In April, a video that showed a passenger being dragged off an overbooked United jet “went viral.” Almost overnight, 3.5 million people visited #BoycottUnited on Twitter. But, the airline recently reported second-quarter earnings that had risen more than 6 percent over the previous quarter. It also accommodated 71 million passengers, up 4.2 percent from the same period last year. How could this happen?
For one thing, over the following few weeks other videos showed other airlines committing similar atrocities. Second, people tend to opt for convenience over principle. Third, with only four major U.S. airlines currently operating, there is usually no choice. And, it is this last factor that creates an “immoral” economy, one typified by oligopolies. An oligopoly is a system in which only a few corporations control a sector of the economy. Furthermore, economists use the term “tight oligopoly” to describe a system with four or fewer such corporate giants. So, let’s look at the sequence of events that brought us to our current situation.
The moral economy
Perhaps in 1776, when he published “The Wealth of Nations,” Adam Smith imagined a perfect world in which the “invisible hand” of supply and demand governed the capitalistic economic system. To paraphrase Mark Antony’s speech at Julius Caesar’s funeral in Shakespeare’s play: If it were so, it were a grievous fault and grievously have we paid for it.
Theoretically, if a large company’s product became too expensive because of its huge operating costs or if the product were inferior in quality, smaller companies would come along, undercut the price or improve the performance of the product, and give the consumer an alternative. In the real world, of course, larger companies simply gobbled up the smaller ones or forced them out of competition, creating monopolies or oligopolies.
There were fewer than 900 million people in the entire world when Smith’s treatise became the “Bible of Capitalism,” and perhaps his concept worked in relatively small homogeneous populations (just as Marxism worked in tiny utopian communes like the Kaweah Colony between 1886 and 1892 in what is now Sequoia National Park). But, as the Industrial Revolution began to develop in Europe, population started to expand as never before in history: one billion by 1810; 2 billion by 1930; 3 billion, 1960; 4 billion, 1975; 5 billion, 1987; 6 billion, 2000; 7.5 billion today.
In historic times, populations were small and people survived mainly by the output of primary industry, that is by growing or extracting necessities. The typical economic activity involved farming, fishing, or mining. This was colonial America. Consequently, the wealthiest and most powerful men were farmers, like John Adams or Thomas Jefferson. Coincidentally, American independence was declared the same year that Smith’s work was circulating in the western world.
Over time, Western Europe and North America began the process of industrialization, entering the era of secondary industry. In this type of economy, more people are employed in manufacturing than in primary pursuits. By the end of the 19th century, the influence of farmers like those who framed the Constitution was in the hands of “robber barons” and “captains of industry.”
Growing populations (which initially occurred only in industrializing countries) meant expanding markets, and huge companies formed in the late nineteenth century. These economic enterprises dominated the markets in necessities from copper, iron, tin, and coal to steel, paper bags, sugar, and salt. Hundreds of small short-line railroads were consolidated into gigantic systems and tiny oil companies were purchased to form Standard Oil Company.
Adams and Jefferson were replaced by Rockefeller (oil industry) and Vanderbilt (railroads) and, in the early 20th century, by Henry Ford (automobiles) and J.P. Morgan (General Electric and U.S. Steel). In terms of the history of human existence, this seems to have been a short, transitional period en route to the third type of economic activity.
Tertiary industry is involved with providing service, not in manufacturing a product. Typical of this phase of development are Walmart (distribution of goods), Berkshire Hathaway (investments), and MGM (entertainment). Initially, people like Sam Walton’s heirs, Warren Buffett, and Louis B. Meyer, as well as Martha Stewart (marketing) and Charles Lubin (Sara Lee, now known as Hillshire Brands) either joined or replaced the “captains of industry.” But, at the end of the 20th century, people like Bill Gates of Microsoft, Mark Zuckerberg of Facebook, Larry Ellison of Oracle, and Jeff Bezos of Amazon may be replacing the “captains” who resided in brick and mortar buildings with those who live on the Internet.
The new oligopolies
Some of the new monopolies (one corporation that controls a marketplace) and oligopolies are easy to identify. Just as Standard Oil controlled most of the petroleum processing and distribution in the U.S. through the early part of the 20th century, Microsoft had a similar advantage during its latter years and into the 21st century.
Government regulations caused Standard Oil to break up into smaller units, like Exxon and Sohio, but some of these smaller “competing” companies were later subsumed by ExxonMobil. Similarly, the telephone company (one monopoly that actually made sense) was forced to divide itself into smaller, regional companies (regional monopolies) in 1984. But, over the years, smaller companies recombined so that Southwestern Bell and Pacific Bell are now subsumed under the AT&T banner. But Microsoft seems to have escaped multiple brushes with the government.
We now see the same consolidating processes occurring throughout the economy. More than 75 percent of U.S. industries have experienced an increase in concentration over the past two decades. Walgreens and CVS dominate the pharmacy and drugstore industries. The computer search business is controlled by Google (88 percent of the market). Facebook (and its subsidiaries Instagram, Messenger, and WhatsApp) account for 77 percent of social media traffic. And half of all money spent on online durable-goods purchasing goes through Amazon, which recently bought Whole Foods.
The problem with few corporations controlling a sector of the economy should be obvious to anyone who has flown on airlines for a few decades. With 80 percent of all air passenger traffic going through American, Delta, Southwest, and United, the companies can optimize their profits at the expense of customers. Seats are getting smaller and have less leg room, baggage is hit with more fees, passengers are charged for food, and prices are increasing despite record earnings by the airlines.
Apparently, Adam Smith’s “invisible hand” has become arthritic over the past 240 years. When there is less competition because of consolidation and concentration within industries, consumers inevitably pay the price. And workers suffer, as I’ll explain next week.