Many of our readers are probably aware of the excellent work our friend Jonathan Tepper does for Variant Perception (VP), a financial research boutique that really does bring a unique perspective to the table*. Jonathan (with co-author Denise Hearn) has just added a new book to his résumé, which is going to be released on 12 November: The Myth of Capitalism (MoC) – Monopolies and the Death of Competition** (a link to the official site is at the end of this post).
MoC deals with a subject that has increasingly captured the attention of political and economic observers in recent years: the growing quasi-monopolistic powers of a small (and shrinking) number of large corporations that have seemingly succeeded in exempting themselves from competition.
They are often aided and abetted by government imposing regulations certain to suppress competition from less well-funded upstarts and smaller firms. At the same time governments are creating loopholes which only the biggest established firms with international operations are able to take advantage of.
Don’t get us wrong – we have no problem with loopholes as such: to paraphrase Mises, they allow capitalism to breathe. Problematic is only that the benefits granted to the most powerful players are denied to their potential competitors; we wouldn’t want to see these loopholes closed, we would like to see them extended far and wide.
MoC is not focused on questions of monopoly theory***. The book is actually quite a page turner, at the same time informative, entertaining and infuriating. It is primarily concerned with practical problems and discusses what might be done to overcome them. The proposed solutions may be open to debate, but the book’s main aim strikes us as being well beyond it: namely the restoration of consumer sovereignty.
Many on the left are looking at the growing concentration of economic power from a Marxist perspective, believing it to be the inevitable outcome of what Marx called the “anarchy of capitalist production”. But this is erroneous: if not for misguided government intercession on behalf of established industries, even the largest companies would be facing the harsh winds of competition – and we would all be better off for it.
In an unhampered market economy an incumbent enterprise could not just sit on its laurels, regardless of how well-funded it was. Companies would certainly not be able to afford to run rough-shod over their customers by worsening the quality of their services or by imposing censorship (the latter has become a nasty habit of large social media platforms and powerful payment service providers).
Not only a handful of well-known internet giants in social media, search and retail have become quasi-monopolies or oligopolies: airlines, beverage companies, banks, health insurers, beef producers, pesticide makers, corn seed manufacturers, high-speed internet access providers and media companies have all joined the trend toward extreme concentration.
As Jonathan points out, entrepreneurs who manage to rise to the top by winning in an industry that was ripe to be taken on by an innovative competitor will quite often turn into anti-capitalist defenders of a monopoly-like dispensation as soon as they themselves are rich and well-established.
Our readers will no doubt greatly enjoy his trenchant portrait of Warren Buffett – a man who by his own words dislikes few things more than genuine competition! Of course Uncle Warren’s image was irretrievably tarnished by the “great financial crisis” (GFC), when he kept weighing in on the alleged necessity of JQ Public bailing out the big banks.
Given Buffett’s own large bank stock holdings, this smelled like a rancid moral hazard sandwich garnished with conflict of interest (not to mention that he had a few billion smackers lying around on the side to lend to Goldman Sachs in a “can’t lose” deal).
To be sure, Marx did in fact assert that the capitalist system would inevitably experience a concentration of economic power in the hands of fewer and fewer big players. For a long time this idea could be shown to be erroneous. However, a shift became detectable around the turn of the millennium, right after the tech mania blew out.
At first the shift was subtle, as only a noticeable deterioration in average economic output growth became detectable. But then the GFC struck and the pace of new company formation suddenly fell off a cliff. But what was the GFC, if not a vivid demonstration of an utter failure of government intervention in the economy?
This dated chart of small business births vs. deaths was the most recent one we could find – it shows how business deaths began to cross above births for the first time ever in 2008. After crossing back below in mid 2011, deaths and births seemed to be almost even at the beginning of 2013. Presumably this statistic looks better by now, but the long-term trend is nevertheless worrisome.
From the Federal Reserve’s ultra-loose monetary policy to the inducements the GSEs provided to the banking sector with respect to the creation of mortgage-backed securities, while blatantly disregarding the creditworthiness of borrowers, the heavy hand of the State left its unmistakable marks all over the event.
Sometime in 2009 or 2010 Mr. Bernanke averred that the giant bust he presided over was the consequence of a “lack of regulation”. He failed to mention that he spoke about one of the most heavily regulated sectors of the economy – a sector his own institution was incidentally supposed to supervise!
In reality the Fed tempted commercial and investment banks alike to recklessly over-trade their thin capital cushions by keeping an extremely loose monetary policy in place far too long. Not even once did Fed officials utter the slightest peep about the risks that were taken as a result – on the contrary, the existence of these risks was incessantly and vehemently denied (not least by Mr. Bernanke himself).
Mind, we believe the Fed should not even exist. The absence of a “lender of last resort” with unlimited money issuance powers would no doubt be a very strong disincentive to the type of reckless speculation that attended the mortgage credit boom of the 2000s.
Here is a quick list of the main problems (both symptoms and causes) identified in MoC as growing obstacles to competition and hence economic progress:
The main symptom is the emergence of oligopolies (rather than monopolies) in the US economy – these can and do collude with consummate ease, so they might as well be monopolies. The companies concerned may benefit from this, but it is certainly detrimental to the economy at large. These firms divide up turf like the mob (and they only need to watch each other carefully to do so).
Innovation and diversity are on the decline as a result of this concentration of economic power. Higher prices, fewer startups, lower productivity, lower wages, higher income inequality, less investment, and the withering of American towns are all symptomatic of the disease.
Workers have become punching bags: a huge surge in non-compete agreements, a growing number of monopsonistic buyers of labor, the inability of workers to sue their employers on account of hidden clauses in their contracts, are all elements contributing to stagnating wages and rising inequality (and the political backlash it generates).
The biggest US tech companies – which together have a market cap exceeding the GDP of all of Western Europe – particularly so-called platform companies, have become so rich and powerful, they are setting the rules. There is no longer a way to out-compete them. Consumers are presented with an illusion of choice, but the platform firms are actually akin to unavoidable toll roads – and that is costly.
Government’s anti-trust enforcement is de facto non-existent (to this point we would remark as a small point of critique that anti-trust regulations were historically rarely the pure-as-the-driven-snow endeavors to establish economic justice they were routinely portrayed as; often sanctimonious pretexts masked the true motives behind them).
The political duopoly of Democrats and Republicans is a symptomatic and highly deplorable form of concentration as well – in this case of political power. It invariably invites “bipartisan” collusion, particularly on matters concerning the pocket books and powers of its members (we find it quite amusing that the media routinely present the term “bipartisan” as having positive connotations).
Patent and intellectual property laws have become an enormous impediment to innovation and economic progress. They favor amply funded giant corporations that can afford to fight endless and costly court battles, not to mention a growing army of patent trolls.
Government is an active participant in fostering inequality (we think “root cause”). Whether through lobbyists or its infamous revolving doors, government is always there to grant favors to wealthy and politically well-connected players. Its regulations often seem deliberately designed to selectively smother competition from upstarts and cement monopoly-like structures in the process.
Stock ownership has also become highly concentrated – oligopolistic shareholders are holding most of the shares in oligopolies – an “oligopoly layer cake” as Jonathan calls it. Stock buybacks are continually exacerbating wealth redistribution from the many to the few. Consumers and employees both are increasingly hostage to dominant corporations, which have grabbed a historically inordinately large share of the economic pie.
Central bank interventions were a major driving force fostering and exacerbating these trends. As Jonathan puts it, the way some central banks acted, it might have been simpler to just wire the money directly to the wealthiest people instead of going the more-or-less circuitous route of purchasing corporate bonds (ECB) and even equities outright (SNB, BoJ).
The following words by Milton Friedman are quoted in the first chapter of MoC, and Jonathan elliptically returns to them in the final chapter of the book, entitled Economic and Political Freedom:
“Economic freedom is a necessary condition for political freedom”.
This is undoubtedly the case. When the political machinery is for sale to the highest bidders and enacts laws and regulations that protect these wealthy incumbents to the detriment of all others actors in the economy, neither economic nor political freedom remain fully operative. Jonathan notes:
During World War I, as hundreds of thousands of men were dying in the trenches, the French Prime Minister George Clemenceau said, “War is too important to be left to the generals.“
Today, capitalism is too important to be left to the economists.
Ludwig von Mises wrote along similar lines:
“Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence.
There is no means by which anyone can evade his personal responsibility. Whoever neglects to examine to the best of his abilities all the problems involved voluntarily surrenders his birthright to a self-appointed elite of supermen.”
We also felt reminded of something Canadian market analyst Bob Hoye said in reference to the modern-day economic orthodoxy, obviously in a somewhat less serious tone (before we all start wailing and gnashing our teeth in the face of the enormity of it all):
“There are two books that are unlikely to be published. Disco’s Greatest Moments and Great Moments in Macroeconomics.”
In the first part of the final chapter of MoC the history of the Anglo-Saxon pro economic freedom tradition is briefly recounted, starting with John Lilburne’s battle against an indictment for publishing “unlicensed books” in the first half of the 17th century – by which time the unjustly privileged license-holders had been in possession of a government-granted printing monopoly for more than two centuries.
Lilburne didn’t live to see what his tireless fight against his lazy competitors and accusers ultimately achieved – but it is hard to overstate the impact of his actions on posterity. This is worth highlighting, because it shows that a single highly dedicated person can sometimes make a world of a difference.****
Moreover, is important to reflect on history (even if there is less agreement on history than one would commonly think). In the worst case a failure to enact sensible reform can lead to a political backlash under less than ideal circumstances, the kind of backlash that can end up making things a lot worse before they get better.
We must admit to being concerned about this: we still remember the elation we felt when the brutal communist system of the Soviets keeled over 28 years ago with remarkably little ado. Looking at today’s college students, we are worried by how widespread extremely naive views on socialism appear to be. As to the difference between the two systems, it was best summarized by K.D. Williamson:
“The difference between communism and socialism is that under socialism central planning ends with a gun in your face, whereas under communism central planning begins with a gun in your face.”
The discussion of the historical record in MoC segues into a list of basic principles on competition, followed by policy proposals and a short list of what people as consumers can personally do if they want to hasten change – after all, the marketplace is an instant direct democracy in which consumers continually vote with their wallets.
We strongly recommend getting the book (best get two and give one as a gift to a friend) – it is highly topical and a breeze to read. You can take a look for yourself: the introduction and the first chapter can be read at the official web site (where you will find additional background information, endorsements and links for ordering it either directly or from your favorite online store – here is the link:
* We find VP’s highly creative forward-looking crunching of macro-economic data for the purpose of forecasting future turning points and trends in financial markets highly useful. VP provides research that has a genuine claim on both originality and practical value – in other words, the rare kind of research that is almost certain to pay for itself, because it will really help your investment process. Readers should definitely check it out.
** Names: Tepper, Jonathan, 1976- author. | Hearn, Denise, 1986- author.
Title: The Myth of Capitalism – Monopolies and the Death of Competition / Jonathan Tepper with Denise Hearn.
Description: Hoboken, New Jersey : John Wiley & Sons, 2019. | Includes index.|
Identifiers: LCCN 2018038947 (print) | LCCN 2018041857 (ebook) | ISBN 9781119548171 (Adobe PDF) | ISBN 9781119548140 (ePub) | ISBN 9781119548195 (hardcover)
***Regular readers of these pages may recall that we have occasionally mentioned Murray Rothbard’s theory on monopoly and competition (from chapter X of Man, Economy & State). Rothbard is highly critical of orthodox monopoly theory. His contribution is quite unique and and very much at odds with what one usually reads on the topic. Interestingly its conclusions are actually well-supported by the findings of complementary empirical/econometric studies conducted by a number of US economists in the course of the 20th century. Readers interested in theory that radically breaks with the consensus should definitely check it out.
****Lilburne’s importance and influence went well beyond the fight against state-supported monopolies, encompassing political thought more broadly. He coined the term “freeborn rights” – the first time the natural god-given rights with which every human is born were described and named in England. When the Star Chamber court tried to break his will by sentencing him to be whipped and pilloried, he reportedly resolved to continue to denounce his accusers and distribute his unlicensed pamphlets even while stooped in the pillory. Evidently Lilburne wasn’t lacking in the righteous ire department. His writings are even cited in a US Supreme Court decision.
Charts by: Gallup, St. Louis Fed