In the second part of his interview with ProMarket, Bernard Yeung—one of the economists who laid the foundations of scientific research on economic power concentration—discusses free trade, the connection between wealth and power, and why governments may actually prefer markets controlled by dominant players rather than by many competitors.


Last week, we published the first part of an extensive three-part interview with Bernard (Bernie) Yeung, Dean of National University of Singapore’s business school. This is the second part. The third and final part will be published next week.

Bernard Yeung
Bernard Yeung

In the first part of our interview with Bernard Yeung, we talked about his 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 this installment, we talk 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 by many competitors.

Guy Rolnik: You, Randall Morck, Raghuram Rajam, Luigi Zingales, and many others started developing this area of research, power concentration. 20 years from those papers, not a lot has been added.

Bernard Yeung: Well, as I said earlier, there was a burst of energy and many wonderful research results in the 2000s. After the Great Financial Crisis in 2008, we have work that addresses cronyism in the financial sector, e.g., Simon Johnson and James Kwak’s 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. The game continues and our work continues.

GR: Professor Stanley Fischer, the Fed’s vice-chair, quoted your paper when he was the governor of the Bank of Israel, right after he won a power struggle with Israel’s strongest tycoons. Before we continue, let’s remember your assertion in that paper:

Around the world, large corporations usually have controlling owners, who are usually very wealthy families. Outside the U.S. and the U.K., pyramidal control structures, cross shareholding and super voting rights are common. Using these devices, a family can control corporations without making a commensurate capital investment. In many countries, such families end up controlling considerable proportions of their countries’ economies. Three points emerge. First, at the firm level, these ownership structures vest dominant control rights with families who often have little real capital invested – creating agency and entrenchment problem simultaneously. In addition, controlling shareholders can divert corporate resources for private benefits using transactions within the pyramidal group. The result is a poor utilization of resources. At the economy level, extensive control of corporate assets by a few families distorts capital allocation and reduces the rate of innovation. The result is an economy-wide misallocation of resources, and slower economic growth. Second, political influence is plausibly related to what one controls, rather than what one owns. The controlling owners of pyramids thus have greatly amplified political influence relative to their actual wealth. They appear to influence the development of both public policy, such as property rights protection and enforcement, and institutions like capital markets.”

GR: This is an interesting quote to be used by a central banker in a developed economy. He felt he needed it to demonstrate that there is literature that discusses the perils and harms of concentrated economies when he was struggling to regulate Israel’s biggest bank.

BY: Yes, I know. When Randall and I wrote that paper, it was a combination of observation and a sense of unfairness. It’s just not right. When I was in Hong Kong, I saw a lot of things that I found really unfair. Your mindset, your mental model and your behavior are dependent on some rules. But the rules are often set by people that favor themselves. We crave for a truly merit based system in allocation of opportunities and resources. 

GR: Have you or any of your colleagues been following the developments around concentration of economies and financial markets since you published this paper more than a decade ago? Do we know what happened in the years that passed since you published your papers?

BY: Anecdotally, yes. I believe there is an increase in concentration of wealth around the world. I do not know whether it is by the nature of our global economics or because of the political economy design. I really don’t know. I have a feeling that in the case of, say, China, there is quite a bit of conscious political economy design going on.

GR: I asked you about concentration, and you replied on concentration of wealth. Must concentration of wealth and concentration of economic power go together? Because sometimes the people who control pyramids are actually not the wealthiest.

BY: That’s a good point. I think this is related to the economic system. In emerging economies, I believe the concentration of wealth and the concentration of power go hand in hand.

I believe that in China concentration of power preceded concentration of wealth. A few of the descendants of people who established the Chinese Communist Party kicked out the Kuomintang (KMT), and their descendants have a lot of political power in their hands and accumulated a huge amount of wealth.

In Taiwan, there was a regional concentration of wealth and also power. The wealth was brought over from China into Taiwan by the KMT, which also had power. Later, a gradual redistribution of power took place, and that redistribution of power led to the current democratic chaos. The Democratic Progressive Party (DPP) took revenge on the KMT and tried to grab the wealth from it quite blatantly, explicitly and aggressively. At the same time, the DPP people apparently found ways to enrich themselves when it was elected. There is concentration of wealth in a few families, but power is redistributed and there’s a tug of war.

In Indonesia, it’s always the case that wealth is concentrated in the hand of the Chinese, but power is not; there is a delicate coexistence. The politicians need the successful Chinese businesses and vice versa.

In the case of Thailand, there is concentration of power and wealth, yet a lot depends on the military; it provides stability. There are tensions all the time among multiple factions, but the wealthy and powerful people are still the same group. Thailand’s wealth distribution is amongst the highest in the world (6th in 2014); the military’s influence is formidable. Yet, like China, in recent years Thailand has grown, which has elevated many out of the poverty line.

Very interestingly, countries like China and Thailand have concentration in wealth and in power, and yet, there is growth in the past 20 to 30 years; many are pulled above the poverty line, and yet many regions, particularly in rural areas, are stuck at a low-income level. It feels like they need a path out of the middle income trap due to crony capitalism after some initial phenomenon growth.

In all these cases, political economy design is in play, but the world is changing. There is growing discontent because, I believe, technological progress, together with international trade, has generated concentrated gains and diversified pains. When the elasticity of substitution between capital and labor exceeds one, people with capital and people with human capital get richer and people with just simple labor get poorer. Open trade further reduces labor income. I think a lot of fact-finding research is needed.

GR: When we look around the world in many economies, we observe cases where most of the concentration of wealth was not only the result of technology and globalization, but the result of people who control large corporations having more political influence, which helped them influence the rules of the game, perhaps also due to a lack of efficient and open financial markets. Let’s call it Robber Baron style, or crony capitalism style, entrenchment. Is that correct?

BY: We can discuss this using the framework of a free economy. I earn my first bucket of gold. I am now the capitalist who supports further industrialization. Other people would like to get money from me, so that they can invest and build their own factories. I become richer and richer, get into new industries and build a pyramid.

It started off with good economic development—but then I got political power and became focused on preserving my power. I might not be so vicious. It’s just that my thinking is conditioned by what is good for me.

GR: Can you elaborate on what you call economic conditioning, mainly the part in which you say it may not be vicious?

BY: Let’s imagine I got rich and now own and control a bank. I’m saying to myself that I know what’s right and what’s wrong. I cannot allow new people to set up new banks and compete with me in an unruly manner. That will create chaos. They will cause people to lose their jobs. I help to set up barriers to entry in the financial sector. I myself lend money to my rich friends and they will create many jobs. I think I’m right—and I am righteous.

I overlook the positive effects that competition will generate for the economy. I overlook the contributions of new ideas and innovations which leads to strong future growth and good future jobs. I focus on my lending to the established, which preserves current jobs and creates interest earnings for me.  I am not [attuned] to the counterfactuals. I’m conditioned to believe that all I’ve done is good for my bank, for the financial sector, and for the country. That’s economic conditioning. I’m not being sinful. I’m not being vicious. I only see what’s good for me, and I believe that’s good for the whole society.

GR: This was the case for the Robber Barons in the U.S. more then a century ago.

BY: Oh yes, and I believe it’s very much how Donald Trump is thinking.

GR: Do you think they genuinely believe that the country should be run by the incumbent oligarchs?

BY: If it ain’t broken don’t fix it, right? ‘Look at all the good things I have done. If I’m so rich and keep so many people employed, I cannot be so bad. I will never see people who cannot get into the market because of my behavior. I never see them. Indeed, I am always thinking that, in helping my established friends and using business judgment that brings me profits, I help society, create jobs and wealth, and my donations help society further. I see myself and my friends as pillars of our country.’

GR: That might not be entirely correct because, as a successful businessman, I spend some of my time making sure that I don’t have competition and destroy the little competition that wants to make inroads.

BY: I do not deny that, but I’m just saying there is a possibility that people don’t see anything wrong with what they are doing and actually think that they are right. Academics always conduct logic audits—how do you know you’re right?—a very powerful thing that motivates us and advances knowledge. That is the contribution of research. But in business, I know I am right if I have a good bottom line. That is economic conditioning.

GR: One could argue that concentrated interests, the economically powerful, and the incumbents can subvert and influence the market of ideas. They make sure that there are more incentives for people with ideas that promote their own well-being, and those are the ones that get funded: they do it by financing think tanks, universities, newspapers, experts, and intellectuals. It is always the concentrated interests that are willing to fund the market for ideas. If you come up with a great idea that favors the dispersed public, nobody will finance you because of the collective action and the free rider problem.

BY: I think that in the U.S. system, academic freedom is still highly respected. I do worry about what you say for the East. But currently, academics in the East still look up to and follow leading academicians in the West.

While that can be a good thing for freedom in the generation of ideas, there is a subtle backfiring effect. In academia, we often second-guess the interests of the high priests. That can hinder the development of fresh ideas or innovative research. Still, occasionally someone comes up with something that is radical, different and changes our perspectives and understanding of the world. I don’t know if we have a better system than our current peer review system, and I do not know whether there’s the best system for science.

In a system with dominance, and I’ve already put that in paper, I think there is built-in resistance to change. Rich people don’t like change and competition. And they themselves
don’t invest too much in innovations that displace their own business; that is, no creative self-destruction.

I believe that a vibrant and robust capital market that gives people with good ideas a chance is very important. The problem is failed capital markets, lack of transparency and alternatives and dominant players in control who don’t encourage entrepreneurship. I am curious if that applies to the market for scientific research.

GR: Open markets—and I’m quoting a phrase that Professor Zingales uses a lot—have no lobbies. There are always lobbies for special interests or for big corporations.

After the financial crisis there was some discussion on the role of large financial institutions in influencing the market of ideas, the incentives of academics and experts. Now we have new looming economic powers: the gigantic digital platforms that are also investing significant resources in research, thinks tanks, academia. Some of these players—like Amazon, Facebook, Google—have significant market power and resources. They also have a lot of data and many useful tools that are sought after by many people in academia. When you have so much concentrated power, with so much data and knowledge, do we have enough countervailing forces?

BY: What you described is multiple-platform economies. Wealth and power are connected and lead to entrenchment. These people know they have so much power in their hands. If you don’t play their game, you’re out. And if you play their game, you have to pay. They have the power of allowing people in or keeping them out. They do have economic power based on their platform.

Do we have to worry about them influencing or even controlling the generation of good research and ideas, for example, [by using] their influence to hinder the advancement of ideas not favorable to them? I cannot say no definitively, but that is a bit far-fetched. Generation of ideas and research is getting quite global. I cannot imagine that Alibaba can stop U.S. academics from generating ideas not favorable to Alibaba. Nor can I imagine that U.S. bankers can stop academics here and overseas from coming up with ideas that erode their dominance. I can see the incentives for doing so. Anyone who brings down Alibaba or changes the U.S. financial system will be famous. However, there will be debates, i.e., arguments defending the good things the U.S. financial sector or Alibaba does. Open debates are good.

Still, it is healthy to worry about these things—dominant business interests distort idea generation. We do have mechanisms. In the past, the U.S. went after Microsoft and earlier IBM and GM. The U.S. used to be very suspicious of concentration of power. That is a good thing.

GR: When people say “concentration of power” they tend to think mostly about the government.

BY: Well, it should not be so. The government represents people and tries to deal with economic power. Like in the Microsoft case.

GR: Yes, but ultimately Microsoft was not broken up.

BY: At the end, the market broke it. Microsoft is not as powerful as it used to be.

GR: But it took a while, and Microsoft today is more profitable and bigger than it was 15 years ago.

BY: I’m not saying that the game is over for them. I just mean that the U.S. had a tradition of anti-concentration policy. These issues are popping up everywhere. China has to be particularly careful when it comes to people like Alibaba’s Jack Ma, Huawei’s Ren Zhengfei, and Tencent’s Pony Ma. The Chinese government is very, very concerned about that. Jack Ma said that “people want me dead.”

Paradoxically, from a political economy standpoint, it’s a lot easier to deal with one than to deal with a million. When you deal with a million, it’s a lot costlier. It’s just simple reasoning. I think the Chinese government would be happy to just work with Tencent, Alibaba, and the other big companies because that is a lot more manageable. I think that somehow governments prefer to deal with a few big dominant players which can be tamed than to deal with a very diverse and hard to control group. 

Interestingly, people may want some stability too. The following is my speculation, which is not based on economic research and empirical investigation. My speculation is that we’re entering a new world. How does this new world fare? We don’t know. If you ask me “Are people given more opportunity than before?” I would say I do not know.

Let me offer an oddball illustration, a paradox. With expected rapid innovation, your creation may not have long-lasting value. The half-life of your innovation may be shorter because you expect to be disrupted faster. You would then be more risk-averse and demand a much higher risk premium. You could prefer to stand still even if the market doesn’t force you to stand still. You choose to stand still because the nature of the discovery regime has changed. So, because of all the ambiguity and volatility, people want more stability for them to invest in innovation. They would rather have some entrenchment than volatile mavericks running around.

It is also possible that there is a real decline in fair chance because regulations make financing costlier. High volatility drives down people’s desire to participate in the game, and stringent regulations drive up the cost of capital. You cannot infer from such data that people have less of a fair chance, and thus the world is sub-optimal, compared to the regime with less expected innovations or to the regime in which regulators overlook concentrated risks and systemic risks.

GR: Is there empirical data that shows that, when we take out economic concentration, we get better growth, better distribution of income, and a better quality of life?

BY: Yes. Once, Randall, his student, and I looked at a current list of top firms, compared it to a similar list of 20 years earlier, and asked ourselves how many survived. We showed that high stability is correlated with lower growth, lower productivity, and poorer Gini.((“Big Business Stability and Economic Growth:  Is What’s Good for General Motors Good for America?” (previous title: “Corporate Stability,” and also listed as NBER 12394) Kathy Fogel, Randall Morck and Bernard Yeung, Journal of Financial Economics, Vol. 89, Issue 1 (July), pp. 83-108, (2008) and Big Business Stability and Social Welfare in Financial Sector Development in the Pacific Rim, East Asia Seminar on Economics, Volume 18 (2009).)) Recently somebody told me, and I haven’t looked at the data, that in the last 10 years, the stability in the Fortune 500 in the U.S. has gone down: there is less entrenchment in the last 1
0 years; the tenure at the Fortune 500 has gotten shorter and shorter.

Yet, there appears to be more concentration than before and profit margin seem to be higher than before, especially for a few leading companies. But how does technology play a role in this? Is it about lobbying? Is it about political economy?

Without writing down a model and without reviewing data, which I doubt we have at this point, we can only rely on storytelling. Let’s say I’m running a hospital. What I’m finding out is that I can use machine learning and the internet to aggregate knowledge generation and utilize the capability globally. Scans are made somewhere, and then my machines in Singapore will tell which image shows lung cancer and which doesn’t, and my machine is more accurate than most human experts. Expanding this to more types of medical practice can lead us to see the incentive to create one big corporation that will control many hospitals in many locations. Hospitals will be very regional; healthcare is decentralized in production and operation. But, there will be a highly centralized knowledge development and utilization. I have created a story here, but it’s not unrealistic.

It can be done in the garment industry too. Why do I need to own production facilities? I can use the internet and big data analysis to manage design and consumer taste, manage flow of raw materials, and so on. There will be individual neighborhood companies, with my technical help and supply of raw materials and design, to produce local customized orders and conduct shipments in minutes. It becomes a virtual garment company that is concentrated on “knowledge.” It will be Bernie Yeung, Inc., making a huge amount of money, while the local suppliers will be “partners” dependent on me.

GR: Like Jeff Bezos?

BY: Yes.

GR: Monopsonies are present in so many markets today. For the customers, it’s great. They got used to it, but it can present other antitrust and anti-competition issues.

BY: Yes, but in this case, is it the same as no fair chance? I don’t know. It needs a lot more analysis. You will say, “Look, I work hard. I make a very decent living.” Somehow, you’re a millionaire but Ms. ABC overseas is a super billionaire. You seem to be doing well locally, but you’re part of the global village controlled by Ms. ABC. Rupert Murdoch is doing that as well.

GR: I would also say that, because of technology and the efficiencies that you get from this consolidation, a lot of markets now tend to be more naturally monopolized.

BY: And at the same time, localized. Old data cannot measure whether you are globalized or not. If you live in a village somewhere in Mozambique and get onto this network, you feel great. You run your own shop. You’re doing great in the sense that you have a very successful local business. Yet, you are a renter in the big global network. Ms. ABC in Singapore is the winner taking all. Anyone who wants to compete with Ms. ABC will face a hard, uphill battle against the established network. Also, there’s a new order in this world. Who is going to finance this little guy in Mozambique? Not the bank. Ms. ABC from Singapore will.