Myth of Capitalism Introduction

February 1, 2018

 

 

On April 9, 2017, police officers from Chicago’s O'Hare airport removed Dr. David Dao from United Express Flight 3411.  The flight was overbooked, but he refused to give up his seat. He had patients to treat the next day. Fellow passengers recorded a video of him being dragged off the plane. You could hear gasps of disbelief from fellow passengers, “Oh, my god!”  “No! This is wrong.”  “Look at what you did to him.”  No one could believe what they were seeing.

In the video he could be seen bleeding from the mouth as police dragged him down the aisle.  The video quickly went viral.  United’s CEO, however, did not apologize and blamed the passenger for being belligerent.  Eventually, the outrage was so great that the CEO apologized and the airline reached an undisclosed settlement with Dr. Dao.

Dr Dao’s lawyer Thomas Demetrio told journalists that Dr Dao “left Vietnam in 1975 when Saigon fell and he was on a boat and he said he was terrified.  He said that being dragged down the aisle was more horrifying and harrowing than what he experienced when leaving Vietnam."[i]

Years ago, such a public relations disaster would have caused United’s stock to stumble, but it quickly recovered.  Financial analysts agreed that it would have no effect on the airline.  For all of 2016, the company reported full-year net income of $2.3 billion.  The results were so good that in 2016 United’s board approved a stock buyback of $2 billion, which is the financial equivalent of spraying yourself with champagne.  Research analysts dismissed the incident, saying “consumers might not have much choice but to fly UAL due to airline consolidation, which has reduced competition over most routes.”[ii]  Online news sites helpfully explained to readers what had happened with headlines like, “Airlines Can Treat You Like Garbage Because They Are an Oligopoly.”[iii] Once investors started focusing on United’s dominant market position, the stock price in fact went up.

The analysts were right.  The American skies have gone from an open market with many competing airlines to a cozy oligopoly with four major airlines. To say that there are four major airlines overstates the true level of competition. Most US airlines dominate a local hub, un-ironically known as “fortress hubs”, where they face little competition and have a near monopoly.  They have the landing slots, and they are willing to engage in predatory pricing to keep out any new entrants.  At 40 of the 100 largest U.S. airports, a single airline controls a majority of the market.[iv]  United, for example, dominates many of the country’s largest airports.  In Houston United has around 60% market share, in Newark 51%, in Washington Dulles 43%, San Francisco 38%, and in Chicago 31%.[v] This situation is even more skewed for other airlines. For example, Delta has 80% market share in in Atlanta, and 77% in Philadelphia, while in Dallas-Fort Worth it has 77%.[vi]  For many routes, you simply have no choice.

The episode became a metaphor for American capitalism in the 21st century.  A highly profitable company had bloodied a consumer, and it didn’t matter because consumers have no choice.  

When consumers see a man bloodied by a big company or see a suffering patient gouged by a hospital, they get the sense that something is profoundly wrong with companies.

All around the world, people have an overwhelming sense that something is broken. This is leading to record levels of populism in the US and Europe, resurgent intolerance, and a desire to upend the existing order.  The left and right cannot agree on what is wrong, but they both know that something is rotten. 

 

Capitalism has been the greatest system in history to lift people out of poverty and create wealth, but the “capitalism” we see today in the United States is a far cry from competitive markets. What we have today is a grotesque, deformed version of capitalism.  Economists such as Joseph Stiglitz have referred to it as “ersatz capitalism,” where the distorted representation we see is as far away from the real thing as Disney’s Pirates of the Caribbean are from real pirates.  

If what we have is a fake version of capitalism, what does the real thing look like? What should we have? 

 

According to the dictionary, the idealized state of capitalism is “an economic system based on the private ownership of the means of production, distribution, and exchange, characterized by the freedom of capitalists to operate or manage their property for profit in competitive conditions.” 

Parts of this definition have universal appeal today.  Today, for example, we take private property for granted in the world.  Communism defined itself in opposition to private property.  Karl Marx wrote in The Communist Manifesto, “The theory of Communists may be summed up in the single sentence: Abolition of private property.” After the fall of the Berlin Wall in 1989, Communism collapsed and was widely discredited as a miserable failure. The battle for private property had been won. 

The harder part of the definition follows: capitalism is “characterized by the freedom of capitalists to operate or manage their property for profit in competitive conditions.”  The battle for competition is being lost. Industries are becoming highly concentrated in the hands of very few players, with little real competition.

 

Capitalism without competition is not capitalism. 

Competition matters because it prevents unjust inequality, rather than the transfer of wealth from consumer or supplier to the monopolist.  If there is no competition, consumers and workers have less freedom to choose. Competition creates clear price signals in markets, driving supply and demand. It promotes efficiency. Competition creates more choices, more innovation, economic development and growth, and a stronger democracy by dispersing economic power. It promotes individual initiative and freedom.  Competition is the essence of capitalism, yet it is dying.  

Competition is the basis for evolution.  An absence of competition means an absence of evolution, a failure to adapt to new conditions. It threatens our survival.

There are fewer winners and many losers when there is less competition. Rising market power by dominant firms has created less competition, lower investment in the real economy, lower productivity, less economic dynamism with fewer startups, higher prices for dominant firms, lower wages and more wealth inequality. The evidence from economic studies is pouring in like a flood.

Competition remains an ideal that is receding further from our reach.  Don’t take our word for it, though.  According to The New York Times,  “Markets work best when there is healthy competition among businesses. In too many industries, that competition just doesn’t exist anymore.”[vii]  The Economist warns that, “America needs a heavy dose of competition.”[viii]

If you believe in competitive free markets, you should be very concerned.  If you believe in fair play and hate cronyism, you should be worried.  With fake capitalism CEOs cozy up to regulators to get the kind of rules they want and donate to get the laws they desire. Larger companies get larger, while the small disappear, and the consumer and worker are left with no choice.

Freedom is essential to capitalism.  It is not surprising then that Milton Friedman picked Free to Choose as the title of his extremely popular PBS series on capitalism, and Capitalism and Freedom was the title of his book that sold over 1.5 million copies.  He argued that economic freedom was “a necessary condition for political freedom.”[ix] 

Free to Choose sounds great.  It’s a bold statement and a really catchy title, 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 United States now has many industries with only three or four competitors controlling entire markets. Since the early 1980s, market concentration has increased severely.  As we’ll document in this book:

  • Two corporations control 90% of the beer Americans drink.

  • Four airlines completely dominate airline traffic, often enjoying local monopolies or duopolies in their regional hubs. 

  • Five banks control about half of the nation’s banking assets. 

  • Many states have health insurance markets where the top two insurers have 80-90% market share. For example, in Alabama one company, Blue Cross Blue Shield, has 84% market share and in Hawaii it has 65% 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 almost 90% market share.  Facebook has almost 80% 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 regular 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.

It was not always like this. Without almost any public debate, industries have become now much more concentrated than they were 30 and even 40 years ago.  As economist Gustavo Grullon has noted, the “nature of US product markets has undergone a structural shift that has weakened competition.”  The federal government has done little to prevent this concentration, and in fact has done much to encourage it. 

 

It is difficult to overstate the stakes for the economy and politics from industrial concentration. One of the great mysteries of the past few years is why economic growth has been so poor and why so many men and women with broken hopes have simply given up and dropped out of the work force.  To give a sense of the crisis, in 2016, 83% of men in the prime working age that were not in the labor force had not worked in the previous year. That means 10 million men are missing from the workforce.[x]  These are not purely statistics; they are our fellow sons, brothers and fathers.

Economic growth has been poor despite the trillions of dollars of liquidity the Federal Reserve has pumped into the economy and despite trillions of dollars of government debt.  After the Financial Crisis, the US has experienced high levels of long-term unemployment, stagnant wages, dismal numbers of new startups, and low productivity growth. 

These problems, though, have deeper roots. After the dot com bust, the economy rebounded but growth was more anemic than during the 1980s or even 1990s.  After the Financial Crisis, growth was even more pathetic.  Each expansion has experienced lower growth than the previous one.  There is not one variable that answers all questions, but growing mountain of research shows that less competition has led to lower wages, fewer jobs, fewer startups and less economic growth.

Broken markets create broken politics. Economic and political power is becoming concentrated in the hands of distant monopolists.  The stronger companies become, the greater their stranglehold on regulators and legislators becomes via the political process. This is not the essence of capitalism.

Capitalism is a game where competitors play by rules that everyone agrees.  The government is the referee, and just as you need a referee and a set of agreed rules for a good basketball game, you need rules to promote competition in the economy.  Left to their own devices, firms will use any available means to crush their rivals. Today, the state, as referee, has not enforced rules that would increase competition, and through regulatory capture has created rules that limits competition.

Workers have helped create vast wealth for corporations, yet wages barely kept up with the growth in productivity and profits.  The reason for the large gap is clear.  Economic power has shifted into the hands of companies.  Income and wealth inequality have increased as companies have captured more and more of the economic pie.  Most workers own no shares and have barely benefited from record corporate profits.  As G. K. Chesterton observed, “Too much capitalism does not mean too many capitalists, but too few capitalists.”

 

When the Left and Right speak of capitalism today, they are telling stories about an imaginary state.  The unbridled, competitive free markets that the Right cherishes don’t exist today. They are a myth.

The Left attacks the grotesque capitalism we see today, as if that were the true manifestation of the essence of capitalism rather than the distorted version it has become. 

Economists like Thomas Piketty even see within capitalism itself a logical contradiction that “devours the future,” rather than locating the problem in a lack of competition.  But what we see today is the result of the Monopoly Machine, where big companies eat up the small, and government is captured to rig the rules of the game for the strong at the expense of the weak.

While many books have been written on capitalism and inequality, the left and the right don’t even read the same books. Researchers have analyzed book purchases, and there are almost no political or economic books that both sides pick up and read. Likewise, if you look at Twitter debates, the data shows that the left and the right don’t even share ideas with each other or debate.  Neither side speaks to the other, much less listens.

 

Supporting capitalism has been identified with being pro-big business rather than being pro-free markets. This book is unabashedly pro-competition.  Big business is not bad, but too often size has come through mergers that have destroyed competition and subverted capitalism. 

We hope this book will bridge the divide and find a common ground between the left and right.  Both sides may prefer different tax rates or have different views on social policy, but left and right should agree that competition is better for creating better jobs, higher pay, greater innovation, lower prices and greater choice. 

 

A book that merely analyzes the problems without offering solutions is not particularly useful.  In this book we’ll present solutions.  We end the book with thoughts on how to reform and fix the economy and political system. 

We do hope you’re outraged after reading this book, but more importantly, we hope that you come away knowing that consumer and voter anger can be harnessed for good.

In 1776 Adam Smith wrote The Wealth of Nations, and the Continental Congress declared independence from Britain.  Smith complained bitterly about monopolies.  He wrote of the East India Company: ”…the monopoly which our manufacturers have obtained… has so much increased the number of some particular tribes of them, that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature.” 

That same year, among the reasons the American Continental Congress cited for separating from Britain in the Declaration of Independence, “For cutting off our Trade with all parts of the world: For imposing Taxes on us without our Consent.”  The Boston Tea Party was in response to the East India Company’s monopoly on tea.  The Wealth of Nations and the Declaration of Independence were bold statements against the abuses of monopoly power.  Americans wanted entrepreneurial freedom to build businesses in a free market.

 

Today, we need a new revolution to cast off monopolies restore free trade.​​​​​​​​​​​​​

Endnotes

[i] http://www.bbc.co.uk/news/world-us-canada-39586391

[ii] https://www.wired.com/2017/04/uniteds-greed-turned-friendly-skies-flying-hellscape/

[iii] https://splinternews.com/airlines-can-treat-you-like-garbage-because-they-are-an-1794192270

[iv] http://www.denverpost.com/2015/07/17/airline-consolidation-has-created-airport-monopolies-increased-fares/

[v] http://www.denverpost.com/2017/04/11/united-boycott/ and https://skift.com/2017/07/14/delta-holds-an-edge-over-competitors-by-dominating-less-competitive-markets/

[vi] https://www.dallasnews.com/business/business/2015/07/14/airlines-carve-us-into-markets-dominated-by-1-or-2-carriers

[vii] https://www.nytimes.com/2015/11/01/opinion/sunday/how-mergers-damage-the-economy.html

[viii] https://www.economist.com/graphic-detail/2016/03/24/corporate-concentration

[ix] Friedman, Milton and Friedman, Rose D. Capitalism and Freedom: Fortieth Anniversary Edition, University of Chicago Press, 2002

[x] https://www.npr.org/2016/09/06/492849471/an-economic-mystery-why-are-men-leaving-the-workforce

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