Baptists and bootleggers explains lofty stock market

Jason Zweig, who writes the Intelligent Investor column for the Wall Street Journal, posted recently about “Disturbing New Facts about American Capitalism.” He wrote:

“Modern capitalism is built on the idea that as companies get big, they become fat and happy, opening themselves up to lean and hungry competitors who can underprice and overtake them. That cycle of creative destruction may be changing in ways that help explain the seemingly unstoppable rise of the stock market."

Zweig cites new research by academics that claims the US is moving to a “a winner-take-all system in which giants get stronger, not weaker, as they grow.” The evidence consists of higher concentrations of market share among just a handful of companies. For example, the top four grocery chains hold 89% of the market. The top four real-estate service companies command 78%. In intro to economics those are called oligopolies.
Twenty years ago the US has more than 7,000 public companies; today there are fewer than 4,000. As a result profit rates have jumped from 6.7% two decades ago to 9.7%. The authors provide these reasons for the success of larger companies:

Declining enforcement of antitrust rules has led to bigger mergers, less competition and higher profits. The other is technology. “If you want to compete with Google or Amazon,” he says, “you’ll have to invest not just billions, but tens of billions of dollars.

I’m disappointed in capitalism,” jokes Doug Ramsey, Leuthold’s chief investment officer. “It seems that the big ones are just slowly pulling away.”

Blaming the lack of anti-trust of enforcement is the socialism in the authors leaking out. Congress passed anti-trust legislation in the late 19th century to combat capitalism’s “natural tendency toward monopoly,” which was Marxist nonsense. Marx wrote that capitalism tends to create monopolies and impoverish workers while all around him, and for the previous 50 years, freer markets in England had dramatically increased competition, reduced inequality and raised standards of living. Marx was blind to all of it.

History proves that capitalism has no tendency to create monopolies or even oligopolies, the concentration of business in the hands of a few giant firms. Capitalism has the opposite effect. So, why would US “capitalism” have this tendency today, as the authors of the research demonstrate?

The obvious answer is the US is no longer capitalist. We are most like the fascist economy of Italy before WWII. The Foundation for Economic Education, fee.org, has good articles on fascism, but the essence of fascism is that Mussolini created oligopolies of the largest firms in each industry and gave them monopoly control over production. Mussolini was a devout Marxist who at first wanted to reshape Italy in the image of Stalin’s USSR then invented his own flavor of socialism. President Roosevelt considered Mussolini a prophet and attempted to shape the US into the image of Mussolini’s Italy with his New Deal legislation.

The Bootleggers and Baptists explains how the US has lost its competitive market and plunged into fascism. Baptists propose regulations to prevent the sale of alcohol on Sundays for moral reasons. Bootleggers join the Baptists in support of the regulations so that they won’t have to compete with legal sellers on Sunday. The Baptists and bootleggers coalition is forces through new regulations.

Socialists are the Baptists in the overall economy. Corporations are the bootleggers. US citizens have demanded greater protection from “evil” corporations through massive regulation for over a century and corporations have joined them. Large corporations love their oligopolies because they don’t have to worry about smaller competitors nipping at their heels. It allows them to pay CEOs larger salaries and raise prices to boost profits. Everyone is happy but the consumer.

As a result, over three million pages of new regulations have been passed since 1970 and about 100,000 pages of new regulations get written each year. Corporations initiate much of the new regulation. Politicians always and everywhere proclaim that the new regs protect the health and safety of voters, but in reality they do little more than stifle competition because only large corporations can endure the growing costs of regulation, which has reached over $1 trillion annually for the US economy.

For investors, US fascism means higher profits for the largest corporations and therefore higher stock prices. In addition, fewer companies mean higher PE ratios. In the short run that works to the investor’s advantage, but in the long run it will impoverish the nation, corporations and investors.