Digital Monopoly Capitalism

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This week it was revealed that Amazon has been bullying the publishing house of Hachette to give it better terms.

Among Amazon’s tactics against Hachette, some of which it has been employing for months, are charging more for its books and suggesting that readers might enjoy instead a book from another author. If customers for some reason persist and buy a Hachette book anyway, Amazon is saying it will take weeks to deliver it.

The scorched-earth tactics arose out of failed contract negotiations. Amazon was seeking better terms, Hachette was balking, so Amazon began cutting it off. Writers from Malcolm Gladwell to J. D. Salinger are affected, although some Hachette authors were unscathed.

Amazon has a near monopoly position in the distribution of books. The supreme irony is that government regulators are so clueless to the effects of monopoly that they brought an anti-trust case against Apple, a relatively minor player in the books business instead of Amazon.

It wasn’t supposed to be this way. The Web’s supposed low barriers to entry would allow a very competitive landscape, but it hasn’t turned out that way. In search we have a monopolist in Google. In smartphone operating systems we have a duopoly in Apple and Google. And we soon might have a near monopolist in Broadband in Comcast and certainly a duopoly in mobile phone service in AT&T and Verizon. It turns out the Internet is very good a creating “winner takes all” scenarios.

In Paul Baran and Paul Sweezy’s classic work, Monopoly Capital they depicted a system that does not function in the way classic economists believe market economies should. As the digital economy becomes a large component of our GDP and companies like Google, Apple, Amazon, Comcast, Verizon and AT&T dominate the Fortune 100, we ought to rexamine some of the deregulatory nostrums of the Reagan era that brought us to this point. John Bellamy Foster and Fred Magdoff, in their book The Great Financial Crisis, describe Baran and Sweezy’s theory like this.

The problem, as they explained it, was that the enormous productivity of the monopoly-capitalist economy, coupled with oligopolist pricing, generated a huge and growing surplus, which went beyond the capacity of the economy to absorb it through the normal channels of consumption and investment.

This is why Apple has $150 Billion of cash on it’s balance sheet, Google has $75 Billion in cash, Cisco has $50 Billion. These enterprises cannot find sufficient opportunities to reinvest their cash because there is already overcapacity in many areas and because they are so productive they are not creating new jobs and new consumers that might buy their products. So as Baran and Sweezy predicted, the economy falls into stagnation.

The system therefore became dependent on the generation of larger  and larger amounts of waste in the form of military spending, the expansion of the sales effort, speculative finance, etc., which functioned as external stimulants boosting production. All of these stimulants, however, were bound to prove inadequate to support the economy over time, since bigger and bigger injections were needed just to keep it going.

This is critical. The amount of waste generated is astonishing. Think of the hundreds of billions a year we spend on building missiles and attack jets that will never be deployed and never create any other jobs. Think of the billions per year we spend trying to convince you that AT&T’s mobile service is better than Verizon’s. Who is paying for this? You are, in the increased cost of your mobile service. Walk into a supermarket in front of the laundry detergent aisle. 60% of cost of that box of Procter and Gamble Tide you just picked up was in the advertising to convince you it was better than Lever Bros All, which has the exact same ingredients. And then there is speculative finance–the biggest waste of all. As Matthew Yglesias points out, four hedge fund managers, who create no products or new businesses make more than all the Kindergarten teachers in the country.

 If you ignore the bottom 22 and just focus on the top three, it turns out that David Tepper, John Paulson, and Steven Cohen earned a combined $8.2 billion last year.

By contrast the BLS reports that there were 157,800 kindergarten teachers earning an average of $52,840 per year. That comes out to about $8.34 billion. That’s a bit more. Then throw in the #4 hedgie and it looks like James Simons made $2.2 billion. In other words the earnings of just four guys absolutely dwarf the combined salaries of all 157,800 kindergarten teachers.

I know there is not much political will to take on monopolies these days. After all, how is a politician expected to get elected if he opposes the very source of his campaign financing? But monopoly doesn’t just harm consumers, it destructive to the greater economy. Lets not kid ourselves that the digital economy is any different than the forces Teddy Roosevelt fought in the Age of Oil and Steel. How much of what he said in 1895 would still be true today?

Too much cannot be said against the men of wealth who sacrifice everything to getting wealth. There is not in the world a more ignoble character than the mere money-getting American, insensible to every duty, regardless of every principle, bent only on amassing a fortune, and putting his fortune only to the basest uses —whether these uses be to speculate in stocks and wreck railroads himself, or to allow his son to lead a life of foolish and expensive idleness and gross debauchery, or to purchase some scoundrel of high social position, foreign or native, for his daughter. Such a man is only the more dangerous if he occasionally does some deed like founding a college or endowing a church, which makes those good people who are also foolish forget his real iniquity. These men are equally careless of the working men, whom they oppress, and of the State, whose existence they imperil. There are not very many of them, but there is a very great number of men who approach more or less closely to the type, and, just in so far as they do so approach, they are curses to the country

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4 Responses to Digital Monopoly Capitalism

  1. BobbyGvegas says:

    “Among Amazon’s tactics against Hachette, some of which it has been employing for months, are charging more for its books and suggesting that readers might enjoy instead a book from another author. If customers for some reason persist and buy a Hachette book anyway, Amazon is saying it will take weeks to deliver it.”
    ___

    Is that not patently illegal restraint of trade?

  2. Fentex says:

    This is why some people are asking “Why are people working?”. As automation improves and network effects concentrate production the theory is there simply aren’t going to be enough jobs to go around. So perhaps the time has come to redesign society to remove the need to employ everyone?

    That implies universal health care, retirement provision and generous welfare. Not a welcome idea in many places.

    It also reminds me of the thought that competing online is competing against the very best in the world. I live in New Zealand, a small country at the end of the worlds communication lines, even with sufficiently capable Internet connections and investment no competitor to Amazon could arise here – we’re at the end, not centre, of the worlds trade.

    I have this discussion with a friend often – how possible is it to over-come the network effects of an established competitor?

    About a decade ago a local Ebay type of company was established in NZ, I thought it a silly idea as I believed it inevitable Ebay would arrive and with it’s superior experience and wealth eat up local competition. I was wrong, Ebay never cared enough to establish a NZ presence and TradeMe became the dominant auction site in NZ.

    Now it is eating the Real Estate market. This friend of mine recently sold and bought a property without an agents help, purchasing his own signs and advertisements, locating his new home via TradeMe and Google Maps and saved himself some $30, ooo in fees.

    So now TradeMe is exploiting it’s position by raising rates and the question of whether it’s possible to compete or not comes up between us. He thinks not, because he argues TradeMe has captured the markets attention and it will not be wrested away. I suspect otherwise.

    Last year a competitor attempted to enter the auction market and failed abysmally due to massive incompetence in programming (it was an outsourced project to an overseas software company that the investors were apparently not competent to judge the quality of), so it’s not a fair test of the idea. I wait to see.

    Another danger to competition is the spurious use of I.P laws to attack competition. The wealthy incumbent is increasingly being given tools to smack down uppity competitors even when their case is weak.

  3. rhbee says:

    A sense of powerlessness, a sense of rage, I’ve lost them both and like you Fentex I wait to see. My most prevalent feeling a sense of growing curiosity at what this “chicken little” world will bring.

  4. Alex Bowles says:

    @Fentex,

    If you haven’t already, see On the Phenomenon of Bullshit Jobs by David Graeber.

    Elsewhere I was reading that all global networks will converge on three core systems: logistics, energy, and information. Assuming the global population stabilizes around 10 billion (+/- 1b) and that energy sources are largely renewable, these interdependent systems will have an upper bound in terms of capacity, demand, and reach.

    Building them out and adapting to the shift may be the last opportunity for mass employment in human history. When that effort is complete the employment problem will be unavoidable. Hopefully, enough people will have seen the endgame for themselves to (a) recognize where we’re going and (b) realize that it’s not a bad thing.

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