capitalism | Human-Centered Change and Innovation

What is Killing Capitalism in America?

GUEST POST from Greg Satell

There’s no doubt that capitalism in America is in bad shape. Higher market share concentration in industry is leading to higher profits for corporate giants, but also to higher prices and lower wages along with decreased innovation and productivity growth as well as a long-term decline in entrepreneurship.

You would think that the rise of progressive politicians like Bernie Sanders and Alexandria Ocasio-Cortez would be responsible for the decline in the power of capitalism and the demise of free markets. However, a new book by NYU finance professor Thomas Philippon, titled The Great Reversal, argues exactly the opposite.

In fact, he shows through meticulous research how capitalists themselves are killing capitalism. Through the charade of “pro-business” policies, industry leaders have been increasing regulation and limiting competition over the past 20 years. We need to right the ship and return to an embrace of free markets, entrepreneurship and innovation.

A Rise in Rent Seeking and Regulatory Capture

The goal of every business is to defy markets. Any firm at the mercy of supply and demand will find itself unable to make an economic profit—that is profit over and above its cost of capital. In other words, unless a firm can beat Adam’s Smith’s invisible hand, investors would essentially be better off putting their money in the bank.

That leaves entrepreneurs and managers with two viable strategies. The first is innovation. Firms can create new and better products that produce new value. The second, rent seeking, is associated with activities like lobbying and regulatory capture, which seeks to earn a profit without creating added value. In fact, rent seeking often makes industries less competitive.

There is abundant evidence that over the last 20 years, American firms have shifted from an innovation mindset to one that focuses more on rent seeking. First and foremost, has been the marked increase in lobbying expenditures, which since 1998 have more than doubled. Firms invest money for a reason, they expect a return.

It seems like they are getting their money’s worth. Corporate tax rates in the US have steadily decreased and are now among the lowest in the developed world. Occupational licensing, often the result of lobbying by trade associations, has increased fivefold since the 1950s. Innovative firms such as Tesla face legislation that seeks to protect incumbent businesses. These restrictions have coincided with a decrease in the establishment of new firms.

Perhaps most importantly, the increasingly lax regulatory environment has resulted in a boom in mergers and acquisitions, which led to increased market power among fewer firms and increased barriers to entry for new market entrants.

The Decline of Competitive Markets

To understand how markets have died in the US, you only have to look at the airline industry. After years of mergers just four airlines control roughly two thirds of the market. Yet even that understates the problem. On individual routes, there are often only one or two competitors. We’ve all experienced the results: increasingly higher prices and worse service.

Airlines are far from an isolated case. Consider the cable industry, where consolidation has resulted in broadband prices that are almost 50% higher than in Europe. For mobile phone service, Americans are being charged more than twice what our European friends are. Across a wide swath of industries, increasing concentration is leading to lower competition.

Yet the problem is more than just Americans getting ripped off by corporations who are able to charge us more and give us less. Fat and happy industries tend to underinvest and become less competitive over time, enjoying short-term profits but putting the economic well-being of the country in serious jeopardy.

Again, there is evidence that this is exactly what’s happening. There is abundant data showing that American corporations are underinvesting, even while they have been reporting strong profits to investors.

Entrepreneurial Headwinds

With protected markets and healthy profits, recent decades have been great for incumbent businesses, but not so great for those who want to start new ones. In fact, entrepreneurship in America recently hit a 40-year low and a recent report by the Brookings Institution found that business dynamism in general has been declining since the 80s.

It’s not hard to see why. A recent study found that about half of all college students struggle with food insecurity even as tuition has risen from an average of $15,160 in 1988 to $34,740 in 2018. Not surprisingly, student debt is exploding. It has nearly tripled in the last decade. In fact student debt has become so onerous that it now takes about 20 years to pay off four years for college and even more for those who pursue a graduate degree.

So even the bright young people who don’t starve are often condemned to decades of what is essentially indentured servitude. That’s no way to run an entrepreneurial economy. In fact, a study done by the Federal Reserve Bank of Philadelphia found that student debt has a measurable negative impact on new business creation.

Another obstacle for entrepreneurs is our healthcare system which represents a huge economic burden. Consider that in the US healthcare expenditures account for roughly 18% of GDP. Most OECD countries spend roughly half that. Anyone who wants to start a business first needs to figure out where their health insurance will come from. Is it any wonder that entrepreneurship is declining in America?

Pro-Business Policies Are Often Anti-Market

The truth is that no business leader wants a free market. In fact, most of our efforts go toward tipping the playing field in our favor. Often, we do that in positive ways, such as building a trusted brand or innovating new products. Yet the incentives, if not the motivations, for rent seeking behavior are exactly the same.

For far too long pro-business lobbies have run rampant over our democracy. The Supreme Court’s Citizens United decision, which led to essentially unrestricted political donations, has made a bad situation worse. Members of Congress now spend roughly 30 hours a week “dialing for dollars” rather than tending to the nation’s business.

And we pay the price in higher prices, stagnant wages and worse service. Where we should be investing in the future, creating better infrastructure, schools and a cleaner healthier environment, instead we are spending it on tax breaks for businesses, even though research has shown that these incentives don’t promote economic growth.

It’s time to claim capitalism back for ourselves and promote free markets, entrepreneurship, innovation and public well-being. That’s how you build competitive markets and a healthy society.

— Article courtesy of the Digital Tonto blog
— Image credit: Pexels

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We Were Wrong About What Drove the 21st Century

GUEST POST from Greg Satell

Every era contains a prism of multitudes. World War I gave way to the “Roaring 20s” and a 50-year boom in productivity. The Treaty of Versailles sowed the seeds to the second World War, which gave way to the peace and prosperity post-war era. Vietnam and the rise of the Baby Boomers unlocked a cultural revolution that created new freedoms for women and people of color.

Our current era began with the 80s, the rise of Ronald Reagan and a new confidence in the power of markets. Genuine achievements of the Chicago School of economics led by Milton Friedman, along with the weakness Soviet system, led to an enthusiasm for market fundamentalism that dominated policy circles.

So it shouldn’t be that surprising that veteran Republican strategist Stuart Stevens wrote a book denouncing that orthodoxy as a lie. The truth is he has a point. But politicians can only convince us of things we already want to believe. The truth is that we were fundamentally mistaken in our understanding of how the world works. It’s time that we own up to it.

Mistake #1: The End Of The Cold War Would Strengthen Capitalism

When the Berlin Wall came down in 1989, the West was triumphant. Communism was shown to be a corrupt system bereft of any real legitimacy. A new ideology took hold, often called the Washington Consensus, that preached fiscal discipline, free trade, privatization and deregulation. The world was going to be remade in capitalism’s image.

Yet for anybody who was paying attention, communism had been shown to be bankrupt and illegitimate since the 1930s when Stalin’s failed collectivization effort and industrial plan led him to starve his own people. Economists have estimated that, by the 1970s, Soviet productivity growth had gone negative, meaning more investment actually brought less output. The system’s collapse was just a matter of time.

At the same time, there were early signs that there were serious problems with the Washington Consensus. Many complained that bureaucrats at the World Bank and the IMF were mandating policies for developing nations that citizens in their own countries would not accept. So called “austerity programs” led to human costs that were both significant and real. In a sense, the error of the Soviets was being repeated—ideology was put before people.

Today, instead of a capitalist utopia and an era of peace and prosperity, we got a global rise in authoritarian populism, stagnant wages, reduced productivity growth and weaker competitive markets. In particular in the United States, by almost every metric imaginable, capitalism has been weakened.

Mistake #2: Digital Technology Would Make Everything Better

In November 1989, the same year that the Berlin Wall fell, Tim Berners-Lee created the World Wide Web and ushered in a new technological era of networked computing that we now know as the “digital revolution.” Much like the ideology of market fundamentalism that took hold around the same time, technology was seen as determinant of a new, brighter age.

By the late 1990s, increased computing power combined with the Internet to create a new productivity boom. Many economists hailed the digital age as a “new economy” of increasing returns, in which the old rules no longer applied and a small initial advantage would lead to market dominance.

Yet by 2004, productivity growth had slowed again to its earlier lethargic pace. Today, despite very real advances in processing speed, broadband penetration, artificial intelligence and other things, we seem to be in the midst of a second productivity paradox in which we see digital technology everywhere except in the economic statistics.

Digital technology was supposed to empower individuals and reduce the dominance of institutions, but just the opposite has happened. Income inequality in advanced economies markedly increased. In America wages have stagnated and social mobility has declined. At the same time, social media has been destroying our mental health.

When Silicon Valley told us they intended to “change the world,” is this what they meant?

Mistake #3: Medical Breakthroughs Would Automatically Make Us Healthier

Much like the fall of the Berlin Wall and the rise of the Internet, the completion of the Human Genome Project in 2003 promised great things. No longer would we be at the mercy of terrible terrible diseases such as cancer and Alzheimer’s, but would design genetic therapies that would rewire our bodies to find off disease by themselves.

The advances since then have been breathtaking. The Cancer Genome Atlas, which began in 2005, helped enable doctors to develop therapies targeted at specific mutations, rather than where in the body a tumor happened to be found. Later, CRISPR revolutionized synthetic biology, bringing down costs exponentially.

The rapid development of Covid-19 vaccines have shown how effective these new technologies are. Scientists have essentially engineered new viruses containing the viral genome to produce a few proteins, just enough to provoke an immune response but not nearly enough to make us sick. 20 years ago, this would have been considered science fiction. Today, it’s a reality.

Yet we are not healthier. Worldwide obesity has tripled since 1975 and has become an epidemic in the United States. Anxiety and depression have as well. American healthcare costs continue to rise even as life expectancy declines. Despite the incredible advance in our medical capability, we seem to be less healthy and more miserable.

Worse Than A Crime, It Was A Blunder

Whenever I bring up these points among technology people, they vigorously push back. Surely, they say, you can see the positive effects all around you. Can you imagine what the global pandemic would be like without digital technologies? Without videoconferencing? Hasn’t there been a significant global decline in extreme poverty and violence?

Yes. There have absolutely been real achievements. As someone who spent roughly half my adult life in Eastern Bloc countries, I can attest to how horrible the Soviet system was. Digital technology has certainly made our lives more convenient and, as noted above, medical advances have been very real and very significant.

However, technology is a process that involves both revealing and building. Yes, we revealed the power of market forces and the bankruptcy of the Soviet system, but failed to build a more prosperous and healthy society. In much the same way, we revealed the power of the microchip, miracle cures and many other things, but failed to put them to use in such a way that would make us measurably better off.

When faced with a failure this colossal, people often look for a villain. They want to blame the greed of corporations, the arrogance of Silicon Valley entrepreneurs or the incompetence of government bureaucrats. The truth is, as the old saying goes, it was worse than a crime, it was a blunder. We simply believed that market forces and technological advancement would work their magic and all would be well in hand.

By now we should know better. We need to hold ourselves accountable, make better choices and seek out greater truths.

— Article courtesy of the Digital Tonto blog
— Image credit: Pixabay