Jonathan welcome back to real vision. Thank you so much
I think we last had you on I think it was March April of 2018 when you'd been
Working on you quite a long way through the sort of basic framework of your book
I mean for capitalism that got published I think at the beginning of December and
So we're going to have a discussion and a chat about
Where you think?
Kaplan maybe has gone wrong
but first
I just like to sort of go into
Kind of a thing that's in the front of your book where you say that first of all
Capitalism is the greatest economic system in history. You are a great believer in capitalism
So before we go into where it's gone wrong
Can you maybe just outline how it works or how it should work what capitalism should really be certainly. So one of the
Quotes that I use in the book comes from GK Chesterton, and he said the problem with capitalism is not too many capitalists
But too few and I think the the real problem that we see right now is essentially that we don't have enough capitalism
Meaning there's not enough competition
people have said that capitalism itself is a false of Piketty for example says that
capitalism has within itself an internal contradiction and
when growth is low returns on capital or high and this creates inequality and potentially revolutions if you look at
Capitalism it's by far the best system that we've seen in terms of generating
Wealth and progress and when we have seen open competitive markets
What we've seen is a lot of innovation and the argument that I make in the book is the title
Myth of capitalism itself comes from the idea that this current system that we're seeing is is indeed capitalist
I argue that in many industries there actually is very little competition. So you could say that capitalism has two central elements one is
private property so Marxists
define themselves in opposition to private property so they wanted all property to be owned by the state and that battle broadly was won in
1989 with the fall of the Berlin Wall even China which is supposedly communist, you know
In fact does have large elements of private property and that's one reason why it's been a success
and then if you look at the other element of capitalism is competition and the reason that competition is important is that
You need to have clear price signals that would be able to
induce changes in supply and demand and
that that side in many industries I argue has been deteriorating if not disappearing and
After I finished writing the book
fortunately, it hadn't yet gone to press and I was able to
Get it to my editor
But I found this wonderful quote by a Polish economist and make I collec II and he did some great work on
Essentially national accounts and he was writing about the same time as Keynes. So even though he was a neo-marxist
He was a great mind, but he said while perfect competition he said is maybe useful as a starting point
you know, in fact the capitalist system tends towards monopolies and
competition itself is a myth and I thought this is a great quote to put in there and it's essentially the
Loss of competition that creates the problem in capitalism, so it's not capitalism itself
It's what Stiglitz calls ersatz capitalism it sort of looks like capitalism but isn't isn't quite so I mean what went wrong?
What has it gone wrong with capitalism? Sure. So one of the big
Problems that you see in the United States and many industries. Is that over the last 40 years?
It really started in 1982 with the change of the merger guidelines under the Reagan administration
Companies were allowed to buy each other
and so you ended up with a system that was fairly open and competitive and if you think of the World Cup or you think
Of the sweet 16 in the US you start out with 16 players. Then you go into 8
And then for so many industries now basically have fewer and fewer players. So the and fewer that matter
so for example the beer industry the United States now dominated by two companies if you look at
Airlines for example we've gone down to four, but actually if you look at the what are known as the fortress hubs
There's almost no competition. So
American will have Charlotte United will have Houston and
Delta has Atlanta and so they basically been carving up the US and if you're looking at you know
Cable and high-speed Internet 75% of Americans don't have any choice at all
It's oh, it's a local monopoly and then the US healthcare system
Basically, if you're looking at over 20 states, you essentially have a duopoly, you know
There's only real to really two companies that you can buy from and so in many of these
Big decisions about spending. The average American actually has no real competition that they can then choose from and you mentioned their
Competition in the sports analogy and I mean isn't competition
Always going to have a victor and surely if you have competition shouldn't the victor can reap the spoils
And so where does that contradiction in terms of we want competition, but we don't want perfect competition
We want something slightly less. How is that going to sort of build into into this?
So the the question is a very important one
I think it ties into one of the reasons why there's quite a lot of dissatisfaction and
Why a broken economy essentially creates broken politics. So if you have a company and you're doing very very well
I'm going to be attracted to the earnings that you have and I'm gonna want to go in and compete with you and so in
theory you shouldn't necessarily have one victor, you know most industries don't have
Extraordinarily high barriers to entry you know, most of them are not natural monopolies yet. What we're seeing essentially is monopolies and oligopolies
Even in industries that should have competitors
and the reason is that often you end up with what I call the crony capitalism and essentially regulation and legislation that supports
Unnatural monopolies or unnatural oligopolies, you know and agriculture in the u.s
Is a classic one where you know?
There's no reason why for example three companies should control 80% of the potato chip and potato markets
right
The main reason that that's done is one to be able to have market power over the farmers
to be able to have power relative to
Supermarkets, but you could go I can go industry after industry pointing out
you know, if or if you look at let's say local regulations regarding
Funeral Homes, right many of them are local monopolies held by service corporation. There are laws
basically that would prevent you and me from going into these industries to compete same things true for
You know a broad variety of industries. I talked about Moody's and S&P in the book, right?
It's easier to raise an armed militia in the US than it is to start a rating agency
You have essentially Act which created a special category called the NRA SRO the National recognized statistical rating
organization and that if you don't have that you can't then write bonds and those ratings essentially go into sort of
how the Fed and other
These look at risk and so much of these barriers to entry that essentially
you know are created are through regulation and
Lobbying a lot of that. It's obviously crony capitalism, but I have no problem with a company
Acquiring monopolies by being the best but generally what happens is they merge to get bigger and then to they corrupt the political process essentially
to keep to erect regulatory barriers around the industry
And as an investor, some people would say the classic moat system is an investor
actually, these are fantastic companies and you want to chase the monopolies because
If I have no moral compass, all I wanted is good returns, and these companies probably have good returns
But you've done quite a lot of work showing that yes, you know, these companies are successful
Relative to others, but they are causing
De-stresses elsewhere they are causing a breakdown potential social fabric
I think you highlight maybe five different areas ranging from income inequality to lack of diversity so you can explain
Maybe before we sort of go on to your whether as an investor
We should care could at you explain what those real issues are when you kind of underlie go underlying in these in these kinda monopolies
oligopolies and Joe Oppel is certainly so I start the book with
Warren Buffett, and you know Buffett
Ultimately, you know, he's probably a very decent person based on everyone
I've spoken to who's met him, but he's monopolist at heart and he likes monopolies
And so he looks for these two moats and generally he's buying a monopoly a duopoly or you know in the worst case an oligopoly
He you know
That's that's where he hunts
But he talks about pricing power and that's the ability of a company to raise prices on consumers and he loves those companies
But what's very interesting is if you think if a company really has that kind of power to raise prices on consumers
Why would they not then have that power? Let's say to
Not raise wages unemployed on their employees, right so they would have power relative to workers
Why would they not have power to squeeze suppliers, right?
So like the the the power on the consumer side is they also have in other areas of the economy
And so what I point out in the book is that there's an increasing body of research
showing that
Wages in highly concentrated commuting areas are much lower than they are in
Concentrated commuting areas a bit. Therefore there is a squeeze that happens to workers and if you look at for example
monopsony, which is the opposite of a monopoly so monopoly is one seller but you could have one buyer and a classic example would be
A coal town in Virginia where one company employs everyone
This is quite rare in the US, but you do have what you could call
What's a metaphorical monopsony right where the company can fire the worker at will but the companies that impose?
Non-compete swear that the employee can actually go out and search for another job
So you've effectively narrowed down who they can possibly work for and over. One-fifth of US workers are now covered by non-competes
so you've seen a collapse in unionization an
increase in concentration a huge shift in the imbalance of power and so
The ability for companies to impact workers is leading to a squeeze in wages. So that's that the first one the second one essentially
comes from a
reduction in productivity and
spending an R&D broadly and the
Endless economic. Dynamism what's quite clear is the argument big versus small I think is a red herring
You know big is certainly good and often better. There are economies of scale
So I'm not getting into the argument of big versus small necessarily but the point is that research shows that companies in highly concentrated
industries do spend less on R&D and innovation and you end up with
less economic dynamism and fewer startups
so
I'm not suggesting in MA. No causal link. It's not like this is the only factor but it is certainly a factor
That is damaging to the US economy when you end up with you know
A few companies and they have an interest in essentially restricting supply
and the
startups at the same time what we've seen is a broadly
Fewer companies are existing in sort of smaller to mid-sized cities moving to the very large cities. So you have a loss of economic
dynamism and
In the book, I'd point out that in the Ireland you had the potato famine
She only had one potato and that was a disastrous. What's happening in the u.s. Is that many industries?
We're now getting down to very few players and in the case of for example
inter Venus
Fluids a saline solution
To companies control that for the US market and they put their production facilities in Puerto Rico
So when Hurricane Maria hit the US had shortages of a saline solution, which is just you know
Mind-blowing and so we're basically ending up with a lot less diversity in terms of supply of many key
Drugs or other products and that really is not very efficient
You know, what we need actually is a fair degree of diversity and that comes through competition. So those are some of the
problems in terms of less economic dynamism productivity lower wages, and obviously the inequality angle is that companies are
Essentially very efficient mechanisms for transferring wealth from the middle and lower class to people who own stock and most Americans don't own
almost any stock or don't own it directly and the the very wealthy do and so to the extent that
everyday people are going about their daily lives paying a toll and the term robber baron itself comes from
The Middle Ages where you had barons in Europe who would charge told across their lands, but they wouldn't keep the lands up
You know in terms of maintaining the roads
So it was just a way of passing money from the poor to the Barons and in the u.s
right
Now if you think of one of the toll roads in people's lives every day
They're transferring a little bit of their wealth to people who are much wealthier than them
and so it's not surprising that inequality is increased in the US and
ultimately, I think that leads to populism and it you know, very poor outcomes for everyone and you
Talk about inequality is not unfair. In fact, we should be clear that inequality is probably the good things that creates dynamism
But you think we pretty gone past optimal inequality to the point where it's become distorted and grotesque
Yeah, so I think that you have to distinguish between a sort of inequality and unjust inequality, sir
Angus Deaton a Nobel Prize winner has done a lot of work on development and inequality and
Inequality itself is essentially an outcome. It's a a symptom. It's not the underlying cause the underlying cause is that the
It's this lack of competition means that people are able to
have pricing power relative to the consumer or have power over wages and and
This would not be happening if you actually have competition and so it's a sense that this is an unjust
Inequality due to competition. That's what creates the problem I have. Absolutely no problem with people
Gaining market share through innovation. I have no problem with patents. The problem comes when you erect regulatory and legal barriers to protect those
Businesses, you know and prevent competition and when we know you see an abuse of the patent system in the United States
You know through reformulations endlessly extending patents and copyrights and things like that. And so I would put those in the unjust
inequality category where people are clearly extracting economic rents, you know without improving production or you know,
Providing any new or better products and it also seems that in this sort of system
You can have I mean one of the great debates is this inflation and other people say, you know
There's deflation but actually what we're saying, what sounds at what you're saying here is actually both camps put could be right
But these people in the middle they potentially take in the deflation and they don't pass it on to the end user
they create deflation of wages, but relative inflation of the output of their good and so they take this fat margin and so
This is where you know everyone could be right about inflation and deflation because it's happening in both ends
Well, so I started looking at this
very question of
competition essentially by looking at very perception leading indicator for US wages, and I thought that
Was our indicator was pointing to very high very big increase in wages
We had a relatively tight labor market all the inputs in terms like the quick rate and others were pointing higher
But wages weren't going up. And at first I thought you know, just give it time
these are long leading indicators and they'll go up and they did never time and I thought it was very troubling one because I was
They don't like things being broken and our indicator was clearly broken
But two I thought that if I don't if I can understand what's going on with this, I'll also understand the profit side. So
The leading indicator for wages if you invert it because the wage bill is the biggest part of corporate spending
Would lead roee and corporate profits
and so when I started looking into this
I realized that actually it's the decline in competition and in a large barriers entry that's creating these abnormally high profit margins and so
from the macro
Standpoint it matters quite a lot because if you what you want to do is to increase wages and you start you know
Trying to shift the aggregate demand curve, which is that the Fed is trying to do via easy money policy
But actually the microstructure doesn't really permit that you know
Meaning that companies do have power over their workers and wages are going to go up
Then you're not really going to achieve your goal of you know, raising wages by shifting
Aggregate demand, you know through sort of loose or financial conditions. And so, you know some macro economists have pointed out that
Pursuing a macro strategy that takes doesn't take into account
the micro is not going to solve the problem and sure enough with what's happened is
You've ended up with sort of pricing power on the side of the corporations and they you know, fatten their margins as wages
Stay low. So it's been tremendously good for anyone who's owned asset prices over the last couple years
It's been very good for owners of stocks and bonds. But ultimately he hasn't done very much for workers
so
obviously this this
Environment is good for the investor lease to short term investor the person who's making the Prophecy's who's kind of gaining from that
but in the word you talk about how the
this overall outlook is
Causing a deterioration and kind of not just the social fabric but really in the economic fabric if we think of this longer term
That it's going to cause this decline in productivity you got evidence for that you you cite some data. What are those data points?
and one of those things you really look at to show that this is actually going to be a
Long-term negative negative for the economy and therefore the investing outlook certainly
So in in the book we start out looking at for example over the last 20 years
half of all public stocks disappeared now clearly the
Tech bust in 2000 2002 is a factor
The financial crisis in onine was a factor
But the broad trend though has been a decline in public stocks and a lot of that has come from murders
And essentially a loss in dynamism
also
if you look at the number of IPOs there been fewer IPOs that have been issued and it's not just a matter of
Regulation like sarbanes-oxley even after the JOBS Act which made it easier for small companies to list
We haven't seen a surge in in listings and at the same time you look at the private companies
We've also seen a fairly steady number of exits
Even as the number of new entrants is collapsed
So this broad economic dynamism is bad
But there is the issue that as these monopolies become much more extractive and sometimes it's through patents
Sometimes it's through regulation
But they end up killing the sort of goose that lays the golden eggs
and if you think of for example the US healthcare system and pharma in
You know
Everyone can raise prices as much as they like
Right, and they have the power to do so due to patents and the lack of competition
but ultimately they're just going to move closer and closer towards a
government-run system essentially where
You know their entire market will probably be taken away
You move towards a British NHS type system, you know or something else
But clearly you can't have private monopolies and duopoly
'he's
endlessly raising prices without having some sort of backlash and you can look at that in sector after sector and I guarantee you that you're
going to see
antitrust reform
in the united states and it may in fact be the big issue of the 2020 election from what people are telling me and
in some ways you have this sort of continuum where if you get extreme capitalism
It's almost the same as communism because you have a very very gilded elite
But a potentially quite an inefficient system below that and use of do you draw those sorts of comparisons?
I don't think there's anything inevitable about
Industrial concentration. I think that ultimately markets are a construct of common law and then
legislation what I do think happens is that there there is a pendulum that swings and so you had a very high concentration in the
Late 19th century in the United States in response. You got the Sherman Act and in 1890 in the Clayton Act in 1914
And then we've had this the pendulum has swung back and forth where in the post-war period there were very few
Mergers that were allowed from direct competitors. So you ended up with bizarre
Conglomerates essentially where you would have a
Hollywood studio
That would also be part of the conglomerate that had an auto parts company and a cigar company and none of these made any sense
From a business standpoint, but because they couldn't buy the direct competitors. They ended up doing odd acquisitions. What happened in the
1960s and early 70s was the Robert Bork and the Chicago school economists
Argued that, you know, you needed mergers to create efficiency
And then that efficiency would be transmitted to the consumer and the term in terms of lower prices
And while the pendulum would probably move too far and preventing almost any mergers and now 40 years later
The pendulum has gone to the other end, you know where basically that they're allowing
Drug companies to buy generic competitors a completely eliminate competition or allowing two companies to control the beer market
you know and to have
Essentially monopolies at the local level in hospitals. So
Now we've gone so far to the other end
I think the pendulum is going to swing and you know
these things are
Multi-year in even multi-decade Affairs and I guarantee you that the pendulum is gonna swing back the other direction
and when you get these mergers people always talk about merging to talk about
Efficiencies and cost-cutting and we'll pass them on but they rarely do in fact
Isn't it the case that after most mergers prices go up? Yes. So the the consumer welfare argument it reminds me of
once a
Journalist asked Gandhi what he thought about Western civilization, and he said that he thought it would be a good idea
The consumer welfare itself would be a good idea
if genuinely all these mergers actually did create more consumer welfare the problem, is that the
studies that have been done
Overwhelmingly show that mergers lead to higher prices
So it doesn't matter whether you're looking at the cement industry whether you're looking at funeral homes
Whether you're looking at hospitals
Whether you're looking at cable and telecoms mergers lead to higher prices so that that's the the evidence and the book has
Extensive footnotes and all of this so on its own terms the the it's failed, you know
Meaning that the consumer welfare standard is not broadest lower prices
and then beyond that you throw in all the other problems and it's quite clear that what we need is a
reform of the laws because the there the current
FTC DOJ people running it and the sort of K Street law firms and private sector economists are
Involved in this very cozy revolving door and I'm written a piece which will appear in the American conservative
Probably be out by the time people watch this video
but basically what you have is, you know, Wall Street itself has made 21 billion dollars this year on mergers the
Firm's like compass Lexecon and Charles Rivers associates make loads and loads and money arguing in favor of mergers and the
Projections for synergies and mergers are so absurd in 2015
Deloitte looked at all the promised synergies and mergers and they mounted about two trillion dollars, you know
which is an absurd amount of money on a global basis and
Almost none of these actually happened and generally in fact prices went up and often prices go up
as studies show even before Moore just go through so
the the promise of lower prices has not materialized and what we've ended up with instead has been less competition and
if you talked to any people in
US administration was sort of on the lawmaker side in the u.s
And sort of engaged them with this and started sort of explaining the framework of the u.s
system and other systems as well and has there been any kind of interest in sort of think people sub stroking the bids and going
Well, we know this is quite serious
Yeah
so there's quite a lot of interest in the House representatives and in the Senate, so there's
many senators who want reform if you look at the
house representatives, they're people who have got in touch and there there's going to be
hearings on the legislative side
So clearly there's a desire for change and a realization that something is very wrong and broken
But if you look at the FTC itself and the part of Justice, they think everything is absolutely fine
of course because you know this they they get paid in that revolving door and they get paid millions of dollars to go work for
Law firms that then push from the mergers since and many of them have done it two and three and even four times
Over the last 30 to 40 years, so they think it's fine
but everyone else in the world recognize that there's a major problem with
that chain mean it's gonna need a catalyst is the catalyst going to be
Slow change slow burning chains people like yourself raising this or is there going to require you know?
the peasants to revolt with their axes and their pitchforks because
It's something which has been brewing for a long time since 1982 as you say it's coming to an extreme
But the legal side takes a very very long time and or less
Everybody is up in arms and says, you know, hey, this is wrong
But that's kind of often social unrest how did you see that casas? When could that happen?
So I don't think that people will be going to the streets and you know
Taking to the barricades and you know burning things. It's not really very American or early snot recently
But I think that the thing that's driving it much more right now is the realization particularly that Facebook and Google essentially
have a duopoly and online ads and one has a monopoly in search any other as a monopoly and social networks and
So in a way, it's the backlash against tech that these companies are now so big and so powerful
That's leading people to focus on it. And then when you look at Donald Trump and you look at brexit, whatever you might think about
You know the merits of either vote
It's quite clear that technology has played a much bigger part than it did in previous elections
and so people are now waking up to the fact that
Two companies essentially control what we find they control the algorithms in terms of what gets shown to us
Whether it's on the you know on YouTube or whether it's on the Facebook feed and so I think these are essentially the lightning rods
Of attention and because of that people are starting to focus on other things, but it's interesting
I wrote the book, you know and wrote it fairly quickly
That's just the way I work, but I didn't know what other books were coming out
you know at around the time the book was coming out and
The Tim will just wrote the curse of bigness
And so there are this really is the zeitgeist where other people are thinking and writing about this
I'm not the only person I'm one of many and
And I think that it tells you that in what you're talking about in terms of their social mood it is changing
And it's not just me
It was a bit danger that the people
Some of these companies it would be kind of useful for them to shine the spotlight on Google on Facebook
Which are it's the social ills it's and it's people say well, you know
You've chosen that we're not sure what we should be really focusing on is the food companies
The people are destroying agriculture to make a massive profit. These guys will hide under the spotlights focused on the tech
so
initially broad-based you think this will be broad-based or do you think it'll be a tech break but not a I am I think I
Suspect the monopolies will turn on each other. I
Read an article last week. That was hilarious. It was in a conservative
Website and it was written by essentially an academic who had been paid by Google
To write positive studies about Google in the past and he was like look, you know
Please leave the innovative tech giants alone
go after these horrible old economy monopolies, you know, it's sort of those like
You know pick on them not us
And so I suspect that you'll see quite a lot of that you know, which is that some people they're monopolies the good one
It's the other ones that are the bad ones
and you know
People will hope that they're they can be a little faster than whoever is the slowest runner and gets eaten by the line
When you talk about the sort of the changes that could come through you got you say the regulation is actually a barrier
So it's not achieve regulation
It's it's other means to try and break these down
but firstly if we just go into
Regulation and antitrust and all these things in the same way that too much competition leads to a single winner potentially
Which is seen to be bad too much regulation can go the other way
I think in the 1960s it went to the extreme where small companies couldn't merge
How did you find that optimal level where you get sufficient?
Let's call it regulation antitrust legislation
That just kept the wing so you don't have too much competition because in red what happens we go too far
That way we go too far that way we're just caught in this never-ending
Swing so one of the things that I talked about in the book is the analogy of chemotherapy
there's a regulation is chemotherapy and
If you think of chemotherapy people generally think that it just attacks cancer, whereas in that it's a selectively toxic. I
Spoke to a friend of mine who is a one of the world cancer
Specialists and the MD Anderson clinic one of the best clinics in the world and I asked him to sort of
you know walk me through chemotherapy and you know, he pointed out that it's actually much more interesting than
Chemotherapy exclusively attacking cancers
Basically, what happens is you and I have stopped growing so our cells all the energy that we have is dedicated to cell repair
Cancers cancerous cells essentially are have been genetically programmed in a way to only grow that's what they do
They're sort of like startups right like they're in growth mode and they don't really use their energy to repair themselves
They just use it to grow. And so what chemotherapy does is it essentially attacks healthy and
unhealthy cells
But the healthy cells can repair themselves and the unhealthy cells when they start to
Replicate and divide they do so with damaged DNA and then they die
And so if you think of regulation what it does is it's essentially attacking large companies and small companies in terms of imposing
compliance burdens
Accounting and tax burdens the big companies those they stopped growing
They've got loads of energy to spend and money to spend on compliance tax and so on
startup stone and so there's quite a lot of studies that
I cite in the book showing the the more highly regulated the sector generally the more concentrated it is and that's
One reason why the US health care system for example is highly concentrated in many areas
Because it's much more highly regulated the alcohol sector for example is very regulated, you know
Due to sort of prohibition and post prohibition the idea that you want to make sure people aren't drunk and killing themselves
Driving or is the restaurant sector it's not so you have two companies with 90 percent market share and alcohol
But you you it's inconceivable that McDonald's or Burger King could ever get to 90 percent of the restaurant market, right? And so
Regulation often does lead to more concentration and and it's because it wrecks
Regulatory barriers and if you think of banking for 70 years you had the glass-steagall Act. It was 35 pages
Very simple, very clear principles and that worked very well
Once dodd-frank came in it was 2200 pages with a thousand pages more
Delegated to rule writing committees and there have been almost no new banks that have been created since dodd-frank was passed. And so
Extensive regulation essentially is tends to favor incumbents. And so I think that
Increasing competition is not just about antitrust. It's actually about having
Principles-based regulation more sensible regulation that favors competition and has clear principles based rules rather than extensive
rules, so
That I think is one of the things that I'm sure like the the left will love the argument of you know
break up the big companies in the book and the the right way some people on the right will hate that and then I think
People on the left will hate my deregulation arguments, you know, and no one's gonna be happy reading the book
But but I hope though that it makes people think of the problem in a more nuanced way with the the companies themselves
there's always a sort of talk and you've seen in the tech sector where the tech giants they buy up the competition and
Half the time they buy them up and then they just let them die within their own behemoth cells
and so this is sort of but there's this thought that if you get the regulation
It's going to be really bad for the tech companies
But but it's Standard Oil that when you actually split it up the some of the parts the individuals was much more valuable
so as it Rockefeller became richer yes not poorer effectively when so if people along all these monopolies
They should just stay long because when they get broken up and they get the individual bits
But they actually be better off what you think is gonna be a big downward pressure on the market
So a stall comes in so there's quite a lot of research that's been done on spin-offs and generally they tend outperform their parents
I think when Greenblatt wrote that book, unfortunately, then it's not the trend came to an end, but people started spinning off
What are known as like garbage barges, you know?
So you take your terrible division and spin it off?
but generally spin-offs with them better historically and part of that is that they can develop and so for example
I was in San Francisco speaking to a friend of mine who works at Google and he was saying look unless
product reaches a billion people Google has no interest and so because of that often you have companies that have like
you know need massive addressable markets or they
You know, like Google does search ads if you're not in the ad business like forget about it
right and
What you find out is many of these smaller companies essentially or innovative activities within larger companies are not pursued or followed or developed
because they don't fit that central mission of the company and so
Standard Oil similar 18t when it's broken up the world and many of the parts ended up becoming worth far more
And and you ended up with innovation in telecommunications
so I think breaking up some of the large monopolies today would in fact be very good and would
Improve competition significantly and you would probably see a lot more
startups and Google itself
There's a website which you can find called Google Cemetery and it has an extensive list of all the companies that Google is essentially either
Shut down or ended some of them were internally generated others were bought in
But that's what tends to happen with large companies often that buy smaller companies
I was seeing the death of competition in a way or reduced competition because of this as you mentioned earlier
we've had a significant reduction in the number of listed shares since some ways with yeogi and it seems that
the growth of
Passive investing in this of dying off of active investing is partly explained by this and actually passive investing in some way
There's a logical response to this reduction in available shares
But then passive investing itself perpetuates the benefits for these large corporates because all capsule is going to them
Directly indirectly. So is that is that fair to say that passive investing is?
Almost a logical result of this process. So the asset management industry itself has also become a highly concentrated
So if you're looking at you know, whether it's Blackrock State Street, what you've seen is some of its passive, you know
They're not taking an active role but you've ended up with very few people having all the assets
this is pretty bad because in the old days, you know if they were let's say for
Probably they're more than for Airlines
But eight Airlines you would own an airline and you would want your airline to do well and the gain market share you didn't want
A competitor to get a dollar, right?
because that was not your dollar you wanted to capture that dollar in the market the problem that happens is when you get
It's known as horizontal shareholdings where you know in the old days JPMorgan would own five railroads
They might have different names, but they were all ultimately JP Morgan's railroads, right? And so he didn't care
you know, he didn't want a competition because you know
he wanted to make sure that you know each dollar that the sure that the railroads had was ultimately his and what happens with the
Current horizontal shareholdings is essentially it reduces the impetus for competition
So Buffett rather than by one airline when they all merged bought them
All right
And the clear message was he did not want all the airlines competing against each other
Right, and and therefore we know when he owns one
The dollar of earnings for the other airline is also very good and he doesn't want an any way compete for that dollar
He's having it let them have their local hub. And that's the problem that we see right now, which is that
If you look at the you know major banks and you look at many sectors the top ten shareholders are the same
Across all competitors, right?
It's not like you have boards that are actively pushing for companies to expand or take market share or invest
So in the old days this is called
Organizing where you'd have one main guy or own lots of companies now
Essentially you could argue that Blackrock State Street and others in Berkshire Hathaway have essentially an organized America
and within that as well when you see this, it may be
An oligopoly maybe four or five companies
Although they don't link each other up and fix prices. There is a sort of sense almost by osmosis
There will be a price leader. So prices are fixed, even though they're not physically discussing it
So once you get to a certain level is it that that the pricing power is there?
even if there's not the illegal actual physical verbal agreements
Yes, so in chapter 2 in the book I go into quite a lot of detail that there's there been
Hundreds of cases of prosecutions for collusion. This is you know where I would call you up and we would secretly agree
You know what, you know, the price of widgets should be next year
But what actually happens much more often is essentially that there's tacit collusion meaning that the the industry has relatively few players
And that's the key. So the
Oligopoly a problem. Is that once you get very few players?
you end up in these repeated games where it makes sense not to compete with your competitor and
And then what generally happens you have one firm that?
Be the biggest then they then become the price leader and no one tries to take market share, right?
So you they hike prices and it's not like the rest of them keep price is the same and try to capture some market share
everyone immediately hikes prices in lockstep
And if you look at for example the the market for insulin, you know
It's uncanny over the last decade basically have two companies moving prices in lockstep
You know down to the day
Over a long period of time but this happens in many different industries
and so the the move to oligopoly the oligopoly problem itself creates essentially tacit collusion where
Airline CEOs can go on the conference calls and say you know what?
We don't plan on expanding more than one percent this year, right and what they're really doing is telling their competitors
Look, we're not going to go after your market. Share. This is what we're doing just to let you know
And it really goes back to I point out the minimax theory that john von neumann
Articulated which essentially is people. Don't try to maximize their maximum gain. They try to minimize the maximum loss
right and the analogy is of a mother with two kids gives them one piece of cake and says
You know to one child you cut the cake and the other one chooses it right ultimately
You're not cutting it to get the biggest piece
You're trying to make sure that you don't end up with the smallest one
and you mentioned that regulation is an issue lobbying is an issue a share buybacks part of this problem of a
Part of the problem creating the problem with another symptom so many people think that share buybacks are the problem itself. I
Argue that in the book my career and I re that the share buybacks essentially are a symptom. They're not the disease
The question is why do what a company has have so much cash, why are corporate profit margins so high?
And in in the book I go through many of the studies why you end up with higher profits and are more concentrated industries
But the whether you paid out dividends or share buybacks, you know
It's just a financial engineering question
the buybacks essentially are the symptom not the cause and if you did have
More competition you would have more mean reverting profit margins. You'd have lower profit margins in many industries. You wouldn't have these abnormal
Monopoly profits and therefore you wouldn't end up with the extreme share buybacks
and obviously if you have little competition you also end up with less investment and no it's sort of
covered in other parts of the book
But you know when you when you're not investing and you sit on that cash you have to do something with it
Neither you'll dividend it or do share buybacks. So it's the symptom not the disease
And when you look at that this sort of the histories, let's see going back to the 1800 the robber barons
than the Sherman Act 1890 and so on you had this sort of decline into this what you might call the golden period of
antitrust, and then that died in 1982 in that golden period
Walking at you point in that period that says look he was better then because again if I'm an investor and I'm concentrated investor
I'll probably be a bit worried about going back to that period and the first antitrust laws really only focused on trade unions, so
Does he sort of this period where you know, was it good? Was it better?
Can we actually sort of say look he was better for these reasons?
So good companies tend to do well in almost any environment and one of the reasons why stocks did poorly in the 70s?
I don't think had anything to do with antitrust and had much more to do with high inflation
You know
That is is it a killer for stock markets?
So I know people would say well the 70s were bad for stock the stock market. Therefore. We can't go back to that
You know, I think it's very misguided view. But if you're looking at the overall economy the 60s and 70s were certainly a
much more equal
society in terms of looking at sort of labor share of GDP
And you also had higher
Real economic growth and you had higher productivity growth which has basically been on the decline
And so I think that when you're looking at some of the more macro outcomes those were certainly better in the 1960s and 70s
Well 50s 60s and 70s
and so those are the things that I would point to and you know, the the problem is basically once the
Merger guidelines were changed in the 80s
And then you had an also an explosion of patents essentially in the 1980s and 90s and then it's continued and gotten even worse
You you essentially have more and more parts of the economy are essentially
Monopolies created by patents and copyright and you have essentially increasing concentration
and so it's no surprise that you know Pekinese book was as well received as it was because he was pointing out that this is
Leading to essentially a much higher level of inequality but good stocks tend to do. Well, you know no matter what
You know, it's the the problem the 70s was really inflation
And in terms of the the actual seconds we mentioned a few you talked about the funeral sacks. He talks about tech
In particular, which is obviously their headline
but within the US
Which of the industries which are really really kind of should be in the spotlight?
and also there's this difference between a lot of people look at this and say well that's not a monopoly but you make the very
Clear distinction that local monopolies do exist
So you might have the four or five railroad companies which yes an oligopoly but actually lots of local monopolies
So which are the ones in which the industry is in the US which have really been at this game for the longest I go
Through the book monopolies do appellees and oligopolies
And as you pointed out you have things that may appear competitive but actually your local monopolies
So for example, like aggregates, you know or waste management, you know
Generally, like if you have a contract for waste management for a town, you know
There's only one company doing it or if you have a local
Aggregates pit and a cement those aren't big transported for and you have a local monopoly a likewise Funeral Homes
For example, I point out that people don't generally shop for for funerals for obvious reasons
They're in great distress. And generally the body is going to be taken care of relatively close to the hospital
and so within that you'd have essentially a local monopoly first for funerals and so Service Corporation, for example
you know has their funerals are about 30% higher than
independent operators and they have actually local monopolies in many parts of the US, but
Hospital markets ninety percent of US hospital markets in this urban hospital markets are highly concentrated
So you generally don't have almost any competition when it comes to going to a hospital, right?
And then I point out that in the book is well that if you're looking at drugstores, right you essentially have a duopoly
Between CVS Walgreens right and if you look at a drug wholesalers
There's three drug wholesalers right there three former benefit managers
So the US healthcare system is among the worst and I certainly hope that you end up with more competition the local insurance markets
They basically are highly concentrated almost all or duopoly in terms of its the state level
and so these are the ones I think that should be most ripe for a
reform there are obviously vast powers of lobbying allied against it, but the insurance
markets, for example
have their their state little fiefdom built through the mccarran-ferguson act and I think would take quite a lot to change that but
the book goes through many many of these that you might not have even considered as
Monopolies and I certainly hope they get broken up and changed. There was the five areas which you identified as being problems productivity
She was startups your jobs lower investment
Less diversity wages and inequality
but what you see is the solutions that how what are the things that we're going to see that really changes that and and
These things often take place over five to ten years the big changes that we see but how we going to get them sooner
in a meaningful way, I
Don't think that antitrust itself will solve all these problems
But I certainly think that it can contribute to an improvement and I think that antitrust is broken
But I think that the loss of competition also is broader and encompasses regulations
So in the last chapter of the book, I point out that you know, a few solutions are one of preventing future mergers
You know, we shouldn't allow industries to get down to three and two, you know
Or even one player. So we have to make sure that we're not allowing for more concentration
There are many mergers that have happened that have reduced competition
Those should be broken up, you know and and reversed many come to mind. Like for example Google buying double-click, right?
That's not one that should have ever been allowed or Facebook buying Instagram and whatsapp, but you could go into many other
Industries, so you have breaking up past mergers, but then on the regulation side
I think what we have to do is to regulate more intelligently, and so I think that for example
Dodd-frank itself should be reformed and made simpler. I
Do like many of the ideas behind it? You know, we should have lower levels of leverage
We know you make sure that banks are safer
but all this could be done in a much simpler way that you know does not create an insurmountable barriers to entry and so
Regulation is also a part. I think for example if you're looking at some of the large tech platforms
Interoperability, right and what when people could port their phone numbers, you know in many countries suddenly
Prices started falling and telecoms, right? So allowing the customer not to be locked in is another key issue
So I think that it's not just antitrust, but when you think very broadly about how do you restore competition?
I think you know on the medical side
Patents should not be endlessly extended through, you know reformulations
Rugs they go into that and the book and so it's a it's a wide array of potential solutions
But all of which I think would make everyone better off
Obviously, they'll be fought because people who are currently gouging consumers and enjoying these set profits are not going to want it
lawyers probably in the most to gain out of this but another group that
Has probably been
Behind a lot of the moves that have created the unwanted competition is economists
Particularly Chicago School, you mentioned Bork and you say that capitalism is too important to be left to economists
Why is it that economists we then end up sort of being on the wrong side of this versus what sort of feels much more?
Natural and kind of correct in the marketplace. So I think many economists are actually doing a wonderful job of highlighting these problems
so there's they're like loads of new studies coming out and it's a very
Sort of it's a growth area to look into the problems of concentration
When I say that, it's too important to be left to the economists
I think part of it is that the antitrust laws were written by Congress and
were meant to be
Implemented to you know to pursue the way we wanted markets in the economy to run
What's ended up happening is essentially that all these decisions on who should merge and who should not merge?
These are now in the hands of bureaucrats essentially in terms of the FTC working in close collaboration with economists
Right who have a vested interest in making sure that mergers get through and as you know talked about earlier
Most of the merger models and simulations in terms of these price savings that are going to happen or total bullshit
and so when I say that should be allowed to the economists is ultimately the the acts were meant to
Reduce concentration to avoid monopolies and effectively what's happened is we sort of out sourced
mergers to
People going through the revolving door or the K Street law firms in the economist like Charles rivers associating compass Lexecon and others
So I don't think the problem is all economists
But certainly when you end up with a very small group of people who stand to benefit greatly, you know
They'll defend their area and they want all the sort of non specialists to stay out
And so the irony is that you know, the book was endorsed by
Mike Spence who's a Nobel Prize winner or Angus Deaton? Who's a Nobel Prize winner Kenneth Rogoff, right?
So economists outside of the antitrust world see that there's a very clear problem people within the antitrust
Who you know are looking for what Nassim Taleb calls the retrospective bribe, right?
They want to get hired by, you know, the compass and Charles River will work, you know carry law firms. They think everything's fine, right?
With the with the sort of us and you've been talking specifically about the u.s
Firstly is this only a u.s. Male or is it global is a global issues it in the UK?
Is it in Europe? Is it in Australia and secondly?
Is it likely that the US is going to break up?
it's it's kind of monopolist because
If you look at it from a kind of global perspective the US had done pretty well over the last ten years
US equity market, and yes, it's been concentrate. But again it goes back to
If you came in from the outside world and you saw as you go the u.s. Looks great
Monopolies look great because the US has outperformed almost everywhere. So isn't that good thing in some ways and
Will the US authorities really wants to break what looks like a relatively good system. Would you need other regions to say?
Hey, you know, this is a problem. So one of the reasons that I focused on the US was the u.s
In a way is the the leader and the most advanced right? So for the u.s
First created antitrust and exported it to the rest of the world and then the u.s
Essentially had the counter-revolution and exported that to the rest of the world. So I think that whatever battles happening in the u.s
That's going to end up playing out elsewhere the u.s
Certainly is the most advanced in terms of going down. The consolidation route Europe is less consolidated in many ways than the u.s
Is some emerging markets are highly concentrated. They also interestingly tend to be the most unequal in terms of Gini coefficients. So I
Chi lays known as the Chicago experiment essentially where a lot of the University Chicago people went down and advised Pinochet, right?
So they have very high industry concentration and extremely high inequality. So when you look around the world you often do find these very interesting
relationships
Some countries like Australia are highly oligopolistic and monopolistic and it's not surprising also that you end up with
sort of a higher degrees of
profitability in some of the sectors and very large transfers of wealth from people who are outside the sector to the sector and the financial
industry in particular, you know due to the the four banks, so
That's you know, one of the problems other countries like can Australia which are very oligopolistic often have higher tax rates
And so they don't deal with they don't have antitrust to increase competition what they're doing is saying, okay
You can pay people very very well in these industries
We're just gonna tax you to a pretty high rate, but my view is you know
Rather than go for the very high tax route. Which Piketty argues this let's create
Let's increase competition to make sure that you don't have like some very fat
Monopolies or duopoly 'z and so it does go go around the world the u.s
Just happens to be sort of the farthest along and what is the perfect?
environment do you think where where this kind of really works because it still goes back to
put regulation or antitrust laws in place and
we clip that top end of
Competition, but how what what are the features that you envisage would be?
Perfect competition. We know what perfect Aldean should look like but real-world perfect competition. How'd you get it?
So I I'm not precise. I'm not in favor of a perfect competition, which is also like another textbook extreme, right?
I'm very much in favor of you know, people who come up with great ideas get patents they can then
you know have
Very high profitability for a period I'm not against that at all if you happen to create a new market
You should enjoy that, you know
Until you get competitors, you know and that creates essentially monopoly type profits until competitors emerge
I don't have a problem with that. My problem is essentially with
mergers that reduce competition materially so taking out competitors from the market, but what's interesting in the book I talk about
You know earlier chatting about prices going up
There's a lot of work that's been done by John Koch at Northeastern University
showing that when you get below six players in an industry you end up with price increases and a pricing power and so I
Argue that we shouldn't allow for mergers and industries below six players, right?
And now if you want to increase your market share by being better go for it
You know try to become number one and you know, take everyone else's market share
But we shouldn't have mergers between players and under six industries. Sorry six players per industry. So that that is what I wear
I think you know you can draw the line in terms of mergers
But it doesn't mean that you couldn't have one company dominating an industry if they're doing it through best service
The problem is when I talk to people almost no one can point to industries like well
They have a monopoly because there the very best right?
Generally what happens is companies merge, even in the case of Google and Facebook
The reason you have a duopoly in the ad market is due to purchases of direct competitors
Do you have a view code? Does this have any impact on princes the bond market?
Because it feels like over the last twenty years
Thirty years when this has been in place or affected been seeing that sort of eating away at potential economic growth
In order to fuel excess profits. So the long equity long bond trade which has worked pretty well over the last thirty years
We're just coming in for a little bit of a little bit of us a tricky patch now
But if this doesn't get broken up, does that suggest that bond yields should actually stay relatively symmetry
you're not saying they stay down but
Relatively subdued so I'm not certain how this plays out in terms of the level of bond yields, but what's certainly interesting?
Is that the real rate of interest has an enormous impact on?
Collusion, you know between market players and the ability of companies to buy each other
So when debts cheap, you know company a can buy Company B
And so you've ended up with merger waves so merger waves tend to happen during bubbles people can use their stock is acquisition
currency
It also happens when rates are relatively low and people companies can then borrow money cheaply to buy competitors
So those are two things driving merger waves and then also when real rates are low
It means that the payoff period can be longer in terms of collusion
When real rates are very high companies generally don't want to collude because you need a very high initial payoff
you know to make that collusion work and so that's the
Very interesting thing. I have a chart in there on global
Real rates which of course have been very low which encourages collusion, you know and allows companies to borrow to buy each other
So I think to the extent that you end up with higher bond yields higher rates going forward that would
Make it more difficult for companies to merge and would be a damper on on the collusion aspect. You've shown that
from your own work
The concentration of industries outperforms the broad index and I think it was strategy gas
You did the lobbyists index where those companies Allah be the most
outperforms the broad index
And until we see any major changes in this structure
Would you recommend basically still be the hyung concentration and long the lobbyist as an investor?
Would you still kind of take you?
As I want to be a moral here and sure mo Grandin and continue with those comes to try
I think you'd have to do it on a selective basis
I think that certainly unfortunately what we see in our last couple years is that
Sort of growth versus value stocks or high quality versus low quality stocks have reached extremes
and
you know as we're seeing this year a lot of the tech stocks are getting beaten up people are waking up to the fact that
Facebook might be broken up. Certainly. There's a move in Congress to do that
and
also
What you're finding out is that you ultimately can kill the goose that lays the golden eggs and some of the pharma companies that discovered
This where you know, like for example valiant you can hike prices
You know quite a lot when you have a monopoly, right?
They have some say in patents on a particular drug or a monopoly on that truck
Ultimately, though there's a backlash and ultimately you can only take that so far and so I think that investors need to think very hard
About what you know, what is the source of that sort of dominance? They're getting is it natural?
Is it unnatural and and are they essentially going to raise the ire of?
regulators or not and at the end of the book you talk about
ways that we can
Try and make a difference. I mean, there's small ways between a from a corn you get the oak tree
What are the things that you think can be done?
So this shift brought them going on the street to our pickaxes and our sides and all the rest of it
You think there are a few things that we can do everyone can do slowly but surely to sort of just start chipping away
what are those things so in some cases the
consumer has no choice when it comes to like high-speed Internet in the US or you know, it comes to
Insurance markets, but there are many places in the US economy where you can decide every day. It's an election
You can decide where you spend your money. I would recommend that
investors and consumers
Back David versus Goliath, you know that you can decide we know where you spend your money
That's a choice that you can make every day in terms of search. For example, I personally use DuckDuckGo
I have no interest in the surveillance capitalism of Google and Facebook, you know
Which basically appear free but you're handing over very valuable personal data. So there there are alternatives to you know, some of the
Programs and companies that essentially are built on
surveillance of the user and obviously
you know people need to get politically active and let their congressman and
Representatives know that this is something that they care about and I think they already are coming to that view and I
think that we're gonna hear a lot more from Congress on this bring the mint why would you think
How long from now what's your what's your timeframe what you think?
It's gonna all happen what and so you know if you think of World War two, for example
There was the Battle of Midway was essentially the turning point, right and that was, you know, very early on in the war
Essentially, but but once once that had happened it was quite clear that Japanese it couldn't win in the Pacific and then the question was
What kind of loss were they going to take and I think that if you look at antitrust right now
all the money is stacked on one side of the table and you know, but I think the
it's extremely popular to
Get some reform and if you're looking at the pop culture or you look at John Oliver is running segments on antitrust, you know
The show Netflix Patriot Act. Basically that pop culture is moving and ultimately the
regulators and
Congressmen are gonna want to get ahead and pretend that they're leading the parade rather than be run out of town
It's the great thing is what you're saying is that capitalism is good capitalism works
It's become a bit grotesque, but it will probably self correct rather than implode. So therefore it's actually quite an optimistic outlook
we've got yes the us in the past and other countries there there been moments where things have been extreme and you've had
People like Teddy Roosevelt, and I certainly think that we're going to see more of that
You know, we're gonna see a reform, you know, rather than a revolution
Jonathan thank you very much indeed. Well, thank you. Thank you
