A Market of Monopolies — The Rogue version of Capitalism

What do you call a free market that is free for a few players to compete in and difficult for everyone else to compete in? It is a free market in the sense that the players in that oligopolistic structure can compete against one another, yet it's not free in that everyone else struggles to compete for the crumbs left by the oligopolistic players.

Capitalism has advanced to this late stage where virtually every sector of the economy has an oligopolistic structure. Every sector is dominated by big firms. When industrial capitalism marched forward, large industrial firms in America emerged that need huge capital bases. The banks consolidated in order to be large enough to fund these enterprises.

The typical structure of any sector follows an 80/20 Pareto style distribution, with a few firms with 80% market share and the rest fighting for the 20%. This structure is prevalent in way too many sections of the economy. Because these firms grow to become too big to fail, every section of the economy appears to have been converted into sections that have natural monopolies. Take food and groceries, for example, a giant is needed to operate at a national scale and harness economies of scale that pushes prices down. Mom-and-pop grocers can exist, but they won't have the efficiencies that a big player has.

Every sector has its Big 4. These typically control more than 50%. If you add another 4, the combined market share easily gets to 80%. In most industries, less than 10 firms eat 80% of the market.

Examples of sections of the economy that have oligopolistic structures.

1. Banking — by nature is oligopolistic, only a few banking licenses are released. FinTech is set to change banking. However, within fintech, only a couple of winners will rule them all.
2. Insurance — in many countries, insurance is regulated, and licenses are limited to a few players.
3. Fund Management — even the finance firms and hedge funds, Black Rock, Vanguard, and State Street dwarf everyone else.
4. Retail Trade — in every country a couple of chains dominate brick & mortar and e-commerce is dominated by Amazon and Alibaba, globally
5. Taxi Industry (Transportation) — Uber, Didi, and Bolt are dominant globally.
6. Shipping (Transportation of goods)- Mediterranean Shipping Co, APM-Maersk, COSCO.
7. Personal Computing Operating Systems — Microsoft, Mac.
8. Car Manufactures — this used to have a lot of competition before consolidation and amalgamations. Today, we have many different car brands coming from the same company that you will be misled to think that its products from different companies. The future of electric cars will have way few companies, probably Big4, like in any other sector.
9. Cellphone Manufactures — Apple, Samsung, Huawei, Xiaomi, and the others.
10. Auditing/Accounting — Big 4 are KPMG, E&Y, Deloitte, and PWC. They take almost everything leaving crumbs for the rest of the accounting/auditing world.

The process of creating large bureaucratic monopolies has not ended. Mergers and Acquisitions (M&A) are consistently in fashion as big fish merge to create even bigger fish and swallow any rising small fish along the way. These big companies have access to huge financial resources (syndicated loans from banks) to acquire virtually any rising company within their industry. The small competitor innovates to try and steal market share from the big fellas. The big fellas resort to buyouts offering insane amounts of equity and cash, thus getting hold of the innovation and becoming even bigger.

The monopolies are costing us in terms of wage suppression, leading to great inequality. At times, they collude (game theory) not to get into price wars and compete on other features like branding. If any of these big firms are about to fail, the job losses will be staggering, and the systemic risk will be huge as well. They become too big to fail so society (via the government) has to give them money whenever they run into trouble since it appears to be in everyone’s best interest to help them survive.

Take the United States for example. The chart below from Yardeni Research shows the revenues of the S&P 500 as a percentage of GDP.

Five hundred companies in the index currently have revenues that are equal to 57% of US GDP. It has been as high as 65%. This can be taken as a proxy for the share of the economy that passes through the hands of these 500 companies. If we dissect deeper, we could easily find out another 80/20 Pareto phenomena within the S&P500 itself, with only 100 firms taking something like 55% of the sales.

Revenue is not exactly GDP, but we can use it as a proxy because the sales revenue is made up of transactions that eventually feed into GDP, and they pass through these big companies.

The Nasdaq has a larger number of listed firms, about 3,300. If we add their revenues to that of the S&P one, we could easily get to 80%. Thus, we are having only 3,700 companies with an 80% share of the economy. This is a country with 6.1 million employer companies. The other companies (small businesses) are operating in the economy but only rake in a fraction of what the big firms make. The small businesses employ more people, who then spend most of their earnings feeding the monopolistic beasts.

What type of capitalism is this?

What we have is not the capitalism that is preached about by economists in their textbooks. What we have today is a rogue form of capitalism. The economy is bifurcated into two structures: capitalism for the struggling 20%, who have to face the full competitive forces of the free market, and something else for the oligopolists, who are protected from the free markets.

The oligopolists benefit from the socialization of their losses, so capitalism only applies to the profits, that are privatized. This dual nature of existence is what confuses people. Many are led to believe that we are still existing under free market capitalism because they see the competitive forces in the 20% share of the economy they participate in and do not have enough vision to see that the bigger guys who take the 80% of the economy are not necessarily existing under the same free market conditions as they are.

Under feudalism, property rights existed as much as they exist today. The structure of the global economy is moving away from free market capitalism to Oligopolistic Capitalism which will eventually take us back to feudalism as the rich get richer and the poor get poorer, and there is no end to it. The middle class gets destroyed. The rich oligarchs and their lackeys will eventually own everything whilst the poor will own nothing. Under feudalism, the poor only had their labor to sell. That's exactly where this rogue form of capitalism is headed, the only difference being that this time around there will be no one to buy that labor if and when it's replaced by machines.

Ciao