Power to the Market!
“Because the free market system is so weak politically, the forms of capitalism that are experienced in many countries are very far from the ideal. They are corrupted (diluted) versions, in which powerful interests prevent competition from playing its natural, healthy role….”
Luigi Zingales – The University of Chicago Booth School of Business
“For Smith, the market moves toward monopoly; it is the job of the philosopher to define, and of the sovereign state to restore, free play.”
Adam Gopnik – Market Man, The New Yorker
By J.M. Hamilton (Originally published 8-11-12)
The Moral imperative of capitalism is its incredible ability, when fully functioning, to create goods and services on a spectacular scale. And service a large number of people, the market, with quality goods and services. Its ability to foster ancillary jobs and innovation are well known phenomenon.
It is the competitive feature of capitalism, and the government - when fully functioning - in its supportive role, that protects the market (the people) from the merchant's/proprietor's worst impulses, which are greed, the quest for unlimited market share and profits, and the elimination of competition.
The bastard child of competition and of capitalism, indeed what Mr. Adam Smith warned us against, is crony capitalism. As crony capitalism is produced, fostered and sanctioned by the state, it is perhaps the most debilitating economic feature of our time that we have the means to control: crony capitalism ultimately leads to monopoly and an unprecedented concentration of wealth and power. Possibly more insidious than communism itself because it wraps itself in the cloak of free enterprise, crony capitalism is the "anti-capitalism," and as such, it leaves a debilitating stain upon the most productive economic system known to man.
More frightening still, because of the link between crony capitalism (monopoly) and true capitalism (competition on the supply side of the curve), capitalism is under attack like never before, so that record numbers of people are turning to the state for assistance.
Monopoly begets monopoly: At a micro level, monopoly in one market, say big oil, inevitably leads to monopoly in other markets, say cellular service, as one market provider attempts to duplicate the profit taking success of another market governed by a monopoly or cartel; separately, because at any given time discretionary income for a nation is fixed, if a monopolistic supplier preys upon a market with inelastic demand, say energy or big oil, this results in diminished demand for other goods and services, as capped discretionary income is eroded by monopolistic profits/taxation. This in turn leads suppliers of other competitive markets to seek out combination, as a means to shore up reduced earnings, sales and income.
Politicians under the dogma of laissez faire capitalism have allowed combination ad nauseum to the detriment of the worker, corporate top line growth, tax revenue, and most importantly the market. Why? Simply put because monopolistic profits, lead to monopoly sized campaign contributions, and intellectual and political hegemony over the body politic. Bottom line, monopolistic profits are the mother’s milk of American politics, like a fist inside a velvet glove or muppet. Some of the largest GOP and DNC campaign contributors come from markets dominated by cartels, oligopoly, or monopoly.
Government, fiscal and monetary policy, can provide a short term fix to problems created by crony capitalism and monopoly; but they are not a long term substitute for structural reform (i.e. the breakup of these organizations)
Of course monopolistic profits and predatory pricing ultimately are anti-market, crush the welfare of the people, savage competitive markets and top line growth, and lead to the collapse of markets. Witness the record profits made by big oil leading up to the 2007-2008 economic collapse. Witness the individual investor flight out of the stock market, due to the flash crash, rigged stock markets, problematic IPOs, program trading, insider trading, and opaque markets, like dark pools.
"Anti-Capitalism" causes instability across the globe, observe the Egyptian military's vast control over broad swaths of the Egyptian economy, ditto Iran's Revolutionary Guard and its extensive ownership and control over that economy. Ultimately, if enough markets are dominated by cartels and monopolies, the cabal at the top can collude to chart a nation's political future, and manipulate a macro economy via capital strike and finance.
By breaking up the concentration of wealth, power, and some of these monolithic institutions, we actually create more opportunity and a larger number of jobs, not just among the rank and file but also among management and the executive class. Specifically in regards Wall Street banks - stock valuations demand it, the dearth of the return on equity demands it, and the market demands the break up of these banking institutions.
Diseconomies of scale, failed management, and egregious risk management insist upon it.
(Don't get me wrong, I am not writing against the scale and size of business, as long as big business operates, side by side, with competitors, and government provides effective "rules of the road" or regulation to protect said market and consumers from predatory behavior.)
As often as not, the excuse for these catastrophic combinations, provided by management, is that it is "in the interest of the stockholder;" however, when the break up value of these monstrosities is greater than the stock valuation by a wide margin-- seemingly and conveniently, the interests of management always trumps stockholder value. Observe Wall Street’s reaction to Mr. Sandy Weill's embrace of the proposed return of Glass Steagall.
Just as politicians created the monopolies and cartels- it can aid the market (i.e. the American people) and the economy by breaking up these statist monstrosities, which often can only exists by state backstop and support.
Possible
solutions to our economic crisis are simple: support the interests of the
market, or the demand side of the curve, and economic recovery will follow.
Here are a few simple thoughts and ideas:
1) Leverage the great American market! Insist that if business sells in America - they produce the goods and services sold in this country with American labor. If a business doesn’t hire American, that’s fine but than access to the American market would be cut off. Since this rule would apply across the board to all domestic and foreign companies selling in the US, no one could complain that they were unfairly treated or at a competitive disadvantage.
2) Close all tax loopholes and dodges, which would allow for a lower corporate tax rate--- since it would be a requirement that US labor be utilized for goods and services sold in the US, there would be no opportunity for tax and labor arbitrage for domestically produced goods and services. If larger business begins paying taxes at a lower effective tax rate (in lieu of paying little or no taxes at all), the consumer could theoretically, enjoy a lower tax rate since they are no longer subsidizing businesses that have the skills and the means to engage in tax avoidance. This too would help stimulate the economy by increasing consumer/market discretionary income (i.e. aggregate demand).
Eliminate the American tax for goods and services sold overseas by American companies, as long as they employ Americans for goods and services sold in the U.S., with one exception. Some percentage of the cost of the US military industrial complex (MIC) should be carried by all foreign governments and multinationals based upon their respective contribution to global GDP and global international sales, respectively. The US military protects and provides stability for global markets, and the beneficiaries of that protection should pay their fair share. If this in turn relieves additional tax burden on the American consumer/market, it means more income and opportunity flowing into our economy, and less consumer/market money flowing into the MIC, via the government.
That's another half trillion dollars, or more, the US taxpayer (domestic businesses and individuals) would no longer be burdened with - that could flow directly into our economy, or be allocated to deficit reduction.
3.) Cap the election season, so that politicians may only run for office the three months proceeding the election, in lieu of the two year - continuous period presently allotted; and cap the amount of campaign contributions taken in per politician, so as to end the financial/contribution arms race that is core to the modern day election cycle. By capping both the duration of the election cycle and campaign contributions, we put a huge dent in the power of cartels and monopolies to control political candidates. In this manner elections become about ideas, and not who has the biggest wad of cash.
4) Break up cartels and monopolies.
Power to the market!
1) Leverage the great American market! Insist that if business sells in America - they produce the goods and services sold in this country with American labor. If a business doesn’t hire American, that’s fine but than access to the American market would be cut off. Since this rule would apply across the board to all domestic and foreign companies selling in the US, no one could complain that they were unfairly treated or at a competitive disadvantage.
2) Close all tax loopholes and dodges, which would allow for a lower corporate tax rate--- since it would be a requirement that US labor be utilized for goods and services sold in the US, there would be no opportunity for tax and labor arbitrage for domestically produced goods and services. If larger business begins paying taxes at a lower effective tax rate (in lieu of paying little or no taxes at all), the consumer could theoretically, enjoy a lower tax rate since they are no longer subsidizing businesses that have the skills and the means to engage in tax avoidance. This too would help stimulate the economy by increasing consumer/market discretionary income (i.e. aggregate demand).
Eliminate the American tax for goods and services sold overseas by American companies, as long as they employ Americans for goods and services sold in the U.S., with one exception. Some percentage of the cost of the US military industrial complex (MIC) should be carried by all foreign governments and multinationals based upon their respective contribution to global GDP and global international sales, respectively. The US military protects and provides stability for global markets, and the beneficiaries of that protection should pay their fair share. If this in turn relieves additional tax burden on the American consumer/market, it means more income and opportunity flowing into our economy, and less consumer/market money flowing into the MIC, via the government.
That's another half trillion dollars, or more, the US taxpayer (domestic businesses and individuals) would no longer be burdened with - that could flow directly into our economy, or be allocated to deficit reduction.
3.) Cap the election season, so that politicians may only run for office the three months proceeding the election, in lieu of the two year - continuous period presently allotted; and cap the amount of campaign contributions taken in per politician, so as to end the financial/contribution arms race that is core to the modern day election cycle. By capping both the duration of the election cycle and campaign contributions, we put a huge dent in the power of cartels and monopolies to control political candidates. In this manner elections become about ideas, and not who has the biggest wad of cash.
4) Break up cartels and monopolies.
Power to the market!
Copyright JM Hamilton Publishing
2015
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