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What’s Killing Capitalism In America?

2020 October 4
by 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, called 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 Bookings 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.

– Greg


Image: Wikipedia



7 Responses leave one →
  1. October 4, 2020

    Funny. There’s one political party who have been pushing for most of these destructive politicizes (and succeeding, even as recently as last week), and are even arguing in court as we type to take health insurance away from 20 million people no replace it with bullshit…

    And one party that’s spent the past 60 years pushing against these destructive policies.

    Why won’t Greg just say it? Instead of blaming it on some amorphous “someones”…? No problem was even solved by ignoring the cause of the problem. Seems like something Greg would write…

  2. Kuldip Singh permalink
    October 4, 2020

    Way back in December 1985, Saint Scholar Giani Naranjan Singh Ji said, “ Come to the turn of the century, the economy of the world will start to go downhill.”

    To the question, “ Why?” the Saint Scholar replied, “ We will be moving from the Age of Falsehood to the Age of Righteousness.”

    To another question, “ If the economy of the world will go downhill, which country will come up?”

    Saint Scholar replied, “India.”

    The questioner asked, “Why?”

    Saint Scholar replied, “ Land on which deep meditation took place will thrive. Other countries will have a hard time.”

    The Saint Scholar ended the discussion by saying, “ In the 21st century, India will lead the world.”

    The first rule in problem solving – identify the problem. These two quotes from the Saint Scholar succintily explains why the world is in such a mess.

    1) Many years ago, someone asked Saint Scholar Naranjan Singh Ji, “All the chaos in this world, who is responsible for it?”

    The Master replied, “2 classes of people who live by the principle of divide and rule. One is politicians and the other preachers.”

    2) A Muslim lady asked Saint Scholar Naranjan Singh Ji, “What is the difference between Islam and the Sikh religion?”

    The Master replied, “There is no difference.”

    The lady was astounded at this reply and asked, ” Master, how can you say this”

    The Master replied, “My daughter, I say this, simply because the Truth is One. It is only our form of worship which is different.”

    We are paying the price for worshipping materialism instead of worshipping the Lord.

    “Give a man a gun and he can rob a bank, but give a man a bank, and he can rob the world.”
    Tyrell Wellick

    “Science has spread scepticism among educated people. The hope of establishing a heaven on earth by means of material progress has led many to ridicule the search for the spiritual path. But, the god of material progress demands worship at its shrines. We worship the swift-moving machinery of our skills, factories and workshops-the temples of industry; we worship our office, our trade and commerce, banks and stock exchanges(the churches of high finance); we worship scholarship, our schools, and colleges.

    And in the midst of all this worship, we have forgotten the worship of the Lord.”

    Quoted from the book
    *Divine Mystic Reflections on Gurmat* by Saint Scholar Naranjan Singh Ji

    Gurmat (gur-mat, mat, Sanskrit mati, i.e. counsel or tenets of the Guru, more specifically focusing the mind towards the Guru).
    Etymologically, Gur means wisdom and Mat means Tenet/Belief.
    Gurmat – Wikipedia › wiki › Gurmat

  3. Michael Breeden permalink
    October 4, 2020

    Capitalism is supposed to be the use of capital as a tool of production, called investment. Instead it tends to be used these days as a bludgeon to monopolize markets. It becomes cheaper to buy tax laws and other legislation than to pay taxes or pay for innovation.
    You mention health care. The greatest boon to business and the American Economy would be universal health care… pretty good for the citizens too. It might threaten my job but I know what would be good for the economy.

  4. October 4, 2020

    The Australian ‘powers that be’ should read and consider this.
    We are about to have delivered a budget that reflects the panic in Canberra, and the power of institutionalised interest groups. Some of the remedies (I suspect) will be sensible, others will fall into the trap outlined.
    Lower taxes for businesses, those who have significant incomes, rather than addressing the political risks of addressing the inequities that exist are an obvious example.
    Short term thinking.

  5. October 5, 2020


  6. October 5, 2020

    Thank you Greg,
    Compelling post as usual. Not only are you on topic, but to add to the discussion the fact that one, concentration one of the bugaboos of unrestrained capitalism, and the focus on financial manipulation (the stock market) as wealth creation have added to the toxic mix.

    While only half of Americans own stock at best, and most in funds the focus on the market is a shiny object that distracts most from where wealth creation for the wider swath of people can exist. Meanwhile, we expect small business to create most jobs, so why do we not focus there also for wealth creation? This is the snow job, not that there is anything wrong with the market just to obsession with it to the point of directing regulation and rules as you set forth.

    We should all know that concentrated power corrupts on its own, and as corporations are “people” as some have said, they are certainly without souls or concerns for others in general no matter the political statement. It is well past time to rebalance the equation as this is what continues to drive inequality and a lottery mentality.

    Thanks again.

  7. October 5, 2020

    That’s a good point. Far too much emphasis is put on stock indexes. The stock market isn’t America, it’s corporate America. It’s like looking at New York and assuming if it’s doing well, then the rest of the country is too.

    – Greg

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