Patrick Watson of Mauldin Economics says if you fear Socialism then the best way to stop it is by cleaning up Capitalism

Patrick Watson of Mauldin Economics says if you fear Socialism then the best way to stop it is by cleaning up Capitalism

By Patrick Watson*

Many people are worried socialism will take over the US. They’re sure it will be awful.

Socialism can mean many things. You hear it applied to state-dominated economies as varied as Venezuela, Norway, and China. I suspect Karl Marx wouldn’t consider any of those socialist.

Whatever the particulars, these fears would be groundless if we had done a better job preserving capitalism. Its failures open the door for other ideologies.

In theory, capitalism is all about free markets—“free” in the sense that anyone has the opportunity to compete against anyone else. Consumers decide who wins.

That’s not what we have in the US today… nor do most of today’s “capitalists” want it. They want the opposite: freedom to sell their wares to consumers who have no choice at all.

This can be highly profitable. Some of today’s top investors use it quite successfully.

Whether it’s good for everyone else’s economy is a different question.


Photo: White House

Wide Moats

My colleague John Mauldin recently reviewed an interesting new book, The Myth of Capitalism: Monopolies and the Death of Competition, by Jonathan Tepper and Denise Hearn. John talked about how one or two companies now dominate many economic sectors. 

Those are exactly the kind of companies that made Warren Buffett, the Sage of Omaha, one of the greatest stock pickers in history. Tepper and Hearn call Buffett the “antithesis of capitalism.” Here’s an excerpt from the book:

Buffett loves monopolies and hates competition. Buffett has said at his investment meetings that “the nature of capitalism is that if you’ve got a good business, someone is always wanting to take it away from you and improve on it.” And in his annual reports, he has approvingly quoted Peter Lynch, “Competition may prove hazardous to human wealth.” And how true that is. What is good for the monopolist is not good for capitalism. Buffett and Munger [Charlie Munger is vice-chairman of Berkshire Hathaway] always tried to buy companies that have monopoly-like status. Once, asked at an annual meeting what his ideal business was, [Buffett] argued it was one that had “high pricing power, a monopoly.” The message is clear: If you’re investing in a business with competition, you’re doing it wrong.

Unsurprisingly, his initial business purchases were newspapers in towns with no competition. According to his friend Sandy Gottesman, “Warren likens owning a monopoly or market-dominant newspaper to owning an unregulated toll bridge. You have relative freedom to increase rates when and as much as you want.” Back in the days before the Internet, people got their news from their local paper. Buffett understood that even a fool could make money with a monopoly, “If you’ve got a good enough business, if you have a monopoly newspaper… your idiot nephew could run it.” With that line of reasoning, in 1977 Buffett purchased the Buffalo Evening News, and then launched a Sunday edition to drive his competitor, the Buffalo Courier-Express, out of business. By 1986, the renamed Buffalo News was a local monopoly.

Over the years, he followed his philosophy of buying into industries with little competition. If he can’t buy a monopoly, he’ll buy a duopoly. And if he can’t buy a duopoly, he’ll settle for an oligopoly.

Buffett’s record speaks for itself. Buffett was one of the biggest shareholders in Moody’s Corporation, a ratings agency that shares an effective duopoly with Standard & Poor’s. (You might remember they rated the toxic subprime junk bonds that blew up the economy as AAA gold). He and his lieutenants bought shares in DaVita, which has a price- gouging duopoly in the kidney dialysis business. (They have paid hundreds of millions to resolve allegations of illegal kickbacks.) He’s owned shares in Visa and MasterCard, which are a duopoly in credit card payments. He also owns Wells Fargo and Bank of America , which dominate banking in many states. (Wells Fargo recently created millions of fraudulent savings and checking accounts in order charge more fees to depositors.) In 2010, he fully acquired railroad Burlington Northern Santa Fe, which is a local monopoly at this stage. He has owned Republic Services Group, a company that bought its largest competitor to have a duopoly in waste management. He has owned UPS, which has a duopoly with FedEx in domestic shipping. He bought all four major airline stocks after they merged and turned into an oligopoly. Lately he’s been buying utility companies that are local monopolies.

We could go on, but you’re probably noticing a pattern. He really doesn’t like competition.

Buffett clearly prefers businesses that don’t have to compete. That’s been good for his investors. It’s even spawned an entire investment industry; hordes of value-investing Buffett acolytes look for stocks with “wide moats” that discourage pesky competitors.

In the long run, though, companies without competition (i.e., monopolies) can lose something important: incentive to get better. With no near-term risk, they stop innovating, and eventually customers drift away.

That’s not good for anyone. The economy thrives when open competition encourages producers to deliver the best goods at the lowest prices. It has a cost: some companies fail. But that’s also important. It signals that those workers and capital should find better uses.


Image: Wikimedia Commons

Cleaned-up Capitalism

The broader point here is that leading  “capitalists” are often nothing of the sort, particularly when they use political influence to carve out monopolies.

That’s neither capitalism nor socialism. It is something completely different: crony capitalism, corporatism, corporate statism—the terms vary. It promotes wealth concentration that leads to economic stagnation, political instability and the current discontent… which might bring realsocialism.

So if you fear socialism, the best way to stop it is to clean up capitalism.

That means stop letting government policy favor large, influential companies. Let everyone compete on an equal footing, and give consumers and workers freedom to choose what they want.

Conversely, if you want to bring on socialism, just pretend nothing is wrong and stay on the present course. 

Fake capitalism isn’t working for most people. Eventually, they’ll demand something else. And they will probably get it too.


*Patrick Watson is senior economic analyst at Mauldin Economics. This article is from a regular Mauldin Economics series called Connecting the DotsIt first appeared here and is used by interest.co.nz with permission.

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18 Comments

People like Patrick Watson have a quasi religious belief that competition for customers among companies drives innovation. It's just nonsense really. Maybe with useless gadgets and knickknacks but what really makes the real difference is a State with vision financing and guiding companies toward a national or imperial goal. We see in China today what can be achieved when the State works with large companies to pursue a vision. We saw it in the past in WW2 with the Allies and Axis powers.We saw it with NASA and the Russian Space Agency. We see it in the defence industries. We saw it in Taiwan, South Korea and Singapore. We saw it in Victorian Britain. It is what gave birth to the Internet. What drives the most important innovation is the State using companies in a relentless drive for supremacy.

They're trying. Phil Twyford and Mike Greer are creating dozens of shoe boxes as we speak. Dozens.

"and give consumers and workers freedom to choose what they want"

Workers are consumers. The problem is that the current ideals of socialism seem focused exclusively on people who have no desire to work at all and demonising people who dare to better themselves by insisting they open their wallets for everyone else, with no incentive for anyone else to do the same.

Problem with the current systems is they're also not helping people who are working to better themselves, merely protecting the lot of previous generations who did have a chance of bettering themselves under earlier policies.

These days it's protecting assets and unearned income, push too much money into assets and away from productive enterprise, and allowing earned income to stagnate and bear the brunt of the tax load.

Productive enterprise is disincentivised by current policies.

This is exactly why all returns in investments in unproductive economy should be highly taxed.

For starters I hate the word "consumers" - it reduces people to shopping slaves and collective planet-destroyers with apparently no morals, desires or other priorities. Clearly neo-liberal BS.

Here's some food for thought about workers & the 1% that I heard somewhere recently -

There's 100 slices of pizza.
The 1% takes 80 slices of pizza leaving 20 slices for everyone else on earth.
The workers get upset and ask the 1% to only take 79 slices.
The 1% then cry "socialism" and claim that only 79 slices will drive them to bankruptcy.

Anything that relies on growth to justify its existence is doomed in this world that just plain needs us to stop growing, stop growing our numbers, stop growing our consuming of non renewables and chucking them into landfill, and stop destroying what is left of forest and stop destroying the oceans.
Both capitalism and socialism and everything along the continuum from one to the other, requires growth to survive, the way we have things set up. We have got to think outside the box.

True capitalism is impossible with a strong estate with ability to regulate competition and enforce the law. This is exactly what liberals always lack to understand, otherwise the "free" (love that word) market always tends to end up birthing Frankestein competition systems that look more like monopolies or in the best case oligopolies, just because wealth tends to generate wealth even in the most unproductive and passive ways. This is why a healthy and redistributive tax system is most required, as when inequality arises and, us the people become aware, populism shows up right away as it's happened in the US and UK, which can lead to pseudo-democracies and dictatorships. Not ever has there been a perfect implementation of any economic and political system, because all of them need perfecting, all have however guidelines that are worth looking into and ignoring all but just one is just a big mistake.

Its failures open the door for other ideologies.

Great point - good article.

In a round about way this is what many of us have been arguing for years. The free market is not "free" it is being manipulated by the big players. That is why there is a call for Government regulation, and another way to ensure balance is achieved.

Socialism is Government mandated monopoly. If you don't like monopoly, stay the hell away from socialism. The difference for Buffet is that none of his monopolies are government mandated, and if he charges to high a price, he opens the door for more competition, which is how capitalism is supposed to work.

Guys like Warren Buffet and Peter Thiel who look for investments with monopoly like characteristics aren't the problem. They've just found a way to make money from the system the way it has been set-up. Its politicians and regulators who've been asleep on the job. And that's putting a favourable interpretation on it.
Really in NZ, its National cosying up to their mates in big business, and Labour, who seem to hate small business, see a few big businesses as easier to control, to achieve their statist agenda.

Good article. Let's consider how NZ is doing.

Way back when Telecom was still a monopoly the CEO said this:
"Think about pricing. What has every telco in the world done in the past? It's used confusion as its chief marketing tool. And that's fine," - Teresa Gattung

The telcos are more numerous and more competitive now which is great. However we still have oligopoly building products, fuel distribution and supermarkets charging exorbitant prices. Peter Thiel has stated that monopoly companies spend far more on marketing because they want to create the illusion of competition and in order to prevent regulation. Case in point the free coffees, fuel discounts and privacy invading club cards at supermarkets.

Shopping will only get more difficult this year as the new GST collection burden cuts out overseas online competition.

The quickest road to serfdom I am afraid is the one marked "unrestrained, deregulated free-market capitalism with tendency to monopoly". The road that is marked "sensible Keynesian demand management, regulation and redistribution" is the one that allows a balance between the dynamism that capitalism offers and its benefit to consumers and the need to ensure all citizens benefit from gains in productivity. It's Utopian to think things can carry on as they are. People will choose a neo-fascist state if it at least gives them a roof over their heads and some basic security. Something the current form of capitalism does not deliver.

So I guess the answer is better anti-trust laws, if you want to break up monopolies.

Ah the good old "illusion of choice" - there's a US focused but very good infographic on it here - https://www.visualcapitalist.com/illusion-of-choice-consumer-brands/

1,000s of brands owned by a handful of companies, competing for market share against their own brands.

For example - Hippy, counter-culture feel good favourite Ben & Jerry's - Unilever brand.

It's an interesting topic alright. The capitalist-social welfare system has been employed for over 80 years now with the only downside being the over-breeding of the lower socio-types, who choose not to work. Otherwise, if you want to work you can create a nice little life for yourself right here, with some travel & generally have a peaceful existence. It's not aging that well, I have to say, but that's mainly because we do not have a quality replacement birth-rate to underwrite our future & that is by choice, so is our own fault. As such, eventual failure of this system is an option, which is taking place before your very eyes.
The controlled capitalism of the Chinese communists has really been the only challenge to the capitalist-welfare system to emerge over that time frame. It enrich's the top end of China, which we do not see from over here, but the bulk of the workforce earns very little while making the top 10% very rich, especially when you have a billion+ people base. I'd still prefer to be an unemployed person in the mid-western USA getting $US10-12,000 pa to a Chinese worker working $50-60 hours a week on $US3-5,000 per year. But hey, the good news is that it's still your choice.

It's an interesting topic alright, that also lets our biases play out....

The largest bar none benefit is Pension, this is true everywhere around the world that adopted a Welfare State. The Welfare System 'from cradle to grave' was set up in an age where the life expectancy was somewhere around the age of retirement - you had your benefit for a year or so before you popped your clogs, from cradle to grave. Now we're up to around 80 for a man and 85 for a woman..

Teen pregnancies which largely occur in lower-socio groups have been falling for years. The current criminalisation of abortion is a shocker which also alarmingly affects lower-socio groups, they do not have access to the workarounds that wealthier, potentially better educated people have.