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The Profit Paradox

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The Profit Paradox

How Thriving Firms Threaten the Future of Work

Princeton UP,

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Firms are profitable but that is, in some ways, bad news. Find out why.

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Editorial Rating

8

Qualities

  • Analytical
  • Eye Opening
  • Concrete Examples

Recommendation

Equity investors prefer firms as protected from their rivals as medieval castles with deep moats. Recent decades have seen powerful companies boom that are all but impregnable to competition. This is good for their investors but bad for customers, workers, other stakeholders and democracy. Professor Jan Eeckhout lucidly explains why market power is toxic to the economy and contrary to capitalism’s fundamental principles. He draws on centuries of economic literature, but makes his case in language accessible even to those with no formal economics training. His provocative exposition of market power and its consequences tackles a subject fraught with political and social implications. 

Summary

Even though workers are much more productive, they are getting a smaller share of the economic pie than when they were less productive.

Today, the wage premium of workers with a college education is 96%, relative to workers with just a high school diploma; it was 46% in 1980. Technology has increased productivity. Even a relatively minor innovation can help a company capture a global market – and, thus, gain a payoff much greater than before 1980. Technological change has also enabled just a few firms to dominate their markets. These firms often outsource functions that, in the past, would have remained in-house: They outsource menial services and employ only highly valued knowledge workers – who enjoy vastly greater salaries.

Changing technology and economic progress allowed a few firms to develop market power during the late 19th and early 20th centuries – the era of “robber barons,” such as J.P. Morgan, Andrew Carnegie, Cornelius Vanderbilt and John D. Rockefeller. Something similar is happening today. 

Famous investor Warren Buffett said that his ideal investment is a ...

About the Author

Jan Eeckhout is the ICREA Research Professor at Pompeu Fabra University in Barcelona. He has also taught at the University of Pennsylvania, University College London, Princeton University and New York University. His work has been featured in The New York Times, The Wall Street Journal, The Economist and the Financial Times.

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