Over the summer, The Economist had its Open Future essay competition for young people. Here is my response to this prompt: What is the best way to improve competition in modern capitalism?
If there’s anything that the 2008 financial crisis taught us, it’s that American corporations are ruthless when it comes to doing whatever it takes to protect the bottom line. Corporations couldn’t lay off people fast enough – 8.7 million people lost their jobs at a rate never before seen. To stay afloat, they let everyone else drown.
In 2008, two factors of production, capital and labor, stood at odds with one another. We learned that labor, regardless of social standing, always loses.
That those two factors are once again at odds exposes the fundamental flaw within modern capitalism. What was once vital to create a profit (along with entrepreneurship and land), is now separated by the same goal it once sought to attain. In today’s world, it is labor and capital which compete.
And though it’s tempting to say that the government can solve the inequality problem, reversing the trend will not occur if left to t regulators. Overarching regulation is not the answer, as it has always had unintended consequences.
The decisions made by the Federal Reserve in the wake of 2008 left us in a boom that is unparalleled. And while the government is not solely responsible for the economy of today, it did enable it.
In trying (and succeeding) to stimulate the economy, the government allowed the FAANG companies to grow to what they are today. Leaving the recession behind wasn’t going to happen unless innovation and competition were encouraged – lowering the federal funds rate made borrowing cheaper, and encouraged businesses to undertake capital investments.
Over time, these capital investments began to look a lot like increasing market share, a domination of the markets. American companies, in line with regulation, grew unopposed, capitalizing on a country’s need to recover. The bottom line brought up labor with capital as it rose because it needed them both.
It appears as though labor and capital are once again in harmony. But what on paper looks successful – Amazon stock just reached an all-time high last week – isn’t very successful at all. What happened in 2008 – the fear, the helplessness, the resignation – it’s happening all over again.
Except this time, there is no Lehman Brothers to blame. There is no bank to bail out, no single company to point to, there’s an economy that keeps making money, and no limit in sight.
The untended consequences of well-intentioned actions to bail the world out of a recession bring us to the argument in front of us today: how do you reverse the trend of competition, once competition has effectively been wiped out?
The free market, that which thrives upon competition, is at its core unregulated. The theory stands that companies would drive each other to find equilibrium. It’s why mergers and acquisitions are so heavily regulated, because unification lowers competition and drives prices up.
But the path we’ve reached today is one where companies don’t need mergers to become the only competitor. Witness Facebook’s rise, an entity that cannot be limited to a single market because it has escaped definition. It’s effectively become its own market. Amazon’s purchase of Whole Foods in 2017 was an exercise in vertical integration that paved entry into a very niche type of retail, but one that has deadly implications for Walmart, already suffering from the threat of online shopping.
In order to stay afloat, Walmart did then what companies did in 2008 – it dealt a double blow. Within a month, Walmart announced plans to raise the minimum wage to $11 an hour for its workers, and turned around to announce that it was closing 63 of its Sam’s Club stores.
In the same time period, the CEO of Walmart made 1,188 times more than the average median employee. The US Securities and Exchange Commission put numbers to always known facts: CEOs were worlds away from the average worker.
And at that moment, there was an enemy to point to, one to look at and say, ‘this is what’s wrong with capitalism’. And the competition shifted – from company to company, to worker against the boss.
This shift was unavoidable. How could it not be, when the survival of a company has come to depend on the decisions of its CEO?
That the fate of a company has come to rest in the hands of so few is where modern capitalism went wrong. Equity compensation has made it so that board salaries are intrinsically tied to the value of the company. In some ways, it’s the exact opposite of what happened in 2008, when traders gambled with money that wasn’t their own in order to make profit. Today, the board of directors plays with stock at the expense of their workers, and the system actively encourages it, until the moment it costs money for the board. Only then are there consequences – Papa John’s stock soared after the CEO resigned.
But for the day when the stock was falling, when workers were laboring away behind ovens and carefully avoiding potholes to deliver pizzas, the world was falling apart. The enemy – their CEO – had gambled not only his livelihood, but theirs. In 2008, the government stepped in on behalf of investors. When the worst happened, investors lost some, but they didn’t lose everything. The consequences of modern capitalism are severe to the people who have everything to lose.
The United States is not a place where regulation to protect the bottom workers will ever pass. The people most hurt by the inequality problem can’t fix it by themselves – those workers simply do not have the social or economic capital to influence change fast enough.
If capitalism is to survive what’s coming next – a rise of people who’ve realized that inequality isn’t a by-factor of capitalism but in fact its enabler – it’ll have to reinvent itself. If companies want to protect the bottom line, they’re going to have to realize that one of the central components of production is gearing up to rise against the system itself. They’re going to have to realize that the illusion of ‘hard work’ getting you to the top is a lie people have stopped believing in.
The government can begin the hard process of leveling the playing ground – it can impose limits on the amount of equity compensation for CEOs. It can remove the incentive for CEOS to act solely in their own interest, and hold them accountable to one of the only few things they actually care about. That’s what caused the 2008 financial crisis, and it’s what is breaking our system now. It’ll put the government and American companies at odds, but it’ll show an initiative that might enable actual progress.
But the system won’t change unless workers themselves begin to hold their employers accountable, until investors decide that profits should intrinsically be tied to purpose. When employees at Google decided that ‘the business of war’ should not include them, it was an insight into those who could potentially be at the forefront of that movement. Lower-income communities have already been mobilized and are putting pressure on their politicians. The next step has to come from the middle class.
In standing up to Google, the employees showed that there is a way to hold their companies accountable. It’s something the government simply can’t do, but something society desperately needs.
In order to fix the inequality problem – that very large gap between the rich and the poor – the people’s whose lives would be most affected if the system goes down need to stand up. People cannot be lulled into being complicit simply because of their privilege. Whether it’s selfishness – the middle class has witnessed the cost of medical care and higher education soar and has yet to see the same trend in wages – or social responsibility, it is their time to stand up.
That choice has the same potential as BlackRock’s decision to only invest in companies that contribute positively to society. In setting this caveat, BlackRock effectively limited the scale of profits a company could hope to achieve. That it was a decision taken after the shooting in Parkland made it a moral and political stance. It defined ‘morality’ as corporate social responsibility and gave companies whose contribution to society was less than positive an ultimatum – either change your ways or cease to exist at all. A company without funding, after all, can never be profitable.
Though the middle class will not have that same immediate impact, it underestimates the value of its worth in the profit companies so desperately crave. It forgot that American companies cannot succeed without the people who keep them running – those calculating reports that make it to the desks of CEOs, those managing departments, those putting out fires. They need to leverage the education and skills that got them there and use it, for they have different type of social responsibility. Exploitation of low-income or migrant workers at the lowest levels has enabled modern capitalism because no one is held accountable for it.
Change of the system will now occur only if it begins on the inside. Labor needs to win this round, and it needs to work together to defend the rights of workers across the two class distinctions. If capital wins, if the bottom line wins again, modern capitalism will raise an unopposed opponent with profit leading the game. And while the bottom line might win, the system will not.