We cannot deny the benefits of pre millennium capitalism. Free market capitalism has created developments that have been enormously beneficial to the living standards of mankind. That entrepreneurs are more creative, inventive, industrious, tenacious, risk averse or more philanthropic has benefitted living standards in countless ways.
Faults in Capitalism
The following is extracted from an article by Sheldon Slabbert in the Newsroom, New Zealand web page, 8th March ’19.
Loss of Competition
Jonathan Tepper in his new book The Myth of Capitalism masterfully lays out the argument that it is the lack of competition as a prime reason for capitalism’s faults. It’s a failure to adhere to that core tenet of capitalism that is to blame for capitalism’s current failures.
Since the 1980s we have seen an ever-increasing consolidation of economic power and wealth in corporate America, with most sectors now dominated by only a few players. Consider Google with almost 90 percent market share of internet search activity outside of China.
The top tech companies in America now have a market capitalisation that exceeds the combined GDP of all the countries in Western Europe - yet many of these organisations are still being allowed to acquire companies and drive out competition, further consolidating their stranglehold over the sector and consumer. Startups have little chance.
Consolidation in banking has brought us companies that are “too big to fail” and we see similar examples across airlines, the pharmaceuticals industry and others - corporate concentration comes in different forms.
New Zealand and Australia have a significant problem with oligopolies and duopolies that weigh on the economies of their citizens. Most will be familiar with a monopoly or duopoly, but not too many will be able to recognise the insidious dangers of oligopolies - where a small number of players have carved up a sector for themselves. Oligopolies create the illusion of competition, and often pass regulatory scrutiny under the promise of increased efficiencies and lower cost to the consumer, which is not sustained.
In New Zealand, oligopolies and duopolies are clear and present across our grocery stores, and power, telecommunications and banking sectors. It is further very evident in the building materials space, contributing to the growing cost of housing.
Companies like Fletcher have long enjoyed a stranglehold over the domestic building materials and distribution business. The extent of their reach to try to keep competition at bay, was on display recently with Knauf’s (the German plasterboard manufacturer) epic struggle to get their product to market in New Zealand.
Taking a broader look, one could also deduce to a certain degree that many of New Zealand’s top stocks are able to pay healthy dividends to shareholders because of their dominant positions. They have less need to reinvest profits into continuous research and development and remunerate staff well to compete for talent, as the existence or threat of real competition is much lower here than in other more competitive markets.
Concentration of power and wealth is further achieved through horizontal shareholding. The Harvard Law Review cited recently that in the US the odds that two competitors have a common shareholder with more than 5 percent shareholding in each company rose from 16 percent in 1999 to 90 percent in 2014.
In other words, there is a 90 percent likelihood that any two random competitors will share a common major shareholder whose profits will suffer if the firms compete with each other for market share.
We can all drive change through our day-to-day spending, striving to bring back the benefits of true capitalism by being more aware of the negative effect that monopolistic behaviour has on our economy and society.
Coinciding with this dramatic rise in horizontal shareholding, executive compensation has become increasingly based on market performance since the 1990s, where business leaders are incentivised for ensuring sector growth, rather than on direct competition with their peers.
Why wages are stagnant
The increased concentration of controlling companies within different industries has led to a number of companies achieving monopsony power as the only buyers of labour. This has left workers with little choice in where they work, and little negotiating power in terms of wages, meaning that over recent years employee benefits have largely been eroded away. Stagnant wages have also prevented many from being able to invest in stocks.
The level of inequality between CEO pay and that of the average worker has never been this extreme - and perhaps, we should also be discussing this pay gap issue.
Further dangers of monopolistic corporate behavior
A loss of competition results in fewer startups, lower wages, higher inequality, less innovation and lower investment. Concentration of economic power also increases corporate lobbying power and political influence – where these organisations are often able to influence new legislation or deregulation of an industry that further insulates their interests. Some see the two-party system as a duopoly in itself.
Milton Friedman is quoted as saying: “Economic freedom is an essential requisite for political freedom” - and competition is a critical element of capitalism because it promotes the diffusion of power and political freedom.
What can we do?
Most monopolies do not come to be through natural economic forces within capitalism, but are generally a product of political decisions that can be reversed. Most of the legislation already exists and simply needs to be applied more readily - anti-trust regulations in particular.
We are now seeing increased calls for regulation, such as with the tech darlings known as the FAANG stocks - the five largest listed firms globally which have (to date) grown with little regulation. This may see digital monopolies like Facebook and Google broken up or with other restrictions imposed upon their current business models.
Paul Tudor Jones has been pioneering a voluntary reform of corporate culture in the US. His company, 'Just Capital' polls the American public in order to evaluate and rank companies on those issues they deem most important - ranging from how they treat workers, the environment, leadership, and product quality to name a few.
He has shown through his Just Capital Index that companies can thrive while doing social and economic good by aligning themselves with a more conscientious consumer and employee. While investors are able to buy shares in the individual companies, Just Capital has launched an exchange-traded fund where investors can buy the basket of shares of these companies more efficiently. These funds can be accessed under their trading codes “JULCD and JUST”. We can all drive change through our day-to-day spending, striving to bring back the benefits of true capitalism by being more aware of the negative effect that monopolistic behaviour has on our economy and society.
Developments Undermining Capitalism
Bo Rothstein an internationally acclaimed Swedish political scientist who holds the August Röhss Chair in Political Science at University of Gothenburg, Sweden gave this commentary on the documentary Can We Do It Ourselves:-
‘Today’s capitalism is very different to how it used to be back in the day. Back then there were hard working individuals who owned the capital, had the skills, the initiative and the abilities, and who also helped to run the business. Today for example, more than 80% of the Swedish stock exchange is owned by investment funds, pension funds and so on. They lack the interest, ability or control of production and they do not really care. No doubt there are similar statistics on other share markets.’
‘There is a difference between how capitalism is marketed and how capitalism actually works. It is marketed with these models … the idea of the free market, the choosing consumer and the idea that the consumer is ultimately in charge. In reality, however, many corporations strive for monopoly. Many corporations want exclusive power over the market and will do whatever it takes to get that power. Today corporations try to manipulate governments to enforce particular rules that suit certain interests, and thus invest heavily in persuasive lobbying. Advertisement is another way and also buying up competing companies taking them out of the market. The free market can be a means for certain capitalists to take over the market in order to abolish the free market because they want monopoly power.’
‘Businesses work really hard not to have competition and free markets. The really big money is to be made in markets that are not free, that are not competitive. This is the single idea that we really have to understand. Free markets and competition are really good things but businesses will move heaven and earth not to have to operate in such environments.’
‘Power becomes the dominating principle not efficiency, not social well-being, not environmental concern for our planet, and not life fulfilment for individuals.’
‘Like the aristocratic ownership of huge tracts of land, which in 1791 Tom Paine attacked in his book ‘The Rights Of Man’, these productive assets remain effectively in the hands of a very few, very rich people, and make our claims to real democracy look pretty thin. In Tom Paine’s lifetime the capitalist system was in its infancy. As an advocate of equality and democracy, he focused his attack on the landed aristocracy, the nobility, the monarchy, and on their ownership of huge swathes of land. He seems to have assumed that the market system, then involving mainly small traders and craftsmen, would remain small-scale, fairly egalitarian, and so compatible with democracy. Had he foreseen how the development of huge multinational corporations would surpass the concentrations of wealth and undemocratic power of his day, he would surely have included them in his sights. The classical figure John Stuart Mill, a leader of classical liberalism, took it for granted that the workplace would be under the control of the people that worked there. Go back further to Adam Smith (or David Hulme), they argued that a fundamental feature of human nature is sympathy for others. He also took for granted along with other classical liberals that a society should be designed so that it provides the most extensive possible support for the fulfilment of individual capacities. The creation of opportunities for people to live their creative and fulfilling lives, and so on, and I think if you trended it – if you go beyond what they were talking about and asked what sort of society they envisaged. I think it is quite consistent with the conclusion that Mill drew explicitly – a kind of economic democracy’.