Saturday, March 20, 2010

Less Free-Market Than Meets the Eye

As industry power consolidates into fewer and fewer hands, we are left with a “capitalistic” system that is ideologically different, but pragmatically similar to socialism. This is different than Karl Marx's suggestion that a series of crises portending revolution would lead communism to replace capitalism, as well as Joseph Schumpeter's inclination that intellectual climates would become ill-suited for entrepreneurialism.

Rather, this is the natural progression of an ill-regulated system of capitalism. Corporations compete with one another in a style similar to the March Madness tournament. Over time, victorious companies acquire or defeat smaller companies. As the victors grow, the barriers to entry for new participants becomes larger and larger. In the end, we are left with each industry dominated by a handful of major players. Barry Lynn addresses this nicely in his book Cornered: The New Monopoly Capitalism and the Economics of Destruction. He highlights that nine of the top ten brands of bottled water are sold by three major players: Pepsi, Coca-Cola, and Nestlé. Whirpool’s Maytag acquisition leaves them with a 75 percent share of the U.S. washer & dryer market. Meanwhile, since the 1990s, the number of large defense firms has consolidated from 107 to 5.

The result is what economists refer to as an oligopoly within industries. Whereas a monopoly consists of one key decision-maker calling all of the shots, oligopolies consist of “a few” decision makers. These oligopolies (sometimes thought of as cartels) encourage the key players to join forces (either implicitly or explicitly) in order to serve their own best interests.

What we find is that, practically speaking, American capitalism is largely characterized by the centralized planning at the heart of socialism. Wherein socialist economies this planning is executed by the state, in cartel economies this planning is executed by a few strong industry players.

This leaves us in a hybrid form of capita-socialism, with important implications for democracy.

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