I am going to do a book review of an econ book that has just come out. And I think it’s fitting that my first post on the return of the Credit Writedowns ‘blog’ is a review of such a good book like “The Myth of Capitalism”.
I started this website just over a decade ago in the middle of the financial crisis. And you would think that, after a decade of recovering from that episode, putting regulations and safeguards in place, and sending the US economy to record low unemployment, that a lot of the complaints people had about ‘capitalism’ would have gone away. In fact, the distrust of capitalism is worse now than it was ten years ago. And Jonathan Tepper’s book, co-written with Denise Hearn, goes a long way toward identifying why. It also ends with some ideas about fixes.
Can I start with my view, first?
A lot of times, when you read reviews about books on the economy, you end up wondering what the reviewer’s ‘priors’ are as people like to say in economics. You read the review and wonder where the biases of the reviewer are, because that can tell you a lot about the review. So I’m going to lay it out there.
The ‘Corporatist’ is a kleptocrat masquerading as a believer in liberty. He uses terminology based in liberty to construct an ideology solely as a means of furthering the gains of a specific strata of society allied with the corporatist and at the expense of other strata, by coercion if necessary.
That’s me, seven years ago on this very website in a post I called Corporatism masquerading as Liberty. So, those are my priors coming into this; I’m someone who sees the ‘ideology’ of freedom and liberty being used as a cloak and shield for people who are almost entirely self-interested. And what I believe has happened is that ideology has been injected into our form of capitalism as a way of disarming naysayers and allowing the ‘Corporatist’ to benefit at everyone’s expense.
So when I read “The Myth of Capitalism” (henceforth The MOC) was subtitled “Monopolies and the Death of Competition”, I was intrigued because the question for me was how self-interested people are able to reap all the gains of our system, while avoiding a lot of the downsides. For example, think of Dick Fuld, the longtime CEO of Lehman Brothers, a company whose failure brought the global financial system to its knees. He’s not in jail. As a far as I know, he never even paid a fine. He probably incurred a lot of legal fees and is a pariah in the world of finance. But, I reckon he’s not much bothered by that and is sitting pretty right now.
The book’s strength is data
But the MOC isn’t about that at all. It’s not about how individual actors went out and took all the gains for themselves, leaving the rest of us holding the bag. It’s more about how the ideology of liberty is used to justify a lax regulatory and anti-trust approach that has led to extreme concentration across a wide swathe of industries. And the strength of this book is data - reams of data. Right out of the gate, The MOC hits you with one factoid, one data set after the next, showing you without question that industry concentration in the US is absolutely enormous.
In Chapter 1 alone, you get charts on the volume of mergers, the number of antitrust cases, the collapse in the number of publicly-listed companies, the collapse in initial public stock offerings, and the decline in the reference to ‘competition’, ‘competitors’ and ‘pressure’ in business annual reports. The data really makes the case. I came away from that first chapter 100% convinced that Tepper and Hearn had made a strog case that nearly every important industry in the US had a high degree of concentration, with a few firms dominating their industry.
The Buffett approach
The key insight for me here in the MOC is that companies that dominate their industries are like a toll road you have to use, extracting their rent for use of their services and products. I immediately thought of Robert Moses and the Port Authority of New York when reading the book because Moses was able to dominate mid-20th century New York City’s landscape and infrastructure through his control of the Port Authority’s tolls of bridges and tunnels leading into and out of Manhattan. And while Moses started off as a do-gooder committed to public works, he ended up becoming a sort of tyrant, impervious to scrutiny and disdainful of public input. That’s a perfect analogy for the oligopolies that control most facets of American life.
Tepper and Hearn actually focus on Warren Buffett here though. They show that one of Buffett’s key insights is that investing in companies that have less competition is hugely profitable. In his world, the aim is to find companies in niches or industries where they have ‘moats’, competitive advantages that make them hard to dislodge as a market leader for years and years into the future. In the finance world, this thinking is virtuous because it means higher returns. But in the real world, if every corporate manager is thinking this way, it leads to monopolies, oligopolies and a decline in competition.
Where regulators come in
The case the MOC makes goes something like this:
In a particular industry, CEO mindsets are that you have to be a leader or get out of the business. This is the Jack Welch paradigm.
So once a company decides, it’s not a leader in one of its business lines or even its main business, it tries to sell off that piece or merge to bulk up and become a leader.
If regulators allow these mergers to take place, the industry becomes very concentrated
The result is that the surviving companies have ‘moats’ because they have the figurative toll roads that you have to use.
Now, the MOC makes it clear that most important industries in the US - banking, airlines, telecom, railway transport, Internet search, social media - are now like this, with three or four companies dominating revenue. So, unless we try to break these companies up a la Standard Oil or AT&T, we’re kind of stuck. Short of breaking companies up, there are a host of things governments can do — and most of that means more regulation (what ideologues who talk about liberty tell you is a bad thing) . But, the funny bit here is that regulation actually creates market power as well.
I would call it ‘regulatory capture’. But, irrespective of the label, Chapter 8 of Tepper and Hearn’s book lays out how patents and intellectual property are instrumental in creating and perpetuating monopolies (think of drug patents and drug prices, for example). And companies don’t get there by just letting things play out. They lobby. The MOC shows a clear correlation between lobbying, regulation, and profit concentration. So the case they make is that government is not just a passive bystander in this. It is actively aiding and abetting the concentration of industry by granting favours to wealthy and powerful political donors.
Why is this bad?
So, after Tepper and Hearn lay out the details in an excruciatingly maddening fashion, of course, you get angry. My first reaction to the book was about fairness, about how unfair this state of affairs is. And The MOC has a lot of charts showing the rise in inequality that is correlated with the increased concentration of industries. But, the real worry has to be political. The worry is that people become desperate for change and are willing to do anything to get it. The worry, then, is that people elect any populist leader, no matter how flawed, simply because he or she tells them what they want to hear. And then that leader can go out and wreak havoc on the world stage. Anything is possible, after that, including war.
Let’s be clear here: as Tepper and Hearn put it, “Capitalism without competition is not capitalism”. That’s where the title of the book comes in. It’s a myth to think that capitalism is all about vanquishing the competition with the help of government so that the few can benefit at the expense of the many. The MOC makes the case for seeing competition as critical because it promotes a wide dispersal of economic and political freedom and power.
The MOC proposes that the big solution involves antitrust regulation. First, mergers that materially reduce competition must be stopped. That’s number one. But for that to happen, the standard for rejecting mergers have to be clear and simple. But more ominously, Tepper and Hearn talk about ‘reversing’ mergers that have reduced competition. I would be interested to see what you think of this as a remedy. Is it so bad now that we need to break companies up?
The MOC has a whole list of specific policy recommendations to promote competition and prevent regulators from being captured by companies. Once you read the book, I’d be curious to see what you make of those items.
I came away from “The Myth of Capitalism” with a deeper knowledge of the challenge our economic system faces. I think that says a lot about how detailed and meticulous the authors were in making their case, because this is a topic I feel I know a lot about. And I don’t feel defeated, having read the book. I feel inspired, even pumped up, by it. I did get a real sense that there is an existential problem here for our society. But I also got the sense that there are fixes too.