Market Dominance Doesn’t Last; Regulation Shouldn’t Either
One of the justifications for heavy regulation of large companies is that they use market power to crush competition and maintain market dominance. Yet the history of America’s most successful companies—those that make it on to the Dow Jones Industrial Average (DJIA)—doesn’t support that theory. Sustainable competitive advantage is very hard to achieve, even for these titans of industry.
If we look at the history of the DJIA, we can immediately identify several significant changes in its sectoral composition over the years.
The DIJA was first published in 1884. It consisted of 11 companies, eight of which were railroad companies. The index was later expanded to 12 companies, before being expanded to 20 in 1916. The present Dow Jones Industrial Average began in 1928, when the list was lengthened once more from 20 to 30, consisting mostly of manufacturing companies and resource extraction companies such as Bethlehem Steel and Atlantic Petroleum (who?).
After the Second World War, the Dow entered a period of stability that probably still colors people’s perception of it. Indeed, there were no changes to its composition between 1959 and 1976. By 1991, however, the DJIA had diversified away from manufacturing and mining as companies like McDonalds, Walt Disney, and J.P. Morgan entered the index.
The data reveal a declining trend in the dominance of the manufacturing industry. It accounted for almost half (46.7 percent) of Dow companies in 1965, going down to just one-fifth of DJIA companies today. In contrast, the tech and financial industries have seen tremendous growth over the same period. These groups accounted for just 6.6 percent of DIJA companies in 1965, growing to 36.7 percent today. Retail and consumer goods companies have also experienced a twofold increase from 16.7 to 33.3 percent over the same period.
Today, the DJIA is probably more diversified than ever before, with tech companies (Apple, Microsoft), payments networks (American Express, Visa), banks (Goldman Sachs, J.P. Morgan), and pharmaceutical and health companies alongside the traditional conglomerates and manufacturers. Needless to say, there are calls for more regulation of all of these companies.
Out of all the companies that have ever appeared on the Dow Jones Index since it was first introduced, 79 percent are no longer on the Index. The average time a company spends on the index is only 22.6 years. Over half of all the companies ever to appear on the index do not even exist anymore. This all shows creative destruction, innovation, and economic dynamism in action.
Moreover, companies are remaining on the Dow for shorter periods than before. Among all companies only 19 percent have been on the index for more than 50 years, while 45 percent have been for 10 years or less, and 65 percent for 20 years or less.
The latest Dow Jones Industrial Average Index was updated in March, 2015. The current companies’ average stay on the index is 29.2 years. Only four out of the current 30 have been on the index for more than 50 years, while eight companies have been on it for less than 10 years.
When we consider how the composition of the DIJA has changed drastically over time from predominantly railroad companies to manufacturing and resource extraction companies and more recently tech ventures and financial firms we can begin to see how outdated regulations drafted during the Dow’s “heyday” of stability are inappropriate and often detrimental when applied to today’s DIJA companies.
Many of the rules and regulations drafted in the years when the manufacturing industry dominated the DJIA (1920’s-1990’s) fail to keep up with the constantly changing and dynamic nature of the market. Rather than having an experimental environment of learning and feedback whereby rules and regulations emerge from the bottom up and adapt to changes in the market, static regulations approaching a century old that were drafted for a manufacturing based economy are inappropriate in today’s economy and can stifle innovation.
Like common law, and the DJIA itself for that matter, regulation should be a product of spontaneous evolution; such a hands-off, experimental regulatory framework would better facilitate a rapidly changing market, ensuring the highest possible degree of market coordination.
Research associates Julija Simionenko and Jack Salmon contributed to this research.