Capitalism Without Competition

Capitalism Without Competition by John Mauldin for Mauldin Economics

The Soviet Union’s collapse and spread of semi-free markets through Eastern Europe seemingly ended the socialism vs. capitalism argument. Capitalism had won. Collectivist economies everywhere began turning free. Even communist China adopted a form of free market capitalism although, as they say, with “Chinese characteristics.

The fruits of capitalism: millions of people freed from abject poverty and a few who got rich indeed. Nor is this a recent phenomenon. Capitalism in the last three centuries, with all its faults and problems, with all its contradictions, generated the greatest accumulation of wealth in human history. From a few hundred years ago when the vast majority of the people of the world lived below the poverty line, barely above subsistence levels, today we have less than 10% doing so and that number is shrinking every year.

Yet now, perhaps because this prosperity is so easily taken for granted, some on the left are again embracing socialist ideas and irrationally high tax rates. What drives this thinking? One problem is “capitalism,” in practice, does indeed provide many points for justifiable criticism. It is, to paraphrase Winston Churchill, the worst of all systems, except for everything else.

Today’s capitalism has a contradiction that is increasingly hard to ignore: lack of competition in key markets. That’s a problem because competition incentivizes producers to get more efficient and reduce prices for consumers. Without competition, you end up with bloated monopolies that may be highly profitable for the owners, but don’t serve the greater cause of economic growth.

My good friend Jonathan Tepper, with whom I wrote Code Red and Endgame, has an excellent new book on this: The Myth of Capitalism: Monopolies and the Death of Competition. He and co-author Denise Hearn explain why this is a serious problem with world-shaking consequences. I highly recommend the book and today I want to give you a brief taste of it, plus a few more thoughts afterward.

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Monopoly Rents

Before we get to the book, let’s deal with one contradiction. People think capitalism and government are opposing forces. Certainly, there’s tension between them, but in fact they need each other. The government needs a thriving economy to generate tax revenue, and business needs the civil order that government protects.

Capitalism in its current form would not exist unless governments had sanctioned corporate business structures distinct from their human owners. The Romans had something like this, but it really took off with 17th-century mercantilism. That’s when the Dutch East India Company emerged along with similar groups in England like the South Sea Company (now often used to describe asset bubbles).

Corporate structures shield business owners from personal liability, which lets them take greater risks and ultimately produced the economy we have today. But that protection depends on a government guarantee. And because governments are prone to corruption, capitalists almost immediately began using their influence to reduce or eliminate competition. This is nothing new. It dates back centuries.

If you would like to understand the 19th-century creation of the modern corporation and subsequent monopolies, read The First Tycoon, the amazing biography of Cornelius Vanderbilt. Vanderbilt was possibly the only trillionaire in history (in current inflation adjusted dollars). He and his friends and government contacts literally created the modern corporation seemingly from scratch. As noted, there were precedents, but Vanderbilt brought it to the level we would recognize today. He and the other 19th-century robber barons created wonderful monopolies and vast wealth for themselves. Later the same government that enabled these monopolies broke them up.

These monopolies had dire economic consequences, as we can see in the “Monopoly” board game. Gain ownership of all the properties on a street through which everyone must pass, and you can charge higher rents without delivering any additional benefits. But then what happens? Eventually the renters run out of money, go bankrupt, and the game ends with your monopoly rendered worthless.

Something along those lines is happening right now in numerous industries. Usually it’s not a single-company monopoly (though these do exist, like state-protected utility companies), but duopolies are growing common.

The vast majority of personal computers run on either Microsoft Windows or some version of the Apple OS. Those two companies are often your only choices. Google is trying to break in, but has hope only because it is so huge and ubiquitous. Smaller players are effectively locked out, no matter how superior their products may be (cf. Firefox). Creating a new operating system and effectively marketing it would be prohibitively expensive. As a result, we pay more and receive less. That may not be the best way to grow an economy.

With that as prologue, let’s look at The Myth of Capitalism.

Not Free to Choose

Like me, Jonathan respects capitalism and capitalists. He’s not a leftist shill. It’s because he respects capitalism that he wants to see the best version of it, just as we all want our children to reach their full potential. Sometimes, that means pushing them to change.

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