Understanding America's Capitalism
Capitalism - innovation and competition to benefit consumers with ease of access and lower prices... right?
No candidate wishes to discuss our nation's economy with you. Sure, they’ll quote you job numbers, unemployment, what the DOW Jones is at, how much our GDP has changed, point out some successful businesses, and more. But none of them have the desire nor the capability to discuss our economy as a whole with you, the people. Truth be told, I really don’t have the capability or credibility to discuss it with you either. None of us running for the office of President are career economists with any sort of academic credentials on the topic.
However, whereas the other would-be candidates think they’re being smart by avoiding the trap of economic discussion, I sincerely want to engage you, the people, in an open, honest, and as truthful a conversation as I can muster concerning our mixed capitalist economy. I am unafraid of being called out for incorrect data or poorly explained concepts. It would be welcomed! For in having this conversation, you can see my logic, my reasoning, and my thought process, thus giving you more insight into me as a potential President of the United States. The other would-be candidates are afraid to show you their logic and reasoning. Why, I don’t know. They seem to be content on giving sound bites that do nothing but reiterate their message; no “why” is being given outside of some superficial or super simple explanation. Explaining our economic decisions isn’t Occam’s Razor. They are complex, multi-tiered ideas that have entire college courses dedicated to them. It’s a bit closed minded to think we can explain why taxes should be higher or lower in a few sentences or why entrepreneurship is important. Regardless, let us see if we can’t open up some minds anyway.
I apologize in advance if this is boring.
To begin, let us define our nations’ economy. We are considered a mixed economy, part free market capitalism and part planned government socialism. The market economy portion of our nation revolves around the usual aspects of capitalism- namely supply and demand along with competition. The private sector is alive and well in America, for sure. But the public sector is kicking just as much. The planned economy portion of our nation revolves around social programs like Social Security, Medicare and Medicaid, Food Stamps, Section 8 housing, and even Pell Grants, programs that help take care of our fellow citizens and even spur innovation in some ways.
Understanding our nation’s economy, in my opinion, starts with an understanding of the philosophy that underlies our nation as a whole. As you may have heard me say before, my belief is that America’s philosophy is reflected in our Declaration of Independence. Humanity is endowed with unalienable Rights, Rights which I feel to be life, love, liberty, honor, humor, and the pursuit of happiness. From there, as our forefathers said in our Constitution, governments are instituted amongst men to secure these Rights. Humanity forms the foundation of our nation’s philosophy; it acknowledges the critical aspects intrinsic to us all, aspects that make us each unique and special, aspects that make us worthy of protection.
A point I hope both Democrats and Republicans agree on is that people sometimes need help. Individuals and families may need assistance. Perhaps they were in a car accident or downsized after a company merger. Maybe they are a war vet trying to get re-acclimated to life at home after multiple tours overseas. Maybe they are a family who was misled by a bank into buying a home they really couldn’t afford. Thousands of reasons exist for why people- young and old, rich and poor- may need a helping hand from time to time. I’m sure all of you can think of at least five reasons. I bring this up because it’s how we handle these situations that show our progress as a society.
Let’s look at two perceived extremes. One extreme says every hardship should be met with aid. Lose your job? Here’s unemployment, you’ll find a new job soon. Get fired? Here’s unemployment, you didn’t deserve that. Get fired for getting high on the job? Here’s unemployment, those guys were buzzkills anyway. Still haven’t found a job after five years of what you feel to be active looking? No problem, here’s some more unemployment, some potato chips, and a number to the local weed dealer. This gives you the perception of one extreme method to handling the social aspect of our economy.
The other extreme goes like this. Lose your job? Tough, life ain’t fair. Get fired? Tough, you probably sucked and deserved it. Get fired for getting high on the job? Tough, you were dumb enough to get caught and now there’s more weed for me. Still haven’t found a job after 26 months of what you feel to be active looking? Tough, should have chosen a real career you worthless hipster.
That last extreme is one which no person should have to deal with. The first extreme, likewise, is one which no person should have to deal with. But both extremes do have aspects of truth to them. We can’t coddle everyone, helping out whenever a hint of hardship arises; likewise, we can’t go super Darwin, declaring that only the fittest should survive. To me, the proper way to understand the ebb and flow of individuals in our economy is somewhere in the middle. We need personal responsibility and to make individuals aware of the role they play in the great cog of American capitalism while also making sure people receive life and health benefits after they become too old to work or unemployment if something bad happens to themselves or their company through no fault of their own. This is why we have programs like Social Security and Medicare. No politician wants to publicly acknowledge cuts to either program because they are popular and they work. They help take care of Americans who, for the most part, have worked hard and contributed to the greatness of this country in one way or another, be it through having a manufacturing job or being a stay-at-home parent helping to raise two kids. This, again, goes back to what I feel is the underlying philosophy of America: our unalienable Rights and equality of opportunity.
Unalienable Rights are covered through the planned portion of our economy. The other part of our economy, the free market, I map to concept of equality of opportunity, a concept Presidents of the past and I have spoken about. Like all free markets, the invisible hand governing the laws of supply and demand reign here. If supply is low and demand is high, there’s profit to be made; likewise, if supply is high and demand is low, expect some sales or watch companies go out of business. This is an overly simplistic explanation, with proof of such simplicity being clear in the oil price fluctuation since January 2015.1 Supply hasn’t outpaced demand to the point where prices should drop 50% over six months. Thus, something else besides immediate supply and demand is in action, something which none of us may ever really know. It could be speculation, or hedging, thoughts that future supply will take off and vastly outgrow demand.
I bring this up to point out how more is happening in our economy and the world economy than mere laws of supply and demand. It is important to be aware of circumstances such as these even if we don't fully understand them, for there are those in power both here and abroad that would seek to maximize revenue and profit at the expense of all else, even if it means subtle market manipulation with stocks, bonds, currency, commodities like oil or frozen concentrated orange juice, or through other avenues such as legislation, trade agreements, being socially irresponsible, and more.
Because of this, equality of opportunity is of paramount importance within our economy and the world economy. Equality of opportunity is giving businesses a chance, from ease of establishment through build out, growth, and even destruction. It represents the foundation of our free market through the "magic and mystery of competition." Unfortunately, while competition plays an important role in our economy, it's also something every company seeks to avoid.
Competition is what spurs innovation, making companies invest in new technology or techniques to bring about advancements to society, in other words, filling a demand by consumers and businesses or even creating new demand that may not have existed. Competition also benefits us through lower prices in the consumer and business worlds. And competition, theoretically, is essential to equality of opportunity because if certain competing members are given unfair advantage over others in the form of legislation or monopoly-like status, then innovation stagnates, prices go up, and everyone suffers.
Everyone except the company's board and the stock market, that is.
Being in a position of power in the market with minimal to no competition is a recipe for economic success, assuming your product is in demand. There's no doubt about it. And when a firm reaches that point, where they have achieved a threshold of market share or monopoly-like status or legislative advantage against other firms competing in their sector, they usually wish to maintain "status quo." We see this in politics as well. How many politicians do you think want nothing more than to stay in power once they are elected, not because they really want to help their constituents, but because they want that special treatment, the power, the favor which is granted to them? Maybe I'm being overly cynical, but I imagine a number of our politicians are like this. And all of our businesses, because the entire point of going into business, according to many, is to make money.
Some are content with making just enough money to get by, to fulfill the basic needs of food, water, clothing, and shelter. Others won't be happy until they have a fleet of Bugatti Veyrons lining their garage made of Honduras Rosewood and carbon fiber. Every advantage they can squeeze out of the system, they will. When it comes to the economy, for many, they see the market is God.
It may seem blasphemous or heretical to say such things, but there is a sense of Truth to that idea. There are those who put their faith in the market, their belief in the market, who follow the rituals of the market, and praise the market as if it was a religion. Unfortunately, this "God" in the form of the world market, is never satiated, never satisfied, always wanting more. As the saying goes, what do men with money and power want? More money and power.
And thus, the American Delusion is born.
The American Delusion is the antithesis of the American Dream, a nasty impurification of the idea that hard work and universal moral kindness can help bring us happiness and success in life. This Delusion is born in greed, desire, selfishness and contempt for anyone who might oppose us. It is a foul stench, a blight upon our country that seeks to consume everything for the sake of market share and profit. This Delusion gives us permission to lie about whose idea it was in a board meeting, it says that people don't really need clean water because that would negatively impact our stock price, it says that owning 85% market share is totally fine even if 95% of your customers think you are a horrible company that screws them over. It's a Delusion that gets pulled over our eyes and the eyes of our representatives. The market God wields the power of the dollar sign with a care only for itself. When you live a life with a purpose of maximizing profit at the expense of all else, you become overly selfish. It brings about a sense of entitlement. You “deserve” that extra money, those profits, even if it does hurt others.
At the end of the day, in the world were the market is God and the American Delusion takes hold, the world economy serves no purpose other than to maximize shareholder value.2 Good products, good services, employees that are taken care of and want to work there, benefits in the community, and more become afterthoughts. Expectation and speculation drive large companies, with "earnings per share" being the key metric. Earnings per share coupled with irrationality keep the Delusion alive. Stock prices have always been somewhat capricious- what one person is willing to pay another for part ownership of an intangible organization seems awfully silly when you think about it. That our corporate philosophy for the last 30-40 years has been to maximize that perceived value of some intangible organization solidifies the American Delusion in my mind.
Let me offer a counter-argument for why maximizing shareholder value should benefit society as a whole. If there are 10 million shares of a company, with 10 million people each holding a share, then maximizing shareholder value becomes a way to maximize income for 10 million people. Furthermore, those 10 million people, as equal part owners, can determine the direction of the firm. Democracy in the board room would exist and equality of opportunity, one of the key aspects of our nation's philosophy and of democracy as a whole, would blossom. Because ownership of the firm emanates out amongst the populace, business objectives would then take social well-being into account. It's hard to imagine those 10 million shareholders willing to trade clean water for a 2% increase stock value. People are less likely to wish ill on others when those others can potentially wish ill back on them, after all, and with 10 million equally powerful shareholders, there is a lot of incentive to not screw over the other 9.999 million.
But we don't live in a world like that. We live in world where stock options, C-suite bonuses, and short term quarterly returns play a major role. The Delusion envelopes these firms which ask what the fewest number of people we can hire to do the most work is, irrespective of how much work is really involved; it asks where production is cheapest, even if that location is not America; it asks not what we can do to make our product better, but what can we do to keep others from stealing our market share, to keep them from producing equal or better products, and from giving us competition in general; it hoards shares amongst the few, creating incentive for said few at the expense of all others- even the firm’s own employees doing the work in the first place. The notion of a democratic board or even appeasement of all shareholders goes out the window entirely. If there are 10 million shares, but three people own six million shares while four million people own the remaining shares, the direction of the company will always be what those three people want.
Thus I come back to the free market portion of our capitalist economy, linked together with equality of opportunity. There are many who will listen to what I just said and feel that I'm against corporations, against capitalism, and think businesses are just greedy bastardcake monsters with selfish-cream filling. They might read it as an attack on grossly overpaid executives. Maybe they think I want legislation to tackle income inequality. "Throw more government into the problem," is what my opponents might come back with.
All of them are wrong because capitalism is a thing of beauty that's been perverted since the '70s into something disgraceful. Corporations have been victim to this, being forced into a game that some would rather not play. Income inequality is real and the overpaid executives are a problem, but legislation and throwing more government bloat into the mix is not the answer. The real answer is a return to good capitalism, the kind that births innovation, jobs, and brings about more business dynamism. And the best thing we can do to accomplish that goal is simply this: increase competition.
It really is that simple. Increase competition. That's the biggest part of my proposed solution to economic woes we face now and in the future as a nation. Globalization is forcing competition on us whether we like it or not, and American firms are shacking up for the long haul with a desire to do nothing more than maintain or increase stock price. Lack of competition allows companies to do this; using cable providers as an example, if Comcast controls 90% of a market, what incentive is there to do anything but raise prices? At least they're being transparent about it, telling you what silly fee is being added to your bill instead of just raising your price with no explanation. Competition is what happened in Austin, Texas when Google Fiber came into town. They offered gigabit internet service in a city where internet speeds and prices were pretty pathetic. What happened next? AT&T was forced to compete and said they, too, would offer gigabit internet service in the city.3 Prices also came down for consumers because of the increased competition. And the cost of all this competing for AT&T? I have no idea, but their stock price is up 6% or so over during the first six months of 2015, so it couldn't have been that bad for the company.
Let me quote Peter Drucker on the purpose of a business. By understanding the purpose of a business, we understand why competition is so critical to a capitalist economy:
There is only one valid definition of business purpose: to create a customer… It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or service converts economic resources into wealth, things into goods. What the customer buys and considers value is never a product. It is always utility, that is, what a product or a service does for him.4
Creating a customer creates a source of revenue. The purpose is not to make money, but rather to create utility that people want to spend money on. Because of this purpose, a business has only two functions to accomplish this goal: marketing and innovation.5 Marketing here does not mean advertising. Sure, it includes advertising, but much like a square is a rectangle while a rectangle is not necessarily a square, advertising is marketing, but marketing isn’t necessarily advertising.
No, marketing is something that businesses are slowly catching up on. With the help of the internet, businesses around the world have discovered that people don’t fall into generalized buckets. Instead, we are an incredibly, magnificently diverse bunch with a myriad of needs and interests. Marketplace demands can get super, microscopically specific to fill niches. Remember when “techno” and “club” music were their own complete categories? Now it’s broken down into so many subsets, even I can’t keep up. Dub techno, acid techno, ambient dub, synthpop, darkcore, breakcore, deep house, disco house, Ibiza trance, vocal trance, and scores more. These are real market needs, thus marketing by firms seeking to create customers demands they start with the realities and values of the customer and that their goal must be satisfaction of customer needs. Businesses should not ask “what do I want to sell?” Rather, they should ask “what do consumers want to buy?” The aim of marketing is to know and understand the customer so well that the good or service being offered fits them and sells itself.6
It follows that this way of understanding marketing requires firms to know that change is natural, acceptable, and, honestly, required as the market grows, expands, and alters its demands. This leads to the second function of business in the quest to achieve its purpose: innovation. Firms must provide different, better, and/or more economical goods or services in order to retain customers, create new ones, and remain aligned with market realities.
That, America, is what the free market is all about. We can achieve this when we understand that competition is key. Equality of opportunity says to me that everyone deserves an equal opportunity, an equal chance to compete. Every firm has equal potential. How they use that potential is another matter entirely. I'm all for equality of opportunity and competition, but if your company has a poor business model resulting in failure, well I'm sorry you failed. But, let’s assume you have a decent business idea and want to start your own company. This is excellent news! I salute you for making such an effort and look forward to your product and/or service. However, this assumes you can get your business established in the first place.
According to a 2014 survey, the third annual Small Business Friendliness Survey of nearly 13,000 diverse small business owners, there are some significant barriers to market entry.7 This, as you can imagine, leads to decreased competition. Fewer companies means less people competing for business. You might not think that matters when it comes to supermarkets or fast food chains, but it does- and it matters more so in the world of technology startups.
According to this survey, it’s not just entrepreneurs and startups that have issue here, but other established small businesses.8 The barriers of both time commitment and cost hinder growth, innovation, and market competition. What do you think respondents said was the greatest barrier to entry? Many people likely feel “taxes” would be the number one barrier to entry. But the survey says otherwise, claiming that only 35% of respondents thought they paid too much in taxes.9 So if taxes aren't the greatest barrier to entry for small business, what is? Professional licensing was the answer given in the survey, citing the notion that the sheer number of them required goes beyond justification of protecting public safety, thanks to the accumulation and influence of lobbying and special interest.10
Nearly four out of every ten American workers will require government certification or licensing to work in their desired occupations today.11 In addition to those preconditions, there are excessive permitting processes that act as deterrents to work. Entrepreneurs cited the complexity of many states’ permitting process which takes away from time they’d rather devote to ensuring their business remains afloat. Is it a coincidence that the five states with the best ratings for small business friendly professional licensing requirements- namely Utah, Idaho, Kansas, Virginia, and Texas- had roughly twice the average real GDP growth in 2013 compared to the bottom five states- Rhode Island, Connecticut, Illinois, Massachusetts, and California?12
Let me be clear right now: I am not suggesting federal government taking over this power from the states. Each state bears responsibility for its own success just like each locality bears responsibility for its own success. As President Reagan might say, "get these state governments off the back of our local government!" If anything, such stats amongst small businesses and GDP growth should be a wake up call for all states to review their small business setups. So why even bring it up as a Presidential candidate where we’re talking federal government, not state government? Because, to me, the President is supposed to be a leader, someone who provides guidance, offering advice and assistance where needed. The only reason I could see the federal government engaging states here would be in an advisory capacity, providing teams of experts to review and help streamline licensing and other hurdles for small businesses, because make no mistake about it: small business is extremely important to the lifeblood of our nation. When small businesses are able to prosper, the economy grows.
Not only does the economy grow, but jobs are created. This is the number which President Obama and economists generally tout these days. You ever heard him bring it up during the State of the Union just recently. For example, in the revised job numbers from the Bureau of Labor Statistics show 280,000 jobs added in May 2015, a bit lower than what was originally thought.13 That covers job creation, but what about job destruction? Job flows and job reallocation play an important role in understanding the state of dynamism in our economy, so we must look at the number of jobs created and the number of jobs lost. To do that, let's look at the Business Employment Dynamics data also from the BLS.
According to the BED report for Q1 2014, gross job gains, that is the number of jobs filled from opening and expanding private sector firms, was 6.9 million.14 At the same time, the gross job loss from private firms closing and downsizing was 6.5 million.15 Why do I point this out? Because job loss isn't necessarily a bad thing when it comes to exploring business dynamics. Yes, losing your job sucks, no one should have an argument with that regardless of your political affiliation. But losing your job or quitting your job gives you more opportunity and, as I've said before, opportunity- specifically, equality of opportunity- creates potential. This potential is where entrepreneurs, startups, and small businesses come into play.
Did you know that startup firms create more jobs in America than all other firms combined? You can look up the data in the Longitudinal Business Database of the Census Bureau's Business Dynamics Statistics website.16 Startups, firms 0-1 year old, are responsible for the vast, vast majority of net job growth. They're also responsible for a lot of job loss as the majority of startups fail within the first five years.
But this is important! Firm creation and destruction together with job creation and destruction yields an ebb and flow, a natural wave of economic motion across our country. This is our dynamic economy in action, born out of small business and the desire to create new products or services. It yields innovation and life experience in how business and capitalism works. Productivity can also be linked to this job creation and job loss flow, this reallocation if you will. Less-valued or less productive goods and services naturally go away, yielding to more-valued or more productive goods and services. It's of increasing importance for us to allow that flow to move as naturally as any river or any cloud moving across the sky.
And to do that, I feel we must focus on equality of opportunity. Give individuals and firms the leeway needed in order to get moving. Allow startups to come about. Not only does this create jobs, but new firms create more competition in the market, resulting in increased innovation and lower prices. If these startups and small businesses succeed, fantastic! More Google's and Apple's and Microsoft's can be unleashed upon the world. If these startups and small businesses fail? Well, they gave it a shot, they had the opportunity. And you know what? There are more opportunities to be had.
All of these things are inter-related. From the need for social programs to protect our unalienable Rights to our free market economy where startups and small business play an important role, this information should serve as a base for policy moving forward. Chief amongst policy changes needed are those stifling competition along with any policy or business mentality that says maximizing shareholder value is most important. We need to return to customer capitalism. We, the people, have many demands, especially when it comes to new technology. It's time we encourage firms new and old to supply us with that.
- International Energy Agency, Oil Market Report.
- For a basic explanation on why companies care about their stock prices, see Investopedia, Why Do Companies Care About Their Stock Prices? Also note that the article further stresses the notion that management are shareholders, there is danger in letting shareholders wield power in a company, and that good old fashioned human ego also plays a role in why C-suite shareholders may act the way they do.
- Competition gets AT&T to follow Google's lead with gigabit fiber. This isn't the only story like this. Competition spurs innovation and lowers prices..
- Drucker, Peter, Management, Revised Edition, p. 98. A must read for understanding business, in my opinion. Drucker was ahead of his time in understanding. There are complaints about the original edition vs the revised edition of the book, but either should give you a general understanding of the concepts being discussed therein.
- See An Even Larger Headache Than Taxes for Small Business which cites the Kauffman Foundation. See also the Foundation's 2014 release on how states can reduce regulatory barriers to innovation and business creation, important considering nearly 29% of jobs now require a government-issued license. Then thumbtack.com/survey has a visual representation of all 50 states ranking small business friendliness, ease of starting a business, regulations, etc.
- Ibid. See also the survey for methodology and analysis.
- Analyzing the Extent and Influence of Occupational Licensing on the Labor Market from the Journal of Labor Economics, Vol. 31, No. 2. They also discuss the affect on wages that such licensing requirements has, which is important to be aware of. The return on investment makes a big difference in determining whether certain legislative headaches to one’s small business are worth the effort.
- An Even Larger Headache Than Taxes for Small Business.
- Bureau of Labor Statistics, The Employment Situation - June 2015. Revised numbers are at the end.
- Bureau of Labor Statistics, Business Employment Dynamics, Third Quarter 2014.
- See U.S. Census Bureau Business Dynamics Statistics for raw data on firms, jobs, age, etc. A few places with more explanation on startup importance to job creation in America can be found in Ryan Decker's Startups are really important blog post and in Who Creates Jobs?, a paper from the National Bureau of Economic Research.