Amazon and ‘the invisible foot’

Amazon comes in for some pretty severe criticisms from various quarters. So I enjoyed reading an article by Reihan Salam in Slate, who argues that “Jeff Bezos’ company is not the problem with American capitalism. It’s the solution to our economy’s ills”.

I shan’t go through a detailed catalogue of the charges levelled at Amazon. The firm’s critics point to a list of abuses typical of a dangerous monopolist abusing its power and directly contributing to market failure. It “has left a trail of destruction in its wake and uses its economic power to bring its many suppliers to heel … (it) is a budding monopoly whose dominance will eventually yield less variety of products and lower quality of the remaining ones”. Many would like to see the company investigated, and preferably broken up to limit its power in the marketplace. And there is something to be said for that approach.

Yet at the same time, consider the counter case raised in the article: Amazon does indeed have a formidable and perhaps even monopolistic position in the book trade, but it certainly doesn't have a monopoly on e-commerce, where it represents 15 percent of all sales, let alone retail as a whole. And although it is dominant position in a handful of niches, it is so cutthroat that it sometimes appears to be cutting its own throat, as evidenced by the fact that the company loses lots of money.

Read the article, which has plenty to say on the subject of innovation. I just want to draw your attention to what makes a very interesting concluding paragraph:

• We've all heard of Adam Smith's “invisible hand” that guides the free market. The invisible foot is the invisible hand's brutish older brother. It is the force that sees to it that capital gets reallocated from firms that aren’t doing their jobs to firms that are by putting the former out of business. The invisible foot has seen better days. In sector after sector—banking, broadband, and utilities come to mind—large incumbent firms have found new ways to protect themselves from competition, whether through coziness with regulators of sweetheart subsidy deals with politicians on the make to a pathetic lack of imagination among entrepreneurs who refuse to take on the toughest challenges. The sectors that Amazon takes on are the big exception. Instead of damning Amazon, we need to be asking why we don't have more companies like it.

That’s a legitimate point (though not one that everyone will agree with). Economists worry that there are a lot of dud firms out there (so-called ‘Zombie’ companies) who are burning through scarce resources, and should really be bankrupt. Some might argue that firms like Amazon are doing us a favour by bringing us to that point sooner.

There's more commentary at Is Amazon a monopoly? and What in the World Is Amazon?