Jonathan Tepper and Denise Hearn's research into why American workers' wages weren't increasing along with corporate profits led them to a problem that plagues the entire economy—a lack of competition.
The Myth of Capitalism: Monopolies and the Death of Competition by Jonathan Tepper with Denise Hearn, Wiley, 320 pages, Hardcover, November 2018, ISBN 9781119548195
Corporate profits have been at record highs, and the stock market (until this week) has been soaring. At a time when many books are exploring ways to make work and business more meaningful in people's lives (a laudable goal), most workers are simply asking that their basic needs be met, and for far too many in our economy, they are not. The wealth is flowing, but it is being dammed up.
What Jonathan Tepper and Denise Hearn make increasingly clear in their new book, The Myth of Capitalism, is that much of the stock market growth and the increase in corporate profits we've seen have come through industry consolidation and economic concentration, and an increasing lack of competition in American business. More to the point, it has come on the backs of American workers and consumers. The argument for larger companies is that they create economies of scale that are more efficient. Large mergers are often sold to the public—and specifically to the regulators who are supposed to work in the public’s interest—with the promise of cost savings and efficiencies they’ll be able to pass onto customers in the form of lower prices. Tim Wu’s recent book, The Curse of Bigness, which we reviewed here last month, documents just how wrong that idea has been since it was first put forth by Gilded Age robber barons of the past century—and how wrong it still is today.
Tepper and Hearn further that argument by bringing the macroeconomic chops of their independent investment research firm to the issue. The book began as an attempt to figure out why their US Wages Leading Indicator appears to have broken, and why workers wages weren’t rising in a time of record corporate profits as they expected (and predicted to clients) they would. What they found is that it could be laid at the feet of industry concentration; that, in fact, “Record high corporate profit margins are merely the other side of the coin of suppressed wages.” Not only that, but most of our many other economic ills were tied to such economic concentration, as well. At a time of increased wealth and profits, though, we are compelled to ask, as they do:
How bad could economic concentration really be for the economy?
The damage to the economy is far worse than you might imagine. The evidence is overwhelming that higher economic concentration has created a toxic cocktail of higher prices, less economic dynamism, fewer startups, lower productivity, lower wages, greater economic inequality, and damage to smaller communities.
While they use the word “monopoly” in the subtitle of the book, it is not quite that simple. The problem of concentration is often overlooked because it is most prevalent today in Monopsonies (industries dominated by one buyer rather than seller), Duopolies (industries dominated by two companies) and Oligopolies (industries dominated by a small number of companies). “Everywhere we look,” write the authors, “we see the illusion of competition, but very little of it is real.” The reality is that, as John Stuart Mill wrote, “Where competitors are so few, they always end by agreeing not to compete.”
Worker productivity has been steadily rising for decades, while wages remain stagnant. Meanwhile, CEO pay has skyrocketed. But that is more the symptom of what is wrong rather than the cause of it. The cause, argue the authors, is that “The boom in mergers and acquisitions over the past 30 years is unprecedented and surpasses the original merger mania at the peak of the Gilded Age when we had robber barons.”
If you read Gerald F. Davis’s great 2016 book on The Vanishing American Corporation, you’ve encountered just how dramatic the decline of corporations has been, and the effect it has had on the social contract that once existed in the American economy. The numbers Tepper and Hearn relate in this book are stark:
Over half of all public firms have disappeared in the past 20 years. Astonishingly, according to a study by Credit Suisse, “between 1996 and 2016, the number of stocks in the U.S. fell by roughly 50%—from more than 7,300 to fewer than 3,600—while rising by about 50% in other developed nations.”
Even as we lionize entrepreneurship, the economy is now producing fewer and fewer new companies.
In the boom years of the 1990s there were an average of 436 IPOs per year in the US. In 2016, we saw only 74 IPOs. The great American economic machine is slowly grinding to a halt.
In many industries, like big tech, the business model of startups is no longer to compete with existing industry leader, but to be bought out by them. So the companies that remain grow by gobbling up others—and a lion’s share of the profit:
In 1995 the top 100 companies accounted for 53% of all income from publicly traded firms, but by 2015, they captured a whopping 84% of all profits.
The authors explore how the ways in which business education has contributed to a focus on shareholder returns above all else and teaches business leaders and investors to look for industries with little competition they can dominate. They explain how investment guru Warren Buffett and venture capitalist Peter Thiel, while agreeing on very little, both abhor competition. But the problem isn’t necessarily greedy CEOs or a lack of ethics amongst the investor class. It’s that “what is good, right, and logical for the corporation is not good, right, or logical for the economy as a whole.”
Their take on the problem is decidedly nonpartisan, but critical of both the left and the right:
When the Left and Right speak of capitalism today, they are telling stories about an imaginary state. The unbridled, competitive free markets the Right cherishes don’t exist today. They are a myth.
The Left attacks the grotesque capitalism we see today, as if that were the true manifestation of the essence of capitalism rather than the distorted version it has become.
When I think of monopolies, I tend to think of Big Tech, and the authors do spend a good portion of the book dissecting the ways in which it has taken over not only American life, but much of the world. But the data they offer shows that concentration has become prevalent across every industry—from hospitals, cable, and airlines, to concrete and beer. Just four companies have 90 percent of the insurance market. Four corporations control 79 percent of all beef sold. Over 96 percent of chickens are raised under production contracts with large companies like Tyson and Purdue, and the processing plants are placed in areas with few other economic opportunities to keep farmers’ options and workers wages low. It is not a pretty scene:
Small farmers have to borrow over $1 million secured against their land and house to build farms for Tyson or Purdue. The debt becomes a millstone around their necks, and contractors must keep producing to service the debt. … The human cost is high; farmers have been dying from suicide at much higher rates than the average population for many years.
Since 1980, 40% of all American cattle farmers and 90% of all hog farmers have gone out of business while the big players have made dozens of billions of dollars in profit. In the 2000s decade, gross income for small and medium-size hog and cattle farmers declined by 32% while 71% of all chicken farmers were estimated to be earning less than the federal poverty line.
Things are not much better for the workers on the farms and processing plants. The workers at the four largest US poultry companies are routinely denied bathroom breaks, forcing some to wear adult diapers to work and others to urinate on themselves in order to avoid retribution from supervisors.
Such industry concentration also leads to less localism and diversity, and increases the divide between urban and rural economies.
Tepper and Hearn are not calling for increased regulation or taxation as a remedy, though. The authors compare regulation to chemotherapy, helpful in the right doses but deadly if used excessively. They see excessive regulations hurting small and medium sized businesses, while actually protecting big business, which can afford the lawyers and legal regimes needed to meet it. They explain how industry lobbying in Washington and the revolving door between industry and government compound the problem.
It is worth remembering that when Adam Smith wrote of “the invisible hand” in The Wealth of Nations, he was not simply praising the free market, but condemning the government acting on behalf of large merchants who were furthering their own interests.
Until lobbying is reformed, there is little hope for reducing the barriers to entry for smaller firms to fight it out in the marketplace. There is little chance the invisible hand can work.
“Government is not a passive bystander in the increase in inequality,” state the authors. “It is an active participant, granting favors to the wealthy and powerful, looking after the interests of the well connected.” Their answer is “A stronger democracy by dispersing economic power.”
The book contains a history of the antitrust movement and the counterrevolution from the Chicago School that became the ascendant intellectual ideology during the Reagan administration, and has remained so until today. It contains an insightful analysis of industry after industry, and speaks of the concentration of ownership and asset management in the economy. They take Thomas Piketty’s Capital in the Twenty-First Century to task, while also acknowledging what he got right. “The problem of inequality is real,” they insist, “but it is not happening due to low growth” as Piketty argues. The authors argue income inequality is not the cause of political changes, but its consequence. Looking at Piketty’s income chart as it correlates with antitrust enforcement, they show clearly how industrial concentration has historically led to income inequality, and how that industrial concentration is as much a political development as an economic one. And they argue that more capitalism through more competition ensured by antitrust enforcement is among the answers—that, in fact, "Capitalism without competition isn't capitalism." I just scratched the surface of the research they provide, and they offer a great list of other "Principles for Reform," "Solutions and Remedies," and things that you can do in the book's Conclusion.
There are countless books on innovation. But the best way to ensure it—through competition—is fading, with profoundly negative consequences for the health of the American economy and the American worker. The Myth of Capitalism: Monopolies and the Death of Competition offers a compelling case for why that this is happening, and ideas about what we can do about it.