Monopoly Capitalism

We are witnessing the death of competition in industry

By Steve Blizard   13 Jan 2018

Vibrant competition is essential for a capitalist economic system to function effectively.

However, we are witnessing the death of competition in industry after industry as global corporations increasingly gobble up their competitors.

John D. Rockefeller, one of America’s first oligopolists, famously said “competition is a sin”.

Within an oligopoly market structure, limited competition exists in which a market is shared by a small number of producers or sellers – an excellent definition of the current state of affairs in many major industries.  

In early American economic history, corporations were greatly limited in scope, and in most cases they existed for short periods. 

But today the largest corporations are so large that they literally dominate the global economy, something that can work against consumers.

I’ve just finished reading the introduction of Jonathon Tepper’s and Denise Hearn’s recently released book – The Myth of Capitalism: Monopolies and the Death of Competition, available free online.

Chosen as one of the Best Economic Books of 2018 by The Financial Times, they outline how America has moved from being an open, competitive marketplace to an economy where a small number of very powerful companies dominating key industries.

Economists describe this state of affairs as being a concentrated market.

The Myth of Capitalism provides numerous present-day examples of where market are “squeezed”, with the result being emergence of a small number of oligopoly players who then boost consumer costs and fees.

Monopolies like Google, Facebook and Amazon act as gatekeepers to the digital world, with the latter have captured the lion’s share of the global online retail sector.

Consumers are left with the illusion of choice, but they are confronted with only one or two companies, when it comes to purchasing high speed internet, health insurance, social networks, Internet searches, or even consumer products like toothpaste.

Here are some excerpts from the book:

America’s second wealthiest man, Warren Buffet, is an iconic figure for Americans and capitalists in other lands. For decades, his annual letters have instructed Americans about the virtues of investing.

In many ways, he’s come to be viewed as the embodiment of American capitalism. He’s called the annual meetings of his investment firm Berkshire Hathaway, a “Celebration of Capitalism”, and refers to his home town of Omaha as the “cradle of capitalism.”

Yet Buffett is the antithesis of capitalism.

For decades, he has recommended buying businesses with what he’s dubbed as strong “moats” and little competition.

The results have shown how correct he is.

Buffet gained control of Berkshire for around $32 per share when it was a fading textile company, and turned it into a conglomerate that now owns businesses that face little competition. The stock is now worth about $300,000 per share, making the entire company worth more than $495 billion.

Buffett has said at his investment meetings, “The nature of capitalism is that if you’ve got a good business, someone is always wanting to take it away from you and improve on It.”

In his annual reports, he has approvingly quoted Peter Lynch’s adage, “Competition may prove hazardous to human wealth.”

How true that is.

What is good for the monopolist is not good for capitalism.

Buffett and his business partner Charlie Munger always tried to acquired companies that have monopoly-like status.

At one of his legendary annual meetings he claimed that his ideal business was that possessed “high pricing power, a monopoly.”

The message is clear: if you’re acquiring in a business that faces a competitive market, you’re making a mistake.

***

If Warren Buffett is the embodiment of American capitalism, then billionaire Peter Thiel is the Godfather of California’s Silicon Valley.

These two could not be more different. Buffett is a hard-nosed committed Democrat, while Thiel, a libertarian has acquired a New Zealand passport so he can promptly flee when the “peasants with pitchforks” come after Silicon Valley monopolists.

Buffett and Thiel have nothing in common, but they can both agree on one thing: operating in a competitive market is for losers.

Thiel founded PayPal and has funded a legendary roster of businesses like LinkedIn and Facebook, which now have a monopoly on the key social networks and has a duopoly with Google on online advertising.

He dislikes competition and redefines capitalism by turning it on its head, “Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites.”

In Thiel’s view without fat profits, you can’t fund innovation and ongoing improvements.

Competition is thus a dirty word, whether you’re in Omaha, Silicon Valley, or, for that matter, Australia.

Anti-competitive forces in Australia

Similar anti-competitive forces also exist in the Australian default employer superannuation market.

While big falls in some super fund administration fees have occurred since the Banking Royal Commission, there were new calls by the construction and transport unions at last month’s ALP National Conference to “turf banks out of superannuation”.

A careful study of Industry Super Funds reveals strong resistance to competition.

They make no secret of the fact that their long game is to drive their competitors out of the business, one way or another.

Like a fox in the hen house, nothing will stop them from taking fund members “to the cleaners”, if that should ever occur.

Concentration opposed

Hearn and Tepper present several ideas and solutions in the book.

For example, “vote with your dollars and buy local”, Hearn says.

“One of the things we say in the book is capitalism is like an election and you vote with your dollars.”

The founding fathers of the USA were suspicious of concentrations of both political and market power.  

That’s why they created a federal political order with constitutional based checks and balances.  And that is also why they imposed substantial restrictions on corporations.

The solution is to unwind this new concentration of power, as most of the rewards from such markets tend to flow to those at the very top of the pyramid – which is precisely what we’ve been witnessing in recent years.

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