Today, I’m going to describe what is perhaps the largest single lie of modern-day Societal Programming. So successful is this lie that I would guess that a billion people, yes, a billion people believe in it.
This lie has been building slowly since around the early 1990s. It reached critical mass around the mid 2000s and crescendoed just after the collapse of 2008. Today, it’s simply accepted “wisdom” and not even questioned. The lie is complete, entrenched into not just Western culture but world culture, and is here to stay, perhaps for the next 100 years.
The lie is this: Capitalism means big government assisting big banks and corporations in ripping off their customers, then bailing out said banks and corporations when they fail.
You’ve probably heard this statement a thousand times: “The 2008 crash was caused by too much capitalism.”
When government throws corporate welfare at big companies or bails out big banks, what do you see people screaming about? Capitalism.
The problem is none of this is capitalism. It’s corporatism, which is completely different.
The United States isn’t a capitalist country or economy. It hasn’t been since at least 1913, which by my math was over 100 years ago. If something horrible happens to the US economy, you can’t blame capitalism. You have to blame what it really is. Corporatism.
Yet how many people do you see bashing corporatism? Virtually none. How many people do you see bashing capitalism? Tons.
In the last few years, they have cleverly started calling corporatism “crony capitalism,” but that’s still a lie, because what they’re calling crony capitalism has nothing to do with capitalism. What we have in the United States is nothing like capitalism.
I shall explain.
What Capitalism Means
Capitalism, or free market capitalism, is based on a (mostly or completely) unregulated free market, voluntarily exchange, entrepreneurship (including the risk that implies) and private property.
In capitalism, you can start your own business and the government has nothing to do with it. You can run that business any way you like. The government doesn’t tell you how to operate the business, how to service your customers, how to manage your money, how much to charge for your products or services, how much to pay your employees, or anything else. You can run that business literally any way you want as long as you don’t murder anyone or steal anyone’s stuff (including things like patents).
Does that sound like the United States?
But let’s keep going.
If your run your business well, you make a lot of money and keep the vast majority of it, since under capitalism, taxes are really low. This is because the government is very tiny and doesn’t do much. Tiny government equals super low taxes.
Does that sound like the United States?
But let’s keep going.
The government also doesn’t pass any laws that make it more advantageous for people to do business with you. It also doesn’t arrange its tax code so that purchasing your product or service is more advantageous to, or detrimental to, people’s tax positions. If you’re a bank, the government doesn’t provide programs where people can get lower-interest loans from you. If you’re a home builder, the government doesn’t provide people extra tax write-offs to buy one of your houses. Once again, government stays the hell out of these things, and it’s completely up to you as the business owner to sell a quality product or service, or not.
Does that sound like the United States?
But I’m still not done. Let’s keep going.
Under capitalism, the only time government gets involved in your business is if you’re caught defrauding your customers. If you lie to a lot of your customers about a product or service, and cause people to lose money or suffer damages because of it, then, and only then, the government steps in. From here, they will then throw your ass in jail where it belongs, and either shut down your business or force you to sell it for pennies on the dollar to someone more honest. The government does not allow you to defraud your customers in any way, at least not on a mass scale.
Does that sound like the United States? Do you see a lot of corporate CEOs or bankers go to jail for defrauding their customers?
But let’s keep going.
Under capitalism, if you run your business incorrectly or incompetently, you go out of business and lose all of your money. This happens even if your business is very large, employs thousands of people, and makes billions of dollars a year. Doesn’t matter. If the people running that large corporation screw it up, those people who lose their jobs are treated as pariahs in the business community, and the corporation either goes under or is purchased for pennies on the dollar by more effective business owners. At no point does anyone from, or even affiliated with the government come in and save you. You lose your job as a shitty business manager and your business goes out of business (or is bought by someone else), which is what’s supposed to happen.
Does that sound like the United States?
But I’ve still got more. Let’s keep going.
Capitalism is made of booms and busts, recessions and prosperity. Sometimes things are great, which is called prosperity. Over time, a few incompetent or corrupt business owners start screwing things up. Then the economy goes into a recession. Recessions are good. They act as a cleanse, just like a juice fast cleanses your body. Recessions clean out all the corrupt and incompetent businesses and business owners. Because of this, under capitalism, recessions are very short. They’re almost always very mild. Soon, you’re right back to prosperity and growth again.
Under capitalism, the government never manipulates the currency, tax rates, or interest rates to make sure there’s “never” a recession, or at least to “put off” recessions. The government has nothing to do with that. It lets the free market correct the problem, which it always does after a brief recession.
Does any of this sound like the United States?
The United States is not capitalist. It’s not even close. It’s corporatist.
What Is Corporatism?
Corporatism is the exact opposite of everything I just said, because it’s the exact opposite of capitalism. According to false Societal Programming, communism is the opposite of capitalism. Incorrect. Communism (and its baby brother, socialism) is a completely different system based on completely different models and goals.
Corporatism isn’t a “type” of capitalism, like the misleading term “crony capitalism” implies. Rather corporatism, which is what the United States embraces, is capitalism’s mirror opposite.
Here’s what I mean.
Under corporatism, you start your own business, and immediately the government gets involved. It tells you where and where not to do business, whether your allowed to put up signs or other advertising, and what you’re allowed or not allowed to say in your advertising, even if it’s 100% honest and you can prove it. In many industries, it tells you exactly how to price your products and how you bill your customers. When you hire employees, it tells you how much to pay them (wage controls, otherwise known as “minimum wage”), what benefits to give them, how much they’re allowed to work, when or when not to fire them, and even the racial makeup of your company.
I could fill the next several pages with ways in which the government is involved in your business, but I don’t have all day. Hopefully you get the idea.
Under corporatism, taxes on you and the business are sky-high. Since the government is so huge and does so much, it requires a massive amount of taxes. However, if your business is really huge, the government allows you to pay very little in taxes, sometimes zero and sometimes even negative taxes, where the government actually writes your giant corporation a check every year!
This ensures the big, fat, giant, incompetent, well-connected companies stay in business while the smaller, more innovative, and often more well-run companies have near-impossible hurdles to overcome in order to be successful. In the United States (and much of Europe) the huge companies pay very little taxes, but the smaller companies pay massive taxes, getting hammered by the tax burdens the giant corporations don’t pay.
Every time these small business owners complain these corporate taxes are too high, left-wingers scream “fatcats” and “rich people” and about how they “don’t pay their fair share.” Left-wingers, hearing the word “corporation” immediately envision a huge company like Goldman Sachs or Hewlett Packard, not the small bakery with six employees trying to make ends meet. Thus, the system perpetuates; the small Main Street bakery gets hammered, big giant Wall Street corporations sail down Easy Street without a care in the world.
Under corporatism, the politicians who run the government pick and choose the industries they want to progress based on what will make them look good and get re-elected. For example, they may see that the more people who buy a house, the better the economy is for the short term, so the politicians will get more votes. So these politicians pass laws to make it easier to buy a house, via huge tax incentives or whatever. Millions of people take advantage, and everyone in the real estate industry artificially makes a lot of money. Not because of a free market, but because of a highly manipulated market. Capitalism is a free market. Corporatism is a manipulated market, which means it benefits the elites.
Under corporatism, if a bigwig in a large corporation is found guilty of ripping of his customers, the government lets him do it. He is not fired and he does not go to jail. The absolute worst thing that might happen is the government fines the giant corporation a few million dollars after it’s made billions ripping off its customers. The corporation just laughs, pays the puny fine, and revels in its billions.
This is because big government likes big corporations. The myth is that big government and big business are enemies. Completely untrue, and another successful element of this capitalism lie. Big government and big business are so cozy that they often work in the same offices. Under corporatism, big government always protects and goes to bat for its big business friends.
It gets worse. Under corporatism, if a big corporation or bank is corrupt or incompetent, instead of going out of business like its supposed to, big government steps in and uses taxpayer dollars to bail out the corporation. The big corporations know this, so they just keep on ripping off customers and behaving incompetently. Big government plays along and keeps bailing all these businesses out, declaring they’re “too big to fail.”
In capitalism, these corrupt and incompetent managers would be replaced by most honest and competent ones. But under corporatism, these corrupt and incompetent managers stay in power forever and ever.
Lastly, under corporatism, big government uses massive power to put off recessions as long as humanly possible. They provide tax loopholes to big corporations. They artificially drop interest rates as low as possible, even to zero, and keep them there. They print trillions of dollars and flood the economy with it, which enriches rich people and damages the poor and middle class. Yet this stuff does actually keep recessions at bay, at least for a while.
Remember, recessions are good. You cannot have sustained growth without the occasional recession. So, when government manipulates its corporatist economy to stave off a recession it desperately needs, the economy stays in a weird, no-growth, limbo-like state. It’s not a recession, but it’s not prosperity either. It’s just this strange dead zone where things suck, but not too horribly. The United States has been like this since 2009. Japan, another corporatist country, has been like this for 20 years.
Of course, you can’t hold off a recession forever. Eventually, you’re going to have one. Under capitalism, recessions are frequent, brief and comparatively light. Under corporatism, they’re less frequent, but when they do happen, they’re huge, terrible, sweeping, and last a long time. Millions lose their jobs. Millions lose their homes. Millions lose their businesses. It’s absolutely horrible, and it’s like that for years. Remember 2008. If you’re old enough, remember 1981. Study history, and look at the Great Depression.
THAT’S the United States. It’s not capitalism. It’s the opposite. If you ever see something in the US economy you don’t like and then complain about “capitalism,” you’re either a complete idiot, or you’re purposely lying in order to play a more sinister game. Let’s discuss that.
The Big Lie
Most people who have succumbed to the big lie that America’s problem is capitalism are simply idiots who don’t understand economics or low-information ignorant folks who are just parroting political pundits on their side without doing any real research.
However, there’s another category. These are people who know damn well that the US is corporatist but purposely call the US “capitalist” anyway. There are many left-wing folks, many of whom are among the elites, who do know the difference, and they hate corporatism just as much as I do. The twist is they hate capitalism too. They hate both corporatism and capitalism. They would rather the US chuck corporatism and go more socialist, which as I said is a completely different system.
They don’t need to worry about capitalism, since the elites in America destroyed capitalism many decades before you or I were born. So they need to instead focus on destroying corporatism. However, they know that the word “corporatism” doesn’t mean anything to most people, whereas even morons have heard the world “capitalism.” Thus, they call corporatism, “capitalism.” (Or at best, “crony capitalism.”)
Thus, the lie is complete. Look at all these banks ripping you off! Capitalism! Look at all these Wall Street billionaires! Capitalism! Look at all these guys getting a bailout! Capitalism! Capitalism! Capitalism!
Never mind that the United States hasn’t had capitalism in over 100 years. Doesn’t matter. A lie repeated often enough will eventually be considered the truth. The Nazis figured that out, and left-wingers are only too happy to follow through on that maxim.
I could give you many examples of this, but my favorite one is Michael Moore. In interviews with him, historically anyway, he has been really good at demonstrating that big business is not capitalism, but corporatism. He doesn’t use the word “corporatism” of course, but he clearly says things about how the airline CEOs are not capitalists (relying on big government corporate welfare) and how Obamacare insurance CEOs are not capitalists (relying on big government to force people to buy their products or get fined; Obamacare is a classic corporatist healthcare system).
He is, of course, absolutely correct. This isn’t capitalism.
Yet he turns right around and makes a move called “Capitalism, A Love Story” about all the bank bailouts and how horrible capitalism is. He knows damn well it’s not capitalism, yet that’s what he calls it.
He’s lying. Period. It’s not just him. Robert Reich, Joseph Stiglitz, Bill Maher, and hundreds of other left-wing pundits also call something they know is corporatism “capitalism.” They’re lying to you because they want you to think what America has is capitalism, which is the opposite of what it really has.
And based on the most recent polls, they’ve succeeded.
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Look up Richard Werner and Princes of the Yen on Youtube, I think you’ll find it interesting.
Here’s a brief video https://www.youtube.com/watch?v=wDHSUgA29Ls
I don’t think the problem is with the economic model. I think the problem is with human nature.
Even if you created in theory the most utopian economic and political system, in practice it would not be able to stay pure in the long term. People would start knawing away at ‘the rules’ as soon as the system was to their detriment in anyway, or if they found a way to exploit things to get ahead. Nepotism and corruption would eventually become endemic.
Communism was utopian as a system, but didn’t account for human nature and eventually fell to corruption. Capitalism was less vulnerable in that people were more motivated to work because the fruits of their labor wouldn’t be claimed by others. Still parasites found a way to funnel the hard work of others into their own pockets because it was an easier way to get ahead. This resulted in the system we now have.
I don’t know how to fix it except to prepare for the crash, but I’m pretty sure if ‘pure’ capitalism is installed in the aftermath it will again eventually turn into corporatism or some other corrupt system.
That’s correct in that every economic model eventually fails because humans turn it into something else. Communism to capitalism, capitalism to communism, etc. So you’re correct. However that doesn’t mean all economic models are just as good or bad. Capitalism is better then communism, even if human beings can’t permanently stick with either one.
I actually agree with everything you said… but then again, what do you expect (Perfection..NOT). Humans are flawed by nature, therefore anything they invent will be flawed also. So whether it’s labeled Corporatism or Socialism for Businesses, the results are the same… I’m reminded of how the middle class was created out of thin air by the Gov’t giving loans (Socialism) to specifc groups…and then creating systems to lock out other groups, i.e.. red-lining, Jim Crow laws, etc…. my point is, it has always been like this. The system has always been rigged, rather for certain businesses or certain groups.
So your point is well made and well taken, just to note this permeates every area in society, including but not limited to the financial sector…. given this reality, in the end, what can you do about it anyway.
I don’t think your examples (Bill Maher, Michael Moore) are *lying* about hating unchecked, unrestrained capitalism, in addition to corporatism. I think they’re pretty straightforward in their view that unregulated capitalism leads eventually a winner-take-all disaster for most people.
The problem you aren’t addressing is the consolidation of bargaining power. In a free market, bargaining power is the ONLY thing that matters. And because money and power beget money and power, you eventually end up with a situation where one person/company owns EVERYTHING because over time they will increasingly consolidate their bargaining power by buying out more and more competitors until none are left. And as one company gets larger, the entry-costs for a competitor get larger and larger til there’s no way there can be any competition. That’s just the nature of how power works. So at the very least, you must have strong anti-trust laws in place or a single private company can and will eventually be the ONLY company in an industry. And only collective bargaining or government have the necessary power to counterbalance the kind of power you get where, for instance, one company could control the entire food supply (which would be the case now if it weren’t for anti-trust laws and government intervention). It is simply not possible for anyone to compete with the financial might and bargaining power of a company like Pfizer, Monsanto, or Walmart…they would simply buy out any competitor, if it weren’t for existing anti-trust laws.
I also think your assertion about “real” capitalism leading to more frequent but shallower recessions isn’t supported by the evidence. The US has had five massive depressions, and 4 of the 5 occurred prior to 1913, which is the year you peg as supposedly changing us from a capitalist to a corporatist nation. And since FDR’s socialist reforms, we haven’t had any depressions. Regardless, I don’t think most people are willing to go for a social model that blithely allows millions of people to lose their jobs every few years simply because that’s the way the market works and it’s actually good for its “health” in the long-run, as you argue. I understand the principle behind your reasoning, but that’s not an idea that will ever get mass traction with voters. Or really with anyone other than the minority who own capital or fantasize that they will one day own capital. Why would it?
Unless the US passed a law mandating that all companies must include employees as stake-holders holding a minimum percentage of the company and profits…say 40%…there’s no reason for the masses to promote a system that allows a small minority of capital-owners to keep all the profit. Most people will never own any significant capital. So how would you feel about a law like that? It’s about the only thing I can think of that would actually promote an “ownership” society and get people to support capitalism, and also to favor the less redistributive taxes you favor.
Bargaining power is everything.
Correct. I said they’re lying when they call the US and it’s problems capitalism.
That has literally never happened.
The only times monopolies occur are with goverment collusion, from the railroads to phone company. Monopolies don’t occur in a truly free market. They can’t.
Again you’re wrong. Formerly little Dell did very well against giant IBM. Formerly little Google did very well against giant Microsoft. I could name scores of examples of when a little, innovative company took down (or at least achieved parity with) a massively huge, dominant competitor.
I agree certain anti-trust laws should be in place to protect capitalism. That’s one of the few areas in which I’m not a 100% libertarian.
I realize that’s what Wikipedia says, but 1807 and 1815 were not depressions, they were recessions. They were also both directly related to war, so they aren’t a good example of something that’s capitalism’s fault.
1840 and 1879 were pretty bad though, yeah.
Correct, that’s exactly what I said in the article. There are less depressions under corporatism because big government pushes them into the future for decades until they explode extra-big.
Of course. Voters like socialism or some variation of it. This is why I’m against the concept of democracy.
Jesus. That’s a variation of communism. Your political views scare the shit out of me.
Those “minority of capital-owners” are the ones creating ALL the jobs, including the good high-paying ones, for everyone else. (And remember, government doesn’t create jobs; it steals from the middle and upper classes to do so.)
Except such a system would not be capitalism at all.
I start a small business by myself. I bust my ass for three years trying to make it work. I take all the risk. I spend all the time, blood, sweat, tears, and money to do so. Finally, it grows, and then I need to hire an employee to keep it growing (to create more jobs). The government puts a gun to my head and says I have to give that guy 40% of my company now? WTF? How is this fair? How would that promote entrepreneurship or innovation? It wouldn’t.
Just one point for KryptoKate to think about. Often when you hear about big companies you hear about economies of scale where the larger you are the cheaper it is on the margin to produce goods. This is an important phenomenon.
What you rarely hear about are the diseconomies of scale. Anyone who has worked in a large organization is entirely familiar with these though they rarely think about them. If you work at a big company it is sometimes verging on the impossible to get anything done because of the straightjacket of processes, politics and communication necessary. The cost of communication in particular is proportional the the square of the number of people being communicated with, meaning it grows at a spectacular rate. We all know this because we have seen it.
What this means is that small nimble companies are able to quickly out maneuver large companies and compensate for their advantages.
It is true that money buys power, but if the government was truly weighed down by the chains of the constitution then that most lucrative well of power would not be available to them.
Companies grow to a certain size and then become sclerotic, and become entirely dependent of two things: government power to enforce their dominance (patents btw, irrespective of what you think of them are one very powerful tool here), and acquisitions of those small companies to infuse new blood into their clogged corporate arteries.
BTW, you can usually tell a company has become sclerotic by two simple measures: firstly when they move their headquarters into a large fancy building, and secondly when the original founders leave an are replaced by a bunch of MBAs. Not universally true, but often true.
Yes, one company has never owned an entire industry because we have anti-trust laws that prevent this. And that’s because we’ve decided that competition is a good thing and we don’t like monopoly. Haven’t you ever played Monopoly? It is always the outcome in a free market absent restraints, at least in industries where there are economies of scale.
Free markets with no regulation will always turn eventually into winner-take-all scenarios, except in industries where there are no (or limited) economies of scale. Therefore, in some industries where this isn’t true, the consolidation of power might not occur, but anywhere where economy of scale exists, you eventually end up with a tiny few owning everything. The internet and personal computing has reduced entry costs in many areas such that economies of scale are no longer so important, but for any industry that actually produces products and not just services conducted with computers, this is still mostly the case.
You focus solely on “job creators” as if those job creators would have *anything* absent people to actually work those jobs!! I don’t understand worshipping only the employer, when a job is useless if no one works it.
And what I described is most certainly NOT communism, it’s nothing of the sort. Communism has no private property, and all property is owned by the state. In the proposal I made, there is still private property, it’s just that the profits of a company would be distributed among not only the founder and investors but also the workers who create the profit. So everyone who had a job would be a capitalist. Your kneejerk reaction against it makes me wonder if you love capitalism as much as you say, or if you just love the idea of winners and losers. I work with a lot of companies in my job, and some of the most successful companies are those that spread equity to all the employees. So everyone profits when the company does well. It isn’t communism, it’s private property and it turns everyone in the company into a capitalist. It imbues everyone with an ownership stake and a desire for the company to do well. Otherwise, employees should only be motivated personally to do the minimum amount they have to in order to keep their job. Why should they do any more when the owners capture all of the profit of their increased productivity?
Sorry but I don’t worship job creators. I have employees and independent contractors that work for the company in which I’m a stakeholder. Sure, I give them work. So what? That’s because I either don’t want to do it myself or because I need someone to do it. It makes us both part of a beneficial arrangement, not me doing them a favor. Considering myself a “job creator” is self aggrandizing…you could just as easily say I have work I couldn’t do myself or that I’m too lazy to do myself. You could also say that my company would collapse without all the staff that keep it running, which is absolutely true. But we don’t pay them more than we have to. And in a good year, we get the profit, whether it’s a lot or a little. The staff gets their wages. And guess whose butt gets kissed? Not theirs. That’s because in our system the owners have (almost) all the power. You want it to be even MORE skewed.
I could also just as easily refer to workers as profit creators. Because there are only four ways to make a profit: (1) by exploiting someone else’s labor and taking the difference between what they produce and what you charge for it (i.e. having employees), (2) by creating new technology that increases productivity, (3) by creating something or providing a service that you get a premium for because no one else can provide it (i.e. artists, celebrities, anyone trading on their personal brand), and (4) by rent-seeking on the ownership of existing assets (i.e. being a landlord). Anyone who profits from an employee by paying them less than what they bring into the company is hardly to be lauded as a hero. They’re just smart and/or powerful enough to figure out how to exploit others by profiting off their labor, and willing to do so. I’m not saying it’s morally wrong but you’re not going to convince me they’re heroic or that people should be grateful to them, either.
Also, I’ll modify my 40% example, since you gave an example where you worked hard in a start-up and hired only one person. OK, in that case you shouldn’t have to give them 40% (though you might be smart to do so because it would probably incentivize them to work harder than whatever wages you’re paying them). But let’s say you have 99 employees and you only work 5 hours a week. In that case, you still want to keep all the profit even though the whole thing couldn’t exist without your employees, and you might be functionally useless at that point. So fine, how about a sliding scale where an owner has to give a higher proportion to the workers depending on how much proportionally the owner works in comparison to the employees. Why are you opposed to sharing profit amongst the people who created that profit? You want to keep it all for the person who was first in, which is EXACTLY why unfettered capitalism eventually leads to the consolidation and accumulation of power in just a few hands.
Free markets with no regulation will always turn eventually into winner-take-all scenarios, except in industries where there are no (or limited) economies of scale.
Kate you make this claim, but can you offer some examples of where that has happened in the long term, where the monopoly is not obviously sustained by the government? Feel free to give examples of this that occurred before the advent of anti-trust law.
Surely if it always happens then there must be many, many such examples?
@ Fraser I absolutely agree that economies of scale are not relevant in all industries, and that once an organization gets too large (whether it’s private or government or non-profit) it is inherently inefficient. Because people are complicated and you can’t coordinate lots of people without lots of inefficiency. At least, so long as it’s humans and not robots doing the work, bigger will mean less efficient.
But there are industries that are so capital-intensive to get into that even with these inefficiencies, it’s simply impossible to compete in unless you’re an enormous, well-financed entity. Most of the new companies in the past decade where the founders made tons of money do NOT create many jobs at all, compared to the profit being captured. Because they are companies mostly involving technology (writing software) and connecting people. Airbnb or Uber being prime examples. Considering how profitable and relevant those companies are, it’s amazing how few jobs have been created. When all you need is networked people and software, it’s a totally different scenario than one that requires intensive capital expenditures in equipment and facilities. And, in the past at least, and before we get our robot workers, those industries required lots of jobs too.
Someone linked to this guy on the Blackdragon blog and I got to reading some of his other essays and thought this one was quite good (and reflects both what BD is talking about wrt corporatism but also what I’m talking about with needing to deal with workers): http://www.paulgraham.com/re.html
The thing that I think unfettered free-market champions never talk about is what exactly they want to do with all the displaced workers/low wages that you inevitably get if you don’t enact at least *some* socialist policies. Whether you put the money into “job training” or “education” or you just take from the rich and hand it out to the poor, or you give them jobs digging ditches or in the military doesn’t seem particularly relevant to me, as they’re all forms of redistribution — just some sit with people better morally than others. But it’s all taking money from the economic winners to give to the economic losers.
Most people are never going to be start-up founders, so what do you do with the billions of people who get left without jobs (or at least a job that pays a living wage)? Because that’s what happens in a pure free-market system. If you don’t do anything, you get an angry horde and they will take everything from the capitalists with guillotines and pitchforks if necessary. We see it time and again when the powerful get too greedy and don’t allow for some voluntary redistribution. You get war or violent revolution. I’m not sure what BD’s answer to this is, besides that he’ll just go running off to another country if and when things get too crazy. That’s nice for him but it’s not feasible public policy.
@ Fraser Sure, here’s an example. Industrial laundries. Every hotel, hospital, and restaurant in America (and around the world) has lots of sheets, tablecloths, and scrubs they need to launder on a daily basis. They don’t do this themselves. They contract it out to an industrial laundry that comes every day or week and picks up their laundry, brings it back to their enormous laundry facilities, washes it, and returns it.
These commercial laundries started in the 19th century when the scale was much smaller. When they were picking up the laundry by horse-drawn buggy and doing it over kettles stoked by fires. There were lots of these companies, run by individual families and servicing localities. As time went on, they got bigger, got richer, improved the technology, and built up the facilities. They started consolidating and expanding and servicing bigger and bigger regions. This industry requires a lot of workers who aren’t particularly skilled, but they need to drive the trucks, operate the facilities, etc.
Over time as these companies got bigger and richer, and they were able to lower their prices because of economies of scale and margins. They now have enormous industrial facilities that can launder tens of thousands of sheets and tablecloths every few hours. These facilities are expensive and require millions and millions of dollars to build. And over the past 20 years, there has not really been any innovation but instead, the companies have just consolidated their power by buying out all their competitors, to the point where now there are only about 6 companies to operate these businesses, and they’ve bought out all the little guys. And the only thing preventing them from consolidating into a single company that runs the entire thing is anti-trust laws. In the US at least, they are very close to being at a point where there can be no further mergers and acquisitions because there will literally be no competitors left. I expect we will see a few more acquisitions untll there are only 2 or 3 companies, and then it will have to stay there because anti-trust won’t allow for further consolidation.
Note that most of these companies are still family-owned (by families with billions of dollars), not publicly held. Absent anti-trust, the buy-outs would simply continue until there was only one company left. No one can get into this business at this point because just to start, you now need a huge facility with industrial equipment that can service an entire state. And btw, as soon as they figure out how to further automate the process with self-driving trucks and robots, they will have NO workers, and one family could conceivably own the entire industry and billions of dollars, while creating effectively zero jobs.
Now, maybe you think this is a great thing because we now have all the sheets and bar towels being laundered for dirt cheap, and that saves the restaurants and hotels money. But perhaps you can also see why we don’t really want ONE family owning and running an entire industry where there is no longer any competition or choice and they can do whatever they want. I’m fairly familiar with this example and as far as I know, anti-trust is the only thing preventing further acquisitions so that there’s just one company left. Frankly there’s not much difference between the remaining competitors or their prices, and your sheets will come back bleached and cleaned regardless of which company does the work. Arguably you might say that that’s an example where we don’t care so much about competition. But I’m also not sure why the descendants of the few families who happened to be the biggest and last standing should get to horde their billions.
I realize that this is an old-school example that doesn’t at all reflect the “new economy” internet start-ups. However, there are still plenty of industries that are more like this example than like Tinder or Twitter. It’s a random example but one I happen to be familiar with (and full disclosure I do not work for nor have any particular interest one way or the other in commercial laundries).
You’re talking out your ass when you say things like this. Name some specific examples if this happens so often.
Correct. I said it was a variation of it. All companies are owned by all of its employees, as mandated by big government. Yuck.
Absolutely wrong. Capitalists take massive risks with their livelihoods, and work often years with zero or near-zero income to get their businesses off the ground. Employees with jobs do none of this, therefore employees are not capitalists even if they own a stake in the companies they happen to work for.
This is why capitalists who are successful deserve to make more money than employees who have risked nothing and have never had to works years for near zero pay. Capitalism is a fair system once you think about it.
Absolutely. I agree wholeheartedly that in many cases it’s good business to share equity with employees. If I owned a large employee-based company I would do this as well. But that’s not what you’re suggesting. You’re suggesting big goverment put a gun to EVERY business owners’ head and FORCE them to hand over 40% of their company to the employees. This is dreadful to even contemplate, and no where near a free market. The government has no right to force business owners to do anything, even if you and I think it’s a good idea (which it is).
Neither do I. I worship freedom and fairness. Forcing 100% of all employees in all companies to receive the benefits of being capitalists when these employees (or at least most of them) did not take any of the risks nor suffered any of the pain to get the business off the ground isn’t fair in the least.
You’re a socialist then? You certainly sound like one.
I never said business owners are heroic. Many of them are idiots. But if you want a prosperous economy with lots of jobs, then yeah, you probably should be at least a little grateful for all those entrepreneurs who risked it all and busted their asses for near-zero income to create the businesses that offer those jobs in the first place.
Yes, of course, these business owners need employees and customers, but without anyone starting any new businesses, your economy’s days are numbered.
See how you’re already modifying your new law? THAT’S the problem with regulation. Something sounds like a great idea on paper, but in real life it causes all kinds of problems. Then you change your new law, more problems, change it again, more problems, and soon you’ve got a cluster fuck on your hands. Welcome to corporatism.
So if I have lots of employees but I work 80 hours a week as the business owner/creator, I don’t have to give them any equity then? I have a feeling you’d STILL want to put a gun to my head even though I was working super hard to grow the company I had already founded.
As I said, I’m not opposed to that. I’m 100% for it.
I’m opposed to the guns of goverment, being controlled by sociopaths like Bush, Obama, and Hillary Clinton forcing all businesses in the nation to do that. That’s insane and won’t work, as you yourself have just demonstrated.
No. That’s corporatism. Again, give me specific examples of this happening in an unregulated free market where government wasn’t involved in the creation of the monopoly.
I’m not a socialist but I’m also not bothered by the word. I think unfettered capitalism causes major problems, and I think too much collectivism also causes major problems. I just want to find an optimum balance. It’s not really about the ideology or the name of the system (we already have a mixed socialist/capitalist system) for me, just utilitarianism. As far as libertarianism goes, I get more worked up about infringements on what I can and can’t do with my body and I don’t care about economic issues so much because everyone is so economically independent that the idea of true economic individualism is an impossible concept.
One thing I find to be really strange, and I don’t have a good explanation for it yet, is that I’ve found that people’s macro-economic philosophies are often the complete opposite of how they behave in their actual lives. In my actual business, I’m very economically conservative and I never want to pay anyone more than market price for anything. At my company I’m known to be whatever the opposite of a bleeding heart is. Everything has to be efficient and I will cut any fat that isn’t necessary the second it’s no longer productive. And it’s the few people I work with who trend more towards the Democrat/pro-socialist policies who are all the hardline, cheap bastard, economically ruthless people in actual business.
But most of the guys I work with are total conservatives who don’t think there should be any progressive taxation or any socialist economic policies at all. Yet they are all the biggest bleeding heart, money-wasting, personally-socialist people I see in their actual lives and at work! We had a huge argument this year because they wanted to give the same holiday bonuses to all staff regardless of performance and I didn’t want them getting any bonus at all if they didn’t perform well, and I wanted the bonuses tied to performance so they would be variable rather than all the same or just lockstep and reflective of years of service. I lost the argument.
Anyway, I just think it’s weird that macro philosophy and personal behavior are often totally opposite. Sort of like how social conservatives are the ones who always getting caught in gay sex scandals. It’s now always the case that people hold a philosophy different from their actual behavior but most of the time it seems to be. Maybe the explanation is that people adopt philosophies intended to curtail their own internal fears or worst tendencies. So for instance, maybe socialists recognize the selfish, non-charitable, economically ruthless part of themselves and realize that those tendencies need to be counterbalanced by the system at the macro level to encourage less greed. And maybe economic conservatives fear the side of themselves that is a lazy, unmotivated loser who would stay at home doing drugs all day and collecting welfare checks if they could, so they favor a macro system intended to reward ambition and mitigate laziness. I don’t know, just a theory.
Of course, I don’t think this applies to you Caleb, because I know you’re a cheap bastard both personally and philosophically. ;D And you know I say that with affection…
Meant to say it’s NOT always the case hat people hold a philosophy different from their actual behavior, but most of the time it seems to be.
@Kate: a couple of things. In regards to your example of hotel laundry, I am guessing you have a personal stake in that somehow, but what you describe is a good thing not a bad thing. The consolidation means that laundry is cheaper for all hotels and so it is less expensive to travel. There is exactly zero opportunity for predatory pricing since it is extremely easy to start up a laundry service to compete, and trivially easy for hotels to switch services. So there is huge competitive pressure on these large laundries to stay cheap.
As to the consequences for jobs, lots of people need laudry done, so any displaced workers can readily open up new markets. I see no evidence in what you say that somehow this laudry service is going to acquire more and more power to the point that they take over the country, and no damage whatsoever in their dominating a market segment. I might add that monopolies come and go, they have a tendency to self implode.
I also wanted to mention this “share 40% of the profits” thing. For public companies employees are perfectly at liberty to share in the profits of the company by buying its stock on the market. This means an employer has a choice between paying the employee more cash money or paying them in profit sharing. There is an argument that both are a good choice (over investing in the company you work for is generally considered bad because it puts you at double risk if you lose your job.) So given that it is an either or thing why should the government insist on one way rather than the other? Plenty of companies offer profit sharing plans, bonuses etc. Me? I’d like the cash to invest it the way I want to, not leave it to the vicissitudes of management and politicians
And it really is an either or thing. Companies pay people for the value they contribute and can’t pay any more without it being worthless to employ the person. So you get your cash in profit sharing or in pure greenbacks. I’d like the money please.
You have no idea…
Fraser, there’s no problem with the laundry example now because there are still several different companies competing to keep prices low. I’m saying that if the largest of the few remaining companies were to buy out the other few, then the downward pressure of price competition would disappear. And anti-trust is one of the main things that prevents one from buying out the others. 40 years ago there were hundreds of these laundries and now, because of all the mergers and acquisitions, there are no more than 5 or 6. Absent anti-trust regulations, there would only be 1.
Monopolies do come and go once new technology makes an existing monopoly irrelevant. But that can take a looong time . I’d rather just keep anti-trust regulation and make sure there’s always competition.
On the point of compensating employees, yes, that’s possible in a public company, but most people don’t work for public companies. And I disagree that companies are willing to pay the same to employees whether it’s as profit-sharing or as wages. In my experience, companies typically end up paying a much larger share of profits over to employees if they do so with stock options or profit-sharing than with wages. Wages will always be as low as they can be. Not so with incentive equity, since it’s percentage based, so if the owners want to make more profit, then the employees have to as well. Companies don’t raise wages just because they increase profit. The owners will always pocket profit for themselves. Companies only raise wages if they’re forced to. The typical profit-sharing situation is a company that offers it in the beginning because they don’t have the cash-flow to pay market wages…and if they’re successful later on they end up paying MUCH more to employees through profit-sharing than market rate for wages. That’s how you get low-level staff who are millionaires because they got stock options in a start-up. But once a company is successful, it will rarely share profits with employees, who are just seen as a liability and a reduction in the profits of the owners. The best possible situation for owners of a company is to have no employees and to have free labor (slaves or robots). It was the law that got rid of slavery, it was the law that requires paying minimum wage, and one day there might be laws preventing use of robots…but these all speak to the same issue, which is that from the perspective of the capitalist, labor is a liability. It’s why I’d prefer workers be capitalists themselves by having an ownership stake.
Anyway, my broader point is that capitalism rewards those who are first-in, those who are first-in have a vested interest in keeping everyone else out for as long as they can, and power consolidates and begets more power. These are my observations from my actual life. When you are poor and have nothing, it is very difficult to get anything and no room for making mistakes. But once you do have some abundance, it’s pretty damn easy to keep it, and you almost have to try on purpose to screw it up and lose it. Hell once you have abundance, people start offering you free stuff and going out of their way to help you (because they’re hoping you’ll share, but still). The more you have, the easier things get. This applies in dating markets, job markets, financial markets, everything.
So from what I can tell, the natural state of things in any market is to have a very small elite who has access to virtually all the resources, and a mass majority with almost nothing. I can’t think of a single historical example where we have seen anything other than that eventual result in any market, if there’s no restrictions or redistribution. The “middle class” in both economic and mating markets was created in the 20th century through regulation, restriction, and redistribution. There was no middle class prior to that. In a natural, unregulated system, the gains all go to the top and everyone else is dependent on their charity, and the winners keep all the gains until it’s taken from them by force.
@Kate, thanks for your reply. You are correct that the problem with monopoly pricing is that there is less downward pressure on prices absent competitors, but I would like to ask you this. If you go to a ball park the hot dog vendor has no competing vendors. Why doesn’t a ballpark frank cost five thousand dollars?
The answer is simply this — no business, no monopoly has no competition (absent government intervention.) At the very worst, as is the case with ballpark franks, you are competing with “doing nothing”, in fact for many start up companies that is their biggest competitor. You are also competing with alternatives (the candy bar in my back pocket) or enabling a black market when there is legal force behind the monopoly (such as sneaking in my own ballpark frank.)
For laundry there are no barriers to entry. Anyone with a washing machine can do it. Now perhaps economy of scale means that the big guys can do it cheaper, but again that is a good thing. The ever present threat of a competitor though keeps a lid on grossly escalating prices. And that lid is less than you might expect. When the big company invests in all that machinery they need a return on that capital. The money is lent to them one way or the other either in actual loans, or investment capital or even just opportunity cost of not investing the money else where. That sunk capital has a cost in either loan interest payments or in lost investment growth. So all that capital has a cost that is built into their pricing. If they elevate their prices too high above total cost (including capital cost) then someone can simply borrow that same amount of money and build a competitive product. After all it is laundry, it is not like it is a complicated business with some special clever, secret business techniques. It isn’t quite as simple as that of course because of what economists can “transaction costs”, but the profit is in those transaction costs and they can be managed by upstarts. (Transaction costs include all those diseconomies of scale I mentioned.)
In terms of how much people get paid, I have employed many people before and I assure you when you are thinking about hiring someone you do not think of their salary as their cost. You add up all the costs of employment including FICA, profit sharing and bonuses, benefits, cost of workplace, cost of management etc. etc. All added together is what you consider the cost of employing that person. If they don’t generate more value than that number you simple don’t employ them. A dollar in each of those buckets is exactly the same. So it doesn’t matter how people get paid, salary or profit sharing, it is all the same sort of dollar. One thing that does matter is tax treatment (for example, dollars spent on benefits have a higher benefit to employee than cost for employer because of favorable tax treatement.)
A couple of other things about this: as you say equity and some other special types of pay are larger. But the reason for this is because they vest. That means that there is a cost to the employee (they must give up other opportunities to vest their pay) and a benefit to the employer (a stable workforce.) So these types of pay are discounted because of this financial exchange.
Also, a question for you: in the case of your 40% of profits go to the employees: what if the company makes a loss? Do the employees get that 40% taken out of their paychecks? If they get laid off are they still required afterward to compensate the employee for the loss they were partly responsible for generating? Entrepreneurs and investors are paid because they put their capital (or sweat equity) at risk, and were willing to accept the risk of total loss. That is part of the equation too. And of course this applies equally to the millionaire first employees of a start up. They take risks, they get a reward.
And you are both right an wrong when you say that employers only raise wages when they are forced too. That is kind of true in a sense. But the most common force is market forces. When employees are rare and hard to find you have to attract them with better money. This is especially true of employees who have made themselves valuable by acquiring special skills. I see it all the time in the market. I see it all the time. I work in computer software and the rate it costs to hire a programmer is up 50% since the 2008 crash.
OK, I think you had other points but I have rambled on long enough.
@ Fraser There are so many points here, and I don’t disagree with anything you said. I don’t think what you’re saying and what I’m saying are mutually exclusive, since ballpark franks won’t ever cost $5k, for the reason you point out, but they’re also running at 5 times what they’d cost if the vendors didn’t have exclusive leases and no competition (at least during the term of their lease).
So one thing we’re talking about here is the fact that much of the time, it’s more profitable for a business to figure out ways to reduce or eliminate competition than it is for them to figure out new ways to innovate or please customers. Virtually all businesses, once they have some initial success, will start trying to create barriers to entry for competitors, delegitimize or otherwise disempower existing competitors, and otherwise reduce competition. It’s natural. And one reason I don’t just trust businesses to regulate themselves, since it’s in the interest of existing businesses to discourage competition. Only new businesses really want to lower competition barriers.
Since I came over here from the BD site, I’ll offer an analogy with relationships: once a guy is successful with getting a woman or women, keeping those women is often easier if he can reduce competition, rather than having to stay competitive himself. If he can send off his younger, virile competitors to war, or teach them they can’t hit on his women, or keep his women squirreled away somewhere away from other men, it’s probably more effective for him than having to constantly be the most competitive. So reducing competition is exactly what those who already control a resource (whether money, land, women, whatever) always do. And why I disagree entirely with conservative or libertarian ethos that don’t do anything to counterbalance this tendency.
Your point about reward being tied to risk is a good one and I’m not sure what the precise balance is to optimize rewarding risk-takers sufficiently. One could argue that right now we already tilt the playing field pretty far in favor of risk-taking, since we have corporations and LLCs that limit a capitalist’s downside and liability, while his upside is essentially unlimited. But I certainly agree that we should offer greater reward to the individuals who took greater risks.
Every industry is so different that there’s probably no across the board rule that would work in each situation. I just know that right now, the allocation of resources does NOT seem optimized. You’ve got people with what I would consider money-addictions stockpiling far more than will ever bring any utility to their lives, while there are masses for whom a very little bit of extra money would have a lot of utility, both for the individual and in the aggregate by stimulating demand and growth in the economy. Anything we do to re-allocate resources or try to counterbalance the forces that lead to power accumulation would be rough justice at best, since it’s too complicated to figure out. Yes, yes, I know, the “free market” is better at allocation than central planning (at least, that’s what I was taught in school as a child, I actually have no idea). But perhaps one day, software written by someone like yourself (or software written by software) will be able to precisely determine the optimum allocation of profits in order to promote competition and growth, and succeed where we humans have thus far failed.
Or possibly Mercantilism.
If I were king for a day, I’d divide companies into holding companies and just plain old companies. Plain old companies may not hold shares in other comapnies. Holding companies may, but their shares must be owned by natural persons who are citizens of the country.
If a company wants to raise capital, it can issue bonds. It can take out loans. But no more ridiculous twelve-layers-deep corporate structures, where no-one can be identified as the owner.
Boards of directors shall be criminally liable for what the companies they direct do. Persons guilty of white collar crime (and being a director of a company committing crimes ) may not hold directorships in holding companies.
@ Paul Ha, you would have to be king. 🙂 Because while those are good ideas, there’s no way they’re getting through the legislative process — more than half the business world would immediately be in violation. And they’d make sure their representatives didn’t support it. The laws limiting liability for directors and allowing ownership with no public records is exactly the kind of thing that’s easy for business to get passed, because they can pay lobbyists, while the regular public doesn’t have the attention span or knowledge to care about such non-visceral, wonky, bloodless issues.
It’s not corporatism, it’s judaism
Thanks again for your interesting reply @Kate, I enjoy your perspective.
A couple of things.
You are certainly right that businesses will try to kill their competition rather than improving their products. Adam Smith, father of modern economics famously wrote “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public” .
However, here is the question: what tools do they have available to do this? Really there are two categories of tools available to them. I don’t know correct terms an economist would use but I’ll call them intrinsic and extrinsic barriers to entry.
Intrinsic barriers to entry are tools that the business has created as a result of their product or service and the effort they put into it. You mentioned investment in plant for laundry services. That is one. Another might be Google who spent millions of dollars acquiring satellite imagery to provide a great Google maps experience. These are huge barriers to entry that make it very hard for a competitor.
However, as with the laundry service, if these advantages are over exploited then the spread between the capital cost of replicating it and the carrying cost of the sunk capital gets small and eventually negative. If you abuse your monopoly you erode it and eventually competitors can eat you.
The other type of barrier are extrinsic ones — where some force outside the product or service prevents your competitors. An example would be regulatory burdens. A great example of that would be the Sarbanes Oxley Act that has made it all but impossible for small to medium sized companies to go IPO and raise capital on the public markets. Another example would be regulatory burdens, such as the cosy relationship between Boeing and the FAA. All these are laws imposed on all companies that asymmetrically benefit one over the other.
Perhaps one of the most important of these is the patent system — a law which is SPECIFICALLY designed to prevent competition. There are many businesses that you can’t compete in because it is literally illegal due to the patent situation. Some might argue that it is a small price to pay for innovation, but I don’t agree at all, it is a nightmare that gives us, among other things, unconscionable prices for life saving medications.
So here is the point — the intrinsic barriers are generally good — there are where someone else has invested time, money and effort to bring the general public a better, cheaper product, and for that company to maintain its lead it needs to maintain investment in the wall — everyone benefits from their greedy aspirations. For extrinsic barriers, almost always produced by laws and regulations — there is no way around them. So the greedy corporations exploit the government to their advantage, and the corporation and the politicians win at gross cost to us mere consumers and regular folks.
More government is not the answer, less government is the answer. It allows the bear fight between greedy capitalists who, to win our business in the absence of government force fight with each other to provide better services at cheaper prices, unable to use the force of government to beat each other up. Being better and cheaper is their only tool for winning your business.
“This is why capitalists who are successful deserve to make more money than employees who have risked nothing and have never had to works years for near zero pay. Capitalism is a fair system once you think about it.”
I agree. I learned so many things from this article. Thanks for writing.
If your run your business well, you make a lot of money and keep the vast majority of it, since under capitalism, taxes are really low. This is because the government is very tiny and doesn’t do much. Tiny government equals super low taxes.
This is 100% bullshit and flies in the face of all common sense. What do you think a business is going to do once it gets large enough to have power? That’s right, lobby the government for less taxes on huge corporations like themselves, and higher taxes on smaller businesses and workers. Which is exactly what we have now. A system where corporations get the easiest tax loopholes, have elaborate schemes for avoiding the rules that they made up themselves and fed to the government, while a small business owner or middle class or poor laborer has absolutely no way of avoiding their taxes.
So called “big government” exists because it benefits mega corporations, which is the endgame of capitalism. “Corporatism” is simply the end result of capitalism after enough wealth is concentrated in one area.
They can only do that if government has the power to do those things. If government is tiny and didn’t have that kind of power, corporations wouldn’t lobby it, since government couldn’t help them.
If a giant corporation like Comcast tried to lobby the US government in 1852, nothing would happen. The government would just laugh at them and say, “We can’t do any of that shit. And if we did, we’d be violating the Constitution so we’d be fired/impeached. So fuck off.”
Exactly. That’s the system we have now. Corporatism. I hate it.
Capitalism doesn’t have and endgame just like socialism doesn’t have an endgame. Capitalism is simply one economic system, like socialism or communism.
I do agree that all systems eventually become other systems, since no system is permanent. (Capitalism eventually becomes socialism. Socialism eventually collapses, etc.)
Crony Capitalism is little more than corporate nepotism.
wherever nepotism exists, there are no controls on companies to produce shared benefits. Inconsistent for the theory of capitalism to produce the most for the many.
Crony capitalism produces the most for the few, and using government to acquire more is greed that serves the growing few.
capitalism can produce the most for the many but unequally distributed, works against prosperity to provide the most poverty wide spread, and detrimental