What’s wrong with capitalism now?

Studies show that New Zealand has one of worst wealth and income inequalities, just a few places above America.

The growing divide has created a sense of dissatisfaction amongst a democratically significant number of people, with many blaming capitalism.

Around the world, political groups are advancing socialist ideologies as a cure but, as Sheldon Slabbert argues, rising inequality should be seen as a symptom and not the disease.

Few will know that in the early days of their settlement, the United States tried socialism (then known as collectivism). The pilgrims in Massachusetts are just one example, which ended in disaster with suffering and starvation. 

In its purest sense, capitalism consists of two parts - private property and competition. True capitalism is aligned with the best part of human nature, seeking to satisfy the highest of human needs, described by Abraham Maslow as self-actualisation.  

But capitalism is also vulnerable to some of the worst aspects of human nature - and the growing inequality currently being experienced is a symptom of the distortion of capitalism as we used to know it. 

Loss of competition

While much of the blame for the distortion of capitalism should be laid at the feet of the central banks, in his new book The Myth of Capitalism Jonathan Tepper masterfully lays out the argument that it is, in fact, the lack of competition that is also at fault. It’s a failure to adhere to that core tenet of capitalism is to blame for capitalism’s current failures. 

Since the 1980s we have seen an ever-increasing consolidation of economic power and wealth in corporate America, with most sectors now dominated by only a few players. Consider Google with almost 90 percent market share of internet search activity outside of China.

The top tech companies in America now have a market capitalisation that exceeds the combined GDP of all the countries in Western Europe - yet many of these organisations are still being allowed to acquire companies and drive out competition, further consolidating their stranglehold over the sector and consumer. Startups have little chance.

Consolidation in banking has brought us companies that are “too big to fail” and we see similar examples across airlines, the pharmaceuticals industry and others - corporate concentration comes in different forms.

New Zealand and Australia have a significant problem with oligopolies and duopolies that weigh on the economies of their citizens. 

Most will be familiar with a monopoly or duopoly, but not too many will be able to recognise the insidious dangers of oligopolies - where a small number of players have carved up a sector for themselves. Oligopolies create the illusion of competition, and often pass regulatory scrutiny under the promise of increased efficiencies and lower cost to the consumer, which is not sustained. 

New Zealand and Australia have a significant problem with oligopolies and duopolies that weigh on the economies of their citizens. 

In New Zealand, oligopolies and duopolies are clear and present across our grocery stores, and power, telecommunications and banking sectors. It is further very evident in the building materials space, contributing to the growing cost of housing. 

Companies like Fletcher have long enjoyed a stranglehold over the domestic building materials and distribution business. The extent of their reach to try to keep competition at bay, was on display recently with Knauf’s (the German plasterboard manufacturer) epic struggle to get their product to market in New Zealand.

Taking a broader look, one could also deduce to a certain degree that many of New Zealand’s top stocks are able to pay healthy dividends to shareholders because of their dominant positions. They have less need to reinvest profits into continuous research and development and remunerate staff well to compete for talent, as the existence or threat of real competition is much lower here than in other more competitive markets. 

Horizontal shareholding

Concentration of power and wealth is further achieved through horizontal shareholding. The Harvard Law Review cited recently that in the US the odds that two competitors have a common shareholder with more than 5 percent shareholding in each company rose from 16 percent in 1999 to 90 percent in 2014. 

In other words, there is a 90 percent likelihood that any two random competitors will share a common major shareholder whose profits will suffer if the firms compete with each other for market share.  

We can all drive change through our day-to-day spending, striving to bring back the benefits of true capitalism by being more aware of the negative effect that monopolistic behaviour has on our economy and society.  

Coinciding with this dramatic rise in horizontal shareholding, executive compensation has become increasingly based on market performance since the 1990s, where business leaders are incentivised for ensuring sector growth, rather than on direct competition with their peers.  

Why wages are stagnant

The increased concentration of controlling companies within different industries has led to a number of companies achieving monopsony power as the only buyers of labour. 

This has left workers with little choice in where they work, and little negotiating power in terms of wages, meaning that over recent years employee benefits have largely been eroded away. Stagnant wages have also prevented many from being able to invest in stocks.  

The level of inequality between CEO pay and that of the average worker has never been this extreme - and perhaps, we should also be discussing this pay gap issue.  

Further dangers of monopolistic corporate behavior

A loss of competition results in fewer startups, lower wages, higher inequality, less innovation and lower investment. Concentration of economic power also increases corporate lobbying power and political influence – where these organisations are often able to influence new legislation or deregulation of an industry that further insulates their interests. Some see the two-party system as a duopoly in itself. 

Milton Friedman is quoted as saying: “Economic freedom is an essential requisite for political freedom” - and competition is a critical element of capitalism because it promotes the diffusion of power and political freedom.

What can we do? 

Most monopolies do not come to be through natural economic forces within capitalism, but are generally a product of political decisions that can be reversed. Most of the legislation already exists and simply needs to be applied more readily - anti-trust regulations in particular.  

We are now seeing increased calls for regulation, such as with the tech darlings known as the FAANG stocks - the five largest listed firms globally which have (to date) grown with little regulation. This may see digital monopolies like Facebook and Google broken up or with other restrictions imposed upon their current business models.

Paul Tudor Jones has been pioneering a voluntary reform of corporate culture in the US. His company, 'Just Capital' polls the American public in order to evaluate and rank companies on those issues they deem most important - ranging from how they treat workers, the environment, leadership, and product quality to name a few. 

He has shown through his Just Capital Index that companies can thrive while doing social and economic good by aligning themselves with a more conscientious consumer and employee. While investors are able to buy shares in the individual companies, Just Capital has launched an exchange-traded fund where investors can buy the basket of shares of these companies more efficiently. These funds can be accessed under their trading codes “JULCD and JUST”. We can all drive change through our day-to-day spending, striving to bring back the benefits of true capitalism by being more aware of the negative effect that monopolistic behaviour has on our economy and society.  

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