Commerce

Better a Crook than a WASP: The Left Ditches Progressivism

June 25, 2014

Multiple Pages
Better a Crook than a WASP: The Left Ditches Progressivism

If you’d asked me at the peak of public cynicism about giant oil companies—say, 1975—if within a quarter of a century a Democratic administration would allow Exxon and Mobil to merge into ExxonMobil, I’d have assumed you were nuts.

After all, Exxon (formerly the Standard Oil Company of New Jersey) and Mobil (the Standard Oil Company of New York) were the two biggest descendants of the 1911 Supreme Court decision enforcing the Taft Administration’s pioneering antitrust lawsuit against John D. Rockefeller’s Standard Oil monopoly.

If even Republican President William Howard Taft had thought Standard Oil was too dominant, how could a Democratic president agree to its reuniting? Yet Bill Clinton’s FTC voted unanimously in 1999 to allow the formation of ExxonMobil.

One of the less heralded developments of recent decades has been the decline of appreciation on the left for the progressive reformers of the first decades of the 20th century and their battles with the robber barons.

When I was young, the history books, which were largely written by those progressives’ protégés, were filled with their praise. Today, however, progressive victories against inequality, such as anti-monopoly enforcement and immigration restriction, are ignored or denounced. Perhaps those old progressives seem too WASP for contemporary tastes. That the most effective opponents of crony capitalism tended to be the distant cousins of the capitalists themselves subverts the dominant narrative that the United States must have been fated to white bread ruin without massive injections of more vibrant immigrant ethnicities.

Moreover, the progressive reforms of a century ago were too pragmatic for subsequent intellectual tastes, which prize grandiose theorizing about how capitalism will save us through “disruptive innovation,” or how we’re doomed by capitalism’s fatal flaws that can only be remedied by turning the power to tax (and, presumably, the accompanying power to use the threat of organized violence to demand taxes) over to a global superstate, as French economist Thomas Piketty demands in Capital in the Twenty-First Century.

Harvard historian Jill Lepore set off a furor last week by writing a New Yorker article making fun of Harvard Business School professor Clayton M. Christensen’s buzzword “disruption,” that talismanic term so beloved by the Forbes 400. Christensen, whose website informs us he’s “the architect of and the world’s foremost authority on disruptive innovation,” has responded with Donald Sterling-quality umbrage:

I hope you can understand why I am mad that a woman of her stature could perform such a criminal act of dishonesty—at Harvard, of all places.

Lepore, unfortunately, doesn’t quite grasp the key fact about technological “disruption”: It only pays off if it helps you grab some degree of monopoly power.

This is ironic because Lepore begins her article by mentioning that she once worked for the previous high guru of business strategy, HBS professor Michael E. Porter, whose books on competitive advantage were eye-opening to a naïve economics major like myself when I was studying for my MBA. Your undergrad Econ 101 professor explains how a wheat farmer is a “perfect competitor,” which sounds pretty cool. When you get to B-school, however, your business strategy professor points out that you do not want to be a wheat farmer. Perfect competition is no fun at all. As Porter wrote in 1979:

The essence of strategy formulation is coping with competition. … In the economists’ “perfectly competitive” industry, jockeying for position is unbridled and entry to the industry is very easy. This kind of industry structure, of course, offers the worst prospect for long-run profitability. … The corporate strategist’s goal is to find a position in the industry where his or her company can best defend itself against these [competitive] forces …

For example, for most of 1982-2000, I worked for a start-up firm that disrupted the heck out of market research for the consumer packaged goods industry by introducing supermarket checkout scanner data into a business that had previously relied for data collection upon pencils and clipboards. Yet, even though my company transformed market research into an early outpost of now-fashionable Big Data, it recurrently disappointed investors.

Why? Because the Reagan Administration vetoed on antitrust grounds the firm’s logical endgame—a merger with the more deep-pocketed of its two established rivals. In the subsequent turmoil, we drove the weaker of the two out of business. But the industry still proved “only big enough for 1.5 firms.” Both survivors constantly cut prices during the ensuing multi-decade price war.

The disastrous surprise was that our huge advance in accuracy of market-share data ruined the profitability of what had previously been a cozy duopoly. Ironically, the sheer wooziness of the two incumbents’ incompatible methodologies had made clients’ market research departments reluctant to switch data suppliers in search of lower prices. Why? Because some of their brands’ market shares would suddenly appear to go up and some would go down. This would lead to embarrassing questions from their bosses about the trustworthiness of the data. So, it was best to keep paying high prices for numbers stylized in a consistent way.

In contrast, by providing clients with scanner data from 2,700 supermarkets, we gave them science rather than art. Unfortunately, the truth turned out to be a commodity, like wheat. Because both surviving competitors delivered virtually identical results, clients were liberated to switch suppliers if prices weren’t lowered.

That kind of too-perfect competition is increasingly rare as antitrust enforcement, and the culture it inculcates, declines.

The left has lost most of its former interest in anti-cartel activism. For example, Piketty, the paladin of the 21st century left, mentions the word “monopoly” only twice in his 685-page Capital in the Twenty-First Century. And one of those appearances is on a page that’s devoted to sniping at criticism of Mexican monopolist Carlos Slim.

This Lebanese-Mexican businessman was sold the national telephone company in 1990 by his close personal friend Carlos Salinas, president of Mexico. The next year, Salinas allowed Slim to inflate prices 170 percent. Mexican historian Lorenzo Meyer noted:

With wage increases of 18 percent and telephone rate increases of 170 percent, you don’t need to be a financial genius to make it in the business world. And since the telephone service in Mexico is a monopoly, there is no free competition to benefit the consumer.

Andres Oppenheimer wrote for PBS:

Mexico in the early nineties was similar to American capitalism in the late 1870s. Azcarraga, Slim, and Hernandez were not much different from railroad and steel magnate Andrew Carnegie or oil trader John D. Rockefeller. Like the American “Robber Barons” of their time, the Mexico Twelve were making a fortune from their close partnership with the government. And to their immense relief, Mexico was not contemplating anything like the 1890 Sherman Anti-Trust Act, which had broken up U.S. monopolies through forced sell-offs.

In return, Salinas demanded at a private dinner party on February 23, 1993 that Slim and Mexico’s other 29 oligarchs donate $25 million each to the ruling party’s campaign war chest, a total of $750 million. Oppenheimer notes:

Telecommunications magnate Slim … supported the motion, adding only that he wished the funds had been collected privately, rather than at a dinner, because publicity over the banquet could “turn into a political scandal.”

Now, you might think that there is something unseemly about a regular contender for the title of World’s Richest Man making his fortune off the relatively small Mexican economy. We’re constantly told that Mexicans have to be allowed to flock to America to escape starvation in their own land. Yet one well-connected monopolist is permitted to pile up an enormous trove by charging exorbitant fees for the lifeblood of any economy, communications.

A 2006 article in the New York Times pointed out:

The Organization for Economic Cooperation and Development, an association of wealthy countries based in Paris, reports that Mexicans pay some of the highest phone rates in the world, with calls costing 50 percent more than the group’s average. Forbes reported that the average monthly phone bill for a small business in Mexico is $132, compared with $60 in the United States.

 

Slim epitomizes the toll taken on the Mexican economy by monopolists:

As a result, said Mr. Ortiz of the Bank of Mexico, economic growth is one percentage point less than it could be with real competition. There are not enough jobs to keep workers from migrating to the United States ...

Piketty, however, is offended by how Slim

… is often described in the Western press as one who owes his great wealth to monopoly rents obtained through (implicitly corrupt) government favors…

(Slim, himself, has been proactive about improving his press coverage: in 2008 he financially bailed out the New York Times and is now the newspaper of record’s second-biggest owner. Not surprisingly, Slim, who profits lavishly off long distance calls between illegal immigrants in America and their loved ones in Mexico, doesn’t get mentioned much in the Times’ vociferous denunciations of immigration skeptics.)

Piketty, in his inimitable prose style, explains that criticizing Slim is a mistake, if not downright racist:

Rather than indulge in constructing a moral hierarchy of wealth, which in practice often amounts to an exercise in Western ethnocentrism, I think it is more useful to try to understand the general laws that govern the dynamics of wealth—leaving individuals aside and thinking instead about modes of regulation, and in particular taxation, that apply equally to everyone, regardless of nationality.

In other words, rather than the citizens of Mexico using the rule of law to break up Slim’s monopoly, as Americans did with Rockefeller’s, the important thing is for readers of Capital to take global control.

What could possibly go wrong in Piketty’s planetary empire?

SIGN UP
Daily updates with TM’s latest


Comments



The opinions of our commenters do not necessarily represent the opinions of Taki's Magazine or its contributors.