Monopolies are forming and it is increasing prices and profits but decreasing wages. Capitalism is broken.

Capitalism is largely defined by its characteristic of competition – the notion of many competing firms battling against each other for business, and in the process driving down prices. Yet in the past 40 years, the market power of a small number of firms in many industries has been steadily increasing, and with it one of the supposed benefits of capitalism, diminishing. The effects of declining competition has led to a decrease in wages for workers as not only do consumers have less choice, so do employees.

The inclusion of different market structures is an essential component of introductory economics courses, hence under pure competition, there are no super normal profits, as exist today, The Economist magazine calculates that abnormal profits are currently at £660 bn. This points towards market failure, as dominant firms eliminate competition.

The Herfindahl-Hirschman Index (HHI) is a measure of market concentration, where the market share of each company in an industry is squared and added together. In the case of a pure monopoly, the index can reach 10,000. While being beneficial in giving us an overarching view of market concentration, such an index can also be deceiving. If we consider the market for cars, for example, we see that there are several competitors on the surface of things, yet lots of these companies come under the ownership of one company. Volkswagen has 12 brands under its umbrella. Coca-Cola has 100’s, arguably 1000’s, which the index does not take account of.

Companies could partially be excused from their practices to eliminate competition if it meant increasing wages, yet once again, this is not the case. Since the 1970’s wages as a % of GDP have decreased from around 51% to 43% in the latter stages of this decade, and they are now at their lowest percentage since 1929. The same pattern decline is evident in the U.K. Which begs the question do companies have a responsibility to increase wages when markets move to monopolies? Your classic Libertarian would argue not, and would likely present you with an argument that if a company can not find an employee to work at wage rate ‘X’ then they must raise the price until they find sufficient employees.

However, there is increased academic research that suggests workers may be more negatively affected by monopolies than consumers. The lack of choice for employees is leading to a decrease in wages. Data on the number of companies listed on the New York Stock Exchange shows that there has been a significant decline in the past 20 years. In Bentonville, AK, Walmart employs 101% of the population (meaning more people commute into the town than live there), similar trends are observed in Seattle where Amazon has half of all office space. Simply put, increased market concentration is depressing wages, but observing patterns that indicate the market is becoming more concentrated is not always easily observable. The Herfindahl index adjusted for common investor ownership was over 0.5 (with 1 being pure monopoly), but the standard index showed the figure to be at around 0.18.

One tenth of the economy is made up of industries in which four firms control more than two-thirds of the market. In a healthy economy you would expect profits to be competed down, but the free cashflow of companies is 76% above its 50-year average, relative to GDP.

Similar problems surrounding competition exist within the UKs train network, where companies are given contracts that exist as franchises to operate a certain route. Competition hardly exists, at least not in the traditional form. Take for example the London-Manchester route; Virgin Trains is the exclusive operator, as is the same with the Liverpool-Norwich route (and the list really does go on). Furthermore, where two companies operate on the same line, it is not the same speed, i.e. one may be an express and the other a commuter train.

Marx predicted as much. The need for accumulation to continue to make profits is one of the inherent flaws of capitalism and hence one of its crucial contradictions. There is also a tendency to move towards monopoly markets, hence driving up price and decreasing the power of consumers, which is undesirable to say the least.

Companies argue that by buying competitors they make efficiency savings, however, empirical evidence tells us otherwise as the savings are usually meagre, and the true intent of such companies is to eradicate competition. With increasing market power and finance, large companies such as Facebook can buy competitors at will, as was the case with Instagram in 2012. Instagram had just 30 million users and was purchased for a measly $1 Billion. The app may never have threatened Facebook, but why take the chance? Antitrust laws are no longer fit for purpose, acquisitions of small value go unnoticed and unchecked, which is why companies such as Facebook purchase at such early stages. Facebook’s market share in the U.K is near to 90%.

I won’t go as far as accusing large companies such as Coca-Cola of collusion but peculiarly bottles of 500ml Coca Cola, Lucozade and Oasis (etc.) are all similar or the same price.  Admittedly the Sugar Tax has complicated this, but before its introduction it was the same. Proponents of the system will argue that it is simply price-matching, but where is the incentive to under-cut your competitor if you’re owned by the same company? The answer is there is, none.

The reform of Capitalism is in the Capitalist’s best interests, but while profits soar, I see no stimulus for the ruling class, and as always with Capitalism no reforms will go far enough. Companies have ridden their luck for too long, regulators have been naïve, and inadequate governmental policy has led to today’s sorry state of affairs. The French riots are just another symptom of a broken system, revolt is near, businesses will wish they had listened to the masses. Marx once remarked that Capitalism would end up destroying itself, never has that statement rung so true.


Seb Chromiak

I was born 09.10.1997, I currently study Economics and Politics at the University of Manchester and have an interest in Neo-liberalism, Russian Politics and Current Affairs.

Seb Chromiak has 55 posts and counting. See all posts by Seb Chromiak

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