level control. It could be for the better: few like unfounded rumors causing social chaos.
GR: We are enamored with capitalism, mostly because we believe in the power of competition. If we take out or substantially weaken competition—it’s not only not efficient, but it becomes an economic system that is not legitimate. In many markets, open competition is a myth.
I believe that Professor Jacob Viner, who was a very important Chicago economist, said that out there in the real world the degree of competition is not anything like what is being taught in the neoclassical models. In many markets and industries, you see concentration and entrenchment. You talked about how convenient it is for governments to have such big companies. Isn’t it possible that it’s not convenient for them only because of control, but also because many regulators and politicians are close to those industries—too close?
BY: I can add something here. The people who want to control use traditional and social media to achieve their own objectives. The Chinese may be using it. If they want to label someone as corrupt, there will be tons of stories about that someone’s corruption—and you don’t know who spreads them. And then, after the government punishes these supposedly corrupt people, they are applauded by the citizens for fighting corruption. Would that be possible? Sounds plausible. If so, is this a new means to manipulation? Other countries use these tools—the Russians allegedly have used them to interfere with the U.S. election; we do not know the truth of all these stories. Trump uses Twitter extensively and we do not know if this helps or hurts him. Still, they highlight that the way of governing has changed. But, look, few politicians do not use communication channels for a purpose.
GR: The U.S. is ruled by law, but laws are enacted by people. Which people? We know. We have some data—and numerous anecdotes and reports on the involvement of money and lobbyists in Washington.
BY: Remembering Simon Johnson and James Kwak’s 13 Bankers, I think that, after Nixon, maybe the U.S. lost its moral supremacy. Nixon’s resignation actually marked the heyday of American moral supremacy: you lie, you cheat—you’re out, even if you are the president. Over the years, lobbying, campaign contributions, Super PACs, buying media outlets, PR, proportionality concepts, the revolving door—all the things you mentioned chipped away at U.S. moral supremacy. Somehow a wonderful system has gradually eroded.
GR: In 2012 I interviewed Warren Buffett and asked him “Is the United States a plutocracy or a democracy?” to which he answered, “The U.S. is becoming a plutocracy.”
BY: To me, capitalism is about giving people a fair chance. In capital markets, this means that the system allocates money in an honest way. Anyone with the right idea can pitch. There’s trust and honesty in this. It’s about trust and being trustworthy. When this is met, we have a utopia, a wonderful world. But we don’t. We continuously strive to get there, but there are always people who try to stop it because they want the surplus money to go to their own pockets instead of a competitor’s pocket. That’s essentially the entrenchment that we’re talking about. Furthermore, there are built-in institutional biases. Kids from well-to-do families find it easier to get to top universities and graduate debt-free—plus [they have] a powerful social network that helps them to advance. The development of plutocracy is partly due to conscious behavior and partly a natural consequence of our system.
GR: When we look at the financial system in the last few decades and its role in promoting efficient resources and competition, versus its tendency to extract rents from retail customers, do we see growth in the latter?
BY: It’s a very pretentious industry.
GR: There is literature on mergers and acquisitions and their contribution to shareholders’ value, and also more recent literature on the efficiencies versus market power that M&A’s create. Again, it seems that we have more of the latter.
BY: Mergers and acquisitions create fees and market power. Instead of disciplining managers, it can become a non-value creating tool.
GR: Then we have proprietary trading, which can also be front-running your clients and using the advantages of bigness. It adds liquidity, but proprietary trading can sometimes be a zero-sum game without clear contributions to efficiencies.
BY: It’s pushing the envelope to squeeze more pennies for yourself.
GR: And then we have hedge funds. Consider the interesting data of Simon Lack on this—76 percent of hedge fund profits go to managing partners, not to the limited partners. And, of course, retail, the problem of asymmetric information, and the recent illuminating example of Wells Fargo’s excellence in pushing products that customers did not want nor need.
BY: Some financial “innovation” is faddish. It does not create value.
GR: Approximately 9 percent of U.S. GDP is finance. Some economists argue that probably 3-5 percent is useful for allocating capital, storing value, smoothing consumptions, and creating competition, and the rest is preying on asymmetric information and on the weak.
BY: The redistribution of risk is the cornerstone of finance. Playing against information asymmetry is not a bad idea because it sets the right price. But when you twist the margin and push the envelope over and over again, eventually the envelope breaks. This is an American phenomenon, a Western phenomenon. In the East, regulators are getting more and more concerned about systemic risk so they raise regulation. And when you increase the regulation, the cost of capital goes up.
Simon Johnson and others say: “You just have to put in more equity.” I take this into consideration, because equity in that part of the world is not small. When you are pushing up the level of safety, you reduce the chance to make profits. Complying financial institutions will only lend to safe borrowers. Or, when their chance to make a profit is too reduced, they raise lending rate, or, they look for alternative investments, that is, off-the-book shadow banking.
Transportation, housing, water, power: these industries always make money. They’re cash cows. Once built, they keep on making money for you. You also have room to raise the price and make more money. This is what is happening in Asia: home rents goes up, power goes up, water fees go up and so on. But because wages don’t match, you get an increasing gap. The question is: Who owns these businesses?
GR: When I interviewed your co-author Randall Morck at the Stigler Center earlier this year, he came with a very radical idea that you’ve probably heard from him. To me, he said, most commercial banks are actually sort of utilities. Since banks are too big to fail, are so important and have so much political power, he said, I want to see them regulated as water companies or electric companies.
BY: Probably he means that with too big to fail, these financial institutions have a license to make profits. In the financial industry in my part of the world, there are not too many alternatives. When push comes to shove, they go with safety. And when safety has to deliver the profits, they raise prices, i.e. lending interest rates and fees.
In China, the government used to tell banks what the lending and borrowing interest rates should be. Now they provide guidelines. Banks could be government-sanctioned monopolists.
GR: I want to return to your comments on economic conditioning: in most democratic market economies, there is a correlation between wealth, income, and social status that sometimes also begets professional status—another channel for influencing regulators and politicians.
BY: It’s a very subtle and circular economic conditioning. If these people make so much money, they must know. So, let’s talk to them and listen to them. It becomes a very subtle kind of entrenchment, the outcome of which is that these people continue to be making good money and appearing to be smart. This is sad for people who care about open competition in its ultimate sense, for people who care about opportunity, for people with ideas but no money. We are somewhat in distress, frankly. The need is to advocate debate and even engineered openness.
Let us turn to a different issue. There is high economic anxiety. Let’s say you are in your forties and you’re in a profession where you feel the threat of machine learning. What do you do? You spend less and you save more. You’re eager to pay off your mortgage and you’re eager to save enough money because most people, when they retire, still have another 20 years to live. Governments and many people are worried.
GR: Maybe people are actually too optimistic about their financial prospects? They still assume annual returns of 8 percent a year and most of them don’t set aside enough money to begin with, considering the rise in the cost of living, especially healthcare.
BY: Maybe here, in the U.S.
BY: Then I’m not living in the real world. But I do worry about tomorrow so much. I really do. I’m in a haste to pay off my mortgages. I’m so nervous about our economic future. I am saving. But God forbid, if there’s some kind of war, I have no recovery.
GR: Interesting times, unfortunately. You may have a better perspective, because you have been in economic research for over 30 years. Correct me if I’m wrong: until not too many years ago, when people looked to the future, they were generally always optimistic. It is only in the last few years that the financial future of the middle class in many countries started looking so bleak.
BY: The anxiety level has gone up. We’ll agree that there’s a high level of political ambiguity. We don’t know what Trump is going to do. Italy’s Renzi lost the referendum and Britain decided on Brexit. What is the future of the euro? How is China going to deal with Trump? Lots of political anxiety and lots of pending changes in the world’s economic orders.
There’s also a lot of economic anxiety due to expected change in economic relationships. Uber is a good example. There are lots of concerned taxi drivers. I’m not thinking about taxi drivers per se; my point is that Uber is nevertheless suggesting a new way of organizing our lives. In most of my adult life, it’s like if I work for a big corporation—I’m pretty safe. If I’m tenured—I’m pretty safe. I don’t think the world is like that anymore. Perhaps Uber teaches us that in the not-too-distant future many of us will be making a living in a shared economy context.
GR: Let’s go back to wage differences between government officials and the private sector; Singapore is an interesting case where civil servants and government bureaucrats get competitive salaries. In most countries, the growing gap has created huge incentives for revolving doors.
BY: Transparent and open movements of talent between government and business are not sinister. What is bad is using one’s regulatory position to get private benefits: in other words, corruption. If the loot is only a few million dollars, you can buy me off by paying me a good salary, say a million a year. But Singapore is small. If we are talking about China, the loot is billions and billions. If I apply the Singapore approach in China, I have to pay these people billions of dollars, not millions.
GR: So, maybe it doesn’t really matter how much we will pay the officials. If the loot is big enough, to use your words, you could always buy them, right?
BY: Well, there’s a price for everything. It’s about the expected gain and the expected loss. It’s like “If I keep my job, I will make $1 billion a year. But if I steal, I will make 100 billion.” The question now is what the probability of getting caught is.
GR: So if we want politicians and regulators that cater to the public’s interests rather than to those of special interest groups and the industry, the issue is not necessarily better compensation, nor better laws, but the right culture, norms, and values?
BY: Exactly, we just went over the probabilities and expectation game. But there’s also the intrinsic value: the shame, the loss of social standing, dignity, and respect. And if you add this to your considerations, the result can be different. Intrinsic value is about doing the right thing, like you said, based on culture, norms, and values.
GR: That’s an excellent cue for talking about your recent paper, “Anti-Corruption Reforms and Shareholder Valuations: Event Study Evidence from China.” Isn’t fighting corruption about norms and values?
BY: For an anti-corruption plan to really take hold, it would take decades to establish. But a good culture is very easy to destroy. Attitude, cultural norms, and the like change gradually—this is economic conditioning again. In the end, a society has to make people believe that integrity, that an anti-corruption stance, is the right thing.
I’ll tell you a story. When I first moved to Canada from Hong Kong, I felt that it’s stupid to line up. Why did I need to line up? Lining up is a waste of time. I cut lines. In Hong Kong, we did not line up in my teenage days. Four years later, I went back to Hong Kong for a summer holiday. I got very mad when people cut lines. I wait, and people cut my line! I’d protest. In Canada, if you don’t line up, people give you these looks. It took me a few years to change my mind, 180 degrees, from “lining up is stupid” to “not lining up is unethical.”
I don’t believe that the anti-corruption process I describe in the paper is about immediate change. It’s about expectations. It is about some useful initial steps to create a path out of a stable corruption-ridden equilibrium. But, I believe that it will take a while for the government to continue to punish the bad guys. It may take years, or even decades, to get there; that is, to establish the right culture and values. Unfortunately, even after established, they are easily destroyed.
One of the things I like about academia is that scholarships breed virtuous behavior. What do we do? Strive for excellence and integrity. In academia, you have to meet the standards of the referees, who push for academic excellence. In academia, integrity is our sacred honor code. We respect property rights and demand from ourselves integrity in reporting our research. Furthermore, we are trained to humbly listen to people’s opinions in the sense that we seek comments and criticism to improve our research. Then, if there’s no innovation, you don’t do it. You have to keep on improving until you find something new. Finally, I think many of us work hard because we believe we have something meaningful to share, we have a sense of purpose. I see education as a very important tool to inculcate ethics to people.
GR: You believe that out of this power struggle a new and better equilibrium can emerge?
BY: I believe that it depends on the expectations. It’s a no-brainer to say that corruption locks people into a stable equilibrium. The payers and payees are both happy. The transition of power may get the economy into a chaotic situation. The power struggle is more important than anything else. With anti-corruption campaigns, there could be bureaucratic freeze and a slowdown in economic activities. So, there are losses. Bureaucrats are taking risks too—they can be whistleblowing targets. Why bother? But, if there are latent market forces built on past efforts of market development, anti-corruption reforms unleash the latent market forces to improve resource allocations. Government, businesses, and people support the gains. It is about the economic calculus of gains and losses. The path out of corruption is to liberalize the market, build some market capabilities, which build up the gains of an anti-corruption campaign, then act.
GR: Let’s move back to the U.S. You see a certain deterioration in terms of legal corruption in the last few decades. Both parties cooperated with special interests and there is growing influence of money in politics. But Donald Trump may introduce something new: he installed four to five billionaires and multi-millionaires in his cabinet and refuses to to sell his businesses, so he has a lot of conflicts of interest.
BY: This is actually discussed in the paper we mentioned earlier, “The Canadian Disease.” We found that, comparing across countries that have a similar level of development, those with a higher share of descendants of billionaires relative to GDP have slower growth, have more political rent-seeking and spend less on innovation. At the same time, countries with a higher share of first-generation billionaires relative to GDP display better growth and less rent-seeking. We then said that it is consistent with wealthy entrenched families’ having objectives other than creating public shareholder value. In this paper, we would classify Trump as a self-made billionaire. He did inherit money from his father but has grown that inheritance significantly. But my point is hugely speculative. I do not know the level of conflict of interest his team has. Furthermore, how good is his team in listening to other people’s opinions? Successful CEOs may or may not be good listeners. At this juncture, I believe we need collective wisdom.
GR: Last April, Greg Ip wrote a piecein the Wall Street Journal under the headline “The Case for Free Trade Is Weaker Than You Think.” It is the WSJ, usually a pro-business newspaper, and he wrote that more and more economists are asking questions about what used to be an axiom: that we should always support free trade. Do you think that the profession got used to not questioning things that were part of the orthodoxy?
BY: We have already questioned the orthodoxy earlier in our conversation.
Let us start with the orthodoxy. Why do we support free trade? Because we believe that it’s efficient. Why was free trade difficult to obtain? Because the loss is very concentrated and the gain is very diffuse. Those on the concentrated side will all have an interest to lobby to protect their territory. Political economy analysis says that they very often prevail because they’re willing to invest. The free trade premise is based on efficiency and political economy—who will lobby?—and also how the government should redistribute the gains.
What about the current world? Where is free trade in this world? The data about globalization is going to be misleading; I have described a world that is very globalized but has very little trade. But, it has a globalized flow of ideas, knowledge, and capabilities.
In my opinion, the data on de-globalization is not trustworthy. In the world that I describe, I don’t need foreign direct investment either. I just need all the small firms to sign up to my platform. Very globalized—but very decentralized. No trade, no FDI—and still a globalized world.
Because of technological changes, our understanding of free trade may be obsolete; the gain is very concentrated but the loss is very diffuse.
GR: We supported free trade because we said the concentrated interests will lose and the dispersed interests will win.
BY: Clear support.
GR: That was the story, but did we really move into a world where free trade has presented us with different outcomes: concentrated gains and dispersed losses? What went wrong? Did we go from free trade that benefits the many, to free trade that sometimes benefits the few?
BY: Changes—technology, capital substitution. This is a conjecture, my speculation. It’s not a theory. It’s not data-supported, but I’m making a point. Take Brexit as an example. Why did voters support Brexit? Because the pain is felt by so many people.
GR: But is it really free trade? Or maybe some of these trade agreements actually contained clauses that made sure that there are a lot of protections for large corporations that have nothing to do with free trade. Free trade agreements were not about free trade. They were about the special interests.
BY: That’s why people are upset with TPP. Do economists still support free trade? We will support whatever gives us a higher level of efficiency. If free trade gives us a higher level of total gain, we will support it. But now we have to add another condition so the result will not be concentrated gain and diffused losses. The only way to fix it is by simultaneously putting a redistribution program in place.
GR: Well, this is the economic policy in Sweden and Denmark: free trade but also redistribution. Both countries rank very high in the indexes of open markets and pro-competition policies.
BY: Right. Brexit and maybe even Trump’s victory say something about the arrogance of the elite.
Bankers say that free trade should prevail. Even we, academics—how many of us are actually looking into distribution and redistribution? Few. We’re still spending time on writing dynamic models to talk about the gains of trade.
Even if old-fashioned free trade is correct, the speed of adjustment is very important. We know that rapid adjustment is no good. How many of us ask ourselves what should be the adjustment in trade? We rarely talk about that.
The world may have changed. I gave you my conjecture. But we are also arrogant. We hold on to our old beliefs on the gains of trade.
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