The Case for Neo-Capitalism
© 2020 Karl Albrecht. Adapted from Blueprint For a New America, pp. 227+
Reading Time: 8 minutes
“When everyone is out digging for gold,
the business to be in is selling shovels.”
According to Milton Friedman, professor of economics at the University of Chicago business school:
“There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits, so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
The billionaire capitalist Malcolm Forbes, founder of the Forbes Magazine publishing empire, agreed with Friedman. Forbes put it even more simply:
“The only sin in business is not making a profit.”
A century earlier, the legendary robber baron John D. Rockefeller had shown the way to fabulous riches in the oil business by amassing capacity and exterminating his smaller rivals. He expressed his philosophy in equally blunt terms:
“The day of combination [monopolies, mergers, acquisitions, and trusts] is here to stay. Individualism has gone, never to return. Competition is a sin. The American Beauty Rose can be produced in the splendor and fragrance which bring cheer to its beholder only by sacrificing the early buds which grow up around it. This is not an evil tendency in business. It is merely the working-out of a law of nature and a law of God.”
Before we take up the question of whether, how, and how much to rein in corporate expansionism, let’s pause to acknowledge a very big truth:
The corporation, as an economic entity,
probably surpasses all other human inventions
in terms of the benefits it has brought to modern societies.
For all of our ambivalence toward corporate influence and our concerns about overreaching corporate power, we must acknowledge the enormous capacity of this remarkable mechanism for getting big things done.
Doing big things in a big way—building a fleet of modern passenger airplanes, sending a spacecraft to Mars, creating a shopping mall, or assembling an aircraft carrier—requires pooling resources, including money, physical equipment and facilities, and human talent. Even if the government pays for it all, nothing happens without well-organized capital, and lots of it. No band of individuals or small business owners, however well motivated, could have built the national railway system, created giant oceangoing cargo ships, or produced enough war materiel to defeat the Nazi empire.
Corporations did it, and did it well.
Rockefeller had it wrong, of course. The great benefit of the corporation as an economic mechanism and a strategy for development lies in its capacity to concentrate resources, not in its capacity to concentrate wealth. That distinction makes all the difference. Any workable policy for oversight will have to support the capacity of corporations to concentrate resources, while limiting their tendency to concentrate wealth in the hands of a few insiders. We need to treat the corporation as a basic component of our modern Republic.
Paleo-Capitalism: A Dying Ideology?
Rockefeller, Carnegie, J.P. Morgan, Henry Ford, Milton Friedman, Malcolm Forbes, and a long line of wealthy older male capitalists—or paleo-capitalists, we should say—represent the most extreme ideology of dog-eat-dog commerce. They have long ignored or disavowed the disastrous impacts of unbridled corporate activity on the Commons and have typically rejected any social or moral responsibility to anyone other than their shareholders and creditors.
Ironically, most of the robber barons turned to philanthropy in their twilight years, setting up charitable foundations bearing their names. Presumably, they hoped to imprint a more humanitarian image in the public mind after they’d gone—and perhaps hoped for what my religious friends call “celestial fire insurance.”
In the modern era, mega-corporations still rule the land, perhaps more powerfully than ever. As of this writing, the 10 biggest companies in the US, with combined annual sales of over 2 trillion dollars, ranked as follows:
- Walmart—mega-stores, $514 bn.
- ExxonMobil—energy company, $290 bn.
- Apple—consumer electronics, $265 bn.
- Berkshire Hathaway—holding company, $248 bn.
- Amazon—online retailer, $233 bn.
- UnitedHealth Group—health insurance, $226 bn.
- McKesson—health products, $214 bn.
- CVS/Health—pharmacies, clinics, $195 bn.
- AT&T—telecom, $170 bn.
- AmerisourceBergen—healthcare, $168 bn.
The concern many social activists have with the mega-corporation goes to the simple fact of self-reinforcing advantage. Bigger companies can compete in ways that smaller ones can’t. Walmart probably stands as the most famous example of this effect.
Typically, when Walmart opens one of its big-box mega-stores in a mid-sized community, it attracts so much of the consumer demand that many of the smaller retailers just can’t survive. Because of its enormous size and buying power, the company can cut prices so low that the small fry can’t possibly match them.
This price dominance advantage, as economists call it, lies at the heart of the paleo-capitalist theology. As both John Rockefeller and Milton Friedman would advise, the devout capitalist pursues growth above all. The rewards of growth—the competitive advantage and marketing power that come with accumulating cash—include the satisfaction of exterminating one’s competitors.
If Walmart stands as the big success story of brick-and-mortar capitalism, we’d have to nominate Amazon as its counterpart in cyberspace. In all fairness, we have to acknowledge the ingenuity, foresight, and determination of the founders of both of those enterprises. Both Sam Walton and Jeff Bezos stand as remarkable examples of entrepreneurs who saw the power of “scaling,” as the popular term goes. They built financial empires by taking advantage of the realities of the American business environment.
Amazon, for its part, went over to the dark side after it became the dominant Internet retailer in the book business, and later moved on to an unlimited range of products. Using brutally competitive purchasing and pricing methods, the company brought the book publishing industry to heel, as it took control of half of the distribution of books in the US.
Amazon became the alpha player, partly by taking losses for the first four years of its existence, racking up over $2 billion in red ink before the turn. It offered big price discounts to customers on one end and squeezed the publishers for lower and lower wholesale prices on the other.
While business experts questioned the need for such deep discounting—Amazon had already become extremely popular for its near-infinite inventory of titles and convenient customer experience—the company persisted, devastating the profit structure of the publishing industry.
The same practices that made Amazon a hit with book buyers also made it the most despised company in the publishing business. Mainline publishers, small independent publishing houses, bookstores both large and small, and even authors have all felt the squeeze of the Amazon monopoly.
In one provocative episode, CEO Jeff Bezos demanded quarterly rebates from the large publishers, on top of discounts off list prices of 55-60 percent. When one of the “Big Seven” rebelled, Amazon’s programmers removed the “buy” buttons from all of that firm’s titles, bringing their online sales to a halt. A group of the biggest publishers took him to court and he backed off. But during the few weeks of the episode, he made his monopoly power brazenly clear.
For their part, those who run the mega-firms, as well as economists and media cheerleaders who encourage them, offer a formidable defense of the monopoly: customers get more for their money. Even the anti-monopoly activists have to concede that a big-box store of the Walmart species can offer a breathtaking selection of products, which the mom and pop players couldn’t possibly stock. In practical terms, why would a consumer seek out a small appliance retailer, with a narrow selection of appliances and pay more for their purchase than they know they’d pay at the big-box store?
To counter, advocates for a kinder, gentler form of capitalism point out that, while the mega-firm offers benefits for customers, it harms other participants in the commercial ecosystem, including authors, smaller entrepreneurs, and small suppliers. They question the morality—and, perhaps, the economic logic—of sacrificing the interests of one part of the ecosystem to favor another. The dog-eat-dog model leaves a lot of dead dogs.
In recent years, courts have often ruled in favor of dominant firms accused by their rivals of predatory pricing—selling products below cost to exterminate their competitors—on the sole premise that the customers pay less.
Cyber-Capitalism: Feudalism Reincarnated?
Some prognosticators say we’ve moved into a new phase in business—cyber-capitalism—which they believe will radically change the economic and social landscape. The rapid spread and acceptance of the digital experience has almost no parallel in our history, with the possible exception of television. Our lives now revolve comfortably around knowledge at a distance—fingertip access to worlds of information, online shopping, and management of our personal affairs. In half a generation, the vast majority of the world’s affluent people have become digital citizens.
Looking back, however, it seems that some of the grandest fantasies promoted by the early philosophers of the digital age haven’t really caught fire. Some have misfired and some even backfired. We didn’t get some of what they promised us, and some of what we got we hadn’t expected.
The digital pundits declared that the Internet would create a “new economy,” somehow vastly different that the one we’d always known. In the red-hot Nineties, before the historic “dot-com” crash, that phrase became the defining mantra of the Internet priesthood.
A wider, flatter, democratized, many-to-many marketplace would mean that every entrepreneur with a dream and a computer might get rich. “Old economy” companies would go the way of the dinosaur. The slogan became “e-business or out of business.”
But it didn’t work out that way. The Internet actually destroyed more fortunes than it created.
Ironically, a new set of monopoly firms now dominates the vast online marketplace: Amazon, Apple, eBay, Facebook, Google, LinkedIn, Twitter, Yahoo, Youtube, and a few others. Microsoft still dominates the office software market.
We see more monopolization now than has ever existed in “real space.” Predictably, the big fish have devoured the small fish. Google acquired Youtube, Microsoft acquired LinkedIn, and Facebook acquired Instagram and WhatsApp, two of the most popular social media companies.
The supposed new economy of the Internet looks a lot like the old economy, only more so. And the mega-firms that had always dominated the physical marketplace, like Walmart, General Motors, Ford, and ExxonMobil, simply extended their operations into cyberspace and kept growing.
So, the feudal model of commerce—the wealthy landowner made richer every day by a horde of toiling peasant farmers—never went away. It just got reincarnated in modern clothes. The much-touted “gig economy,” for example, based on supposedly democratic models of cyber-commerce such as Uber, just became a hipper version of the plantation-and-sharecropper system.
As of this writing, Uber claims almost 5 million free-lance cab drivers all over the world, providing their own vehicles and mostly earning something in the neighborhood of a minimum wage.
Ironically, Uber and its nearest competitor Lyft have racked up over $10 billion dollars in red ink so far, and neither firm has a clear path to profitability.
It also became painfully evident to many business operators that the Internet wouldn’t become the magical fountain of profits they hoped it would. In reality, it turned into a profit grinder. Price transparency, dynamic pricing, and hyper-competition, driven by price-comparison Web sites, put tremendous pressure on retail prices across the board. If the people running airline companies, for example, held any hope of escaping from their decades-long price wars, they saw those hopes dashed by a flock of fare-shopping sites.
The Internet business has become a boundaryless battlefield. The surviving giants increasingly try to invade one another’s turf, offering the same or similar products and steadily commoditizing the online experience.
Entrepreneurs with ideas and energy will still get their turns at bat, but the days of garage to global have mostly gone. Small businesses will become increasingly dependent on cheap and accessible cloud-based software services controlled by the digital giants.
Just as the US Congress considered breaking up John Rockefeller’s prized Standard Oil Company—and they finally did, in 1911—the same hue and cry has arisen about the mega-firms of the digital age. More and more economists, activists, and politicians have called for the break-up of the cyber-monopolies, especially Facebook and Google.
This time around, though, they’ve gotten worked up about the issues of digital privacy, illegal manipulation of social media platforms, and foreign interference in public elections. They’ve mostly given up on free competition in cyber-space.
Neo-Capitalism: A New Model for a Democratic Republic?
In recent years a new and more enlightened approach to commerce has emerged, which we might call neo-capitalism. In its most advanced form, it recognizes a number of key principles:
- The corporation survives and thrives by means of its relationship to the Commons.
- It benefits from the resources of the natural environment and makes use of the infrastructure of the built environment.
- In a sense, the corporation holds a license, so to speak, for access to the Commons, and it should pay for that license by returning value to the Commons.
- The primary purpose of the corporation remains to return a profit to its owners. By law, the board members and the executive team serve as stewards of the shareholders’ interests.
- But they must reconcile the interests of the shareholders with their responsibility to the Commons and to the society, in terms of the three figurative bottom lines: People, Profits, and Planet.
- The corporation owes fair and reasonable treatment to its employees, customers, and suppliers; responsible use of the assets of its shareholders and creditors; and ecologically responsible business practices that preserve natural resources and sustain the built environment.
- The federal, state, and local governments serve as stewards or custodians of the Commons, on behalf of the society. The role and responsibility of government in the commercial dimension of the Republic calls for ensuring that all enterprises, of all types and sizes, carry out their obligations to protect and preserve the Commons; to return value to society and the Commons; and to act ethically and responsibly in their dealings with members of the society.
- Governments have a legitimate role in promoting free and fair competition, which includes preventing the mega-firms and deep-pocket capitalists from running roughshod over the small fry. That implies a proactive role in reining in big-company excess, and includes creating advantages for small businesses that offset the disadvantages of their size.
Arguments abound over the means, methods, and limits of this oversight. Considering that governments at all levels serve as custodians of the Commons, it follows that they should have the authority, the means, and the methods to steer all enterprises toward responsible, sustainable development.