Where’s the Competition?

The danger to capitalism comes from capitalists. A new book, The Myth of Capitalism, illustrates how this works.

Saving Capitalism from the Capitalists, written by Raghuram Rajan and Luigi Zingales, was published in 2003. In that book, the authors wrote:

Throughout its history, the free market system has been held back, not so much by its own economic deficiencies as Marxists would have it, but because of its reliance on political goodwill for its infrastructure. The threat primarily comes from…incumbents, those who already have an established position in the marketplace…The identity of the most dangerous incumbents depends on the country and the time period, but the part has been played at various times by the landed aristocracy, the owners and managers of large corporations, their financiers, and organised labour.

Basically, the danger to capitalism comes from capitalists, or the people who have benefited from a free market system. Once they have benefited from the free market system, they want to clamp down on it, and ensure that they capture a bulk of its benefits.

Around a decade-and-a-half later comes The Myth of Capitalism, written by Jonathan Tepper and Denise Hearn, which works as a perfect sequel to Saving Capitalism. In 2003 Rajan and Zingales talked about the dangers of capitalists taking over capitalism. By 2018 this was already happening, across different sectors.

As Tepper and Hearn write: “The battle for competition is being lost. Industries are becoming highly concentrated in the hands of very few players, with little real competition.”

The authors offer examples from scores of different sectors. But one sector they come back to repeatedly is the airlines sector in the United States. The sector was deregulated in 1978 and over a period of time, many airlines consolidated into four big airlines: American, Delta, United and Southwest.

Now on the face of it, four big airlines operating in a country doesn’t sound like lack of competition. But the airlines have neatly ended up dividing different airports among themselves, and in the process throttled competition. In fact, in forty out of the 100 largest American airports, one airline controls the majority of the market. This has led to even Warren Buffett, who had always stayed from investing in airlines, and had even talked about shooting Orville Wright down, investing in them.

There are a host of other sectors where competition has become fairly limited over the years. Two companies control 90% of the beer market in the United States. Five banks control around 50% of the banking assets in the United States. While there are many insurance companies operating across the length and breadth of the United States, in many states the top two companies control 80-90% of the market.

Of course, there are many other examples in the technology space. Google has 90% of the internet search market and Facebook dominates 80% of social media. Apple’s iPhone and Google’s Android control the mobile app market.

In fact, the situation has become so bad that when The Economist looked at how often companies used the word competition in their annual reports, it found that the use of the word had collapsed. As Tepper and Hearn put it: “CEOs no longer even need to write about competition because so little remains.”

This lack of competition has led to many things that are now hurting the American economy: 1) Workers have lost the power to negotiate with large companies that dominate different sectors now, and not surprisingly, wages have declined. This has also led to more inequality. 2) On a more disturbing note, in 2014, it came to light that Steve Jobs, the Apple maverick, had been preventing employees from moving on to other companies. As Tepper and Hearn put it:

Silicon Valley was founded on the mobility of workers, but the tech giants – Apple, Facebook, Google, Adobe and many others – were caught in “gentlemen’s agreements” to not poach each other’s employees. Staff brought the case forward claiming that these pacts made it difficult to market their skills and that they also suppressed their salaries.

3) New business formation in the United States has slowed down dramatically over the decades. 4) Business investment has stagnated. The large firms make large profits, and money is shared through dividends and used for large buybacks to drive up the share price. 5) In fact, the lack of competition had a political impact as well, and it helped push Donald Trump to become the American president.

Trump’s great idea was to “make America great again” or MAGA, as it popularly referred to. This worked very well in large parts of America, which had been hurt due to lack of competition. As the authors write:

In the 2016 election Hilary Clinton won 472 counties that represented 64% of the US Gross Domestic Product, compared to the 36% for the 2,584 counties that voted for Donald Trump. In many small towns, a single meat packing company, insurer, hospital system, or big box store owned by a distant company has now replaced locally owned businesses.

Trump just tapped into this anxiety that prevailed across large parts of small and middle America.

The authors do a great job of highlighting and explaining the problem of lack of competition or the fact that there is so little capitalism being practiced in America, like the way it was or like the way it should be. Towards the end of the book they offer some good solutions as well, including reviving the anti-trust regulations in the United States, which used to work very well in the past, but haven’t done so lately.

Many books on economics, are not written for the lay audience. This book clearly is, and that’s the best part. Also, while the authors do a great job of building their case by using American examples extensively, it would have been even better if they could have had a chapter or two, on the situation outside America.

To conclude, Thomas Sowell in his book Basic Economics, makes a very fundamental point about competition, where he says that ccompetitors and competition are two very different things, and competition “as a condition is precisely what eliminates many competitors.”

Basically, competition over a period of time leads to less competition. This is a point which Tepper and Hearn do not address adequately in their book. Are their cycles to competition or the lack of it, as well? This is something that the authors miss out writing about in an otherwise very good book.