By John Mauldin
Without realizing it, we’ve become a nation of monopolies. A large and growing part of our economy is “owned” by a handful of companies that face little competition.
They have no incentive to deliver better products or to get more efficient. They simply rake in cash from people who have no choice but to hand it over.
Even if we admit some businesses are natural monopolies, most aren’t. Most of them found some non-capitalistic flaw to exploit.
In theory, this problem should solve itself as technology and consumer preferences change. Yet it isn’t happening. Axios outlined the problem in a recent article on farm bankruptcies.
Across industries, the U.S. has become a country of monopolies.
- Three companies control about 80% of mobile telecoms. Three have 95% of credit cards. Four have 70% of airline flights within the U.S. Google handles 60% of search. The list goes on. (h/t The Economist)
- In agriculture, four companies control 66% of U.S. hogs slaughtered in 2015, 85% of the steer, and half the chickens, according to the Department of Agriculture. (h/t Open Markets Institute)
- Similarly, just four companies control 85% of U.S. corn seed sales, up from 60% in 2000, and 75% of soy bean seed, a jump from about half, the Agriculture Department says. Far larger than anyone — the American companies DowDuPont and Monsanto.
As we have reported, some economists say this concentration of market power is gumming up the economy and is largely to blame for decades of flat wages and weak productivity growth.
“Gumming up the economy” is a good way to describe it.
Competition is an economic lubricant. The machine works more efficiently when all the parts move freely. We get more output from the same input, or the same output with less input.
Take away competition and it all begins to grind together. Eventually friction brings it to a halt… sometimes a fiery one.
Normally, companies grow their profits by delivering better products at lower prices than their competitors. It is a dynamic process with competitors constantly dropping out and new ones appearing.
Joseph Schumpeter called this “creative destruction,” which sounds harsh but it’s absolutely necessary for economic growth.
Today, the creative destruction isn’t happening. And as companies refuse to die and monopolies refuse to improve, we struggle to generate even mild economic growth.
I think those facts are connected.
Some of this happened with good intentions.
Creative destruction means companies go out of business and workers lose their jobs. Maybe a new competitor will hire them eventually, but they suffer in the meantime.
Politicians try to help but finding the right balance is hard.
I assign greater blame to the central bankers, not just the Fed but its peers as well. For whatever reason, they kept short-term stimulus measures like QE and near zero rates (or negative in some places) for far too long.
The resulting flood of capital bypassed the creative destruction process.
A lot of this happens under the radar. You’ve probably seen stories about the Lyft IPO and other unicorns that will soon go public. This is news because it’s now so unusual.
The number of listed companies is shrinking because (a) cheap capital lets them stay private longer and (b) the founders and VCs often “exit” by selling to a larger, cash-flush competitor instead of going public.
An economy in which it is easier and cheaper to buy your competitors rather than out-innovate them is probably headed toward stagnation.
Drive for Scale
My usually bearish friend, hedge-fund manager Doug Kass, wrote last week that Amazon will be at $3,000 within a few years and $5,000 by 2025.
If it was anybody but Doug Kass, I would have probably ignored such a massively bullish analysis. But when Doug makes a case, I take notice.
Doug’s prediction got me thinking about scale. How do you compete with that?
It is like watching the small farmer disappear. Your heart is with them but the market demands scale. Can small farmers producing locally grown food survive? Absolutely. But it is a niche market.
And as the world demands scale, cheap money helps it go even faster. Understand this: Cheap money is not going away. Neither is technology and the drive for scale.
We can cheer for the “small farmer,” but the reality is that the world is moving to fewer competitors and larger businesses.
And as I write that, I literally find myself sighing. I hate writing those words. But I can’t avoid reality. The world is changing, and we must deal with it.