George Rebane

The good part of capitalism is that it games the system; the bad part of capitalism is that it games the system.

[This is the transcript of my regular KVMR commentary broadcast on 5 September 2018.]

I was going to do this week’s commentary on the ongoing Senate Judiciary Committee hearing on Judge Kavanaugh’s nomination to the Supreme Court.  But after what I saw happen today and during yesterday’s opening round, I thought better of it – since, after all, this is a family radio station, and there are still some limits on what words can be used on the air.  Let’s just say that I was more than put out by things I have never witnessed from a Senate chamber conducting one of its most serious constitutional assignments for our republic.  And the outrage on display was perpetrated equally by protesters in the audience and senators on the panel.

Instead, tonight I want to talk about something pretty bad that happens when government and capitalism collude, or more accurately, when they conspire.  Such conspiratorial collusion is called corporatism.  Corporatism occurs when a usually large corporation and government conspire to mangle the market in which the corporation is then shielded from new competitors – usually start-ups and small companies.  This paid protection plan includes cleverly minted regulations, required licenses, fees, and taxes that create a barrier to entry which the small guys cannot afford to overcome.  In turn, the protected corporatist donates ample sums to the politicians who enshrined into law what the corporation’s lobbyists and lawyers had drafted.

Corporatism has many barnacles; here we’ll consider how corporatists create and manage their supply chains in ways where they reduce their costs, maintain control, and eliminate or greatly reduce business risk.  The short form description goes like this.  The corporation seeks out competent small manufactories or farms, convinces them that if they upgrade their operation, the corporation will sign lucrative purchase contracts for their produce.  The big corporation will also help them get financing for expanding operations, and even provide the small company with the necessary expertise to build out and run the larger operation.  The small company enthusiastically signs up, expands, and starts enjoying much higher revenues and profits – what could go wrong?

Soon thereafter, when the small company has a generous cashflow from increased production and economies of scale, its big customer starts putting on the squeeze by reducing the price it is willing to pay and demanding even higher production levels.  Along the way it shows its small supplier where to cut its costs and accept lower profit margins.  Due to his large debt and having essentially only one customer, the small guy has very little choice but to either comply or go bankrupt.  From that point on, the corporatist has created another secure, low cost, and essentially risk-free supplier, who is now effectively a vassal of the corporatist.

During all this the government has been a supportive partner by having created a set of laws, regulations, and taxing structures that enable the corporatist to expand its group of such suppliers and subsequently keep them under its thumb.  Regular inspection visits by government bureaucrats will remind the small supplier that continuing to play by the prescribed rules remains its best or perhaps only option.

This type of corporatism is now a mature game played by industry giants in sectors such as automotive, agribusiness, and big pharma.  Besides keeping prices low and profits high, the other effect of such government-enabled conspiracies is that the wages of labor are kept at a minimum because each corporatist essentially controls its cohort of supply vassals.

So what to do?  Folks leaning Left or Right respond to such a state of affairs with totally different solutions.  The progressives will immediately see the need for more regulations, a bigger bureaucracy to enforce them, and higher taxes to pay for the whole thing.  Those of a conservetarian bent will instead work to reduce corporatism by eliminating business stifling regulations and costs, making it easier for competitors to enter the markets.  And along the way reduce the size of government bureaucracies that make it hard for smaller businesses to grow and compete with established corporatists.

My name is Rebane, and I also expand on this and related themes on Rebane’s Ruminations where the transcript of this commentary is posted with relevant links, and where such issues are debated extensively.  However, my views are not necessarily shared by KVMR.  Thank you for listening.