a critique of capitalism from an unlikely source

excerpt from:

https://www.hussmanfunds.com/comment/mc240623/

Every speculative episode convinces investors that the economy has entered a “new era,” defined by some novel, exciting innovation that captures the imagination. Yet investors somehow overlook the fact that that despite repeated cycles of technological innovation, real U.S. GDP growth and corporate revenue growth has been fairly consistent over time. In fact, real growth has been slower in the past two decades than it has been across most of U.S. history.

There’s no question that the emergence of the internet, wireless communications, smart phones, social media, data centers, and other technologies have introduced widespread changes in people’s lives. Then again, so did automobiles, and commercial aviation, and telephones, and electricity.

Despite the current conviction that “this time is different,” my sense is that many investors are mistaking concentration for prosperity. The most striking feature of glamour growth companies in recent years isn’t that they’ve produced more economic growth, but rather, that they’ve produced more economic concentration and greater wealth disparity. That outcome is largely the result of “network effects” — as certain companies gain customers, users, or vendors, the likelihood of new customers, users, or vendors choosing the same company increases. Leading companies become larger in size, because a handful of companies substitute for what would otherwise be many more. This concentration is often amplified through acquisition of competitors to obtain more customers or to incorporate or suppress competing technologies.

Aggregate growth isn’t higher as a result. It’s just that industries and wealth have become more concentrated, while the middle class and Main Street businesses can get hollowed out. The industry composition of the S&P 500 changes, but overall revenue growth doesn’t, nor does the arithmetic that links cash flows, prices, valuations, and long-term total returns.

Many of today’s largest companies have features of a “monopoly,” but not in the traditional economic sense. In the typical analysis of monopoly, excess profits are preserved by the ability of the monopolist to limit output and by doing so, to maintain prices at higher levels than would exist in a competitive economy. This sort of monopolist has an incentive to hold output at a sufficiently limited level to ensure a wide gap between revenue and cost. So, monopolists are traditionally thought of as producers that charge high prices and limit supply.

However, in any situation where the additional (“marginal”) cost of producing an extra unit declines or even approaches zero as the company expands output, simply obtaining more customers is sufficient to enhance profits, without any need to raise prices or limit supply. In this case, the largest companies become like “black holes” — drawing in more and more customers and eventually dominating the entire industry. These companies enjoy the status of a “natural monopoly.”

This sort of outcome may be “efficient,” but the level of profits can ultimately have little relationship to the contribution of the entrepreneurs that created these businesses. There’s no question that innovation should be rewarded enough to preserve incentives, but the skew of the wealth distribution has become increasingly bizarre. My impression is that corporate profits and extreme wealth, particularly among mega-cap companies, have become a sort of “capture” or “rent” that reflects network effects, social dynamics, and general technological efficiencies that were not part of that entrepreneur’s invention, and might be better characterized as public goods.