Capitalism Isn’t Bad, It’s Just BrokenMauldin Economics
The Soviet Union’s collapse ended the socialism vs. capitalism argument.
Q4 hedge fund letters, conference, scoops etc
Semi-free markets spread through Eastern Europe. Collectivist economies everywhere began turning free. Capitalism seemingly won.
Even communist China adopted a form of free market capitalism. Although, as they say, it has “Chinese characteristics.”
With all its faults and problems, capitalism generated the greatest accumulation of wealth in human history. It has freed millions of people from abject poverty.
A few hundred years ago, the majority of people stood below the poverty line. Today, the global poverty rate is at record-low 10%. And that number is shrinking every year.
Yet now, some on the left are again embracing socialist ideas and irrationally high taxes. What drives this thinking?
In practice, “capitalism” does indeed have flaws that justify the criticism. It is, to paraphrase Winston Churchill, the worst of all systems, except for everything else.
One problem is that today’s capitalism has contracted to an extent that is hard to ignore. Competition is increasingly shrinking in key markets.
Competition incentivizes producers to get more efficient and reduce prices for consumers. Without competition, you end up with bloated monopolies. They may be highly profitable for the owners, but don’t serve the public.
My good friend Jonathan Tepper wrote an excellent new book on this: The Myth of Capitalism: Monopolies and the Death of Competition.
He and co-author Denise Hearn explain why this is a serious problem with world-shaking consequences.
I’ll use some excerpts from the book for this discussion.
Not Free to Choose
Like me, Jonathan respects capitalism and capitalists. He’s not a leftist shill. It’s because he respects capitalism that he wants to see the best version of it.
The book refers to Milton Friedman’s old TV series Free to Choose, then says this:
“Free to Choose” sounds great. Yet Americans are not free to choose.
In industry after industry, they can only purchase from local monopolies or oligopolies that can tacitly collude. The US now has many industries with only three or four competitors controlling entire markets. Since the early 1980s, market concentration has increased severely. We’ve already described the airline industry. Here are other examples:
- Two corporations control 90 percent of the beer Americans drink.
- Five banks control about half of the nation’s banking assets.
- Many states have health insurance markets where the top two insurers have an 80 percent to 90 percent market share. For example, in Alabama one company, Blue Cross Blue Shield, has an 84 percent market share and in Hawaii it has 65 percent market share.
- When it comes to high-speed internet access, almost all markets are local monopolies; over 75 percent of households have no choice with only one provider.
- Four players control the entire US beef market and have carved up the country.
- After two mergers this year, three companies will control 70 percent of the world’s pesticide market and 80 percent of the US corn-seed market.
The list of industries with dominant players is endless. It gets even worse when you look at the world of technology. Laws are outdated to deal with the extreme winner-takes-all dynamics online. Google completely dominates internet searches with an almost 90 percent market share. Facebook has an almost 80 percent share of social networks. Both have a duopoly in advertising with no credible competition or regulation.
Amazon is crushing retailers and faces conflicts of interest as both the dominant e-commerce seller and the leading online platform for third-party sellers. It can determine what products can and cannot sell on its platform, and it competes with any customer that encounters success.
Apple’s iPhone and Google’s Android completely control the mobile app market in a duopoly, and they determine whether businesses can reach their customers and on what terms. Existing laws were not even written with digital platforms in mind.
So far, these platforms appear to be benign dictators, but they are dictators nonetheless.
Small Drives Growth
Now, to be clear, some industries need such massive scale. Thus they can only support a small number of producers.
Passenger aircraft, for instance. You have Boeing, Airbus, and a handful of smaller players that make smaller airplanes.
Most industries aren’t like that.
Banking certainly isn’t. Lots of studies show a bank’s efficiency stops improving once it passes $50 billion or so in assets.
Yet the megabanks have grown larger without growing more efficient. They have done so by killing local banks that once financed local businesses on favorable terms.
That’s a problem because we need those small, local businesses. Here’s Jonathan again:
Ever since the time of Thomas Jefferson, Americans have idealized the yeoman farmer and the small business. While family neighborhood stores are a critical part of the economy, it is important to distinguish between small businesses and the high-growth startups that Haltiwanger describes.
Small businesses like restaurants and dry cleaners create most jobs, but they also destroy most jobs. They create most new businesses, but they have the highest rate of failures. They are important, but they don’t drive productivity.
It is the small companies that become big, like the next Costco, Southwest Airlines or Celgene. All of these started small.
Geoffrey West, in his masterful book “Scale,” showed that companies are like living organisms. Just like in the animal world, many startups die when they are very young, but those that survive and grow quickly tend to grow exponentially, which leads to higher profitability and productivity.
Note, this is not an argument against large companies. They have an important role. But the real innovation and growth starts much lower on the food chain.
So, it is a problem when small business loses the chance to thrive and prove itself.
I go fishing in Maine every summer with a group of economists. Maine has complex rules for its lakes, governing which fish you can keep or must release.
We rely on professional guides to know the differences, but the general idea is to give the younger fish from underpopulated species a chance to grow. This preserves the lakes as a resource for everyone.
We might look at small businesses the same way. Most won’t grow into big businesses, but it serves everyone to protect their opportunity.
As Jonathan points out, that isn’t happening. We’re already paying a price, and it is getting worse.
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Article By John Mauldin