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Wisdom from Vernon Smith

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My Nobel-laureate emeritus colleague Vernon Smith e-mailed me yesterday in response to this post [2]. I here share Vernon’s response with his kind permission.

Don:

How do they [those who allege that the U.S. is in the grips of monopolists] explain the fact that Amazon (also EBAY, GOOGLE, FB et al.) are all relatively new firms? They were survivors of the huge creation of new firms in the 1990s and the dotcom crash in 2000-1.

Everything they say about Amazon was being said about IBM in the 1970s-80s. No one could dislodge them from the monopoly power of their operating system; all their clients were locked in. Then came Microsoft that beat ’em fair and square. In the 80s IBM barely survived bankruptcy.

Ask them to list the five top firms, every 10 years, starting in 1950. Their model cannot predict the turnover. Why? If the world has changed after a couple hundred years of the same, why?

Here is a long term look at the Fortune 500. https://www.aei.org/carpe-diem/fortune-500-firms-in-1955-vs-2015-only-12-remain-thanks-to-the-creative-destruction-that-fuels-economic-growth/ [3]

Vernon

…..

Vernon, of course, is correct. He knows history. History is filled [4] with allegations of “monopoly!” frantically thrown at large firms that currently have a great deal of market share. History is filled also with those same “monopolists” being outcompeted by new and more creative rivals – firms that themselves become the targets of allegations of “monopoly!” And so it goes.

Economically ignorant and historically uninformed academics, pundits, and other members of the emotigentsia [5], having themselves absolutely no entrepreneurial talent, cannot imagine how to successfully compete against currently “dominant” firms. These economically ignorant and historically informed folk then mistakenly interpret their own lack of imagination, and their own inabilities, as being powerful evidence – proof, even! – that today’s “dominant” firms are immune to competition.

Such economically ignorant and historically uninformed people have all the creativity of three-year-olds. Seeing something that they do not understand, they form a dislike for it. And they further suppose that the only possible way to rid reality of this unlikeable thing is to call on mommy, daddy, or Big Brother to forcefully cage it or destroy it.

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