Source: Patricia M. McClane
A recent Fox News poll reported that 59% of Democrats have a favorable view of socialism compared with 49% who have a favorable view of capitalism. A few weeks ago, Nancy Pelosi, while speaking at an event in London, commented that capitalism has not served our country as well as it should.
Why all the ill will for capitalism? Conventional wisdom seems to be that the widening gap between the haves and have-nots is driving the shift away from capitalism and toward socialism. The gap is wide and getting wider, but the problem is not with capitalism itself; it is that we no longer have a capitalist economy. We have faux capitalism or a watered-down version.
Capitalism is typically defined by the following characteristics.
- Private ownership of the means of production
- Profit motive
- Minimal government intervention
- Two classes (owners and worker)
- Free markets where prices are set by supply and demand, rather than monopolies where prices are set by the seller
But how many of these key characteristics are alive and well within our economic system?
Private owners continue to control the means of production within our economy for the most part. There are exceptions, however, where government has an ownership or a quasi-ownership interest, including Amtrak, USPS, and Fannie Mae/Freddie Mac — hardly shining examples that you would want to imitate in the private sector.
Most businesses are still driven by the profit motive, but in the past two years, there has been a push to replace the importance of profits with other objectives. In August 2019, the Business Roundtable, a group of CEOs from the country’s largest businesses, issued a revised statement on the purpose of corporations. The group decided that profits were not enough and that corporations must serve all stakeholders — customers, employees, suppliers, communities in which they operate, and shareholders. Interestingly, they did not use the word “profit” when defining their purpose for shareholders. Instead, they said their objective was to create long-term value. There have also been proxy campaigns to elect corporate directors who advocate an environmental, social, and governance (ESG) agenda. These directors view corporate responsibility as including things like climate change, social unrest, and racial inequality, rather than simply making a profit.
Minimal government intervention is almost a laughing point, with government tentacles reaching into most market segments through direct regulation. What is not directly controlled can be manipulated using the federal purse strings or punitive actions. Obviously, some industries are more regulated than others (health care and financial institutions come to mind), but can you name one industry that enjoys freedom from government oversight in all its forms? The risk of non-compliance with government dictates is fines and regulatory enforcement actions that are costly to combat and all but impossible to beat.
Two of the characteristics of capitalism — competition and free markets — are deceptive in that they appear to be alive and well, but on close inspection, they are just as diluted as some of the more obvious. Dr. Jeffrey Miron, head of undergraduate economics at Harvard University, points out in his video, “3 Myths of Capitalism,” that competition is good for consumers because it requires owners to work hard to capture market share at a price reasonable to all parties. But what if owners could gain a competitive advantage by buying out their competition or making a political contribution in exchange for favorable legislation that would cripple the competition? The U.S. federal code is chock-full of tax breaks, regulatory advantages, price controls, supply controls, and costly entrance requirements for particular industries and businesses that can reduce or eliminate competition.
Our economy has few monopolies, but it does have an abundance of oligopolies, which are almost as harmful to consumers. We have the illusion of choice when making a purchase or hiring a service, but, in fact, the choices are limited. The four largest airlines control 65% of air travel, and because one of the four usually dominates a regional hub, there is even less competition within a region. Two corporations control 90% of the American beer market, and the four largest banks have 44% of the market. Four companies control about 80% of the meat-packing market, and they also control large portions of the supply chain. Carnival Corporation owns nine cruise lines, including Carnival, Holland America, Cunard, Seaborn, and Princess. Royal Caribbean owns six lines, and Norwegian owns three. About the only line that is not owned by one of these three companies is Disney. So while it may seem as though there is a lot of competition in the cruise market, it just ain’t so. Avis, Enterprise, and Hertz account for 95% of the car rental business, although they operate under ten different brand names. Ever notice how Hertz, Dollar, and Thrifty often share a location close to an airport? They are all owned by Hertz, so they can reduce overhead with one shared facility and staff.
Consolidation in most industries began in the 1980s when mergers and acquisitions were allowed to sail through. The conservative legal theorist Robert Bork argued that any merger making businesses more efficient must be approved and that a larger scale generally increases efficiency. Sounds reasonable, but with every merger and acquisition, the market becomes more concentrated with few choices. Not only is competition decreased, but by acquiring so many resources, companies also acquire power that can be used to protect their resources. Think about how Mark Zuckerberg used his power and resources during the 2020 election cycle. Surely those campaign contributions, investments in election drop boxes, and grants to Democratic groups were worth a few favorable votes in Congress to keep Facebook in one piece.
Unfortunately, I have no solution to offer, but recognizing the problem is half the battle. Although there has been plenty of criticism, at least we can reasonably argue that the income gap is not due to capitalism. It is because we no longer have a capitalist economy that the gap is becoming as wide as the Grand Canyon.