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Karl Marx. Photo: Wikimedia Commons
Karl Marx. Photo: Wikimedia Commons

Marx misread capitalism but we must not fall into the same trap

Curbing excessive market power is best done by working out why capitalism results in monopolies

The central problem thrown up by capitalist success is very clear: the inequality of outcomes and persistent maldistribution of wealth and incomes. This is obvious from the fact that a handful of technology companies—Apple, Alphabet, Amazon, Microsoft and Facebook—account for a disproportionate share of all market capitalization, wielding economic power that can rival nation-states.

This has led to growing calls for breaking up tech monopolies to curtail their power. Recently, former Greek finance minister Yanis Varoufakis made this point in a column in Mint. While this is an important way forward, it would be useful to understand why capitalism throws up monopolies so often. This would help the formulation of sound policies to prevent the concentration of market power beyond a point.

Our jaundiced views on capitalism come largely from its socialist and communist critics, especially Karl Marx, who wrote tomes on it without really understanding why capitalism works (when it does). Almost all of Marx’s assumptions—most of his knowledge, it would seem, came from reading reports in the British Museum and not from actually visiting factories or marketplaces—have turned out to be wrong.

Whether it is extracting a “surplus" from labour’s efforts, or the prevalence of deplorable working conditions on the factory floor, or how the worker is alienated from his tools, Marx got it all wrong. As management guru Peter Drucker pointed out, his egregious error was to presume that the worker’s tools belong to the capitalist and hence his alienation from work. In an information society, the worker owns his or her tools (i.e., skills and knowledge). This knowledge can at best be purchased by a capitalist but not controlled.

Author Paul Johnson, writing on Intellectuals and their personal follies, found Marx’s understanding of capitalism or worker exploitation too shallow. Even as he was writing Das Kapital, he seemed to ignore the fact that the existence of labour inspection reports documenting bad working conditions implied that the state was beginning to do something about protecting workers’ rights. Marx’s data on work conditions was outdated even as he was fulminating about them. It was “fake news". More importantly, the use of more capital actually improves work conditions for labour, whether on the factory floor or in general.

So beyond pointing out inequalities, Marxism gives us no real understanding of where capitalism ends up doing us a disservice.

The reason why capitalist “competition" tends to produce monopoly power lies in two understated truths: the power of compounding, and the existence of winner-takes-all situations.

The power of compounding tells us that once returns start accumulating, whether in an individual’s bank account or in terms of corporate financial power, capital grows exponentially rather than in a linear fashion. This is the secret behind the wealth of today’s richest individuals, including iconic investor Warren Buffett. If capitalist returns were governed by the rules of simple interest, wealth and power accumulation would slow down sharply. But we can’t uninvent the principle of compounding.

The second issue, related to the first, is this: Most winners in the first round of competition tend to be one-trick ponies; they are good at only one thing, but the qualitative difference in the product or service they offer is so attractive that it facilitates the emergence of consumer-market monopolies. This is the winner-takes-all phenomenon. Google was not a first mover in internet search, but its algorithm was so much superior that it conquered all. And this one trick, once taken to other allied markets (advertising, maps, mail, etc.), made it so powerful that it could effectively invest in many other unrelated areas and come out trumps (browsers, mobile phone operating systems, video publishing platform, et al).

Ditto for Facebook. It won the social media race even though it was a late entrant. Having won the first race, it could buy out competitors in other fields (WhatsaApp, Instagram, etc.) by sheer money power. The same applies to Microsoft, which converted its desktop monopoly into an opportunity to get into many other areas.

One can extend this logic even to manufacturing, where China—a late entrant to capital-led growth—became factory to the world for several products. This is one reason why shifting supply chains out of China will be difficult, for it won that race by using scale and such winner-takes-all success cannot be easily copied.

Most importantly, capitalism’s success (or failure) depends on information (or the lack of it). Unlike socialism, capitalism uses information such as prices to allocate resources. Where this information is plentiful and available easily, it works. Where it is lacking, it fails (example: our destruction of the ecology, where the price of excess use of fossil fuels is paid only by later generations).

So, the way forward for policymakers is clear: Break up monopolies when they become too big, and develop methods to improve price information for products that cannot be priced easily. Regulation is the only solution here.

R Jagannathan is editorial director, ‘Swarajya’ magazine

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