An Alternative Competition Policy Explanation of Trump's Victory
The Phenomenon Described: In the battle Main Street versus Wall Street, Main Street has won. Trump has unwittingly exposed the hollowness of the edifice of contemporary financial capitalism. In the avalanche of thought, words, concepts, ideas and explanations that has accompanied Donald Trump’s victory in the race for US President, little attention has been paid to why Main Street has beaten Wall Street.
Donald Trump’s grassroots supporters have been nativists, racists or ethnic supremacists. His views on gender, race and masculinity have been reprehensible. His policies on climate change and trade can wither world prosperity for all time to come.
His primary anti-establishment message, against a social New York elitism and snobbery that has forever had him as a Queens outsider in New York, at best physically based in midtown Manhattan, but never to socially be a part of the Manhattan Upper East Side or Upper West Side elite, has seen him pitch a message of populism that has subliminally touched the hearts and minds of those comprising the mass market for votes in the United States.
The demography of rural, suburban, small and middle town America is where Main Street prevails. It is not Caucasian any more, and suburban residents, and voters, are increasingly immigrants.
While nativist or ethnic considerations would have prompted one lot of voters to vote for him, Trump’s message, and the absence of a counter-weight message from Hillary Clinton, will have prompted the other lot of Main Street voters to not vote at all.
This seething mass of rural, suburban, small and middle town humanity is what makes up Main Street, the multitude who make up the population of a nation. Donald Trump was a nominee of Main Street. Main Street has won. Hillary Clinton was a nominee of Wall Street. Wall Street has lost.
Origins of Contemporary Financial Capitalism: Starting with the presidency of Bill Clinton, when the Internet revolution took hold, leading to massive across-the-board productivity growth in all sectors of the economy, a substantial rise in prosperity occurred. This prosperity was driven by the white heat of the 1990s technology revolution. But the wealth creation occurred for only a small sliver of the population as many commentators have noted.
The winner-take-all society was not born then, but its core premise became an article of faith for American society. The dynamics of the winner-take-all Internet society became substantial and evocative in the networked world of the 1990s. Along with the acceptance of this premise, however, inequality exacerbated in the United States. These are well known empirically regular assertions.
A direct beneficiary of this technology-driven revolution was the financial sector which had to deal with the substantial masses of cash being generated by a newly-networked society. As network effects drove the consumption of communications and media products, services and functionalities, the service providers and media houses of the 1990s gained from large streams of cash flow, and founders of Internet, technology, communications and media companies became extremely wealthy.
The companies, in turn, became large repositories of cash, and a motivation for further size drove numerous giant merger deal. Big ticket acquisitions became ubiquitous, with valuations running into several billions of dollars, in many cases over a hundred billion, and, the size of merger and acquisition valuations have stayed at the same stratospheric levels ever since.
Three Contingencies: Concomitantly, three contingencies crystallized. The first was the role of investment banks in brokering deals. The core competence of the financial sector is intermediation. This led to banks being intermediaries for large cash volumes and the recipient of extremely substantial fees and commissions.
The possession of large cash volumes furthered a motivation to possess even greater cash volumes. This hubris motive led to the occurrence of several mergers and consolidations in the financial sector. Investment banks became absolutely enormous in their size of cash holdings and ability to transfer funds. Just a few large banks handled the transactions for a few large technology companies. The market structure of the financial sector became extremely concentrated, breeding monopoly.
The speculation motive was paramount. This was a second contingency, arising in the 1990s. Since the rationale of financial sector enterprises is money management, as opposed to creating tangible or intangible goods, the motivation to profit from an ever-increasing array of derived financial products, currencies and shares was paramount. This led to the emergence of unregulated hedge funds, in part driven by technological change in trading systems that permitted trading to occur in micro-milliseconds.
The third contingency was the emergence of venture capital (VC) and private equity (PE) funds. These unregulated entities complemented banking sector entities as repositories of funds that had been generated by the technology revolution of the 1990s. They became important players in the financial sector pantheon. The venture capital and private equity funds possessed the wherewithal to generate large volumes of cash, and were important players in the economic system.
Cartelization of Intermediation: Financial capitalism, in the sense that Rudolf Hilferding had defined a century ago, became the driver of the American economy. Hilferding had stated that the process of financial capitalism would give large political powers to possessors of financial sector wealth and enable them to tamper with the levers of economic and, if necessary, social policy.
The formation of special interest groups is a well-studied topic. Both Karl Marx and Joseph Schumpeter had reached identical conclusions about the role of special interest groups in modern societies, though from vastly differing starting perspectives. In the US financial sector, from the 1990s till now, a generation later, the phenomenon of the cartelization of intermediation could have led to the cartelization of the economy.
The financing and inputs that banks, financial institutions and VC and PE funds provide are based on relationships, unlike the financing and inputs of received from primary or secondary debt and equity markets. The latter are transactional sources of capital. The transactional obtained funds provide contractual constraints on the behavior of funds providers as well as those receiving funds.
Conversely, banks and financial institutions enter into information-rich and interaction-intensive relationships with customers. It takes two to tango, and collusion between financial institutions and corporate clients can occur rapidly.
As financial institutions become insiders, with close ties and complex multifaceted relationships with clients, the receipt of internal facts provides them with an information advantage relative to the public. Asymmetric knowledge permits financial institutions to engage in market manipulations to the detriment of the common person, on Main Street. The number of events of this type has rapidly expanded in the last generation.
The close relationships between financial institutions, and their assorted clients, such as giant communications, insurance, technology, pharmaceutical and other manufacturing companies, has led to the cartelization of almost the entire United States economy in the hands of a few monopolists.
Outcomes of Cartelization: The failure of competition policy enforcement, by the bodies charged to do so in the United States, such as the Department of Justice, the Federal Trade Commission, and the Federal Communications Commission, and the allowing of mega-mergers has led to the concentration of economic power in the United States. The presence of a welfare-enhancing market structure has been compromised.
The failure of competition policy enforcement to investigate and prosecute cartelization has meant that anti-competitive behavior that makes life miserable for consumers everywhere, and that has led to slippage in living standards.
Old-school capitalists made profits by investing in equipment and assets, including human assets. Human asset costs were long-term fixed costs, as human capital was permanent. Today’s large corporations treat human asset costs as a variable cost, with short-term human assets to be dispensed off at will if required to boost profits.
The rentier capitalism model sees large short-term profits emerging from the disposal of people, and it is these very disposed-off persons that have voted against Wall Street. The disrespect of businessmen for the disposable working man has led to deep resentment and anger. It is these angst that Donald Trump has unknowingly seized on to address the concerns of Main Street, and unconsciously appeal to voters’ senses.
Trump might have pulled off a Schumpeterian episode of creative destruction. Maybe in only a very temporary manner, the role of the collusion-based financial capitalist system that has governed the United States economy for the last generation has been exposed and vitiated.
It will be a mega-tragedy if President Trump’s incoming administration does not drain the swamp and undertake a root-and-branch assessment of competition policy norms and enforcement measures to make life better, cheaper and safer for the denizens of America’s Main Street!
(Sumit K. Majumdar is Professor of Technology Strategy, University of Texas at Dallas)