High profits mean capitalism is cooked

From The Economist to the White House Council of Economic Advisers to Goldman Sachs itself, the staunchest supporters of capitalism are worried about the consistently high profit margins in key industries, especially finance.

The efficient markets hypothesis holds that high margins attract competitors, who whittle them away to next to nothing, spurring firms to innovate to create new products, services, and methods that are more efficient, benefiting the wider society. This process is the whole moral and utilitarian basis for "free market" capitalism, the idea that if you let companies compete without limitations, they will force one another to ever-greater heights of innovation, efficiency, and productivity, giving all of us more for less.

When firms -- and sectors -- enjoy consistent high margins, there's something wrong. The only way that's possible is if the companies are cooking the process: securing monopolies, conspiring to fix prices, capturing their regulators and using regulation to keep new entrants out of the market. Collectively, these activities are called "rent-seeking" and preventing them is, in free market ideology, the most important function of the state. Without an extra-industrial referee to police rent-seeking, it will grow to dominate every industry, since investors and managers and employees tend to prefer to lay down their arms and use collusion and capture to secure their positions, rather than constantly striving. Without constant vigilance, there's no markets, only crony capitalism.

Sounds familiar, doesn't it?

Grullon, Larkin, and Michaely (2015) studied all the public firms traded on major exchanges in the United States between 1972 and 2014 and found that more than 90 percent of US industries have experienced an increase in concentration levels over the last two decades. They also found that firms in industries with the largest increase in product market concentration have enjoyed higher profit margins, positive abnormal stock returns, and more profitable M&A deals, suggesting that market power is becoming an important source of value.

This phenomenon has been mainly driven by the consolidation of publicly traded firms into larger entities. The increased level of concentration due to public firms’ consolidation has not been offset by a larger presence of private or foreign firms. Overall they assert that the nature of US product markets has undergone a structural shift that has weakened competition.

The persistence of historic all-time high profit margins of the US companies did not, of course, escape the eyes of the analysts on Wall Street. Sumana Manohar from Goldman Sachs recently pondered how persistent high margins can be reconciled with the very idea of capitalism. Manohar predicted that high margins should attract competition and force margins down eventually but cautioned “if we are wrong and high margins manage to endure for the next few years (particularly when global demand growth is below trend), there are broader questions to be asked about the efficacy of capitalism.”

Are We All Rent-Seeking Investors? [Guy Rolnik/Promarket]

(via Naked Capitalism)

(Image: MonopolySet 2014, Hasbro)

Notable Replies

  1. Look, monopolies and collusion are a small price to pay for the huge profits you'll never see a cent of.

  2. I think that cheerleading this tendency (or enabling it) is one of the key behaviors of idle GOP rich kids since Nixon.

    ...Without an extra-industrial referee to police rent-seeking, it will grow to dominate every industry, since investors and managers and employees tend to prefer to lay down their arms and use collusion and capture to secure their positions, rather than constantly striving. ...

    Maybe add thinking that stealing from the public interest means being "smarter" than others and pretending that "rent-seeking" is real grownup work.

    And also add pitching tantrums when actual working people appear skeptical.

  3. Dude, not funny.

    You may be joking about that, but the "Jews are all rich!" stereotype is frequently used to oppress and kill Jews today, when we're statistically more likely to live in poverty (and, over in Poland, the Poles are digging up Jewish cemeteries looking for the "Jew gold" that "everyone knows they're buried with!").

    Are the 1%ers thin-skinned and respond to any criticism with that type of hyperbole? Yes, as Tom Perkins demonstrated a few years back, which is what I'm assuming that you're referencing, and that's alright.

    But the "Jews control the banks!" comment, even in jest, scares the shit out of me, because it's often the prelude to rampant antisemitism under the cover of "I was just joking!" (Meanwhile, I'm being told that I can't be poor, because I'm a Jew, despite having made less than $8,000 last year). So, yeah, even though it was a joke, and I know it was a joke, I'm going to say, honestly and sincerely: NOT FUNNY.

  4. I agree with @bibliophile20. It feels scary to me even though I'm confident you intended the remark differently. I grew up in a place where antisemitic remarks were so common, it wouldn't feel safe to mention anything. Even pointing out that it feels scary, feels scary.

  5. The basic gist has been pretty obvious even to laymen for a long time. The real "no more veil" moment was the Madoff scandal, where it was reported that it obvious to all knowledgeable traders that Madoff couldn't pull in those consistent returns without being dirty in some way. But they all thought he was dirty the way they were, insider trading, front running etc, so it was OK. The culture of Wall Street is rotten to the core, and corrupts all it touches with it's moral relativism.

    In the early 2000's I opened the paper and saw on the front page of the business section a friend of mine in handcuffs. A nice guy with a young family who had bought into the "anything goes" culture. He got caught with his hand in the cookie jar, and became the poster boy of the time for rule flouting on The Street. The result: The rule benders became more careful of course!

    I was recently having a drink with an old friend, a hardcore Fiscal Republican in Big Banking with whom I don't agree much on these subjects. I tried to provoke him by saying hedge funds are nothing more than institutionalized insider trading. To my surprise he agreed vehemently! Everyone knows this game is rigged, but no one can pay the sheriff more than the hustlers, so the game goes on....

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