Big companies are crushing their competition in the US, and it's creating a dangerous 'fake capitalism' that hurts workers and consumers
- The following book excerpt is an adaptation of the introduction to "The Myth of Capitalism: Monopolies and the Death of Competition," by Variant Perception's founder Jonathan Tepper and head of business development Denise Hearn.
- The authors argue that an increase in market concentration across the United States has resulted in a system that is not true capitalism, since freedom is being restricted.
- They believe that updating antitrust regulations should be an issue both the left and right could unite around.
- This article is part of Business Insider's ongoing series on Better Capitalism.
On April 9, 2017, police officers from Chicago's O'Hare Airport removed Dr. David Dao from United Express Flight 3411.
The flight was overbooked, but he refused to give up his seat. He had patients to treat the next day. Fellow passengers recorded a video of him being dragged off the plane. You could hear gasps of disbelief from fellow passengers.
In the video he could be seen bleeding from the mouth as police dragged him down the aisle. The video quickly went viral. Eventually, the outrage was so great that the CEO apologized and the airline reached an undisclosed settlement with Dr. Dao.
Years ago, such a public relations disaster would have caused United's stock to stumble, but it quickly recovered. Financial analysts agreed that it would have no effect on the airline. Once investors started focusing on United's dominant market position, the stock price, in fact, went up.
The analysts were right. The American skies have gone from an open market with many competing airlines to a cozy oligopoly with four major airlines. They have the landing slots, and they are willing to engage in predatory pricing to keep out any new entrants. At 40 of the 100 largest US airports, a single airline controls a majority of the market.
The United episode became a metaphor for American capitalism in the twenty-first century. A highly profitable company had bloodied a consumer, and it didn't matter because consumers have no choice.
Something is broken
All around the world, people have an overwhelming sense that something is broken. This is leading to record levels of populism in the United States and Europe, resurgent intolerance, and a desire to upend the existing order. The left and right cannot agree on what is wrong, but they both know that something is rotten.
According to the dictionary, the idealized state of capitalism is "an economic system based on the private ownership of the means of production, distribution, and exchange, characterized by the freedom of capitalists to operate or manage their property for profit in competitive conditions."
Parts of this definition have universal appeal today, but the harder part is the last section. The battle for competition is being lost. Industries are becoming highly concentrated in the hands of very few players, with little real competition. Capitalism without competition is not capitalism.
Read more: Nobel Prize-winning economist Joseph Stiglitz says the US has a major monopoly problem
Competition matters because it prevents unjust inequality, rather than the transfer of wealth from consumer or supplier to the monopolist. It creates clear price signals in markets, driving supply and demand. It promotes efficiency. It creates more choices, more innovation, economic development and growth, and a stronger democracy by dispersing economic power. It promotes individual initiative and freedom.
An absence of competition means an absence of evolution, a failure to adapt to new conditions. It threatens our survival.
This affects all of us
If you believe in competitive free markets, you should be very concerned. If you believe in fair play and hate cronyism, you should be worried. With fake capitalism, CEOs cozy up to regulators to get the kind of rules they want and donate to get the laws they desire. Larger companies get larger, while the small disappear, and the consumer and worker are left with no choice.
The list of industries with dominant players, from beer corporations to internet providers, is endless. It gets even worse when you look at the world of technology. Laws are outdated to deal with the extreme winner-takes-all dynamics online. Google completely dominates internet searches with an almost 90% market share. Facebook has an almost 80% share of social networks. Both have a duopoly in advertising with no credible competition or regulation.
Amazon is crushing retailers and faces conflicts of interest as both the dominant e-commerce seller and the leading online platform for third-party sellers. It can determine what products can and cannot sell on its platform, and it competes with any customer that encounters success. Apple's iPhone and Google's Android completely control the mobile app market in a duopoly, and they determine whether businesses can reach their customers and on what terms.
Existing laws were not even written with digital platforms in mind. So far, these platforms appear to be benign dictators, but they are dictators nonetheless.
It was not always like this. Without almost any public debate, industries have now become much more concentrated than they were 30 and even 40 years ago.
After the dot-com bust, the economy rebounded but growth was more anemic than during the 1980s or even 1990s. After the financial crisis, growth was even more pathetic. Each expansion has experienced lower growth than the previous one. There is not one variable that answers all questions, but a growing mountain of research shows that less competition has led to lower wages, fewer jobs, fewer startups, and less economic growth.
It's not too late to save capitalism
Capitalism is a game where competitors play by rules that everyone agrees. The government is the referee, and just as you need a referee and a set of agreed rules for a good basketball game, you need rules to promote competition in the economy. Left to their own devices, firms will use any available means to crush their rivals. Today, the state, as referee, has not enforced rules that would increase competition, and through regulatory capture has created rules that limit competition.
In 1776 Adam Smith wrote "The Wealth of Nations," and the Continental Congress declared independence from Britain. Smith complained bitterly about monopolies. He wrote of the East India Company: "the monopoly which our manufacturers have obtained . . . has so much increased the number of some particular tribes of them, that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature."
That same year, among the reasons the American Continental Congress cited for separating from Britain in the Declaration of Independence, was, "For cutting off our Trade with all parts of the world: For imposing Taxes on us without our Consent." The Boston Tea Party was in response to the East India Company's monopoly on tea. The Wealth of Nations and the Declaration of Independence were bold statements against the abuses of monopoly power. Americans wanted entrepreneurial freedom to build businesses in a free market.
Today, we need a new revolution to cast off monopolies and restore free trade.
This excerpt is adapted with permission from "The Myth of Capitalism: Monopolies and the Death of Competition" (2018) by Jonathan Tepper and Denise Hearn, from Wiley.