Hong Kong consumers are more familiar than most with a lack of competition. From power to buses, and supermarkets to bookmaking, many of Hong Kong’s industrial and service sectors are at best, duopolies, and some are even monopolies. Thus The Myth of Capitalism, by Jonathan Tepper, should have some resonance.
Tepper, is the Founder of Variant Perception, a macroeconomic research group that caters to hedge funds, family offices and high net worth individuals. He previously worked at major banks and hedge funds.
Despite his strong finance background, Tepper professes no love for the system that made him rich, and while he rightfully draws attention to poor regulation that enables companies to dominate their market, he leans towards showing the absolute worst side of corporatism.
Indeed, Tepper opens his book with one of the ugliest depictions of corporate America in recent times. In 2017, security staff dragged a bloodied David Dao, a Vietnamese-American doctor, from a United Express flight. His crime? He was on an overbooked flight and had been selected – randomly, United Airlines insisted – to be put on a later flight. His response that he had patients to urgently treat fell on deaf ears and staff sought assistance.
Other passengers videotaped the incident and United was subsequently excoriated in the press and vilified on social media. United – from their public relations staff up to Chief Executive Officer Oscar Munoz – blamed the passenger for being belligerent. Eventually, the outrage was so great that the CEO apologized and was denied a promotion, and the airline reached an undisclosed settlement with Dao.
A public relations disaster of this magnitude should have had stock market repercussions. Instead, United’s shares were unaffected. “For all of 2016, the company reported full-year net income of US$2.3 billion,” Tepper writes. “The results were so good that in 2016 United’s board approved a stock buyback of US$2 billion, which is the financial equivalent of spraying yourself with champagne.”
Such extreme incidents aside, the author presents a detailed case on how industry concentration over the past 40 years has led to – at least in the United States, the focus of his studies – low productivity, low business dynamism, higher consumer prices, record levels of inequality, low wages and lost localism and diversity.
More controversially, Tepper asserts that low levels of competition lead to low levels of innovation and thus lower levels of economic growth, citing the London School of Economics’ Professor Zoltan Acs and Indiana University’s Professor David Audretsch, whose study concluded that “the total number of innovations is inversely correlated with concentration and that monopoly power deters innovation.”
Tepper also argues that companies with market dominance use their power to raise prices for customers and squeeze suppliers and employees. And it is true that some of the most lionized figures in American capitalism appear to resent competition. Ex-CEO of General Electric Jack Welch taught managers at his company that market dominance was vital. “Since the cult of Welch and GE has taken over,” Tepper writes, “managers have sold smaller competitors to the biggest rivals, and the top firms have gobbled up any small competitor.”
Warren Buffett – often called the “Oracle of Omaha” because of his Nebraska roots and sage investment advice – has praised pricing power, where companies can raise costs for consumers. “In a monopoly, one company is the only seller and can hike prices as it likes. In a monopsony, one company is the only buyer and can pay whatever prices or wages it likes,” Tepper writes.
More gloomily, the brave new world of high-tech isn’t going to rescue us. “Americans mythologize competition and credit it with saving us from socialist bread lines,” Peter Thiel, Co-founder of PayPal, wrote in The Wall Street Journal in 2014. “Actually, capitalism and competition are opposites.”
One of the few companies that escapes Tepper’s wrath is Costco, a kind of big-box consumer-goods wholesaler that attracts retail customers through member-only warehouse clubs. “Costco workers are paid more than US$20/hour and as a result have only 5 percent employee turnover for those who have been with the company for over a year.”
Is Costco exhibiting counter-intuitive altruism? No. It’s a profitable company. “They continue to outperform industry competitors, pay workers well, offer great benefits to close to 90 percent of staff, and have very low turnover as a result,” Tepper writes. Costco’s model provides a living wage with health benefits, so “it also puts more money back into the economy and creates a healthier country.”
Tepper suggests that despite all the innovation that’s giving us Uber, Airbnb and video app TikTok, the capitalist model is in need of dire reform. If not in the U.S., where is it going to be recast in a kinder, gentler model that doesn’t see bloodied medical practitioners dragged out of the seats of highly profitable airlines?
Author interview: Jonathan Tepper
Jonathan Tepper might find the United States system of capitalism dispiriting, but don’t look elsewhere for joy. “I don’t think that there are much more enlightened systems to be found outside of the U.S. and Europe,” he tells A Plus from his home in Charlotte, North Carolina.
Mainland China, he notes, is “very much a command and control economy where even private businesses obey the party and state,” while Latin America “has experienced booms and busts as countries have embraced capitalism and flirted with deficit spending.”
Tepper says the main concern of the book is that we need to embrace more capitalism and competition, not less. “We need to fix the flaws limiting competition and capitalism in the U.S. and Europe, not discard capitalism,” he says.
The author, who founded Variant Perception – a macroeconomic research unit that studies financial markets, asset allocation and asset management – insists he is not anti-capitalist. “When markets aren’t rigged through excessive regulation and lobbying, the U.S. still has some of the most dynamic companies and industries out there [and] leads the world in technology, venture capital, and design.”
But, he points out, there is louder clamouring for reform, noting the rise of younger voices such as Alexandria Ocasio-Cortez, the high-profile 29-year-old New York congresswoman. “She is a sign that people want something different,” says Tepper. “She’s clearly meeting demand that is already there with her message.”
Capitalism reform was a theme of the 2016 presidential election, he adds. “Both Donald Trump and Bernie Sanders sounded the same on the campaign trail. Both talked about a rigged system. And most candidates who have announced they’re running for president espouse anti- monopoly views, so the tide is turning.”
Individual countries will have to address flawed systems on their own, says Tepper. “International bodies like the United Nations, World Trade Organization and Asia-Pacific Economic Cooperation are not designed or suited to solving national issues of competition and antitrust. These issues have to be treated at the national level.”
Tepper says he isn’t planning to write more books – at the moment. “Writing a book and getting the word out is an enormous amount of work,” he says. “When I finish, I don’t want to write another. Then time passes, and I forget how much work it is and I write a book. Ask me in a year or two. I’m sure something will come up.”
